<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
SHELBY COUNTY BANCORP
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(Name of Registrant as Specified in its Charter)
SHELBY COUNTY BANCORP
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(Name of Person Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock
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(2) Aggregate number of securities to which transaction applies:
189,750 Shares (assuming exercise of outstanding stock options)
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
$58.00
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(4) Proposed maximum aggregate value of transaction:
$11,005,500.00
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(5) Total fee paid:
$2,201.10
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[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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SHELBY COUNTY BANCORP LOGO
29 East Washington Street
Shelbyville, Indiana 46176
(317) 398-9721
June 11, 1998
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders
(the "Special Meeting") of Shelby County Bancorp ("Shelby County"), which will
be held at Shelby County's main office located at 29 East Washington Street,
Shelbyville, Indiana, on Tuesday, June 23, 1998, at 8:00 a.m., Eastern Standard
Time.
At the Special Meeting, shareholders will be asked to approve the Amended
and Restated Agreement of Affiliation and Merger dated as of March 12, 1998, as
amended (the "Merger Agreement"), whereby Shelby County will be merged (the
"Merger") with and into Blue River Bancshares, Inc. ("Blue River"), with Blue
River as the surviving corporation. If the Merger is consummated, each share of
common stock of Shelby County, no par value per share, outstanding immediately
prior to consummation of the Merger (other than shares as to which dissenters'
rights have been asserted and duly perfected in accordance with Indiana law)
shall be converted into and represent the right to receive $56.00 in cash
without any interest thereon.
As a result of the Merger, Shelby County's wholly-owned subsidiary, Shelby
County Savings Bank, FSB ("SCSB"), will become a wholly-owned subsidiary of Blue
River. Approval by Shelby County's shareholders of the Merger Agreement is a
condition to consummation of the Merger. The terms of the Merger are explained
in detail in the accompanying Proxy Statement, which we urge you to read
carefully.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT YOU VOTE IN FAVOR OF THE MERGER BECAUSE THE BOARD BELIEVES IT TO
BE IN THE BEST INTERESTS OF SHAREHOLDERS.
Enclosed is a Notice of Special Meeting of Shareholders, the Proxy
Statement, and a proxy card. Your vote is important, regardless of the number of
shares you own. Please complete, sign and date the enclosed proxy card and
return it as soon as possible in the envelope provided. If you decide to attend
the meeting, you may vote your shares in person whether or not you have
previously submitted a proxy. On behalf of the Board, I thank you for your
attention to this important matter.
Sincerely,
/s/ James M. Robinson
James M. Robison, Chairman
<PAGE> 3
SHELBY COUNTY BANCORP
29 EAST WASHINGTON STREET
SHELBYVILLE, INDIANA 46176
(317) 398-9721
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 23, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Shelby
County Bancorp ("Shelby County") will be held at Shelby County's main office
located at 29 East Washington Street, Shelbyville, Indiana, on Tuesday, June 23,
1998, commencing at 8:00 a.m., Eastern Standard Time, for the following
purposes:
1. To consider and vote upon the Amended and Restated Agreement of
Affiliation and Merger (the "Merger Agreement") dated as of March 12, 1998,
as amended, by and among Blue River Bancshares, Inc. ("Blue River"), Shelby
County and Shelby County Savings Bank, FSB ("SCSB"), pursuant to which (i)
Shelby County will be merged with and into Blue River (the "Merger"), with
Blue River as the surviving corporation; and (ii) each share of common
stock of Shelby County, no par value per share ("Common Stock"),
outstanding immediately prior to consummation of the Merger (other than
shares as to which dissenters' rights have been asserted and duly perfected
in accordance with Indiana law) shall be converted into and represent the
right to receive $56.00 in cash as described in the Proxy Statement and in
the Merger Agreement which is attached as Appendix A thereto; and
2. To transact such other business, if any, as may properly come
before the Special Meeting or any adjournment thereof.
Only holders of record of the Shelby County Common Stock at the close of
business on April 30, 1998 are entitled to notice of and to vote at the Special
Meeting or any adjournments thereof.
Dissenting shareholders who comply with the procedural requirements of the
Indiana Business Corporation Law will be entitled to receive payment of the fair
cash value of their shares. For a summary of the rights of shareholders of
Shelby County to dissent, see "Dissenters' Rights" in the attached Proxy
Statement and Appendix D thereto.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ David A. Carmony
David A. Carmony, Secretary
Shelbyville, Indiana
June 11, 1998
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YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. IT IS IMPORTANT THAT
YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU OWN. EVEN IF YOU PLAN TO
BE PRESENT, YOU ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY
PROMPTLY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE MEETING, YOU MAY VOTE
EITHER IN PERSON OR BY YOUR PROXY. ANY PROXY GIVEN MAY BE REVOKED BY YOU IN
WRITING OR IN PERSON AT ANY TIME PRIOR TO THE EXERCISE THEREOF.
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<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction................................................
Summary..................................................... 2
Market Prices............................................... 6
The Special Meeting......................................... 8
The Merger.................................................. 10
Background of and Reasons for the Merger; Recommendation
of the Board of Directors.............................. 10
Opinion of Financial Advisor.............................. 12
Terms of the Merger....................................... 16
Surrender of Certificates................................. 17
Representations and Warranties; Conditions to the
Merger................................................. 17
Regulatory and Other Approvals............................ 18
Business Pending the Merger............................... 18
Effective Time of the Merger; Termination................. 19
Stock Option Agreement.................................... 20
Interests of Certain Persons in the Merger................ 21
Certain Federal Income Tax Consequences................... 22
Accounting Treatment of the Merger........................ 23
Expenses of the Merger.................................... 23
Dissenters' Rights.......................................... 24
Voting Securities and Principal Holders Thereof............. 26
Information Regarding Blue River Bancshares, Inc. .......... 27
Management's Discussion and Analysis of Financial Conditions
and Results of Operations................................. 27
Business of Shelby County................................... 40
Supervision and Regulation.................................. 55
Shareholder Proposals....................................... 65
Accountants................................................. 65
Other Matters............................................... 65
Index to Consolidated Financial Statements -- Shelby County
Bancorp................................................... F-1
Appendix A -- Amended and Restated Agreement of Affiliation
and Merger................................................ A-1
Appendix B -- Opinion of Shelby County's Financial
Advisor................................................... B-1
Appendix C -- Stock Option Agreement........................ C-1
Appendix D -- Statutory Dissenters' Rights.................. D-1
</TABLE>
i
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SHELBY COUNTY BANCORP
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is being furnished to the shareholders of Shelby
County Bancorp ("Shelby County") in connection with the solicitation of proxies
by the Board of Directors of Shelby County for use at the special meeting of
shareholders, and any adjournment thereof, to be held at the time and place set
forth in the accompanying notice of special meeting ("Special Meeting"). It is
anticipated that the mailing of this Proxy Statement and the enclosed proxy card
will commence on or about June 12, 1998.
At the Special Meeting, shareholders of Shelby County will be asked to
approve an Amended and Restated Agreement of Affiliation and Merger (the "Merger
Agreement") dated as of March 12, 1998, as amended, a copy of which is attached
hereto as Appendix A.
Upon the Effective Time (as defined in the Merger Agreement) of the merger
of Shelby County with and into Blue River (the "Merger"), each share of the
common stock of Shelby County, no par value per share ("Shelby County Common
Stock"), issued and outstanding immediately prior to the Effective Time (other
than shares as to which dissenters' rights have been asserted and duly perfected
in accordance with Indiana law) shall be converted into and represent the right
to receive $56.00 in cash without any interest thereon. For a more complete
description of the Merger Agreement and the terms of the Merger, see "The
Merger."
The Shelby County Common Stock is traded in the over-the-counter market. On
February 5, 1998, the last full trading day prior to the public announcement of
the Merger, the closing bid price per share of Shelby County Common Stock as
reflected in the pink sheets was $30.00. The last reported closing bid price per
share for Shelby County Common Stock as of June 2, 1998, the latest practicable
trading date before printing of this Proxy Statement, was $40.00. See "Market
Prices."
ALL SHAREHOLDERS ARE URGED TO READ THIS PROXY STATEMENT
CAREFULLY AND IN ITS ENTIRETY.
<PAGE> 6
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT AND IS NOT INTENDED TO BE A COMPLETE STATEMENT OF THE
MATTERS DESCRIBED HEREIN. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN
ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN THIS PROXY STATEMENT
AND IN THE APPENDICES ATTACHED HERETO. SHAREHOLDERS ARE URGED TO READ THIS PROXY
STATEMENT AND THE APPENDICES HERETO IN THEIR ENTIRETY.
THE PARTIES TO THE MERGER
SHELBY COUNTY AND SCSB. Shelby County is an Indiana corporation and a
unitary savings and loan holding company registered under the Home Owners' Loan
Act, as amended (the "HOLA"). Shelby County is the parent holding company of
Shelby County Savings Bank, FSB ("SCSB"), a federally chartered savings bank
which was formed in 1937. The only significant assets of Shelby County are the
capital stock of SCSB and SCSB's branch building located at Shelbyville,
Indiana. Shelby County conducts business from four offices located in
Shelbyville, Morristown, and St. Paul, Indiana. At March 31, 1998, Shelby County
had $98.5 million of total assets, $91.1 million of total liabilities, including
$70.5 million of deposits, and $7.3 million of total shareholders' equity.
References herein to Shelby County include SCSB (and its two inactive
subsidiaries) except where otherwise noted.
Shelby County is primarily engaged in attracting deposits from the general
public through its offices and using those and other available sources of funds
to originate loans secured primarily by one- to four-family residences located
in the Shelby County, Indiana area. At March 31, 1998, Shelby County's net loans
receivable totaled $85.1 million or 86.4% of total assets. One- to four-family
residential loans amounted to $54.3 million or 63.1% of Shelby County's total
loan portfolio at March 31, 1998. To a lesser extent, Shelby County also
originates commercial real estate loans, construction loans, consumer loans and
commercial business loans.
SCSB is a community-oriented savings institution which emphasizes customer
service and convenience. It generally has sought to enhance its net income by,
among other things, maintaining strong asset quality. In pursuit of these goals,
Shelby County has adopted a business strategy that emphasizes lending and
deposit products and services traditionally offered by savings institutions.
The deposits of SCSB are insured to the maximum extent provided by law by
the Savings Association Insurance Fund ("SAIF"), which is administered by the
Federal Deposit Insurance Corporation ("FDIC"). SCSB is subject to examination
and comprehensive regulation by the Office of Thrift Supervision ("OTS"), which
is SCSB's chartering authority and primary federal regulator. SCSB is also
regulated by the FDIC, subject to certain reserve requirements established by
the Board of Governors of the Federal Reserve System ("FRB") and is a member of
the Federal Home Loan Bank ("FHLB") of Indianapolis, which is one of the 12
regional banks comprising the FHLB System.
The executive office for Shelby County and SCSB is located at 29 East
Washington Street, Shelbyville, Indiana 46176, and its telephone number is (317)
398-9721.
BLUE RIVER. Blue River is an Indiana corporation organized on March 18,
1997 by two individuals for the purpose of forming a de novo community bank in
Southeastern Indiana or obtaining ownership of an existing financial
institution. Blue River filed a Registration Statement with the Securities and
Exchange Commission (the "SEC") pursuant to the Securities Act of 1933, as
amended (the "1933 Act"), covering up to 1,725,000 shares of Blue River's common
stock to be sold in its initial public offering. One of the conditions precedent
to the Merger is that Blue River has sold at least 1.0 million shares of its
common stock in the initial public offering (hereinafter, references to the
"IPO" mean the consummation of the sale of at least 1.0 million shares in that
initial public offering).
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Upon completion of the Merger, Blue River intends to be registered as a
unitary savings and loan holding company under the HOLA. Currently, Blue River's
Board of Directors consists of three individuals, but is expected to expand to
seven directors upon the effectiveness of the Merger.
Blue River's executive offices are located at 116 South Harrison Street,
Shelbyville, Indiana 46176, and its telephone number is (317) 392-7700.
Currently, Blue River has no significant assets or liabilities. See "Information
Regarding Blue River Bancshares, Inc."
THE SPECIAL MEETING
The Special Meeting will be held at Shelby County's main office located at
29 East Washington Street, Shelbyville, Indiana, on June 23, 1998 at 8:00 A.M.,
Eastern Standard Time. Only the holders of record of the outstanding shares of
Shelby County Common Stock at the close of business on April 30, 1998 (the
"Voting Record Date") are entitled to notice of and to vote at the Special
Meeting. At the Special Meeting, Shelby County's shareholders will be asked to
consider and vote upon a proposal to approve the Merger Agreement, as well as
the transaction of such other business as may properly come before the Special
Meeting and any adjournment thereof. The affirmative vote of a majority of the
total votes eligible to be cast at the Special Meeting is required to approve
the Merger Agreement. See "The Special Meeting."
HOLDERS OF SHELBY COUNTY COMMON STOCK ARE URGED TO COMPLETE, DATE AND SIGN
THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED, POSTAGE-PAID
ENVELOPE, EVEN IF THEY ARE PLANNING TO ATTEND THE SPECIAL MEETING. ALL PROPERLY
EXECUTED PROXIES RECEIVED PRIOR TO OR AT THE SPECIAL MEETING WILL BE VOTED WITH
RESPECT TO THE MATTERS IDENTIFIED ON THE PROXY CARDS IN ACCORDANCE WITH ANY
INSTRUCTIONS THEREON AND, IF NO INSTRUCTIONS ARE GIVEN, WILL BE VOTED FOR
APPROVAL OF THE MERGER AGREEMENT.
TERMS OF THE MERGER
In accordance with the terms of the Merger Agreement, on the Effective
Time, Shelby County will be merged with and into Blue River (the "Merger"), with
Blue River as the surviving corporation. Each share of Shelby County Common
Stock outstanding immediately prior to consummation of the Merger (other than
shares as to which dissenters' rights have been asserted and duly perfected in
accordance with Indiana law) shall be converted into and represent the right to
receive $56.00 in cash without any interest thereon (the "Merger Price"). In
addition, each unexercised option to purchase Shelby County Common Stock issued
by Shelby County, which in the aggregate currently represent the right to
purchase 13,800 shares of Shelby County Common Stock (together, the "Shelby
County Options"), outstanding at the Effective Time, shall be canceled. Upon
consummation of the Merger, Shelby County shareholders will have not voting
control or financial interest whatsoever in Blue River.
The Merger Agreement is an amendment and restatement of an Agreement of
Affiliation and Merger dated as of February 5, 1998 (the "Prior Merger
Agreement") entered into by the parties. However, in early March, 1998, Blue
River informed Shelby County that Blue River desired to delete one of the
conditions precedent to the Merger set forth in the Prior Merger Agreement, that
being that SCSB would convert from a federally chartered savings bank to an
Indiana state-chartered commercial bank immediately prior to the consummation of
the Merger. In light of the fact that such change did not affect the Merger
Price or otherwise affect the shareholders or other constituents of Shelby
County and SCSB, the Boards of Directors of Shelby County and SCSB approved the
amended and restated version of the Merger Agreement (the "Restated Merger
Agreement").
On June 2, 1998, the Boards of Directors of Shelby County and SCSB, after
consultation with Shelby County's financial advisor, approved amending the
Restated Merger Agreement (the "Amendment"). The sole change to the Restated
Merger Agreement was to reduce the cash consideration per share to be received
by Shelby County shareholders from $58.00 to $56.00. Blue River initially
proposed a reduction to $55.00, but
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<PAGE> 8
Shelby County and its financial advisor negotiated the smaller reduction to
$56.00. The reduction was agreed to due to certain events which occurred as a
result of a routine periodic examination of SCSB by the OTS and after entering
into the Restated Merger Agreement. Specifically, Blue River noted that (i)
Shelby County's allowance for loan losses was increased to $435,000 for the six
months ended March 31, 1998 compared to $50,000 for the six months ended March
31, 1997, and (ii) Shelby County reserved approximately $150,000 which it
expects to incur for certain environmental remediation efforts at the St. Paul
branch location. (For more information about these two matters, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Subsequent Events.") Blue River noted that these two items
resulted in a charge to earnings for the period ended March 31, 1998.
Accordingly, Shelby County's net worth had been reduced.
For a more detailed discussion of the Amendment's adoption by the Boards of
Directors, and for a description of the analysis of Shelby County's financial
advisor as to the reduction, see "The Merger -- Background of and Reasons for
the Merger; Recommendation of the Board of Directors -- Reduced Merger Price"
and "The Merger -- Opinion of Financial Advisor -- Reduced Merger Price." (As
mentioned above, throughout this Proxy Statement, the Restated Merger Agreement,
as amended by the Amendment, is referred to as the "Merger Agreement.")
FAIRNESS OPINION
The Board of Directors of Shelby County has received a written opinion from
Trident Financial Corporation ("Trident"), dated as of June 11, 1998, to the
effect that the consideration to be paid to Shelby County's shareholders
pursuant to the Merger Agreement is fair to the shareholders of Shelby County
from a financial point of view (the "Fairness Opinion"). A copy of the Fairness
Opinion of Trident is attached hereto as Appendix B and should be read in its
entirety. See "The Merger -- Opinion of Financial Advisor." For additional
information pertaining to the surrender of stock certificates, see "The
Merger -- Surrender of Certificates."
RECOMMENDATION OF THE BOARD OF DIRECTORS OF SHELBY COUNTY
The Board of Directors of Shelby County has determined that the Merger is
in the best interests of the shareholders and, accordingly, has unanimously
approved the Merger. THE BOARD OF DIRECTORS OF SHELBY COUNTY UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE MERGER AGREEMENT. SEE "THE
MERGER -- BACKGROUND OF AND REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD
OF DIRECTORS."
CONDITIONS TO THE MERGER
The obligations of the parties to the Merger Agreement to consummate the
transactions contemplated thereunder are subject to a variety of conditions,
including the approval by the shareholders of Shelby County, the receipt of all
required regulatory approvals, the completion of the IPO, the receipt of
opinions from counsel to Shelby County and Blue River, the continued accuracy of
the representations and warranties of each party to the Merger Agreement, and
the delivery of certain documentation contemplated by the Merger Agreement. See
"The Merger -- Representations and Warranties; Conditions to the Merger." SHELBY
COUNTY'S BOARD OF DIRECTORS REMINDS SHAREHOLDERS THAT COMPLETION OF THE MERGER
IS CONDITIONED UPON SEVERAL CONDITIONS PRECEDENT. IN PARTICULAR, BLUE RIVER'S
ABILITY TO COMPLETE THE IPO IS ONE OF THOSE CONDITIONS PRECEDENT, AND IT IS
CONTINGENT UPON MANY FACTORS, SUCH AS THE GENERAL CONDITION OF THE STOCK MARKET,
THE MARKET FOR INITIAL PUBLIC OFFERINGS, AND THE MARKET FOR FINANCIAL
INSTITUTIONS' STOCK. ACCORDINGLY, SHAREHOLDERS SHOULD NOTE THAT COMPLETION OF
THE MERGER IS IN NO WAY GUARANTEED.
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DISSENTERS' RIGHTS
Holders of shares of Shelby County Common Stock who object to the Merger
and comply with the prescribed statutory procedures may be entitled to have the
fair value of their shares determined in accordance with the Indiana Business
Corporation Law ("BCL") and paid to them in cash in lieu of the cash they would
otherwise be entitled to receive in the Merger. A copy of the pertinent
statutory provisions of the BCL is attached to this Proxy Statement as Appendix
D. FAILURE TO FOLLOW SUCH PROVISIONS PRECISELY MAY RESULT IN A LOSS OF
DISSENTERS' RIGHTS. See "Dissenters' Rights."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The payment of cash for the Shelby County Common Stock pursuant to the
terms of the Merger Agreement will be a taxable transaction to the shareholders
of Shelby County for federal income tax purposes and may also be a taxable
transaction under state, local and other tax laws. The shareholders of Shelby
County are urged to consult their personal tax advisors regarding the tax
consequences of the proposed transaction as it may relate to them. See "The
Merger -- Certain Federal Income Tax Consequences."
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for as a purchase for accounting purposes. See
"The Merger -- Accounting Treatment of the Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The Merger Agreement contains provisions which (i) require Blue River, from
and after the Effective Time, to provide coverage for all SCSB employees who
meet the applicable eligibility requirements under Blue River's profit sharing
plan and group health and hospitalization insurance plan; (ii) require Blue
River to cause SCSB to keep the indemnification provisions in its Charter in
effect on the date of the Merger Agreement in full force and effect for a period
of not less than two years following the Effective Time; and (iii) require SCSB
to pay to Mr. Meyerholtz severance pay equal to approximately three times his
current annual compensation ($211,094), as well as provide him with certain
health insurance benefits, as a result of the termination of his employment as
of the Effective Time. Also, each director of Shelby County has agreed to vote
his shares of Shelby County Common Stock in favor of the Merger. See "The
Merger -- Interests of Certain Persons in the Merger."
Chairman Robison's nephew, D. Warren Robison, is an executive officer and
director of Blue River and is one of its founders. However, Chairman Robison and
Mr. Robison have no agreement or understanding as to any matter in connection
with the Merger, and Shelby County's Board of Directors was informed of this
relationship prior to the initial discussions with Blue River. Chairman Robison
was actively involved in the merger negotiations on behalf of Shelby County.
Blue River has informed Shelby County that D. Warren Robison was involved in
Blue River's internal discussions pertaining to the Merger. He was not, however,
actively involved in the direct negotiations with Shelby County.
Other than as summarized above or set forth in the referenced section, no
director or executive officer of Shelby County or Blue River has any direct or
indirect material interest in the Merger, except in the case of the directors
and executive officers of Shelby County insofar as ownership of Shelby County
Common Stock and the Shelby County Options might be deemed such an interest.
STOCK OPTION AGREEMENT
In connection with entering into the Prior Merger Agreement, Blue River and
Shelby County entered into a Stock Option Agreement dated as of February 5, 1998
(the "Option Agreement"). Pursuant to the Option Agreement, Blue River has the
right to obtain 24.8% of the issued and outstanding shares of the common stock
of Shelby County (on a fully diluted basis) at a $49.16 cash price per share,
after the
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occurrence of one of three conditions precedent (the "Blue River Option"). The
Blue River Option is exercisable through the date which is one year following
termination of the Merger Agreement, provided that the Blue River Option will
automatically expire on the date the Merger Agreement has been terminated if
Shelby County has not breached its covenant in the Merger Agreement not to enter
into a business combination or other affiliation with another person or entity.
While outstanding, the Blue River Option is exercisable only if a shareholder of
Shelby County (or a group of such shareholders) which beneficially owns 20.0% or
more of the shares of Shelby County Common Stock opposes the Merger Agreement or
proposes to enter into a merger or similar agreement with Shelby County, a
person or group of persons makes a tender or exchange offer for 20.0% or more of
the Shelby County Common Stock, or Shelby County accepts a proposal or enters
into an agreement with another person or group of persons to acquire Shelby
County by merger, tender office or similar transaction. In addition, the Stock
Option Agreement provides Blue River with certain rights to require Shelby
County to redeem the shares it obtains upon exercise of the Blue River Option.
See "The Merger -- Stock Option Agreement."
MARKET PRICES
The Shelby County Common Stock is traded in the over-the-counter market.
The following table sets forth the high and low bid prices for the quarters
indicated and the dividends paid for such quarter. Such over-the-counter
quotations, garnered through pink sheets, reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
PRICE RANGE DIVIDENDS
------------------- PER
QUARTER ENDED HIGH BID LOW BID SHARE
- ------------- -------- ------- ---------
<S> <C> <C> <C>
March 31, 1996................................ $18.00 $17.00 $.10
June 30, 1996................................. 20.00 18.00 .10
September 30, 1996............................ 20.00 18.00 .10
December 31, 1996............................. 20.00 18.00 .10
March 31, 1997................................ 22.00 21.00 .10
June 30, 1997................................. 24.00 22.00 .10
September 30, 1997............................ 24.50 24.00 .10
December 31, 1997............................. 26.00 25.00 .125
March 31, 1998................................ 45.00 25.00 .125
Through June 2, 1998.......................... N/A* N/A N/A
</TABLE>
- ---------------
* From April 1, 1998 through June 2, 1998, no trades of Shelby County Common
Stock were reported.
On February 5, 1998, the last full trading day prior to the public
announcement of the Merger, the closing bid price per share of Shelby County
Common Stock as reflected in the pink sheets was $30.00. The last reported
closing bid price per share for Shelby County Common Stock as of June 2, 1998,
the latest practicable trading date before printing of this Proxy Statement, was
$40.00.
SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE SHELBY
COUNTY COMMON STOCK, TO THE EXTENT POSSIBLE, PRIOR TO THE SPECIAL MEETING.
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SELECTED FINANCIAL DATA OF SHELBY COUNTY
(DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA AND PER SHARE DOLLAR AMOUNTS)
The following table presents certain condensed consolidated historical
financial and operating data of Shelby County as of and for each of the years in
the five-year period ended September 30, 1997 and as of and for each of the six
month periods ended March 31, 1998 and 1997. The following table should be read
in conjunction with the consolidated financial statements of Shelby County,
including the respective notes thereto, which appear elsewhere in this Proxy
Statement. See "Consolidated Financial Statements -- Shelby County Bancorp". In
the opinion of management of Shelby County, the data presented for the six month
periods ended March 31, 1998 and 1997 reflect all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of such data.
Results for the six month periods ending March 31, 1998 and 1997 are not
necessarily indicative of results that may be expected for any other interim
period or the year as a whole.
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS ENDED
MARCH 31, AT OR FOR THE YEAR ENDED SEPTEMBER 30,
----------------- -----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME:
Interest income................................ $ 3,740 $ 3,270 $ 6,708 $ 5,839 $ 4,876 $ 4,375 $ 4,506
Interest expense............................... 2,219 1,914 3,892 3,341 2,577 2,138 2,305
------- ------- ------- ------- ------- ------- -------
Net interest income............................ 1,521 1,356 2,816 2,498 2,299 2,237 2,201
Provision for loan losses...................... 435 50 104 100 55 66 52
Non-interest income............................ 219 168 349 518 368 291 327
Non-interest expense........................... 1,302 1,072 2,253 2,546 2,078 1,893 1,916
------- ------- ------- ------- ------- ------- -------
Income before income taxes..................... 3 402 808 370 534 569 560
Provision for income taxes..................... 1 153 295 134 196 209 228
------- ------- ------- ------- ------- ------- -------
Net income..................................... $ 2 $ 249 $ 513 $ 236 $ 338 $ 360 $ 332
======= ======= ======= ======= ======= ======= =======
PER SHARE DATA:
Basic earnings per share....................... $ .01 $ 1.41 $ 2.92 $ 1.34 $ 1.94 $ 2.08 $ 1.93
Diluted earnings per share..................... .01 1.39 2.83 1.32 1.94 2.08 1.93
Cash dividends per share....................... .25 .40 0.40 0.40 .36 .33 .33
Book value per share........................... 41.75 38.25 40.76 36.56 35.65 33.54 30.87
BALANCE SHEET DATA:
Total assets................................... $98,465 $87,795 $90,609 $82,676 $67,887 $57,123 $59,343
Loans, net..................................... 85,133 70,349 76,038 66,098 50,600 43,136 41,697
Allowance for loan losses...................... 715 362 392 326 241 189 141
Securities..................................... 8,834 8,410 8,695 8,511 7,281 5,470 7,403
Deposits....................................... 70,533 65,853 64,633 65,286 61,202 51,068 53,992
Shareholders' equity........................... 7,346 6,730 7,171 6,433 6,100 5,733 5,215
PERFORMANCE RATIOS:(1)
Return on average assets....................... .00% .58% 0.59% 0.31% 0.54% 0.61% 0.59%
Return on average shareholders' equity......... .05 7.57 7.66 3.83 5.84 6.62 6.54
Net interest margin............................ 3.23 3.29 3.37 3.46 3.81 3.91 4.03
Non-interest income to total average assets.... .45 .39 0.40 0.68 0.59 0.49 0.58
Non-interest expense to total average assets... 2.67 2.50 2.59 3.63 3.32 3.21 3.41
Efficiency ratio(2)............................ 74.83 70.34 71.18 84.42 78.00 75.00 76.00
ASSET QUALITY RATIOS:
Non-performing loans to total loans............ .78% .80% 0.54% 0.45% 0.90% 1.25% 0.69%
Allowance for loan losses to total loans....... .83 .51 0.52 0.49 0.48 0.44 0.34
Allowance for loan losses to non-performing
loans........................................ 106.24 64.53 86.34 108.67 53.16 34.92 48.79
Net charge-off loans to average loans(1)....... .14 .02 0.05 0.02 0.01 0.04 0.09
CAPITAL RATIOS:
Shareholders' equity to assets (at end of
period)...................................... 7.46% 7.67% 7.91% 7.78% 9.00% 10.04% 8.79%
Tangible capital ratio......................... 5.91 6.41 6.32 6.09 7.30 9.20 8.70
Core capital ratio............................. 5.91 6.41 6.32 6.09 7.30 9.20 8.70
Total risk-based capital ratio................. 8.89 10.17 9.49 9.66 12.30 17.54 16.80
OTHER RATIOS:
Dividend payout ratio.......................... 2299.42% 14.13% 13.71% 29.80% 18.71% 15.93% 16.48%
Average equity to average assets............... 7.55 7.66 7.70 8.15 9.25 9.21 9.03
</TABLE>
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(1) Performance ratios for the six months ended March 31, 1998 and 1997 are
stated on an annualized basis.
(2) Efficiency ratio is equal to non-interest expense divided by net interest
income plus non-interest income less gains or losses on security
transactions.
7
<PAGE> 12
THE SPECIAL MEETING
This Proxy Statement is being furnished to Shelby County's shareholders in
connection with the solicitation of proxies by the Board of Directors of Shelby
County for use at the Special Meeting to be held on June 23, 1998, and at any
adjournment thereof.
SHAREHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS. Shelby County stock certificates should NOT be forwarded until after
receipt of a letter of transmittal, which will be provided to shareholders
promptly following consummation of the Merger.
This Proxy Statement, the Notice of Special Meeting of Shareholders and the
accompanying proxy solicited by the Board of Directors of Shelby County are
first being mailed to the shareholders of Shelby County on or about June 12,
1998.
All information contained in this Proxy Statement relating to Shelby County
and its subsidiaries has been supplied by Shelby County, and all information
contained in this Proxy Statement relating to Blue River has been supplied by
Blue River.
PURPOSE OF MEETING. The purpose of the Special Meeting is to consider and
vote upon a proposal to approve the Merger Agreement and the transaction of such
other business as may properly come before the Special Meeting and any
adjournment thereof. It is not anticipated that any other matter will be brought
before the Special Meeting. If any other matter is properly presented at the
Special Meeting for consideration, the persons named in the enclosed form of
proxy card and acting thereunder will have discretion to vote on such matter in
accordance with their best judgment.
SHARES OUTSTANDING AND ENTITLED TO VOTE; VOTING RECORD DATE. The close of
business on April 30, 1998 has been fixed by the Board of Directors of Shelby
County as the Voting Record Date for the determination of holders of Shelby
County Common Stock entitled to notice of and to vote at the Special Meeting and
any adjournment thereof. At the close of business on the Voting Record Date,
there were 175,950 shares of Shelby County Common Stock outstanding, held by
approximately 230 holders of record. Each share of Shelby County Common Stock
entitles the holder thereof to one vote on each matter to be submitted to
shareholders at the Special Meeting.
VOTE REQUIRED. A quorum, consisting of a majority of the voting power of
the issued and outstanding Shelby County Common Stock, must be present in person
or by proxy before any action may be taken at the Special Meeting. Shares as to
which the "ABSTAIN" box has been marked on the proxy will be counted as present
for determining if a quorum is present. Under the BCL, the affirmative vote of
the holders of at least a majority of the issued and outstanding Shelby County
Common Stock is required to approve the Merger Agreement. Because of the
required vote, abstentions will have the effect of a vote against the Merger
proposal.
Under the agreements with most brokers and similar firms, the proposal to
approve the Merger Agreement is a "non-discretionary" item upon which such firms
may not vote in the absence of voting instructions from their clients and for
which there will be broker non-votes (i.e., the withholding of a vote by a
broker on a non-discretionary proposal by the broker). Broker non-votes will
have the same effect as a vote against the Merger proposal.
As of the Voting Record Date, the directors, a former director, and
executive officers of Shelby County and their associates in the aggregate
beneficially owned and are entitled to vote 29,239 shares or 16.6% of the
outstanding shares of Shelby County Common Stock. The directors of Shelby County
intend to vote or cause to be voted all shares of Shelby County which they have
the right to vote for approval of the Merger Agreement, and they have so agreed
in the Merger Agreement.
VOTING; REVOCATION OF PROXIES. A proxy for use at the Special Meeting is
being furnished to each Shelby County shareholder together with this Proxy
Statement and is solicited by the Board of Directors of Shelby County. Any
shareholder executing a proxy may revoke it at any time before it is voted by
filing with the Secretary of Shelby County (David A. Carmony, Secretary, Shelby
County Bancorp, 29 East Washington Street, Shelbyville, Indiana 46176) a written
notice of revocation or a proxy bearing a later date, or by voting
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<PAGE> 13
in person at the Special Meeting. Attendance at the Special Meeting will not of
itself constitute revocation of a proxy. If your shares are not registered in
your own name, you will need additional documentation from your recordholder in
order to vote personally at the Special Meeting. Each proxy returned to Shelby
County (and not revoked) will be voted in accordance with the instructions
indicated thereon.
SOLICITATION OF PROXIES. Shelby County will bear the costs of soliciting
proxies from the holders of Shelby County Common Stock. Proxies will initially
be solicited by Shelby County by mail, but directors, officers and selected
other employees of Shelby County may also solicit proxies by personal interview,
telephone, telegraph or e-mail. Directors, officers and any other employees of
Shelby County who solicit proxies will not be specially compensated for such
services, but may be reimbursed for out-of-pocket expenses incurred in
connection therewith. Brokerage houses, nominees, fiduciaries and other
custodians will be requested to forward soliciting materials to beneficial
owners and will be reimbursed for their reasonable out-of-pocket expenses
incurred in sending proxy materials to beneficial owners. Shelby County's
transfer agent, Registrar and Transfer Company, has agreed to assist Shelby
County in connection with the tabulation of proxies. In addition, Corporate
Investors Communications, Inc. ("CIC") has been retained by Shelby County to
assist in the solicitation of proxies. CIC may contact holders of shares of
Shelby County Common Stock by mail, telephone, facsimile, telegraph, e-mail and
personal interviews, and may request brokers, dealers and other nominee
shareholders to forward materials to beneficial owners of shares of Shelby
County Common Stock. CIC will receive reasonable and customary compensation for
its services (estimated at $3,000), will be reimbursed for certain reasonable
out-of-pocket expenses and will be indemnified against certain liabilities and
expenses in connection therewith.
IF NO INSTRUCTIONS ARE INDICATED, THE PROXY WILL BE VOTED
FOR APPROVAL OF THE MERGER AGREEMENT.
9
<PAGE> 14
THE MERGER
The following description of the material terms of the Merger does not
purport to be complete and is qualified in its entirety by reference to the
Merger Agreement (as amended by the Amendment), a copy of which is attached to
this Proxy Statement as Appendix A. All shareholders are urged to read such
document carefully.
BACKGROUND OF AND REASONS FOR THE MERGER;
RECOMMENDATION OF THE BOARD OF DIRECTORS
BACKGROUND OF THE MERGER. In 1993, Shelby County entered into an agreement
to merge with a bank holding company for stock consideration valued at $35.22
per share of Shelby County Common Stock. That transaction was approved by Shelby
County's shareholders, and the transaction was scheduled to close. However, the
potential buyer terminated the agreement citing environmental concerns about
SCSB's St. Paul branch location and adjoining property. During the rest of 1993,
all of 1994, and the early portion of 1995, SCSB engaged environmental
specialists to test and sample the property (both the St. Paul branch location
and adjoining property) and its ground water. Through this process, it was
determined that the environmental concerns (which generally involved the
existence of petroleum-based liquid phase hydrocarbons) as to the adjoining
property were lessening, but were still of a sufficient magnitude that a
potential buyer of Shelby County and SCSB might be concerned. Accordingly, in
April 1995, the adjoining parcel was sold to a third party and SCSB obtained
indemnification from the buyer for any future environmental claims in connection
with that property.
Thereafter, Shelby County was approached by two potential acquirors, but
the negotiations never proceeded to the execution of a definitive purchase
agreement. The first indication of interest occurred in late 1995, but the
proposed buyer informed Shelby County in June 1996 that it was no longer
interested in pursuing an affiliation because of (i) the environmental situation
at the St. Paul branch location and (ii) SCSB's declining profits. Shelby
County's Board of Directors responded that the environmental situation had been
appropriately addressed, and noted that the declining profits were mostly due to
expenses incurred with the opening of two new branches. Nevertheless, the
parties were not able to continue negotiations.
Shortly thereafter, during late 1996 and into early 1997, a bank holding
company held discussions with Shelby County's Board of Directors about a
possible stock transaction. However, the discussions ceased because the
potential buyer believed that SCSB should significantly increase its loan loss
reserves and the inability of the potential buyer to serve SCSB's customers.
Shelby County's Board of Directors believed the concern about the loan loss
reserves occurred because the potential acquiror was familiar with operating
commercial banks but not thrift associations (and therefore was not familiar
with the thrift's generally more secure real estate mortgage loan portfolio as
compared to commercial loan portfolio). Also, Shelby County's Board of Directors
believed that the potential buyer was concerned that it would want to make
changes which might not be readily accepted in a small community.
In May 1997, Blue River initiated informal discussions with Shelby County
pertaining to a proposed merger for cash consideration of $46.50 per share of
Shelby County Common Stock. Shelby County and Blue River continued negotiations,
with Blue River ultimately increasing the proposed per share consideration to
$50.00 cash per share or two shares of Blue River common stock for each share of
Shelby County Common Stock. However, those discussions were put on hold because
Shelby County received a proposal from another thrift organization to obtain
control of SCSB for cash consideration of $56.00 per share in August 1997. The
Board of Directors pursued that transaction because of the larger proposed
purchase price per share as compared to Blue River's offer, but the potential
buyer halted the discussions in October 1997. The potential buyer indicated that
it was not interested in proceeding because of (i) SCSB's long-term data
processing contract, (ii) concern about certain commercial loans, and (iii) to a
degree, the environmental situation at the St. Paul branch location. Based upon
the cessation to these negotiations, Shelby County renewed negotiations with
Blue River.
In connection with Blue River's initial interest in acquiring Shelby
County, the Board of Directors believed it was appropriate to obtain the
services of an independent financial advisor to assist in evaluating Blue
River's offer (and any other offers that might be received). Accordingly, Shelby
County and Trident
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<PAGE> 15
entered into a letter agreement dated July 3, 1997. As part of Trident's
engagement, Trident is to provide the Fairness Opinion, which is described in
"-- Opinion of Financial Advisor." Trident's engagement also includes providing
the Board of Directors with information that supports Trident's conclusions and
a discussion of negotiation issues that could occur if Shelby County were to
receive one or more offers. For instance, Trident generally reviewed the offer
from the thrift organization discussed in the preceding paragraph, and concluded
that it was more attractive and less risky to the shareholders of Shelby County
than Blue River's offer because of the larger proposed purchase price and the
fact that the proposed purchaser, as a well-capitalized entity, would most
likely not need to make a stock offering or otherwise need to raise the funds to
pay the aggregate purchase price. However, Trident was not engaged to direct or
participate in negotiation with potential acquirors.
From mid-December 1997 to February 5, 1998, the Board of Directors of
Shelby County and its counsel reviewed and revised several drafts of the
definitive agreement to be entered into with Blue River. The terms of the Prior
Merger Agreement were reviewed in detail and actively negotiated. In late
December, Shelby County's counsel contacted Trident to confirm that Trident's
earlier valuation range was still applicable and that Trident would be able to
issue a fairness opinion to the Board of Directors that the proposed cash
consideration of $50.00 per share was fair to Shelby County's shareholders.
Trident updated its earlier valuation materials and determined that, based upon
increases in the consideration paid in recently completed acquisitions of
similar financial institutions, Trident would not be able to issue such a
fairness opinion. Accordingly, Blue River and Shelby County renewed negotiations
as to the purchase price, with Blue River proposing an increased purchase price
of $54.50 per share of Shelby County Common Stock. The Board of Directors, after
conferring with Trident, decided that the increased per share amount was still
not sufficient, and the parties continued negotiations. Ultimately, they arrived
at the previously proposed Merger Price of $58.00 per share of Shelby County
Common Stock. Once that was determined in late January 1998, the parties
finalized negotiations as to the Prior Merger Agreement, related documents, and
the Stock Option Agreement, and on February 2, 1998, the Board of Directors of
Shelby County reviewed the proposed definitive Prior Merger Agreement in detail.
After consideration of all factors deemed relevant and in conjunction with
advice from Trident and Shelby County's counsel, the Board of Directors
determined that the proposed Merger was in Shelby County's best interests and
the best interests of Shelby County's shareholders and unanimously approved the
Merger. Blue River and Shelby County executed the Prior Merger Agreement on
February 5, 1998 and publicly announced the transaction after the close of
business on such date.
In connection with the above-mentioned discussions, and the proposed Merger
in particular, the Board of Directors of Shelby County considered the long-term
ability of Shelby County to grow in the competitive banking community of
Southeastern Indiana and to provide its shareholders with the returns necessary
to remain an independent company. The Board also considered the continued
consolidation of the thrift and banking industries; the fact that larger savings
institutions and banks are able to compete more effectively for new customers;
and the uncertainty of congressional and other proposals to eliminate the thrift
charter.
REDUCED MERGER PRICE. On June 2, 1998, the Boards of Directors of Shelby
County and SCSB, after consultation with Shelby County's financial advisor,
approved amending the Restated Merger Agreement (the "Amendment"). The sole
change to the Restated Merger Agreement was to reduce the cash consideration per
share to be received by Shelby County shareholders from $58.00 to $56.00. Blue
River initially proposed a reduction to $55.00, but Shelby County and its
financial advisor negotiated the smaller reduction to $56.00. The reduction was
agreed to due to certain events which occurred as a result of a routine periodic
examination of SCSB by the OTS and after entering into the Restated Merger
Agreement. Specifically, Blue River noted that (i) Shelby County's allowance for
loan losses was increased to $435,000 for the six months ended March 31, 1998
compared to $50,000 for the six months ended March 31, 1997, and (ii) Shelby
County reserved approximately $150,000 which it expects to incur for certain
environmental remediation efforts of the St. Paul branch location. (For more
information about these two matters, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Subsequent Events.") Blue
River noted that these two items resulted in a charge to earnings for the period
ended March 31, 1998. Accordingly, Shelby County's net worth had been reduced.
11
<PAGE> 16
As noted above, the Boards of Directors of Shelby County and SCSB agreed to
this reduction, but only a reduction of $2.00 per share (or $379,500 in the
aggregate) as compared to Blue River's proposed $3.00 per share (or $569,250 in
the aggregate). In negotiating this change, Trident noted to Blue River and its
underwriter in the IPO that the net effect of these two reductions in net
income, taking into account the income tax savings resulting from Shelby
County's gross income being reduced, more approximated the aggregate effect of a
$2.00 reduction rather than a $3.00 reduction. Blue River agreed, and the new
Merger Price of $56.00 was agreed to by the parties. Also, the Boards noted that
the reduced Merger Price of $56.00 remains within the valuation range previously
determined by Trident (see "-- Opinion of Financial Advisor" below), and Trident
confirmed that the Merger Price remained within the applicable valuation range.
REASONS FOR THE MERGER. The terms of the Merger Agreement, including the
Merger Price to be paid to Shelby County's shareholders, were the result of
arm's-length negotiations between the representatives of Shelby County and Blue
River. Among the factors considered by the Board of Directors of Shelby County
in deciding to approve and recommend the terms of the Merger were (i) the Merger
Price to be paid to Shelby County's shareholders in relation to the market
value, book value, earnings per share and dividend rates of the Shelby County
Common Stock, (ii) information concerning the financial condition, results of
operations, capital levels, asset quality and prospects of Shelby County, (iii)
industry and economic conditions, (iv) the impact of the Merger on the
depositors, employees, customers and communities served by Shelby County through
possibly expanded commercial, consumer and retail banking products and services,
and (v) the opinion of Trident as to the fairness of the Merger Price from a
financial point of view to the holders of the Shelby County Common Stock. In
making its determination, the Board of Directors of Shelby County did not
ascribe relative weights to the factors which it considered.
The Board of Directors of Shelby County believes that the Merger is in the
best interest of Shelby County and its shareholders. THE BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE APPROVAL OF THE MERGER
AGREEMENT.
OPINION OF FINANCIAL ADVISOR
FAIRNESS OPINION. As mentioned above, Shelby County retained Trident in
July, 1997 to serve as its financial advisor and to provide valuation services
in connection with possible offers to obtain control of Shelby County and SCSB.
On September 23, 1997, Trident delivered to the Board of Directors a report that
estimated the value of Shelby County in a merger or sale of control (the
"Valuation Report"). Trident updated a portion of the Valuation Report in
December, 1997. Shelby County's Board of Directors used the updated Valuation
Report, along with other information, to negotiate the Merger with Blue River.
On February 2, 1998, Trident delivered a fairness opinion to Shelby County's
Board of Directors to the effect that, as of that date, the previous Merger
Price of $58.00 to be received by Shelby County's shareholders was fair from a
financial point of view. Trident then confirmed the conclusions set forth in
that fairness opinion (taking into account the Amendment and the $2.00 reduction
in the Merger Price) and issued the Fairness Opinion as of June 11, 1998. The
financial fairness standard employed by Trident in rendering its Fairness
Opinion was whether such consideration was within the range of the economic
values of consideration that companies having the characteristics of Shelby
County and Blue River might negotiate in comparable circumstances. In
determining this range of values, all forms of consideration were included.
Trident established a minimum value of $55.00 per share for Shelby County, and
the Merger Price is in excess of that minimum value. See "-- Valuation of Shelby
County" and "-- Updated Valuation" below.
A copy of the Fairness Opinion, which sets forth certain assumptions made,
matters considered and limitations on the reviews undertaken, is attached to
this Proxy Statement as Appendix B. Trident has consented to the inclusion of
the Fairness Opinion and summaries of the Valuation Report, as updated, in this
Proxy Statement.
TRIDENT'S FAIRNESS OPINION IS DIRECTED TO THE BOARD OF DIRECTORS OF SHELBY
COUNTY AND IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF
THE CONSIDERATION TO BE RECEIVED BY SHELBY COUNTY'S SHAREHOLDERS BASED ON
CONDITIONS AS THEY EXIST AND CAN BE EVALUATED AS OF THE DATE
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<PAGE> 17
OF THE FAIRNESS OPINION. TRIDENT'S FAIRNESS OPINION DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY SHELBY COUNTY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER
SHOULD VOTE AT THE SPECIAL MEETING, NOR DOES TRIDENT'S FAIRNESS OPINION ADDRESS
THE UNDERLYING BUSINESS DECISION TO EFFECT THE MERGER. THIS SUMMARY OF TRIDENT'S
FAIRNESS OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE TEXT OF SUCH
OPINION, WHICH IS ATTACHED TO THIS PROXY STATEMENT AS APPENDIX B. SHAREHOLDERS
ARE URGED TO READ TRIDENT'S FAIRNESS OPINION IN ITS ENTIRETY FOR A DESCRIPTION
OF THE ASSUMPTIONS MADE AND MATTERS CONSIDERED AND THE LIMITS ON THE REVIEW
UNDERTAKEN IN RENDERING SUCH OPINION.
In connection with rendering its Fairness Opinion, Trident reviewed and
analyzed, among other things, the following (i) this Proxy Statement; (ii) the
Merger Agreement; (iii) certain publicly available information concerning Shelby
County, including the audited financial statements of Shelby County for each of
the years in the three year period ended September 30, 1997 and the unaudited
financial statements of Shelby County for the six months ended March 31, 1998
and 1997; (iv) certain other internal information, primarily financial in
nature, concerning the business and operations of Shelby County furnished to
Trident by Shelby County for purposes of its analysis; (v) certain market
information concerning the limited trading of, and the limited trading market
for, the Shelby County Common Stock; (vi) certain publicly available information
with respect to other companies which it believed to be comparable to Shelby
County and the trading markets for such other companies' securities; and (vii)
certain publicly available information concerning the nature and terms of other
transactions that it considered relevant to its inquiry (which transactions
involved various forms of consideration). Trident met with certain officers of
Shelby County to discuss the foregoing as well as other matters it believed
relevant to its inquiry. No limitations were imposed by either Shelby County or
its Board of Directors or management with respect to the investigation made or
procedures followed by Trident.
In its review and analysis and in arriving at its Fairness Opinion, Trident
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to them by Shelby County, or that was publicly
available, the accuracy of the representations and warranties of the officers
and the employees of Shelby County with whom Trident held discussions, and the
accuracy of the representations and warranties of Shelby County and Blue River
in the Merger Agreement, and did not attempt independently to verify any such
information. Trident further assumed that there are no conditions in the
regulatory approvals of the Merger Agreement that will have a material adverse
effect upon the contemplated economic benefits of the Merger. The financial
information provided to Trident by Shelby County was of the type normally
produced by the management of Shelby County and reviewed by Shelby County's
Board of Directors at its regular meetings and the Board and management of
Shelby County have represented to Trident that they have no reason to believe
that Trident's reliance thereon was unreasonable. Shelby County's Board,
however, did not specifically review the information, assumptions and other
information provided by management to Trident for accuracy and completeness.
Trident did not conduct a physical inspection of the properties or facilities of
Shelby County, nor did it make or obtain any independent evaluations or
appraisals of any of such properties or facilities.
In conducting its analysis and arriving at its Fairness Opinion as
expressed herein, Trident considered such financial and other factors as it
deemed appropriate under the circumstances including, among others, the
following: (i) the historical and current financial condition and results of
operations of Shelby County, including interest income, interest expense, net
interest income, net interest margin, interest sensitivity, non-interest income
and expense, earnings, dividends, book value, return on assets, return on
equity, capitalization, the amount and type of non-performing assets and the
reserve for possible loan losses; (ii) the business prospects of Shelby County;
(iii) the economy in Shelby County's market area; (iv) the historical and
current market for the Shelby County Common Stock and for the equity securities
of certain other companies that it believed to be comparable to Shelby County;
and (v) the nature and terms of certain other acquisition transactions that it
believed to be relevant (which transactions involved various forms of
consideration). Trident also took into account its assessment of general
economic, market, financial and regulatory conditions
13
<PAGE> 18
and trends, as well as its knowledge of the thrift industry, its experience in
connection with similar transactions, and its knowledge of securities valuation
generally.
VALUATION REPORT. The summary of Trident's Valuation Report set forth below
does not purport to be a complete description of the presentation by Trident of
the report to the Board of Directors or of the analyses performed by Trident.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial or summary description. Trident believes that
its analyses and the summary set forth below must be considered as a whole and
that selecting portions of its analyses, without considering all of the
analyses, or all the above summary, without considering all factors and
analyses, would create an incomplete view of the processes underlying the
analyses set forth in Trident's reports and its Fairness Opinion. In addition,
Trident may have given various analyses more or less weight than other analyses,
and may have deemed various assumptions more or less probable than other
assumptions, so that the ranges of valuations resulting from any particular
analysis described above should not be taken to be Trident's view of the actual
value of Shelby County. The fact that any specific analysis has been referred to
in the summary above is not meant to indicate that such analysis was given
greater weight than any other analyses. In performing its analyses, Trident made
numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
Shelby County. The specific analyses performed by Trident are not necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than suggested by such analyses. Such individual analyses
were prepared solely as part of Trident's overall analysis of the fairness of
the consideration to be received by Shelby County's shareholders and were
provided to the Board of Directors in connection with the delivery of Trident's
Fairness Opinion. The analyses do not purport to be appraisals or to reflect the
prices at which a company might actually be sold or the prices at which any
securities may trade at the present time or at any time in the future. In
addition, as described above, Trident's Fairness Opinion and presentation to the
Board of Directors were among the many factors taken into consideration by the
Board of Directors in making its determination to approve the Merger Agreement.
FINANCIAL ANALYSIS OF SHELBY COUNTY. Trident examined Shelby County's
financial performance for the period September 30, 1993 through June 30, 1997 by
analyzing the composition of its balance sheet, adjusting and normalizing its
earnings, and calculating a variety of operating and financial ratios for Shelby
County. Trident also compared the trading multiples of Shelby County's Common
Stock to those of other relevant thrift institutions.
PUBLIC COMPANY ANALYSIS. Trident compared certain financial characteristics
of Shelby County to those of the following groups of Pink Sheet-traded thrifts
as of June 30, 1997: (i) U.S. actively-traded thrifts with assets of between $70
million and $110 million; and (ii) nine Pink Sheet-traded thrifts Trident
believed were most similar to Shelby County in terms of capital structure and
profitability (BankPlus FSB, Gilmer Financial Services, Inc., HFS Bank, FSB,
Mid-Central Financial Corp., Midland Federal S&LA, Pekin Savings SB, Sturgis
B&TC, FSB, Towne Financial Corporation, and Union Financial Bancshares, Inc.).
The financial characteristics compared included Shelby County's balance sheet,
GAAP capital, regulatory capital, asset quality, loan loss reserves, asset and
deposit growth, return on average assets, return on average equity, and earnings
components during the trailing four quarters. In comparison to these peers,
Shelby County had a lower level of liquidity, higher risk-weighted assets,
higher interest rate spread, higher operating expenses, higher non-performing
assets and comparable profitability.
VALUATION OF SHELBY COUNTY. Trident estimated the fair market value of
Shelby County in a merger context. In valuing Shelby County, Trident utilized
the asset approach, income approach and market approach, and then reconciled the
values derived therefrom.
The asset approach considers the market value of a company's assets and
liabilities, as well as any intangible value Shelby County may have. Trident
estimated Shelby County's net asset value by adjusting the carrying value of its
assets and liabilities to reflect current market values. In addition, Trident
increased Shelby County's net asset value for the assumed exercise of
outstanding options to purchase the Shelby County Common Stock, and reduced its
net asset value for the cost of terminating certain long-term contracts and
other merger related expenses. Based on the adjustments discussed above, Trident
estimated Shelby County's
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fully-diluted net asset value to be approximately $6.4 million, or $33.56 per
share. After determining Shelby County's net asset value, Trident added an
intangible premium to reflect the estimated value of its customer relationships.
Based on a branch purchase methodology and intangible ("core deposit") premiums
observed in the market for thrift acquisitions, as well as Trident's knowledge
of Shelby County, Trident applied premiums equal to 4.0% and 8.0% of core
deposits to Shelby County's estimated fully-diluted net asset value. Using the
asset approach, Trident established a reference range of $45.25 to $57.00 per
share of the Common Stock using the asset approach.
Trident also used an income method in its valuation of Shelby County by
capitalizing adjusted earnings for the three months ended June 30, 1997. The
earnings were then annualized and adjusted to included expected merger cost
savings of 30% to 50% as a result of an assumed acquisition of Shelby County
(the "normalized earnings"). The normalized earnings were capitalized by
discounting them at 13%, 15%, and 17% with growth rates from 1% to 7%. These
rates were chosen as an estimate of the required rate of return for holders or
prospective holder of shares of financial institutions similar to Shelby County,
based on a number of factors, including prevailing interest rates, the pricing
ratios of publicly traded financial institutions, the financial condition and
operating results of Shelby County, as well as Trident's general knowledge of
valuation, the securities markets, and acquisition values in mergers of other
financial institutions. Trident also adjusted the resulting values to reflect
the cost of terminating certain long-term contracts, and certain merger-related
expenses. Using the income approach, Trident established a reference range of
$40.25 to $54.00 per share.
In the market approach, Trident analyzed certain median pricing ratios
(e.g., price to book value, price to tangible book value, price to reported
earnings, price to assets, and the premium paid over tangible book value as a
percentage of core deposits) resulting from selected completed thrift merger
transactions, as well as recently announced pending transactions. In applying
the market approach, Trident considered the pricing ratios for the following
groups of thrift merger transactions: (i) all pending thrift merger transactions
(47 transactions); (ii) all pending thrift mergers announced during the 90 days
prior to August 25, 1997 (the date of the market data) (18 transactions); (iii)
all pending thrift mergers involving thrifts located in the Midwest (15
transactions); (iv) all pending thrift mergers in which the aggregate
consideration was between $5 million and $15 million (17 transactions); (v) all
pending thrift mergers in which the target thrift had assets less between $50
million and $125 million (14 transactions); (vi) all pending thrift mergers in
which the target thrift had a return on assets of between 0.40% and 0.70% (10
transactions); (vii) all pending thrift mergers in which the target thrift had a
return on equity of between 5% and 8% (9 transactions); (viii) all pending
thrift mergers in which the target thrift had a tangible equity ratio of between
7% and 9% of assets (10 transactions); and (ix) all pending thrift mergers in
which the target thrift had a non-performing asset ratio of between 0.5% and
1.0% (5 transactions). Trident also considered the pricing ratios for eight
pending or completed thrift merger transactions (since January 1994) in which
the target thrift was of similar size and capital structure as Shelby County,
and in which the target thrift had similar profitability and asset quality.
Trident then compared a number of financial ratios for Shelby County to those of
the target thrift institutions. Based on Shelby County's financial condition and
results of operations, as well as other factors, relative to the groups of
thrift mergers noted above, Trident chose ranges of pricing ratios to apply to
Shelby County. Trident chose price to book value ratios of 135% to 160%,
resulting in per share values of $54.00 to $64.00; price to tangible book value
ratios of 135% to 160%, also resulting in per share values of $54.00 to $64.00;
price to earnings ratios of 20 to 24 times trailing four quarter earnings,
resulting in per share values of $50.00 to $60.00; price to assets ratios of 11%
to 13%, resulting in per share values of $55.50 to $65.50; and premiums over
tangible book value as a percentage of core deposits of 3.0% to 7.0%, resulting
in per share values of $49.50 to $62.25. Based on these derived ranges of value,
Trident established a reference range of $53.00 to $64.00 per share using the
market approach.
Trident then reviewed the results from the three approaches, and after
consideration of all relevant facts, reconciled the acquisition values generated
by each approach and determined a final range for the acquisition value of
Shelby County of $47.00 to $57.00 per share (the "Valuation Range"). Trident did
not apply specific weights to the results under any of the three methods, but
Trident gave greater consideration to the asset approach, which better reflects
specific adjustments and considerations unique to Shelby County.
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UPDATED VALUATION. As mentioned above, Trident updated the Valuation Range
to reflect the changes in the market value of publicly traded thrift stocks
generally and the increase in the acquisition premiums paid in recently
announced thrift acquisitions. However, because Blue River's November 1997 offer
was $50.00, Shelby County's Board of Directors requested that Trident update the
minimum dollar amount of the Valuation Range so that the Board of Directors
could use that information in negotiating the highest Merger Price with Blue
River. Accordingly, after compiling, reviewing, and analyzing the types of
groups of thrift acquisitions described above in the paragraph pertaining to the
market approach, and adding a recently announced transaction involving an
Indiana thrift somewhat similar in size and other characteristics to SCSB in
which the consideration was solely cash, Trident determined that the minimum
price per share for the Merger should be $55.00.
REDUCED MERGER PRICE. On June 2, 1998, Trident orally advised Shelby
County's Board of Directors that the proposed reduction to the Merger Price of
$2.00 contained in the Amendment would not alter Trident's ability to issue the
proposed Fairness Opinion. Trident informed the Board that the $56.00 Merger
Price remained above the suggested minimum price per share earlier determined by
Trident. Also, Trident informed the Board that the reasons given by Blue River
for the proposed reduction supported a reduction of this size. Accordingly,
Trident informed the Board that, if no significant changes occurred, Trident
expected to be in a position to issue its Fairness Opinion at the time of
mailing this Proxy Statement to Shelby County's Shareholders.
TRIDENT. Trident, as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwriting, and
valuations for corporate and other purposes. Trident has extensive experience
with the valuation of financial institutions. In the ordinary course of
business, Trident Securities, Inc., an affiliate of Trident, may actively trade
the securities of Shelby County for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities. The Board of Directors selected Trident as its financial
advisor because of its previous experience with Trident, because Trident is a
nationally recognized investment banking firm specializing in financial
institutions, and because of its substantial experience in transactions similar
to the Merger. Trident is not affiliated with Shelby County or Blue River.
For its services as financial advisor, Shelby County paid Trident a
retainer of $5,000 and a fee of $10,000 upon delivery of the Valuation Report.
An additional fee of $10,000 was paid to Trident shortly after delivery of the
fairness opinion in February, 1998, and an additional $25,000 will be payable
upon consummation of the Merger, for total fees of $50,000. Shelby County has
also agreed to indemnify Trident against certain liabilities, including
liabilities under any applicable federal or state laws.
TERMS OF THE MERGER
At the Effective Time, the Merger will be effectuated and Shelby County
will be merged with and into Blue River and the separate existence of Shelby
County will cease. Each outstanding share of Shelby County Common Stock issued
and outstanding immediately prior to the consummation of the Merger (other than
shares as to which dissenters' rights have been asserted and duly perfected in
accordance with Indiana law) shall be converted into and represent the right to
receive $56.00 in cash without any interest thereon, representing the Merger
Price. The aggregate amount of the Merger Price to be paid in connection with
the Merger is expected to be approximately $10.6 million if all outstanding and
exercisable Shelby County Options are exercised prior to the Effective Time. As
of the date of this Proxy Statement, Shelby County Options have been granted to
purchase an aggregate 13,800 shares of Shelby County Common Stock. As part of
the Merger Agreement, Shelby County has agreed to issue no additional options or
to adopt any additional stock option plan. All such options will automatically
be deemed canceled and of no further effect as of the Effective Time. However,
management of Shelby County anticipates that all such options will be exercised
prior to the Effective Time (and therefore the optionees will have the right to
receive the Merger Price for each such share received upon such exercise).
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SURRENDER OF CERTIFICATES
Promptly but no more than fifteen days following the Effective Time, the
conversion agent designated by Blue River (with the prior approval of Shelby
County) will mail to all holders of record of the Shelby County Common Stock a
letter of transmittal, together with instructions for the exchange of their
Shelby County Common Stock certificates for cash. (Included in those
instructions will be a deadline by which shareholders must deliver their stock
certificates.) Until so exchanged, each certificate representing Shelby County
Common Stock outstanding immediately prior to the Effective Time shall be deemed
for all purposes to evidence ownership of the Merger Price, consisting of cash
in the amount of $56.00 into which each such share is to be converted. Also, in
connection with the certificate exchange, Shelby County shall pay $0.01 per
share of Shelby County Common Stock held by each shareholder as payment of the
redemption of each Common Share Purchase Right outstanding pursuant to Shelby
County's Rights Agreement dated as of April 17, 1995 (the "Rights Agreement").
SHELBY COUNTY'S SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES OF SHELBY
COUNTY COMMON STOCK UNTIL THEY RECEIVE FURTHER INSTRUCTIONS. (If you have
questions prior to receiving your letter of transmittal, please contact
President Meyerholtz at (317) 398-9721.)
REPRESENTATIONS AND WARRANTIES;
CONDITIONS TO THE MERGER
The Merger Agreement contains representations and warranties by Shelby
County, SCSB, and Blue River regarding a variety of matters (made as of the date
of the Prior Merger Agreement, i.e., February 5, 1998). In the case of Shelby
County and SCSB, representations and warranties have been made concerning their
organization, authority to conduct business, capitalization, the power and
authority to enter into the Merger Agreement and to consummate the Merger,
material accuracy of financial statements, compliance with applicable laws, the
absence of certain legal proceedings and other events including material adverse
changes in their business or financial condition, the adequacy of insurance
coverage generally, the validity of loans, taxes, employee benefit plans,
certain contracts, undisclosed liabilities, environmental matters, properties
and the accuracy of information prepared and provided in connection with the
Merger Agreement, among other things. In the case of Blue River, representations
and warranties have been provided concerning its organization, its power and
authority to enter into the Merger Agreement and to consummate the Merger and
compliance with applicable laws. All representations and warranties of the
parties expire upon the earlier of the Effective Time and the termination of the
Merger Agreement and such parties shall have no further liability with respect
thereto, except for fraud or intentional and knowing participation in the making
of untrue, inaccurate or misleading statements in such representations and
warranties.
The obligations of Shelby County, SCSB, and Blue River to consummate the
Merger are subject to the fulfillment, at or prior to the Effective Time, of a
variety of conditions, the material conditions of which are as follows: (i)
completion of the IPO; (ii) approval of the Merger Agreement by the requisite
vote of the shareholders of Shelby County; (iii) the receipt of all requisite
regulatory approvals for the Merger; (iv) the consolidated shareholders' equity
of Shelby County, as of the last day of the month immediately preceding the
Effective Time, shall be at least $6.9 million (after giving effect to expenses
and certain other accruals contemplated in the Merger Agreement); (v) the
continuing accuracy in all material respects of the representations and
warranties of the other party to the Merger Agreement; (vi) compliance in all
material respects with all obligations and covenants of the other party to the
extent not otherwise waived; and (vii) the receipt of certain certificates and
legal opinions.
Except with respect to any required shareholder or regulatory approvals,
all of the conditions of consummating the Merger may be waived at any time by
the party for whose benefit they were created, and the Merger Agreement may be
amended by written agreement of the parties, except that after approval of the
Merger Agreement by Shelby County's shareholders, there may not be, without
further approval of such shareholders, any amendment, of the Merger Agreement
which materially and adversely affects the rights of the shareholders.
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REGULATORY AND OTHER APPROVALS
Receipt of all requisite regulatory approvals is a condition precedent to
consummating the Merger. There can be no assurance, however, that any or all of
such regulatory approvals will be forthcoming or, if received, the timing of
such receipt. Blue River filed an application with the OTS with respect to Blue
River becoming a unitary savings and loan holding company on March 20, 1998, has
received comments on that application, and recently responded to those comments.
OTS will take into consideration the financial managerial resources and future
prospects of Blue River and SCSB, as well as the convenience and needs of the
communities to be served after the Merger, in reaching a decision as to whether
to approve the application. Blue River expects the OTS to grant approval of that
application in June 1998.
In connection with the IPO, Blue River filed a registration statement with
the SEC registering the shares to be offered and sold in the IPO pursuant to the
1993 Act. Certain limited offering efforts may be undertaken while that
registration statement is pending, but the sale of the common stock of Blue
River will not be able to be effected until the SEC declares the registration
statement "effective." Blue River currently expects the registration statement
to be declared effective prior to June 23, 1998, although there can be no
assurance that the SEC will so act, or when the SEC will declare the
registration statement effective if it does so act.
Blue River and Shelby County are unaware of any other governmental
approvals or actions that are required for consummation of the Merger except as
described above. Should any such approval or action be required, it is presently
contemplated that such approval or action will be sought. There can be no
assurance, however, that any such approval or action, if needed, could be
obtained, would not delay the consummation of the Merger.
BUSINESS PENDING THE MERGER
Section 6.03(a) of the Merger Agreement prohibits certain actions by Shelby
County and SCSB without the prior written consent of Blue River. The material
prohibitions on activities include the following: (a) making any changes in
their capital stock accounts; (b) authorizing or issuing any new securities
(other than the 13,800 shares of Shelby County Common Stock which may be
exercised in connection with the outstanding Shelby County Options); (c) paying
dividends on the Shelby County Common Stock in an amount in excess of $0.125 per
share per quarter; (d) redeeming any of Shelby County's outstanding shares of
common stock; (e) merging, combining, consolidating or effecting a share
exchange, selling substantially all their assets, or undertaking a similar
transaction; (f) making any loan except in the ordinary course of business in
accordance with sound banking practices; (g) acquiring or disposing of any
property or asset in excess of $5,000 individually or $10,000 in the aggregate
except in the ordinary course of business; (h) borrowing more than $22.5 million
from the FHLB of Indianapolis; (i) increasing compensation of employees except
in the ordinary course of business and in accordance with past practices and
established employment policies; (j) changing employee benefit plans; (k) hiring
a significant number of new employees; (l) amending charter documents; (m)
failing to accrue for reserves and various liabilities in keeping with past
practice; (n) opening, closing, moving or, in any material respects, expanding,
renovating, altering or changing any offices or branches; (o) paying certain
consulting or related fees; (p) entering into certain types of contracts; (q)
electing or appointing any director or officer; (r) violating any law, statute,
rule, regulation, directive or other legal requirement in any material respect;
or (s) entering into any contract, agreement, commitment or understand with
respect to any of the foregoing.
Prior to the Effective Time, Shelby County must terminate the stock option
plan pursuant to which the Shelby County Options have been granted and assist
Blue River in the termination of SCSB's retirement plan. Also, Shelby County
must redeem the rights granted pursuant to the Rights Agreement, and SCSB must
use all reasonable efforts to cause the employment agreements between SCSB and
three executives of SCSB to be amended so that each such employee no longer has
a stated right to participate in a stock option plan, that each such employee
will receive employee benefits in accordance with Blue River's employee benefit
plans instead of SCSB's plans, and the term of each such employment agreement
ends one year from the Effective Time.
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In addition, Shelby County has agreed not to solicit or encourage inquiries
or proposals with respect to, or furnish information relating to or participate
in any negotiations or discussions concerning, any acquisition or purchase of
all or a substantial portion of the assets of, or of a substantial equity
interest in, Shelby County or any subsidiary thereof, or any business
combination with Shelby County or any subsidiary thereof, other than as
contemplated by the Merger Agreement. Notwithstanding the foregoing, Shelby
County, after written notice to Blue River, may furnish information in response
to unsolicited inquiries from third parties and/or engage in discussions or
negotiations with third parties if, in each case, the Board of Directors of
Shelby County determines in good faith based on the advice of legal counsel that
the failure to furnish information in response to such unsolicited inquiries
and/or engage in such discussions or negotiations is likely to be deemed to
constitute a breach of their fiduciary duties under applicable law.
EFFECTIVE TIME OF THE MERGER; TERMINATION
The Effective Time shall be the time set forth in the articles of merger to
be filed in the Office of the Secretary of State. The closing of the Merger (the
"Closing") will take place not later than the last business day of the month
following the fulfillment of all conditions precedent and the expiration of all
waiting periods in connection with the regulatory applications filed for the
approval of the Merger. It is anticipated that the Closing and the Effective
Time will occur on the same date.
Blue River and Shelby County each anticipate that the Merger will be
consummated in June or July 1998. Consummation of the Merger could be delayed,
however, as a result of delays in obtaining the necessary governmental and
regulatory approvals, if the IPO is not completed, or if any other condition to
the consummation of the Merger is not satisfied. There can be no assurance as to
if or when such approvals will be obtained or such conditions will be satisfied.
The Merger Agreement may be terminated at any time prior to the Effective
Time (a) by mutual agreement of the parties, (b) by Blue River or Shelby County
if the Merger has not been consummated by August 31,1998, provided that Blue
River may extend such date for up to sixty days solely for the purpose of
obtaining regulatory approvals; (c) by Blue River if (i) any item, event or
information set forth in a supplement, amendment or update to the disclosure
schedules to the Merger Agreement has had or would be expected to have, in the
reasonable discretion of Blue River, a material adverse effect on the business,
prospects, assets, capitalization, financial condition or results of operations
of Shelby County or SCSB; (ii) there has been a misrepresentation or a breach of
any warranty by or on the part of Shelby County or SCSB in its representations
and warranties set forth in the Merger Agreement which has had or would be
expected to have, in the reasonable discretion of Blue River, a material adverse
effect on the business, prospects, assets, capitalization, financial condition
or results of operations of Shelby County or SCSB; (iii) there has been a
material breach of or a failure to comply in all material respects with any
covenant set forth in the Merger Agreement by or on the part of Shelby County or
SCSB; (iv) Blue River shall reasonably determine that the Merger has become
inadvisable or impracticable by reason of commencement or threat of any claim,
litigation or proceeding against Blue River, Shelby County, or any director or
officer of any of such entities relating to the Merger Agreement or the Merger
or which is likely to have a material adverse effect on the business, profits,
assets, capitalization, financial condition or results of operations of Shelby
County or SCSB; or (v) there has been a material adverse change in the business,
prospects, assets, capitalization, financial condition or results of operations
of Shelby County at any time as compared to that in existence as of September
30, 1997; and (d) by Shelby County if (i) there has been a misrepresentation or
a breach of any warranty by or on the part of Blue River in its representations
and warranties set forth in the Merger Agreement which has had or would be
expected to have, in the reasonable discretion of Shelby County, a material
adverse effect on the business, assets, capitalization, financial condition or
results of operation of Blue River; (ii) there has been a breach of or failure
to comply with any covenant set forth in the Merger Agreement by or on the part
of Blue River; or (iii) Blue River's investment banker withdraws or terminates
its letter of intent or other similar document relating to the IPO (except in
connection with the execution of an underwriting agreement); provided, however,
that before Shelby County may exercise its right to terminate the Merger
Agreement in such situation, Blue River shall have thirty days from the date of
such withdrawal to
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obtain a letter of intent or similar document from another investment banker
with respect to the intent of such other investment banker to act as the
principal underwriter in the IPO.
In the event that Shelby County terminates the Merger Agreement as set
forth above in (d), Blue River shall be obligated to pay to Shelby County One
Hundred Thousand Dollars ($100,000.00) (the "Termination Fee"). Blue River has
agreed to pay the Termination Fee in such a situation to reimburse Shelby County
for its commitment of substantial time, effort, resources, and expenses in
pursuing the Merger. Specifically, the parties agree that the Termination Fee
will be payable in such circumstances to compensate Shelby County for (i)
certain expenses incurred for attorneys, accountants, financial advisors,
consultants of Shelby County in developing the Merger and drafting the Merger
Agreement, (ii) Shelby County's management time and expense in investigating,
analyzing, developing and pursuing the Merger and (iii) expenses related to
Shelby County's due diligence efforts.
In the event Blue River terminates the Merger Agreement as a result of an
intentional breach by Shelby County or SCSB of any representation, warranty,
covenant or other provision in the Merger Agreement, or an intentional act or
omission by Shelby County or SCSB which resulted in any representation,
warranty, covenant or other provision in this Agreement to be breached, Shelby
County and SCSB shall be liable to Blue River for damages and all costs and
expenses incurred in connection with the preparation, negotiation and execution
of this Agreement, including, but not limited to, reasonable attorneys' fees and
disbursements, reasonable fees and disbursements of accountants and tax
advisors, and reasonable fees and costs of environmental consultants.
STOCK OPTION AGREEMENT
In connection with entering into the Prior Merger Agreement, Blue River and
Shelby County entered into the Option Agreement. Pursuant to the Option
Agreement, Blue River has the right to obtain 24.8% of the issued and
outstanding shares of common stock of Shelby County (on a fully diluted basis)
at a $49.16 cash price per share, after the occurrence of one of three
conditions precedent (the "Blue River Option"). The Blue River Option is
exercisable, in whole or in part, on or before the date which is one year
following the termination of the Merger Agreement. Furthermore, the Blue River
Option automatically expires and will be of no further force and effect on and
after the date the Merger Agreement has been terminated if neither Shelby County
nor SCSB has breached the covenants set forth in Section 6.05 of the Merger
Agreement pertaining to a business combination or other affiliation with another
person or entity.
The Blue River Option is exercisable only if one of the following events
has occurred without the prior written consent of Blue River: (a) the
acquisition by an entity, person or group obtaining beneficial ownership of
20.0% or more of shares of Shelby County Common Stock, but only if (i) such
entity, person or group has publicly announced its opposition to the Merger
Agreement or the Merger or its intention not to vote the common stock
beneficially owned by the entity, person or group in favor of the Merger
Agreement or the Merger and has solicited or indicated its intention to solicit
proxies or votes against the Merger Agreement or the Merger; (ii) such entity,
person or group has proposed or indicated an intention to propose to enter into
an agreement to effect a merger, consolidation, share exchange or other
combination with Shelby County or SCSB; or (iii) such entity, person or group
has voted against the Merger Agreement for the Merger at the Special Meeting;
(b) the making by any entity, person or group, other than Blue River, of a
tender or exchange offer for, or any other offer to purchase, an amount
equivalent to 20.0% or more of the shares of Shelby County Common Stock; or (c)
the acceptance by Shelby County or SCSB of any proposal of, or the execution by
Shelby County or SCSB of any letter of intent, agreement in principle or other
agreement with, any entity, person or group, other than Blue River to (i)
acquire Shelby County or SCSB by merger, consolidation, share exchange,
combination, purchase or all or substantially all of Shelby County's or SCSB's
assets or capital or any other similar transaction or (ii) make a tender or
exchange offering for any shares of Shelby County Common Stock.
Furthermore, the Stock Option Agreement provides that Blue River may
require Shelby County to purchase all of the shares obtained by Blue River if it
exercises the Blue River Option (the "Option Shares"), and grants Shelby County
the right to redeem such shares. Blue River may require Shelby County to pay to
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Blue River for the Option Shares an amount in cash equal to the highest price
paid or to be paid by any entity, person or group referenced in the preceding
paragraph for any share of Shelby County Common Stock, multiplied by the total
number of Option Shares, plus interest at the rate of 8.0% per annum from the
date of purchase of those shares through the date of repurchase. Similarly, if
the Merger Agreement has been terminated in accordance with its terms, Shelby
County shall have the right to purchase, and Blue River shall have the right to
require Shelby County to purchase, for cash all of the Option Shares for a price
determined in the same manner set forth in the preceding sentence. The above
description of the material terms of the Stock Option Agreement and the Blue
River Option does not purport to be complete and is qualified in its entirety by
the reference to the Stock Option Agreement, a copy of which is attached to this
Proxy Statement as Appendix C. All shareholders are to read such document
carefully.
The granting of the Blue River Option may have possible anti-takeover
effects. For example, if another potential purchaser of Shelby County desired to
make an offer at a per share price in excess of $49.16, Blue River might
exercise the Blue River Option and thereby increase the number of shares of
Shelby County common stock outstanding by 24.8%. The result of that issuance
would be to make the proposed acquisition of Shelby County more expensive.
Accordingly, the existence of the Blue River Option makes any other offer to
acquire control of Shelby County less likely to occur. However, the granting of
the Blue River Option was a condition precedent to Blue River agreeing to
execute the Merger Agreement and to proceed with the Merger, and its terms were
significantly negotiated by the parties. As mentioned elsewhere, Shelby County's
Board of Directors believes the Merger to be in the best interests of Shelby
County's shareholders, Shelby County, and SCSB. Therefore, the Board of
Directors determined that granting the Blue River Option was necessary and
appropriate in order to induce Blue River to execute the Merger Agreement and to
agree to proceed with the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of Shelby
County, shareholders should be aware that members of Shelby County's management
and the Shelby County Board of Directors have interests in the Merger that are
in addition to the interests of shareholders generally. The Shelby County Board
of Directors was aware of these interests and considered them, among other
matters, in approving the Merger Agreement and the Merger.
BENEFITS TO MR. MEYERHOLTZ. The employment of Mr. Meyerholtz as the
President and Chief Executive Officer (the "Executive") of Shelby County and
SCSB will be terminated as of the Effective Time. Furthermore, the Executive's
current Employment Agreement dated October 17, 1991 with SCSB (the "Employment
Agreement") will also be terminated. Such termination will be effected pursuant
to a Termination of Employment Agreement dated as of February 5, 1998 by and
among SCSB, Blue River, and the Executive (the "Termination Agreement").
Pursuant to the Termination Agreement, the Executive will have the right to
receive $211,094 in thirty-six approximately equal installments following the
Effective Time. As additional consideration to the Executive, he will (i)
receive health insurance coverage pursuant to his "COBRA" rights under
applicable law, (ii) receive health insurance under Blue River's group health
insurance policy (subject to the terms and conditions of the insurer providing
such coverage) and (iii) be permitted similar coverage for the Executive's wife
and three children, although such coverage for his family will be at his
expense. If instead of electing this option, the Executive exercises his COBRA
rights, Blue River will reimburse him for his COBRA costs of his individual
coverage. However, neither of these options will be available to the Executive
if he becomes eligible to participate in a group health insurance policy or plan
of a subsequent employer. In consideration of SCSB and Blue River entering into
the Termination Agreement, the Executive has agreed to release SCSB from any
claims under the Employment Agreement and related matters.
BENEFITS TO EMPLOYEES. From and after the Effective Time, Blue River will,
subject to compliance with applicable legal and regulatory requirements, provide
coverage for all SCSB employees who meet the applicable eligibility requirement
under Blue River's profit sharing plan and group health and hospitalization
insurance plan. Furthermore, Blue River has agreed to make available to the
employees of SCSB who
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continue as employees of SCSB after the Effective Time such employee benefits as
the Board of Directors of Blue River may determine to provide to employees from
time to time. Until such time as the employees of SCSB become eligible to
participate in or are eligible to be covered by Blue River's employee pension
benefit plans or employee welfare benefit plans, employees of SCSB shall remain
participants in or covered by the employee pension benefit plans and employee
welfare benefit plans of Shelby County in existence at the Effective Time,
subject to the terms of such plans and to the extent provided by such plans of
Shelby County. Also years of service, as defined in the applicable Blue River
employee welfare pension benefit plan, with SCSB prior to the Effective Time
shall be credited to each employee of SCSB eligible for coverage provided in
this paragraph for purposes of (i) eligibility under the Blue River's employee
welfare benefit plans and (ii) eligibility and vesting, but not for purposes of
benefit accrual or contributions, under the Blue River Employees' Savings and
Profit Sharing Plan. In addition, the accrual of participants' benefits under
SCSB's current retirement plan shall be frozen effective as of December 31 of
the year in which the Effective Time occurs, and all accrued benefits of
participants in that plan shall thereupon become fully vested.
INDEMNIFICATION RIGHTS AND INSURANCE. For a period of two years following
the Effective Time, Blue River shall cause SCSB to keep the indemnification
provisions in its Charter in effect as were in effect as of the date of the
Merger Agreement.
CERTAIN OTHER MATTERS. Chairman Robison's nephew, D. Warren Robison, is an
executive officer and a director of Blue River and is one of its founders.
However, Chairman Robison and Mr. Robison have no agreement or understanding as
to any matter in connection with the Merger, and Shelby County's Board of
Directors was informed of this relationship prior to the initial discussions
with Blue River. Chairman Robison was actively involved in the merger
negotiations on behalf of Shelby County. Blue River has informed Shelby County
that D. Warren Robison was involved in Blue River's internal discussions
pertaining to the Merger. He was not, however, actively involved in the direct
negotiations with Shelby County.
As mentioned earlier, each of Shelby County's directors has agreed to vote
his shares of Shelby County Common Stock in favor of the Merger. Also, as
discussed above in "-- Business Pending the Merger," it is expected that three
executives will have the term of their current employment agreements extended an
additional year as of the Effective Time. Furthermore, Chairman Robison
currently serves as legal counsel to SCSB in connection with certain loan
transaction and other matters, and he may continue to so serve SCSB following
the Effective Time.
Other than as set forth above, no director or executive officer of Shelby
County has any direct or indirect material interest in the Merger, except in the
case of Shelby County insofar as ownership of Shelby County Common Stock and
existing Shelby County Options might be deemed such an interest.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The exchange of Shelby County Common Stock for cash pursuant to the terms
of the Merger Agreement will be a taxable transaction for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the "Code"), and
may also be a taxable transaction under state, local and other tax laws.
Similarly, shareholders of Shelby County who exercise their dissenters'
appraisal rights and receive cash in exchange for their shares of Shelby County
Common Stock will realize and recognize income for federal tax purposes and may
recognize income under state, local and other tax laws. A shareholder of Shelby
County will recognize gain or loss equal to the difference between the amount of
cash received by the shareholder pursuant to the Merger and the tax basis in the
Shelby County Common Stock exchanged by such shareholder pursuant to the Merger.
Gain or loss recognized by the shareholder exchanging his or her Shelby
County Common Stock pursuant to the Merger or pursuant to the exercise of
dissenters' rights will be capital gain or loss if such Shelby County Common
Stock is a capital asset in the hands of the shareholder. If the Shelby County
Common Stock has been held for more than eighteen months, the gain or loss will
be long-term, and if it has been held for more than twelve but no more than
eighteen months, the gain or loss will be mid-term capital gain. Capital gains
recognized by an exchanging individual shareholder generally will be subject to
tax at the
22
<PAGE> 27
top marginal rate applicable to the shareholder (up to a maximum of 39.6% for
short-term capital gains, 28% for mid-term capital gains, and 20% for long-term
capital gains), and capital gains recognized by an exchanging corporate
shareholder generally will be subject to tax at a maximum rate of 35%.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS BASED UPON CURRENT LAW
AND IS INTENDED FOR GENERAL INFORMATION ONLY. EACH SHELBY COUNTY SHAREHOLDER IS
URGED TO CONSULT HIS TAX ADVISOR CONCERNING THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER TO SUCH SHAREHOLDER, INCLUDING THE APPLICABILITY AND EFFECT OF STATE,
LOCAL OR OTHER TAX LAWS AND OF ANY PROPOSED CHANGES IN THE CODE.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for as a purchase for financial reporting
purposes. Under this method of accounting, Blue River will record the
acquisition of Shelby County at its cost at the Effective Time of the Merger,
which cost would include the cash paid in the Merger and all direct acquisition
costs. The acquisition costs will be allocated to the acquired assets and
liabilities of Shelby County based upon their fair values at the Effective Time
of the Merger in accordance with generally accepted accounting principles.
Acquisition cost in excess of the fair values of the net assets acquired, if
any, will be recorded as an intangible asset and amortized for financial
accounting purposes. The reported income of Blue River will include the
operations of SCSB after the Effective Time of the Merger.
EXPENSES OF THE MERGER
All out-of-pocket costs and expenses incurred in connection with the Merger
(including, but not limited to, counsel fees) shall be paid by the party
incurring such costs and expenses.
23
<PAGE> 28
DISSENTERS' RIGHTS
Dissenting shareholders who comply with the procedural requirements of the
BCL will be entitled to receive payment of the fair cash value of their shares
if the Merger is effected. Chapter 44 of the BCL ("Chapter 44") sets forth the
procedures which must be complied with in order to qualify for dissenters'
rights. THE FOLLOWING DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE
PROVISIONS OF CHAPTER 44 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THOSE
PROVISIONS, A COPY OF WHICH IS ATTACHED HERETO AS APPENDIX D. SUCH PROVISIONS
MUST BE STRICTLY COMPLIED WITH OR A SHAREHOLDER'S DISSENTERS' RIGHTS WILL BE
LOST.
WRITTEN NOTICE TO SHELBY COUNTY. Written notice of a shareholder's intent
to demand payment for his Shelby County Common Stock in the event the
shareholders of Shelby County approve the Merger must be received by Shelby
County before the Special Meeting. Such written notice should state the number
of shares of Shelby County Common Stock which are dissenting from the Merger and
should be sent to the attention of Rodney L. Meyerholtz, President, Shelby
County Bancorp, 29 East Washington, Shelbyville, Indiana 46176. Because
statutory dissenters' rights are not available unless this notice requirement is
fulfilled, it is recommended that any notice to be delivered by mail be sent by
registered or certified mail with return receipt requested.
DIFFERING RECORD AND BENEFICIAL OWNERSHIP. A record shareholder may assert
dissenters' rights as to fewer than the shares of Shelby County Common Stock
registered in that shareholder's name only if the shareholder dissents (in
accordance with the provisions of Chapter 44) with respect to all the shares of
Shelby County Common Stock beneficially owned by any one person and notifies
Shelby County in writing of the name and address of each person on whose behalf
the shareholder is asserting dissenters' rights.
A beneficial shareholder may assert dissenters' rights as to the Shelby
County Common Stock held on the shareholder's behalf only if (i) the beneficial
shareholder submits to Shelby County the record shareholder's written consent to
the dissent no later than the time the beneficial shareholder asserts
dissenters' rights and (ii) the beneficial shareholder asserts dissenters'
rights (in accordance with the provisions of Chapter 44) with respect to all the
beneficial shareholder's shares of Shelby County Common Stock or those shares
over which the beneficial shareholder has power to direct the vote.
VOTING. Shares of Shelby County Common Stock for which notice has been
received that dissenters' rights are being sought ("Dissenting Shares") must not
be voted in favor of the Merger, but such shares need not be voted against the
Merger.
NOTICE TO DISSENTERS. If the Merger is approved, Shelby County will send
notice to holders of Dissenting Shares within ten days of such approval. Such
notice will (i) supply a form for demanding payment for the Dissenting Shares,
which form shall include the date of the first announcement to news media or to
shareholders of the terms of the Merger and require that the holder of the
Dissenting Shares certify whether or not beneficial ownership of the Dissenting
Shares was acquired before such date; (ii) state where the payment demand and
the certificates representing the Shelby County Common Stock must be sent; (iii)
set a date by which Shelby County must receive the payment demand and those
stock certificates; and (iv) be accompanied by a copy of Chapter 44.
PAYMENT DEMAND. The holder of Dissenting Shares must (i) demand payment,
(ii) certify whether beneficial ownership of the Dissenting Shares was acquired
prior to the date set forth in the dissenters' notice and (iii) deposit his or
her certificates representing the Shelby County Common Stock, all in accordance
with the notice from Shelby County in order for the holder's statutory
dissenters' rights to be available.
PAYMENT BY BLUE RIVER. Upon the consummation of the Merger, Blue River (as
survivor to Shelby County) will pay the holders of Dissenting Shares who have
met all statutory conditions Blue River's estimate of the fair value of the
Dissenting Shares. However, Blue River may elect to withhold such payment from
holders of Dissenting Shares who acquire beneficial ownership of them after the
date set forth in the dissenters' notice as the date of the first announcement
to news media or shareholders of the terms of the Merger (the "Post Announcement
Dissenting Shares"). If Blue River does elect to withhold payment from
24
<PAGE> 29
such shareholders, it will send an offer to pay Blue River's estimate for the
fair value of the Post Announcement Dissenting Shares to their holders provided
such holders agree to accept the payment offered in full satisfaction of their
dissenters' demands.
OPTIONAL SECONDARY PAYMENT DEMAND. Within 30 days after (i) Blue River pays
the holders of Dissenting Shares Blue River's estimate of the fair value of the
Dissenting Shares or (ii) Blue River offers to pay the holders of Post
Announcement Dissenting Shares its estimate of the fair value of the Post
Announcement Dissenting Shares, each such shareholder may notify Blue River of
the shareholder's own estimate of the value of the Dissenting Shares or Post
Announcement Dissenting Shares (if it differs from Blue River's estimate) and
(i) demand payment of the shareholder's estimate of the fair value of the
Dissenting Shares (less any payment received from Blue River) or (ii) reject
Blue River's offer and demand payment of the shareholder's estimate of the fair
value of the Post Announcement Dissenting Shares, as appropriate.
PETITION FOR DETERMINATION OF VALUE. If a demand for payment by the holder
of Dissenting Shares or Post Announcement Dissenting Shares remains unsettled 60
days after the receipt of such demand, Blue River will commence a proceeding in
a circuit or superior court of Shelby County, Indiana, to appraise the value of
the Dissenting Shares or for Post Announcement Dissenting Shares. All holders of
Dissenting Shares or Post Announcement Dissenting Shares at such time will be
made party to those proceedings. A holder of Dissenting Shares will be entitled
to judgment for an amount, if any, by which the court finds the fair value of
his or her shares, plus interest, exceeds any amount paid by Blue River. The
holder of Post Announcement Dissenting Shares will be entitled to judgment for
the fair value, plus accrued interest, of the holder's shares.
The court in an appraisal proceeding will determine and assess costs
against all parties in such amounts as the court finds equitable. The court may
assess fees and expenses of counsel and experts against either Blue River or a
dissenter if the court finds that a party against whom fees and expenses are
asserted acted arbitrarily, vexatiously, or not in good faith. In addition, if
the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated and that the fees for
those services should not be assessed against Blue River, the court may award to
those counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefitted.
EFFECT ON DIVIDENDS AND VOTING RIGHTS. A dissenting shareholder will retain
his or her rights, if any, to vote and receive dividends, until the Merger is
consummated. Upon the consummation of the Merger, any shareholder who has given
proper notice and made a valid demand will cease to be a shareholder and will
have no rights with respect to the Dissenting Shares or Post Announcement
Dissenting Shares except the right to receive payment of the fair market value
of his or her shares.
NO RIGHT TO CHALLENGE MERGER. Chapter 44 provides that a shareholder who is
entitled to dissent to a particular corporate transaction such as the Merger is
not entitled to otherwise challenge that transaction.
25
<PAGE> 30
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Only shareholders of record at the close of business on April 30, 1998 (the
"Voting Record Date"), will be entitled to vote at the Special Meeting. On the
Voting Record Date, there were 175,950 shares of the Common Stock issued and
outstanding, and Shelby County had no other class of equity securities
outstanding. Each share of Common Stock is entitled to one vote at the Special
Meeting on all matters properly presented at the Special Meeting.
The following table sets forth as of the Voting Record Date, the beneficial
owners of more than 5% of the outstanding shares of Shelby County Common Stock
known to Shelby County and the beneficial ownership of directors (including a
former director who continues to own Shelby County Options) and directors and
executive officers as a group. Unless otherwise indicated, the named beneficial
owner has sole voting and dispositive power with respect to the shares.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES OF COMMON PERCENT
OF BENEFICIAL OWNER STOCK BENEFICIALLY OWNED OF CLASS
- ------------------- -------------------------- --------
<S> <C> <C>
Baupost Group, Inc.(1)............................. 17,200 9.8%
44 Brattle Street
Cambridge, MA 02238-1925
William N. Salin................................... 17,126 9.7%
10587 Coopergate Drive
Carmel, IN 46032
Directors:
David A. Carmony................................... 8,615(2) 4.8%
Jack D. Disser..................................... 1,000(3) .6%
Leonard J. Fischer................................. 11,040(4) 6.2%
Rodney L. Meyerholtz............................... 6,865(5) 3.8%
James M. Robison................................... 5,415(6) 3.0%
Former Director:
Robert E. Thomas................................... 2,765(7) 1.6%
All directors, the former director and executive
officers as a group (8 persons).................. 43,039(8) 22.7%
</TABLE>
- ---------------
(1) This information is based on Schedules 13D or amendments thereto filed with
the Securities and Exchange Commission. It does not reflect any changes that
may have occurred since the date of the applicable filing or amendment.
(2) Of these shares, 2,415 are subject to stock options granted under the Option
Plan.
(3) These shares are held jointly by Mr. Disser and his spouse.
(4) Includes 2,415 shares of Shelby County Common Stock which are subject to
stock options granted under the Shelby County Bancorp Stock Option Plan (the
"Option Plan"). In addition to the 11,040 shares reported above, members of
Leonard Fisher's family beneficially own 10,332 shares of Shelby County
Common Stock (or 5.9% of Shelby County's outstanding shares). On June 30,
1995, Leonard Fischer and his family members filed with the OTS a Rebuttal
of Rebuttal Determination of Control under 12 C.F.R. sec.574 in order to
retain shares which collectively aggregate 11.6% of Shelby County's
outstanding shares. On August 31, 1995, the OTS accepted the conclusion that
no "control" requiring regulatory application and approval existed as a
result of the Fischer family ownership of shares.
(5) Of these shares, 4,375 are owned jointly by Mr. Meyerholtz and his wife, 75
are owned by his wife as custodian for their children under the Uniform
Transfers to Minors Act, and 2,415 are subject to stock options granted
under the Option Plan.
(6) Of these shares, 2,500 are owned jointly by Mr. Robison and his wife, 2,025
are owned jointly by Mr. Robison's wife and his children or grandchildren,
100 are owned directly by Mr. Robison's wife, 100
26
<PAGE> 31
are owned directly by Mr. Robison as guardian for William Jones, and 690 are
subject to a stock option granted under the Option Plan.
(7) Of these shares, 350 are held in revocable trusts by Mr. Thomas and his
spouse and 2,415 are subject to options granted under the Option Plan.
(8) Such shares include 13,800 shares subject to stock options granted under the
Option Plan.
INFORMATION REGARDING BLUE RIVER BANCSHARES, INC.
Blue River is an Indiana corporation organized on March 18, 1997 by two
individuals for the purpose of forming a de novo community bank in Southeastern
Indiana or obtaining ownership of an existing financial institution. Blue River
has filed a Registration Statement with the SEC pursuant to the 1933 Act,
covering shares of Blue River's common stock to be sold in its IPO. As mentioned
earlier, one of the conditions precedent to the Merger is that Blue River has
sold at least 1.0 million shares of its common stock in the IPO.
Upon completion of the Merger, Blue River intends to be registered as a
unitary savings and loan bank holding company under the HOLA. Currently, Blue
River's Board of Directors consists of three individuals, but is expected to
expand to seven directors upon the effectiveness of the Merger. As mentioned
above, however, Shelby County's current President, Mr. Rodney L. Meyerholtz,
intends to pursue other opportunities upon the effectiveness of the Merger, and
Mr. Robert C. Reed of Blue River intends to serve in that capacity. Furthermore,
Blue River expects that some changes in both SCSB's operations and strategic
plans will occur over time.
Blue River's executive offices are located at 116 South Harrison Street,
Shelbyville, Indiana 46176, and its telephone number is (317) 392-7700.
Currently, Blue River has no significant assets or liabilities.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements throughout this section regarding Shelby County's and
SCSB'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 Shelby County and SCSB or their respective managements,
identify forward-looking statements. Such forward-looking statements are based
on the beliefs of the management of Shelby County and SCSB as well as
assumptions made by and information currently available to the management of
Shelby County and SCSB. 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 Shelby County and SCSB
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 Shelby County and SCSB.
GENERAL. Shelby County was formed as part of the conversion of SCSB from a
federal mutual savings bank to a federal stock savings bank in October of 1991.
In the stock thrift conversion, 172,500 shares of common stock were sold at
$10.00 per share. Net proceeds of the stock thrift conversion were approximately
$1,324,000. Of this amount, $150,000 was retained by Shelby County and the
remainder was used to purchase all of the common shares of SCSB. The principal
business of savings associations, including SCSB, has historically consisted of
attracting deposits from the general public and making loans secured by
residential and other real estate. SCSB, like the entire savings association
industry, is significantly affected by prevailing economic and market conditions
as well as by government policies and regulations concerning, among other
27
<PAGE> 32
things, monetary and fiscal affairs, housing and financial institutions. Deposit
flows are influenced by a number of factors, including interest rates paid on
money market funds and other competing investments, account maturities and level
of personal income and savings. In addition, deposit growth is also affected by
how customers perceive the stability of the financial services industry in
general and the savings and loan industry specifically. Various current events
such as regulatory changes, failures of other thrifts and financing of the
deposit insurance fund also have an impact on deposit growth. Lending activities
are influenced by, among other things, the demand for and supply of housing in
the area as well as prevailing interest rates. Sources of funds for lending
activities include deposits, borrowings, amortization and prepayments of loan
principal, retained earnings and funds provided by operations.
RESULTS OF OPERATIONS. Net earnings for the year ended September 30, 1997
were $513,000, compared to $236,000 for the year ended September 30, 1996, an
increase of $277,000 or 117.4%. During the six month period ended March 31,
1998, net earnings decreased to $2,000 compared to net earnings of $249,000
during the six month period ended March 31, 1997. Shelby County's earnings in
recent years have been affected by certain changes that have occurred in the
regulatory, economic, and competitive environments in which savings associations
operate. As is the case with most savings associations, SCSB's earnings are
primarily dependent upon its net interest income. Net interest income is the
difference between the interest income and interest expense. Net interest income
of SCSB increased from $2,498,000 for the year ended September 30, 1996 to
$2,816,000 for the year ended September 30, 1997, a 12.8% increase. Interest
income is a function of the balances of loans and investments outstanding during
a given period of time and the yield earned on such loans and investments.
Interest expense is a function of the amount of deposits and borrowings
outstanding during the same period of time and the rates paid on such deposits
and borrowings.
AVERAGE BALANCES AND INTEREST. The following table presents for the periods
indicated the monthly average balances of each category of interest-earning
assets and interest-bearing liabilities, and the interest earned or paid on such
amounts. (Management of SCSB believes that the use of month-end average balances
instead of daily average balances has not caused any material difference in the
information presented.)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31, YEAR ENDED SEPTEMBER 30,
--------------------------------------- ---------------------------------------
1998 1997 1997 1996
------------------ ------------------ ------------------ ------------------
INTEREST INTEREST INTEREST INTEREST
AVERAGE EARNED/ AVERAGE EARNED/ AVERAGE EARNED/ AVERAGE EARNED/
BALANCE PAID BALANCE PAID BALANCE PAID BALANCE PAID
------- -------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits.......... $4,133 $ 97 $3,824 $ 68 $2,781 $ 108 $5,055 $ 234
Investment securities.............. 4,650 144 2,899 118 3,286 171 2,998 223
Loans (1).......................... 81,380 3,382 70,023 2,923 72,195 6,066 58,485 5,036
Stocks in FHLB of Indianapolis..... 933 37 690 26 746 59 458 35
Mortgage-backed securities......... 2,951 80 5,093 135 4,622 304 5,261 311
------ ------- ------ ------- ------ ------- ------ -------
Total interest-earning
assets..................... 94,047 3,740 82,529 3,270 83,630 6,708 72,257 5,839
------ ------- ------ ------- ------ ------- ------ -------
Interest-bearing liabilities:
Passbook accounts.................. 8,905 133 9,969 141 10,027 283 10,175 313
NOW and money market accounts...... 19,688 278 14,405 157 14,468 314 13,062 302
Certificates of deposit............ 42,282 1,288 41,007 1,227 40,536 2,399 43,173 2,604
------ ------- ------ ------- ------ ------- ------ -------
Total deposits............... 70,875 1,699 65,381 1,525 65,031 2,996 66,410 3,219
Borrowings......................... 18,316 520 13,067 389 14,372 896 2,503 122
------ ------- ------ ------- ------ ------- ------ -------
Total interest-bearing
liabilities................ 89,191 2,219 78,448 1,914 79,403 3,892 68,913 3,341
------ ------- ------ ------- ------ ------- ------ -------
Net interest-earning assets.......... $4,856 $4,081 $4,227 $3,344
------ ------ ------ ------
Net interest income.................. $1,521 $1,356 $2,816 $2,498
------- ------- ------- -------
Average interest-earning assets to
average interest-bearing
liabilities........................ 105.44% 105.20% 105.32% 104.85%
======= ======= ======= =======
</TABLE>
- ---------------
(1) Average balances include non-accrual loans.
28
<PAGE> 33
INTEREST RATE SPREAD. The following table sets forth the weighted average
effective interest rate earned by SCSB on its loan and investment portfolios,
the weighted average effective costs of SCSB's deposits and borrowings, the
interest rate spread of SCSB, and the net yield on weighted average
interest-earning assets for the periods and as of the date shown. Average
balances are based on month-end average balances.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
AT AT MARCH 31, SEPTEMBER 30,
MARCH 31, SEPTEMBER 30, ------------ --------------
1998 1997 1998 1997 1997 1996
--------- ------------- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Weighted average interest rate earned on:
Interest-earning deposits............... 5.50% 5.56% 4.69% 3.56% 3.88% 4.63%
Investment securities................... 6.32 7.00 6.19 8.14 5.20 7.44
Loans................................... 8.53 8.42 8.31 8.35 8.40 8.61
Stock in FHLB of Indianapolis........... 8.00 8.25 7.93 7.54 7.91 7.64
Mortgage-backed securities.............. 6.61 6.60 5.42 5.30 6.58 5.91
---- ---- ---- ---- ---- ----
Total interest-earning assets... 8.26% 8.30% 7.96% 7.92% 8.02% 8.08%
Weighted average interest rate cost of:
Passbook accounts....................... 2.96% 2.81% 2.99% 2.83% 2.82% 3.08%
NOW and money market accounts........... 3.24 2.74 2.82 2.18 2.16 2.31
Certificates of deposit................. 6.10 6.07 6.04 5.96 5.92 6.03
Borrowings.............................. 6.51 6.88 5.82 6.15 6.23 4.87
---- ---- ---- ---- ---- ----
Total interest-bearing
liabilities................... 5.35% 5.24% 4.98% 4.88% 4.90% 4.85%
Interest rate spread(1)................... 2.91% 3.06% 2.98% 3.04% 3.12% 3.23%
==== ==== ==== ==== ==== ====
Net yield on weighted average interest
earning assets (Net Interest
Margin)(2).............................. N/A N/A 3.23% 3.29% 3.37% 3.46%
==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(1) Interest rate spread is calculated by subtracting total weighted average
interest rate cost from total weighted average interest rate earned for the
period indicated. Interest rate spread figures must be considered in light
of the relationship between the amounts of interest-earning assets and
interest-bearing liabilities. Since Shelby County's interest-earning assets
exceeded its interest-bearing liabilities for the three years shown above, a
positive interest rate spread resulted in net interest income.
(2) The net yield of weighted average interest-earning assets is calculated by
dividing net interest income by weighted average interest-earning assets for
the period indicated. No net yield figure is presented at September 30, 1997
and March 31, 1998, because the computation of net yield is applicable only
over a period rather than at a specific date.
29
<PAGE> 34
The following table describes the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have affected
SCSB's interest income and expense during the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (1) changes in rate (changes in rate
multiplied by old volume) and (2) changes in volume (changes in volume
multiplied by old rate). Changes attributable to both rate and volume that
cannot be segregated have been allocated proportionally to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN
NET INTEREST INCOME
-----------------------------
TOTAL NET DUE TO DUE TO
CHANGE RATE VOLUME
--------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Six months ended March 31, 1998 compared to six months
ended March 31, 1997
Interest-earning assets:
Interest-earning deposits......................... $ 29 $ 23 $ 6
Investment securities............................. 26 (17) 43
Loans............................................. 459 (14) 473
Stock in FHLB of Indianapolis..................... 11 1 10
Mortgage-backed securities........................ (55) 3 (58)
------ ----- ------
Total........................................ $ 470 $ (4) $ 474
------ ----- ------
Interest-bearing liabilities:
Passbook accounts................................. (8) 9 (17)
NOW and money market accounts..................... 121 54 67
Certificates of deposit........................... 61 23 38
Borrowings........................................ 131 (17) 148
------ ----- ------
Total........................................ $ 305 $ 69 $ 236
------ ----- ------
Net change in net interest income...................... $ 165 $ (73) $ 238
------ ----- ------
Year ended September 30, 1997 compared to year ended
September 30, 1996
Interest-earning assets:
Interest-earning deposits......................... $ (126) $ (33) $ (93)
Investment securities............................. (52) (72) 20
Loans............................................. 1,030 (125) 1,155
Stock in FHLB of Indianapolis..................... 24 2 22
Mortgage-backed securities........................ (7) 33 (40)
------ ----- ------
Total........................................ $ 869 $(195) $1,064
------ ----- ------
Interest-bearing liabilities:
Passbook accounts................................. $ (30) $ (26) $ (4)
NOW and money market accounts..................... 12 (20) 32
Certificates of deposit........................... (205) (46) (159)
Borrowings........................................ 774 43 731
------ ----- ------
Total........................................ $ 551 $ (49) $ 600
------ ----- ------
Net change in net interest income...................... $ 318 $(146) $ 464
====== ===== ======
</TABLE>
FINANCIAL CONDITION AT MARCH 31, 1998 COMPARED TO SEPTEMBER 30, 1997
Total assets at March 31, 1998, were $98,465,000, an increase of $7,856,000
from total assets of $90,609,000 at September 30, 1997. The most significant
increases in assets were in net loans receivable and interest bearing deposits.
Total net loans receivable increased from $76,038,000 at September 30, 1997 to
$85,133,000 at March 31, 1998. This increase reflects an increase in mortgage
loans which is attributed to a
30
<PAGE> 35
very strong local economy and loan demand. The two branches that were opened in
1995 have contributed over $6,585,000 in mortgage and consumer lending.
In connection with an ongoing Office of Thrift Supervision safety and
soundness examination, the OTS has requested the Bank increase its allowance for
loan losses as of March 31, 1998 an additional amount of $375,000. While
management notes that none of the commercial real estate or commercial loans are
non-performing at this time, that type of lending has increased over the last
two years. Accordingly, the Bank's lending risks have increased because
commercial real estate and commercial loans are generally believed to be more
risky than other types of lending such as residential mortgage lending.
Therefore, the Bank has increased its provision for loan losses of $50,000 for
the six months ended March 31, 1997 to $435,000 for the six months ended March
31, 1998.
On May 6, 1998, the Office of Thrift Supervision advised the Bank that,
until certain corrective actions are undertaken, the Bank should cease all
commercial real estate and commercial lending. In light of the pending
acquisition of the Bank by Blue River Bancshares, Inc. (which currently is
expected to close in June or July, although there can be no guarantee that the
transaction will close then or at a later date), the Board of Directors of the
Bank has determined to cease all such lending while the transaction is pending.
Management does not expect that ceasing to make such loans during that interim
period will have a material adverse effect on the net earnings of the Bank.
Total deposits at September 30, 1997 of $64,633,000 increased to
$70,533,000 at March 31, 1998. This increase in deposits is primarily due to an
increase in certificates of deposit and checking accounts.
COMPARISON OF OPERATING RESULTS FOR
SIX MONTHS ENDED MARCH 31, 1998 COMPARED
TO SIX MONTHS ENDED MARCH 31, 1997
GENERAL. During the six month period ended March 31, 1998, net earnings
decreased to $2,000 (basic EPS of $.01 per share) compared to net earnings of
$249,000 (basic EPS of $1.41 per share) during the six month period ended March
31, 1997. The decrease in earnings is primarily the result of an increase in the
provision for loan loss of $375,000 for six months ended March 31, 1998 and the
establishment of an approximately $150,000 reserve for an environmental matter.
(See the discussion below and in "--Subsequent Matters" below.) Net interest
income was $1,086,000, after provision for loan losses, for six months ended
March 31, 1998, compared to $1,307,000 for the six months ended March 31, 1997.
Net interest margin for the six months ended March 31, 1998 was 3.23% compared
to 3.29% for the same period one year ago.
On May 6, 1998, in connection with a routine periodic examination, the
Office of Thrift Supervision advised SCSB that, until certain corrective actions
are undertaken, SCSB should cease all commercial real estate and commercial
lending. The OTS noted several supervisory concerns including loan documents
which fail to clearly establish repayment terms, loans priced below market rates
and extended maturities at fixed rates, failure to perform and document proper
credit analysis and reliance on overstated collateral values. In light of the
pending Merger, the Board of Directors of SCSB has determined to cease all such
lending while the transaction is pending. SCSB is addressing certain of the OTS'
concerns while the Merger is pending, and Blue River has engaged a consultant to
assist in addressing the OTS' concerns, is developing a new commercial real
estate and commercial lending policy, and is coordinating with the OTS to
address any remaining issues so that SCSB will be permitted to resume commercial
real estate and commercial lending at the closing of the Merger. Management does
not expect that ceasing to make such loans during that interim period will have
a material adverse effect on the net earnings of SCSB.
INTEREST INCOME. Interest income increased from $3,270,000 for the six
months ended March 31, 1997 to $3,740,000 for the six months ended March 31,
1998.
INTEREST EXPENSE. Interest expense for the six month period ended March 31,
1998 was $2,219,000 compared to $1,914,000 for the six months ended March 31,
1997. This increase is primarily attributed to the increase in deposit accounts.
31
<PAGE> 36
NON-INTEREST INCOME. Total non-interest income was $219,000 for the six
months ended March 31, 1998, compared to $168,000 for the same period in 1997.
NON-INTEREST EXPENSE. Non-interest expense totaled $1,302,000 for the six
months ended December 31, 1997 compared to $1,072,000 for the same period in the
prior year. The primary increase in non-interest expense relates to costs
incurred with the proposed acquisition of the company. In addition, in
connection with certain preliminary environmental testing at SCSB's St. Paul
branch location undertaken in April so that the property could be entered into
Indiana's Voluntary Remediation Program ("VRP"), the environmental consultant
performing the testing informed SCSB that remediation would be necessary to
remove certain liquid phase hydrocarbons (i.e., petroleum-based liquids).
Accordingly, management asked the consultant to propose what remediation would
be necessary and to estimate the expected cost. The consultant did so on May 18,
1998, and estimated the remediation and costs associated with the VRP to be
$157,920. SCSB has reserved approximately $150,000 in its income statement for
the periods ending March 31, 1998. For additional information about this
environmental testing and the VRP, see "-- Subsequent Matters" below.
PROVISION FOR LOAN LOSSES. SCSB's provision for loan losses was $435,000
for the six months ended March 31, 1998 compared to $50,000 for the same period
in the prior year. Non-performing assets increased from $561,000 at March 31,
1997 to $710,000 at March 31, 1998. This increase resulted from an increase in
non-performing residential mortgage loans, and the non-performing assets did not
include any commercial real estate or commercial loans. Furthermore, no
commercial real estate or commercial loans were classified as nonaccrual,
restructured or 90 days past due at March 31, 1998.
In connection with the examination noted above, the OTS has requested that
SCSB increase its allowance for loan losses as of March 31, 1998. While
management notes that none of the commercial real estate or commercial loans are
non-performing at this time, that type of lending has increased over the last
two years. Accordingly, SCSB's lending risks have increased because commercial
real estate and commercial loans are generally believed to be more risky than
other types of lending such as residential mortgage lending. Therefore, SCSB
increased its provision for loan losses of $50,000 for the six months ended
March 31, 1997 to $435,000 for the six months ended March 31, 1998.
Specifically, management noted that, since September 30, 1997, several
items had occurred which, in management's opinion, supported the increase in the
provision for loan losses. For instance, during the six month period, a savings
account (which became overdrawn by $52,000) was reclassified as a loan, and was
charged-off. Also, an $80,000 loan was determined to be classified as of March
31, 1998 due to a customer bankruptcy, and therefore management determined that
an additional $80,000 should be added to the provision for loan losses. During
that six month period, past due residential mortgage loans increased from
$416,000 at September 30, 1997 to $673,000 at March 31, 1998. In management's
opinion, this increase in loans 90 days or more delinquent justified a $120,000
addition to the loan loss reserve. From September 30, 1997 to March 31, 1998,
commercial and commercial real estate loans increased approximately $500,000.
Accordingly, management believed that 5% of that increase, or $25,000, should be
added to the provision for loan losses so that the provision's allocation to
commercial and commercial real estate loans remained proportionate to the
aggregate amount of those types of loans outstanding. In addition, management
has usually reserved $10,000 per month (or $60,000 during these six months) for
loan losses inherent in the loan portfolio. The remainder of the $435,000
provision for loan losses during the six months was attributable to a more
conservative approach taken by the OTS in evaluating the loan portfolio and,
which in light of SCSB's current lending activities, was appropriate in
management's opinion.
COMPARISON OF OPERATING RESULTS FOR
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO
YEAR ENDED SEPTEMBER 30, 1996
GENERAL. Net earnings for the year ended September 30, 1997 were $513,000,
compared to $236,000 for the year ended September 30, 1996, an increase of
$277,000 or 117.4%. Net interest income after provision for loan losses
increased by $314,000 or 13.1% from $2,398,000 to $2,712,000.
32
<PAGE> 37
Total assets increased during the year ended September 30, 1997. Total
assets at September 30, 1997 were $90,609,000 compared to $82,676,000 at
September 30, 1996, an increase of $7,933,000, or 9.6%. This increase was
primarily due to an increase in loans receivable of $9,940,000 or 15.0%, from
$66,098,000 in 1996 to $76,038,000 in 1997.
INTEREST INCOME. Total interest income for the year ended September 30,
1997 was $6,708,000 compared to $5,839,000 for the year ended September 30,
1996, an increase of $869,000 or 14.9%. This increase resulted primarily from an
increase of $1,030,000 or 20.5%, in interest earned on loans receivable.
Although the weighted average interest rate earned on loans in 1997 dropped
slightly from 8.61% to 8.40%, the growth in the loan portfolio accounted for the
increase in interest income. The loan portfolio growth reflects management's
commitment to meet the needs of the growing economy in Shelby County.
INTEREST EXPENSE. Total interest expense for the period ended September 30,
1997, totaled $3,892,000, an increase of $551,000, or 16.5%, compared with
$3,341,000 for the year ended September 30, 1996. This increase was primarily a
result of higher costs on additional advances from the Federal Home Loan Bank of
Indianapolis. The weighted average interest rate cost for all deposits and
borrowings in 1997 was 4.90% compared to 4.85% in 1996.
NON-INTEREST INCOME. Total non-interest income for the year ended September
30, 1997, totaled $349,000 compared to $518,000 for the year ended September 30,
1996. The reason for the decline is because 1996 amounts included non-recurring
items.
NON-INTEREST EXPENSE. Non-interest expense decreased $293,000, or 11.5%,
from $2,546,000 for the year ended September 30, 1996, to $2,253,000 for the
year ended September 30, 1997. The decrease was primarily attributed to a
reduction in the Federal Deposit Insurance Fund expense due to the one-time
special assessment in 1996.
PROVISION FOR LOAN LOSSES. SCSB's provision for loan losses was $104,000
for the year ended September 30, 1997, compared to $100,000 for the year ended
September 30, 1996. The 1997 provision exceeded net charge-offs of $38,000
during the year ended September 30, 1997. This provision reflects management's
intent to provide an increased general allowance for loan loss and further
provide for losses inherent in its consumer loan portfolio. Also, the provision
resulted in an allowance for loan losses of $392,000 (.52% of total loans) at
September 30, 1997. The allowance as a percentage of non-performing loans was
86% at September 30, 1997, compared to 109% at September 30, 1996. At September
30, 1997, non-performing loans as a percent of total gross loans were .54%.
LIQUIDITY AND CAPITAL RESOURCES
The standard measure of liquidity for the savings association industry is
the ratio of cash and eligible investments to a percentage of savings deposits
and borrowings due within one year. The minimum required ratio is currently set
by OTS regulation at 4%. At September 30, 1997, the Bank's regulatory liquidity
ratio was 8.3%, of which 100% were short-term investments. This was an increase
of .8% from its liquidity ratio at September 30, 1996. Management believes that
SCSB's liquidity level, both on a short-term and a long-term basis, is
sufficient for SCSB's liquidity needs.
Historically, SCSB has maintained its liquid assets above the minimum
requirements imposed by OTS regulations and at a level believed by management
adequate to meet requirements of normal daily activities and potential deposit
withdrawals. Management monitors the cash flow position periodically to assure
that adequate liquidity is maintained. Cash for liquidity purposes is generated
through loan prepayments, repayments and increases in deposits. Loan payments
are a relatively stable source of funds, while deposit flows are influenced
significantly by the level of interest rates and general market conditions.
SCSB's liquidity, represented by cash and cash equivalents, is a result of its
operating, investing and financing activities.
During the year ended September 30, 1997, there was a net decrease of
$2,487,000 in cash and cash equivalents. The major reason for this decrease was
an increase in loans receivable.
33
<PAGE> 38
As a member of the Federal Home Loan Bank System ("FHLB System"), SCSB may
borrow from the FHLB of Indianapolis. Borrowings outstanding at September 30,
1997, were $17,746,000, and under OTS regulations, SCSB could have borrowed up
to an additional $10.2 million from the FHLB of Indianapolis as of that date. As
of that date, SCSB had commitments to fund loan originations of approximately
$2.1 million. In the opinion of management, SCSB has sufficient cash flow and
borrowing capacity to meet current and anticipated funding commitments.
Shelby County is subject to regulations as a savings and loan holding
company by the OTS. SCSB, as a subsidiary of a savings and loan holding company,
is subject to certain restrictions in its dealing with Shelby County. SCSB is
subject to regulatory requirements applicable to a federal savings bank.
Capital regulations require savings institutions to have a minimum
regulatory tangible capital equal to 1.5% of total assets and a minimum core
capital ratio equal to 4% of total assets. Additionally, savings institutions
are required to meet a risk-based capital ratio of 8% of risk-weighted assets.
In connection with the Federal Deposit Insurance Corporation Improvement
Act of 1991, the OTS implemented additional minimal capital standards that place
savings institutions into one of five categories, from "critically
undercapitalized" to "well capitalized," depending on levels of three measures
of capital. At each successively lower capital category, an institution is
subject to more restrictive and numerous mandatory or discretionary regulatory
actions and limits. A well capitalized institution, as defined by the
regulations, has a total risk-based capital ratio of at least 10 percent, a Tier
1 (core) risk-based capital ratio of at least six percent, and a leverage (core)
risk-based capital of at least five percent.
At September 30, 1997, SCSB was classified as adequately capitalized.
SCSB's capital ratios are as follows at September 30, 1997:
<TABLE>
<CAPTION>
GAAP TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
------- -------- ------- ----------
<S> <C> <C> <C> <C>
Corporation GAAP Capital..................... $7,171
SCSB GAAP Capital............................ $6,219
Regulatory Capital........................... $5,593 $5,593 $5,985
Minimum capital requirement.................. 1,327 2,653 5,048
------ ------ ------
Excess capital............................... $4,266 $2,940 $ 937
------ ------ ------
Regulatory capital ratio..................... 6.3% 6.3% 9.5%
Requirement.................................. 1.5% 4.0% 8.0%
</TABLE>
IMPACT OF INFLATION
The audited consolidated financial statements of Shelby County presented
herein have been prepared in accordance with generally accepted accounting
principles. These principles require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
Shelby County's primary assets and liabilities are monetary in nature. As a
result, interest rates have a more significant impact on performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or with the same magnitude as the price of goods and
services, which is more directly affected by inflation.
ASSET/LIABILITY MANAGEMENT
SCSB, like other banks, is subject to interest rate risk to the degree that
its interest-bearing liabilities, primarily deposits with short and medium-term
maturities, mature or reprice more rapidly than its interest-earning assets.
Although having liabilities that mature or reprice more frequently on average
than assets will be beneficial in times of declining interest rates, such an
asset/liability structure will result in lower net income during periods of
rising interest rates, unless offset by other factors such as non-interest
income. Therefore, a
34
<PAGE> 39
key element of SCSB's asset/liability plan is to protect net earnings from
changes in interest rates by reducing the maturity or repricing mismatch between
its interest-earning assets and rate-sensitive liabilities.
Principal elements of SCSB's asset/liability management strategy include
the origination of residential and small commercial mortgage loans with
adjustable interest rates and increasing the origination of consumer loans. For
example, SCSB has increased its adjustable rate mortgages from $107,000 at
September 30, 1987, to $6,587,000 at September 30, 1997. Consumer lending was
initiated in March 1989 and had a balance of $7,512,000 at September 30, 1997.
The difference between SCSB's assets and liabilities having maturities and
repricing periods of three months or less ("Interest Rate Gap") was negative
26.16% at September 30, 1997. A negative Interest Rate Gap leaves SCSB's
earnings vulnerable to periods of rising interest rates because during such
periods the interest expense paid on liabilities will generally increase more
rapidly than the interest income earned on assets. Conversely, in a falling
interest rate environment, the total expense paid on liabilities will generally
decrease more rapidly than the interest income earned on assist. A positive
Interest Rate Gap will have the opposite effect. During the years ended
September 30, 1990, and 1989, SCSB's negative Interest Rate Gap did not result
in increased net interest income even though interest rates were falling. During
that period of time, the expected decrease in the average rate paid on deposits
due to falling interest rates was offset by depositors reinvesting their time
deposits from lower-rate short-term certificates to higher-rate long-term
certificates. Additionally, new deposit customer accounts were attracted to the
higher rate certificates. Net interest income during that period was also
reduced because a significant portion of the increased funds derived from
deposits was invested in short-term interest-earning instruments with a lower
yield than long-term fixed-rate loans. During the years ended September 30, 1991
through and including September 30, 1997 interest income was positively affected
by falling interest rates.
SCSB has used a portion of the proceeds from the conversion to originate
both consumer loans and adjustable rate mortgages, which have assisted in the
management of Interest Rate Gap. Recently, the demand for adjustable-rate
mortgage loans in SCSB's lending area has decreased and customers have sought
fixed-rate loans due to the relatively low long-term interest rates. SCSB
remains committed to originating adjustable rate mortgage loans, although market
conditions may require that it originate more fixed rate mortgages in the
future. SCSB will respond to a continued stronger demand for fixed-rate loans by
emphasizing longer-term deposits and the purchase of adjustable-rate mortgages.
Given the current negative Interest Rate Gap, in the event of increasing
interest rates, SCSB may be exposed to the resulting demands for liquidity and
funding. If additional liquidity or funding is necessary, management believes
SCSB could meet such increased demand. For instance, at March 31, 1998, Shelby
County had the ability to borrow an additional $10.8 million from the FHLB of
Indianapolis. For additional discussion of SCSB's liquidity and ability to
borrower, see "-- Liquidity and Capital Resources" above.
35
<PAGE> 40
The following table illustrates the projected maturities and the repricing
mechanisms of the major asset and liability categories of SCSB as of September
30, 1997. Maturity and repricing dates have been projected by applying the
assumptions set forth below to contractual maturity and repricing dates. The
information presented in the following table is derived from data that is
provided to the OTS in "Schedule CMR; Consolidated Maturity/Rate" filed as part
of SCSB's September 30, 1997, quarterly report. That information in Schedule CMR
was reformulated by the FHLB of Indianapolis based upon certain repricing and
other assumptions determined by the FHLB of Indianapolis. The repricing and
other assumptions determined by the FHLB of Indianapolis are based on a study
done by the FHLB of Indianapolis of industry interest rate and repricing trends
and are not necessarily representative of SCSB's actual results. Classifications
of such items are different from those presented in other schedules and
financial statements included herein.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
MATURING OR REPRICING IN
----------------------------------------------------------------
0 TO 3 TO 6 MONTHS 1 TO 3 TO 5 TO
3 MONTHS 6 MONTHS TO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Adjustable rate mortgages.... $ 749 $ 3,763 $ 174 $ 2,808 $ -- $ --
Fixed-rate mortgages......... 816 811 1,616 6,367 7,359 15,778
Non-mortgage loans........... 834 854 1,770 6,541 1,758 --
Non-mortgage investments..... 3,566 -- -- -- 4,168 1,398
-------- -------- -------- -------- -------- --------
Total
interest-earning
assets........... $ 5,965 $ 5,428 $ 3,560 $ 15,716 $ 13,285 $ 17,176
======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
Fixed maturity deposits...... $ 8,359 $ -- $ 11,427 $ 15,927 $ 4,021 $ --
Other deposits............... 2,640 2,191 3,444 6,937 2,941 3,827
Variable-rate fixed
maturity................... 17,746 -- -- -- -- --
Other liabilities............ 625 -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities................ $ 29,370 $ 2,191 $ 14,871 $ 22,864 $ 6,962 $ 3,827
======== ======== ======== ======== ======== ========
Excess (deficiency) of
interest-bearing assets
over interest-bearing
liabilities................ $(23,405) $ 3,237 $(11,311) $ (7,148) $ 6,323 $ 13,349
======== ======== ======== ======== ======== ========
Cumulative excess
(deficiency) of
interest-bearing assets
over interest-bearing
liabilities................ $(23,405) $(20,168) $(31,479) $(38,627) $(32,304) $(18,955)
======== ======== ======== ======== ======== ========
Cumulative interest
sensitivity gap as a
percentage of total
assets..................... (26.16)% (22.54)% (35.18)% (43.17)% (36.10)% (21.18)%
======== ======== ======== ======== ======== ========
</TABLE>
36
<PAGE> 41
<TABLE>
<CAPTION>
10 TO 20 OVER 20
YEARS YEARS TOTAL
-------- ------- -------
<S> <C> <C> <C>
Assets:
Adjustable rate mortgages.............................. $ -- $ -- $ 7,494
Fixed-rate mortgages................................... 16,934 8,479 58,160
Non-mortgage loans..................................... -- -- 11,757
Non-mortgage investments............................... -- -- 9,132
------- ------ -------
Total interest-earning assets................ $16,934 $8,479 $86,543
------- ------ -------
Interest-bearing liabilities:
Fixed maturity deposits................................ $ -- $ -- $39,734
Other deposits......................................... 2,462 688 25,130
Variable-rate fixed maturity........................... -- -- 17,746
Other liabilities...................................... -- -- 625
------- ------ -------
Total interest-bearing liabilities........... $ 2,462 $ 688 $83,235
------- ------ -------
Excess (deficiency) of interest-bearing assets over
interest-bearing liabilities......................... $14,472 $7,791 $ 3,308
======= ====== =======
Cumulative excess (deficiency) of interest-bearing
assets over interest-bearing liabilities............. $(4,483) $3,308 $ 3,308
======= ====== =======
Cumulative interest sensitivity gap as a percentage of
total assets......................................... (5.01)% 3.70% 3.70%
======= ====== =======
</TABLE>
In preparing the table above, it has been assumed, consistent with the
assumptions used by the FHLB of Indianapolis at September 30, 1997, in assessing
the interest-rate sensitivity of savings institutions, that (i) adjustable rate
first mortgage loans on one-to four-family residences will repay at the rate of
22.0% per year; (ii) first mortgage loans on residential properties of five or
more units and non-residential properties will prepay at the rate of 15.0% per
year; (iii) fixed-rate first mortgage loans on one-to four-family residences
with terms to maturity of 5 years or less will prepay at a rate of 9.06% per
maturity classification; (iv) second mortgage loans on one-to four-family
residences will prepay at a rate of 26.0% per maturity classification; (v)
non-mortgage loans and investments will not prepay; and (vi) fixed-rate mortgage
loans on one-to four-family residential properties with remaining terms to
maturity of more than 5 years will prepay annually as follows:
<TABLE>
<CAPTION>
PREPAYMENT
INTEREST RATE ASSUMPTION
- ------------- ----------
<S> <C>
Less than 8%...................................... 9.06%
8.99%............................................. 12.06%
9 to 9.99%........................................ 19.50%
10 to 10.99%...................................... 24.82%
11 and over....................................... 42.75%
</TABLE>
In addition, it is assumed that fixed maturity deposits are not withdrawn
prior to maturity, and that other deposits are withdrawn or reprice as follows:
<TABLE>
<CAPTION>
0 TO 3 3 TO 6 6 MONTHS 1 TO 3 3 TO 5 5 TO 10 10 TO 20 OVER 20
MONTHS MONTHS TO 1 YEAR YEARS YEARS YEARS YEARS YEARS
------ ------ --------- ------ ------ ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook.............................. 4.55% 4.34% 8.11% 25.82% 16.83% 21.37% 14.78% 4.20%
Money market accounts................. 32.31% 21.87% 24.82% 11.00% 5.24% 4.01% .72% .03%
Transaction accounts.................. 10.91% 9.72% 16.37% 33.87% 9.06% 12.16% 6.68% 1.22%
Non-interest bearing accounts......... 2.60% 2.53% 4.87% 17.10% 13.85% 24.18% 22.71% 12.16%
</TABLE>
In evaluating SCSB's exposure to interest rate movements, certain
shortcomings inherent in the method of analysis presented in the foregoing
tables must be considered. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable rate mortgages,
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
37
<PAGE> 42
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their debt may decrease in the event of an interest rate increase.
SCSB considers all of these factors in monitoring its exposure to interest rate
risk.
The principal effect of inflation, as distinct from levels of interest
rates, on Shelby County's earnings is in the area of other expenses. Such
expense items as salaries and employee benefits, occupancy expense and equipment
costs may be subject to increases as a result of inflation.
SUBSEQUENT MATTERS
On May 6, 1998, in connection with a routine periodic examination, the
Office of Thrift Supervision advised SCSB that, until certain corrective actions
are undertaken, SCSB should cease all commercial real estate and commercial
lending. The OTS noted several supervisory concerns including loan documents
which fail to clearly establish repayment terms, loans priced below market rates
and extended maturities at fixed rates, failure to perform and document proper
credit analysis and reliance on overstated collateral values. In light of the
pending Merger, the Board of Directors of SCSB has determined to cease all such
lending while the transaction is pending. SCSB is addressing certain of the OTS'
concerns while the Merger is pending, such as the documentation issue, and Blue
River has engaged a consultant to assist in addressing the OTS' concerns, is
developing a new commercial real estate and commercial lending policy, and is
coordinating with the OTS to address any remaining issues so that SCSB will be
permitted to resume commercial real estate and commercial lending at the closing
of the Merger. Management does not expect that ceasing to make such loans during
that interim period will have a material adverse effect on the net earnings of
SCSB because (i) the time period involved is expected to be only a few months,
(ii) residential mortgage lending, SCSB's primary lending vehicle, remains quite
strong, and (iii) the interest rate margins which SCSB had been experiencing in
its commercial real estate and commercial lending had been relatively comparable
to other forms of lending. Also, management does not anticipate that any of its
corrective actions undertaken while the Merger is pending will have any
quantifiable impact on operations.
In connection therewith, the OTS has requested that SCSB increase its
allowance for loan losses as of March 31, 1998. While management notes that none
of the commercial real estate or commercial loans are non-performing at this
time, that type of lending has increased over the last two years. Accordingly,
SCSB's lending risks have increased because commercial real estate and
commercial loans are generally believed to be more risky than other types of
lending such as residential mortgage lending. Therefore, SCSB increased its
provision for loan losses of $50,000 for the six months ended March 31, 1997 to
$435,000 for the six months ended March 31, 1998.
Specifically, management noted that, since September 30, 1997, several
items had occurred which, in management's opinion, supported the increase in the
provision for loan losses. For instance, during the six month period, a savings
account (which became overdrawn by $52,000) was reclassified as a loan, and was
charged-off. Also, an $80,000 loan was determined to be classified as of March
31, 1998 due to a customer bankruptcy, and therefore management determined that
an additional $80,000 should be added to the provision for loan losses. During
that six month period, past due residential mortgage loans increased from
$416,000 at September 30, 1997 to $673,000 at March 31, 1998. In management's
opinion, this increase in loans 90 days or more delinquent justified a $120,000
addition to the loan loss reserve. From September 30, 1997 to March 31, 1998,
commercial and commercial real estate loans increased approximately $500,000.
Accordingly, management believed that 5% of that increase, or $25,000, should be
added to the provision for loan losses so that the provision's allocation to
commercial and commercial real estate loans remained proportionate to the
aggregate amount of those types of loans outstanding. In addition, management
has usually reserved $10,000 per month (or $60,000 during these six months) for
loan losses inherent in the loan portfolio. The remainder of the $435,000
provision for loan losses during the six months was attributable to a more
conservative approach taken by the OTS in evaluating the loan portfolio and,
which in light of SCSB's current lending activities, was appropriate in
management's opinion.
During the last several years, certain environmental monitoring and
remediation has occurred at SCSB's St. Paul branch location and an adjoining
property (which adjoining property was transferred to an unrelated
38
<PAGE> 43
third party in 1995). At the conclusion of those environmental efforts, it was
determined that no further environmental remediation was necessary at that time.
Since then, the Indiana Department of Environmental Management ("IDEM") has
initiated Indiana's Voluntary Remediation Program (the "VRP"). Pursuant to the
VRP, a parcel of real property may be "submitted" and, after successful
completion of testing and monitoring by the applicant and review by IDEM, the
Indiana Governor's Office will issue a Certificate of Completion and a Covenant
Not to Sue. In connection with the proposed acquisition of SCSB and at the
request of Blue River, SCSB agreed in April to begin the process to submit the
St. Paul branch location into the VRP. Accordingly, SCSB engaged an
environmental consultant to assist.
As mentioned above, when deciding to begin the process, management of SCSB,
based upon prior environmental reports and remediation efforts, believed that
the environmental consultant would only need to undertake monitoring (and not
any remediation) in connection with the VRP. However, after undertaking
preliminary testing, the consultant informed SCSB that remediation would be
necessary to remove certain liquid phase hydrocarbons (i.e., petroleum-based
liquids). Accordingly, management asked the consultant to propose what
remediation would be necessary and to estimate the expected cost. The consultant
did so on May 18, 1998, and estimated the remediation and costs associated with
the VRP to be $157,920. SCSB has reserved approximately $150,000 in its income
statement for the periods ending March 31, 1998. (It should be noted that the
expected amount of time for the VRP, including expected monitoring, is
approximately three (3) years.)
It should be noted that the environmental consultant has only provided an
estimate, and the actual total costs may be different. In addition, certain
costs which may be incurred may not be estimated in the proposal. However, at
this time management does not believe material additional expenditures in
connection with this matter will be necessary during the foreseeable future.
SCSB's actions are voluntary, and have not been required by any governmental
agency or body. Accordingly, SCSB has the right not to proceed with the VRP as
to the St. Paul branch property, although management intends to so proceed at
this time. Except for the VRP, no administrative, legal, or other proceeding is
pending in connection with this matter and, to the knowledge of management, none
is threatened.
39
<PAGE> 44
BUSINESS OF SHELBY COUNTY
Certain statements throughout this section regarding Shelby County's and
SCSB'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 Shelby County and SCSB or their respective managements,
identify forward-looking statements. Such forward-looking statements are based
on the beliefs of the management of Shelby County and SCSB as well as
assumptions made by and information currently available to the management of
Shelby County and SCSB. 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 Shelby County and SCSB
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 Shelby County and SCSB.
Shelby County is an Indiana corporation organized in June, 1991 to become a
unitary savings and loan holding company. Shelby County became a unitary savings
and loan holding company upon the conversion of SCSB from a federal mutual
savings bank to a federal stock savings bank in October, 1991. SCSB was
established in 1937 as a federal savings and loan. Shelby County is the sole
shareholder of SCSB. Shelby County and SCSB conduct business from its main
office in Shelbyville, Indiana with branch offices for SCSB in Shelbyville, St.
Paul, and Morristown, Indiana. SCSB is and historically has been among the top
residential real estate lenders in Shelby County and is the largest locally
owned financial institution in Shelby County. SCSB offers a variety of retail
deposits and lending services to retail and commercial customers in Shelby
County.
LENDING ACTIVITIES
LOAN PORTFOLIO DATA. The following table sets forth the composition of
SCSB's loan portfolio by loan type and security type as of the dates indicated,
including a reconciliation of gross loans receivable after consideration of the
allowance for possible loan losses and deferred net loan fees on loans.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT MARCH 31, ---------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family.................. $54,334 63.14% $46,870 61.17% $42,131 63.24%
Residential construction............ 1,148 1.33 1,054 1.38 1,003 1.51
Multi-family........................ 4,800 5.58 4,512 5.89 3,406 5.11
Non-residential..................... 12,659 14.71 11,746 15.33 10,418 15.64
Home equity loans................... 1,268 1.47 977 1.28 740 1.11
Consumer loans:
Installment loans................... 2,968 3.45 3,411 4.45 2,494 3.74
Auto loans.......................... 4,043 4.69 3,878 5.06 3,423 5.14
Home improvement loans.............. 100 0.12 86 .11 -- --
Loans secured by deposits........... 258 0.30 137 .18 169 .25
Commercial loans.................... 4,489 5.21 3,947 5.15 2,838 4.26
------- ------ ------- ------ ------- ------
Gross loans receivable.............. $86,067 100.00% $76,618 100.00% $66,622 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
40
<PAGE> 45
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT MARCH 31, ---------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
TYPE OF SECURITY
One-to-four family(1)................. $56,850 66.05% $48,987 63.94% $43,874 65.86%
Non-residential real estate........... 12,659 14.70 11,746 15.33 10,418 15.64
Multi-family.......................... 4,800 5.58 4,512 5.89 3,406 5.11
Autos................................. 4,043 4.70 3,878 5.06 3,423 5.14
Deposits.............................. 258 0.30 137 .18 169 .25
Other security........................ 4,137 4.81 4,027 5.26 3,009 4.52
Unsecured............................. 3,320 3.86 3,331 4.34 2,323 3.49
------- ------ ------- ------ ------- ------
Gross loans receivable.............. $86,067 100.00% 76,618 100.00% $66,622 100.00%
======= ====== ======= ====== ======= ======
Deduct:
Allowance for possible losses on
loans............................ 715 .83% 392 .51% 326 .49%
Deferred net loan fees.............. 219 .25 188 .25 198 .30
------- ------ ------- ------ ------- ------
Net loans receivable.................. $85,133 98.92% $76,038 99.24% $66,098 99.21%
======= ====== ======= ====== ======= ======
</TABLE>
- ---------------
(1) Includes residential construction loans, home equity loans and home
improvement loans.
SCSB's portfolio includes no highly leveraged transaction loans. SCSB does
not intend to make such loans in the future. The following table sets forth
certain information at March 31, 1998, regarding the dollar amount of loans
maturing in SCSB's loan portfolio based on the due date of each payment. Demand
loans having no stated schedule of repayments and no stated maturity are
reported as due in one year or less. This schedule does not reflect the effects
of possible prepayments or enforcement of due-on-sale clauses. Management of
SCSB expects prepayments will cause actual maturities to be shorter.
<TABLE>
<CAPTION>
DUE DURING YEARS ENDED MARCH 31,
BALANCE --------------------------------------------------------
OUTSTANDING 2001 2003 2008 2013
MARCH 31, TO TO TO AND
1998 1999 2000 2002 2007 2012 FOLLOWING
------------ ------- ------ ------ ------ ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgages:
Residential one-to-four family
mortgage loans............. $54,334 $ 3,473 $2,133 $2,192 $4,676 $12,454 $29,406
Residential construction...... 1,148 1,071 9 10 18 40 --
Multi-family loans............ 4,800 778 149 194 504 1,192 1,983
Non-residential............... 12,659 742 495 608 1,495 4,046 5,273
Home equity................... 1,268 33 32 62 141 124 876
Consumer loans:
Home improvement loans........ 100 36 17 19 28 -- --
Auto.......................... 4,043 1,577 1,041 751 653 21 --
Installment loans............. 2,968 2,185 211 124 108 195 145
Loans secured by deposits..... 258 194 11 9 13 26 5
Commercial loans................ 4,489 2,772 394 339 482 502 --
------- ------- ------ ------ ------ ------- -------
Gross loans receivable........ $86,067 $12,861 $4,492 $4,308 $8,118 $18,600 $37,688
======= ======= ====== ====== ====== ======= =======
</TABLE>
41
<PAGE> 46
The following table sets forth, as of March 31 1998, the dollar amount of
all loans due after one year which have fixed interest rates and floating or
adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER MARCH 31, 1999
--------------------------------------
FIXED RATES VARIABLE RATES TOTAL
----------- -------------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgages:
Residential one-to-four family mortgage loans...... $47,534 $3,327 $50,861
Multi-family loans................................. 2,802 1,220 4,022
Non-residential.................................... 9,552 2,101 11,917
Home equity........................................ -- 1,235 1,235
Residential construction........................... 77 -- 77
Consumer loans:
Home improvement loans............................. 64 -- 64
Auto............................................... 2,466 -- 2,466
Installment loans.................................. 783 -- 783
Loans secured by deposits.......................... 64 -- 64
Commercial loans..................................... 1,717 -- 1,717
------- ------ -------
Total................................................ $65,059 $7,883 $73,206
======= ====== =======
</TABLE>
RESIDENTIAL LOANS. Approximately $54.3 million, or 63.1% of SCSB's total
loan portfolio at March 31, 1998, consisted of one-to-four family mortgage
loans, of which 93.5% had fixed-rates. Historically, such loans have generally
not been written on terms that are in conformity with the standard underwriting
criteria of the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal
National Mortgage Association ("FNMA"), thereby making resale of such loans
difficult. See "-- Lending Activities, Origination, Purchase and Sale of Loans."
SCSB's fixed-rate mortgages generally have terms of 15, 20, 25 or 30 years.
SCSB began originating adjustable rate mortgages in April, 1988. As of
March 31, 1998, approximately 6.5% of the mortgage loans on one-to-four family
residences included in SCSB's loan portfolio had adjustable rates. The
adjustment for all of SCSB's adjustable rate mortgage loans is indexed to U.S.
Treasury securities. Such loans have interest rates which adjust annually, with
maximum rate changes of 2.0% per adjustment. These loans have terms of 25 years.
The rates offered on SCSB's adjustable rate and fixed-rate residential
mortgage loans are competitive with the rates offered by other mortgage lenders
in SCSB's market area.
Although SCSB's residential mortgage loans are written for amortization
terms up to 30 years, due to prepayments and refinancings, its residential
mortgage loans generally have remained outstanding for a substantially shorter
period of time than the maturity terms of the loan contracts.
Substantially all of the residential mortgage loans that SCSB has
originated since 1987 include "due on sale" clauses, which give SCSB the right
to declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid. SCSB requires private mortgage
insurance on all conventional residential single-family mortgage loans with
loan-to-value ratios in excess of 89%. SCSB will not lend more than 95% of the
lower of current cost or appraised value of a residential single family
property. At March 31, 1998, residential mortgage loans amounting to $673,000,
or .78% of SCSB's total loan portfolio, were included in non-performing assets.
SCSB offers residential construction loans only in conjunction with
residential mortgage loans. Interest is charged on the money disbursed under the
loan. After the construction phase (typically 3 to 12 months), SCSB makes a
mortgage loan, the proceeds of which are used to pay off the construction loan.
At March 31, 1997, SCSB had $1.1 million, or 1.3% of its total loan portfolio,
in residential construction loans outstanding.
NON-RESIDENTIAL REAL ESTATE LOANS. At March 31, 1998, $13.0 million, or
14.7%, of SCSB's total loan portfolio consisted of mortgage loans secured by
non-residential real estate. The non-residential mortgage loans are written for
terms not exceeding 25 years, and generally require a 75% or lower loan-to-value
ratio.
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<PAGE> 47
The largest non-residential mortgage loan as of March 31, 1998, had a balance of
approximately $871,000. At that date, all of SCSB's non-residential mortgage
loans consisted of loans secured by real estate located in Indiana.
Under the Financial Institutions Reform, Recovery, and Enforcement Act
("FIRREA"), a savings association's portfolio of non-residential real estate
loans is limited to 400% of its capital. In addition, the application of the
Qualified Thrift Lender ("QTL") test has had the effect of limiting the
aggregate investment in non-residential real estate loans made by SCSB. See
"Supervision and Regulation -- Regulation of SCSB as a Savings Bank -- Qualified
Thrift Lender." SCSB currently complies with the non-residential real estate
loan limitations.
Generally, non-residential mortgage loans involve greater risk than do
residential loans. Non-residential mortgage loans typically involve larger loan
balances to single borrowers or groups of related borrowers. In addition, the
payment experience on loans received by income-producing properties is typically
dependent on the successful operation of the related project and thus may be
subject to adverse conditions in the real estate market or in the economy in
general.
MULTI-FAMILY LOANS. At March 31, 1998, $4.8 million, or 5.6%, of SCSB's
total loan portfolio consisted of mortgage loans secured by multi-family
dwellings (those consisting of more than four units). All of SCSB's multi-family
loans are secured by apartment complexes located in Shelby County. The largest
such multi-family mortgage loan as of March 31, 1998, had a balance of
approximately $639,000 and none of these loans were non-performing at that time.
As with SCSB's non-residential real estate loans, multi-family mortgage loans
are written for terms not exceeding 25 years, and require at least a 75%
loan-to-value ratio.
Multi-family loans, like non-residential real estate loans, involve a
greater risk than do residential loans. Also, the more stringent loans-to-one
borrower limitation, described below in "-- Origination, Purchase and Sale of
Loans," limits the ability of SCSB to make loans to developers of apartment
complexes and other multi-family units.
HOME EQUITY LOANS. SCSB markets a home equity line of credit loan. The
maximum loan-to-value ratio for such loans is 80%, and the minimum draw on a
home equity line of credit is $250. As of March 31, 1998, SCSB had approximately
$1.3 million outstanding home equity loans, or 1.5% of its total loan portfolio,
with approximately $612,000 of additional credit available to its borrowers
under existing home equity lines of credit. Home equity line of credit loans are
adjustable rate loans, indexed to the base rate on corporate loans at large U.S.
money center commercial banks that the Wall Street Journal publishes as the
Prime Rate.
CONSUMER LOANS. Federal laws and regulations permit federally chartered
savings associations to make secured and unsecured consumer loans in an
aggregate amount of up to 35% of the association's total assets. In addition, a
federally chartered savings association has lending authority above the 35%
limit for certain consumer loans, such as property improvement loans and deposit
account secured loans. However, the QTL test places additional limitations on a
savings association's ability to make consumer loans.
In the spring of 1989, SCSB, as part of its strategy of becoming a
community bank for Shelby County, hired a Vice President -- Consumer Loans to
guide SCSB's entry into the consumer loan area. By March 31, 1998, approximately
eight and one-half years after SCSB began making consumer loans, these loans,
consisting primarily of auto, installment, loans secured by deposits and home
improvement loans, were $7.4 million, or approximately 8.6% of SCSB's total loan
and mortgage-backed securities portfolio. Although consumer loans are currently
only a small portion of its lending business, SCSB consistently originates
consumer loans to meet the needs of its customers, and SCSB intends to originate
more such loans to assist in meeting its asset/liability management goals.
Although consumer loans generally involve a higher level of risk than
one-to-four family residential mortgage loans, their relatively higher yields
and shorter terms to maturity are believed to be helpful in reducing the
interest-rate risk of SCSB's portfolio. At March 31, 1998, no consumer loans
were included in non-performing assets.
43
<PAGE> 48
SCSB's portfolio of automobile loans was $4.0 million, or 4.7% of its total
loan portfolio at March 31, 1998. The maximum term of these loans is 66 months,
and the borrower must provide proof of insurance.
Installment loans, loans secured by deposits and home improvement loans
totaled $3.3 million, or 4.0% of SCSB's total loan portfolio at March 31, 1998.
COMMERCIAL LOANS. SCSB has historically made a limited number of secured
commercial loans. At March 31, 1998, these loans, which included inventory
financing for a lawn and garden equipment supplier, totaled $4.5 million, or
5.2% of SCSB's total loan portfolio.
ORIGINATION, PURCHASE AND SALE OF LOANS. SCSB has historically not
originated its residential mortgage loans in conformity with the standard
criteria of the FHLMC or FNMA. SCSB would therefore experience some difficulty
selling such loans in the secondary market, although most loans could be brought
into conformity. SCSB's mortgage loans vary from secondary market criteria
because SCSB capitalizes taxes rather than using escrow accounts. This practice
allows SCSB to keep its administrative costs down and have thus provided SCSB
with the competitive advantage of being able to make mortgage loans without
charging points. However, SCSB's inability to quickly and easily sell its
residential mortgage loans may subject SCSB to increased interest rate risk
(since most of SCSB's residential mortgage loans have fixed rates) and could
adversely affect SCSB's liquidity position during periods of rising interest
rates.
Although SCSB currently has authority to lend anywhere in the United
States, it has confined its loan origination activities primarily to Shelby
County, Indiana. SCSB's loan originations are generated from referrals from
builders, developers, real estate brokers and existing customers, newspaper,
radio and periodical advertising, and walk-in customers. Loans are originated at
either the main or branch offices. All loan applications have historically been
processed and underwritten at SCSB's main office.
FIRREA contains a generally more stringent loans-to-one-borrower limitation
than that applicable to savings associations before FIRREA's enactment. Under
FIRREA, a savings association generally may not make any loan to a borrower or
its related entities if the total of all such loans by the savings association
exceeds 15% of its capital (plus up to an additional 10% of capital in the case
of loans fully collateralized by readily marketable collateral); provided,
however, that loans up to $500,000 regardless of the percentage limitations may
be made and certain housing development loans of up to $30 million or 30% of
capital, whichever is less, are permitted. The maximum amount which SCSB could
have loaned to one borrower and the borrower's related entities under the 15% of
capital limitation was approximately $850,000 at March 31, 1998. At that date,
the highest outstanding balance of loans by SCSB to one borrower and related
entities was approximately $740,000, an amount within such loans-to-one-borrower
limitations. SCSB's portfolio of loans and mortgage-backed securities currently
contains no group of loans-to-one-borrower that in the aggregate exceed the 15%
of capital limitation.
SCSB's loan approval process is intended to assess the borrower's ability
to repay the loan, the viability of the loan and the adequacy of the value of
the property that will secure the loan. SCSB studies the employment and credit
history and information on the historical and projected income and expenses of
its individual and corporate mortgagors to assess their ability to repay its
mortgage loans. It uses an independent appraiser to appraise the property
securing its loans and requires title insurance and a valid lien on its
mortgaged real estate. Generally, appraisals on real estate underlying most real
estate loans in excess of $100,000 are required to be performed by either
state-licensed or state-certified appraisers, depending on the type and size of
the loan. SCSB requires fire and extended coverage insurance in amounts at least
equal to the principal amount of the loan. It may also require flood insurance
to protect the property securing its interest. SCSB generally makes
disbursements for taxes and insurance on the borrower's behalf, adding the
amount of such disbursements to the principal of the loan.
SCSB's policy is to apply consistent underwriting standards to the several
types of consumer loans it makes to protect SCSB adequately against the risks
inherent in making such loans. Borrower character, paying habits, net worth and
underlying collateral are important considerations.
SCSB has historically not sold and has rarely purchased loans. SCSB may
enter into participations to diversify its portfolio, to supplement local loan
demand and to obtain more favorable yields. During the year
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<PAGE> 49
ended September 30, 1992, SCSB acquired a $114,000 participation in a mobile
home park in Shelby County. During the year ended September 30, 1993, SCSB
acquired additional $182,000 participation in the same mobile home park. During
the year ended September 30, 1996, SCSB acquired an additional $366,000 in loan
participations. During the year ended September 30, 1997, SCSB acquired an
additional $1,908,000 in loan participation. As of March 31, 1998, SCSB held in
its loan and mortgage-backed securities portfolio 15 participations. SCSB's
portion of the outstanding balance of such participations on that date was
approximately $4,657,000.
The following table shows loan origination, purchase and repayment activity
for SCSB during the periods indicated (there were no sales during these
periods):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
------------------ ------------------
1998 1997 1997 1996
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Gross loans receivable at beginning of period....... $76,618 $66,622 $66,622 $50,927
Originations:
First mortgage loans:
Residential....................................... 10,856 5,300 12,150 17,084
Non-residential................................... 1,579 582 3,559 3,087
Miscellaneous additions........................... -- -- 744 271
------- ------- ------- -------
Total first mortgage loans................ 12,435 5,882 16,453 20,442
------- ------- ------- -------
Consumer loans:
Installment loans................................. 5,551 4,475 13,327 10,302
Loans secured by deposits......................... 24 38 54 72
Miscellaneous additions........................... -- -- -- --
------- ------- ------- -------
Total consumer loans...................... 5,575 4,513 13,381 10,374
------- ------- ------- -------
Commercial loans.................................... 2,721 1,256 1,103 3,920
------- ------- ------- -------
Total originations........................ 20,731 11,651 30,937 34,736
------- ------- ------- -------
Purchases:
First mortgage loans.............................. 250 1,784 536 1,636
------- ------- ------- -------
Total originations and purchases.......... 20,981 13,435 31,473 36,372
------- ------- ------- -------
Repayments and other deductions..................... 11,532 9,139 21,477 20,677
------- ------- ------- -------
Gross loans receivable at end of period............. $86,067 $70,918 $76,618 $66,622
======= ======= ======= =======
</TABLE>
ORIGINATION AND OTHER FEES. SCSB realizes income from fees for originating
loans, late charges, checking account service charges, and fees for other
miscellaneous services, including cashier's checks. In order to increase its
competitive position with respect to other mortgage lenders, SCSB currently does
not charge points and charges a flat mortgage origination fee of $300, not
dependent on the size of the loan, payable at loan closing. Late charges are
assessed if payment is not received within a specified number of days after it
is due.
SCSB charges miscellaneous fees for appraisals, inspections (including a 1%
inspection fee for construction loans), obtaining credit reports, certain loan
applications, recording and similar services. SCSB also collects fees for Visa
and MasterCard applications which it refers to another institution. SCSB does
not make credit card loans directly.
ASSET QUALITY
NON-PERFORMING ASSETS. Mortgage loans are reviewed by SCSB on a regular
basis and are generally placed on a non-accrual status when the loans become
contractually past due 90 days or more. Once a mortgage loan is 15 days past
due, a notice of delinquency is mailed to the borrower. Telephone contact with
the borrower is made, and another written notice follows at the end of the
month, with a demand to pay-in-full
45
<PAGE> 50
notice sent on the 32nd day. SCSB attempts to arrange a personal interview after
a loan has been delinquent for two months. When the loan is 75 days delinquent,
a title search or abstract update is ordered. By the time a mortgage loan is 90
days past due, management has decided whether to foreclose. Further, the loan
status is reported to the Board of Directors. The Board of Directors normally
confers foreclosure authority at that time, but management may continue to work
with the borrower if circumstances warrant.
Consumer and commercial loans other than mortgage loans are treated
similarly. It is SCSB's policy to recognize losses on these loans as soon as
they become apparent. The Board will determine whether to charge off a loan by
the time it is four months past due.
At March 31, 1998, $710,000, or .72%, of SCSB's total assets were
non-performing.
At September 30, 1997, SCSB did have one real estate acquired as a result
of foreclosure, voluntary deed, or other means totaling $37,000. Such real
estate, is classified as "real estate owned" or "REO" until it is sold. When
property is so acquired, it is recorded at the lower of the unpaid principal
balance at the date of acquisition plus foreclosure and other related costs or
at fair value. Interest accrual ceases no later than the date of acquisition and
all costs incurred from that date in maintaining the property are expensed.
The table below sets forth the amounts and categories of SCSB's
non-performing assets (non-accrual loans, real estate owned and troubled debt
restructurings) for the last three years. It is the policy of SCSB that all
earned but uncollected interest on all loans be reviewed monthly to determine if
any portion thereof should be classified as uncollectible for any loan past due
in excess of 90 days.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT MARCH 31, ----------------
1998 1997 1996
------------ ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans(1)................................... $673 $416 $247
Real estate owned -- net............................... 37 37 --
Troubled debt restructurings........................... -- -- --
---- ---- ----
Total non-performing assets.................... $710 $453 $247
---- ---- ----
Non-performing assets to total assets.................... .72% .50% .30%
==== ==== ====
</TABLE>
- ---------------
(1) SCSB generally places loans on a nonaccrual status when the loans become
contractually past due 90 days or more. At March 31, 1998, all $673,000 of
nonaccrual loans were residential loans. For the fiscal years ended
September 30, 1997 and 1996, the income that would have been recorded had
the non-accrual loans not been in a non-performing status was approximately
$31,359 and $15,585, respectively, compared to actual income recorded of
$20,667 and $8,696, respectively.
As of March 31, 1998, SCSB held loans delinquent from 30 to 89 days
aggregating approximately $2.1 million, or 2.13% of total assets. The amount of
past due payments on such loans aggregated approximately $35,000. SCSB is not
aware of any loans not classified as non-accrual or delinquent of which the
borrowers were experiencing financial difficulties.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is maintained
through the provision for losses on loans, which is charged to earnings. The
provision is determined in conjunction with management's review and evaluation
of current economic conditions (including those of SCSB's lending area), changes
in the character and size of the loan portfolio, loan delinquencies (current
status as well as past and anticipated trends) and adequacy of collateral
securing loan delinquencies, historical and estimated net charge-offs, and other
pertinent information derived from a review of the loan portfolio. Loans or
portions thereof are charged
46
<PAGE> 51
to the allowance when losses are considered probable. The following table
analyzes changes in the allowance during the two years ended September 30, 1997
and 1996 and the six months ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
FOR THE YEARS
SIX MONTHS ENDED
ENDED MARCH 31, SEPTEMBER 30,
---------------- --------------
1998 1997 1997 1996
------ ------ ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance of allowance at beginning of period........... $392 $326 $326 $241
Add:
Provision for loan losses........................... 435 50 104 100
Recoveries of loans previously charged off............ 4 -- 1 1
Less gross charge-offs:
Residential real estate loans....................... -- 14 -- --
Consumer loans...................................... 116 -- 39 16
---- ---- ---- ----
Gross charge-offs................................... 116 14 39 16
---- ---- ---- ----
Balance of allowance at end of period................. $715 $362 $392 $326
==== ==== ==== ====
Net charge-offs to total average loans outstanding.... 0.14% 0.02% 0.05% 0.02%
==== ==== ==== ====
Allowance at end of period to total average loans
outstanding......................................... 0.83% 0.51% 0.52% 0.49%
==== ==== ==== ====
</TABLE>
The following table sets forth information concerning the allocation of
SCSB's allowance for loan losses by loan categories at the dates indicated.
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
------------------------------------------- -------------------------------------------
1998 1997 1997 1996
-------------------- -------------------- -------------------- --------------------
PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans........... $375 86.23% $238 85.53% $283 85.05% $202 86.61%
Consumer loans........... 100 8.56% 124 9.49% 109 9.80% 124 9.13%
Commercial loans......... 240 5.21% -- 4.98% -- 5.15% -- 4.26%
---- ------ ---- ------ ---- ------ ---- ------
Total.................... $715 100.00% $362 100.00% $392 100.00% $326 100.00%
==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
47
<PAGE> 52
INVESTMENTS
SCSB's investment portfolio consists of mortgage-backed securities,
corporate and municipal bonds and FHLMC preferred stock. The following table
sets forth the amortized cost and fair value of SCSB's investment portfolio at
the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, AT MARCH 31, AT SEPTEMBER 30, AT SEPTEMBER 30,
1998 1997 1997 1996
------------------ ------------------ ------------------ ------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------ --------- ------ --------- ------ --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
Available for sale:
Mortgage-backed
securities............. $2,174 $2,160 $3,279 $3,215 $2,997 $2,973 $4,700 $4,583
Municipal bonds........... 2,519 2,496 444 436 1,339 1,353 445 435
Corporate bonds........... 1,863 1,861 1,759 1,690 2,253 2,227 1,517 1,446
Agencies.................. 98 99 1,083 1,048 -- -- -- --
Treasury notes............ -- -- -- -- 224 225 -- --
FHLMC preferred stock..... 31 1,473 31 867 31 1,109 31 780
------ ------ ------ ------ ------ ------ ------ ------
Total............. 6,685 8,089 6,596 7,256 6,844 7,887 6,693 7,244
------ ------ ------ ------ ------ ------ ------ ------
Held to maturity:
Mortgage-backed
securities............. 274 282 388 399 336 325 633 637
Municipal bonds........... 221 226 225 223 223 227 227 224
Corporate bonds........... 250 253 404 410 250 255 408 414
Derivatives............... -- -- 107 107 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total............. 745 761 1,124 1,139 809 807 1,268 1,275
====== ====== ====== ====== ====== ====== ====== ======
Total investment
securities................ $7,430 $8,850 $7,720 $8,395 $7,653 $8,694 $7,961 $8,519
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The following table sets forth the amount of investment securities
(excluding FHLMC preferred stock which is an equity security) which mature
during each of the periods indicated and the weighted average yields for each
range of maturities at March 31, 1998.
<TABLE>
<CAPTION>
AMOUNT AT MARCH 31, 1998 WHICH MATURES IN
---------------------------------------------------------------------------------
ONE YEAR SIX YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS OVER TEN YEARS
------------------ ------------------ ------------------ ------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities......... -- -- 566 5.99% 1,129 6.80% 740 4.32
Municipal and
corporate bonds.... -- -- 2,669 5.10% 1,923 7.61% 236 6.10%
Agencies............. -- -- -- -- 99 5.66% -- --
</TABLE>
The OTS requires savings associations to maintain an average daily balance
of liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable savings deposits plus short-term borrowings.
Liquid assets include cash, certain time deposits, certain bankers' acceptances,
specified U.S. government, state or federal agency obligations, certain
corporate debt securities, commercial paper, certain mutual funds, certain
mortgage-related securities, and certain first lien residential mortgage loans.
This liquidity requirement may be changed from time to time by the OTS to any
amount within the range of 4% to 10%, and is currently 5%, although the OTS has
proposed a reduction to 4%. Monetary penalties may be imposed for failure to
meet these liquidity requirements. At March 31, 1998, SCSB had liquid assets of
$5.4 million, and a regulatory liquidity ratio of 6.13%, of which 62.87% were
short-term investments.
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<PAGE> 53
SOURCES OF FUNDS
GENERAL. Deposits have traditionally been SCSB's primary source of funds
for use in lending and investment activities. In addition to deposits, SCSB
derives funds from loan amortization, prepayments, retained earnings and income
on earning assets. While loan amortization and income on earning assets are
relatively stable sources of funds, deposit inflows and outflows can vary widely
and are influenced by prevailing interest rates, market conditions and levels of
competition.
DEPOSITS. Deposits are attracted, principally from within Shelby County,
through the offering of a broad selection of deposit instruments including NOW
accounts, fixed-rate certificates of deposit, individual retirement accounts,
and savings accounts. SCSB does not actively solicit or advertise for deposits
outside of Shelby County, although deposits at the St. Paul branch may come from
neighboring Decatur County and certain advertising media may extend into other
nearby areas. Substantially all of SCSB's depositors are residents of Shelby
County. Deposit account terms vary, with the principal differences being the
minimum balance required, the amount of time the funds remain on deposit and the
interest rate. Although SCSB has accepted a limited number of brokered deposits
in the past (for which it paid no commissions), SCSB does not solicit such
deposits and does not anticipate accepting such deposits in the future.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established by SCSB on a periodic basis. Determination of rates and terms
are predicated on funds acquisition and liquidity requirements, rates paid by
competitors, growth goals, and federal regulations.
An analysis of SCSB deposit accounts by type, maturity, and rate at March
31, 1998 and September 30, 1997, is as follows:
<TABLE>
<CAPTION>
MINIMUM BALANCE AT WEIGHTED BALANCE AT WEIGHTED
OPENING MARCH 31, % OF AVERAGE SEPTEMBER 30, % OF AVERAGE
TYPE OF ACCOUNT BALANCE 1998 DEPOSITS RATE 1997 DEPOSITS RATE
- --------------- -------- ---------- -------- -------- ------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Withdrawable:
Savings accounts.................. $ 25 $ 8,351 11.84% 2.97 $ 9,206 14.24% 2.81
NOW............................. 100 15,625 22.15 2.78 13,063 20.21 2.15
Money Market.................... 10,000 6,647 9.42 5.50 2,732 4.23 5.60
-------- ------- ------ ---- ------- ------ ----
Total withdrawable........ 30,623 43.41 25,001 38.68
------- ------ ------- ------
Certificates (original terms):
31 days......................... 2,500 7 .01 2.75 67 .10 4.77
3 months........................ 1,000 420 .60 4.65 601 .93 4.60
6 months........................ 1,000 4,934 7.00 5.13 5,854 9.06 5.11
12 months....................... 500 4,266 6.05 5.62 3,850 5.96 5.53
18 months....................... 500 1,444 2.05 5.68 1,529 2.37 5.59
30 months....................... 500 4,587 6.50 5.72 4,602 7.12 5.78
48 months....................... 500 1,158 1.64 6.18 1,039 1.61 6.13
60 months....................... 500 9,715 13.77 6.70 10,700 16.56 6.67
IRA's
6 months........................ 1,000 146 .21 5.17 140 .22 5.12
12 months....................... 500 170 .24 5.91 156 .24 5.75
18 months....................... 500 46 .07 5.70 49 .08 5.67
30 months....................... 500 609 .86 5.67 608 .94 5.73
48 months....................... 500 21 .03 5.88 17 .03 5.89
60 months....................... 500 2,766 3.92 6.53 2,779 4.30 6.57
96 months....................... 1,000 -- -- -- -- -- --
Jumbo certificates................ 100,000 9,621 13.64 6.42 7,641 11.80 6.49
-------- ------- ------ ---- ------- ------ ----
Total certificates........ 39,910 56.59 39,632 61.32
------- ------ ------- ------
Total deposits............ $70,533 100.00% $64,633 100.00%
======= ====== ======= ======
</TABLE>
49
<PAGE> 54
The following table sets forth by various interest rate categories the
composition of time deposits of SCSB at the dates indicated:
<TABLE>
<CAPTION>
AT AT SEPTEMBER 30,
MARCH 31, ------------------
1998 1997 1996
--------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Under 5%.............................................. $ 3,011 $ 4,066 $ 5,374
5.01-7.00%............................................ 33,588 32,250 33,106
7.01-9.00%............................................ 3,311 3,316 3,245
9.01 and over......................................... -- -- --
------- ------- -------
Total....................................... $39,910 $39,632 $41,725
======= ======= =======
</TABLE>
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the two years following March
31, 1998. Matured certificates which have not been renewed as of March 31, 1998,
have been allocated based upon certain rollover assumptions.
<TABLE>
<CAPTION>
AMOUNTS AT
MARCH 31, 1998, MATURING IN
----------------------------------------------------
ONE YEAR GREATER THAN
OR LESS TWO YEARS THREE YEARS THREE YEARS
-------- --------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Under 5%.............................. $ 2,916 $ 95 $ -- $ --
5.01-7.00%............................ 16,004 4,099 10,599 2,886
7.01-9.00%............................ 228 2,027 414 642
9.01 and over......................... -- -- -- --
------- ------ ------- ------
Total....................... $19,148 $6,221 $11,013 $3,528
======= ====== ======= ======
</TABLE>
The following table indicates the amount of SCSB's jumbo certificates of
deposit of $100,000 or more by time remaining until maturity as of March 31,
1998.
<TABLE>
<CAPTION>
MATURITY
- -------- (DOLLARS IN THOUSANDS)
<S> <C>
Three months or less........................................ $2,647
Greater than three months through six months................ 750
Greater than six months through twelve months............... 900
Over twelve months.......................................... 5,324
------
Total............................................. $9,621
======
</TABLE>
50
<PAGE> 55
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by SCSB at the dates indicated, and
the amount of increase or decrease in such deposits as compared to the previous
period.
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
-----------------------------------------------------------------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
BALANCE AT FROM BALANCE AT FROM BALANCE AT
MARCH % OF SEPTEMBER SEPTEMBER % OF SEPTEMBER SEPTEMBER % OF
31, 1998 DEPOSITS 30, 1997 30, 1997 DEPOSITS 30, 1997 30, 1997 DEPOSITS
---------- -------- ---------- ---------- -------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Withdrawable:
Savings accounts............ $ 8,351 11.84% $ (855) $ 9,206 14.24% $ (822) $10,028 15.36%
NOW......................... 15,625 22.15 2,562 13,063 20.21 (470) 13,533 20.73
Money Market................ 6,647 9.42 3,915 2,732 4.23 2,732 -- --
------- ------ ------ ------- ------ ------- ------- ------
Total withdrawable.... 30,623 43.41 5,622 25,001 38.68 1,440 23,561 36.09
------- ------ ------ ------- ------ ------- ------- ------
Certificates (original terms):
31 days....................... 7 .01 (60) 67 .10 (7) 74 .11
3 months...................... 420 .60 (181) 601 .93 155 446 .68
6 months...................... 4,934 7.00 (920) 5,854 9.06 (2,130) 7,984 12.23
12 months..................... 4,266 6.05 416 3,850 5.96 716 3,134 4.80
18 months..................... 1,444 2.05 (85) 1,529 2.37 382 1,147 1.76
30 months..................... 4,587 6.50 (15) 4,602 7.12 (548) 5,150 7.89
48 months..................... 1,158 1.64 119 1,039 1.61 (1,405) 2,444 3.75
60 months..................... 9,715 13.77 (985) 10,700 16.56 (541) 11,241 17.22
72 months..................... -- -- -- -- -- -- -- --
96 months..................... -- -- -- -- -- -- -- --
IRA's
31 days....................... -- -- -- -- -- -- -- --
6 months...................... 146 .21 6 140 .22 7 133 .21
12 months..................... 170 .24 14 156 .24 58 98 .15
18 months..................... 46 .07 (3) 49 .08 (6) 55 .08
30 months..................... 609 .86 1 608 .94 70 538 .82
48 months..................... 21 .03 4 17 .03 (5) 22 .03
60 months..................... 2,766 3.92 (13) 2,779 4.30 152 2,627 4.02
96 months..................... -- -- -- -- -- -- -- --
------- ------ ------ ------- ------ ------- ------- ------
Jumbo certificates............ 9,621 13.64 1,980 7,641 11.80 1,009 6,632 10.16
------- ------ ------ ------- ------ ------- ------- ------
Total certificates.... 39,910 56.59 278 39,632 61.32 (2,093) 41,725 63.91
------- ------ ------ ------- ------ ------- ------- ------
Total deposits........ $70,533 100.00% $5,900 $64,633 100.00% $ (653) $65,286 100.00%
======= ====== ====== ======= ====== ======= ======= ======
</TABLE>
BORROWINGS. Generally, SCSB focuses on generating high quality loans and
then funds such loans from deposits and investments. SCSB may obtain advances
from the Federal Home Loan Bank ("FHLB") of Indianapolis to supplement its
supply of lendable funds. See " -- Regulation of SCSB as a Savings Bank --
Federal Home Loan Bank System" and "-- Qualified Thrift Lender." These
limitations are not expected to have any impact on SCSB's ability to borrow from
the FHLB of Indianapolis. At March 31, 1998, SCSB had approximately $19.6
million in borrowings outstanding, of which approximately $19.3 million were
FHLB advances. SCSB does not anticipate any problem obtaining additional
advances appropriate to meet its requirements in the future, if such advances
should become necessary.
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<PAGE> 56
The following table represents certain information relating to our
borrowings at or for the three months ended March 31, 1998 and 1997 and at or
for the years ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
SIX MONTHS ENDED ENDED
MARCH 31, SEPTEMBER 30,
----------------- ------------------
1998 1997 1997 1996
------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB Advances:
Outstanding at end of period.................. $19,321 $14,246 $17,746 $9,746
Average balance outstanding for period........ 18,009 12,746 14,054 2,173
Maximum amount outstanding at any month-end
during the period.......................... 19,321 14,246 17,746 9,746
Weighted average interest rate during the
period..................................... 5.77% 6.10% 6.19% 4.41%
Weighted average interest rate at end of the
period..................................... 6.48% 7.10% 5.87% 5.70%
</TABLE>
SERVICE CORPORATION SUBSIDIARY
OTS regulations permit federal savings associations to invest in the
capital stock, obligations, or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of an association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special-purpose finance subsidiaries), in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. FIRREA requires a savings association that acquires a
non-savings association subsidiary, or that elects to conduct a new activity
within a subsidiary, to give the FDIC and the OTS at least 30 days advance
written notice. The FDIC may, after consultation with the OTS, prohibit specific
activities if it determines such activities pose a serious threat to the Savings
Association Insurance Fund (the "SAIF"). Moreover, FIRREA requires savings
associations to deduct from capital, for purposes of meeting the core capital,
tangible capital, and risk-based capital requirements, their entire investment
in and loans to a subsidiary engaged in activities not permissible for a
national bank (other than exclusively agency activities for its customers or
mortgage banking subsidiaries).
SCSB wholly owns two subsidiaries. First Tier One Corporation, an Indiana
corporation, holds common stock issued by Intrieve, Inc. (formerly known as
Savings & Loan Data Corporation), SCSB'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. SCSB ceased the operations
of TSGI as of November 1, 1996.
EMPLOYEES
As of March 31, 1998, Shelby County employed no persons on a full- or
part-time basis. As of March 31, 1998, SCSB employed 28 persons on a full-time
basis and four persons on a part-time basis. None of SCSB's employees are
represented by a collective bargaining group.
Management considers its employee relations to be good.
COMPETITION
SCSB originates most of its loans to, and accepts most of its deposits
from, residents of Shelby County, Indiana and surrounding counties. SCSB is the
only financial institution headquartered in Shelby County.
SCSB is subject to competition from various financial institutions,
including state and national banks, state and federal savings associations,
credit unions, certain nonbanking consumer lenders, and other
52
<PAGE> 57
companies or firms, including brokerage houses and mortgage brokers, that
provide similar services in Shelby County with significantly larger resources
than SCSB. In particular, three commercial banks and one savings association
compete with SCSB in its market area. To some extent, SCSB must also compete
with banks and savings associations in Indianapolis, since media advertising
from Indianapolis reaches Shelbyville. SCSB also competes with money market
funds and with insurance companies with respect to its individual retirement
accounts.
Under current law, bank holding companies may acquire savings associations.
Savings associations may also acquire banks under federal law. To date, several
bank holding company acquisitions of healthy savings associations in Indiana
have been completed. Affiliations between banks and healthy savings associations
based in Indiana may also increase the competition faced by SCSB and Shelby
County.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. SCSB competes for loan
originations primarily through the efficiency and quality of services it
provides borrowers, builders and realtors and through interest rates and loan
fees it charges. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels, and other factors that are not readily predictable.
In the current environment, with many savings associations
undercapitalized, SCSB will attempt to differentiate itself from other providers
of financial services by emphasizing its strong capital base.
TAXATION
FEDERAL TAXATION. Shelby County and SCSB file a consolidated federal income
tax return on the accrual basis for each fiscal year ending September 30. The
consolidated federal income tax return has the effect of eliminating
intercompany distributions, including dividends, in the computation of
consolidated taxable income. Income of Shelby County generally would not be
taken into account in determining the bad debt deduction allowed to SCSB,
regardless of whether a consolidated tax return is filed. However, certain
"functionally related" losses of Shelby County 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. SCSB's
federal income tax returns have not been audited in the last five years.
Historically, savings associations, such as SCSB, have been permitted to
compute bad debt deductions using either SCSB experience method or the
percentage of taxable income method. However, for years beginning after December
31, 1995, SCSB will no longer be able to use the percentage of taxable income
method of computing its allocable tax bad debt deduction. SCSB will be required
to compute its allocable deduction using the experience method. As a result of
the repeal of the percentage of taxable income method, reserves taken after 1987
using the percentage of taxable income method generally must be included in
future taxable income over a six-year period, although a two-year delay may be
permitted for institutions meeting a residential mortgage loan origination test.
In addition, the pre-1988 reserve, in which no deferred taxes have been
recorded, will not have to be recaptured into income unless (i) SCSB 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 SCSB.
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.
53
<PAGE> 58
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 SCSB appropriated to bad debt reserves and deducted for federal
income tax purposes is not available for payment of cash dividends or other
distributions to Shelby County without the payment of federal income taxes by
SCSB on the amount of such income deemed removed from the reserves at the
then-current income tax rate. At March 31, 1998, approximately $1.1 million of
SCSB's retained income represented bad debt deductions for which no federal
income tax provision had been made.
STATE TAXATION. SCSB 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.
SCSB's state income tax returns have not been audited in the last five
years.
CURRENT ACCOUNTING ISSUES
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Comprehensive Income", was issued in June 1997 and becomes effective for fiscal
periods beginning after December 15, 1997. SFAS 130 requires reclassification of
earlier financial statements for comparative purposes. SFAS No. 130 requires
that changes in the amounts of certain items, including foreign currency
translation adjustments and gain and losses on certain securities be shown in
the financial statements. SFAS No. 130 does not require a specific format for
the financial statement in which comprehensive income is reported, but does
require that an amount representing total comprehensive income be reported in
that statement. Management of SCSB has not yet quantified the effect of the new
standard on the consolidated financial statements.
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," was
issued in June 1997 and is effective for fiscal periods beginning after December
15, 1997. This statement will change the way public companies report information
about segments of their business in their annual financial statements and
requires them to report selected segment information in their quarterly reports
issued to shareholders. It also requires entity-wide disclosures about the
products and services an entity provides, the material countries in which it
holds assets and reports revenues, and its major customers. Management of SCSB
has not yet quantified the effect of this new standard on the consolidated
financial statements.
PROPERTIES
At March 31, 1998, SCSB conducted its business from its main office at 29
East Washington Street, Shelbyville, Indiana, and three branch offices. All four
offices are full-service offices. The Main Office in Shelbyville, the Rampart
Office in Shelbyville and the office in St. Paul are either owned by SCSB or
Shelby County and the office in Morristown is leased.
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<PAGE> 59
The following table provides certain information with respect to SCSB's
offices as of March 31, 1998:
<TABLE>
<CAPTION>
NET BOOK VALUE
YEAR OPENED OR OF PROPERTY, FURNITURE APPROXIMATE SQUARE
DESCRIPTION AND ADDRESS ACQUIRED & FIXTURES FOOTAGE
- ----------------------- -------------- ---------------------- ------------------
<S> <C> <C> <C>
Shelbyville Main Office
29 East Washington Street....... 1975 $787,359 15,000
Shelbyville Rampart Office
34 Rampart Street............... 1995 $880,588 3,000
Morristown Office
127 East Main Street............ 1995 $ 45,471 1,800
St. Paul Office
105 County Line Road............ 1989 $ 36,138 1,476
</TABLE>
SCSB has two ATMs, one of which is located at its main office and the other
which is located at its Rampart office. SCSB's ATMs are on the INTRIEVE INC.
interchange system and participate in the nationwide CIRRUS ATM network.
SCSB 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
SCSB was $132,000 at March 31, 1998.
SCSB also has contracted for the data processing and reporting services of
Intrieve. SCSB's service corporation subsidiary owns common stock of Intrieve
having a book value of $15,000. The cost of these data processing services is
approximately $18,000 per month.
LEGAL PROCEEDINGS
Neither Shelby County, SCSB, nor SCSB's service corporation subsidiaries is
a party to any material pending legal proceeding.
YEAR 2000 COMPLIANCE
Because computer memory was so expensive on early mainframes, some computer
programs used only the final two digits for the year in the date field while
maintaining the first two digits of each year constant. As a result, some
computer applications may be unable to interpret the change from the year 1999
to the year 2000. Shelby County is actively monitoring its year 2000 computer
compliance issues. The bulk of Shelby County's computer processing is contracted
with Intrieve. Intrieve's schedule for compliance with year 2000 is for all data
processing to be in compliance by Fall of 1998. (Currently, Intrieve is testing
certain of Shelby County's systems.) Intrieve will assist Shelby County with
other phases of year 2000 compliance through 1998 and 1999. Shelby County has
also appointed a year 2000 team to address all aspects of the year 2000
compliance.
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 Shelby County and SCSB can be affected not only by management
decisions and general economic conditions, but also by the statutes administered
by, and the regulations and policies of, various governmental regulatory
authorities. Those authorities include, but are not limited to, the Federal
Reserve, the OTS, the FDIC, the Department, the Commission, the Internal Revenue
Service and state taxing authorities. The effect of such statutes, regulations
and policies can be significant, and cannot be predicted with a high degree of
certainty.
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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 Shelby County
and SCSB 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 SCSB and the public, rather than shareholders of SCSB
or Shelby County.
Federal law and regulations, including provisions added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and regulations
promulgated thereunder, establish supervisory standards applicable to the
operation, management and lending activities of SCSB, including internal
controls, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation and loan-to-value ratios for loans secured by real
property. SCSB 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
Shelby County and SCSB. Any change in government regulation may have a material
adverse effect on Shelby County, SCSB and their operations.
REGULATION OF SHELBY COUNTY UNDER HOLA
As the holding company for SCSB, Shelby County is regulated as a
"non-diversified savings and loan holding company" within the meaning of the
HOLA, and subject to regulatory oversight of the Director of the OTS. As such,
Shelby County is 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, SCSB is subject to certain restrictions in its
dealings with Shelby County and with other companies affiliated with Shelby
County.
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 Shelby County, or any person who owns more than 25% of Shelby
County's common stock, from acquiring control of another savings association or
savings and loan holding company without obtaining the prior approval of the
Director of the OTS.
OTS regulations generally do not restrict the permissible business
activities of a unitary savings and loan holding company. Notwithstanding the
above rules as to permissible business activities of unitary savings and loan
holding companies, if the savings association subsidiary of such a holding
company fails to meet the Qualified Thrift Lender ("QTL") test, then such
unitary holding company would become subject to the activities restrictions
applicable to multiple holding companies. (Additional restrictions on securing
advances from the FHLB also apply.) At March 31, 1998, SCSB's asset composition
was in excess of that required to qualify as a Qualified Thrift Lender.
If Shelby County were to acquire control of another savings association
other than through a merger or other business combination with SCSB, Shelby
County would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
test, the activities of Shelby County and any of its subsidiaries (other than
SCSB 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
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<PAGE> 61
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 SCSB AS A SAVINGS BANK
As a federally chartered, SAIF-insured savings association, SCSB is subject
to extensive regulation by the OTS and the FDIC. For example, SCSB 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 SCSB'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. SCSB's semi-annual assessment owed to the OTS,
which is based upon a specified percentage of assets, is approximately $10,000.
The activities of SCSB are governed by the HOLA and, in certain respects,
the FDI Act. The Director of the OTS is authorized to promulgate regulations to
ensure the safe and sound operation of savings associations and may impose
various requirements and restrictions on the activities of savings associations.
FEDERAL HOME LOAN BANK SYSTEM. SCSB 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, SCSB is required to purchase and maintain stock in the FHLB of
Indianapolis in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. At September 30, 1997, SCSB's investment in stock of
the FHLB of Indianapolis was $920,000. The FHLB imposes various limitations on
advances such as limiting the amount of certain types of real estate-related
collateral to 30% of a member's capital and limiting total
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advances to a member. Interest rates charged for advances vary depending upon
maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the
borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended September 30, 1997, dividends paid by
the FHLB of Indianapolis to SCSB totaled approximately $59,000, for an annual
rate of 7.9%.
SAVINGS ASSOCIATION REGULATORY CAPITAL. Currently, savings associations are
subject to three separate minimum capital-to-assets requirements: (i) a leverage
limit, (ii) a tangible capital requirement, and (iii) a risk-based capital
requirement. The leverage limit requires that savings associations maintain
"core capital" of at least 4% of total assets. Core capital is generally defined
as common shareholders' equity (including retained income), noncumulative
perpetual preferred stock and related surplus, certain minority equity interests
in subsidiaries, certain non-withdrawable accounts, qualifying supervisory
goodwill, purchased mortgage servicing rights and purchased credit card
relationships (subject to certain limits) less nonqualifying intangibles. Under
the tangible capital requirement, a savings association must maintain tangible
capital (core capital less all intangible assets except purchased mortgage
servicing rights which may be included after making the above-noted adjustment
in an amount up to 100% of tangible capital) of at least 1.5% of total assets.
Under the risk-based capital requirements, a minimum amount of capital must be
maintained by a savings association to account for the relative risks inherent
in the type and amount of assets held by the savings association. The risk-based
capital requirement requires a savings association to maintain capital (defined
generally for these purposes as core capital plus general valuation allowances
and permanent or maturing capital instruments such as preferred stock and
subordinated debt less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four categories
(0-100%). A credit risk-free asset, such as cash, requires no risk-based
capital, while an asset with a significant credit risk, such as a non-accrual
loan, requires a risk factor of 100%. Moreover, a savings association must
deduct from capital, for purposes of meeting the core capital, tangible capital
and risk-based capital requirements, its entire investment in and loans to a
subsidiary engaged in activities not permissible for a national bank (other than
exclusively agency activities for its customers or mortgage banking
subsidiaries). At March 31, 1998, SCSB was in compliance with all capital
requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework.
The following is a summary of SCSB's regulatory capital and capital
requirements at March 31, 1998:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Regulatory capital..................................... $5,671 $5,671 $6,385
Minimum capital requirement............................ 1,459 3,835 5,748
Excess capital......................................... 4,342 1,836 637
------ ------ ------
Regulatory capital ratio............................... 5.91% 5.91% 8.89%
------ ------ ------
Minimum capital ratio.................................. 1.5% 4.0% 8.0%
------ ------ ------
</TABLE>
If an association is not in compliance with the capital requirements, the
OTS is required to prohibit asset growth and to impose a capital directive that
may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include
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restricting the operations activities of the association, imposing a capital
directive, cease and desist order, or civil money penalties, or imposing harsher
measures such as appointing a receiver or conservator or forcing the association
to merge into another institution.
DIVIDEND LIMITATIONS. An OTS regulation imposes limitations upon all
"capital distributions" by savings associations, including cash dividends,
payments by an association to repurchase or otherwise acquire its shares,
payments to shareholders of another institution in a cash-out merger and other
distributions charged against capital. The regulation establishes a three-tiered
system of regulation, with the greatest flexibility being afforded to
well-capitalized associations. A savings association which has total capital
(immediately prior to and after giving effect to the capital distribution) that
is at least equal to its fully phased-in capital requirements would be a Tier 1
institution ("Tier 1 Institution"). An association that has total capital at
least equal to its minimum capital requirements, but less than its fully
phased-in capital requirements, would be a Tier 2 institution ("Tier 2
Institution"). An institution having total capital that is less than its minimum
capital requirements would be a Tier 3 institution ("Tier 3 Institution").
However, an institution which otherwise qualifies as a Tier 1 Institution may be
designated by the OTS as a Tier 2 Institution or Tier 3 Institution if the OTS
determines that the institution is "in need of more than normal supervision."
SCSB 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, SCSB is required to maintain an
average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, specified United States Government, state or federal agency
obligations, shares of certain mutual funds and certain corporate debt
securities and commercial paper) equal to an amount not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement may be changed from time to time by the OTS to any
amount within the range of 4% to 10% depending upon economic conditions and the
savings flows of member institutions. The OTS recently reduced the level of
liquid assets that must be held by a savings association from 5% to 4% of the
associations net withdrawable accounts plus short-term borrowings based upon the
average daily balance of such liquid assets for each quarter of the
associations's fiscal year. The OTS may impose monetary penalties upon savings
associations that fail to comply with those liquidity requirements. The OTS
eliminated the requirement that each savings association maintain an average
daily balance of short-term 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 SCSB for September, 1997 was 5.3%
which exceeded the then-applicable 5% liquidity requirement. Its average
short-term liquidity ratio for September, 1997, was 8.3%. SCSB 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
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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. SCSB may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are fully secured by
readily marketable collateral, including certain debt and equity securities but
not including real estate. In some cases, a savings association may lend up to
30 percent of unimpaired capital and surplus to one borrower for purposes of
developing domestic residential housing, provided that the association meets its
regulatory capital requirements and the OTS authorizes the association to use
this expanded lending authority. At March 31, 1998, SCSB did not have any loans
or extensions of credit to a single or related group of borrowers in excess of
its lending limits.
QUALIFIED THRIFT LENDER. Savings associations must meet a QTL test. If SCSB
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, SCSB will continue
to enjoy full borrowing privileges from the FHLB of Indianapolis. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the association in conducting its business
and liquid assets equal to 20% of total assets). In addition, savings
associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs.
Compliance with the QTL test is determined on a monthly basis in nine out of
every twelve months. As of March 31, 1998, SCSB was in compliance with its QTL
requirement, with approximately 69.83% of its assets invested in QTIs.
A savings association which fails to meet the QTL test must either convert
to a bank (but its deposit insurance assessments and payments will be those of
and paid to the SAIF) or be subject to the following penalties: (i) it may not
enter into any new activity except for those permissible for a national bank and
for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
BRANCHING. The rules of the OTS on branching by federally-chartered savings
associations permit nationwide branching to the extent allowed by federal
statute. This permits federal savings associations with interstate networks to
diversify their loan portfolio and lines of business. The OTS authority
pre-empts any state law purporting to regulate branching by federal savings
associations.
INSURANCE OF DEPOSITS. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of banks and thrifts
and safeguards the safety and soundness of the banking and thrift industries.
The FDIC administers two separate insurance funds, SCSB Insurance Fund (the
"BIF") for commercial banks and state savings banks and the SAIF for savings
associations such as SCSB 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
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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,
SCSB was charged a one-time special assessment equal to $.657 per $100 in
assessable deposits at March 31, 1995. SCSB 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 SCSB paid this assessment in
November 1996. The assessment was fully deductible for both federal and state
income tax purposes. Beginning January 1, 1997, SCSB's annual deposit insurance
premium was reduced from .23% to .0644% of total assessable deposits. BIF
institutions pay lower assessments than comparable SAIF institutions because BIF
institutions pay only 20% of the rate being paid by SAIF institutions on their
deposits with respect to obligations issued by the federally-chartered
corporation which provided some of the financing to resolve the thrift crisis in
the 1980's ("FICO"). The 1996 law also provides for the merger of the SAIF and
the BIF by 1999, but not until such time as bank and thrift charters are
combined. Until the charters are combined, savings associations with SAIF
deposits may not transfer deposits into the BIF system without paying various
exit and entrance fees, and SAIF institutions will continue to pay higher FICO
assessments. Such exit and entrance fees need not be paid if a SAIF institution
converts to a bank charter or merges with a bank, as long as the resulting bank
continues to pay applicable insurance assessments to the SAIF, and as long as
certain other conditions are met.
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 SCSB 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 SCSB 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
SCSB 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 SCSB
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 SCSB has a ratio of tangible equity to total assets of 2% or
less. At March 31, 1998, SCSB was categorized as "adequately capitalized," and
it was not subject to regulatory order, agreement or directive to meet and
maintain a specific level for any capital measure.
Subject to certain exceptions, these capital ratios are generally
determined on the basis of Call Reports submitted by each depository institution
and the reports of examination by each institution's appropriate federal
depository institution regulatory agency.
Depending upon the capital category to which an institution is assigned,
the regulators' corrective powers include: requiring the submission of a capital
restoration plan (which must include a holding company guarantee of
performance); placing limits on asset growth and restrictions on activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions with
affiliates; restricting the interest rate the institution may pay on deposits;
ordering a new election of directors of the institution; requiring that senior
executive officers or directors be dismissed; prohibiting the institution from
accepting deposits from correspondent banks; requiring the holding company to
divest certain subsidiaries including the institution; requiring the institution
to divest certain subsidiaries;
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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. SCSB is subject to certain restrictions imposed by
the Federal Reserve Act ("FRA") on any extensions of credit to Shelby County or
its subsidiaries, on investments in the stock or other securities of Shelby
County or its subsidiaries, and the acceptance of the stock or other securities
of Shelby County or its subsidiaries as collateral for loans. These restrictions
limit the aggregate amount of transactions with any individual affiliate to 10%
of SCSB's capital and surplus, limit the aggregate amount of transactions with
all affiliates to 20% of SCSB'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 SCSB 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 SCSB to its directors and executive officers, to
directors and executive officers of Shelby County and its subsidiaries, to
principal shareholders of Shelby County and its subsidiaries, to principal
shareholders of Shelby County 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 SCSB may extend to such individuals and require certain approval
procedures to be followed. In addition, such legislation and regulations may
affect the terms upon which any person becoming a director or officer of Shelby
County or one of its subsidiaries or a principal shareholder of Shelby County
may obtain credit from banks with which SCSB 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. SCSB 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 SCSB'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,
62
<PAGE> 67
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. SCSB's business will include making a variety of types of
loans to individuals. In making these loans, SCSB 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 SCSB, 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. In
receiving deposits, SCSB will be subject to extensive regulation under state and
federal law and regulations, including the Truth in Savings Act, the Expedited
Funds Availability Act, SCSB 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 SCSB, its directors and officers.
REGULATORY DEVELOPMENTS
In 1994, the Congress enacted two major pieces of banking legislation, the
Riegle Community Direction Act (the "Riegle Act") and the Riegle-Neal Interstate
Banking and Branching Efficiency Act (the "Riegle-Neal Act"). The Riegle Act
addressed such varied issues as the promotion of economic revitalization of
defined urban and rural "qualified distressed communities" through special
purpose "Community Development Financial Institutions," the expansion of
consumer protection with respect to certain loans secured by a consumer's home
and reverse mortgages and reductions in compliance burdens regarding Currency
Transaction Reports, in addition to reform of the National Flood Insurance
Program, the promotion of a secondary market for small business loans and leases
and mandating specific changes to reduce regulatory impositions on depository
institutions and holding companies.
The Riegle-Neal Act substantially changed the geographic constraints
applicable to the banking industry. Effective September 29, 1995, the
Riegle-Neal Act allows bank holding companies to acquire banks located in any
state in the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may
be held by the acquiring holding company and all of its insured depository
institution affiliates. Effective June 1, 1997 (or earlier if expressly
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.
63
<PAGE> 68
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 Shelby County or SCSB to their respective directors
or officers otherwise permitted under Indiana state law.
On May 13, 1998, the House of Representatives passed financial reform
legislation. The legislation is intended to break down barriers between banking,
securities and insurance activities, while maintaining the bank holding company
structure and continuing to restrict commercial activity by banks. Under the
bill, financial services holding companies, which would be regulated by the
Federal Reserve, would be allowed to own banks, securities firms and insurance
companies. The bill contains provisions regulating the commercial activities of
holding companies. Additionally, the bill contains language allowing the office
of the Comptroller of the Currency to preempt state insurance laws' application
to national banks in certain instances. The bill must be considered by the
Senate Banking Committee and ultimately passed by the Senate. Shelby County
cannot predict whether, or in what form, this legislation may be enacted, and if
enacted, what the effect would be on Shelby County and SCSB.
The FDIC includes, in its evaluations of a bank's capital adequacy, an
assessment of SCSB's exposure to declines in the economic value of SCSB'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
SCSB'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 SCSB, the nature and complexity of its activities, the adequacy of its
capital and earnings in relation to SCSB'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 SCSB's senior
management in ensuring the effective management of interest rate risk. Further,
the statement specifies the elements that a risk management process must
contain.
In August, 1996, the Federal Reserve and the FDIC issued final regulations
further revising their risk-based capital standards to include a supervisory
framework for measuring market risk. The effect of the new regulations is that
any bank holding company or bank which has significant exposure to market risk
must measure such risk using its own internal model, subject to the requirements
contained in the regulations, and must maintain adequate capital to support that
exposure.
The new regulations apply to any bank holding company or bank whose trading
activity equals 10% or more of its total assets, or whose trading activity
equals $1 billion or more. Examiners may require a bank holding company or bank
that does not meet the applicability criteria to comply with the capital
requirements if necessary for safety and soundness purposes.
The new regulations contain supplemental rules to determine qualifying and
excess capital, calculate risk-weighted assets, calculate market risk equivalent
assets and calculate risk-based capital ratios adjusted for market risk.
Safety and soundness guidance on the risks posed to financial institutions
by the Year 2000 problem has been issued by the Federal Institutions Examination
Council, whose members include the OTS, the FDIC and the Federal Reserve Board.
The guidance underscores that Year 2000 preparation is not only an information
systems issue, but also an enterprise-wide challenge that must be addressed at
the highest level of a financial institution. The guidance sets out the
responsibilities of senior management and boards of directors in managing their
Year 2000 projects. Among the responsibilities of institution managers and
directors is that of managing the internal and external risks presented by
providers of data-processing products and services,
64
<PAGE> 69
business partners, counterparties and major loan customers. Under the guidance,
senior management must provide the board of directors with status reports, at
least quarterly, on efforts to reach Year 2000 goals both internally and by the
institution's major vendors. Senior managers and directors must allocate
sufficient resources to ensure that high priority is given to seeing that
remediation plans are fulfilled, and that the project receives the quality
personnel and timely support it requires. The guidance does not require
financial institutions to obtain Year 2000 certification from their vendors.
Rather, an institution must implement its own internal testing or verification
processes for vendor products and services to ensure that its different computer
systems function properly together.
Additional legislation and administrative actions affecting the banking
industry are being considered and in the future may be considered by the United
States Congress, state legislatures and various regulatory agencies, including
those referred to above. It cannot be predicted with certainty whether such
legislation or administrative action will be enacted or the extent to which the
banking industry in general or Shelby County and SCSB in particular would be
affected thereby.
SHAREHOLDER PROPOSALS
Shelby County will hold its next annual meeting of shareholders only if the
Merger is not consummated before the time of such meeting, which is presently
expected to be held in January, 1999. In order to be eligible for inclusion in
Shelby County's proxy materials for that next annual meeting of shareholders,
any shareholder proposal to take action at such meeting must be received at
Shelby County's office no later than 120 days in advance of December 29, 1998.
Any such proposals should be sent to the attention of the Secretary of Shelby
County at 29 East Washington Street, Shelbyville, Indiana 46176.
ACCOUNTANTS
A representative of KPMG Peat Marwick LLP is expected to be present at the
Special Meeting with the opportunity to make a statement if he so desires. He
will be available to respond to any appropriate questions the shareholders may
have.
OTHER MATTERS
Management is not aware of any business to come before the Special Meeting
other than the Merger. However, if any other matters should properly come before
the Special Meeting, it is intended that the proxy solicited hereby will be
voted with respect to those other matters in accordance with the judgment of the
persons voting the proxies.
By order of the Board of Directors
RODNEY L. MEYERHOLTZ
Rodney L. Meyerholtz, President
June 11, 1998
EACH SHAREHOLDER IS URGED TO COMPLETE, DATE AND SIGN THE PROXY AND RETURN
IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
65
<PAGE> 70
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SHELBY COUNTY BANCORP
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Independent Auditors' Report................................ F-2
Financial Statements
Consolidated Statements of Financial Condition as of March
31, 1998 (Unaudited) and as of September 30, 1997 and
1996................................................... F-3
Consolidated Statements of Earnings for the Six Months
Ended March 31, 1998 and 1997 (Unaudited) and for the
Years Ended September 30, 1997 and 1996................ F-4
Consolidated Statements of Shareholders' Equity for the
Six Months Ended March 31, 1998 (Unaudited) and for the
Years Ended September 30, 1997 and 1996................ F-5
Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 1998 and 1997 (Unaudited) and for the
Years Ended September 30, 1997 and 1996................ F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 71
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated statements of financial
condition of Shelby County Bancorp and subsidiary as of September 30, 1997 and
1996, and the related consolidated statements of earnings, shareholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Shelby
County Bancorp and subsidiary as of September 30, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
November 21, 1997
F-2
<PAGE> 72
SHELBY COUNTY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
MARCH 31, --------------------------
1998 1997 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents:
Cash.............................................. $ 730,019 $ 663,335 $ 1,043,977
Interest-bearing deposits......................... 9,407 1,772,848 3,879,299
----------- ----------- -----------
739,426 2,436,183 4,923,276
Investment securities available for sale (note 2)... 8,809,139 7,886,663 7,243,756
Investment securities held to maturity (market
value):
$782,948, $806,995 and $1,275,717) (note 3)......... 745,085 808,817 1,267,448
Loans receivable, net (note 4)...................... 85,133,188 76,037,920 66,098,422
Accrued interest receivable on investment
securities........................................ 105,929 133,053 104,504
Accrued interest receivable on loans................ 553,673 486,247 424,054
Stock in FHLB of Indianapolis, at cost.............. 998,900 920,200 620,100
Premises and equipment (note 5)..................... 1,749,559 1,774,961 1,874,702
Real estate owned................................... 36,727 36,727 --
Prepaid expenses and other assets................... 313,093 88,607 119,353
----------- ----------- -----------
$98,464,719 $90,609,378 $82,675,615
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits (note 6)................................. $70,533,461 $64,633,384 $65,286,137
Advances from FHLB and other borrowings (note
7)............................................. 19,625,790 18,057,629 10,071,360
Accrued interest on deposits and FHLB advances.... 127,294 126,484 133,492
Income taxes payable.............................. -- 70,789 225,237
Deferred income taxes (note 8).................... 478,617 333,912 4,954
Accrued expenses and other liabilities (note 6)... 353,252 215,858 521,557
----------- ----------- -----------
91,118,414 83,438,056 76,242,737
Shareholders' equity (note 10):
Common stock no par value; shares authorized of
5,000,000, shares issued and outstanding of
175,950........................................ 1,358,123 1,358,123 1,358,123
Retained earnings -- substantially restricted..... 5,145,456 5,187,531 4,744,525
Net unrealized appreciation on investment
securities available for sale (notes 2 and
8)............................................. 842,726 625,668 330,230
----------- ----------- -----------
7,346,305 7,171,322 6,432,878
----------- ----------- -----------
Commitments and contingencies (notes 4 and 7)....... $98,464,719 $90,609,378 $82,675,615
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 73
SHELBY COUNTY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED FOR THE YEARS ENDED
MARCH 31, SEPTEMBER 30,
------------------------ ------------------------
1998 1997 1997 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable........................ $3,382,187 $2,922,909 $6,065,982 $5,036,470
Mortgage-backed securities.............. 79,818 135,498 303,587 311,135
Interest-bearing deposits............... 97,310 67,756 108,161 234,009
Investment securities................... 143,628 117,812 171,230 222,910
Dividends from FHLB..................... 36,707 26,269 59,049 35,008
---------- ---------- ---------- ----------
Total interest income........... 3,739,650 3,270,244 6,708,009 5,839,532
---------- ---------- ---------- ----------
Interest expense on deposits (note 6)..... 1,698,251 1,524,856 2,996,545 3,219,473
Interest expense on FHLB advances and
other borrowings (note 7)............... 520,206 388,693 895,844 122,018
---------- ---------- ---------- ----------
Total interest expense.......... 2,218,457 1,913,549 3,892,389 3,341,491
---------- ---------- ---------- ----------
Net interest income............. 1,521,193 1,356,695 2,815,620 2,498,041
Provision for loan losses (note 4)........ 435,000 50,000 104,000 100,000
---------- ---------- ---------- ----------
Net interest income after
provision
for loan losses............... 1,086,193 1,306,695 2,711,620 2,398,041
---------- ---------- ---------- ----------
Non-interest income:
Service charges and fees................ 123,620 119,341 249,383 235,991
Annuity commissions..................... -- -- 268 41,304
Other (note 2).......................... 95,266 48,368 99,683 240,478
---------- ---------- ---------- ----------
Total non-interest income....... 218,886 167,709 349,334 517,773
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits.......... 481,218 488,129 960,375 939,740
Premises and equipment.................. 126,536 130,175 268,952 271,121
Federal deposit insurance (note 6)...... 55,411 35,214 74,721 484,823
Data processing......................... 143,782 121,961 255,402 236,452
Advertising............................. 51,464 60,864 161,625 140,476
Bank fees and charges................... 25,900 45,793 84,296 72,403
Other................................... 417,632 190,463 447,483 400,518
---------- ---------- ---------- ----------
Total non-interest expense...... 1,301,943 1,072,599 2,252,854 2,545,533
---------- ---------- ---------- ----------
Earnings before income taxes.... 3,136 401,805 808,100 370,281
Income taxes (note 8)..................... 1,223 152,845 294,720 134,100
---------- ---------- ---------- ----------
Net earnings.................... $ 1,913 $ 248,960 $ 513,380 $ 236,181
========== ========== ========== ==========
Basic earnings per share.................. $ .01 $ 1.41 $ 2.92 $ 1.34
========== ========== ========== ==========
Dilutive earnings per share............... $ .01 $ 1.39 $ 2.83 $ 1.32
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 74
SHELBY COUNTY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION ON
INVESTMENT
SECURITIES TOTAL
RETAINED AVAILABLE SHAREHOLDERS'
COMMON STOCK EARNINGS FOR SALE EQUITY
------------ ---------- --------------- -------------
<S> <C> <C> <C> <C>
Balance at September 30, 1995.......... $1,340,873 $4,578,724 $290,881 $6,210,478
Exercise of options for 1,725 shares
of common stock at $10 per share
(note 10)......................... 17,250 -- -- 17,250
Net change in unrealized appreciation
on investment securities available
for sale (note 2)................. -- -- 39,349 39,349
Dividends ($.40 per share)........... -- (70,380) -- (70,380)
Net earnings for 1996................ -- 236,181 -- 236,181
---------- ---------- -------- ----------
Balance at September 30, 1996.......... 1,358,123 4,744,525 330,230 6,432,878
Net change in unrealized appreciation
on investment securities available
for sale (note 2)................. -- -- 295,438 295,438
Dividends ($.40 per share)........... -- (70,374) -- (70,374)
Net earnings for 1997................ -- 513,380 -- 513,380
---------- ---------- -------- ----------
Balance at September 30, 1997.......... 1,358,123 5,187,531 625,668 7,171,322
Net change in unrealized appreciation
on investment securities available
for sale (unaudited).............. -- -- 217,058 217,058
Dividends ($.125 per share)
(unaudited)....................... -- (43,988) -- (43,988)
Net earnings (unaudited)............. -- 1,913 -- 1,913
---------- ---------- -------- ----------
Balance at March 31, 1998
(unaudited).......................... $1,358,123 $5,145,456 $842,726 $7,346,305
========== ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 75
SHELBY COUNTY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED FOR THE YEARS ENDED
MARCH 31, SEPTEMBER 30,
------------------------- ---------------------------
1998 1997 1997 1996
----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................ $ 1,913 $ 248,960 $ 513,380 $ 236,181
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization............. 81,765 78,467 157,211 110,761
Net deferred loan origination fees........ (1,032) 7,214 (9,979) (8,117)
Deferred income taxes..................... -- -- 132,000 (155,846)
Provision for loan losses................. 435,000 50,000 104,000 100,000
Loss on disposal of premises and
equipment.............................. -- -- -- --
(Increase) decrease in accrued interest
receivable on investment securities.... 27,124 (2,057) (28,549) (36,223)
(Increase) decrease in other assets....... (295,275) (19,613) 30,746 26,733
Increase (decrease) in other
liabilities............................ 138,205 (300,199) (467,155) 540,661
Gain on sale of securities available for
sale................................... 23,809 4,156 (5,807) (28,445)
----------- ----------- ------------ ------------
Net cash provided (used) by operating
activities......................... 411,509 66,928 425,847 785,705
----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded net of collections............. (9,596,660) (4,314,871) (10,132,439) (15,838,914)
Purchase of securities available for sale... (4,513,507) (1,374,562) (5,201,233) (7,916,623)
Purchase of securities held to maturity..... -- -- -- (116,446)
Proceeds from sales of securities available
for sale.................................. 4,399,399 1,152,057 4,533,477 3,575,098
Maturities of securities available for
sale...................................... 236,310 304,522 488,863 3,190,824
Maturities of securities held to maturity... 61,163 138,114 448,255 148,102
Purchase of FHLB stock...................... (78,700) (104,900) (300,100) (210,800)
Purchase of premises and equipment.......... (40,520) (31,981) (47,758) (37,645)
Disposals of premises and equipment......... 21,154 34,853 --
----------- ----------- ------------ ------------
Net cash used in investing
activities......................... (9,532,515) (4,210,467) (10,176,082) (17,206,404)
----------- ----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on common stock.............. (43,988) (35,178) (70,374) (70,380)
Net increase (decrease) in deposits......... 5,900,077 567,357 (652,753) 4,084,063
Proceeds from FHLB advances and other
borrowings................................ 1,575,000 4,500,000 8,000,000 10,081,000
Repayments of FHLB advances and other
borrowings................................ (6,840) -- (13,731) (9,640)
Proceeds from issuance of common stock
through stock option plan................. -- -- -- 17,250
----------- ----------- ------------ ------------
Net cash provided by financing
activities......................... 7,424,249 5,032,179 7,263,142 14,102,293
----------- ----------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents................................. (1,696,757) 888,640 (2,487,093) (2,318,406)
Cash and cash equivalents at beginning of
year........................................ 2,436,183 4,923,276 4,923,276 7,241,682
----------- ----------- ------------ ------------
Cash and cash equivalents at end of year...... $ 739,426 $ 5,811,916 $ 2,436,183 $ 4,923,276
=========== =========== ============ ============
Supplemental cash flow information:
Interest paid............................... $ 1,682,362 $ 1,536,393 $ 3,899,397 $ 3,320,806
=========== =========== ============ ============
Income taxes paid........................... $ 190,000 $ 100,000 $ 312,000 $ 80,000
=========== =========== ============ ============
Loans transferred to real estate owned...... $ -- $ -- $ 36,727 $ --
=========== =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 76
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Shelby County
Bancorp (the "Corporation") and its wholly-owned subsidiary, Shelby County
Savings Bank, FSB and subsidiaries (the "Savings Bank"). All significant
intercompany balances and transactions are eliminated in consolidation.
The Savings Bank offers retail deposit and lending services through its
office and banking center in Shelbyville, Indiana and branches in Shelbyville,
Morristown and St. Paul, Indiana. The Savings Bank is subject to competition
from other financial institutions and is regulated by certain federal agencies
and undergoes periodic examinations by those regulatory authorities.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from those
estimates.
The consolidated statement of financial condition as of March 31, 1998 and
the related consolidated statements of earnings, changes in shareholders' equity
and cash flows for the six months ended March 31, 1998 and 1997 are unaudited.
However, in the opinion of management, the interim consolidated financial
statements include all adjustments, which consist of only normal recurring
adjustments, necessary for fair presentation of the Corporation's financial
statements. The results of operations for the unaudited six month period ended
March 31, 1998, are not necessarily indicative of the results which may be
expected for the entire fiscal year 1998.
Securities Held to Maturity and Available for Sale
Securities classified as available for sale are securities that the
Corporation intends to hold for an indefinite period of time, but not
necessarily until maturity, and include securities that management might use as
part of its asset-liability strategy, or that may be sold in response to changes
in interest rates, changes in prepayment risk, the need to increase regulatory
capital or other similar factors, and which are carried at market value.
Unrealized holding gains and losses, net of tax, on available for sale
securities are reported as a net amount in a separate component of shareholders'
equity until realized.
Securities classified as held to maturity are securities that the
Corporation has both the ability and positive intent to hold to maturity and are
carried at cost adjusted for amortization of premium or accretion of discount.
Gains and losses are computed on a specific identification basis.
Loans Receivable and Real Estate Owned
Loans receivable are considered long-term investments and, accordingly, are
carried at historical cost. The Savings Bank has a mortgage lien on all real
estate on which mortgage, participation or purchased loans are made.
Substantially all loan originations are secured by mortgages on property in
Shelby County, Indiana.
An allowance for interest accrued but uncollected is established once a
loan is 90 days delinquent, in process of foreclosure or is otherwise considered
to be uncollectible as determined by management.
The Savings Bank provides specific valuation allowances for estimated
losses on loans and real estate owned when a significant and permanent decline
in value occurs. Loans considered to be impaired are reduced to the present
value of expected future cash flows or to fair value of collateral by allocating
a portion of the allowance for loan losses to such loans. If these allocations
cause the allowance for loan losses to require an increase, allocations are
considered in relation to the overall adequacy of the allowance for loan losses
and
F-7
<PAGE> 77
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subsequent adjustment to the loss provision. In providing valuation allowances,
through a charge to operations, the estimated net realizable value of the
underlying collateral and the costs of holding real estate are considered.
Non-specific valuation allowances for estimated losses are established based on
management's judgment of current economic conditions and the credit risk of the
loan portfolio and real estate owned.
Management believes the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions and borrower circumstances. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on their judgments about information available
to them at the time of their examination.
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of carrying amount or fair value less cost to sell.
Loan Fees
Loan origination fees and certain direct costs are deferred and recognized
over the lives of the related loans as an adjustment of the loan's yield.
FHLB Stock
Federal law requires a member institution of the Federal Home Loan Bank
system to hold common stock of its district FHLB according to a predetermined
formula. This investment is stated at cost, which represents redemption value,
and may be pledged to secure FHLB advances.
Premises and Equipment
Purchases of premises and equipment and expenditures which materially
extend useful lives are capitalized at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the related assets as
follows: 2 to 50 years for buildings and improvement and 2 to 20 years for
furniture and equipment.
Federal Income Taxes
The Corporation and the Savings Bank file consolidated tax returns.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Corporation considers cash on
hand and at banks and liquid money market investments of less than three months
maturity to be cash equivalents.
Earnings Per Share
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS
128"). FAS 128 provides computation, presentation and
F-8
<PAGE> 78
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disclosure requirements for earnings per share and supersedes Accounting
Principles Board Opinion 15. Basic earnings per share for 1997 and 1996 were
computed by dividing net earnings by the weighted average shares of common stock
outstanding (175,950 in 1997 and 1996). Diluted earnings per share for 1997 and
1996 were computed by dividing net earnings by the weighted average shares of
common stock and common stock that would have been outstanding assuming the
issuance of all dilutive potential common shares outstanding (181,282 and
179,605 in 1997 and 1996, respectively). Dilution of the per share calculation
relates to stock options. Diluted earnings for 1997 and 1996 are the same as
primary earnings per share calculated and reported under superseded APB 15.
Reclassifications
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform with the 1997 presentation.
(2) INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale at September 30, consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES MARKET VALUE
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Treasury notes:
Due after one year through five years.... $ 223,917 $ 1,434 $ -- $ 225,351
Mortgage-backed securities:
FNMA..................................... 1,083,541 -- (9,125) 1,074,416
FHLMC.................................... 1,562,472 -- (14,308) 1,548,164
FHLB..................................... 351,213 -- (650) 350,563
2,997,226 -- (24,083) 2,973,143
---------- ---------- -------- ----------
FHLMC preferred stock...................... 30,691 1,078,103 -- 1,108,794
---------- ---------- -------- ----------
Corporate bonds:
Due after one year through five years.... 617,180 -- (6,369) 610,811
Due after five years through ten years... 1,636,055 -- (20,407) 1,615,648
---------- ---------- -------- ----------
2,253,235 -- (26,776) 2,226,459
---------- ---------- -------- ----------
Municipal bonds:
Due after five years through ten years... 443,575 241 -- 443,816
Due after ten years...................... 895,239 13,861 -- 909,100
---------- ---------- -------- ----------
1,338,814 14,102 -- 1,352,916
---------- ---------- -------- ----------
$6,843,883 $1,093,639 $(50,859) $7,886,663
========== ========== ======== ==========
</TABLE>
F-9
<PAGE> 79
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES MARKET VALUE
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
FNMA...................................... $2,907,950 $ 2,986 $ (72,473) $2,838,463
FHLMC..................................... 1,792,181 2,735 (50,242) 1,744,674
---------- -------- --------- ----------
4,700,131 5,721 (122,715) 4,583,137
---------- -------- --------- ----------
FHLMC preferred stock....................... 30,691 748,991 -- 779,682
---------- -------- --------- ----------
Corporate bonds:
Due after one year through five years..... 508,235 -- (20,120) 488,115
Due after five years through ten years.... 1,009,184 -- (50,837) 958,347
---------- -------- --------- ----------
1,517,419 -- (70,957) 1,446,462
---------- -------- --------- ----------
Municipal bonds:
Due after five years through ten years.... 445,131 -- (10,656) 434,475
---------- -------- --------- ----------
$6,693,372 $754,712 $(204,328) $7,243,756
========== ======== ========= ==========
</TABLE>
A reclassification of investment securities from the held to maturity
portfolio to the available for sale portfolio occurred during the quarter ended
December 31, 1995, in accordance with the FASB Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investment in Debt and
Equity Securities, which was issued November 15, 1995. The investment securities
that were reclassified had a carrying value of $1,521,922 and a market value of
$1,550,360 at the time of transfer.
For the year ended September 30, 1997, gross realized gains and gross
realized losses on sales of securities available for sale were $8,603 and
$2,796, respectively, and are included in other non-interest income. For the
year ended September 30, 1996, gross realized gains on sales of investment
securities available for sale were $28,445 and are included in other
non-interest income.
At September 30, 1997 and September 30, 1996, the Savings Bank had pledged
approximately $3,309,000 and $5,333,000, respectively, of investment securities
as collateral for advances from the FHLB of Indianapolis.
(3) INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity at September 30, consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES MARKET VALUE
--------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
FHLMC....................................... $310,135 $ 3,310 $(17,543) $295,902
GNMA........................................ 26,144 2,607 -- 28,751
-------- ------- -------- --------
336,279 5,917 (17,543) 324,653
-------- ------- -------- --------
Municipal bonds:
Due after five years through ten years...... 222,525 4,924 (547) 226,902
-------- ------- -------- --------
Corporate bonds:
Due after one year through five years....... 250,013 5,427 -- 255,440
-------- ------- -------- --------
$808,817 $16,268 $(18,090) $806,995
======== ======= ======== ========
</TABLE>
F-10
<PAGE> 80
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES MARKET VALUE
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
FNMA....................................... $ 199,678 $ 2,380 -- $ 202,058
FHLMC...................................... 400,373 2,851 $(3,672) 399,552
GNMA....................................... 33,039 2,834 -- 35,873
---------- ------- ------- ----------
633,090 8,065 (3,672) 637,483
---------- ------- ------- ----------
Municipal bonds:
Due after five years through ten years..... 226,672 1,703 (4,345) 224,030
---------- ------- ------- ----------
Corporate bonds:
Due after one year through five years...... 407,686 6,518 -- 414,204
---------- ------- ------- ----------
$1,267,448 $16,286 $(8,017) $1,275,717
========== ======= ======= ==========
</TABLE>
(4) LOANS RECEIVABLE
Loans receivable at September 30, 1997 and 1996, respectively, consist of:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Real estate mortgage loans:
One-to-four family...................................... $45,137,304 $40,697,356
Commercial.............................................. 11,317,800 9,828,050
Home equity loans....................................... 977,216 740,433
Residential construction................................ 1,053,769 1,002,262
Participations purchased:
One-to-four family................................... 3,300 5,430
Commercial........................................... 4,485,388 2,770,483
Consumer loans............................................ 9,696,072 8,257,929
Commercial loans.......................................... 3,946,964 3,320,574
----------- -----------
76,617,813 66,622,517
Less:
Deferred loan fees...................................... 188,216 198,195
Allowance for loan losses............................... 391,677 325,900
----------- -----------
$76,037,920 $66,098,422
=========== ===========
</TABLE>
Activity in the allowance for loan losses for the years ended September 30,
consist of:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Balance at beginning of year................................ $325,900 $241,094
Provision charged to earnings............................... 104,000 100,000
Charge-offs................................................. (39,369) (15,523)
Recoveries.................................................. 1,146 329
-------- --------
Balance at end of year...................................... $391,677 $325,900
======== ========
</TABLE>
At September 30, 1997 and 1996, non-accrual loans totaled $416,601 and
$299,649, respectively.
The Savings Bank makes loans to certain directors and officers in the
normal course of business. These loans are made on substantially the same terms,
including interest rate and collateral, as those prevailing at the
F-11
<PAGE> 81
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
time for comparable transactions with other customers and do not involve more
than the normal risk of collectibility. A summary of activity in these loans for
the year ended September 30, 1997 follows:
<TABLE>
<S> <C>
Balance at beginning of year................................ $ 996,255
New loans................................................... 218,822
Repayments.................................................. (388,035)
---------
Balance at end of year...................................... $ 827,042
=========
</TABLE>
At September 30, 1997, the Savings Bank and the Corporation had commitments
to originate $1,958,000 of fixed and variable-rate loans. The interest rates on
these loans commitments range from 6.50% to 12.0%. The Savings Bank also had
commitments to fund $587,284 of variable-rate home equity loans.
(5) PREMISES AND EQUIPMENT
Premises and equipment at September 30, consist of:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land........................................................ $ 251,766 $ 251,766
Buildings and improvements.................................. 1,326,961 1,315,069
Furniture and equipment..................................... 972,890 971,877
---------- ----------
2,551,617 2,538,712
Less accumulated depreciation............................... 776,656 664,010
---------- ----------
$1,774,961 $1,874,702
========== ==========
</TABLE>
(6) DEPOSITS
Deposits at September 30, consist of:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
AMOUNT % AMOUNT %
----------- ---- ----------- ----
<S> <C> <C> <C> <C>
Passbook accounts (2.85% at Sept. 30, 1997 and
1996)............................................ $ 9,206,489 14 $10,027,894 15
NOW and Super NOW (2.00% and 2.50% at Sept. 30,
1997 and 2.00% at Sept. 30, 1996)................ 13,062,895 21 13,532,702 21
Money Market (2.85% to 5.60% at Sept. 30, 1997).... 2,731,690 4 -- --
----------- ---- ----------- ----
25,001,074 39 23,560,596 36
----------- ---- ----------- ----
Certificate accounts:
Up to 3%......................................... 109,407 -- 58,945 --
3.01%-4%......................................... 203,144 -- 431,614 1
4.01%-5%......................................... 3,753,973 6 4,884,518 7
5.01%-6%......................................... 20,917,804 32 21,169,641 33
6.01%-7%......................................... 11,331,750 18 11,936,295 18
7.01%-8%......................................... 2,023,232 3 1,951,528 3
8.01%-9%......................................... 1,293,000 2 1,293,000 2
----------- ---- ----------- ----
39,632,310 61 41,725,541 64
----------- ---- ----------- ----
$64,633,384 100 $65,286,137 100
=========== ==== =========== ====
Weighted average cost of all deposits.............. 4.78% 4.75%
==== ====
</TABLE>
Included in certificates at September 30, 1997 and 1996 are $7,641,000 and
$4,737,000, respectively, in certificates of $100,000 or more.
F-12
<PAGE> 82
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Eligible deposit accounts are insured by the full faith and credit of the
government up to $100,000 under the Federal Deposit Insurance Corporation's
Savings Association Insurance Fund (SAIF) at September 30, 1997.
The contractual maturities of certificates at September 30, 1997 consist
of:
<TABLE>
<CAPTION>
AMOUNT %
----------- ---
<S> <C> <C>
Under 12 months.......................................... $19,446,737 49%
12 to 24 months.......................................... 4,528,213 11
24 to 36 months.......................................... 11,356,770 29
36 to 48 months.......................................... 2,709,640 7
48 to 60 months.......................................... 1,347,170 3
Over 60 months........................................... 243,780 1
----------- ---
$39,632,310 100%
=========== ===
</TABLE>
Interest expense by type of deposit for the years ended September 30,
consist of:
<TABLE>
<CAPTION>
ACCOUNT TYPE 1997 1996
- ------------ ---------- ----------
<S> <C> <C>
Passbook............................................ $ 283,217 $ 313,341
NOW and Super NOW................................... 313,997 301,579
Certificates........................................ 2,399,331 2,604,553
---------- ----------
$2,996,545 $3,219,473
========== ==========
</TABLE>
The deposits of the Savings Bank are insured by the Savings Association
Insurance Fund (SAIF), which together with the Bank Insurance Fund (BIF), which
insures the deposits of commercial banks, are the two deposit insurance funds
administered by the Federal Deposit Insurance Corporation (FDIC). The Deposit
Insurance Funds Act, enacted on September 30, 1996, required the FDIC to assess
a special one-time premium on deposits insured by SAIF to raise the ratio of
SAIF insurance funds to insured deposits to 1.25%. The Savings Bank was assessed
an additional premium of $332,077 in 1996 which was paid in November 1996.
(7) ADVANCES FROM FHLB AND OTHER BORROWINGS
Advances from FHLB and other borrowings at September 30, 1997 and 1996
consist of:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Advances from FHLB with interest at variable rates (6.85%
and 6.48% at September 30, 1997 and 1996) collateralized
by qualifying mortgage loans and investments (as defined)
equal to 160% of FHLB advances............................. $17,746,000 $ 9,746,000
Mortgage borrowing secured by bank branch with monthly
payments of principal and interest at 8.75% through
October 2010............................................... 311,629 325,360
----------- -----------
$18,057,629 $10,071,360
=========== ===========
</TABLE>
The weighted average interest rate of all borrowings was 6.88% and 6.55% at
September 30, 1997 and 1996, respectively.
F-13
<PAGE> 83
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Advances from FHLB and other borrowings at September 30, 1997 are scheduled
to mature as follows:
<TABLE>
<CAPTION>
FHLB OTHER
ADVANCES BORROWINGS TOTAL
----------- ---------- -----------
<S> <C> <C> <C>
1998.......................................... $17,746,000 $ 13,382 $17,759,382
1999.......................................... -- 14,601 14,601
2000.......................................... -- 15,931 15,931
2001.......................................... -- 17,382 17,382
2002.......................................... -- 18,965 18,965
Thereafter.................................... -- 231,368 231,368
----------- -------- -----------
$17,746,000 $311,629 $18,057,629
=========== ======== ===========
</TABLE>
(8) INCOME TAXES
The composition of income taxes for the years ended September 30, consist
of:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Current:
Federal................................................... $ 86,196 $ 228,946
State..................................................... 76,524 61,000
-------- ---------
162,720 289,946
Deferred.................................................... 132,000 (155,846)
-------- ---------
$294,720 $ 134,100
======== =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September 30
follow:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Deferred loan fees........................................ $ 75,300 $ 79,300
Allowance for delinquent interest......................... 1,400 9,800
Allowance for possible loan losses for financial reporting
purposes............................................... 133,200 110,800
SAIF special assessment................................... -- 132,800
Allowance for environmental contingency................... -- 18,300
--------- ---------
$ 209,900 $ 351,000
========= =========
Deferred tax liabilities:
FHLB stock dividend....................................... (29,200) (29,200)
Depreciation.............................................. (43,200) (29,200)
Tax bad debt reserve...................................... (35,900) (51,600)
Deductible prepaid expense................................ (18,400) (25,800)
Investment securities available for sale.................. (417,112) (220,154)
--------- ---------
(543,812) (355,954)
--------- ---------
Net temporary differences................................. (333,912) (4,954)
Less valuation allowance.................................. -- --
--------- ---------
Net deferred tax liability................................ $(333,912) $ (4,954)
========= =========
</TABLE>
F-14
<PAGE> 84
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective income tax rate differs from the statutory federal corporate
rate as follows:
<TABLE>
<CAPTION>
1997(%) 1996(%)
------- -------
<S> <C> <C>
Statutory tax rate.......................................... 34.0% 34.0%
State income taxes.......................................... 5.6 5.6
Tax exempt interest income.................................. (.7) (3.5)
Other....................................................... (2.4) .1
---- ----
Effective tax rate.......................................... 36.5% 36.2%
==== ====
</TABLE>
Under the Internal Revenue Code, through 1996, the Savings Bank was allowed
a special bad debt deduction for additions to tax bad debt reserves established
for the purpose of absorbing losses. Subject to certain limitations, the
allowable bad debt deduction was computed based on one of two alternative
methods: (1) a percent of taxable income before such deduction or (2) loss
experience method. The Savings Bank generally computed its annual addition to
its tax bad debt reserves using the percentage of taxable income method through
1996.
Under Legislation enacted in 1996, beginning in fiscal 1997, the Savings
Bank is no longer allowed a special bad debt deduction using the percentage of
taxable income method. Beginning in 1997, the Savings Bank is required to
recapture its excess tax bad debt reserve over its 1987 base year reserve over a
six-year period. This amount has been provided for in the Savings Bank's
deferred tax liability.
Retained earnings at September 30, 1997 include approximately $1,100,000
for which no provision for Federal income taxes has been made. This amount
represents allocations of earnings to tax bad debt deductions prior to 1987.
Reduction of amounts so allocated for purposes other than tax bad debt losses
will create taxable income, which will be subject to the then current corporate
income tax rate. It is not contemplated that amounts allocated to bad debt
deductions will be used in any manner to create taxable income.
(9) RETIREMENT PLAN
The Savings Bank maintains a noncontributory defined benefit retirement
plan which covers substantially all employees. Pension expense amounted to
$18,173 and $39,521 for the years ended September 30, 1997 and 1996. The Plan in
which the Savings Bank participates is a multi-employer plan for which separate
actuarial valuations are not made with respect to each employer.
(10) STOCKHOLDERS' EQUITY
The Corporation is subject to regulation as a savings and loan holding
company by the Office of Thrift Supervision ("OTS"). The Savings Bank, as a
subsidiary of a savings and loan holding company, is subject to certain
restrictions in its dealings with the Corporation. The Savings Bank is further
subject to the regulatory requirements applicable to a federal savings bank.
Savings institutions are required to maintain risk-based capital of 8.0% of
risk-weighted assets. At September 30, 1997, the Savings Bank's risk-based
capital exceeded the required amount. Risk-based capital is defined as the
Savings Bank's core capital adjusted by certain items. Risk weighting of assets
is derived from assigning one of four risk-weighted categories to an
institution's assets, based on the degree of credit risk associated with the
asset. The categories range from zero percent for low-risk assets (such as
United States Treasury securities) to 100% for high-risk assets (such as real
estate owned). The book value of each asset is then multiplied by the risk
weighting applicable to the asset category. The sum of the products of the
calculation equals total risk-weighted assets.
F-15
<PAGE> 85
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Savings institutions are also required to maintain a minimum leverage ratio
under which core capital must equal at least 3% of total assets, but no less
than the minimum required by the Office of the Comptroller of the Currency
("OCC") for national banks, which minimum currently stands between 4% and 5% for
other than the highest rated institutions. The Savings Bank's primary regulator,
the Office of Thrift Supervision, is expected to adopt the OCC minimum. The
components of core capital are the same as those set by the OCC for national
banks, and consist of common equity plus non-cumulative preferred stock and
minority interests in consolidated subsidiaries, minus certain intangible
assets. At September 30, 1997, the Savings Bank's core capital and leverage
ratio were in excess of the required amount.
Savings institutions must also maintain minimum tangible capital of 1.5% of
total assets. The Savings Bank's tangible capital and tangible capital ratio at
September 30, 1997 exceeded the required amount.
The OTS has minimum capital standards that place savings institutions into
one of five categories, from "critically undercapitalized" to
"well-capitalized," depending on levels of three measures of capital. A well
capitalized institution as defined by the regulations has a total risk-based
capital ratio of at least 10 percent, a Tier 1 (core) risk-based capital ratio
of at least six percent, and a leverage (core) risk-based capital ratio of at
least five percent. At September 30, 1997, the Savings Bank was classified as
adequately capitalized.
The following is a summary of the Savings Bank's regulatory capital and
capital requirements at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
------------------ ------------------ ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- ----- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997:
Tangible Capital.............. $5,593,000 6.3 $1,342,000 1.5 $ N/A N/A
Core (Tier One) Capital....... 5,593,000 6.3 2,684,000 3.0 4,473,000 5.0
Tier One Risk-Based Capital... 5,593,000 8.9 N/A N/A 3,786,000 6.0
Total Risk-Based Capital...... 5,985,000 9.5 5,048,000 8.0 6,310,000 10.0
Savings Bank Capital.......... 6,219,000 N/A N/A N/A N/A N/A
As of September 30, 1996:
Tangible Capital.............. $5,256,000 6.4 $1,232,000 1.5 $ N/A N/A
Core (Tier One) Capita........ 5,256,000 6.4 2,464,000 3.0 4,107,000 5.0
Tier One Risk-Based Capital... 5,582,000 10.2 N/A N/A 3,264,000 6.0
Total Risk-Based Capital...... 5,256,000 9.7 4,352,000 8.0 5,400,000 10.0
Savings Bank Capital.......... 5,586,000 N/A N/A N/A N/A N/A
</TABLE>
The OTS has regulations governing dividend payments, stock redemptions, and
other capital distributions, including upstreaming of dividends by a savings
institution to a holding company. Under these regulations, the Savings Bank may,
without prior OTS approval, make capital distributions to the Corporation of up
to 100% of its net income during the calendar year, plus an amount that would
reduce by half its excess capital over its fully phased-in capital requirement
at the beginning of the calendar year. The Corporation is not subject to any
regulatory restrictions on the payments of dividends to its stockholders, other
than restrictions under Indiana law.
At the time of conversion, October 17, 1991, the Savings Bank established a
liquidation account of $3,348,000 which equaled the Savings Bank's retained
earnings as of the date of the latest statement of financial condition, June 30,
1991, contained in the final offering circular. The liquidation account will be
maintained for the benefit of depositors, as of the eligibility record date, who
continue to maintain their deposits in the Savings Bank after conversion. In the
event of a complete liquidation (and only in such event), each eligible
depositor will be entitled to receive a liquidation distribution from the
liquidation account, in the
F-16
<PAGE> 86
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
proportionate amount to the then current adjusted balance for deposits then
held, before any liquidation distribution may be made with respect to the
shareholders. Except for the repurchase of stock and payment of dividends by the
Savings Bank, the existence of the liquidation account does not restrict the use
or application of such retained earnings.
The Corporation has a stock option plan whereby 17,250 shares of authorized
but unissued common stock are reserved for future issuance upon the exercise of
stock options. Stock options for the purchase of 12,075 shares have been granted
to certain officers and directors at $10 per share, the market value at the date
of approval of the plan. The options can be exercised at any time until
expiration in October 2001. Stock options for the purchase of 1,725 shares were
granted to a new director in 1995 at $18 per share, the market value the date
the options were granted. The options can be exercised at any time until
expiration in January 2005. Additionally, stock options for the purchase of
3,450 shares were granted in 1996 to certain officers and directors at $20 per
share, the market value at the date the options were granted. The options can be
exercised at any time until expiration in August 2006. During 1994, options for
1,725 shares were exercised. No options were exercised in 1995. During 1996,
options for 1,725 shares were exercised leaving 13,800 unexercised options at
September 30, 1996. No options were exercised in 1997. At September 30, 1997,
there were 13,800 options outstanding and currently exercisable at prices
ranging from $10.00 to $20.00. The weighted average price was $13.50, and the
weighted average remaining contractual life was six years.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), effective for transactions entered into after
December 15, 1995. This statement defines a fair value method of accounting for
employee stock options and encourages entities to adopt that method of
accounting for its stock compensation plans. SFAS 123 allows an entity to
continue to measure compensation costs for these plans using the intrinsic value
based method of accounting prescribed by the Accounting Principles Board Option
No. 25, Accounting for Stock Issued to Employees ("APB 25"). The Corporation has
elected to continue to account for its employee stock compensation plan as
prescribed under APB 25 and make the pro forma disclosures of net income and
earnings per share required by SFAS 123. As only 1,725 options were issued in
1996 and no stock options were awarded in 1997, the adoption of SFAS 123 had no
impact on the Corporation's financial position or results of operations.
In April 1995, the Corporation issued to its shareholders one Common Share
Purchase Rights (the Rights) for each share of common stock owned. The Rights
entitle the shareholders to purchase one share of common stock for $70.
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<PAGE> 87
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) PARENT COMPANY FINANCIAL INFORMATION
Following is condensed parent company financial information of the
Corporation:
CONDENSED STATEMENT OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Cash, including interest-bearing deposit of $100,000........ $ 156,228 $ 378,342
Investment in Savings Bank.................................. 6,218,520 5,585,782
Due from Savings Bank for income taxes and proceeds from
issuance of common stock.................................. 8,426 61,300
Premises and equipment, net................................. 817,735 830,859
Loans receivable............................................ 350,155 --
---------- ----------
$7,551,064 $6,856,283
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to Savings Bank for compensation expense................ 44,994 80,448
Long-term debt.............................................. 311,629 325,360
Other Liabilities........................................... 23,119 17,597
---------- ----------
379,742 423,405
---------- ----------
Shareholders' Equity
Common stock................................................ 1,358,123 1,358,123
Retained earnings........................................... 5,187,531 4,744,525
Unrealized appreciation on investment securities available
for sale held by Savings Bank............................. 625,668 330,230
---------- ----------
7,171,322 6,432,878
---------- ----------
$7,551,064 $6,856,283
========== ==========
</TABLE>
CONDENSED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Dividend from Savings Bank.................................. $ 200,000 $ --
Lease income................................................ 42,135 49,500
Interest income on deposits................................. 11,926 10,646
Interest income on loans.................................... 21,664 --
Interest expense on loans................................... (26,457) (26,212)
Operating expenses.......................................... (119,631) (108,393)
---------- ----------
129,637 (74,459)
Income tax benefit.......................................... 46,443 25,300
---------- ----------
Income (loss) before equity in undistributed earnings of
Savings Bank........................................... 176,080 (49,159)
Equity in undistributed earnings of Savings Bank............ 337,300 285,340
---------- ----------
Net earnings.............................................. $ 513,380 $ 236,181
========== ==========
</TABLE>
F-18
<PAGE> 88
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 513,380 $ 236,181
Adjustments to reconcile net cash provided by operating
activities:
Equity in undistributed earnings of Savings Bank....... (337,300) (285,340)
Depreciation and amortization.......................... 23,697 22,817
(Increase) decrease in due from Savings Bank........... 52,874 73,925
Increase in due to Savings Bank........................ (29,932) --
Decrease in other receivables.......................... -- 25
Increase in other liabilities.......................... -- 22,503
--------- ---------
Net cash provided by operating activities......... 222,719 70,111
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded net of collections........................... (350,155) --
Purchase of premises and equipment........................ (10,573) --
--------- ---------
Net cash used by investing activities............. (360,728)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.................................. -- 335,000
Repayment of borrowings................................... (13,731) (9,640)
Net proceeds from issuance of common stock................ -- 17,250
Dividends paid to shareholders............................ (70,374) (70,380)
--------- ---------
Net cash provided (used) by financing
activities...................................... (84,105) 272,230
--------- ---------
Net increase (decrease) in cash............................. (222,114) 342,341
Cash and cash equivalents at beginning of year.............. 378,342 36,001
--------- ---------
Cash and cash equivalents at end of year.................... $ 156,228 $ 378,342
========= =========
Supplemental cash flow information -- Interest paid......... $ 26,457 $ 26,212
========= =========
</TABLE>
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of fair value information is made in accordance
with the requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments." SFAS No. 107 requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate value.
The estimated fair value amounts have been determined by the Corporation using
available market information and other appropriate valuation techniques. These
techniques are significantly affected by the assumptions used, such as the
discount rate and estimates of future cash flows. Accordingly, the estimates
made herein are not necessarily indicative of the amounts Shelby County Bancorp
could realize in a current market exchange and the use of different market
assumptions and/or estimation methods may have a material effect on the
estimated fair value amount.
F-19
<PAGE> 89
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following schedule includes the book value and estimated fair value of
all financial assets and liabilities, as well as certain off balance sheet
items, at September 30.
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents.................. $ 2,436 $ 2,436 $ 4,923 $ 4,923
Securities including securities available
for sale................................. 8,695 8,695 8,511 8,520
Loans receivable, net...................... 76,038 76,443 66,098 65,563
Accrued interest receivable................ 619 619 529 529
Stock in FHLB of Indianapolis.............. 920 920 620 620
Liabilities
Deposits................................... 64,633 65,374 65,286 66,150
Borrowings:
FHLB advances............................ 17,746 17,746 9,746 9,746
Long-term borrowing...................... 312 312 325 325
Accrued interest payable................... 126 126 133 133
</TABLE>
The following valuation methods and assumptions were used by the
Corporation in estimating the fair value of its financial instruments.
CASH AND CASH EQUIVALENTS. The fair value of cash and cash equivalents
approximates carrying value.
SECURITIES. Fair values are based on quoted market prices.
LOANS RECEIVABLE, NET. The fair value of loans is estimated by discounting
the estimated future cash flows using market rates at which similar loans would
be made to borrowers with similar credit ratings and for the same remaining
maturities. Contractual cash flows were adjusted for prepayment estimates
consistent with those used by the Office of Thrift Supervision at September 30,
1997 and 1996.
ACCRUED INTEREST RECEIVABLE. The fair value of these financial instruments
approximates carrying value.
STOCK IN FHLB OF INDIANAPOLIS. Fair value of FHLB stock is based on the
price at which it may be resold to the FHLB.
DEPOSITS. The fair values for demand deposits (i.e., interest bearing and
non-interest bearing checking, passbooks savings and money market accounts) are
equal to the amount payable on demand at the reporting date. Fair values for
fixed-maturity certificates of deposit are calculated using a discounted cash
flow analysis that applies interest rates currently offered on certificates.
FHLB ADVANCES. The fair values of the FHLB advances approximate carrying
values as the interest rates are variable and adjust to market rates.
LONG-TERM BORROWING. The fair value of long-term borrowing approximates
carrying value as the interest rate approximates current market rates.
ACCRUED INTEREST PAYABLE. The fair value of these financial instruments
approximates carrying value.
F-20
<PAGE> 90
APPENDIX A
AMENDED AND RESTATED AGREEMENT OF AFFILIATION AND MERGER
(AS AMENDED)
THIS AMENDED AND RESTATED AGREEMENT OF AFFILIATION AND MERGER
("Agreement"), dated as of this 12th day of March, 1998, as amended on June 2,
1998, by and among BLUE RIVER BANCSHARES, INC. ("Blue River"), SHELBY COUNTY
BANCORP ("Shelby County") and SHELBY COUNTY SAVINGS BANK, FSB ("SCSB"), being
parties to a certain Agreement of Affiliation and Merger dated as of February 5,
1998 (the "Prior Agreement"), agree to amend and restate the Prior Agreement in
its entirety to read as follows:
WITNESSETH:
WHEREAS, Blue River is an Indiana corporation with its principal office
located in Shelbyville, Shelby County, Indiana; and
WHEREAS, Shelby County is an Indiana corporation registered as a savings
and loan holding company under the Home Owners' Loan Act, as amended ("HOLA"),
with its principal office located in Shelbyville, Shelby County, Indiana; and
WHEREAS, SCSB is a federally chartered savings bank and a wholly-owned
subsidiary of Shelby County with its principal office located in Shelbyville,
Shelby County, Indiana; and
WHEREAS, a majority of the Board of Directors of Blue River and a majority
of the Board of Directors of Shelby County have approved this Agreement, have
authorized its execution and delivery, and have designated this Agreement as a
plan of merger.
NOW, THEREFORE, in consideration of the foregoing premises, the
representations, warranties, covenants and mutual obligations herein contained
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Blue River, Shelby County and SCSB hereby agree as
follows:
SECTION 1
THE MERGER
1.01. General Description. Upon the terms and subject to the conditions of
this Agreement, Shelby County shall be merged into Blue River ("Merger"). Blue
River shall survive the Merger ("Surviving Corporation") and shall continue its
corporate existence under the laws of the State of Indiana and pursuant to the
provisions of and with the effect provided in the Indiana Business Corporation
Law, as amended. Upon consummation of the Merger, SCSB shall be a wholly-owned
subsidiary of Blue River.
1.02 Name and Offices. The name of the Surviving Corporation shall be "Blue
River Bancshares, Inc." Its principal office shall be located at 29 East
Washington Street, Shelbyville, Indiana 46176.
1.03 Directors and Officers. (a) Surviving Corporation. The Board of
Directors of the Surviving Corporation, until such time as their respective
successors have been elected and have qualified, shall consist of the directors
of Blue River serving immediately prior to the Effective Time (as hereinafter
defined). The officers of the Surviving Corporation shall consist of the
officers of Blue River serving immediately prior to the Effective Time until the
Board of Directors of the Surviving Corporation shall elect new or successor
officers.
(b) SCSB. The Board of Directors of SCSB following the Effective Time,
until such time as their respective successors have been elected and qualified,
shall consist of those persons who are serving as directors of Blue River
immediately prior to the Effective Time. The officers of SCSB serving
immediately prior to the Effective Time shall be the officers of SCSB following
the Effective Time until the Board of Directors of SCSB shall elect new or
successor officers. In addition, as of the Effective Time, Rodney L. Meyerholtz
shall resign as President and Chief Executive Office of SCSB, and Robert C. Reed
shall be
A-1
<PAGE> 91
elected as the President and Chief Executive Officer of SCSB and shall serve in
such positions until such time as his successor has been duly elected and
qualified.
(c) Term of Office. All directors and officers of the Surviving Corporation
and SCSB shall serve for a term and otherwise be subject to the qualification
and other requirements for directors and officers of the Surviving Corporation
and SCSB, respectively, as set forth in their respective Articles of
Incorporation, Charter or By-Laws in effect from time to time.
1.04 Capital Structure. The capital of the Surviving Corporation shall not
be less than the capital of Blue River immediately prior to the Effective Time.
The issued and outstanding shares of common stock of Blue River immediately
prior to the Effective Time shall remain issued and outstanding following the
Effective Time.
1.05 Articles of Incorporation; Charter and By-Laws. The Articles of
Incorporation and By-Laws of Blue River in existence at the Effective Time shall
be the Articles of Incorporation and By-Laws of the Surviving Corporation
following the Effective Time until such Articles of Incorporation and By-Laws
shall be amended as provided by applicable law. The Charter and By-Laws of SCSB
in existence at the Effective Time shall be the Charter and By-Laws of SCSB
following the Effective Time until such time as such Charter and By-Laws shall
be amended as provided by applicable law.
1.06 Effect of Merger. The effect of the Merger upon consummation thereof
shall be as set forth in Indiana Code Section 23-1-40-6, as amended.
SECTION 2
MANNER AND BASIS
OF CONVERSION OF STOCK
2.01. Conversion of Shelby County Common Stock. Upon and by virtue of the
Merger becoming effective at the Effective Time, each issued and outstanding
share of Shelby County Common Stock shall be converted into the right to receive
a cash amount equal to Fifty-Six Dollars ($56.00) ("Conversion Price").
2.02. Distribution of Cash. (a) Promptly but not more than fifteen (15)
days following the Effective Time, the conversion agent designated by Blue River
with the prior approval of Shelby County which approval shall not be
unreasonably withheld ("Conversion Agent") shall mail to each Shelby County
shareholder a letter of transmittal providing instructions as to the transmittal
to Blue River of certificates formerly representing shares of Shelby County
Common Stock and the payment of cash in exchange therefor pursuant to the terms
of this Agreement.
(b) Following the Effective Time, the Conversion Agent, on behalf of Blue
River, shall distribute the cash payment, without interest, required by Section
2.01 hereof to each holder of Shelby County Common Stock of record at the
Effective Time within twenty (20) business days following receipt by the
Conversion Agent of the shareholder's certificate(s) formerly representing such
shareholder's shares of Shelby County Common Stock together with a properly
completed and executed letter of transmittal, all in form and substance
reasonably satisfactory to the Surviving Corporation.
(c) Following the Effective Time, stock certificates formerly representing
Shelby County Common Stock held by shareholders of Shelby County shall be deemed
to evidence only the right to receive cash, without interest thereon, pursuant
to Section 2.01 hereof.
(d) Blue River shall be entitled to rely upon the stock transfer books and
records of Shelby County to establish the persons entitled to receive the cash
payment pursuant to this Agreement, which books, in the absence of actual
knowledge by Blue River of any adverse claim thereto, shall be conclusive with
respect to the ownership of shares of Shelby County Common Stock.
(e) With respect to any certificate for shares of Shelby County Common
Stock which has been lost, stolen or destroyed, Blue River shall be authorized
to pay the cash amount required by Section 2.01 hereof to the registered owner
of such certificate upon Blue River's receipt of an agreement to indemnify Blue
River
A-2
<PAGE> 92
against loss from such lost, stolen or destroyed certificate, an affidavit of
lost, stolen or destroyed stock certificate and, if necessary in Blue River's
reasonable discretion, a bond, all in form and substance reasonably satisfactory
to Blue River, and upon compliance by the shareholder of Shelby County with all
other reasonable requirements of Blue River in connection with lost, stolen or
destroyed stock certificates.
SECTION 3
DISSENTING SHAREHOLDERS
Shareholders of Shelby County who properly exercise and perfect statutory
dissenters' rights shall have the rights accorded to dissenting shareholders
under Chapter 23-1-44 of the Indiana Code, as amended.
SECTION 4
REPRESENTATIONS AND WARRANTIES
OF SHELBY COUNTY AND SCSB
Each of Shelby County and SCSB hereby represents and warrants to Blue River
with respect to itself, the other, The Shelby Group, Inc. ("Shelby Group") and
First Tier One Corporation ("First Tier") as follows as of February 5, 1998:
4.01. Organization and Authority. (a) Shelby County is a corporation duly
organized and validly existing under the laws of the State of Indiana and is a
savings and loan holding company under the HOLA. Shelby County has full power
and authority (corporate and otherwise) to own and lease its properties as
presently owned and leased and to conduct its business in the manner and by the
means utilized as of the date hereof. Shelby County has no direct subsidiaries
and owns directly no voting stock or equity securities of any corporation,
partnership, association or other entity, other than all of the issued and
outstanding common stock of SCSB. The Shelby County Common Stock is the only
class of Shelby County stock and is registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended ("1934 Act").
(b) SCSB is a federally chartered savings bank duly organized and validly
existing under the laws of the United States of America. SCSB has full power and
authority (corporate and otherwise) to own and lease its properties as presently
owned and leased and to conduct its business in the manner and by the means
utilized as of the date hereof. Except for shares of common stock of the Federal
Home Loan Bank of Indianapolis, Shelby Group and First Tier and except as
provided in the Disclosure Schedule, SCSB has no subsidiaries and owns no voting
stock or equity securities of, or any interest in, any corporation, partnership,
association or other entity. SCSB is subject to primary federal regulatory
supervision and examination by the Office of Thrift Supervision ("OTS").
(c) Shelby Group is an Indiana corporation duly organized and validly
existing under the laws of the State of Indiana. Shelby Group has full power and
authority (corporate and otherwise) to own and lease its properties as presently
owned and leased and to conduct its business in the manner and by the means
utilized as of the date hereof. SCSB owns all of the issued and outstanding
shares of capital stock of Shelby Group. Shelby Group has no subsidiaries and
owns no voting stock or equity securities of or any interest in, any
corporation, partnership, association or other entity.
(d) First Tier is an Indiana corporation duly organized and validly
existing under the laws of the State of Indiana. First Tier has full power and
authority (corporate and otherwise) to own and lease its properties as presently
owned and leased and to conduct its business in the manner and by the means
utilized as of the date hereof. SCSB owns all of the issued and outstanding
shares of capital stock of First Tier. First Tier has no subsidiaries and owns
no voting stock or equity securities of or any interest in, any corporation,
partnership, association or other entity. Shelby Group and First Tier are
sometimes hereinafter referred to collectively as the "Subsidiaries."
4.02. Authorization. (a) Each of Shelby County and SCSB has the requisite
corporate power and authority to enter into this Agreement and to perform its
obligations hereunder, subject to the fulfillment of
A-3
<PAGE> 93
the conditions precedent set forth in Section 8.02 hereof. This Agreement and
its execution and delivery by Shelby County and SCSB have been duly authorized
and approved by the Board of Directors of Shelby County and SCSB, respectively.
This Agreement constitutes a valid and binding obligation of Shelby County and
SCSB and is enforceable in accordance with its terms, except to the extent
limited by general principles of equity and public policy and by bankruptcy,
insolvency, fraudulent transfer, reorganization, liquidation, moratorium,
readjustment of debt or other laws of general application relating to or
affecting the enforcement of creditors' rights.
(b) Neither the execution of this Agreement nor consummation of the Merger
(i) conflicts with or violates Shelby County's Articles of Incorporation or
By-Laws or SCSB's Charter or By-Laws; (ii) conflicts with or violates any local,
state, federal or foreign law, statute, ordinance, rule or regulation (provided
that the approvals of or filings with applicable government regulatory agencies
or authorities required for consummation of the Merger are obtained) or any
court or administrative judgment, order, injunction, writ or decree; (iii)
conflicts with, results in a breach of or constitutes a default under any note,
bond, indenture, mortgage, deed of trust, license, lease, contract, agreement,
arrangement, commitment or other instrument to which Shelby County, SCSB or
either of the Subsidiaries is a party or by which SCSB, Shelby County or either
of the Subsidiaries is subject or bound and which is material to Shelby County
or SCSB, whether individually or on a consolidated basis, or Shelby Group or
First Tier on a consolidated basis with Shelby County; (iv) results in the
creation of or gives any person, corporation or entity the right to create any
material lien, charge, claim, encumbrance or security interest, or results in
the creation of any other material rights or claims of any other party or any
other material adverse interest, upon any right, property or asset of Shelby
County, SCSB or either of the Subsidiaries; or (v) terminates or gives any
person, corporation or entity the right to terminate, accelerate, amend, modify
or refuse to perform under any note, bond, indenture, mortgage, deed of trust,
license, lease, contract, agreement, arrangement, commitment or other instrument
to which Shelby County, SCSB or either of the Subsidiaries is bound or with
respect to which Shelby County, SCSB or either of the Subsidiaries is to perform
any duties or obligations or receive any rights or benefits.
(c) Other than in connection or in compliance with the provisions of the
applicable federal and state banking, thrift, securities and corporation
statutes, all as amended, and the rules and regulations promulgated thereunder,
no notice to, filing with, exemption by or consent, authorization or approval of
any governmental agency or body is necessary for the consummation of the Merger
by Shelby County and SCSB, respectively.
4.03. Capitalization. (a) The authorized capital stock of Shelby County
consists, and at the Effective Time will consist, of (i) 5,000,000 shares of
common stock, no par value per share, 175,950 of which shares are validly issued
and outstanding, which number of issued and outstanding shares of Shelby County
Common Stock is subject to increase to a total of 189,750 shares pursuant to the
exercise of options (collectively, the "Stock Options") granted under the Shelby
County Bancorp Stock Option Plan ("Stock Option Plan") to purchase an aggregate
of 13,800 shares of Shelby County Common Stock (the shares of common stock
outstanding on the date of this Agreement and the shares of common stock to be
issued pursuant to the exercise of the Stock Options are referred to in this
Agreement as the "Shelby County Common Stock") and (ii) 2,000,000 shares of
"blank check" preferred stock, none of which shares are issued or outstanding.
The shares of Shelby County Common Stock presently issued and outstanding have
been (and with respect to the shares of common stock of Shelby County to be
issued upon exercise of the Stock Options shall be) duly and validly authorized
by all necessary corporate action of Shelby County, are (and with respect to the
shares of common stock of Shelby County to be issued upon exercise of the Stock
Options shall be) validly issued, fully paid and nonassessable and have not been
(and with respect to the shares of common stock of Shelby County to be issued
upon exercise of the Stock Options shall not be) issued in violation of any
pre-emptive rights of any present or former Shelby County shareholders. Shelby
County has no capital stock authorized, issued or outstanding other than as
described in this Section 4.03(a) and has no intention or obligation to
authorize or issue any other capital stock, or any additional shares of Shelby
County Common Stock, except for 13,800 shares of Shelby County Common Stock
pursuant to the exercise of the Stock Options. As of September 30, 1997, Shelby
County had total shareholders' equity of $7,171,322, which consisted of common
stock of $1,358,123, retained earnings of $5,187,531, and unrealized
appreciation on investment securities available for sale of $625,668. A
description of the terms, relative rights, preferences and limitations of the
Shelby County
A-4
<PAGE> 94
Common Stock is contained in the Articles of Incorporation of Shelby County, a
copy of which is set forth in the Disclosure Schedule pursuant to Section 4.04
hereof (for purposes of this Agreement, "Disclosure Schedule" shall mean the
schedules referencing the applicable provisions of this Section 4 which are
signed by the Chairman and the President of Shelby County and SCSB solely in
their respective officer capacities and are attached hereto and made a part of
this Agreement).
(b) The authorized capital stock of SCSB consists, and at the Effective
Time will consist, of 1,000 shares of common stock, $.01 par value per share,
all of which shares are validly outstanding and issued to Shelby County (such
issued and outstanding shares of common stock are referred to in this Agreement
as the "SCSB Common Stock"). Such issued and outstanding shares of SCSB Common
Stock have been duly and validly authorized by all necessary corporate action of
SCSB, are validly issued, fully paid and non-assessable and have not been issued
in violation of any pre-emptive rights of any present or former SCSB
shareholders. All of the issued and outstanding shares of SCSB Common Stock are
owned by Shelby County free and clear of all liens, pledges, charges, claims,
encumbrances, restrictions, security interests, options and pre-emptive rights
and of all other rights or claims of any other person, corporation or entity
with respect thereto.
SCSB has no capital stock authorized, issued or outstanding other than as
described in this Section 4.03(b) and has no intention or obligation to
authorize or issue any other capital stock or any additional shares of SCSB
Common Stock. As of September 30, 1997, SCSB had total assets of $89,544,152,
total liabilities of $83,325,632 and total capital of $6,218,520, which capital
consisted of common stock of $10, capital surplus of $1,154,295, undivided
profits of $4,438,547, and unrealized appreciation on investment securities
available for sale of $625,668.
(c) The authorized capital stock of Shelby Group consists, and at the
Effective Time will consist, of 1,000 shares of common stock, no par value per
share, 1,000 of which shares are outstanding and validly issued to SCSB (such
issued and outstanding shares of common stock are referred to in this Agreement
as the "Shelby Group Common Stock"). The shares of Shelby Group Common Stock
have been duly and validly authorized by all necessary corporate action of
Shelby Group, are validly issued, fully paid and non-assessable and have not
been issued in violation of any pre-emptive rights of any present or former
shareholders of Shelby Group. All of the shares of Shelby Group Common Stock are
owned by SCSB free and clear of all liens, pledges, charges, claims,
encumbrances, restrictions, security interests, options and pre-emptive rights
and of all other rights or claims of any other person, corporation or entity
with respect thereto. Shelby Group has no capital stock authorized, issued or
outstanding other than as described in this Section 4.03(c) and has no intention
or obligation to authorize or issue any other capital stock or any additional
shares of Shelby Group Common Stock. As of September 30, 1997, Shelby Group had
total assets of $10,001, total liabilities of $-0-and total capital of $10,001,
which capital consisted of common stock of $100,000, capital surplus of $-0-,
and undivided profits of ($89,999).
(d) The authorized capital stock of First Tier consists, and at the
Effective Time will consist, of 1,000 shares of common stock, no par value per
share, 1,000 of which shares are outstanding and validly issued to Shelby County
(such issued and outstanding shares of common stock are referred to in this
Agreement as the "First Tier Common Stock"). The shares of First Tier Common
Stock have been duly and validly authorized by all necessary corporate action of
First Tier, are validly issued, fully paid and non-assessable and have not been
issued in violation of any pre-emptive rights of any present or former
shareholders of First Tier. All of the shares of First Tier Common Stock are
owned by Shelby County free and clear of all liens, pledges, charges, claims,
encumbrances, restrictions, security interests, options and pre-emptive rights
and of all other rights or claims of any other person, corporation or entity
with respect thereto. First Tier has no capital stock authorized, issued or
outstanding other than as described in this Section 4.03(d) and has no intention
or obligation to authorize or issue any other capital stock or any additional
shares of First Tier Common Stock. As of September 30, 1997, First Tier had
total assets of $63,384, total liabilities of $35 and total capital of $63,349,
which capital consisted of common stock of $15,000, capital surplus of $-0-, and
undivided profits of $48,349.
(e) Except for options to purchase 13,800 shares of Shelby County Common
Stock under the Stock Option Plan, there are no options, warrants, commitments,
calls, puts, agreements, understandings, arrangements or subscription rights
relating to any capital stock, or any securities convertible into or
representing the
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right to purchase or otherwise acquire any capital stock or debt securities of
Shelby County by which Shelby County is or may become bound. Shelby County does
not have any contractual or other obligation to repurchase, redeem or otherwise
acquire any of its issued and outstanding shares of Shelby County Common Stock.
Set forth in the Disclosure Schedule is a true, accurate and complete (i) copy
of an incentive stock option agreement and a non-qualified stock option
agreement that are identical in all material respects to the presently
outstanding stock option agreements (except as to the number of shares subject
to the option, the purchase price per share and the duration of the option),
(ii) copy of the Stock Option Plan and (iii) a list of all optionees, including
the number of shares subject to each Stock Option.
(f) There are no options, warrants, commitments, calls, puts, agreements,
understandings, arrangements or subscription rights relating to the capital
stock, or any securities convertible into or representing the right to purchase
or otherwise acquire the capital stock or any debt securities, of the
Subsidiaries by which either of the Subsidiaries are or may become bound. The
Subsidiaries do not have any contractual or other obligation to repurchase,
redeem or otherwise acquire any of their respective outstanding shares of
capital stock.
(g) Except as set forth in the Disclosure Schedule, Shelby County has no
knowledge of any person who beneficially owns 5% or more of the issued and
outstanding shares of Shelby County Common Stock.
4.04. Organizational Documents. The Articles of Incorporation and By-Laws
of Shelby County, Shelby Group and First Tier and the Charter and By-Laws of
SCSB, representing true, accurate and complete copies of such corporate
documents of Shelby County, SCSB, Shelby Group and First Tier, respectively, in
effect as of the date of this Agreement, have been delivered to Blue River and
are included in the Disclosure Schedule.
4.05. Compliance with Law. (a) Neither Shelby County, SCSB nor either of
the Subsidiaries has engaged in any activity or has taken or omitted to take any
action which has resulted in the violation of any local, state, federal or
foreign law, statute, regulation, rule, ordinance, order, restriction or
requirement nor is it in violation of any order, injunction, judgment, writ or
decree of any court or government agency or body, the violation of which could
have a material adverse effect on the financial condition, results of
operations, business, assets or capital of Shelby County and SCSB, whether
individually or on a consolidated basis, or Shelby Group or First Tier on a
consolidated basis with Shelby County. Shelby County, SCSB and each of the
Subsidiaries possess and hold all licenses, franchises, permits, certificates
and other authorizations necessary for the continued conduct of their respective
businesses without interference or interruption, and such licenses, franchises,
permits, certificates and authorizations held by Shelby County are transferable
to the Surviving Corporation at the Effective Time without any restrictions or
limitations thereon or the need to obtain any consents of government agencies or
other third parties other than as set forth in this Agreement.
(b) All agreements, understandings and commitments with, and all orders and
directives of, all government regulatory agencies or authorities with respect to
the financial condition, results of operations, business, assets or capital of
Shelby County, SCSB or either of the Subsidiaries which presently are binding
upon or require action by, or at any time during the last five (5) years have
been binding upon or have required action by, Shelby County, SCSB or either of
the Subsidiaries, including, without limitation, all correspondence,
communications and commitments related thereto, are set forth in the Disclosure
Schedule. There are no uncured violations, or violations with respect to which
refunds or restitutions may be required, cited in any examination report
provided to Shelby County, SCSB or either of the Subsidiaries as a result of an
examination by any regulatory agency or body or set forth in any accountant's,
auditor's or other report to Shelby County, SCSB or either of the Subsidiaries.
(c) All of the existing offices and branches of SCSB have been legally
authorized and established in accordance with all applicable federal, state and
local laws, statutes, rules, regulations, ordinances, orders, restrictions and
requirements. SCSB does not have any approved but unopened offices or branches.
(d) Shelby County and SCSB and their respective properties (including those
held by either of them in a fiduciary capacity) are in compliance in all
material respects with all applicable provisions of the Americans With
Disabilities Act ("ADA"), and no action under the ADA against Shelby County,
SCSB or any of their respective properties has been initiated or, to Shelby
County's and SCSB's best knowledge, threatened. Neither Shelby County nor SCSB
are required to comply with the Family and Medical Leave Act.
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4.06. Accuracy of Statements Made and Materials Provided to Blue River. (a)
No representation, warranty or other statement made, or any information
provided, by Shelby County, SCSB or either of the Subsidiaries in this Agreement
or in the Disclosure Schedule (and any update thereto) and no written report,
statement, list, materials or other written information which has previously
been or which shall be provided subsequent to the date hereof by Shelby County,
SCSB or either of the Subsidiaries or any of their attorneys, accountants or
agents to Blue River or any of its attorneys, accountants or agents in
connection with this Agreement, the Merger, Blue River's due diligence
investigation or confidential review of Shelby County, SCSB and the Subsidiaries
or otherwise, including, without limitation, any written information with
respect to Shelby County's, SCSB's and the Subsidiaries' business, capital,
assets, financial condition, results of operations, and directors and officers
for inclusion in the Registration Statement (as defined in Section 7.02 hereof),
the Prospectus (as defined in Section 7.02 hereof) and the Proxy Statement (as
defined in Section 6.01 hereof), contains or shall contain (with respect to
information relating to the Registration Statement at the time it is declared
effective, with respect to information relating to the Prospectus at the time it
is first delivered to prospective investors and with respect to information
relating to the Proxy Statement at the time it is mailed to Shelby County
shareholders) any untrue or misleading statement of material fact or omits or
shall omit to state a material fact necessary to make the statements contained
herein or therein, in light of the circumstances in which they are made, not
false or misleading.
(b) All materials or information provided by Shelby County, SCSB or either
of the Subsidiaries to Blue River for use by Blue River in any filing with any
state or federal bank or thrift regulatory agency or authority shall not, at the
time such filings are made, contain any untrue or misleading statement of
material fact or shall omit to state a material fact necessary to make the
statements contained therein, in light of the circumstances in which they are
made, not false or misleading.
4.07. Litigation and Pending Proceedings. (a) Except as set forth in the
Disclosure Schedule, there are no claims, actions, suits, proceedings,
arbitrations, mediations or investigations pending or, to the best knowledge of
Shelby County, SCSB and the Subsidiaries after due inquiry, threatened in any
court or before any government agency or authority, arbitration panel, mediator
or otherwise (nor does Shelby County, SCSB or either of the Subsidiaries have
any knowledge of a basis for any claim, action, suit, proceeding, litigation,
arbitration, mediation or investigation) against, by or affecting Shelby County,
SCSB or either of the Subsidiaries which could have a material adverse effect on
the financial condition, results of operations, business, assets or capital of
Shelby County or SCSB, whether individually or on a consolidated basis, or
Shelby Group or First Tier on a consolidated basis with Shelby County, or which
would prevent the performance of this Agreement, declare the same unlawful or
cause the rescission hereof.
(b) Neither Shelby County, SCSB nor either of the Subsidiaries is (i)
subject to any outstanding judgment, order, writ, injunction or decree of any
court, arbitration panel or governmental agency or authority, (ii) presently
charged with or under governmental investigation with respect to any actual or
alleged violations of any law, statute, rule, regulation or ordinance, or (iii)
the subject of any pending or, to the best knowledge of Shelby County, SCSB and
the Subsidiaries, threatened proceeding by any government regulatory agency or
authority having jurisdiction over their respective businesses, properties or
operations.
4.08. Financial Statements and Reports. Shelby County previously has
delivered to Blue River copies of the following financial statements and
reports, including the notes thereto, of Shelby County, SCSB and the
Subsidiaries (collectively, the "Shelby County Financial Statements"):
(a) Consolidated statements of financial condition as of September 30, 1996
and 1997 and the related statements of earnings and statements of changes in
shareholders' equity of Shelby County as of and for the fiscal years ended
September 30, 1995, 1996 and 1997; and
(b) Consolidated statements of cash flows of Shelby County for the fiscal
years ended September 30, 1995, 1996 and 1997.
The Shelby County Financial Statements are true, accurate and complete in
all material respects and present fairly the consolidated financial positions of
Shelby County, SCSB and the Subsidiaries as of and at the dates shown and the
consolidated results of operations for the periods covered thereby. The Shelby
County
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Financial Statements described in clauses (a) and (b) above have been audited by
KPMG Peat Marwick and have been prepared in conformance with generally accepted
accounting principles applied on a consistent basis. The Shelby County Financial
Statements do not include any assets, liabilities or obligations or omit to
state any assets, liabilities or obligations, absolute or contingent, or any
other facts, which inclusion or omission would render any of the Shelby County
Financial Statements false, misleading or inaccurate in any material respect as
of the respective dates thereof.
4.09. Properties, Contracts, Employees and Other Agreements. (a) Set forth
in the Disclosure Schedule is a true, accurate and complete copy and, when
applicable, a list or description of the following:
(i) A brief description and the location of all real property owned by
Shelby County, SCSB and each of the Subsidiaries and the principal
buildings and structures located thereon, together with a legal description
of such real property, and each lease of real property to which Shelby
County, SCSB or either of the Subsidiaries is a party (excluding any
exhibits thereto which are not material), identifying the parties thereto,
the annual rental payable, the expiration date of the lease and a brief
description of the property covered;
(ii) All loan or credit agreements and promissory notes relating to
money borrowed by Shelby County, SCSB and the Subsidiaries, all land,
conditional sales or installment sales contracts or other title retention
agreements and all agreements for the purchase of federal funds to which
Shelby County, SCSB or either of the Subsidiaries is a party;
(iii) All agreements, contracts, leases, licenses, lines of credit,
understandings, commitments or obligations of Shelby County, SCSB or either
of the Subsidiaries which individually or in the aggregate:
(A) involve payment or receipt by Shelby County, SCSB or either of
the Subsidiaries (other than as disbursements of loan proceeds to
customers or loan payments by customers) of more than $10,000 during any
twelve (12) month period;
(B) involve payments based on profits of Shelby County, SCSB or
either of the Subsidiaries;
(C) relate to the purchase of goods, products, supplies or services
in excess of $5,000;
(D) were not made in the ordinary course of business; or
(E) may not be terminated without penalty within one (1) year from
the date of this Agreement; and
(iv) The name and current annual salary of each director, officer and
employee of Shelby County, SCSB or either of the Subsidiaries whose current
annual salary and bonus or incentive compensation from Shelby County, SCSB
or either of the Subsidiaries is in excess of $25,000, and the profit
sharing and other form of compensation (other than salary) paid or payable
by Shelby County, SCSB or either of the Subsidiaries to or for the benefit
of each such person for the fiscal years ended September 30, 1996 and 1997.
(b) SCSB has, prior to the date of this Agreement, provided or given access
to Blue River to the files and documentation of all of its borrowers, or persons
or entities that are or may become obligated to SCSB under a letter of credit,
line of credit, loan transaction, loan agreement, promissory note or other
commitment of SCSB, in excess of $10,000 individually or in the aggregate,
whether in principal, interest or otherwise, and including all guarantors of
such indebtedness.
(c) To the best knowledge of Shelby County, SCSB and the Subsidiaries, each
of the agreements, contracts, commitments, leases, instruments and documents set
forth in the Disclosure Schedule relating to this Section 4.09 is valid and
enforceable in accordance with its terms. Shelby County, SCSB and the
Subsidiaries are and, to their best knowledge, all other parties thereto are in
compliance with the provisions thereof, and Shelby County, SCSB and the
Subsidiaries are not and, to their best knowledge, no other party thereto is in
default in the performance, observance or fulfillment of any material
obligation, covenant or provision contained therein. None of the foregoing
requires the consent of any party to its assignment in connection with the
Merger.
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4.10. Absence of Undisclosed Liabilities. Except as provided in the Shelby
County Financial Statements, except for accounts payable incurred and unfunded
loan commitments made to customers in the ordinary course of business, except
for additional borrowings from the Federal Home Loan Bank of Indianapolis not to
exceed $22.5 Million incurred in the ordinary course of business between the
date hereof and the Effective Time, neither Shelby County, SCSB nor either of
the Subsidiaries has any obligation, agreement, contract, commitment, liability,
lease or license which exceeds $5,000 individually or in the aggregate, or any
obligation, agreement, contract, commitment, liability, lease or license made
outside of the ordinary course of business.
4.11. Title to and Condition of Assets. (a) Shelby County, SCSB or either
of the Subsidiaries, as the case may be, has good and marketable title in fee
simple absolute to all real property (including, without limitation, all real
property used as bank premises and all other real estate owned) which is
reflected in the Shelby County Financial Statements as of September 30, 1997;
good and marketable title to all personal property reflected in the Shelby
County Financial Statements as of September 30, 1997, other than personal
property disposed of in the ordinary course of business since September 30,
1997; good and marketable title to or right to use by valid and enforceable
lease or contract all other properties and assets (whether real or personal,
tangible or intangible) which Shelby County, SCSB or either of the Subsidiaries
purports to own or which Shelby County, SCSB or either of the Subsidiaries uses
in their respective businesses; and good and marketable title to, or right to
use by the terms of a valid and enforceable lease or commitment all other
property and assets acquired and not disposed of or leased, as the case may be,
since September 30, 1997. All of such properties and assets owned by Shelby
County, SCSB and the Subsidiaries are owned free and clear of all land or
conditional sales contracts, mortgages, encumbrances, liens, pledges,
restrictions, security interests, charges, claims or rights of third parties of
any nature except (i) as set forth in the Disclosure Schedule; (ii) as
specifically noted in reasonable detail in the Shelby County Financial
Statements; (iii) statutory liens for taxes not yet delinquent or being
contested in good faith by appropriate proceedings; (iv) pledges or liens
required to be granted in connection with the acceptance of government deposits
or granted in connection with repurchase or reverse repurchase agreements; and
(v) easements, encumbrances and liens of record, minor imperfections of title,
building or use restrictions, variations and other limitations which are not
substantial in amounts, do not materially detract from the value or materially
interfere with the present or contemplated use of any of the properties subject
thereto or otherwise materially impair the use thereof for the purposes for
which they are held or used. All real property owned or leased by Shelby County,
SCSB and the Subsidiaries is in material compliance with all applicable zoning
and land use laws.
(b) To the best of their respective knowledge, Shelby County, SCSB and each
of the Subsidiaries have conducted their respective businesses in compliance
with all federal, state, county and municipal laws, statutes, regulations,
rules, ordinances, orders, directives, restrictions and requirements relating
to, without limitation, responsible property transfer, underground storage
tanks, petroleum products, air pollutants, water pollutants, storm water or
process waste water or otherwise relating to the environment or toxic or
hazardous substances or to the manufacturing, recycling, handling, processing,
distribution, use, generation, treatment, storage, disposal or transport of any
hazardous or toxic substances or petroleum products (including polychlorinated
biphenyls, whether contained or uncontained, and asbestos-containing materials,
whether friable or not), including, without limitation, the Federal Solid Waste
Disposal Act, the Hazardous and Solid Waste Amendments, the Federal Clean Air
Act, the Federal Clean Water Act, the Occupational Health and Safety Act, the
Federal Resource Conservation and Recovery Act, the Toxic Substances Control
Act, the Federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 and the Superfund Amendments and Reauthorization Act of
1986, all as amended, and all regulations of the Environmental Protection
Agency, the Nuclear Regulatory Agency, the Army Corp of Engineers, the
Department of Interior, the United States Fish and Wildlife Service and any
state department of natural resources or state environmental protection agency
now or at any time hereafter in effect (collectively, "Environmental Laws").
There are no pending or, to the best knowledge of Shelby County, SCSB and the
Subsidiaries threatened claims, actions or proceedings by any local
municipality, sewage district or other federal, state or local governmental
agency or authority or any other party against Shelby County, SCSB or either of
the Subsidiaries with respect to any of the Environmental Laws and, except as
set forth in the Disclosure Schedule, to the best of Shelby County's, SCSB's and
the Subsidiaries' knowledge, there is no basis or grounds for any such claim,
action or proceeding. Except as set forth in the Disclosure Schedule, to the
best of
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Shelby County's, SCSB's and the Subsidiaries' knowledge, no environmental
clearances or other governmental environmental approvals are required for the
conduct of Shelby County's, SCSB's or either of the Subsidiaries' business or
consummation of the Merger. Except as set forth in the Disclosure Schedule, to
the best of Shelby County's, SCSB's and the Subsidiaries' knowledge, neither
Shelby County, SCSB nor either of the Subsidiaries is the owner, and has not
been in the chain of title or the operator or lessee, of any property on which
any substances have been used, stored, deposited, treated, recycled or disposed
of, which substances if known to be present on, at or under such property would
require clean-up, removal or any other remedial action under any of the
Environmental Laws.
(c) Neither Shelby County, SCSB nor either of the Subsidiaries (i) is in
default in any respect under any agreements pursuant to which it leases real or
personal property, (ii) has knowledge of any default under such agreements by
any party thereto and (iii) has knowledge of any event which, with notice or
lapse of time or both, would constitute a default or a breach thereof.
4.12. Loans and Investments. (a) Except as set forth in the Disclosure
Schedule, SCSB has no loan in excess of $5,000 that has been classified by
regulatory examiners or management of SCSB as "Substandard," "Doubtful" or
"Loss" or in excess of $5,000 that has been identified by accountants or
auditors (internal or external) as having a significant risk of
uncollectability. The most recent loan watch list of SCSB and a list of all
loans in excess of $5,000 that SCSB has determined to be ninety (90) days or
more past due with respect to principal or interest payments or has placed on
nonaccrual status are set forth in the Disclosure Schedule.
(b) All loans reflected in the Shelby County Financial Statements as of
September 30, 1997 and which have been made, extended, renewed, restructured,
approved, amended or acquired since September 30, 1997 (i) have been made for
good, valuable and adequate consideration in the ordinary course of business;
(ii) to the best of SCSB's knowledge, constitute the legal, valid and binding
obligation of the obligor and any guarantor named therein, except to the extent
limited by general principles of equity and public policy or by bankruptcy,
insolvency, fraudulent transfer, reorganization, liquidation, moratorium,
readjustment of debt or other laws of general application relative to or
affecting the enforcement of creditors' rights; (iii) are evidenced by notes,
instruments or other evidences of indebtedness which are true, genuine and what
they purport to be; and (iv) are secured, to the extent that SCSB has a security
interest in collateral or a mortgage securing such loans, by perfected security
interests or recorded mortgages naming SCSB as the secured party or mortgagee.
(c) The reserves, the allowance for possible loan and lease losses and the
carrying value for real estate owned which are shown on the Shelby County
Financial Statements are adequate in all respects under the requirements of
generally accepted accounting principles applied on a consistent basis to
provide for possible losses on items for which reserves were made, on loans and
leases outstanding and real estate owned as of the respective dates. To the best
knowledge of SCSB, the aggregate loan balances outstanding as of September 30,
1997, in excess of the reserve for loan losses as of such date, are collectible
in accordance with their respective terms.
(d) Shelby County and SCSB have complied in all material respects with all
laws, statutes, rules, regulations and other legal requirements relating to its
loans such that any failure to so comply will not interfere with the collection
of any loan or provide to any borrower any right, claim or action against Shelby
County or SCSB. Except as set forth in the Disclosure Schedule, to the best of
Shelby County's and SCSB's knowledge, no property in which SCSB has an interest
as collateral to secure a loan or that is held as an asset of any trust violates
any of the Environmental Laws or obligates Shelby County or SCSB, or the owner
or operator of such property, to remediate, treat or otherwise alter the
environmental condition of such property.
(e) None of the investments reflected in the Shelby County Financial
Statements as of and for the year ended September 30, 1997 and none of the
investments made by Shelby County, SCSB or either of the Subsidiaries since
September 30, 1997 are subject to any restriction, whether contractual or
statutory, which materially impairs the ability of Shelby County, SCSB or either
of the Subsidiaries to dispose freely of such investment at any time. Neither
Shelby County, SCSB nor either of the Subsidiaries is a party to any repurchase
agreements with respect to securities. All investment securities and other
investments of SCSB are carried on its books in accordance with generally
accepted accounting principals applied on a consistent basis.
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(f) Set forth in the Disclosure Schedule is a true, accurate and complete
list of all loans in which SCSB has any participation interest or which have
been made with or through another financial institution on a recourse basis
against SCSB.
(g) The aggregate amount of SCSB's indebtedness to the Federal Home Loan
Bank of Indianapolis does not exceed $22.5 Million.
4.13. Anti-takeover Provisions. Neither Shelby County, SCSB nor either of
the Subsidiaries has a shareholder rights plan or any other plan, program,
agreement or arrangement involving, restricting, prohibiting or discouraging a
change in control, merger or other combination of Shelby County, SCSB or either
of the Subsidiaries or which may be considered an anti-takeover mechanism,
except for (i) the Rights Plan Agreement, dated April 17, 1995 ("Rights
Agreement"), between Shelby County and Bank One, Indianapolis, NA, as Rights
Agent, (ii) the provisions in the Articles of Incorporation and By-Laws of
Shelby County, (iii) the Stock Option Plan, (iv) the Employment Agreements (as
hereinafter defined), and (v) the employment agreement between Rodney L.
Meyerholtz and SCSB dated October 17, 1991 ("Meyerholtz Agreement").
4.14. Employee Benefit Plans. (a) With respect to the employee benefit
plans, as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), whether written or oral, sponsored or otherwise
maintained by Shelby County or SCSB; in which Shelby County, SCSB or either of
the Subsidiaries participates as a participating employer; to which Shelby
County, SCSB or either of the Subsidiaries contributes; with respect to which
Shelby County, SCSB or either of the Subsidiaries acts as administrator, trustee
or fiduciary, whether written or oral; and including any such plans which have
been terminated, merged into another plan, frozen or discontinued (collectively,
the "Shelby County Plans"): (i) all such Shelby County Plans have, on a
continuous basis since their adoption, been maintained in compliance in all
materials respects with the requirements prescribed by all applicable statutes,
orders and governmental rules or regulations, including, without limitation,
ERISA, the Code, and the Department of Labor ("Department") and the Treasury
Regulations promulgated thereunder; (ii) all Shelby County Plans intended to
constitute tax-qualified plans under the Code have complied, in form and in
operation, since their adoption, or, with respect to form, have been timely
amended to comply, in all material respects, with all applicable requirements of
the Code and the Treasury Regulations promulgated thereunder, and favorable
determination letters with respect to the Tax Reform Act of 1986 have been
timely received from the Internal Revenue Service ("Service") with respect to
each such Shelby County Plan stating that each, in its current form (or at the
time of its disposition if it has been terminated, merged or discontinued), is
qualified under and satisfies all applicable provisions of the Code and Treasury
Regulations; (iii) no Shelby County Plan (or its related trust) holds any Shelby
County Common Stock or any stock of a related or affiliated person or entity,
except as provided in the Disclosure Schedule; (iv) neither Shelby County, SCSB
nor either of the Subsidiaries has liability to the Department or the Service
with respect to any Shelby County Plan; (v) neither Shelby County, SCSB nor
either of the Subsidiaries has engaged in any transaction that may subject
Shelby County, SCSB, either of the Subsidiaries or any Shelby County Plan to a
civil penalty imposed by Section 502 of ERISA; (vi) no prohibited transaction
(as defined in Section 406 of ERISA and as defined in Section 4975(c) of the
Code) has occurred with respect to any Shelby County Plan; (vii) each Shelby
County Plan subject to ERISA or intended to be qualified under Section 401(a) of
the Code has been and, if applicable, is being operated in accordance with the
applicable provisions of ERISA and the Code and the Department and Treasury
Regulations promulgated thereunder; (viii) to the best of Shelby County's,
SCSB's and the Subsidiaries' knowledge, no participant or beneficiary or
nonparticipating employee has been denied any benefit due or to become due under
any Shelby County Plan or has been misled as to his or her rights under any
Shelby County Plan; (ix) all obligations required to be performed by Shelby
County, SCSB or either of the Subsidiaries under any provision of a Shelby
County Plan have been performed by it and it is not in default under or in
violation of any provision of a Shelby County Plan; (x) no event has occurred
which would constitute grounds for an enforcement action by any party under Part
5 of Title I of ERISA under any Shelby County Plan; (xi) there are no actions,
suits, proceedings or claims pending (other than routine claims for benefits)
or, to the best knowledge of Shelby County, SCSB and the Subsidiaries,
threatened against Shelby County, SCSB, either of the Subsidiaries, any Shelby
County Plan or the assets of any Shelby County
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Plan; and (xii) with respect to any Shelby County Plan sponsored, participated
in or contributed to by Shelby County, SCSB or either of the Subsidiaries or
with respect to which Shelby County, SCSB or either of the Subsidiaries is
responsible for complying with the reporting and disclosure requirements of
ERISA or the Code, there has been no violation of the reporting and disclosure
requirements imposed either under ERISA or the Code for which a penalty has been
or may be imposed.
(b) With regard to any Shelby County Plan intended to be a tax-qualified
plan under Section 401(a) of the Code, to the best knowledge of Shelby County,
SCSB and the Subsidiaries, no director, officer, employee or agent of Shelby
County, SCSB or either of the Subsidiaries has engaged in any action or failed
to act in such a manner that, as a result of such action or failure to act, the
Service could revoke or deny that plan's qualification under the Code or the
exemption under Section 501(a) of the Code for any trust or annuity contract
related to such Plan.
(c) Shelby County, SCSB and the Subsidiaries have provided to Blue River in
the Disclosure Schedule true, accurate and complete copies and, in the case of
any plan or program which has not been reduced to writing, a complete summary,
of all of the following: (i) pension, retirement, profit-sharing, savings, stock
purchase, stock bonus, stock ownership, stock option and stock appreciation or
depreciation right plans and agreements and all amendments thereto (except that,
with respect to the stock option agreements between Shelby County and certain
employees and directors of Shelby County, SCSB and the Subsidiaries with respect
to the Stock Options, only a true, accurate and complete copy of an incentive
stock option agreement and a non-qualified stock option agreement that are
identical in all material respects to the remaining outstanding stock option
agreements have been included in the Disclosure Schedule); (ii) all employment,
deferred compensation (whether funded or unfunded), salary continuation,
consulting, bonus, severance and collective bargaining agreements, arrangements
or understandings; (iii) all executive and other incentive compensation plans
and programs; (iv) all group insurance and health contracts, policies or plans;
and (v) all other incentive, welfare or employee benefit plans, understandings,
arrangements or agreements, maintained or sponsored, participated in, or
contributed to by Shelby County, SCSB or either of the Subsidiaries for their
current or former directors, officers or employees. All of the foregoing have
been, since their inception, drafted, implemented, administered and, where
applicable, amended or terminated in accordance with their terms and with
applicable law.
(d) No current or former director, officer or employee of Shelby County,
SCSB or either of the Subsidiaries is entitled to any benefit under any welfare
benefit plans (as defined in Section 3(1) of ERISA) after termination of
employment with Shelby County, SCSB or either of the Subsidiaries, except that
such individuals may be entitled to continue their group health care coverage
pursuant to Section 4980B of the Code if they pay the cost of such coverage
pursuant to the applicable requirements of the Code with respect thereto.
(e) With respect to any group health plan (as defined in Section 607(1) of
ERISA) sponsored or maintained by Shelby County, SCSB or either of the
Subsidiaries, in which Shelby County, SCSB or either of the Subsidiaries
participates as a participating employer or to which Shelby County, SCSB or
either of the Subsidiaries contributes, to the best knowledge of Shelby County,
SCSB and the Subsidiaries, no director, officer, employee or agent of Shelby
County, SCSB or either of the Subsidiaries has engaged in any action or failed
to act in such a manner that, as a result of such action or failure to act,
would cause a tax to be imposed upon Shelby County, SCSB or either of the
Subsidiaries under Section 4980B(a) of the Code. With respect to all such plans,
all applicable provisions of Section 4980B of the Code and Section 601 of ERISA
have been complied with in all material respects by Shelby County, SCSB and the
Subsidiaries.
(f) Except as otherwise provided in the Disclosure Schedule, there are no
collective bargaining, employment, management, consulting, deferred
compensation, reimbursement, indemnity, retirement, early retirement, severance
or similar plans or agreements, commitments or understandings, or any employee
welfare, benefit or retirement plan or agreement, binding upon Shelby County,
SCSB or either of the Subsidiaries and no such agreement, commitment,
understanding or plan is under discussion or negotiation by management with any
employee or group of employees, any member of management or any other person.
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4.15. Obligations to Employees. Except as otherwise provided in the
Disclosure Schedule, all accrued obligations and liabilities of Shelby County,
SCSB, the Subsidiaries and the Shelby County Plans, whether arising by operation
of law, by contract or by past custom, for payments to trusts or other funds, to
any government agency or authority or to any present or former director,
officer, employee or agent of Shelby County, SCSB or either of the Subsidiaries
(or his heirs, legatees or legal representatives) have been and are being paid
to the extent required by applicable law or by the plan, trust, contract or past
custom or practice, and adequate accruals and reserves for such payments have
been and are being made by Shelby County, SCSB and the Subsidiaries in
accordance with generally accepted accounting principles and applicable law
applied on a consistent basis and actuarial methods with respect to the
following: (a) withholding taxes, unemployment compensation or social security
benefits; (b) all pension, profitsharing, savings, stock purchase, stock bonus,
stock ownership, stock option and stock appreciation rights plans and
agreements; (c) all employment, deferred compensation (whether funded or
unfunded), salary continuation, consulting, retirement, early retirement,
severance, reimbursement or bonus plans or agreements; (d) all executive and
other incentive compensation plans, programs or agreements; (e) all group
insurance and health contracts and policies; and (f) all other incentive,
welfare, retirement or employee benefit plans or agreements maintained,
sponsored, participated in, or contributed to by Shelby County, SCSB or either
of the Subsidiaries for their current or former directors, officers, employees
and agents, including, without limitation, all liabilities and obligations to
the Shelby County Plans. All obligations and liabilities of Shelby County, SCSB
and the Subsidiaries, whether arising by operation of law, by contract or by
past custom or practice, for all other forms of compensation which are or may be
payable to their current or former directors, officers, employees or agents have
been and are being paid to the extent required by applicable law or by the plan
or contract, and adequate accruals and reserves for payment therefor have been
and are being made by Shelby County, SCSB and the Subsidiaries in accordance
with generally accepted accounting and principles applied on a consistent basis.
Except as otherwise provided in the Disclosure Schedule, all accruals and
reserves referred to in this Section 4.15 are correctly and accurately reflected
and accounted for in all material respects in the Shelby County Financial
Statements and the books, statements and records of Shelby County, SCSB and the
Subsidiaries.
SCSB is not and has not engaged in any unfair labor practice within the
meaning of the National Labor Relations Act, as amended, and there is no
proceeding or investigation pending or threatened against it with respect
thereto. There are no, and during the last five (5) years have not been any,
formal, informal or internal charges or complaints of, or any proceedings or
lawsuits pending or threatened involving, discrimination or harassment, nor is
there any investigation pending or threatened before the Equal Employment
Opportunity Commission or any other federal, state or local agency or authority
involving SCSB or any of its present or former directors, employees or agents.
Except to set forth in the Disclosure Schedule, neither the execution and
delivery of this Agreement nor the consummation of any of the transactions
contemplated hereby, will (a) result in any payment (including, without
limitation, severance, unemployment compensation or golden parachute payment)
becoming due to any director or employee of Shelby County or SCSB from either of
such entities; (b) increase any benefit otherwise payable under any of the
Shelby County Plans or any other plan of program relating to directors or
employees of Shelby County or SCSB; or (c) result in the acceleration in the
time of payment of any benefit or amount owed to any present or former director
or employee of Shelby County or SCSB.
4.16. Taxes, Returns and Reports. Shelby County, SCSB and the Subsidiaries
have (a) duly filed all federal, state, local and foreign tax returns of every
type and kind required to be filed, and each such return is true, accurate and
complete in all material respects; (b) paid all taxes, assessments and other
governmental charges due or claimed to be due upon each of them or any of their
income, properties or assets; and (c) not requested an extension of time for any
such payments (which extension is still in force). Except for taxes not yet due
and payable, the reserve for taxes in the Shelby County Financial Statements as
of September 30, 1997 is adequate to cover all of Shelby County's, SCSB's and
the Subsidiaries' tax liabilities (including, without limitation, income taxes
and franchise fees) that may become payable in future periods with respect to
any transactions consummated prior to September 30, 1997. Neither Shelby County,
SCSB nor either of the Subsidiaries has, or will have, any liability for taxes
of any nature for or with respect to the operation of
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their respective businesses, including the business of any subsidiary, or
ownership of their assets, including the assets of any subsidiary, from the date
hereof up to and including the Effective Time, except to the extent set forth in
the Subsequent Shelby County Financial Statements (as hereinafter defined).
Neither Shelby County, SCSB nor either of the Subsidiaries is currently under
audit by any state or federal taxing authority. No federal, state or local tax
returns of Shelby County, SCSB or either of the Subsidiaries have been audited
by any taxing authority during the past five (5) years.
4.17. Deposit Insurance. The deposits of SCSB are insured by the Federal
Deposit Insurance Corporation in accordance with the Federal Deposit Insurance
Corporation Act, as amended, and SCSB has paid or properly reserved or accrued
for all current premiums and assessments with respect to such deposit insurance.
4.18. Insurance. Set forth in the Disclosure Schedule is a list and brief
description of all policies of insurance (including, without limitation, blanket
bond, directors' and officers' liability insurance, property and casualty
insurance, group health or hospitalization insurance and insurance providing
benefits for employees) owned or held by Shelby County, SCSB or either of the
Subsidiaries on the date hereof or with respect to which Shelby County, SCSB or
either of the Subsidiaries pays any premiums. Each such policy is in full force
and effect, all premiums due thereon have been paid when due, and a true,
accurate and complete copy thereof has been made available to Blue River prior
to the date hereof.
4.19. Books and Records. The books and records of Shelby County, SCSB and
the Subsidiaries are in all material respects complete and correct and
accurately reflect the basis for the respective financial condition, results of
operations, business, assets and capital of Shelby County, SCSB and the
Subsidiaries set forth in the Shelby County Financial Statements.
4.20. Broker's, Finder's or Other Fees. Except for the reasonable fees of
Shelby County's attorneys, accountants and investment bankers and the printing
and mailing costs relating to the proxy statement pertaining to the Merger, all
of which will be paid by Shelby County prior to the Effective Time, no agent,
broker or other person acting on behalf of Shelby County, SCSB or either of the
Subsidiaries or acting under any authority of Shelby County, SCSB or either of
the Subsidiaries is or shall be entitled to any commission, broker's or finder's
fee or any other form of compensation or payment from any of the parties hereto
relating to this Agreement or the Merger. A true, accurate and complete copy of
Shelby County's agreements with its attorneys, accountants, investment banker or
other advisors relative to their respective fees in connection with the Merger
is set forth in the Disclosure Schedule.
4.21. Interim Events. Except as otherwise permitted hereunder, since
September 30, 1997, neither Shelby County, SCSB nor either of the Subsidiaries
has:
(a) Suffered any changes having a material adverse effect on its financial
condition, results of operations, assets, capital or business;
(b) Suffered any material damage, destruction or loss to any of its
properties not fully-covered by insurance;
(c) Declared, distributed or paid any dividend or other distribution to its
shareholders, except for payment of dividends as permitted by Section
6.03(a)(iii) hereof and except for 13,800 shares of Shelby County Common Stock
issued pursuant to the exercise of the Stock Options;
(d) Repurchased, redeemed or otherwise acquired shares of its capital
stock, issued any shares of its capital stock or stock appreciation rights or
sold or agreed to issue or sell (except for 13,800 shares of Shelby County
Common Stock issued pursuant to the exercise of the Stock Options) any shares of
its capital stock or any right or option to purchase or acquire any such stock
or any security convertible into such stock or taken any action to reclassify,
recapitalize or split up its stock;
(e) Granted or agreed to grant any increase in benefits payable or to
become payable under any pension, retirement, profit-sharing, savings, bonus,
deferred compensation, stock or option plan or agreement; any employee welfare
or benefit plan or arrangement; or any other agreement, commitment or
understanding, to present or former employees, officers or directors of Shelby
County, SCSB or either of the Subsidiaries;
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(f) Increased the salary, compensation or fees of any director, officer or
employee, except for normal increases in the ordinary course of business and in
accordance with past practices, entered into any employment contract, indemnity
agreement or any other agreement or understanding with any officer or employee
or installed any employee benefit plan;
(g) Leased, sold or otherwise disposed of any of its assets except in the
ordinary course of business or leased, purchased or otherwise acquired from
third parties any assets except in the ordinary course of business;
(h) Merged, consolidated or sold shares of capital stock of SCSB; except
for the Merger, agreed or committed to merge, consolidate, combine or affiliate
with or into any third party; agreed or committed to sell the substantial assets
or any shares of capital stock of Shelby County, SCSB or either of the
Subsidiaries; or except pursuant to foreclosure actions and mortgages, liens or
security interests securing loans, acquired or agreed to acquire any securities,
equity interest, assets or business of any third party;
(i) Incurred, assumed or guaranteed any obligation or liability (fixed or
contingent) (including borrowings in the ordinary course of business from the
Federal Home Loan Bank of Indianapolis not exceeding $22.5 Million) other than
obligations and liabilities incurred in the ordinary course of business;
(j) Mortgaged, pledged or subjected to a lien, security interest, option or
other encumbrance any of its assets, except for tax and other liens which arise
by operation of law and with respect to which payment is not past due and except
for pledges or lien: (i) required to be granted in connection with acceptance by
SCSB of government deposits; or (ii) granted in connection with repurchase or
reverse repurchase agreements; or (iii) otherwise incurred in the ordinary
course of the conduct of its business;
(k) Canceled, released or compromised any loan, debt, obligation, claim or
receivable other than in the ordinary course of business;
(l) Entered into or made any loan or other transaction, contract or
commitment other than in the ordinary course of business;
(m) Agreed to enter into any transaction for the borrowing or lending of
monies, funds or securities, other than in the ordinary course of its lending
business; or
(n) Conducted its business in any manner other than substantially as it was
being conducted on September 30, 1997.
4.22. Regulatory Filings. Shelby County, SCSB and the Subsidiaries have
filed and will continue to file in a timely manner all filings and reports with
all federal and state regulatory agencies and authorities as required by
applicable law. All such filings with federal and state regulatory agencies were
true, accurate and complete in all respects as of the dates of the filings and
were prepared in conformity with generally accepted accounting principles
applied on a consistent basis and applicable law, and no such filing contained
any untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements, at the time and in light of the
circumstances under which they were made, not false or misleading.
4.23. Contracts. Neither Shelby County, SCSB nor either of the Subsidiaries
is in default under or in breach of or, to the best knowledge of Shelby County,
SCSB and the Subsidiaries, alleged to be in default under or in breach of, any
loan or credit agreement, security agreement, bond, indenture, mortgage,
license, contract, lease, commitment or any other instrument or obligation,
which breach or default could have a material adverse effect on the financial
condition, results of operation, business, assets or capital of Shelby County or
SCSB, whether individually or on a consolidated basis, or Shelby Group or First
Tier on a consolidated basis with Shelby County.
4.24. No Third Party Options. Except as provided in the Disclosure Schedule
with respect to the options to purchase 13,800 shares of Shelby County Common
Stock under the Stock Option Plan, there are no agreements, options, commitments
or rights with, of or to any third party to acquire any shares of capital stock
or assets of Shelby County, SCSB or either of the Subsidiaries which are binding
upon Shelby County, SCSB or either of the Subsidiaries.
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4.25. Disclosure Schedule and Documents. All written data, documents,
materials and information referred to in this Agreement and delivered by Shelby
County, SCSB or either of the Subsidiaries pursuant to or in connection with the
Disclosure Schedule are true, accurate and complete in all material respects as
of the date hereof and, with respect to such items delivered subsequent to the
date hereof or with any update to the Disclosure Schedule, will be true,
accurate and complete in all material respects on the date of delivery thereof.
4.26. Indemnification Agreements. (a) Neither Shelby County, SCSB nor
either of the Subsidiaries is a party to any indemnification, indemnity or
reimbursement agreement, contract, commitment or understanding to indemnify any
present or former director, officer, employee, shareholder or agent against
liability or hold the same harmless from liability, other than as expressly
provided in the Articles of Incorporation or By-Laws of Shelby County, Shelby
Group or First Tier or the Charter or By-Laws of SCSB.
(b) No claims have been made against or filed with Shelby County, SCSB or
either of the Subsidiaries nor has, to the best knowledge of Shelby County, SCSB
and the Subsidiaries after due inquiry, any claims been threatened against
Shelby County, SCSB or either of the Subsidiaries, for indemnification against
liability or for reimbursement of any costs or expenses incurred in connection
with any legal or regulatory proceeding by any present or former director,
officer, shareholder, employee or agent of either Shelby County, SCSB or either
of the Subsidiaries.
4.27. Representations and Warranties at the Effective Time. All
representations and warranties of Shelby County and SCSB contained herein shall
be true, accurate and complete in all material respects on and as of the
Effective Time as though made or given at such time, except as otherwise
expressly contemplated by this Agreement.
4.28. Nonsurvival of Representations and Warranties. The representations
and warranties of Shelby County and SCSB contained in this Agreement shall
expire upon the earlier of the Effective Time or the termination of this
Agreement pursuant to Section 9 hereof (except that any claim of
misrepresentation or breach of a warranty may be brought following any such
termination), and thereafter Shelby County, SCSB and the Subsidiaries and all
directors, officers and employees thereof shall have no further liability with
respect thereto, except for fraud or intentional and knowing participation in
the making of untrue, inaccurate or misleading statements in such
representations and warranties. Nothing in the foregoing shall result in the
termination of any of the covenants provided for in this Agreement that shall by
their terms survive the Effective Time.
SECTION 5
REPRESENTATIONS AND WARRANTIES OF BLUE RIVER
Blue River represents and warrants to Shelby County and SCSB as follows as
of the date hereof and at all times that this Agreement shall be in effect:
5.01. Organization and Authority. Blue River is a corporation duly
organized and validly existing under the laws of the State of Indiana and has
full power and authority (corporate and otherwise) to own and lease its
properties as presently owned and leased and to conduct its business in the
manner and by the means utilized as of the date hereof.
5.02. Authorization. (a) Blue River has the requisite corporate power and
authority to enter into this Agreement and to carry out its obligations
hereunder subject to the fulfillment of the conditions precedent set forth in
Section 8.01 hereof. This Agreement and its execution and delivery by Blue River
have been duly authorized and approved by the Board of Directors of Blue River.
This Agreement constitutes a valid and binding obligation of Blue River and is
enforceable in accordance with its terms, except to the extent limited by
general principles of equity and public policy and by bankruptcy, insolvency,
fraudulent transfer, reorganization, liquidation, moratorium, readjustment of
debt or other laws of general application relating to or affecting the
enforcement of creditors' rights.
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(b) Neither the execution of this Agreement nor consummation of the Merger
(i) conflicts with or violates Blue River's Articles of Incorporation or
By-Laws; (ii) conflicts with or violates any local, state, federal or foreign
law, statute, ordinance, rule or regulation (provided that the approvals of or
filings with applicable government regulatory agencies or authorities required
for consummation of the Merger are obtained) or any court or administrative
judgment, order, injunction, writ or decree; (iii) conflicts with, results in a
breach of or constitutes a default under any note, bond, indenture, mortgage,
deed of trust, license, contract, lease, agreement, arrangement, commitment or
other instrument to which Blue River is a party or by which Blue River is
subject or bound; (iv) results in the creation of or gives any person,
corporation or entity the right to create any lien, charge, claim, encumbrance
or security interest, or results in the creation of any other rights or claims
of any other party or any other adverse interest, upon any right, property or
asset of Blue River; or (v) terminates or gives any person, corporation or
entity the right to terminate, accelerate, amend, modify or refuse to perform
under any note, bond, indenture, mortgage, deed of trust, license, lease,
contract, agreement, arrangement, commitment or other instrument to which Blue
River is bound or with respect to which Blue River is to perform any duties or
obligations or receive any rights or benefits.
(c) Other than in connection or in compliance with the provisions of
applicable federal and state banking, thrift, securities and corporation
statutes, all as amended, and the rules and regulations promulgated thereunder,
no notice to, filing with, exemption by or consent, authorization or approval of
any governmental agency or body is necessary for consummation by Blue River of
the Merger.
5.03. Organizational Documents. The Articles of Incorporation and By-Laws
of Blue River in effect as of the date of this Agreement have been delivered to
Shelby County and represent true, accurate and complete copies of such corporate
documents of Blue River in effect as of the date of this Agreement.
5.04. Compliance With Law. Blue River has not engaged in any activity or
has taken or omitted to take any action which has resulted or could result in
the violation of any local, state, federal or foreign law, statute, rule,
regulation, ordinance, order, restriction or requirement or of any order,
injunction, judgment, writ or decree of any court or government agency or body,
the violation of which could have a material adverse effect on the financial
condition, results of operations, business, assets or capitalization of Blue
River.
5.05. Litigation and Pending Proceedings. (a) There are no claims, actions,
suits, proceedings, investigations, arbitrations or mediations pending or, to
the best knowledge of Blue River after due inquiry, threatened in any court or
before any government agency or authority, arbitration panel or otherwise (nor
does Blue River have any knowledge of a basis for any claim, action, suit,
proceeding, litigation, investigation, arbitration or mediation) against, by or
affecting Blue River which could have a material adverse effect on the financial
condition, results of operations, business, assets or capitalization of Blue
River, or which would prevent the performance of this Agreement, declare the
same unlawful or cause the rescission hereof.
(b) Blue River is not (i) subject to any outstanding judgment, order, writ,
injunction or decree of any court, arbitration panel or governmental agency or
authority having a material adverse effect on its business, assets,
capitalization, financial condition or results of operations on a consolidated
basis, (ii) presently charged with or under governmental investigation with
respect to any actual or alleged violations of any law, statute, rule,
regulation or ordinance, or (iii) the subject of any pending or, to the best
knowledge of Blue River, threatened proceeding by any government regulatory
agency or authority having jurisdiction over its business, properties or
operations.
5.06. Representations and Warranties at the Effective Time. All
representations and warranties of Blue River contained herein shall be true,
accurate and complete in all material respects on and as of the Effective Time
as though made or given at such time.
5.07. Nonsurvival of Representations and Warranties. The representations
and warranties of Blue River contained in this Agreement shall expire upon the
earlier of the Effective Time or the termination of this Agreement pursuant to
Section 9 hereof (except that any claim of misrepresentation or breach of
warranty may be brought following any such termination), and thereafter, Blue
River and all directors, officers and employees of Blue River shall have no
further liability with respect thereto, except for fraud or intentional and
knowing participation in the making of untrue, inaccurate or misleading
statements in such representations
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and warranties. Nothing in the foregoing shall result in the termination of any
covenants provided for herein that shall by their terms survive the Effective
Time.
SECTION 6
COVENANTS OF SHELBY COUNTY AND SCSB
Shelby County and SCSB covenant and agree with Blue River, and SCSB
covenants and agrees with Blue River to cause Shelby Group and First Tier to
act, as follows:
6.01. Shareholder Approval. Shelby County shall submit this Agreement and
the Merger to its shareholders for approval at a meeting to be called and held
in accordance with applicable law and the Articles of Incorporation and By-Laws
of Shelby County on a date mutually acceptable to Shelby County and Blue River.
Shelby County shall use its reasonable efforts to hold such meeting of
shareholders no later than sixty (60) days following the date of this Agreement.
In connection with such meeting of shareholders of Shelby County, (a) Shelby
County shall deliver to its shareholders a proxy statement relating to the
Merger ("Proxy Statement") which shall include a copy of this Agreement and all
other information required to be provided to shareholders of Shelby County in
accordance with applicable law; and (b) the Board of Directors of Shelby County
shall recommend, by at least a majority vote, to Shelby County's shareholders
that such shareholders approve this Agreement and the Merger and shall solicit
proxies in favor of this Agreement from such shareholders (unless, in the
written opinion of counsel for Shelby County, the fiduciary duties of such Board
might reasonably be found to prohibit such a recommendation, in which event the
individual members of the Board of Directors shall nevertheless remain
personally obligated to vote in favor of this Agreement and the Merger pursuant
to their personal undertakings set forth elsewhere in this Agreement).
Shelby County shall use its reasonable efforts to cause Trident Financial
Corporation ("Trident") to issue, no later than the date of the Proxy Statement,
Trident's written opinion ("Fairness Opinion") stating that the Conversion Price
is fair to the shareholders of Shelby County from a financial point of view.
Shelby County shall attach a copy of Trident's fairness opinion to the proxy
statement to be delivered to Shelby County's shareholders in connection with the
meeting of shareholders referenced in this Section 6.01.
6.02. Other Approvals and Actions. (a) Shelby County and SCSB shall proceed
expeditiously, cooperate fully and use their reasonable efforts to assist Blue
River in procuring, upon terms and conditions reasonably acceptable to Blue
River, all consents, authorizations, approvals, registrations and certificates,
in completing all filings and applications and in satisfying all other
requirements prescribed by law which are necessary for the IPO (as defined in
Section 7.02 hereof) and the consummation of the Merger on the terms and
conditions provided in this Agreement.
(b) Shelby County and SCSB shall take all necessary steps to (i) terminate
the Stock Option Plan as of the Effective Time such that, among other things,
the Stock Options will terminate or lapse if not exercised prior to the
Effective Time and (ii) assist Blue River in the disposition of the SCSB
Retirement Plan (as hereinafter defined), in accordance with Section 7.03
hereof. Shelby County shall pay all costs and expenses associated with the
disposition of such plans, to the extent incurred prior to the Effective Time.
(c) Shelby County shall take all necessary steps to redeem the rights
granted pursuant to the Rights Agreement at or prior to the Effective Time at an
aggregate cost not to exceed Twenty Thousand Dollars ($20,000).
(d) In advance of filing the Proxy Statement with the Securities and
Exchange Commission ("SEC"), Shelby County shall provide to Blue River and its
counsel with a copy of the Proxy Statement and provide them an opportunity to
comment thereon.
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6.03. Conduct of Business. (a) On and after the date of this Agreement and
until the Effective Time or until this Agreement shall be terminated as herein
provided, neither Shelby County, SCSB nor either of the Subsidiaries shall,
without the prior written consent of Blue River:
(i) make any changes in its capital stock accounts (including, without
limitation, any stock split, stock dividend, recapitalization or
reclassification);
(ii) authorize a class of securities, issue or grant, or authorize the
issuance or grant of, securities or options other than or in addition to
the presently issued and outstanding shares of Shelby County Common Stock,
SCSB Common Stock, Shelby Group Common Stock or First Tier Common Stock set
forth in Section 4.03 hereof and other than the presently outstanding
options to purchase an aggregate of 13,800 shares of Shelby County Common
Stock;
(iii) distribute or pay any dividends on its shares of common stock,
or make any other distribution to its shareholders, except that Shelby
County may pay to its shareholders its normal and customary quarterly cash
dividend in an amount not to exceed twelve and one-half cents ($0.125) per
share of Shelby County Common Stock for each such dividend until the
Effective Time and except that SCSB may pay cash dividends to Shelby County
in the ordinary course of business in accordance with past practices for
payment of reasonable and necessary business and operating expenses of
Shelby County;
(iv) redeem any of its outstanding shares of common stock;
(v) merge, combine or consolidate or effect a share exchange with or
sell substantially all of its assets or any of its securities to any other
person, corporation or entity or enter into any similar transaction not in
the ordinary course of business;
(vi) assume any liabilities of any bank or savings and loan holding
company, bank, savings association, corporation or other entity, except in
the ordinary course of business;
(vii) except in the ordinary course of business in accordance with
sound banking practices (and, with respect to loan transactions or
commitments, letters of credit and deposit accounts, only on terms and
conditions which are not materially more favorable than those available to
the borrower or customer from competitive sources in transactions in the
ordinary course of business) make any loan, payment or disbursement; issue
any loan commitment, letter of credit or line of credit; accept any
deposit; enter into any lease, contract, agreement understanding or
arrangement; amend, modify or terminate, or forgive or grant any waiver or
concession under, any loan, debt or obligation owed to Shelby County or
SCSB; or guaranty any debt or obligation of any third party;
(viii) except for acquisitions or dispositions in the ordinary course
of business, acquire or dispose of any property or asset in excess of
$5,000 individually or $10,000 in the aggregate;
(ix) except for the pledge of securities to secure public funds
deposits or except for additional borrowings in the ordinary course of
business from the Federal Home Loan Bank of Indianapolis not to exceed
$22.5 Million in the aggregate, subject any of its properties or assets to
a mortgage, lien, claim, charge, option, restriction, security interest or
encumbrance;
(x) promote to a new position or increase the rate of compensation
(except for promotions and compensation increases in the ordinary course of
business and in accordance with past practices and established employment
policies), or enter into any agreement to promote to a new position or
increase the rate of compensation, of any director, officer or employee of
Shelby County, SCSB or either of the Subsidiaries;
(xi) execute, create, institute, modify, amend or terminate (except
with respect to any amendments to the Shelby County Plans required by law,
rule or regulation, except with respect to the amendments to the Stock
Option Plan as described in Section 6.02(b)(i) hereof, except with respect
to the termination of the SCSB Retirement Plan as described in Section
6.02(b)(ii) hereof and as contemplated by Section 7.03 hereof, except with
respect to the amendments to the Employment Agreements and the Meyerholtz
Agreement as contemplated by Section 6.11 hereof and except with respect to
the
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Termination Agreement (as hereinafter defined)) any pension, retirement,
savings, stock purchase, stock bonus, stock ownership, stock option, stock
appreciation or depreciation right or profit sharing plans of Shelby County
or SCSB; any employment, deferred compensation, consulting, bonus or
collective bargaining agreement; any group insurance or health contract or
policy; or any other incentive, retirement or employee welfare or pension
benefit plan, agreement or understanding for current or former directors,
officers or employees of Shelby County, SCSB or either of the Subsidiaries;
or change the level of benefits or payments under any of the foregoing or
increase or decrease any severance or termination of pay benefits or any
other fringe or employee benefits other than as required by law or
regulatory authorities;
(xii) make any filing concerning the amendments to or disposition of
the Shelby County Plans as provided in Section 7.03 hereof to any employee
of Shelby County, SCSB or either of the Subsidiaries or any third party,
including any regulatory authority;
(xiii) modify, amend or institute new employment policies or practices
(other than in the ordinary course of business consistent with past
practices) or enter into, renew or extend any employment, indemnity,
reimbursement, consulting, compensation or severance agreements with
respect to any present or former directors, officers or employees of Shelby
County, SCSB or either of the Subsidiaries;
(xiv) hire or employ any new or additional employees of Shelby County,
SCSB or either of the Subsidiaries, except those which are reasonably
necessary for the proper operation of Shelby County's, SCSB's or either of
the Subsidiaries' business;
(xv) amend, modify or restate Shelby County's, Shelby Group's or First
Tier's Articles of Incorporation or By-Laws or SCSB's Charter or By-Laws
from those in effect on the date of this Agreement and as delivered to Blue
River hereunder;
(xvi) give, dispose of, sell, convey or transfer; assign, hypothecate,
pledge or encumber; or grant a security interest in or option or right to
acquire any shares of capital stock of Shelby County, SCSB, Shelby Group or
First Tier or substantially all of the assets of Shelby County, SCSB,
Shelby Group or First Tier, or enter into any agreement or commitment
relative to the foregoing;
(xvii) fail to continue to make additions to in accordance with past
practices and to otherwise maintain in all respects SCSB's reserve for loan
and lease losses, or any other reserve account, in accordance with safe,
sound and prudent banking practices and in accordance with generally
accepted accounting principles applied on a consistent basis;
(xviii) fail to accrue, pay, discharge and satisfy all accounts
payable, debts, liabilities, obligations and expenses incurred in the
regular and ordinary course of business as such payables, debts,
liabilities, obligations and expenses become due;
(xix) issue, or authorize the issuance of, any securities convertible
into or exchangeable for Shelby County Common Stock, SCSB Common Stock,
Shelby Group Common Stock or First Tier Common Stock;
(xx) except for accounts payable and similar liabilities and
obligations incurred in the ordinary course of business, for the payment,
discharge or satisfaction in the ordinary course of business of liabilities
reflected in the Shelby County Financial Statements or the Subsequent
Shelby County Financial Statements and for additional borrowings in the
ordinary course of business from the Federal Home Loan Bank of Indianapolis
not to exceed $22.5 Million, borrow any money or incur any indebtedness,
including, without limitation, through the issuance of debentures, or incur
any liability or obligation (whether absolute, accrued, contingent or
otherwise), in an aggregate amount exceeding $5,000, other than legal,
accounting, and investment banker fees and proxy printing and mailing costs
relating to the Merger or the operation of Shelby County's and SCSB's
business;
(xxi) open, close, move or, in any material respect, expand, renovate,
alter or change any of its offices or branches;
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(xxii) pay or commit to pay any management, consulting, professional
or other similar type of fees, except for the reasonable fees paid to
Shelby County's and SCSB's existing attorneys and accountants for work done
in the ordinary course of Shelby County's and SCSB's business and the
reasonable fees paid to Shelby County's attorneys, accountants, investment
banker and other advisors with respect to the Merger which shall not exceed
in the aggregate the amount of fees set forth in the agreements or other
arrangements disclosed in the Disclosure Schedule;
(xxiii) enter into any contract, agreement, lease, commitment,
understanding, arrangement or transaction or incur any liability or
obligation (other than as contemplated by Section 6.03(a)(vii) hereof)
requiring payments by Shelby County, SCSB or either of the Subsidiaries
which exceed $5,000, whether individually or in the aggregate, or that is
not in the ordinary course of business;
(xxiv) elect or appoint any director or officer of Shelby County, SCSB
or either of the Subsidiaries in addition to or other than Jack Disser and
those persons who were directors or officers of Shelby County, SCSB or
either of the Subsidiaries on the date of the Agreement;
(xxv) execute, create, institute, modify, amend or terminate any
shareholders rights plan (including the Rights Agreement), poison pill or
any other anti-takeover plan, device, mechanism or arrangement involving,
restricting, prohibiting or discouraging a change in control, merger, sale
or other combination of Shelby County, SCSB or either of the Subsidiaries
or which may be considered an anti-takeover mechanism (except with respect
to the amendments to the Stock Option Plan as contemplated by Section
6.02(b)(i) hereof and except with respect to the amendments to the
Employment Agreements and the Meyerholtz Agreement as contemplated by
Section 6.11 hereof and except with respect to the Termination Agreement);
(xxvi) redeem the rights granted pursuant to the Rights Agreement
(except as provided by Section 6.02(c) hereof and Section 5(d) of the Stock
Option Agreement ("Lock-up Agreement") dated of even date herewith by and
between Blue River and Shelby County);
(xxvii) make or modify, or commit to make or modify, any 30-year fixed
rate mortgage loan that will have an annual interest rate which is less
than the Federal National Mortgage Association (Fannie Mae) posted yields
on 30-year mortgage commitments (priced at par) for delivery within 30
days, as published in the "Money Rates" section of The Wall Street Journal
(Midwest Edition) on the most recent date (which The Wall Street Journal
(Midwest Edition) is published) preceding the date which SCSB makes or
commits to make any such 30-year fixed rate mortgage loan;
(xxviii) violate any law, statute, rule, regulation, directive or
other legal requirement in any material respect; or
(xxviv) enter into any contract, agreement, commitment or
understanding with respect to any of the foregoing specified in this
Section 6.03(a).
(b) Shelby County, SCSB and each of the Subsidiaries shall maintain, or
cause to be maintained, in full force and effect, insurance on its assets,
properties and operations, fidelity coverage and directors' and officers'
liability insurance on its directors, officers and employees in such amounts and
with regard to such liabilities and hazards as are currently insured by Shelby
County, SCSB and the Subsidiaries as of the date of this Agreement.
(c) Shelby County, SCSB and each of the Subsidiaries shall cause its
attorneys, accountants and other professionals and advisors and all other
parties doing business with Shelby County, SCSB or any of the Subsidiaries to
bill or invoice for goods or services provided no less frequently than monthly.
6.04. Preservation of Business. On and after the date of this Agreement and
until the Effective Time or until this Agreement is terminated as herein
provided, each of Shelby County, SCSB and each of the Subsidiaries shall (a)
carry on its business diligently, substantially in the manner as is presently
being conducted and in the ordinary course of business; (b) use its reasonable
efforts to preserve its business organization intact, keep available the
services of the present officers and employees and preserve its present
relationships with customers and persons having business dealings with it; (c)
maintain all of the properties
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and assets that it owns or utilizes in good operating condition and repair,
reasonable wear and tear excepted, and maintain insurance upon such properties
and assets in amounts and kinds comparable to that in effect on the date of this
Agreement; (d) maintain its books, records and accounts in the usual, regular
and ordinary manner, on a basis consistent with prior years and in compliance
with all material respects with all statutes, laws, rules and regulations
applicable to it and to the conduct of its business; and (e) not do or fail to
do anything which will cause a material breach of, or material default in, any
contract, agreement, commitment, obligation, understanding, arrangement, lease
or license to which it is a party or by which it is or may be subject or bound.
6.05. Other Negotiations. (a) Subject to Section 6.05(b) hereof, on and
after the date of this Agreement and until the Effective Time or until this
Agreement is terminated as herein provided, Shelby County, SCSB and each of the
Subsidiaries (except with the prior written approval of Blue River) shall not,
nor shall they permit or authorize their respective directors, officers,
employees, agents or representatives to, directly or indirectly, initiate,
solicit, facilitate, encourage or engage in discussions or negotiations with, or
provide information to, any corporation, association, partnership, limited
liability company, person or other entity or group concerning any merger,
consolidation, share exchange, combination, affiliation, purchase or sale of
substantial assets, sale of shares of common stock (or securities convertible or
exchangeable into or otherwise evidencing, or any agreement or instrument
evidencing, the right to acquire capital stock) or similar transaction relating
to Shelby County, SCSB or either of the Subsidiaries or to which Shelby County,
SCSB or either of the Subsidiaries may become a party (all such transactions are
hereinafter referred to as "Acquisition Transactions"). Shelby County, SCSB and
the Subsidiaries shall promptly communicate to Blue River the terms of any
proposal or offer which either of them may receive with respect to an
Acquisition Transaction and any request by or indication of interest on the part
of any third party with respect to the initiation of any Acquisition Transaction
or discussions with respect thereto.
(b) On and after the date of this Agreement and until the Effective Time or
until this Agreement is terminated as herein provided, Shelby County may engage,
and may permit and authorize its directors, officers, employees, agents or
representatives to engage in discussions or negotiations with or provide
information to any corporation, association, partnership, limited liability
company, person or other entity or group concerning an unsolicited offer by such
third party with respect to an Acquisition Transaction only with the prior
written approval of Blue River, which approval shall be provided to Shelby
County promptly upon receipt by Blue River of a letter from Shelby County signed
by at least a majority of its Board of Directors then in office indicating that
Shelby County has received an unsolicited offer regarding an Acquisition
Transaction which the Board of Directors of Shelby County (i) considers, in the
exercise of its fiduciary duties as a Board, to be substantially superior,
taking into account all relevant factors, to the then current offer of Blue
River pursuant to this Agreement and (ii) concludes, after consultation with its
counsel, that its fiduciary duties as a Board require it to consider (based upon
a written opinion of Shelby County's legal counsel advising the Board to
consider) and, in light of such duties, take such other actions with respect to
such unsolicited offer as may be necessary or appropriate; and such approval
may, in all other instances, be provided to Shelby County when and if Blue River
shall, in its sole discretion, determine. This Section 6.05 shall not authorize
Shelby County, SCSB or either of the Subsidiaries or any of their directors,
officers, employees, agents or representatives to solicit or initiate any
discussions or negotiations relative to an Acquisition Transaction with a third
party.
6.06. Press Releases. Except as required by law, neither Shelby County,
SCSB nor either of the Subsidiaries shall issue any press releases or make any
other public announcements or disclosures relating to the Merger without the
prior consent of Blue River, which consent shall not be unreasonably withheld.
6.07. Disclosure Schedule Update. Shelby County shall promptly supplement,
amend and update, upon the occurrence of any change prior to the Effective Time,
and as of the Effective Time, the Disclosure Schedule with respect to any
agreements, documents, matters or events hereafter arising which, if in
existence or having occurred as of the date of this Agreement, would have been
required to be set forth or described in the Disclosure Schedule or this
Agreement and including, without limitation, any fact which, if existing or
known as of the date hereof, would have made any of the representations or
warranties of Shelby County or SCSB contained herein materially incorrect,
untrue or misleading.
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6.08. Information, Access Thereto, Confidentiality. Blue River and its
attorneys, accountants, representatives, advisors and agents shall, at all times
during normal business hours prior to the Effective Time, have full and
continuing access to the properties, facilities, operations, books and records
of Shelby County, SCSB and the Subsidiaries. Blue River and its attorneys,
accountants, representatives, advisors and agents may, prior to the Effective
Time, make or cause to be made such reasonable investigation (including, without
limitation, any environmental review study, survey or assessment of Shelby
County's, SCSB's or any Subsidiary's real properties) of the operations, books,
records and properties of Shelby County, SCSB and the Subsidiaries and of their
financial and legal condition as deemed necessary or advisable to familiarize
themselves with such operations, books, records, properties and other matters;
provided, however, that such access or investigation shall not interfere
unnecessarily with the normal operations of Shelby County, SCSB or either of the
Subsidiaries; and provided further, that if Blue River elects to conduct or have
conducted on its behalf an environmental review, study, survey or assessment to
verify the representations and warranties given by Shelby County, SCSB and the
Subsidiaries with respect to the environmental matters specified in Section
4.11(b) hereof, all reports and findings related to such environmental review,
study, survey or assessment shall be shall be disclosed to Shelby County, SCSB
and the Subsidiaries within fifteen (5) days of the date of such report or
finding. Upon request, Shelby County, SCSB and the Subsidiaries shall furnish
Blue River, or its attorneys, accountants, representatives, advisors or agents,
Shelby County's attorneys' responses to external auditors requests for
information, management letters received from its external auditors and such
financial, loan and operating data and other information reasonably requested by
Blue River which has been or is developed by Shelby County, SCSB or either of
the Subsidiaries or their auditors, accountants or attorneys (provided with
respect to attorneys, such disclosure would not result in the waiver by Shelby
County, SCSB or either of the Subsidiaries of any claim of attorney-client
privilege), and will permit Blue River and its respective representatives or
agents to discuss such information directly with any individual or firm
performing auditing or accounting functions for Shelby County, SCSB or either of
the Subsidiaries, and such auditors and accountants shall be directed to furnish
copies of any reports or financial information as developed to Blue River or its
auditors or accountants. No investigation or review by Blue River (whether
conducted before or after the date hereof) shall affect the representations and
warranties made by Shelby County or SCSB herein or the information contained in
any document provided hereunder, and Blue River shall be entitled to rely on
such representations, warranties and documents notwithstanding any such
investigation or review. Any confidential information or trade secrets received
by Blue River or its representatives or agents in the course of such examination
shall be treated confidentially, and any correspondence, memoranda, records,
copies, documents and electronic or other media of any kind containing such
confidential information or trade secrets or both shall be destroyed by Blue
River or, at Shelby County's request, returned to Shelby County in the event
this Agreement is terminated as provided in Section 9 hereof. This Section 6.08
shall not require the disclosure of any information to Blue River which would be
prohibited by law.
6.09. Subsequent Shelby County Financial Statements. As soon as available
after the date of this Agreement, Shelby County shall deliver to Blue River the
monthly unaudited consolidated balance sheets and income statements of Shelby
County prepared for its internal use, Shelby County's Forms 10-Q for each
quarterly period and Form 10-K for each fiscal year completed prior to the
Effective Time and all other financial reports or statements, including the
notes thereto, submitted to regulatory authorities after the date hereof, to the
extent permitted by law (collectively, "Subsequent Shelby County Financial
Statements"). The Subsequent Shelby County Financial Statements shall be
prepared on a basis consistent with past accounting practices and generally
accepted accounting principles applied on a consistent basis and shall present
fairly the financial condition and results of operations as of the dates and for
the periods presented. The Subsequent Shelby County Financial Statements will
not include any assets, liabilities or obligations or omit to state any assets,
liabilities or obligations, absolute or contingent, or any other facts, which
inclusion or omission would render such financial statements inaccurate,
incomplete or misleading in any material respect.
6.10. Employee Benefits. Neither the terms of Section 7.03 hereof (except
as otherwise expressly provided therein) nor the provision of any employee
benefits by Blue River or any of its subsidiaries to employees of Shelby County,
SCSB and the Subsidiaries shall (i) create any employment contract, agreement or
understanding with or employment rights for, or constitute a commitment or
obligation of employment to, any of the officers or employees of Shelby County,
SCSB and the Subsidiaries or (ii) except
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as expressly provided in this Agreement, prohibit or restrict Blue River or its
subsidiaries, whether before or after the Effective Time, from changing,
amending or terminating any employee benefits provided to its employees from
time to time.
6.11. Employment Agreements. Prior to the Effective Time, SCSB shall use
all reasonable efforts to cause the employment agreements between SCSB and each
of Ronald L. Lanter, Joyce E. Ford and Rita Sturgill (each in the form set forth
in the Disclosure Schedule) (collectively referred to herein as the "Employment
Agreements") to be amended, all in form and substance reasonably satisfactory to
Blue River, such that (i) the requirement that each participate in a stock
option plan shall be deleted and all references as to title other than the title
of Vice President shall be deleted, (ii) each will receive employee benefits in
accordance with Blue River's employee benefit plans instead of SCSB's plans and
(iii) the term of each of the Employment Agreements shall end one (1) year from
the Effective Time. Other than the foregoing amendments, the Employment
Agreements shall not be amended or modified in any respect, and none of the
respective terms of the Employment Agreements shall be extended or renewed. On
the date hereof, SCSB and Rodney L. Meyerholtz shall enter into an agreement
relating to the Meyerholtz Agreement ("Termination Agreement") to the effect
that the Meyerholtz Agreement shall be terminated as of the Effective Time upon
the terms and conditions specified in the Termination Agreement. Other than as
set forth in the Termination Agreement, the Meyerholtz Agreement shall not be
changed, amended or modified in any respect and the term thereof shall not be
extended or renewed without the prior written consent of Blue River, SCSB and
Mr. Meyerholtz.
6.12. Certain Actions. Neither Shelby County, SCSB nor either of the
Subsidiaries shall intentionally or knowingly take, cause to be taken or fail to
take any action which will cause or result in a misrepresentation or a breach of
a covenant or warranty of this Agreement that will give Blue River the right to
terminate this Agreement pursuant to Section 9.01(b) hereof or which will result
in a condition precedent to consummation of the Merger not to be satisfied or
fulfilled.
6.13. Restructure. Shelby County and SCSB understand, acknowledge and agree
that Blue River, in its sole discretion, may change the structure of the
transactions contemplated by this Agreement; provided, however, that any such
change in structure shall not affect the Conversion Price or the consideration
to be paid hereunder to the shareholders of Shelby County or cause the
consummation of the Merger to be delayed. Shelby County and SCSB shall execute
and deliver such amendments, agreements and instruments and take such further
actions as Blue River may reasonably request in connection with any such
restructure of the transactions contemplated by this Agreement.
SECTION 7
COVENANTS OF BLUE RIVER
Blue River covenants and agrees with Shelby County as follows:
7.01. Approvals. (a) Blue River shall have primary responsibility for the
preparation, filing and cost of all filings and applications required for
consummation of the Merger, except for the Proxy Statement. Blue River shall
file all such applications as soon as practicable after the execution of this
Agreement. Blue River shall provide to Shelby County's counsel copies of all
applications filed and copies of all material written communications with all
state and federal bank regulatory agencies relating to such applications. Blue
River shall proceed expeditiously, cooperate fully and use its best efforts to
procure, upon terms and conditions reasonably acceptable to Blue River, all
consents, authorizations, approvals, registrations and certificates, to complete
all filings and applications and to satisfy all other requirements prescribed by
law which are necessary for consummation of the Merger on the terms and
conditions provided in this Agreement at the earliest possible reasonable date,
except as set forth in Section 6.01 hereof.
(b) Blue River shall submit this Agreement to its shareholders for approval
at a meeting to be called and held in accordance with applicable law and the
Articles of Incorporation and By-Laws of Blue River at a date reasonably in
advance of the Effective Time and the Board of Directors of Blue River shall
recommend, by at
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least a majority vote, to Blue River's shareholders that such shareholders
approve this Agreement and the Merger.
7.02. SEC Registration. Blue River shall file with the SEC as soon as
practicable after the execution of this Agreement a Registration Statement on an
appropriate form under the 1933 Act covering the shares of Blue River common
stock to be sold in its initial public offering ("IPO"). Such Registration
Statement and any amendments and supplements thereto are referred to in this
Agreement as the "Registration Statement." The Registration Statement shall
include a prospectus ("Prospectus") relating to the shares of Blue River common
stock to be sold in the IPO. In advance of filing the Registration Statement and
all other filings described in Section 7.01 hereof, Blue River shall provide
Shelby County and its counsel with a copy of the Registration Statement and each
such other filing and provide an opportunity to comment thereon.
7.03. Blue River Benefit Plans. (a) General. Blue River will make available
to the employees of SCSB who continue as employees of SCSB after the Effective
Time such employee benefits as the Board of Directors of Blue River may
determine to provide to employees from time to time. Until such time as the
employees of SCSB become eligible to participate in or eligible to be covered by
Blue River's employee pension benefit plans or employee welfare benefit plans,
employees of SCSB who would otherwise be eligible to participate in or be
covered by the employee pension benefit and employee welfare benefit plans of
Blue River under the terms thereof shall remain participants in or covered by
the employee pension benefit plans and employees welfare benefit plans of Shelby
County in existence at the Effective Time, subject to the terms of such plans,
to the extent provided by such plans of Shelby County. Notwithstanding the
foregoing or anything herein to the contrary, Blue River shall not be obligated
to provide any employee benefit plans to employees of SCSB following the Merger
who meet the applicable eligible requirements except for the Blue River Profit
Sharing Plan (as hereinafter defined) and group health and hospitalization
insurance.
(b) Eligibility and Vesting. Years of service, as defined in the applicable
Blue River employee welfare or pension benefit plan, with SCSB prior to the
Effective Time shall be credited to each employee of SCSB eligible for coverage
under Section 7.03(a) hereof for purposes of (i) eligibility under Blue River's
employee welfare benefit plans; and (ii) eligibility and vesting, but not for
purposes of benefit accrual or contributions, under the Blue River Employees'
Savings and Profit Sharing Plan ("Blue River Profit Sharing Plan"). The
employees of SCSB shall become covered by Blue River's employee pension and
welfare benefit plans at such time(s) as shall be specified by Blue River in its
sole discretion, subject to Section 7.03(a) hereof. The service credit provided
by this Section 7.03(b) will become effective for a plan on the date Blue River
specifies pursuant to the preceding sentence. Those officers and employees of
SCSB who otherwise meet the eligibility requirements of the designated plan,
based upon their age and years of service for SCSB and Blue River, shall become
participants thereunder on the entry date which coincides with or next follows
the specified date. Those officers and employees of SCSB who do not meet the
eligibility requirements of the designated plan on such date shall become
participants thereunder on the first plan entry date which coincides with or
next follows the date on which such eligibility requirements are satisfied.
(c) Financial Institutions Retirement Fund. The accrual of participants'
benefits under SCSB's Financial Institutions Retirement Fund ("SCSB Retirement
Plan") shall be frozen effective as of December 31st of the year in which the
Effective Time occurs, and all accrued benefits of participants in the SCSB
Retirement Plan shall thereupon become fully vested. To the extent permitted by
the SCSB Retirement Plan and applicable law, the accrued benefit of each
participant in the SCSB Retirement Plan shall be held and remain under the SCSB
Retirement Plan and shall be payable at the time(s) and in the forms provided
for under that plan. Blue River shall be responsible for the withdrawal of SCSB
from the SCSB Retirement Plan and for making any required or appropriate
application to the Service for a determination letter to the effect that such
withdrawal does not adversely affect the tax-qualified status of such plan and
for providing any notices to the Pension Benefit Guaranty Corporation or other
governmental entity regarding the withdrawal. SCSB shall make contributions to
the SCSB Retirement Plan through the date of such withdrawal only to the extent
required to maintain the plan's tax-qualified status and avoid any federal
income taxes or penalties attributable to the plan's funding status.
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7.04. Press Releases. Except as required by law, Blue River shall not issue
any press releases or make any other public announcements or disclosures
relating primarily to Shelby County, SCSB or either of the Subsidiaries with
respect to the Merger without the prior consent of Shelby County, which consent
shall not be unreasonably withheld.
7.05. Information, Access Thereto, Confidentiality. Shelby County and its
attorneys, accountants, representatives, advisors and agents shall, at all times
during normal business hours prior to the Effective Time, have full and
continuing access to the facilities, operations, books, records and properties
of Blue River. Shelby County and its attorneys, accountants, representatives,
advisors and agents may, prior to the Effective Time, make or cause to be made
such reasonable investigation of the operations, books, records and properties
of Blue River and of its financial and legal condition as Shelby County shall
deem reasonable necessary or advisable to familiarize itself with such books,
records, properties and other matters; provided, however, that such access or
investigation shall not interfere unnecessarily with the normal operations of
Blue River. No investigation or review by Shelby County (whether conducted
before or after the date hereof) shall affect the representations and warranties
made by Blue River or the information contained in any document provided herein,
and Shelby County shall be entitled to rely on such representations, warranties
and documents notwithstanding any such investigation or review. Any confidential
information or trade secrets received by Shelby County or its respective
employees or agents in the course of such examination shall be treated
confidentially, and any correspondence, memoranda, records, copies, documents
and electronic or other media of any kind containing such confidential
information or trade secrets or both shall be destroyed by Shelby County or, at
Blue River's request, returned to Blue River in the event this Agreement is
terminated as provided in Section 9 hereof. This Section 7.05 shall not require
the disclosure of any information to Shelby County which would be prohibited by
law.
7.06. Employment Agreements. Following the Effective Time, Blue River
agrees to cause SCSB to assume all obligations under the Employment Agreements,
as amended pursuant to Section 6.11 hereof, except as may be otherwise required
by law or any government agency or authority.
7.07. Indemnification. Blue River shall cause SCSB to keep the
indemnification provisions in SCSB's Charter in effect on the date hereof in
full force and effect for a period of not less than two (2) years following the
Effective Time.
7.08. Termination Fee. (a) Blue River hereby acknowledges and agrees that
Shelby County and SCSB have committed and will commit substantial time, effort,
resources and expenses in pursuing the Merger. Blue River further agrees that it
shall pay to Shelby County a termination fee in the amount the amount of One
Hundred Thousand Dollars ($100,000) in immediately available funds ("Termination
Fee"), in the event that Shelby County terminates this Agreement pursuant to
Section 9.01(c)(i), 9.01(c)(ii), 9.01(c)(iii) or 9.01(c)(iv) hereof.
(b) The Termination Fee shall be immediately paid to Shelby County upon the
termination of this Agreement by Shelby County pursuant to Section 9.01(c)
hereof. If the Termination Fee is not immediately paid as provided, then Shelby
County shall be entitled to recover interest at the highest prime rate set forth
in The Wall Street Journal (Midwest Edition) under the section entitled "Money
Rates" on the unpaid amount of the Termination Fee from the time the Termination
Fee is due until paid-in-full, together with all costs of collection thereof,
including reasonable attorneys' fees and expenses.
(c) Blue River, Shelby County and SCSB hereby acknowledge and agree that
the Termination Fee shall compensate Shelby County and SCSB for (i) certain
expenses incurred for attorneys, accountants, financial advisors and consultants
of Shelby County and SCSB in developing the Merger and drafting this Agreement,
(ii) Shelby County and SCSB's management time and expense in investigating,
analyzing, developing and pursuing the Merger, and (iii) expenses relating to
Shelby County and SCSB's due diligence efforts. Blue River further acknowledges
and agrees that the amount of the Termination Fee is fair, reasonable and not a
penalty and that its obligation to pay the Termination Fee shall survive any
termination of this Agreement by Shelby County or SCSB.
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SECTION 8
CONDITIONS PRECEDENT TO THE TRANSACTION
8.01. Blue River. The obligation of Blue River to consummate the Merger is
subject to the satisfaction and fulfillment of each of the following conditions
on or prior to the Effective Time, unless waived in writing by Blue River:
(a) Representations and Warranties at Effective Time. Each of the
representations and warranties of Shelby County and SCSB contained in this
Agreement shall be true, accurate and correct in all material respects at and as
of the Effective Time as though such representations and warranties had been
made or given on and as of the Effective Time.
(b) Covenants. Each of the covenants and agreements of Shelby County and
SCSB shall have been fulfilled or complied with from the date of this Agreement
through and as of the Effective Time.
(c) Deliveries at Closing. Blue River shall have received from Shelby
County and SCSB at the Closing (as hereinafter defined) the items and documents,
in form and content reasonably satisfactory to Blue River, set forth in Section
11.02(b) hereof.
(d) Stock Offering. Blue River shall have (i) registered under the 1933 Act
its shares of common stock to be sold in the IPO; (ii) caused each registration
statement with respect to the shares to be issued in the IPO to have been
declared effective by the SEC, and the SEC shall not have issued or threatened
to issue a stop order with respect to each such registration statement; (iii)
received all state securities or Blue Sky approvals, authorizations and/or
exemptions with respect to the shares to be sold in the IPO; (iv) executed with
Roney & Co. or any other investment banking firm, an underwriting agreement with
respect to the shares to be sold in the IPO; and (v) sold at least 1 million
shares of common stock of Blue River in the IPO.
(e) Regulatory Approvals. All appropriate orders, consents, approvals and
clearances from all regulatory agencies and governmental authorities whose
orders, consents, approvals or clearances are required by law for consummation
of the Merger shall have been obtained on terms and conditions reasonably
satisfactory to Blue River.
(f) Shareholder Approvals. The shareholders of Blue River and Shelby County
shall have approved and adopted this Agreement as required by applicable law and
their respective Articles of Incorporation.
(g) Officers' Certificate. Shelby County shall have delivered to Blue River
a certificate signed by its Chairman or President and its Secretary, dated as of
the Effective Time, certifying that (i) all the representations and warranties
of Shelby County and SCSB are true, accurate and correct in all material
respects on and as of the Effective Time; (ii) all the covenants of Shelby
County and SCSB have been complied with from the date of this Agreement through
and as of the Effective Time; and (iii) Shelby County and SCSB has satisfied and
fully complied with all conditions necessary to make this Agreement effective as
to it.
(h) Shareholders' Equity. As of the last day of the month immediately
preceding the Effective Time, the shareholders' equity of Shelby County on a
consolidated basis shall be at least Six Million Nine Hundred Thousand Dollars
($6,900,000) as reflected on Shelby County's financial statements as of such
date and as determined in accordance with generally accepted accounting
principles applied in a consistent basis. Such amount of shareholders' equity
shall be calculated after all liability accruals and payments have been made for
all legal, accounting, investment banking, environmental and other professional
or advisors' fees of Shelby County and SCSB and all expenses of Shelby County
and SCSB relating to the Merger incurred as of and through the date of such
financial statements.
8.02. Shelby County. The obligations of Shelby County and SCSB to
consummate the Merger is subject to the satisfaction and fulfillment of each of
the following conditions on or prior to the Effective Time, unless waived in
writing by Shelby County:
(a) Representations and Warranties at Effective Time. Each of the
representations and warranties of Blue River contained in this Agreement shall
be true, accurate and correct in all material respects on and as of
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the Effective Time as though such representations and warranties had been made
or given at and as of the Effective Time.
(b) Covenants. Each of the covenants and agreements of Blue River shall
have been fulfilled or complied with from the date of this Agreement through and
as of the Effective Time.
(c) Deliveries at Closing. Shelby County and SCSB shall have received from
Blue River at the Closing the items and documents, in form and content
reasonably satisfactory to Shelby County, listed in Section 11.02(a) hereof.
(d) Regulatory Approvals. All appropriate orders, consents, approvals and
clearances from all regulatory agencies and governmental authorities whose
orders, consents, approvals or clearances are required by law for consummation
of the Merger shall have been obtained.
(e) Shareholder Approvals. The shareholders of Blue River and Shelby County
shall have approved and adopted this Agreement as required by applicable law and
their respective Articles of Incorporation.
(f) Fairness Opinion. Shelby County shall have received the Fairness
Opinion by the date of the Proxy Statement. The obligations of Shelby County and
SCSB to consummate the Merger are not subject to or conditioned upon any update
to, supplement to or bring-down of the Fairness Opinion or the issuance of
another opinion stating that the Conversion Price is fair to the shareholders of
Shelby County from a financial point of view.
(g) Officers' Certificate. Blue River shall have delivered to Shelby County
and SCSB a certificate signed by its Chairman or President and its Secretary,
dated as of the Effective Time, certifying that (i) all the representations and
warranties of Blue River are true, accurate and correct in all material respects
on and as of the Effective Time; (ii) all the covenants of Blue River have been
complied with from the date of this Agreement through and as of the Effective
Time; and (iii) Blue River has satisfied and fully complied with all conditions
necessary to make this Agreement effective as to it.
SECTION 9
TERMINATION OF MERGER
9.01. Manner of Termination. This Agreement and the Merger may be
terminated at any time prior to the Effective Time by written notice delivered
by Blue River to Shelby County, or by Shelby County to Blue River, as follows:
(a) By Blue River or Shelby County, if:
(i) the Merger contemplated by this Agreement has not been consummated
by August 31, 1998; provided, however, that Blue River may extend such date
for up to sixty (60) days, solely for the purpose of obtaining regulatory
approvals contemplated by Section 8.01(e) hereof and Section 8.02(d)
hereof; or
(ii) the respective Boards of Directors of Blue River, Shelby County
and SCSB mutually agree to terminate this Agreement.
(b) By Blue River, if:
(i) any item, event or information set forth in any supplement,
amendment or update to the Disclosure Schedule has had or would be expected
to have, in the reasonable discretion of Blue River, a material adverse
effect on the business, prospects, assets, capitalization, financial
condition or results of operations of Shelby County or SCSB, whether
individually or on a consolidated basis, or Shelby Group or First Tier on a
consolidated basis with Shelby County; or
(ii) there has been a misrepresentation or a breach of any warranty by
or on the part of Shelby County or SCSB in their representations and
warranties set forth in this Agreement which has had or would be expected
to have, in the reasonable discretion of Blue River, a material adverse
effect on the business, prospects, assets, capitalization, financial
condition or results of operations of Shelby County or
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SCSB, whether individually or on a consolidated basis, or Shelby Group or
First Tier on a consolidated basis with Shelby County; provided, however,
that in the event of any inaccuracy in the representations and warranties
contained in Section 4.03 hereof relative to the number of issued and
outstanding shares of Shelby County Common Stock, SCSB Common Stock, Shelby
Group Common Stock or First Tier Common Stock, then Blue River shall have
the absolute right in its discretion to terminate this Agreement without
regard to the materiality of any such inaccuracy; or
(iii) there has been a material breach of or a failure to comply in
all material respects with any covenant set forth in this Agreement by or
on the part of Shelby County or SCSB; provided, however, that the covenants
set forth in Sections 6.01, 6.02, 6.03(a)(i), (ii), (iii), (iv), (v), (vi),
(vii), (ix), (xi), (xv), (xvi), (xix), (xxi), (xxii), (xxiv), (xxv), (xxvi)
and (xvii), 6.05, 6.07 and 6.11 shall be fully complied with by Shelby
County and SCSB without regard to materiality, except for any materiality
qualification set forth in such Sections; or
(iv) Blue River shall reasonably determine that the Merger has become
inadvisable or impracticable by reason of commencement or threat of any
claim, litigation or proceeding against Blue River, Shelby County, SCSB,
Shelby Group, or First Tier or any director or officer of any of such
entities (A) relating to this Agreement or the Merger or (B) which is
likely to have a material adverse effect on the business, prospects,
assets, capitalization, financial condition or results of operations of
Shelby County or SCSB, whether individually or on a consolidated basis, or
Shelby Group or First Tier on a consolidated basis with Shelby County, or
of Blue River; or
(v) there has been a material adverse change in the business,
prospects, assets, capitalization, financial condition or results of
operations of Shelby County or SCSB, whether individually or on a
consolidated basis, or Shelby Group or First Tier on a consolidated basis
with Shelby County, at any time as compared to that in existence as of
September 30, 1997; or
(vi) Trident has not issued, by the date of the Proxy Statement, its
written opinion stating that the Conversion Price is fair to the
shareholders of Shelby County from a financial point of view.
(c) By Shelby County, if:
(i) there has been a misrepresentation or a breach of any warranty by
or on the part of Blue River in its representations and warranties set
forth in this Agreement which has had or would be expected to have, in the
reasonable discretion of Shelby County, a material adverse effect on the
business, assets, capitalization, financial condition or results of
operation of Blue River; or
(ii) there has been a breach of or failure to comply with any covenant
set forth in this Agreement by or on the part of Blue River; or
(iii) Blue River does not receive, by February 20, 1998, a letter of
intent or other similar document from Roney & Co. regarding its intent to
act as the principal underwriter in the IPO; or
(iv) Roney & Co. withdraws or terminates its letter of intent or other
similar document relating to the IPO (except in connection with the
execution of an underwriting agreement); provided, however, that before
Shelby County may exercise its right to terminate this Agreement pursuant
to this Section 9.01(c)(iv), Blue River shall have thirty (30) days from
the date of such withdrawal to obtain a letter of intent or similar
document from another investment banker with respect to the intent of such
other investment banker to act as the principal underwriter in the IPO.
9.02. Effect of Termination. Upon termination by written notice, this
Agreement shall be of no further force or effect, and there shall be no further
obligations or restrictions on future activities on the part of Blue River,
Shelby County, SCSB and their respective directors, officers, employees, agents
and shareholders, except as provided in compliance with the confidentiality
provisions of this Agreement set forth in Section 6.08 and Section 7.05 hereof,
for the payment of the Termination Fee as provided by Section 7.08 hereof and
for the payment of expenses set forth in Section 12.09 hereof; provided,
however, the damages of Shelby County and SCSB relating to this Agreement and
the Merger shall be limited solely to the Termination Fee; provided, further, if
such termination was the result of an intentional breach by Shelby
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County or SCSB of any representation, warranty, covenant or other provision in
this Agreement, or an intentional act or omission by Shelby County or SCSB which
resulted in any representation, warranty, covenant or other provision in this
Agreement to be breached, Shelby County and SCSB shall be liable to Blue River
for damages and all costs and expenses incurred in connection with the
preparation, negotiation and execution of this Agreement, including, but not
limited to, reasonable attorneys' fees and disbursements, reasonable fees and
disbursements of accountants and tax advisors, and reasonable fees and costs of
environmental consultants. In the event that this Agreement is terminated
pursuant to this Section 9, the parties hereto each agree that Roney & Co. and
any other investment banking firm engaged by Blue River shall have no liability
relating to the failure of Blue River to fulfill the conditions contemplated by
Section 8.01(d) hereof.
SECTION 10
EFFECTIVE TIME OF THE MERGER
Upon the terms and subject to the conditions specified in this Agreement,
the Merger shall become effective at the time specified in the Articles of
Merger of Shelby County with and into Blue River as filed with the Indiana
Secretary of State ("Effective Time"). The Effective Time shall occur not later
than the last business day of the month following (a) the fulfillment of all
conditions precedent to the Merger set forth in Section 8 hereof, and (b) the
expiration of all waiting periods in connection with the regulatory applications
filed for the approval of the Merger.
SECTION 11
CLOSING
11.01. Closing Date and Place. So long as all conditions precedent set
forth in Section 8 have been satisfied and fulfilled, the closing of the Merger
("Closing") shall take place on the Effective Time at the offices of Krieg
DeVault Alexander & Capehart in Indianapolis, Indiana.
11.02. Deliveries. (a) At the Closing, Blue River shall deliver to Shelby
County the following:
(i) an opinion of its counsel dated as of the Effective Time and
substantially in the form set forth in Exhibit A attached hereto;
(ii) the officers' certificate contemplated by Section 8.02(g) hereof;
(iii) copies of all approvals by government regulatory agencies
necessary to consummate the Merger;
(iv) copies of the resolutions of the Board of Directors of Blue River
and the shareholders of Blue River, if necessary, certified by the
President or Secretary of Blue River, relative to the approval of this
Agreement and the Merger; and
(v) such other documents as Shelby County or its legal counsel may
reasonably request.
(b) At the Closing, Shelby County shall deliver to Blue River the
following:
(i) an opinion of its counsel dated as of the Effective Time and
substantially in the form set forth in Exhibit B attached hereto;
(ii) the officers' certificate contemplated by Section 8.01(g) hereof;
(iii) a list of Shelby County's shareholders as of the Effective Time
certified by the President and Secretary of Shelby County;
(iv) copies of the resolutions adopted by the Board of Directors and
shareholders of Shelby County, certified by its Chairman or President and
Secretary, relative to the approval of this Agreement and the Merger;
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(v) copies of resolutions adopted by the Board of Directors and sole
shareholder of SCSB, certified by its Chairman or President and Secretary,
relative to the approval of this Agreement; and
(vi) such other documents as Blue River or its legal counsel may
reasonably request.
SECTION 12
MISCELLANEOUS
12.01. Effective Agreement. This Agreement shall be binding upon and inure
to the benefit of the respective parties hereto and their respective successors
and assigns; provided, however, that this Agreement may not be assigned by any
party hereto without the prior written consent of the other parties hereto. The
representations, warranties, covenants and agreements contained in this
Agreement are for the sole benefit of the parties hereto and their successors
and assigns, and they shall not be construed as conferring any rights on any
other persons.
12.02. Waiver; Amendment. (a) Blue River or Shelby County may by an
instrument in writing: (i) extend the time for the performance of or otherwise
amend any of the covenants, conditions or agreements of the other parties to
this Agreement (other than SCSB with respect to Shelby County); (ii) waive any
inaccuracies in the representations or warranties of the other parties contained
in this Agreement or in any document delivered pursuant hereto or thereto (other
than SCSB with respect to Shelby County); (iii) waive the performance by the
other parties (other than SCSB with respect to Shelby County) of any of the
covenants or agreements to be performed by it or them under this Agreement; or
(iv) waive the satisfaction or fulfillment of any condition, the nonsatisfaction
or nonfulfillment of which is a condition to the right of the party so waiving
to consummate the Merger. The waiver by any party hereto of a breach of or
noncompliance with any provision of this Agreement shall not operate or be
construed as a continuing waiver or a waiver of any other or subsequent breach
or noncompliance hereunder.
(b) This Agreement may be amended, modified or supplemented only by a
written agreement executed by the parties hereto and, if such amendment,
modification or supplement occurs after the approval of the Agreement by the
shareholders of Shelby County, only in a manner that will not materially and
adversely affect the rights of Shelby County's shareholders hereunder without
obtaining their approval thereof.
12.03. Notices. All notices, requests and other communications hereunder
shall be in writing (which shall include telecopier communication) and shall be
deemed to have been duly given if delivered by hand and receipted for, sent by
certified United States Mail, return receipt requested, first class postage
pre-paid, delivered by overnight express receipted delivery service or
telecopied if confirmed immediately thereafter by also mailing a copy of such
notice, request or other communication by certified United States Mail, return
receipt requested, with First Class postage prepaid as follows:
<TABLE>
<S> <C>
If to Blue River: with a copy to (which shall not constitute
notice):
Blue River Bancshares, Inc. Krieg DeVault Alexander & Capehart
ATTN: Robert C. Reed, President ATTN: Nicholas J. Chulos, Esq.
113 South Harrison Street One Indiana Square, Suite 2800
Shelbyville, Indiana 46176 Indianapolis, Indiana 46204-2017
Telephone: (317) 392-7700 Telephone: (317) 238-6224
Telecopier: (317) 398-7004 Telecopier: (317) 636-1507
If to Shelby County or SCSB: with a copy to (which shall not constitute
notice):
Shelby County Bancorp Bose McKinney & Evans
ATTN: James M. Robison, Chairman ATTN: David A. Butcher, Esq.
29 East Washington Street 2700 First Indiana Building
P. O. Box 438 135 South Pennsylvania Street
Shelbyville, Indiana 46176 Indianapolis, Indiana 46204
Telephone: (317) 398-9721 Telephone: (317) 684-5000
Telecopier: (317) 835-0306 Telecopier: (317) 684-5173
</TABLE>
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or such substituted address or person as any of them given to the other in
writing. All such notices, requests or other communications shall be effective:
(a) if delivered by hand, when delivered; (b) if mailed in the manner provided
herein, three (3) business days after deposit with the United States Postal
Service; (c) if delivered by overnight express delivery service, on the next
business day after deposit with such service; and (d) if by telecopier, on the
next business day if also confirmed by mail in the manner provided herein.
12.04. Headings. The headings in this Agreement have been inserted solely
for ease of reference and should not be considered in the interpretation or
construction of this Agreement.
12.05. Severability. In case any one or more of the provisions contained
herein shall, for any reason, be held to be invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Agreement, but this Agreement shall be construed as
if such invalid, illegal or unenforceable provision or provisions had never been
contained herein.
12.06. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.
12.07. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Indiana and applicable federal laws.
12.08. Entire Agreement. This Agreement supersedes all other prior or
contemporaneous understandings, commitments, representations, negotiations or
agreements, whether oral or written, between or among the parties hereto
relating to the Merger and the matters contemplated herein (including, but not
limited to, the Prior Agreement and the Memorandum dated December 5, 1997 from
Blue River to the Board of Directors of Shelby County and SCSB) and constitutes
the entire agreement among the parties hereto relating to the subject matter
hereof, except with respect to the Confidentiality Agreement dated December 9,
1997 by and between Blue River and Shelby County, the Lock-up Agreement, the
Termination Agreement and the Disclosure Schedule delivered with the Prior
Agreement, each of which shall remain in full force and effect. The parties
hereto agree that each party and its counsel reviewed and revised this Agreement
and that the normal rule of construction to the effect that any ambiguities are
to be resolved against the drafting party shall not be employed in the
interpretation of this Agreement or any amendments or exhibits hereto.
12.09. Expenses. The parties hereto shall each pay their respective
expenses incidental to the Merger.
12.10. Certain References. Whenever in this Agreement a singular word is
used, it also shall include the plural wherever required by the context and
vice-versa. Except expressly stated otherwise, all references in this Agreement
to periods of days shall be construed to refer to calendar, not business, days.
The term "business day" shall mean any day except Saturday and Sunday when SCSB,
is open for the transaction of business.
12.11. Disclosure Schedule. The Disclosure Schedule attached hereto is
intended to be and hereby is specifically made a part of this Agreement, and the
information contained in the Disclosure Schedule shall be deemed to be
representations and warranties of Shelby County and SCSB.
* * *
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IN WITNESS WHEREOF, Blue River, Shelby County and SCSB have entered into,
executed and delivered this Agreement as of the day and year first above
written.
BLUE RIVER BANCSHARES, INC.
By: /s/ ROBERT C. REED
------------------------------------
Robert C. Reed, President
ATTEST:
By: /s/ D. WARREN ROBISON
----------------------------------
D. Warren Robison, Secretary
SHELBY COUNTY BANCORP
By: /s/ JAMES M. ROBISON
------------------------------------
James M. Robison, Chairman
ATTEST:
By: /s/ DAVID A. CARMONY
----------------------------------
David A. Carmony, Secretary
SHELBY COUNTY SAVINGS BANK, FSB
By: /s/ JAMES M. ROBISON
------------------------------------
James M. Robison, Chairman
ATTEST:
By: /s/ BETTY J. BAKER
----------------------------------
Betty J. Baker, Secretary
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Each of the undersigned directors of Shelby County hereby (a) agrees in his
capacity as a director to recommend to Shelby County's shareholders the approval
of this Agreement and the Merger in accordance with Section 6.01 hereof, and (b)
agrees in his individual capacity to vote his shares of Shelby County Common
Stock that are registered in his personal name (and agrees to use his reasonable
efforts to cause all additional shares of Shelby County Common Stock owned
jointly with any other person or by his spouse or over which he has voting
influence or control to be voted) in favor of this Agreement and the Merger. In
addition, each of the undersigned directors hereby agrees not to make any
transfers of shares of Shelby County Common Stock with the purpose of avoiding
his agreements set forth in the preceding sentence.
Dated this 12th day of March, 1998.
/s/ JAMES M. ROBISON
--------------------------------------
James M. Robison
/s/ RODNEY L. MEYERHOLTZ
--------------------------------------
Rodney L. Meyerholtz
/s/ DAVID A. CARMONY
--------------------------------------
David A. Carmony
/s/ LEONARD J. FISCHER
--------------------------------------
Leonard J. Fischer
/s/ JACK D. DISSER
--------------------------------------
Jack D. Disser
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APPENDIX B
TRIDENT FINANCIAL CORPORATION
Investment Bankers and Financial Advisors
4601 SIX FORKS ROAD, SUITE 400
RALEIGH, NORTH CAROLINA 27609
TELEPHONE (909) 781-8900
FACSIMILE (909) 787-1670
June 11, 1998
Board of Directors
Shelby County Bancorp
29 East Washington Street
Shelbyville, Indiana 46176
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the shareholders of common stock (the "Shelby County Common Stock")
of Shelby County Bancorp ("Shelby County") of the consideration to be received
by such shareholders in a merger (the "Merger") of Shelby County with Blue River
Bancshares, Inc. ("Blue River"), pursuant to the Amended and Restated Agreement
of Affiliation and Merger dated March 12, 1998 (the "Agreement"), as amended.
Unless otherwise noted, all terms used herein will have the same meaning as
defined in the Agreement.
As more specifically set forth in the Agreement, and subject to a number of
conditions and procedures described in the Agreement, in the Merger each of the
issued and outstanding shares of Shelby County Common Stock shall be exchanged
for $56.00 of cash. All unexercised options for the right to purchase shares of
Shelby County Common Stock will be canceled.
Trident Financial Corporation ("Trident") is a financial consulting and
investment banking firm experienced in the valuation of business enterprises
with considerable experience in the valuation of thrift institutions. In the
past, Trident and its affiliates have provided financial advisory services for
Shelby County and have received fees for the rendering of these services. In
addition, in the ordinary course of our business we may actively trade the
securities of Shelby County for our own account and for the accounts of our
customers and, accordingly, may at any one time hold a long or short position in
such securities. Trident is not affiliated with Shelby County or Blue River.
In connection with rendering our opinion, we have reviewed and analyzed,
among other things, the following: (i) the agreement; (ii) certain publicly
available information concerning Shelby County, including the audited financial
statements for each year in the three year period ended September 30, 1997 and
unaudited financial statements for the six months ended March 31, 1997 and 1998;
(iii) certain other internal information, primarily financial in nature,
concerning the business and operations of Shelby County (including previous
merger inquiries) furnished to us by Shelby County for purposes of our analysis;
(iv) information with respect to the trading market for Shelby County Common
Stock; (v) certain publicly available information with respect to other
companies that we believe to be comparable to Shelby County and the trading
markets for such other companies' securities; and (vi) certain publicly
available information concerning the nature and terms of other transactions that
we believe relevant to our inquiry. We met with certain officers and employees
of Shelby County to discuss the foregoing. We have also taken into account our
assessment of general economic, market, financial and regulatory conditions and
trends, as well as our knowledge of the thrift industry, experience in
connection with similar transactions and general knowledge of securities
valuation.
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TRIDENT FINANCIAL CORPORATION
Board of Directors
June 11, 1998
Page 2
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us or publicly available. We have not attempted
independently to verify any such information. We have not conducted a physical
inspection of the properties or facilities of Shelby County, nor have we made or
obtained any independent evaluations or appraisals of any such properties or
facilities. We did not specifically evaluate Shelby County's loan portfolio or
the adequacy of reserves for possible loan losses.
Based upon and subject to the foregoing, we are of the opinion that the
consideration to be received by the holders of Shelby County Common Stock in the
Merger is fair, as of the date hereof, from a financial point of view, to such
holders. Our opinion is contingent upon Blue River raising the funds necessary
to complete the transaction, and obtaining regulatory approval in a timely
manner. The standard employed by us in reaching our judgment as to fairness of
such consideration from a financial point of view was whether our estimation of
the economic value of such consideration is within the range of estimated
economic values within which companies having the characteristics of Shelby
County and Blue River might negotiate a merger transaction at arm's length and
not whether such consideration is at or approaching the higher end of such
range.
Our opinion necessarily is based upon conditions as they exist and can be
evaluated on the date hereof and does not address Shelby County's underlying
business decision to effect the Merger. Finally, our opinion does not constitute
a recommendation to any stockholder of Shelby County as to how such stockholder
should vote at the stockholders' meeting held in connection with the Merger.
This opinion is being delivered to the Board of Directors of Shelby County
and may not be summarized, excerpted from, reproduced, disseminated or delivered
to any third party without the express written consent of Trident. Our opinion
is as of the date set forth above, and events or circumstances occurring after
this date may adversely impact the validity of the bases of our opinion and/or
such opinion.
Very truly yours,
TRIDENT FINANCIAL CORPORATION
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APPENDIX C
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT ("Agreement"), is made and entered into as of
February 5, 1998, by and between BLUE RIVER BANCSHARES, INC. ("Blue River"), an
Indiana corporation, and SHELBY COUNTY BANCORP ("Shelby County"), an Indiana
corporation,
WITNESSETH:
WHEREAS, Blue River, Shelby County and Shelby County Savings Bank, FSB
("Bank"), a wholly-owned subsidiary of Shelby County, have entered into an
Agreement of Affiliation and Merger ("Merger Agreement") dated of even date
herewith contemporaneously with the execution of this Agreement. The Merger
Agreement provides for, among other items, the conversion of each issued and
outstanding share of common stock of Shelby County at the Effective Time (as
defined in the Merger Agreement) into the right to receive a cash amount equal
to $58.00 from Blue River; and
WHEREAS, Blue River has paid to Shelby County the sum of One Hundred
Dollars ($100) in consideration for the grant of the Option (as hereinafter
defined) by Shelby County to Blue River, which has been granted to further
induce Blue River to enter into the Merger Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the cash
payment referenced therein, the receipt of which is hereby acknowledged, the
mutual covenants and obligations set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
Section 1. Grant of Option. Shelby County hereby grants to Blue River an
irrevocable option (the "Option") to purchase up to such number of shares of
common stock of Shelby County, which will, immediately following the exercise of
the Option in its entirety, aggregate twenty-four and 80/100 percent (24.80%) of
the issued and outstanding shares of common stock of Shelby County ("Option
Shares") (such issued and outstanding shares shall for purposes of this
Agreement be deemed to include all shares that are issuable pursuant to the
exercise of stock options granted to directors and employees of Shelby County or
the Bank) at a price per Option Share equal to $49.16 ("Purchase Price");
provided, however, that this Agreement and the Option shall automatically expire
and be of no further force or effect (a) on and after the date the Merger
Agreement has been terminated pursuant to Section 9 of the Merger Agreement and
(b) only so long as neither Shelby County nor SCSB has breached the covenants
set forth in Section 6.05 of the Merger Agreement. In the event that Shelby
County or SCSB breaches the covenants set forth in Section 6.05 of the Merger
Agreement, then this Agreement and the Option shall automatically expire and be
of no further force or effect on and after the date which is one (1) year
following the date of termination of the Merger Agreement pursuant to Section 9
thereof.
Section 2. Exercise of Option. Subject to Sections 1, 3 and 9 hereof, the
Option may be exercised by Blue River, in whole or in part, at any time, and
from time to time, on or before the later of September 30, 1998 or the date
which is one (1) year following the termination of the Merger Agreement. If the
Option has not expired pursuant to Section 1 hereof or has not been exercised by
the later of September 30, 1998 or the date which is one (1) year following the
termination of the Merger Agreement, then this Agreement and the Option shall
automatically terminate on the succeeding day and thereafter be of no further
force or effect. In the event Blue River wishes to exercise the Option, Blue
River shall deliver a written notice(s) to Shelby County specifying the total
number of Option Shares that it will purchase and a place and date not later
than sixty (60) days from the date of delivery of such notice for the closing
("Closing") of such purchase; provided, however, that if the approval of any
governmental authority required for purchasing the Option Shares shall not have
been obtained prior to the Closing, the date of the Closing shall be postponed
to a date five (5) business days following receipt of all such required
governmental approvals; provided, further, that Blue River, at any time prior to
the Closing, may rescind such notice of intent to purchase the Option Shares and
shall not thereafter be obligated to purchase any or all of the Option Shares.
The Option fee of One
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Hundred Dollars ($100) paid by Blue River as of the date hereof shall be applied
against the purchase price of the Option Shares.
Section 3. Conditions to Exercise of Option. Blue River may exercise the
Option only if any of the following events occurs or has occurred without the
prior written consent of Blue River:
(a) The acquisition, following the date of this Agreement, by any
entity, person or group, other than Blue River, of beneficial ownership of
twenty percent (20%) or more (in the aggregate) of the shares of Shelby
County Common Stock (as defined in the Merger Agreement) (for purposes of
this Section 3, the terms "group" and "beneficial ownership" shall have the
same meanings ascribed to them in Section 13(d) of the Securities Exchange
Act of 1934, as amended, and the regulations promulgated thereunder), but
only if (i) such entity, person or group has publicly announced its
opposition to the Merger Agreement or the Merger (as defined in the Merger
Agreement) or its intention not to vote the common stock beneficially owned
by the entity, person or group in favor of the Merger Agreement or the
Merger and has solicited or indicated its intention to solicit proxies or
votes against the Merger Agreement or the Merger; (ii) such entity, person
or group has proposed, indicated an intention to propose, or entered into
an agreement to effect a merger, consolidation, share exchange or other
combination with Shelby County or the Bank; or (iii) such entity, person or
group has voted against the Merger Agreement or the Merger at the meeting
of shareholders of Shelby County at which the Merger Agreement and the
Merger are voted upon; or
(b) The making, following the date of this Agreement, by any entity,
person or group, other than Blue River, of a tender or exchange offer for,
or any other offer to purchase, an amount equivalent to twenty percent
(20%) or more (in the aggregate) of the shares of Shelby County Common
Stock; or
(c) The acceptance by Shelby County or the Bank of any proposal
(however conditional or future) of, or the execution by Shelby County or
the Bank of any letter of intent, agreement in principle or other agreement
(whether binding or non-binding) with, any entity, person or group, other
than Blue River, to (i) acquire Shelby County or the Bank by merger,
consolidation, share exchange, combination, purchase of all or
substantially all of Shelby County's or the Bank's assets or capital stock
or any other similar transaction, or (ii) make a tender or exchange offer
for any shares of Shelby County Common Stock.
Section 4. Payment and Delivery of Certificate(s). Subject to any necessary
regulatory approval, at any Closing hereunder (a) Blue River shall pay to Shelby
County the aggregate purchase price for the Option Shares so purchased by
delivery of a cashier's or certified check or other immediately available funds
payable to the order of Shelby County, less the Option fee of One Hundred
Dollars ($100), and (b) Shelby County shall promptly thereafter issue the Option
Shares in compliance with all applicable laws and regulations and deliver to
Blue River a certificate or certificates representing the Option Shares as
purchased, free and clear of all liens, claims, pledges, security interests,
charges and rights of any third parties.
Section 5. Representations, Warranties and Covenants of Shelby
County. Shelby County hereby represents, warrants and covenants to Blue River as
follows:
(a) This Agreement and the consummation by Shelby County of the
transactions contemplated hereby have been duly authorized and approved by
all necessary corporate action on the part of Shelby County, have been duly
executed and delivered by an authorized officer of Shelby County and
constitute a valid and binding obligation of Shelby County. Shelby County
is an Indiana corporation duly organized and validly existing under the
laws of the State of Indiana and has all requisite corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby.
(b) As of the date of this Agreement, the authorized capital stock of
Shelby County consists of 5,000,000 shares of common stock, no par value
per share, 175,950 shares of which are issued and outstanding, which number
of issued and outstanding shares is subject to increase to a total of
189,750 shares pursuant to the exercise of certain stock options granted to
employees and directors of Shelby County. Shelby County has no other
capital stock authorized and is under no obligation to and shall not
authorize or issue any other shares of capital stock or any additional
options or rights to acquire shares of
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common stock of Shelby County. Upon exercise in full of the Option, the
Option Shares shall at all times represent not less than 24.80% of the
outstanding shares of capital stock of Shelby County.
(c) Shelby County has taken all necessary corporate and other action
to authorize and reserve and to permit it to issue the Option Shares
pursuant hereto. At all times from the date hereof until such time as the
obligation to deliver the Option Shares hereunder terminates, Shelby County
will have reserved for issuance upon exercise of the Option by Blue River
sufficient shares of common stock of Shelby County, all of which, upon
issuance pursuant hereto, shall be duly authorized, validly issued, fully
paid and nonassessable, shall be free and clear of all liens, claims,
pledges, security interests, charges and rights of any third parties of any
nature whatsoever and shall not have been issued in violation of any
preemptive right of any of the shareholders of Shelby County.
(d) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will violate or result
in any violation of or be in conflict with, result in acceleration or
termination of or constitute a default under any term or provision of the
Articles of Incorporation or By-Laws of Shelby County or of any agreement,
note, bond, indenture, instrument, obligation, judgment, decree, order,
law, rule or regulation binding upon or applicable to Shelby County or any
of its subsidiaries or any of their respective properties or assets. If
Blue River exercises the Option, whether in whole or in part, Shelby County
shall immediately thereafter redeem the rights granted pursuant to the
Rights Agreement (as defined in the Merger Agreement) at an aggregate cost
not to exceed Twenty Thousand Dollars ($20,000).
(e) Upon any exercise of the Option, whether in whole or in part, the
Option Shares (i) shall be entitled to vote on all matters to come before
the shareholders of Shelby County at any meeting thereof, (ii) shall be
entitled to the same preferences, limitations and relative voting and other
rights (including dividend and distribution rights) as possessed by all
other holders of Shelby County Common Stock, and (iii) shall not be subject
to any limitation or restriction not imposed on all other shareholders of
Shelby County generally.
(f) The representations and warranties of Shelby County contained
herein are true, accurate and complete on and as of the date hereof, shall
survive the execution of this Agreement and shall continue to be true,
accurate and complete during the period that the Option may be exercised by
Blue River. Shelby County shall comply with the covenants applicable to it
contained herein from the date of this Agreement through and until such
time as the Option terminates.
Section 6. Representations and Warranties of Blue River. Blue River hereby
represents and warrants to Shelby County as follows:
(a) This Agreement and the consummation by Blue River of the
transactions contemplated hereby have been duly authorized and approved by
all necessary corporate action on the part of Blue River, have been duly
executed and delivered by an authorized officer of Blue River and
constitute a valid and binding obligation of Blue River. Blue River is a
corporation duly organized and validly existing under the laws of the State
of Indiana and has all requisite corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby.
(b) Blue River is purchasing the Option, and any shares of common
stock of Shelby County issued upon exercise of the Option, for its own
account and not with a view to the public distribution thereof and will not
sell, assign or transfer any such shares of common stock issued to Blue
River upon exercise of the Option except in compliance with all applicable
laws and regulations and a legend to such effect shall be noted on the
certificate or certificates representing the Option Shares issued upon
exercise of the Option.
(c) The representations and warranties of Blue River contained herein
are true, accurate and complete on and as of the date hereof, shall survive
the execution of this Agreement and shall continue to be true, accurate and
complete during the period that the Option may be exercised by Blue River.
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Section 7. Certain Rights.
(a) In the event that Blue River exercises the Option and desires to
sell any of the Option Shares, and so requests in writing, Shelby County
agrees to use its best efforts to assist Blue River in complying with all
applicable federal laws relating to such sale and any applicable state
securities laws (including, without limitation, providing Blue River with
appropriate information relating to Shelby County to be included in any
registration statement filed by Blue River), not later than thirty (30)
days after Blue River requests such assistance, with respect to that number
of the Option Shares beneficially owned by Blue River for which Blue River
requests such assistance, unless, in the opinion of counsel to Shelby
County addressed to Blue River, which opinion shall be in form and
substance reasonably satisfactory to Blue River and its counsel, a
registration statement is not required for the proposed sale or
distribution of such Option Shares. All registration statements and all
actions relating to compliance with federal and state law pursuant to this
Section 7(a) shall be completed at Blue River's expense except for any fees
and disbursements of counsel for Shelby County, which shall be paid by
Shelby County.
(b) In addition to the foregoing rights, if at any time Shelby County
proposes to offer for sale for cash in an offering to the public any of its
equity securities, Shelby County at such time will provide written notice
to Blue River of its intention to do so. Upon written request of Blue
River, given within fifteen (5) days after the providing of any such notice
to Blue River by Shelby County (which request shall state the intended
method of disposition of such shares), Shelby County shall cause that
number of the Option Shares as to which Blue River identifies in such
request to be included in Shelby County's registration statement in
compliance with all applicable federal and state securities laws. Such
Option Shares so identified by Blue River shall be included in Shelby
County's registration statement proposed to be filed by Shelby County,
unless, in the opinion of counsel to Shelby County addressed to Blue River,
which opinion shall be in form and substance reasonably satisfactory to
Blue River and its counsel, inclusion of such shares in such registration
statement is not required for any proposed sale or distribution of such
Option Shares by Blue River. All registration statements and all actions
relating to compliance with federal and state law pursuant to this Section
7(b) shall be completed at Shelby County's expense except for any fees and
disbursements of counsel for Blue River, which shall be paid by Blue River.
Section 8. Adjustment Upon Changes in Capitalization. In the event of any
changes in the capital stock of Shelby County by reason of any stock dividend,
stock split, merger, recapitalization, combination, exchange of shares or
otherwise, the number and kind of Option Shares subject to this Agreement and
the Option and the purchase price per Option Share hereunder shall be
appropriately adjusted so that the number of Option Shares subject to the Option
following the occurrence of any of the foregoing events shall be equal to the
same percentage of voting capital stock referenced in Section 5(b) hereof.
Section 9. Right of Repurchase.
(a) In the event that Blue River has purchased all of the Option
Shares pursuant to this Agreement, and Blue River so requests in writing,
Shelby County shall pay to Blue River an amount in cash equal to the
highest price paid or to be paid by any entity, person or group referenced
in Section 3 hereof for any share of Shelby County Common Stock (or the
aggregate consideration paid for the assets of Shelby County divided by the
number of shares of Shelby County Common Stock then outstanding), as the
case may be, multiplied by the total number of Option Shares, plus interest
at the rate of 8% per annum from the date of the purchase of the Option
Shares through the repurchase contemplated hereby (the value of any such
price or consideration other than cash to be determined, in the case of
consideration with a readily-ascertainable market value, on the basis of
such market value and, in the case of any other consideration, by Blue
River in good faith).
(b) In the event that (i) Blue River has purchased any of the Option
Shares pursuant to this Agreement and (ii) the Merger Agreement has been
duly executed and delivered but subsequently has been terminated in
accordance with the terms thereof, then Shelby County shall have the right
to purchase, and Blue River shall have the right to require Shelby County
to purchase, for cash, all, but not less than all, of the Option Shares
theretofore purchased by Blue River pursuant to this Agreement. If Shelby
County exercises its right to purchase, or if Blue River exercises its
right to require Shelby County
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to purchase, the Option Shares so held such party shall give written notice
of its intention to so exercise its right to the other party within fifteen
(5) days after the event giving rise to such right. The purchase price for
each Option Share held by Blue River shall be a cash amount equal to the
highest price paid or to be paid by any entity, person or group referenced
in Section 3 hereof for any share of Shelby County Common Stock (or the
aggregate consideration paid for the assets of Shelby County divided by the
number of shares of Shelby County Common Stock then outstanding), as the
case may be, multiplied by the total number of Option Shares, plus interest
at the rate of 8% per annum from the date of the purchase of the Option
Shares through the repurchase contemplated hereby (the value of any such
price or consideration other than cash to be determined, in the case of
consideration with a readily-ascertainable market value, on the basis of
such market value and, in the case of any other consideration, by Blue
River in good faith).
(c) If any of the events specified in Section 3 hereof shall occur
during the period in which Blue River is entitled to exercise the Option,
Shelby County shall, upon Blue River's written request, pay to Blue River
an amount in cash equal to the difference between the highest price paid or
to be paid by any entity, person or group for any share of Shelby County
Common Stock (or the aggregate consideration paid for the assets of Shelby
County or the Bank divided by the number of shares of Shelby County Common
Stock then outstanding) and the Purchase Price, multiplied by the total
number of Option Shares (the value of any such price or consideration other
than cash to be determined, in the case of consideration with a
readily-attainable market value, on the basis of such market value and, in
the case of any other consideration, by determination by Blue River in good
faith). If Blue River exercises its rights under this Section 9(c), then
the rights granted to Blue River under Sections 9(a) and 9(b) hereof shall
terminate.
(d) The closing of any of the transactions contemplated by this
Section 9 shall be made within ten (10) business days of any request made
pursuant to this Section 9. Payment for the Option Shares shall be made by
Shelby County to Blue River at the closing by delivery of cash or
immediately available funds. Any closing pursuant to this Section 9 may be
delayed to a date no later than ten (10) business days after the receipt of
any applicable regulatory clearance, and Shelby County shall promptly file
any notice or application for such clearance.
Section 10. Injunction; Specific Performance. Each of the parties hereto
hereby acknowledges that the other party will suffer irreparable damage and
injury and will not have an adequate remedy at law in the event of any breach of
any of its obligations under this Agreement. Accordingly, in the event of such a
breach or of a threatened or attempted breach, in addition to all other remedies
to which each party hereto is entitled to at law, each party shall be entitled
to a temporary and permanent injunction (without the necessity of showing any
actual damage) or a decree of specific performance of the provisions hereof, and
no bond or other security shall be required in that connection. The remedies
described in this Section 10 shall not be exhaustive and shall be in addition to
all other remedies that either party may have at law, in equity or otherwise.
Section 11. Miscellaneous.
(a) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns; provided,
however, that neither party may assign this Agreement without the prior
written consent of the other party.
(b) This Agreement may be modified, amended or supplemented only by a
written agreement executed by the parties hereto.
(c) All notices, requests and other communications hereunder shall be
in writing and shall be delivered by hand, by certified United States mail
(return receipt requested, first-class postage pre-paid) or by overnight
express receipted delivery service (i) to Blue River, at 113 South Harrison
Street, Shelbyville, Indiana 46176, attention: Robert C. Reed, President,
and (ii) to Shelby County, at 29 East Washington, Shelbyville, Indiana
46176, attention: James M. Robison, Chairman.
(d) In case any one or more of the provisions contained herein shall,
for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not
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affect any other provision of this Agreement, but this Agreement shall be
construed as if such invalid, illegal or unenforceable provision or
provisions had never been contained herein.
(e) This Agreement may be executed in any number of counterparts, each
of which shall be an original, but all of which together shall constitute
one and the same agreement.
(f) The headings in this Agreement have been inserted solely for
convenience and ease of reference and shall not be considered in the
interpretation or construction of this Agreement.
(g) This Agreement shall be governed by and construed in accordance
with the laws of the State of Indiana without giving effect to the choice
of law principles thereof.
(h) This Agreement supersedes all other prior understandings,
commitments, representations, negotiations or agreements, whether oral or
written, between the parties hereto relating to the matters contemplated by
this Agreement and constitutes the entire agreement between the parties
hereto relating to the subject matter hereof.
(i) The rule of construction to the effect at any ambiguities are to
be resolved against the drafting party shall not be employed in the
interpretation of this Agreement.
(j) No waiver by any party hereto of any right or provision of this
Agreement shall be effective unless the same shall be in writing and signed
by the waiving party. The failure in one or more instances of any party to
enforce any term or provision of this Agreement or to exercise any right or
remedy shall not prohibit any subsequent enforcement or exercise thereof or
constitute a waiver of any such term, provision, right or remedy. The
waiver by any party hereto of a breach of or noncompliance with any term,
covenant, restriction or provision of this Agreement shall not operate or
be construed as a continuing waiver or as a waiver of any other or
subsequent breach or noncompliance hereunder.
* * *
IN WITNESS WHEREOF, the undersigned have executed, entered into and
delivered this Agreement as of the day and year first above written.
BLUE RIVER BANCSHARES, INC.
By: /s/ ROBERT C. REED
------------------------------------
Robert C. Reed, President
ATTEST:
By: /s/ D. WARREN ROBISON
----------------------------------
D. Warren Robison, Secretary
SHELBY COUNTY BANCORP
By: /s/ JAMES M. ROBISON
------------------------------------
James M. Robison, Chairman
ATTEST:
By: /s/ DAVID A. CARMONY
----------------------------------
David A. Carmony, Secretary
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APPENDIX D
WEST'S ANNOTATED INDIANA CODE
TITLE 23. BUSINESS AND OTHER ASSOCIATIONS
ARTICLE 1. INDIANA BUSINESS CORPORATION LAW
CHAPTER 44. DISSENTERS' RIGHTS
23-1-44-1 "CORPORATION" DEFINED
Sec. 1. As used in this chapter, "corporation" means the issuer of the
shares held by a dissenter before the corporate action, or the surviving or
acquiring corporation by merger or share exchange of that issuer.
23-1-44-2 "DISSENTER" DEFINED
Sec. 2. As used in this chapter, "dissenter" means a shareholder who is
entitled to dissent from corporate action under section 8 of this chapter and
who exercises that right when and in the manner required by sections 10 through
18 of this chapter.
23-1-44-3 "FAIR VALUE" DEFINED
Sec. 3. As used in this chapter, "fair value", with respect to a
dissenter's shares, means the value of the shares immediately before the
effectuation of the corporate action to which the dissenter objects, excluding
any appreciation or depreciation in anticipation of the corporate action unless
exclusion would be inequitable.
23-1-44-4 "INTEREST" DEFINED
Sec. 4. As used in this chapter, "interest" means interest from the
effective date of the corporate action until the date of payment, at the average
rate currently paid by the corporation on its principal bank loans or, if none,
at a rate that is fair and equitable under all the circumstances.
23-1-44-5 "RECORD SHAREHOLDER" DEFINED
Sec. 5. As used in this chapter, "record shareholder" means the person in
whose name shares are registered in the records of a corporation or the
beneficial owner of shares to the extent that treatment as a record shareholder
is provided under a recognition procedure or a disclosure procedure established
under IC 23-1-30-4.
23-1-44-6 "BENEFICIAL SHAREHOLDER" DEFINED
Sec. 6. As used in this chapter, "beneficial shareholder" means the person
who is a beneficial owner of shares held by a nominee as the record shareholder.
23-1-44-7 "SHAREHOLDER" DEFINED
Sec. 7. As used in this chapter, "shareholder" means the record shareholder
or the beneficial shareholder.
23-1-44-8 RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
Sec. 8. (a) A shareholder is entitled to dissent from, and obtain payment
of the fair value of the shareholder's shares in the event of, any of the
following corporate actions:
(1) Consummation of a plan of merger to which the corporation is a
party if:
(A) shareholder approval is required for the merger by IC 23-1-40-3
or the articles of incorporation; and
(B) the shareholder is entitled to vote on the merger.
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(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan.
(3) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all
or substantially all of the net proceeds of the sale will be distributed to
the shareholders within one (1) year after the date of sale.
(4) The approval of a control share acquisition under IC 23-1-42.
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(b) This section does not apply to the holders of shares of any class or
series if, on the date fixed to determine the shareholders entitled to receive
notice of and vote at the meeting of shareholders at which the merger, plan of
share exchange, or sale or exchange of property is to be acted on, the shares of
that class or series were:
(1) registered on a United States securities exchange registered under
the Exchange Act (as defined in IC 23-1-43-9); or
(2) traded on the National Association of Securities Dealers, Inc.
Automated Quotations System Over-the-Counter Markets -- National Market
Issues or a similar market.
(c) A shareholder:
(1) who is entitled to dissent and obtain payment for the
shareholder's shares under this chapter; or
(2) who would be so entitled to dissent and obtain payment but for the
provisions of subsection (b); may not challenge the corporate action
creating (or that, but for the provisions of subsection (b), would have
created) the shareholder's entitlement.
23-1-44-9 DISSENTERS' RIGHTS OF BENEFICIAL SHAREHOLDER
Sec. 9. (a) A record shareholder may assert dissenters' rights as to fewer
than all the shares registered in the shareholder's name only if the shareholder
dissents with respect to all shares beneficially owned by any one (1) person and
notifies the corporation in writing of the name and address of each person on
whose behalf the shareholder asserts dissenters' rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to which the
shareholder dissents and the shareholder's other shares were registered in the
names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
held on the shareholder's behalf only if:
(1) the beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(2) the beneficial shareholder does so with respect to all the
beneficial shareholder's shares or those shares over which the beneficial
shareholder has power to direct the vote.
23-1-44-10 PROPOSED ACTION CREATING DISSENTERS' RIGHTS; NOTICE
Sec. 10.(a) If proposed corporate action creating dissenters' rights under
section 8 of this chapter is submitted to a vote at a shareholders' meeting, the
meeting notice must state that shareholders are or may be entitled to assert
dissenters' rights under this chapter.
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(b) If corporate action creating dissenters' rights under section 8 of this
chapter is taken without a vote of shareholders, the corporation shall notify in
writing all shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in section 12 of this
chapter.
23-1-44-11 PROPOSED ACTION CREATING DISSENTERS' RIGHTS; ASSERTION OF DISSENTERS'
RIGHTS
Sec. 11.(a) If proposed corporate action creating dissenters' rights under
section 8 of this chapter is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights:
(1) must deliver to the corporation before the vote is taken written
notice of the shareholder's intent to demand payment for the shareholder's
shares if the proposed action is effectuated; and
(2) must not vote the shareholder's shares in favor of the proposed
action.
(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for the shareholder's shares under this chapter.
23-1-44-12 DISSENTERS' NOTICE; CONTENTS
Sec. 12.(a) If proposed corporate action creating dissenters' rights under
section 8 of this chapter is authorized at a shareholders' meeting, the
corporation shall deliver a written dissenters' notice to all shareholders who
satisfied the requirements of section 11 of this chapter.
(b) The dissenters' notice must be sent no later than ten (10) days after
approval by the shareholders, or if corporate action is taken without approval
by the shareholders, then ten (10) days after the corporate action was taken.
The dissenters' notice must:
(1) state where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not the person acquired beneficial
ownership of the shares before that date;
(4) set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty (30) nor more than sixty
(60) days after the date the subsection (a) notice is delivered; and
(5) be accompanied by a copy of this chapter.
23-1-44-13 DEMAND FOR PAYMENT AND DEPOSIT OF SHARES BY SHAREHOLDER
Sec. 13. (a) A shareholder sent a dissenters' notice described in IC
23-1-42-11 or in section 12 of this chapter must demand payment, certify whether
the shareholder acquired beneficial ownership of the shares before the date
required to be set forth in the dissenter's notice under section 12(b)(3) of
this chapter, and deposit the shareholder's certificates in accordance with the
terms of the notice.
(b) The shareholder who demands payment and deposits the shareholder's
shares under subsection (a) retains all other rights of a shareholder until
these rights are canceled or modified by the taking of the proposed corporate
action.
(c) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter and is considered, for purposes of this article, to have voted the
shareholder's shares in favor of the proposed corporate action.
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23-1-44-14 UNCERTIFICATED SHARES; RESTRICTION ON TRANSFER; DISSENTERS' RIGHTS
Sec. 14. (a) The corporation may restrict the transfer of uncertificated
shares from the date the demand for their payment is received until the proposed
corporate action is taken or the restrictions released under section 16 of this
chapter.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
23-1-44-15 PAYMENT TO DISSENTER
Sec. 15. (a) Except as provided in section 17 of this chapter, as soon as
the proposed corporate action is taken, or, if the transaction did not need
shareholder approval and has been completed, upon receipt of a payment demand,
the corporation shall pay each dissenter who complied with section 13 of this
chapter the amount the corporation estimates to be the fair value of the
dissenter's shares.
(b) The payment must be accompanied by:
(1) the corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of payment, an
income statement for that year, a statement of changes in shareholders'
equity for that year, and the latest available interim financial
statements, if any;
(2) a statement of the corporation's estimate of the fair value of the
shares; and
(3) a statement of the dissenter's right to demand payment under
section 18 of this chapter.
23-1-44-16 FAILURE TO TAKE ACTION; RETURN OF CERTIFICATES; NEW ACTION BY
CORPORATION
Sec. 16. (a) If the corporation does not take the proposed action within
sixty (60) days after the date set for demanding payment and depositing share
certificates, the corporation shall return the deposited certificates and
release the transfer restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under section 12 of this chapter and repeat the payment
demand procedure.
23-1-44-17 WITHHOLDING PAYMENT BY CORPORATION; CORPORATION'S ESTIMATE OF FAIR
VALUE; AFTER-ACQUIRED SHARES
Sec. 17. (a) A corporation may elect to withhold payment required by
section 15 of this chapter from a dissenter unless the dissenter was the
beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement to news media or to shareholders of
the terms of the proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after taking the proposed corporate action, it shall estimate
the fair value of the shares and shall pay this amount to each dissenter who
agrees to accept it in full satisfaction of the dissenter's demand. The
corporation shall send with its offer a statement of its estimate of the fair
value of the shares and a statement of the dissenter's right to demand payment
under section 18 of this chapter.
23-1-44-18 DISSENTERS' ESTIMATE OF FAIR VALUE; DEMAND FOR PAYMENT; WAIVER
Sec. 18. (a) A dissenter may notify the corporation in writing of the
dissenter's own estimate of the fair value of the dissenter's shares and demand
payment of the dissenter's estimate (less any payment under section 15 of this
chapter), or reject the corporation's offer under section 17 of this chapter and
demand payment of the fair value of the dissenter's shares, if:
(1) the dissenter believes that the amount paid under section 15 of
this chapter or offered under section 17 of this chapter is less than the
fair value of the dissenter's shares;
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(2) the corporation fails to make payment under section 15 of this
chapter within sixty (60) days after the date set for demanding payment; or
(3) the corporation, having failed to take the proposed action, does
not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty (60) days after the date set
for demanding payment.
(b) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (a) within thirty (30) days after the corporation made
or offered payment for the dissenter's shares.
23-1-44-19 COURT PROCEEDING TO DETERMINE FAIR VALUE; JUDICIAL APPRAISAL
Sec. 19.(a) If a demand for payment under IC 23-1-42-11 or under section 18
of this chapter remains unsettled, the corporation shall commence a proceeding
within sixty (60) days after receiving the payment demand and petition the court
to determine the fair value of the shares. If the corporation does not commence
the proceeding within the sixty (60) day period, it shall pay each dissenter
whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in the circuit or
superior court of the county where a corporation's principal office (or, if none
in Indiana, its registered office) is located. If the corporation is a foreign
corporation without a registered office in Indiana, it shall commence the
proceeding in the county in Indiana where the registered office of the domestic
corporation merged with or whose shares were acquired by the foreign corporation
was located.
(c) The corporation shall make all dissenters (whether or not residents of
this state) whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one (1) or
more persons as appraisers to receive evidence and recommend decision on the
question of fair value. The appraisers have the powers described in the order
appointing them or in any amendment to it. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment:
(1) for the amount, if any, by which the court finds the fair value of
the dissenter's shares, plus interest, exceeds the amount paid by the
corporation; or
(2) for the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under section 17 of this chapter.
23-1-44-20 COSTS; FEES; ATTORNEY FEES
Sec. 20.(a) The court in an appraisal proceeding commenced under section 19
of this chapter shall determine all costs of the proceeding, including the
reasonable compensation and expenses of appraisers appointed by the court. The
court shall assess the costs against such parties and in such amounts as the
court finds equitable.
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(1) against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of sections 10 through 18 of this chapter; or
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(2) against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by this chapter.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
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[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
SHELBY COUNTY BANCORP
29 East Washington Street
Shelbyville, Indiana 46176
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<S> <C>
]
The undersigned hereby appoints James M. Robison and 1. THE TRANSACTION For Against Abstain
Rodney L. Meyerholtz, and each of them, attorneys- Vote to approve the Amended and Restated [ ] [ ] [ ]
in-fact and proxies, with full power of substitution, Agreement of Affiliation and Merger dated as
to vote as designated below all shares of Shelby County of March 12, 1998, as amended (the "Merger Agreement"), by and
Bancorp (the "Corporation") which the undersigned would among Blue River Bancshares, Inc. ("Blue River"), the
be entitled to vote if personally present at the Special Corporation, and Shelby County Savings Bank, FSB, pursuant
Meeting of Shareholders to be held on June 23, 1998 at to which the Corporation (i) will be merged with and into
8:00 a.m., EST, and at any adjournment thereof. Blue River, with Blue River as the surviving corporation
(the "Merger"), and (ii) each share of common stock of the
Corporation, no par value per share, outstanding immediately
prior to consummation of the Merger shall be converted into
and represent the right to receive $56.00 in cash, as more
fully described in the Corporation's Proxy Statement dated
June 11, 1998 and in the Merger Agreement which is attached
as Appendix A therein.
2. In their discretion, the proxies are authorized to vote on such
other matters as may properly come before the Meeting or any
adjournments or postponements thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ADOPTION OF THE
MERGER AGREEMENT.
This proxy when properly executed will be voted in the manner
directed herein by the undersigned shareholder. If no direction is
made, this proxy will be voted FOR Proposals 1 and 2.
The undersigned acknowledges receipt from Shelby County Bancorp,
prior to the execution of this proxy, of notice of the meeting and
a proxy statement.
Please sign exactly as name appears below. When shares are held
as joint tenants, both should sign. When signing as attorney,
executor, administrator, trustee or guardian, please give full title
as such. If a corporation, please sign in full corporate name by the
president or other authorized officer. If a partnership, please sign
in partnership name by authorized person.
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Please be sure to sign and date Date |
this Proxy in the box below |
- ------------------------------------------------------------|
|
|
- --Stockholder sign above ---Co-holder (if any) sign above---|
+ +
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+ Detach above card, sign, date and mail in postage paid envelope provided. +
SHELBY COUNTY BANCORP
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Please sign exactly as your name appears above on this card. When signing as attorney, executor, administrator, trustee or guardian,
please give your full title. If shares are held jointly, each holder should sign.
PLEASE PROMPTLY COMPLETE, DATE, SIGN AND MAIL THIS PROXY IN
THE ENCLOSED POSTAGE-PAID ENVELOPE.
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