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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended September 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission File Number 0-19445
SHELBY COUNTY BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-1832715
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
29 East Washington Street
Shelbyville, Indiana 46176
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(317) 398-9721
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
Common Share Purchase Rights
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of December 5, 1997, was $3,642,497.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of December 5, 1997, was 175,950 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
September 30, 1997, are incorporated into Part II. Portions of the Proxy
Statement for the 1998 Annual Meeting of Shareholders are incorporated into Part
I and Part III.
Exhibit Index on Page 38
Page 1 of 78 Pages
SHELBY COUNTY BANCORP
Form 10-K
INDEX
Page
Forward Looking Statement................................................
PART I
Item 1. Business.................................................
Item 2. Properties...............................................
Item 3. Legal Proceedings........................................
Item 4. Submission of Matters to a Vote of Security Holders......
Item 4.5. Executive Officers of the Registrant.....................
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters..................................
Item 6. Selected Financial Data..................................
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................
Item 7A. Quantitative and Qualitative
Disclosures about Market Risks.......................
Item 8. Financial Statements and Supplementary Data..............
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................
PART III
Item 10. Directors and Executive Officers of the Registrant.......
Item 11. Executive Compensation...................................
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................
Item 13. Certain Relationships and Related Transactions...........
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K..............................
SIGNATURES...............................................................
FORWARD LOOKING STATEMENT
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Holding Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Holding Company. Readers of this Form 10-K are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-K identifies important factors that could cause such differences. These
factors include changes in interest rates; loss of deposits and loan demand to
other savings and financial institutions; substantial changes in financial
markets; changes in real estate values and the real estate market; regulatory
changes; or unanticipated results in pending legal proceedings.
PART I
Item 1. Business.
General
Shelby County Bancorp (the "Holding Company") is an Indiana corporation
organized in June, 1991, to become a unitary savings and loan holding company.
The Holding Company became a unitary savings and loan holding company upon the
conversion of Shelby County Savings Bank, FSB ("SCSB") from a federal mutual
savings bank to a federal stock savings bank on October 17, 1991 (the
"Conversion"). The principal asset of the Holding Company consists of 100% of
the issued and outstanding shares of common stock, $.01 par value per share, of
SCSB. SCSB began operations in Shelbyville, Indiana and received its federal
charter in 1937. SCSB primarily serves the needs of residents of Shelby County,
Indiana.
SCSB directly, and indirectly, through its service corporation subsidiary,
offers a number of consumer and commercial financial services. These services
include: (i) residential and non-residential real estate loans; (ii) home equity
loans; (iii) auto loans; (iv) installment loans; (v) loans secured by deposits;
(vi) home improvement loans; (vii) commercial loans; (viii) NOW accounts; (ix)
certificates of deposit, (x) consumer and commercial demand deposit accounts;
(xi) individual retirement accounts; and (xii) insurance products. SCSB provides
these services through its four full-service offices, two in Shelbyville,
Indiana, one in St. Paul, Indiana and one in Morristown, Indiana. It has two
automated teller machines, located at its offices in Shelbyville. Historically,
SCSB has concentrated business activities within Shelby County.
SCSB's primary source of revenue is interest income from lending
activities, primarily the origination of residential mortgage loans. At
September 30, 1997, $50.2 million, or 62.8% of SCSB's total loan and
mortgage-backed securities portfolio consisted of mortgage loans on one-to-four
family residential real property. These loans are generally secured by first
mortgages on the property. Substantially all of the real estate loans originated
by SCSB are secured by properties located in Shelby County, although SCSB has
authority to make or purchase real estate loans throughout the United States.
SCSB's portfolio of mortgage-backed securities constituted 4.1% of its total
loan and mortgage-backed securities portfolio at September 30, 1997.
Multi-family loans constituted 5.7% of SCSB's loan and mortgage-backed
securities portfolio at September 30, 1997.
SCSB also makes non-residential real estate loans which totaled $11.7
million at September 30, 1997, or 14.7% of SCSB's total loan and mortgage-backed
securities portfolio. All other loans, including residential construction, home
equity and improvement, installment, auto loans, loans secured by deposits and
commercial loans, totaled $13.5 million, or 16.9% of SCSB's total loan and
mortgage-backed securities portfolio, at September 30, 1997.
In the early 1980s, most savings associations' loan portfolios consisted of
long-term, fixed-rate loans, which then carried low interest rates. At the same
time, most savings associations had to pay competitive and high market interest
rates on deposits in order to be competitive and maintain deposit accounts. This
resulted in a "negative" interest spread. SCSB experienced these problems, but
responded to them as changes in regulations over the period permitted, and it
has thus been quite successful in managing its interest rate risk. Among its
strategies are an emphasis on originating adjustable-rate mortgages, short-term
consumer loans, and adjustable rate home equity loans. Additionally, SCSB
attempts to lengthen liability repricing periods by aggressively pricing longer
term certificates of deposit during periods of relatively low interest rates.
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 and mortgage-backed
securities after consideration of the allowance for possible loan losses and
deferred net loan fees on loans.
At September 30,
1997 1996 1995 1994 1993
----------------- ---------------- ------------------ ---------------- ----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
TYPE OF LOAN
Mortgage loans:
One-to-four family ......... $46,870 58.64% $42,131 58.65% $33,961 61.11% $32,762 66.84% $32,936 66.58%
Mortgage-backed securities . 3,309 4.14 5,21 7.26 4,649 8.37 5,470 11.16 7,403 14.97
Residential construction ... 1,054 1.32 1,003 1.39 545 .98 506 1.03 357 .72
Multi-family ............... 4,512 5.65 3,406 4.74 2,606 4.69 1,863 3.80 1,743 3.52
Non-residential ............ 11,746 14.70 10,418 14.50 7,415 13.34 4,577 9.34 3,988 8.06
Home equity loans .......... 977 1.21 740 1.03 591 1.06 416 .85 520 1.05
Consumer loans:
Installment loans .......... 3,411 4.27 2,494 3.47 1,200 2.16 900 1.84 953 1.93
Auto loans ................. 3,878 4.85 3,423 4.76 2,466 4.44 1,175 2.40 955 1.93
Home improvement loans ..... 86 .11 -- -- 38 .07 3 .00 10 .02
Loans secured by deposits .. 137.17 169.24 189.34 324.66 127.26
Commercial loans .............. 3,947 4.94 2,838 3.95 1,916 3.44 1,021 2.08 476 .96
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable and
mortgage-backed securities $79,927 100.00% $71,838 100.00% $55,576 100.00% $49,017 100.00% $49,468 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
TYPE OF SECURITY
One-to-four family (1) ........ $52,353 65.50% $49,090 68.33% 39,240 70.61% $38,651 78.85% $40,869 82.62%
Non-residential real estate ... 11,746 14.70 10,418 14.50 7,415 13.34 4,577 9.34 3,988 8.06
Multi-family .................. 4,512 5.65 3,406 4.74 2,606 4.69 1,863 3.80 1,743 3.52
Autos ......................... 3,878 4.85 3,423 4.76 2,466 4.44 1,175 2.40 955 1.93
Deposits ...................... 137 .17 169 .24 189 .34 324 .66 127 .26
Other security ................ 3,970 4.97 3,010 4.19 2,261 4.07 1,566 3.19 1,585 3.20
Unsecured ..................... 3,331 4.16 2,322 3.24 1,399 2.51 861 1.76 201 .41
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable and
mortgage-backed securities $79,927 100.00% $71,838 100.00% $55,576 100.00% $49,017 100.00% $49,468 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Deduct:
Allowance for possible
losses on loans .......... 392 .49% 326 .45% $ 241 .43% $ 189 .39% $ 141 .28%
Deferred net loan fees .... 188 .24 198 .28 206 .37 222 .45 227 .46
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Net loans receivable including
mortgage-backed securities $79,347 99.27% $71,314 99.27% $55,129 99.20% $48,606 99.16% $49,100 99.26%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
(1) Includes mortgage-backed securities, 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 September 30, 1997, 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
expects prepayments will cause actual maturities to be shorter.
Balance Due during years ended September 30,
Outstanding 2000 2002 2007 2012
September30, to to to and
1997 1998 1999 2001 2006 2011 following
--------------------------------------------------------------------------------
(In thousands)
Mortgages:
Residential one-to-four
family mortgage loans...... $46,870 $ 3,124 $2,025 $2,077 $4,418 $11,593 $23,633
Mortgage-backed securities... 3,309 357 329 666 1,193 309 455
Residential construction..... 1,054 1,054 --- --- --- --- ---
Multi-family loans........... 4,512 244 668 168 421 1,052 1,959
Non-residential.............. 11,746 526 509 597 1,522 3,606 4,986
Home equity.................. 977 26 24 48 109 95 675
Consumer loans:
Home improvement loans....... 86 15 17 18 36 --- ---
Auto......................... 3,878 1,435 1,029 759 631 24 ---
Installment loans............ 3,411 2,858 216 114 93 117 13
Loans secured by deposits.... 137 66 13 12 17 26 3
Commercial loans ............. 3,947 2,683 330 257 345 332 ---
------- ------- ------ ------ ------ ------- -------
Gross loans receivable and
mortgage-backed securities. $79,927 $12,388 $5,160 $4,716 $8,785 $17,154 $31,724
======= ======= ====== ====== ====== ======= =======
The following table sets forth, as of September 30, 1997, the dollar amount
of all loans due after one year which have fixed interest rates and floating or
adjustable interest rates.
Due After September 30, 1998
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Mortgages:
Residential one-to-four family
mortgage loans.............................. $40,398 $3,323 $43,721
Mortgage-backed
securities.................................. 2,191 786 2,977
Multi-family loans............................ 3,323 945 4,268
Non-residential............................... 9,020 2,200 11,220
Home equity .................................. --- 951 951
Consumer loans:
Home improvement loans........................ 71 --- 71
Auto.......................................... 2,443 --- 2,443
Installment loans............................. 553 --- 553
Loans secured by deposits..................... 71 --- 71
Commercial loans ............................ 1,264 --- 1,264
------- ------ -------
Total....................................... $59,334 $8,205 $67,539
======= ====== =======
Residential Loans. Approximately $50.2 million, or 62.8% of SCSB's total
loan and mortgage-backed securities portfolio at September 30, 1997, consisted
of one-to-four family mortgage loans, of which approximately 91.7% had
fixed-rates. Such loans are generally not 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 "-- 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
September 30, 1997, approximately 8.3% of the mortgage loans on one-to-four
family residences included in SCSB's loan and mortgage-backed securities
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 September 30, 1997, residential mortgage loans amounting to
$416,000, or .5% of SCSB's total loan and mortgage-backed securities 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 September 30, 1997, SCSB had $1.0 million, or 1.3% of its total loan and
mortgage-backed securities portfolio, in residential construction loans
outstanding.
Mortgage-Backed Securities. As of September 30, 1997, $3.3 million, or 4.1%
of SCSB's total loan and mortgage-backed securities portfolio consisted of
mortgage-backed securities. These mortgage-backed securities had an estimated
market value of $3.0 million at September 30, 1997. Management has classified
these securities into held to maturity and available for sale portfolios in
accordance with Statement of Financial Accounting Standards No 115, "Accounting
for Certain Investments in Debt and Equity Securities."
Non-Residential Real Estate Loans. At September 30, 1997, $11.7 million, or
14.7%, of SCSB's total loan and mortgage-backed securities portfolio consisted
of mortgage loans secured by non-residential real estate. The non-residential
mortgage loans, substantially all adjustable rate, are written for terms not
exceeding 25 years, and generally require a 70% or lower loan-to-value ratio.
The largest non-residential mortgage loan as of September 30, 1997, had a
balance of $888,000. 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
"Regulation -- 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 September 30, 1997, $4.5 million, or 5.7%, of SCSB's
total loan and mortgage-backed securities 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 September 30,
1997, had a balance of $635,000 and none of these loans was non-performing at
that time. As with SCSB's non-residential real estate loans, multi-family
mortgage loans are substantially all adjustable rate loans, are written for
terms not exceeding 25 years, and require at least a 75% loan-to-value ratio.
Multi-family loans, like non-residential real estate loans, involve a
greater risk than do residential loans. See "Non-Residential Real Estate Loans"
above. 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 September 30, 1997, SCSB had $977,000
outstanding home equity loans, or 1.2% of its total loan and mortgage-backed
securities portfolio, with $546,000 of additional credit available to its
borrowers under existing home equity lines of credit. Home equity line of credit
loans are adjustable rate loans, indexed to the base rate on corporate loans at
large U.S. money center commercial banks that the Wall Street Journal publishes
as the Prime Rate.
Consumer Loans. Federal laws and regulations permit federally chartered
savings associations to make secured and unsecured consumer loans in an
aggregate amount of up to 35% of the association's total assets. In addition, a
federally chartered savings association has lending authority above the 35%
limit for certain consumer loans, such as property improvement loans and deposit
account secured loans. However, the QTL test places additional limitations on a
savings association's ability to make consumer loans. See "Regulation --
Qualified Thrift Lender."
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 September 30, 1997,
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 $7.5 million, or approximately 9.4% 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 September 30, 1997, no consumer loans
were included in non-performing assets.
SCSB's portfolio of automobile loans was $3.9 million, or 4.9% of its total
loan and mortgage-backed securities portfolio at September 30, 1997. These loans
are for a maximum term of 66 months, and the borrower must provide proof of
insurance.
Installment loans, loans secured by deposits and home improvement loans
totaled $3.4 million, or 4.3% of SCSB's total loan and mortgage-backed
securities portfolio at September 30, 1997.
Commercial Loans. SCSB makes a limited number of secured commercial loans.
At September 30, 1997, these loans, which included inventory financing for a
lawn and garden equipment supplier, totaled $3.9 million, or 4.9% of SCSB's
total loan and mortgage-backed securities portfolio. All commercial loans are
currently performing under their original terms.
Origination, Purchase and Sale of Loans. SCSB currently does not originate
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 has no intention, however, of attempting to sell such loans.
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 office. All loan applications are 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 $935,000 at September 30, 1997. At that date, the highest
outstanding balance of loans by SCSB to one borrower and related entities was
approximately $888,000, 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 applies 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 does not sell and rarely purchases loans. SCSB may enter into
participations to diversify its portfolio, to supplement local loan demand and
to obtain more favorable yields. During the year ended September 30, 1992, 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 September 30, 1997, SCSB held in its loan and
mortgage-backed securities portfolio 16 participations. SCSB's portion of the
outstanding balance of such participations on that date was $4,489,000.
The following table shows loan origination, purchase, sale and repayment
activity for SCSB during the periods indicated:
Year Ended September 30,
1997 1996 1995
---------------------------------------------
(In thousands)
Gross loans receivable and
mortgage-backed securities
at beginning of period................................. $71,838 $55,576 $49,017
------- ------- -------
Originations:
First mortgage loans:
Residential.......................................... 12,150 17,084 8,024
Non-residential...................................... 3,559 3,087 2,319
Miscellaneous additions.............................. 744 271 1,583
------- ------- -------
Total first mortgage loans....................... 16,453 20,442 11,926
------- ------- -------
Consumer loans:
Installment loans.................................... 13,327 10,302 6,335
Loans secured by deposits............................ 54 72 273
Miscellaneous additions.............................. --- --- ---
------- ------- -------
Total consumer loans............................. 13,381 10,374 6,608
------- ------- -------
Commercial loans....................................... 1,103 3,920 2,187
------- ------- -------
Total originations .............................. 30,937 34,736 20,721
------- ------- -------
Purchases:
Mortgage-backed securities............................. 1,296 2,650 200
First mortgage loans................................... 536 1,636 388
------- ------- -------
Total originations and purchases................. 32,769 39,022 21,309
------- ------- -------
Sales:
First mortgage loans................................... --- --- ----
Mortgage-backed securities............................. 2,848 1,017 485
------- ------- -------
Total sales.......................................... 2,848 1,017 485
------- ------- -------
Repayments and other deductions........................... 21,832 21,743 14,265
------- ------- -------
Gross loans receivable and
mortgage-backed securities
at end of period....................................... $79,927 $71,838 $55,576
======= ======= =======
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.
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 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 September 30, 1997, $453,000, or .5%, 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.
Year Ended September 30,
1997 1996 1995
-------------------------------------------
(In thousands)
Non-performing assets:
Non-accrual loans (1) ............................... $416 $247 $454
Real estate owned - net................................ 37 --- ---
Troubled debt restructurings........................... --- --- ---
--- ---- ----
Total non-performing assets.......................... 453 $247 $454
=== ==== ====
Non-performing assets to total assets..................... .50% .30% 0.67%
=== ==== ====
(1) SCSB generally places loans on a nonaccrual status when the loans become
contractually past due 90 days or more. At September 30, 1997, all
$416,000 of nonaccrual loans were residential loans. For the fiscal years
ended September 30, 1997, 1996 and 1995, the income that would have been
recorded had the non-accrual loans not been in a non-performing status
was approximately $31,359, $15,585, and $38,529, respectively, compared
to actual income recorded of $20,667, $8,696 and $8,195, respectively.
As of September 30, 1997, SCSB held loans delinquent from 30 to 89 days
aggregating $2,190,000, or 2.5% of total assets. The amount past due on such
loans aggregated approximately $35,000. Management does not believe that the
amount of delinquent loans represents a material deterioration of SCSB's loan
portfolio. SCSB is not aware of any loans not classified as non-accrual or
delinquent of which the borrowers were experiencing financial difficulties.
Allowance for Possible Loan Losses
The allowance for possible 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 to the allowance when losses are considered probable. In
management's opinion, SCSB's allowance for possible loan losses is adequate to
absorb anticipated future losses from loans at September 30, 1997.
The following table analyzes changes in the allowance during the three
years ended September 30, 1997.
Year Ended September 30,
1997 1996 1995
-------------------------------------------
(In thousands)
Balance of allowance at beginning of period............... $325,900 $241,094 $188,879
Add:
Provision for loan losses.............................. 104,000 100,000 55,000
Recoveries of loans previously charged off............ 1,146 329 ---
Less gross charge-offs:
Residential real estate loans.......................... --- --- ---
Consumer loans......................................... 39,369 15,523 2,785
------- -------- --------
Gross charge-offs...................................... 39,369 15,523 2,785
------- -------- --------
Balance of allowance at end of period..................... 391,677 $325,900 $241,094
======= ======== ========
Net charge-offs to total average loans outstanding........ .05% .02% .01%
======= ======== ========
Allowance at end of period to
total average loans outstanding........................ .54% .45% .51%
======= ======== ========
In management's opinion, SCSB's allowance for possible loan losses at
September 30, 1997, is adequate to absorb anticipated future losses from
nonperforming and other loans.
Investments
SCSB's investment portfolio consists of corporate and municipal bonds and
investments in Federal Home Loan Bank ("FHLB") time and demand deposits. At
September 30, 1997, approximately $8.2 million, or 9.1%, of SCSB's total assets
consisted of such investments.
The following table sets forth the carrying value (cost for held to
maturity investments and market for available for sale investments) of SCSB's
investment portfolio at the dates indicated.
Year Ended September 30,
1997 1996 1995
---------------------------------------------------
(In thousands)
Banker Acceptances.................... $ --- $ --- $ 633
Federal Home Loan Bank time and
demand accounts.................. 1,772 3,880 6,428
Municipal and corporate bonds......... 4,277 2,515 1,484
Federal Home Loan Bank stock.......... 920 620 409
Other................................. 1,197 818 443
----- --- ---
Total investments.................. $8,166 $7,833 $9,397
====== ====== ======
The following table sets forth the amount of investment securities which
mature during each of the periods indicated and the weighted average yields for
each range of maturities at September 30, 1997.
Amount at September 30, 1997 which matures in
One Year or Less, One Year to Five Years, Over Ten Years
----------------- ----------------------- --------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- -----
(In thousands)
FHLB time and demand accounts $1,772 4.97% $ --- ---% $--- ---%
Municipal and corporate bonds --- ---% 4,277 6.75 --- ---%
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 September 30, 1997, SCSB had liquid assets
of $6.7 million, and a regulatory liquidity ratio of 8.3%, of which 8.3% were
short-term investments.
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
September 30, 1997, is as follows:
Minimum Balance at Weighted
Opening September 30, % of Average
Type of Account Balance 1997 Deposits Rate
----------------------------------------------------------
(Dollars in thousands)
Withdrawable:
Savings accounts......................... $ 25 $ 9,206 14.24% 2.81%
NOW...................................... 100 13,063 20.21 2.15
Money Market............................. 10,000 2,732 4.23 5.60
------- ------
Total withdrawable.......................... 25,001 38.68
------- ------
Certificates (original terms):
31 days.................................. 2,500 67 .10 4.77%
3 months................................. 1,000 601 .93 4.60
6 months................................. 1,000 5,854 9.06 5.11
12 months................................ 500 3,850 5.96 5.53
18 months................................ 500 1,529 2.37 5.59
30 months................................ 500 4,602 7.12 5.78
48 months................................ 500 1,039 1.61 6.13
60 months................................ 500 10,700 16.56 6.67
IRA's
31 days.................................. 2,500 --- --- ---
6 months................................. 1,000 140 .22 5.12
12 months................................ 500 156 .24 5.75
18 months................................ 500 49 .08 5.67
30 months................................ 500 608 .94 5.73
48 months................................ 500 17 .03 5.89
60 months................................ 500 2,779 4.30 6.57
96 months................................ 1,000 --- --- ---
Jumbo certificates.......................... 100,000 7,641 11.80 6.49
------- ------
Total certificates....................... 39,632 61.32
------- ------
Total deposits........................... $64,633 100.00%
======= ======
The following table sets forth by various interest rate categories the
composition of time deposits of SCSB at the dates indicated:
At September 30,
1997 1996 1995
------------------------------------------------
(In thousands)
Under 5%............................................... $ 4,066 $ 5,374 $ 6,987
5.01 - 7.00%........................................... 32,250 33,106 29,107
7.01 - 9.00%........................................... 3,316 3,245 3,265
9.01% and over......................................... --- --- ---
------- ------- -------
Total................................................ $39,632 $41,725 $39,359
======= ======= =======
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
September 30, 1997. Matured certificates which have not been renewed as of
September 30, 1997, have been allocated based upon certain rollover assumptions.
Amounts At
September 30, 1997, Maturing in
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In thousands)
Under 5%............................................. $ 3,927 $ 139 $ --- $ ---
5.01 - 7.00 %........................................ 15,486 4,191 8,916 3,657
7.01 - 9.00%......................................... 34 198 2,440 644
9.01 - and over...................................... --- --- --- ---
------- ------ ------- ------
Total............................................. $19,447 $4,528 $11,356 $4,301
======= ====== ======= ======
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 September 30,
1997.
Maturity (In thousands)
Three months or less.................................. $1,090
Greater than three months
through six months............................... 756
Greater than six months
through twelve months............................ 823
Over twelve months.................................... 4,972
-----
Total............................................ $7,641
======
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.
Deposit Activity
Increase Increase
(Decrease) (Decrease)
Balance at from Balance at from Balance at
September 30, % of September 30,September 30, % of September 30, September 30, % of
1997 Deposits 1996 1996 Deposits 1995 1995 Deposits
--------------------------------------------------------------------------------------------
(Dollars in thousands)
Withdrawable:
Savings accounts..... $ 9,206 14.24% (822) $10,028 15.36% $ 101 $ 9,927 16.22%
NOW.................. 13,063 20.21 (470) 13,533 20.73 1,617 11,916 19.47
Money market......... 2,732 4.23 2,732 --- --- --- --- ---
------- ------ ---- ------- ------ ------ ------- ------
Total withdrawable. 25,001 38.68 1,440 23,561 36.09 1,718 21,843 35.69
------- ------ ---- ------- ------ ------ ------- ------
Certificates (original terms):
31 days.............. 67 .10 (7) 74 .11 51 23 .04
3 months............. 601 .93 155 446 .68 249 197 .32
6 months............. 5,854 9.06 (2,130) 7,984 12.23 (1,006) 8,990 14.69
12 months............ 3,850 5.96 716 3,134 4.80 1,083 2,051 3.35
18 months............ 1,529 2.37 382 1,147 1.76 370 777 1.27
30 months............ 4,602 7.12 (548) 5,150 7.89 (90) 5,240 8.56
48 months............ 1,039 1.61 (1,405) 2,444 3.75 (207) 2,651 4.33
60 months............ 10,700 16.56 (541) 11,241 17.22 936 10,305 16.84
72 months............ --- --- --- --- --- (30) 30 .05
96 months............ --- --- --- --- --- (2) 2 .01
IRA's
31 days.............. --- --- --- --- --- --- -- --
6 months............. 140 .22 7 133 .21 32 101 .16
12 months............ 156 .24 58 98 .15 79 19 .03
18 months............ 49 .08 (6) 55 .08 8 47 .08
30 months............ 608 .94 70 538 .82 (86) 624 1.02
48 months............ 17 .03 (5) 22 .03 (1) 23 .04
60 months............ 2,779 4.30 152 2,627 4.02 958 1,669 2.73
96 months............ --- --- --- --- --- --- -- --
Jumbo certificates...... 7,641 11.80 1,009 6,632 10.16 22 6,610 10.78
------- ------ ---- ------- ------ ------ ------- ------
Total certificates... 39,632 61.32 (2,093) 41,725 63.91 2,366 39,359 64.31
------- ------ ---- ------- ------ ------ ------- ------
Total deposits....... $64,633 100.00% (653) $65,286 100.00% $4,084 $61,202 100.00%
======= ====== ==== ======= ====== ====== ======= ======
Borrowings. Generally, SCSB focuses on generating high quality loans and
then funds such loans from deposits and investments. SCSB may obtain advances
from the FHLB of Indianapolis to supplement its supply of lendable funds. See
"Regulation -- 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 September 30, 1997, SCSB had
approximately $17.7 million in borrowings outstanding, of which approximately
$17.7 million were FHLB advances. SCSB does not anticipate any problem obtaining
addtional advances appropriate to meet its requirements in the future, if such
advances should become necessary.
Asset/Liability Management
SCSB, like other savings associations, is subject to interest rate risk to
the degree that its interest-bearing liabilities, primarily deposits with short
and medium-term maturities, mature or reprice more rapidly than its
interest-earning assets. Although having liabilities that mature or reprice more
frequently on average than assets will be beneficial in times of declining
interest rates, such an asset/liability structure will result in lower net
income during periods of rising interest rates, unless offset by other factors
such as non-interest income. Therefore, a key element of 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 one year 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.
Management of SCSB believes that its Interest Rate Gap in recent periods
has generally been, and currently is, acceptable in view of the prevailing
interest rate environment. However, because of SCSB's concentration of earning
assets in fixed-rate mortgage loans, net interest income will continue to be
adversely affected by a significant rising interest rate environment. SCSB will
continue to seek to improve the matching of its assets and liabilities as market
conditions permit.
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 Federal Home Loan Bank of Indianapolis (the "FHLBI")
based upon certain repricing and other assumptions determined by the FHLBI. The
repricing and other assumptions determined by the FHLBI are based on a study
done by the FHLBI 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.
At September 30, 1997
Maturing or Repricing in
(Dollars in Thousands)
6 Months
0 to 3 3 to 6 to 1 to 3 3 to 5 5 to 10
Months Months 1 Year Years Years Years
---------------------------------------------------------------------------------
Assets:
Adjustable rate mortgages ........ $ 74 $ 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)
Cummulative interest sensitivity
gap as a percentage of
total assets .................. (26.16)% (22.54)% (35.18)% (43.17)% (36.10)% (21.18)%
10 to 20 Over 20
Years Years Total
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
Cummulative interest sensitivity
gap as a percentage of
total assets .................. (5.01)% 3.70% 3.70%
In preparing the table above, it has been assumed, consistent with the
assumptions used by the FHLBI 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 7.8% 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:
Interest Rate Prepayment Assumption
Less than 8% 7.8%
8 to 8.99% 8.6%
9 to 9.99% 9.5%
10 to 10.99% 15.5%
11 and over 24.5%
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:
6 Months
0 to 3 3 to 6 to 1 to 3 3 to 5 5 to 10 10 to 20 Over 20
Months Months 1 Year Years Years Years Years Years
------------------------------------------------------------------------------
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%
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,
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.
Service Corporation Subsidiary
Office of Thrift Supervision ("OTS") regulations permit federal savings
associations to invest in the capital stock, obligations, or other specified
types of securities of subsidiaries (referred to as "service corporations") and
to make loans to such subsidiaries and joint ventures in which such subsidiaries
are participants in an aggregate amount not exceeding 2% of an association's
assets, plus an additional 1% of assets if the amount over 2% is used for
specified community or inner-city development purposes. In addition, federal
regulations permit associations to make specified types of loans to such
subsidiaries (other than special-purpose finance subsidiaries), in which the
association owns more than 10% of the stock, in an aggregate amount not
exceeding 50% of the association's regulatory capital if the association's
regulatory capital is in compliance with applicable regulations. [ FIRREA
requires a savings association that acquires a non-savings association
subsidiary, or that elects to conduct a new activity within a subsidiary, to
give the Federal Deposit Insurance Corporation (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 ("First Tier One"), holds common stock issued by Savings & Loan Data
Corporation. 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 September 30, 1997, the Holding Company employed no persons on a
full- or part-time basis. As of September 30, 1997, SCSB employed 32 persons on
a full-time basis and three 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 locally-owned financial institution remaining 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 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 the Holding
Company.
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.
Regulation
General
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.
SCSB is also subject to federal and state regulation as to such matters as
loans to officers, directors, or principal shareholders, required reserves,
limitations as to the nature and amount of its loans and investments, regulatory
approval of any merger or consolidation, issuance or retirements of securities,
and limitations upon other aspects of banking operations. In addition, SCSB's
activities and operations are subject to a number of additional detailed,
complex and sometimes overlapping federal and state laws and regulations. These
include state usury and consumer credit laws, state laws relating to
fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal
Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act,
the Community Reinvestment Act, anti-redlining legislation and antitrust laws.
The United States Congress is considering legislation that would require
all federal savings associations, such as SCSB, to either convert to a national
bank or a state-chartered bank by a specified date to be determined. In
addition, under the legislation, the Holding Company likely would not be
regulated as a savings and loan holding company but rather as a bank holding
company. This proposed legislation would abolish the OTS and transfer its
functions among the other federal banking regulators. Certain aspects of the
legislation remain to be resolved and, therefore, no assurance can be given as
to whether or in what form the legislation will be enacted or its effect on the
Holding Company and SCSB.
Savings and Loan Holding Company Regulation
As the holding company for SCSB, the Holding Company is regulated as a
"non-diversified savings and loan holding company" within the meaning of the
Home Owners' Loan Act, as amended ("HOLA"), and subject to regulatory oversight
of the Director of the OTS. As such, the Holding Company 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 the Holding Company
and with other companies affiliated with the Holding Company.
In general, the HOLA prohibits a savings and loan holding company, without
prior approval of the Director of the OTS, from acquiring control of another
savings association or savings and loan holding company or retaining more than
5% of the voting shares of a savings association or of another holding company
which is not a subsidiary. The HOLA also restricts the ability of a director or
officer of the Holding Company, or any person who owns more than 25% of the
Holding Company's 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.
The Holding Company's Board of Directors presently intends to continue to
operate the Holding Company as a unitary savings and loan holding company. 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 September 30,
1997, SCSB's asset composition was in excess of that required to qualify as a
Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with SCSB,
the Holding Company would thereupon become a multiple savings and loan holding
company. Except where such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary savings association
meets the QTL test, the activities of the Holding Company 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
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 Board (the "FRB") 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 Indiana
Department of Financial Institutions. 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 Indiana Department of Financial Institutions.
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.
Federal Home Loan Bank System
SCSB is a member of the FHLB of Indianapolis, which 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 ("FHFB"), 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 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%.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the Bank Insurance Fund (the
"BIF") for commercial banks and state savings banks and the SAIF for savings
associations such as 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. See "-- Assessments" below.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
On September 30, 1996, President Clinton signed into law legislation which
included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
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.
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 3% 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, 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 September 30, 1997, 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. If the OTS were to implement this regulation, SCSB
would not be required to maintain additional capital at September 30, 1997 under
the terms of the OTS proposed interest rate risk rule.
The following is a summary of SCSB's regulatory capital and capital
requirements at September 30, 1997:
Tangible Core Risk-based
capital capital capital
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%
Minimum capital ratio 1.5% 3.0% 8.0%
If an association is not in compliance with the capital requirements, the
OTS is required to prohibit asset growth and to impose a capital directive that
may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operations activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At September
30, 1997, SCSB was categorized as "adequately capitalized," meaning that its
total risk-based capital ratio exceeded 8%, its Tier I risk-based capital ratio
exceeded 4%, its leverage ratio exceeded 4%, and it was not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital to
take corrective actions. For example, a savings association which is categorized
as "undercapitalized" would be subject to growth limitations and would be
required to submit a capital restoration plan, and a holding company that
controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
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 Camel 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 month, 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.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA 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 FedICIA. SCSB does not believe that these regulations will have a
materially adverse effect on its current operations.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety and
soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. On August 27, 1996, the federal banking agencies added asset
quality and earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's Board
of Directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, 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 September 30, 1997, 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 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio 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 September 30, 1997, SCSB was in compliance with its
QTL requirement, with approximately 69% 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).
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Code or the asset
composition test of ss.7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks
in other states and, with state consent and subject to certain limitations,
allows banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana enacted legislation establishing interstate
branching provisions for Indiana state-chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law authorizes Indiana banks to branch interstate by merger or de novo
expansion, provided that such transactions are not permitted to out-of-state
banks unless the laws of their home states permit Indiana banks to merge or
establish de novo banks on a reciprocial basis. The Indiana Branching Law became
effective March 15, 1996.
Transactions with Affiliates
SCSB is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act,
which restrict financial transactions between banks and affiliated companies.
The statute limits credit transactions between a bank or savings association and
its executive officers and its affiliates, prescribes terms and conditions for
bank affiliate transactions deemed to be consistent with safe and sound banking
practices, and restricts the types of collateral security permitted in
connection with a bank's extension of credit to an affiliate.
Federal Securities Law
The shares of Common Stock of the Holding Company are registered with the
SEC under the Securities Exchange Act of 1934, as amended (the "1934 Act"). The
Holding Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the 1934 Act and the rules of the
SEC thereunder. If the Holding Company has fewer than 300 shareholders, it may
deregister its shares under the 1934 Act and cease to be subject to the
foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the Holding
Company may not be resold without registration unless sold in accordance with
the resale restrictions of Rule 144 under the Securities Act of 1933, as amended
(the "1933 Act"). If the Holding Company meets the current public information
requirements under Rule 144, each affiliate of the Holding Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) will be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Holding Company or (ii) the average weekly volume of trading in
such shares during the preceding four calendar weeks.
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.
Taxation
Federal Taxation
The Holding Company and its subsidiary 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 the Holding Company 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 the Holding Company would be required to be
taken into account in determining the permitted bad debt deduction which,
depending upon the particular circumstances, could reduce the bad debt
deduction. 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 the bank 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 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.
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
Internal Revenue Code ("IRC"). 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.
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. 128 ("SFAS 128"),
"Earnings per Share," was issued in February 1997 and is effective for both
interim and annual fiscal periods ending after December 15, 1997. Early adoption
is not permitted. SFAS 128 establishes new standards for computing and
presenting earnings per share ("EPS"). Specifically, SFAS 128 replaces the
presentation of primary EPS with a presentation of basic EPS, requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Management has determined that the
adoption of SFAS 128 will not have a material effect on the consolidated
financial statements.
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 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 has not
yet quantified the effect of this new standard on the consolidated financial
statements.
Item 2. Properties.
At September 30, 1997, 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 the Holding Company and the office in Morristown is leased.
The following table provides certain information with respect to SCSB's
offices as of September 30, 1997:
Net Book Value
of Property,
Year Opened Furniture & Approximate
Description and Address or Acquired Fixtures Square Footage
Locations in Shelbyville
Main Office-
29 East Washington Street ................ 1975 $793,680 15,000
Rampart Office-
34 Rampart Street......................... 1995 $895,935 3,000
Location in Morristown
127 East Main Street...................... 1995 $ 46,315 1,800
Location in St. Paul
105 County Line Road...................... 1989 $ 39,031 1,476
SCSB has two automatic teller machines ("ATM"), 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 participates 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 $108,495 at September 30, 1997.
SCSB also has contracted for the data processing and reporting services of
Savings and Loan Data Corporation, Inc. of Cincinnati, Ohio ("Data
Corporation"). SCSB's service corporation subsidiary owns common stock of Data
Corporation having a book value of $15,000. See "Business--Service Corporation
Subsidiary." The cost of these data processing services is approximately $18,000
per month.
Item 3. Legal Proceedings.
Neither the Holding Company, SCSB, nor SCSB's service corporation
subsidiaries is a party to any material pending legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended September 30, 1997.
Item 4.5. Executive Officers of the Registrant.
Presented below is certain information regarding the executive officers of
the registrant. Each of the executive officers of the Holding Company is a
member of the Board of Directors of both the Holding Company and SCSB.
Name Position
James M. Robison Chairman of the Holding Company
Rodney L. Meyerholtz President of the Holding Company and SCSB
Leonard J. Fischer Vice President of the Holding Company
David A. Carmony Secretary of the Holding Company
Robert E. Thomas Treasurer of the Holding Company
Ronald L. Lanter Vice President-- Consumer Lending of SCSB
Joyce E. Ford Vice President-- Mortgage Lending of SCSB
David A. Carmony (age 48) has been the Secretary of the Holding Company
since its incorporation in June, 1991. He also has been President and a 50%
shareholder of Carmony-Ewing Funeral Homes, Inc., which provides funeral
services in the Shelby County area, since 1988. Prior to 1988, Mr. Carmony owned
and operated Carmony Funeral Home, Incorporated, a similar business. In
addition, Mr. Carmony, prior to 1991, owned 50% of Powakaddy, U.S.A., a
distributor of golf equipment. Powakaddy, U.S.A. began operations in September
1988, but filed Chapter 11 bankruptcy proceedings and ceased operations and
existence in April 1991.
Leonard J. Fischer (age 60) has been a Vice President of the Holding
Company since its incorporation in June 1991, and is also a self-employed metal
fabricator. Prior to 1986, Mr. Fischer was manager of plants and equipment for
Shelby Steel, Inc.
Joyce E. Ford (age 45) became Vice President -- Mortgage Lending of SCSB in
1991. Before her appointment as Vice President -- Mortgage Lending, she was
Assistant Vice President of SCSB from 1989 to 1991, and was a loan officer from
1986 to 1989.
Ronald L. Lanter (age 53) has served as Vice President -- Consumer Lending
of SCSB since 1989. From 1986 until joining SCSB in 1989, Mr. Lanter was a Vice
President of Ameritrust National Bank in Shelbyville.
Rodney L. Meyerholtz (age 43) has been President of the Holding Company
since its incorporation in June, 1991, and President and a director of SCSB
since 1986.
James M. Robison (age 70) became a director and Chairman of the Board of
Directors of the Holding Company at the time of the conversion and of SCSB in
1991, and has served as legal counsel to SCSB since prior to 1986. Mr. Robison
is an attorney with the Shelbyville law firm of Robison & Apsley, P.A.
Robert E. Thomas (age 72) became a Director of the Holding Company in 1995.
Mr. Thomas has served as a general agent for the Franklin Life Insurance Company
(Shelbyville, Indiana) since prior to 1991.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
SCSB converted from a mutual savings bank to a federal stock savings bank
effective October 17, 1991 and simultaneously formed a savings and loan holding
company, Shelby County Bancorp. The Holding Company's common stock, without par
value ("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. 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.
Price Range Dividends
Quarter Ended High Bid Low Bid Per Share
---------------------------------------------------------------------------
December 31, 1995 $18.00 $17.00 $.10
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 $25.50 $24.00 $.10
As of December 5, 1997, the Holding Company had 228 shareholders of record.
It is currently the policy of the Holding Company's Board of Directors to
continue to pay quarterly dividends, but any future dividends are subject to the
Board's discretion based on its consideration of the Holding Company's operating
results, financial condition, capital, income tax considerations, regulatory
restrictions and other factors.
Since the Holding Company has no independent operations or other
subsidiaries to generate income, its ability to accumulate earnings for the
payment of cash dividends to its shareholders is directly dependent upon the
ability of SCSB to pay dividends to the Holding Company.
Under OTS regulations, a converted savings association may not declare or
pay a cash dividend if the effect would be to reduce its net worth below the
amount required for the liquidation account created at the time it converted. In
addition, under OTS regulations, the extent to which a savings association may
make a "capital distribution," which includes, among other things, cash
dividends, will depend upon in which one of three categories, based upon levels
of capital, that savings association is classified. SCSB is now and expects to
continue to be a "tier one institution" and therefore would be able to pay cash
dividends to the Holding Company during any calendar year up to 100% of its net
income during that calendar year plus the amount that would reduce by one half
its "surplus capital ratio" (the excess over its capital requirements) at the
beginning of the calendar year. See "Regulation -- Capital Distributions
Regulation" in Item 1 hereof. Prior notice of any dividend to be paid by SCSB to
the Holding Company will have to be given to the OTS.
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 the Holding Company 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 September 30, 1997, approximately $1.1 million
of SCSB's retained income represented bad debt deductions for which no federal
income tax provision had been made. See "Taxation--Federal Taxation" in Item 1
hereof.
Unlike SCSB, generally there is no regulatory restriction on the payment of
dividends by the Holding Company, subject to the determination by the Director
of the OTS that there is reasonable cause to believe that the payment of
dividends constitutes a serious risk to the financial safety, soundness or
stability of SCSB. Indiana law, however, would prohibit the Holding Company from
paying a dividend if, after giving effect to the payment of that dividend, the
Holding Company would not be able to pay its debts as they become due in the
usual course of business or the Holding Company's total assets would be less
than the sum of its total liabilities plus preferential rights of holders of
preferred stock, if any.
On April 17, 1995, the Board of Directors of the Holding Company declared a
dividend of one common share purchase right (a "Right" or "Rights") for each
outstanding share of Common Stock. The dividend was paid on April 30, 1995 to
the shareholders of record as of April 17, 1995. If and when the Rights become
exercisable, each Right will entitle the registered holder to purchase from the
Holding Company one Common Share at a purchase price of $70.00 (the "Purchase
Price"), subject to adjustment as described in the Rights Agreement between the
Holding Company and Bank One, Indianapolis, NA (the "Rights Agreement") which
specifies the terms of the Rights. The Rights will be represented by the
outstanding Common Share certificates and the Rights cannot be bought, sold or
otherwise traded separately from the Common Shares until the "Distribution
Date," which is the earliest to occur of (i) 10 calendar days following a public
announcement that a person or group (an "Acquiring Person") has (a) acquired
beneficial ownership of 15% or more of the outstanding Common Shares or (b)
become the beneficial owner of an amount of the outstanding Common Shares (but
not less than 10%) which the Board of Directors determines to be substantial and
which ownership the Board of Directors determines is intended or may be
reasonably anticipated, in general, to cause the Holding Company to take actions
determined by the Board of Directors to be not in the Holding Company's best
long-term interests (an "Adverse Person"), or (ii) 10 business days following
the commencement or announcement of an intention to make a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 30% or more of such outstanding Common Shares.
The Rights have certain anti-takeover effects. The Rights may cause
substantial dilution to a person or group that attempts to acquire the Holding
Company on terms not approved by the Board of Directors of the Holding Company,
except pursuant to an offer conditioned on a substantial number of Rights being
acquired. The Rights should not interfere with any merger or other business
combination approved by the Board of Directors since the Rights may be redeemed
by the Holding Company at $.01 per Right prior to the tenth calendar day
following the date of a public announcement that a person or group has becom an
Acquiring Person.
Item 6. Selected Consolidated Financial Data.
The information required by this item is incorporated by reference to the
material under the heading "Selected Consolidated Financial Data" on pages 3 and
4 of the Holding Company's 1997 Shareholder Annual Report (the "Shareholder
Annual Report").
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The information required by this item is incorporated by reference to pages
6 through 13 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Analysis of Financial Condition and
Results of Operation.
The OTS required each thrift institution to calculate the estimated change
in the institution's net portfolio value ("NPV") assuming an instantaneous,
parallel shift in the Treasure yield curve of 100 to 400 basis points whether up
or down in 100 basis point increments. NPV represents the sum of future cash
flows of assets discounted to present value less the sum of future cash flows of
liabilities discounted to present value. The OTS permits institutions to utilize
the OTS' model, which is based upon data submitted in the institution's
quarterly thrift financial reports.
In estimating the NPV of mortgage loans and mortgage-backed securities, the
OTS model utilizes various price indications and prepayment rates. At September
30, 1997, these price indications varied from 70.80 to 120.86 for fixed-rate
mortgages and mortgage-backed securities and varied from 88.74 to 109.03 for
adjustable rate mortgages and mortgage-backed securities. Prepayment rates for
September 30, 1997 ranged from a CPR of 5% to a CPR of 77%.
The value of deposit accounts appears on both the asset and liability side
of the NPV calculation of the OTS model. In estimating the value of certificates
of deposit accounts, ("CDs"), retail price estimates represent the value of the
liability implied by the CD and reflect the difference between the CD coupon and
secondary-market CD rates. As of September 30, 1997, the retail CD price
assumptions varied from 74.65 to 123.18. The retail CD intangible prices
represent the value of the "customer relationship" due to the rollover of CD
deposits and are an intangible asset for an institution. As of September 30,
1997, the retail CD intangible price assumptions varied from .01 to .72.
Other deposit accounts such as transaction accounts, money market deposit
accounts, statement savings accounts and non-interest bearing accounts are
valued at 100% of their respective outstanding balances in all nine interest
rate scenarios on the liability side of the OTS model. On the asset side of the
model, intangible prices are used to reflect the value of the "customer
relationship" of the various types of deposit accounts. As of September 30,
1997, the intangible prices for transaction accounts, money market deposit
accounts, passbook accounts and non-interest-bearing accounts varied from (2.20)
to 20.16, (.60) to 11.30, (.93) to 16.49 and 3.50 to 17.49, respectively.
The following table sets forth the institution's interest rate
sensitivity of NPV as of September 30, 1997, (in thousands).
Change Net Portfolio Value NPV as % of Present Value of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
+400 bp 317 (6,966) (96 %) 0.39% (761) bp
+300 bp 2,079 (5,204) (71 %) 2.47% (553) bp
+200 bp 3,901 (3,382) (46 %) 4.51% (349) bp
+100 bp 5,700 (1,583) (22 %) 6.42% (159) bp
0 bp 7,283 8.00%
-100 bp 8,388 1,105 15 % 9.05% 104 bp
-200 bp 9,341 2,058 28 % 9.90% 190 bp
-300 bp 10,655 3,372 46 % 11.06% 306 bp
-400 bp 12,240 4,957 68 % 12.42% 442 bp
Various strategies are in place to control SCSB's exposure to interest rate
risk. SCSB's senior management personnel are primarily responsible for
management of the Corporation's exposure to interest rate risk. Senior
management personnel monitors the interest rate risk position to minimize its
potential negative effects on SCSB's financial condition. As its primary
strategy to control the potential negative effects of SCSB's market risk
exposure, senior management personnel actively adjusts its interest earning
asset and interest bearing liability composition and pricing.
Item 8. Financial Statements and Supplementary Data.
The Holding Company's Consolidated Financial Statements and Notes thereto
contained on pages 14 through 29 in the Shareholder Annual Report are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no such changes or disagreements during the applicable period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 2 through 4 of the Holding Company's Proxy
Statement for its Annual Shareholder Meeting to be held January 22, 1998 (the
"1998 Proxy Statement"). Information concerning the Registrant's executive
officers is included in Item 4.5 in Part I of this report.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 4 and 5 of the 1998 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to pages
1 through 3 of the 1998 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to pages
4 and 5 of the 1998 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List the following documents filed as part of the report:
Financial Statements Annual Report Page No.
Consolidated Statements of Financial Condition
at September 30, 1997, and 1996...................... 15
Consolidated Statements of Earnings for the Years
Ended September 30, 1997, 1996 and 1995.............. 16
Consolidated Statements of Shareholders' Equity for the
Years Ended September 30, 1997, 1996 and 1995........ 17
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1997, 1996 and 1995.............. 18
Notes to Consolidated Financial Statements................ 19-25
(b) Reports on Form 8-K.
The Registrant filed no Reports on Form 8-K for the quarter ending September
30, 1997.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page ___.
(d) All financial statement schedules are omitted as the required information
is not applicable or the required information is included in the
Consolidated Financial Statements or related notes.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
SHELBY COUNTY BANCORP
Date: December 23, 1997 By: /s/ Rodney L. Meyerholtz
-------------------------------
Rodney L. Meyerholtz, President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 23rd day of December,
1997.
/s/ Rodney L. Meyerholtz
-----------------------------
Rodney L. Meyerholtz,
President and Director
(Principal Executive Officer)
/s/ James M. Robison
-----------------------------
James M. Robison,
Chairman of the Board
/s/ Leonard J. Fischer
-----------------------------
Leonard J. Fischer,
Vice President and Director
/s/ Robert E. Thomas
-----------------------------
Robert E. Thomas, Treasurer (Principal Financial
and Accounting Officer) and Director
/s/ David A. Carmony
-----------------------------
David A. Carmony, Secretary and Director
EXHIBIT INDEX
Exhibit Page
3(1) The Articles of Incorporation of the Registrant are
incorporated by reference to Exhibit 3(1) to the Registration
Statement on Form S-1 (Registration No. 33-40540).
3(2) The Code of By-Laws of the Registrant are incorporated by
reference to Exhibit 3(2) to the Registration Statement on
Form S-1 (Registration No. 33-40540).
4 (1) Rights Agreement, dated as of April 17, 1995, between
Registrant and Bank One, Indianapolis, NA, as Rights Agent, as
incorporated by reference to Exhibit 2 to the Registration
Statement on Form 8-A (Registration No. 19445).
10(1) Employment Agreement entered into between SCSB and Rodney L.
Meyerholtz is incorporated by reference to Exhibit 10(2) to
the Registration Statement on Form S-1 (Registration No.
33-40540).
10(2) Employment Agreement entered into between SCSB and Ronald L.
Lanter is incorporated by reference to Exhibit 10(3) to the
Registration Statement on Form S-1 (Registration No.
33-40540).
10(3) Employment Agreement entered into by SCSB and Joyce E. Ford is
incorporated by reference to Exhibit 10(4) to the Registration
Statement on Form S-1 (Registration No. 33-40540).
10(4) Registrant's Stock Option Plan is incorporated by reference to
Exhibit A to Registrant's Proxy Statement in respect of its
1992 Annual Meeting, filed on or about December 27, 1991.
11 Statement of Computation of Per Share Earnings.
13 1997 Shareholder Annual Report.
22 Subsidiaries of the Registrant are incorporated by reference
to Exhibit 22 to the Registration Statement on Form S-1
(Registration No. 33-40540).
27 Financial Data Schedule