FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20552
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES ACT OF 1934
For the Quarterly Period Ended June 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number
0-24501
BLUE RIVER BANCSHARES, INC.
---------------------------
(Exact name of small business issuer as specified in its charter)
Indiana 35-2016637
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
29 East Washington Street
Shelbyville, Indiana 46176
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(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code:
(317) 398-9721
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
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As of June 30, 2002, there were 1,549,913 shares of the Registrant's Common
Stock issued outstanding.
Transitional Small Business Disclosure Format.
(Check one): Yes No X
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BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
INDEX
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PAGE
NUMBER
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PART I. FINANCIAL INFORMATION (Unaudited):
Item 1. Consolidated Financial Statements:
Consolidated Statement of Financial Condition (Unaudited)
as of June 30, 2002 3
Consolidated Statements of Operations (Unaudited) for the
three months ended June 30, 2002 and 2001 4
Consolidated Statements of Operations (Unaudited) for the
six months ended June 30, 2002 and 2001 5
Consolidated Statements of Cash Flows (Unaudited) for the
six months ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements (Unaudited) 7-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-18
PART II. OTHER INFORMATION: 19
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE PAGE 20
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
AS OF JUNE 30, 2002
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ASSETS
Cash and due from banks $ 4,291,124
Interest-bearing deposits with banks 4,575,504
Investment securities available for sale 31,992,343
Investment securities held to maturity 279,102
Loans receivable, net 64,482,582
Stock of FHLB Indianapolis 2,153,000
Accrued interest receivable 697,947
Deferred and refundable income taxes 2,491,082
Premises and equipment, net 1,778,476
Real estate owned 1,351,669
Prepaid expenses and other assets 435,127
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TOTAL ASSETS $ 114,527,956
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits 100,572,686
FHLB advances 2,500,000
Accrued expenses and other liabilities 458,033
Accrued interest payable 1,013,150
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Total liabilities 104,543,869
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SHAREHOLDERS' EQUITY:
Common stock, without par value: 1,549,913 shares issued and outstanding 16,579,196
Accumulated deficit (6,919,222)
Unrealized gain on available for sale securities, net of income taxes 324,113
-------------
Total shareholders' equity 9,984,087
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 114,527,956
=============
See notes to consolidated financial statements (unaudited).
-3-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
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2002 2001
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INTEREST INCOME:
Loans receivable $ 1,252,069 $ 2,303,640
Securities 372,285 262,467
Interest-bearing deposits 30,243 158,016
Dividends from FHLB 33,548 41,600
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Total interest income 1,688,145 2,765,723
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INTEREST EXPENSE:
Interest expense on deposits 1,070,608 1,645,971
Interest expense on FHLB and other borrowings 34,377 152,868
----------- -----------
Total interest expense 1,104,985 1,798,839
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NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 583,160 966,844
PROVISION FOR LOAN LOSSES 400,000
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 583,160 566,884
----------- -----------
NON-INTEREST INCOME:
Service charges and fees 64,418 64,670
Loss on Sale of Securities, Loans and other assets (9,519) (6,233)
Other 36,078 62,310
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Total non-interest income 90,977 120,747
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NON-INTEREST EXPENSE:
Salaries and employee benefits 358,784 515,448
Premises and equipment 114,074 175,661
Federal deposit insurance 49,553 16,043
Data processing 116,784 133,457
Advertising and promotion 4,973 12,698
Bank fees and charges 17,925 23,593
Directors fees 28,950 32,610
Professional fees 105,698 67,359
Stationery, supplies and printing 20,177 11,602
Goodwill amortization 53,103
Other 234,216 205,223
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Total non-interest expense 1,051,134 1,246,797
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LOSS BEFORE INCOME TAX BENEFIT (376,997) (559,166)
INCOME TAX BENEFIT (155,664) (206,397)
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NET LOSS before cumulative effect of change in accounting principle (221,333) (352,769)
Cumulative effect of change in accounting principle 2,429,081
----------- -----------
NET LOSS $(2,650,414) $ (352,769)
=========== ===========
Basic and diluted loss per share before change in accounting principle $ (0.14) $ (0.23)
Cumulative effect of change in accounting principle (1.57)
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Basic and diluted loss per share $ (1.71) $ (0.23)
=========== ===========
See notes to consolidated financial statements (unaudited).
-4-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
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2002 2001
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INTEREST INCOME:
Loans receivable $ 2,586,843 $ 4,696,223
Securities 710,276 561,265
Interest-bearing deposits 77,240 222,126
Dividends from FHLB 65,401 84,070
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Total interest income 3,439,760 5,563,684
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INTEREST EXPENSE:
Interest expense on deposits 2,233,282 3,275,809
Interest expense on FHLB and other borrowings 73,225 313,967
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Total interest expense 2,306,507 3,589,776
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NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 1,133,253 1,973,908
PROVISION FOR LOAN LOSSES 75,000 445,000
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,058,253 1,528,908
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NON-INTEREST INCOME:
Service charges and fees 123,972 125,989
Gain/(Loss) on Sale of Securities, Loans and other assets (959) 2,317
Other 79,936 125,692
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Total non-interest income 202,949 253,998
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NON-INTEREST EXPENSE:
Salaries and employee benefits 705,606 1,082,255
Premises and equipment 230,202 360,972
Federal deposit insurance 108,321 31,682
Data processing 219,926 260,180
Advertising and promotion 12,104 32,806
Bank fees and charges 35,144 43,182
Directors fees 57,900 56,550
Professional fees 185,215 211,245
Stationery, supplies and printing 42,857 52,092
Goodwill amortization 106,206
Other 348,074 337,309
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Total non-interest expense 1,945,349 2,574,479
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LOSS BEFORE INCOME TAX BENEFIT (684,147) (791,573)
INCOME TAX BENEFIT (286,630) (283,160)
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NET LOSS before cumulative effect of change in accounting principle (397,517) (508,413)
Cumulative effect of change in accounting principle 2,429,081
----------- -----------
NET LOSS $(2,826,598) $ (508,413)
=========== ===========
Basic and diluted loss per share before change in accounting principle $ (0.26) $ (0.33)
Cumulative effect of change in accounting principle (1.56)
----------- -----------
Basic and diluted loss per share $ (1.82) $ (0.33)
=========== ===========
See notes to consolidated financial statements (unaudited).
-5-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
- ---------------------------------------------------------------------------------------------------------------
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,826,598) $ (508,415)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization 293,780 271,690
Cumulative effect of change in accounting principle 2,429,081
Loss on premises and equipment 100,000
Provision for loan losses 75,000 445,000
(Gain)/Loss on sales of available-for-sale securities (4,200)
(Gain)/Loss on sales of premises and equipment and other assets 1,088 (8,550)
Changes in assets and liabilities:
Accrued interest receivable 20,640 73,154
Other assets (516,632) (645,794)
Other liabilities 894,236 772,499
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Net cash from operating activities 466,395 399,584
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CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations, net of principal repayments 7,347,517 3,438,433
Principal maturities collected on securities 5,021,609 3,187,119
Proceeds from sale of premises and equipment 401,804
Capital expenditures (1,901)
Proceeds from sale of available-for-sale securities 4,830,120
Purchases of available-for-sale securities (14,292,006) (134,607)
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Net cash from investing activities 2,905,339 6,892,749
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of FHLB advances and other borrowings (2,500,000) (2,500,000)
Net change in deposits (7,042,434) (5,369,454)
Net cash used in financing activities (9,542,434) (7,869,454)
------------ ------------
NET DECREASE IN CASH AND EQUIVALENTS (6,170,700) (577,121)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 15,037,328 19,084,277
------------ ------------
CASH AND EQUIVALENTS, END OF PERIOD $ 8,866,628 $ 18,507,156
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 1,536,564 $ 2,526,000
See notes to consolidated financial statements (unaudited).
-6-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
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1. BASIS OF CONSOLIDATION AND PRESENTATION
The unaudited consolidated financial statements include the accounts of Blue
River Bancshares, Inc. (the "Company") and its wholly-owned subsidiary Shelby
County Bank (the "Bank"). Summary of significant accounting policies is set
forth in Note 1 of the Notes to the Consolidated Financial Statements of the
Company included in the December 31, 2001 Annual Report to Shareholders.
The accompanying consolidated interim financial statements at June 30, 2002,
and for the three months ended June 30, 2002 and 2001, and the six month
periods ended June 30, 2002 and 2001, are unaudited and have been prepared in
accordance with instructions to Form 10-QSB. In the opinion of management,
the financial statements include all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows for such periods.
2. DESCRIPTION OF BUSINESS
The Bank provides financial services to south central Indiana through its
main office in Shelbyville and three other full service branches in
Shelbyville, Morristown, and St. Paul, Indiana.
On December 31, 2001, the Company completed the sale of its two Fort Wayne
branches pursuant to a Branch Purchase and Assumption Agreement (the
"Agreement") entered into with Community First Bank and Trust, an Ohio
state-chartered bank ("Community") on October 17, 2001. The Agreement
provided for Community's assumption of certain deposit and other liabilities
and purchase of certain assets of two branch offices. Under the terms of the
Agreement, Community acquired the loans, personal property, fixed assets,
cash, records, and real property lease interests of the two branches located
in Fort Wayne, Indiana. The transaction involved the purchase of
approximately $31 million in assets and the assumption of approximately $11
million in liabilities. The difference between the assets and liabilities was
offset by a cash payment from Community to the Company of approximately $21
million. Community also retained all the employees of the Fort Wayne
branches.
The Bank is subject to competition from other financial institutions and is
regulated by certain federal agencies and undergoes periodic examinations by
those regulatory authorities.
3. COMPREHENSIVE INCOME
In accordance with SFAS No. 130, reclassification adjustments have been
determined for all components of other comprehensive income reported in the
consolidated statements of changes in shareholders' equity. Amounts are
presented within those statements for the six month periods ended June 30,
2002 and 2001.
-7-
June 30, June 30,
2002 2001
Net Loss $(2,826,598) $(508,413)
Other comprehensive income before tax:
Net unrealized gains/(losses) on available-for-sale securities 365,720 317,045
Less: reclassification adjustment for gains realized in net income (4,200)
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Other comprehensive income/(loss) before income taxes 361,520 317,045
Income tax expense/(benefit) related to items of other
comprehensive income 143,737 126,054
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Other comprehensive income/(loss), net of tax 217,783 190,991
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Comprehensive Loss $(2,608,815) $(317,422)
=========== =========
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, ("SFAS 133") Accounting for Derivative
Instruments and Hedging Activities, was issued. This statement was amended by
Statement of Financial Accounting Standards No. 137 ("SFAS 137"), Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of SFAS 133. SFAS 133, as amended by SFAS 137, is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognizes
all derivatives as either assets or liabilities in the statement of financial
condition and measures those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as a fair value hedge, a
cash flow hedge, or a hedge of foreign currency exposure. The accounting for
changes in the fair value of a derivative (that is, gains and losses) depends
on the intended use of the derivative and the resulting designation. The
Company adopted this statement on January 1, 2001, and the adoption of this
statement had no material impact on the financial condition, results of
operations or cash flows of the Company.
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations," was issued in July 2001. SFAS 141 requires the purchase method
of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method.
Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill
and Other Intangible Assets," was issued in July 2001. Under SFAS 142,
goodwill amortization ceases when the new standard is adopted. The new rules
also require an initial goodwill impairment assessment in the year of
adoption and at least annual impairment tests thereafter. SFAS 142, is
effective for the Company January 1, 2002. Annual goodwill amortization of
approximately $212,000 was ceased on January 1, 2002.
Management completed the assessment and evaluation process of determining the
impairment of goodwill in accordance with SFAS 142 during the second quarter
of 2002. The Company engaged an independent 3rd party appraiser to complete a
phase 1 evaluation of the company. The measurement of impairment resulted in
a reduction of goodwill and a cumulative change in accounting principle of
$2,429,081. The proforma impact of amortization expense on net loss before
change in accounting principle for the initial application and prior periods
are as follows:
-8-
Six Month Periods Ended Three Month Periods Ended
June 30, June 30,
----------------------- -----------------------------
2002 2001 2002 2001
Reported net loss before change in
accounting principle $(397,517) $(508,413) $(221,333) $(352,769)
Addback: Goodwill Amortization 106,206 53,103
--------- --------- --------- ---------
Adjusted net loss before change in
accounting principle $(397,517) $(402,207) $(221,333) $(299,666)
========= ========= ========= =========
Basic and diluted loss per share
before change in accounting principle: $ (0.26) $ (0.33) $ (0.14) $ (0.23)
Addback: Goodwill Amortization 0.07 0.04
--------- --------- --------- ---------
Adjusted basic and diluted loss per share
before change in accounting principle $ (0.26) $ (0.26) $ (0.14) $ (0.19)
========= ========= ========= =========
Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting
for Asset Retirement Obligations," was issued in June 2001 and is effective
for financial statements issued for fiscal years beginning after June 15,
2002. SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Management has not yet quantified the
effect, if any, of this new standard on the consolidated financial
statements.
Statement of Financial Accounting Standards No. 144 ("SFAS 144), "Accounting
for the Impairment or Disposal of Long-Lived Assets" was issued in August
2001 and is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. Management has determined that
there will be minimal or no impact on the consolidated financial statements
after adopting SFAS 144.
Statement of Financial Accounting Standards No. 145 "Rescission of FASB No.
4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections"
was issued April 2002. The Company has not yet determined the impact that
adopting SFAS 145 will have on its results of operations or financial
position.
5. SEGMENT INFORMATION
In accordance with SFAS No. 131, the Company has disclosed all required
information relating to its one operating segment, Community Banking.
6. REGULATORY MATTERS
On July 10, 2000 the Office of Thrift Supervision (the "OTS") issued a letter
which formally designated Shelby County Bank to be in "troubled condition"
based upon the preliminary findings of the OTS' then ongoing examination of
the Bank. The OTS expressed supervisory concern relating to the Bank's
management, operating losses, interest rate risk sensitivity, internal
controls and loan documentation. Pursuant to the letter, the Bank is subject
to the following restrictions: (i) no increase in total assets during any
quarter in excess of an amount equal to interest credited on deposits during
the quarter without prior written approval of the OTS, (ii) prior OTS
approval of all executive compensation and agreements and the hiring of any
executive officer, director or consultant or changing the responsibilities of
any current executive officer, (iii) prior notice to the OTS of all
transactions between the Bank and its affiliates, (iv) prior OTS approval of
all transactions between the Bank and third parties outside the normal course
of business and (v) no golden parachute payments by the Bank, unless
permissible pursuant to applicable law. The Company and the Bank are taking
action to address the
-9-
concerns set forth in this letter. The growth restrictions imposed by the OTS
may have a material adverse effect on the Bank's operations.
On February 7, 2001 the OTS issued a letter which formally designated Blue
River Bancshares to be in "troubled condition" pursuant to the results of the
March 13, 2000 examination. This letter places restrictions on the Company to
notify the OTS at least 30 days prior to adding or replacing of members of
the board of directors, or employing or changing responsibilities of senior
executive officers. The letter also prohibits golden parachute payments
unless such payments are permitted by regulation.
On April 5, 2001, the OTS notified Shelby County Bank in writing that the
business plan and budget submitted by the Bank had been approved. Although
the Bank is no longer subject to the growth restrictions previously imposed
by the OTS, the Bank may not make any significant changes to its business
plan and budget without prior approval of the OTS. The Bank's business plan
and budget contemplates minimal growth in the foreseeable future. However,
there can be no assurances that the Bank will grow. In fact, depending on
business conditions, the Bank's size may decrease.
7. PRIVATE PLACEMENT
On June 7, 2002, the Company entered into a Stock Purchase Agreement with
three individuals, Russell Breeden III, Wayne Ramsey and L. Gene Tanner (the
"Purchasers") which provides for the purchase of 321,089 shares of common
stock at a price of $4.73 per share. The Agreement also provides for a
subsequent purchase of 535,148 shares of common stock by individuals
identified by the Purchasers at a price of $4.73. The total amount of capital
raised by this private placement is expected to be approximately $4,050,000.
This private placement is subject to regulatory approval, which is now
pending and certain other customary conditions. The shares will not be
registered under the Securities Act of 1933 and may not be offered or sold in
the United States by the investors absent registration or an applicable
exemption from registration requirements. The proceeds from the private
placement will be used for general corporate purposes. The Agreement further
provides that the Company intends to conduct a rights offering in the near
future in which its existing shareholders would receive non-transferable
rights to acquire shares in the offering.
In connection with the Stock Purchase Agreement, on June 16, 2002 a Change of
Control Application was filed with the Office of Thrift Supervision. In
accordance with 12 CFR, the proceeds from the private placement will be used
for general corp. purposes a Change of Control Application must be filed if
a purchase of stock or issuance of stock creates an ownership or voting
position in excess of 10%. The application is pending approval of the OTS.
8. SUBSEQUENT EVENTS
None.
-10-
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements throughout this section regarding the Company's and the
Bank's financial position, business strategy and plans and objectives of
management for future operations are forward-looking statements rather than
historical or current facts. When used in this section, words such as
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
as they relate to the Company and the Bank or their respective management,
identify forward-looking statements. Such forward-looking statements are based
on the beliefs of management of the Company and the Bank as well as assumptions
made by and information currently available to management of the Company and the
Bank. Such statements are inherently uncertain, and there can be no assurance
that the underlying assumptions will prove to be valid. Actual results could
differ materially from those contemplated by the forward-looking statements as a
result of certain factors, including but not limited to competitive factors and
pricing pressures, changes in legal and regulatory requirements, technological
change, product development risks and general economic conditions, including,
but not limited to, changes in interest rates, loss of deposits and loans to
other savings and financial institutions, substantial changes in financial
markets, substantial changes in real estate values and the real estate market
and unanticipated results in pending legal proceedings. Such statements reflect
the current view of the Company and the Bank with respect to future events and
are subject to these and other risks, uncertainties and assumptions relating to
the operations, results of operations, growth strategy and liquidity of the
Company and the Bank.
CRITICAL ACCOUNTING POLICIES
Real estate owned represents real estate acquired through foreclosure or deed in
lieu of foreclosure and is recorded at the lower of cost or fair value less
estimated costs to sell. When property is acquired, it is recorded at the lower
of cost or estimated fair value at the date of acquisition, with any resulting
write-down charged against the allowance for loan losses. Any subsequent
deterioration of the property is charged directly to real estate owned expense.
Costs relating to the development and improvement of real estate owned are
capitalized, whereas costs relating to holding and maintaining the property are
charged to expense as incurred.
Interest on real estate, commercial and installments loans is accrued over the
term of the loans on a level yield basis. The Company discontinues accruing
interest on loans and reverses previously accrued amounts for loans that are
more than 90 days past due on commercial and consumer loans and 120 days past
due on mortgage loans. Income is subsequently recognized only to the extent that
cash payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments returns to normal, in
which case the loan is returned to accrual status.
Nonrefundable loan origination fees, net of certain direct loan origination
costs, are deferred and recognized as a yield adjustment over the life of the
underlying loan. Any unamortized fees on loans sold are included as part of the
gain/loss on sale of loans at time of sale.
An analysis of the allowance for loan losses is performed quarterly by
management to assess the appropriate levels of allowance for loan losses. This
analysis is performed to recognize specific reserves allocated to classified
assets, assess portfolio growth, and to monitor trends in loan delinquencies and
charge-offs. Specific reserves are established based upon review of individual
borrowers identified in the classified loan list, establishing the probability
of loss associated with such borrowers, including comparison of loan balances
versus estimated liquidation values of collateral based upon independent
information sources or appraisals performed by board-approved licensed
appraisers. Management establishes such specific reserves at or above minimum
percentage allocations established by the Office of Thrift Supervision ("OTS")
guidelines for each classification, including delinquent loans. The remaining
pool of loans, excluding those classified or delinquent, is the source for the
general loan loss reserve. Management evaluates this general reserve using loan
loss statistics by various types of loans, as published periodically by the OTS
and
-11-
multiplying such loss percentages to the Bank's distribution of portfolio
balances. The calculated reserve is compared to the Bank's existing reserve to
establish the provision necessary to bring the actual reserve balance in
compliance with the findings of the allowance analysis.
The Bank holds certain investment securities as "available for sale". Available
for sale securities are stated at their current fair value. Unrealized gains and
losses associated with available for sale securities, net of taxes, are excluded
from earnings and reported as a net amount in shareholders' equity until
realized.
The Bank has the ability and does hold securities classified as "held to
maturity" until their respective maturities. Accordingly, such securities are
stated at cost and are adjusted for amortization of premiums and accretion of
discounts.
Realized gains or losses from the sale of securities are reflected in income on
specific identification basis. Interest income and the amortization of the
premium and discount arising at the time of acquisition are included in interest
income.
FINANCIAL CONDITION:
The Company's total assets at June 30, 2002 were $114,528,000, a decrease of
$11,262,000 from December 31, 2001. In order to maintain "well capitalized"
status the Bank has scaled back it's growth strategy while continuing to focus
on improving net interest income and overall profitability. The Bank's balance
sheet has been reduced from historical levels primarily through the sale of its
Fort Wayne banking centers in the fourth quarter of 2001.
The investment portfolio balances have increased to $32,271,000 at June 30, 2002
from $27,636,000 at December 31, 2001. The Bank has continued to invest
primarily in agency securities and mortgage-backed securities. Both of these
investment products receive favorable risk-based capital treatment.
Due to increases in the investment portfolios, the Bank's interest-bearing
deposits within other banks declined ($6,345,000) to $4,576,000 at June 30, 2002
from $10,921,000 at December 31, 2001. Management believes that the Bank's
liquidity levels are sufficient to meet its operating needs.
The Bank's net loans declined ($7,453,000) from December 31, 2001 to $64,483,000
at June 30, 2002. Due to the Bank's desire to maintain its "well capitalized"
status, the Bank's efforts in lending have been reduced. However, the Bank is
making efforts to originate sufficient loan volume to stabilize the portfolio
holdings. Due to the higher risk weighting of non-residential products, and the
highly competitive rates available to borrowers, the Bank has continued to focus
its new lending efforts in home equity products.
JUNE 30, DECEMBER 31,
2002 2001
Residential mortgages $ 31,502,259 $ 31,843,376
Commercial loans secured by real estate 19,218,584 23,397,672
Commercial and agriculture 3,988,746 4,866,174
Consumer loans 7,972,538 10,199,602
Home equity loans 3,563,155 3,520,294
Less allowance for loan losses (1,762,700) (1,891,366)
---------- ----------
Total loans receivable, net $ 64,482,582 $ 71,935,752
============ ============
-12-
JUNE 30, DECEMBER 31,
2002 2001
Non-performing loans consist of the following:
Non-accrual loans $2,336,465 $2,699,996
Real estate owned - net 1,351,669 1,003,329
--------- ---------
Total non-performing loans $3,688,134 $3,703,325
========== ==========
Non-performing loans to total loans 5.57% 5.02%
The Bank stops accruing interest on loans secured by real estate that become
delinquent in excess of 120 days, and loans not secured by real estate in excess
of 90 days. At June 30, 2002 loans in non-accruing status were $2,336,000, a
decrease of ($364,000) from December 31, 2001. The Bank's real estate owned,
containing properties foreclosed upon, increased approximately $348,000.
Total liabilities at June 30, 2002 were $104,544,000, a decrease of $8,653,000
compared to $113,197,000 at December 31, 2001. Deposits at June 30, 2002 were
$100,573,000 compared to $107,620,000 at December 31, 2001, a decrease of
($7,047,000). The Bank continues to focus efforts on attracting retail deposits,
and to decrease its concentration of certificates.
Shareholders' equity at June 30, 2002 was $9,984,000, a decrease of ($2,609,000)
compared to December 31, 2001. This decrease is the result of $218,000 of
unrealized gains within the Company's available-for-sale securities portfolio,
net of income tax, combined with the Company's net loss of ($2,827,000).
The Company's liquidity position is the primary source of additional capital for
infusion into its banking subsidiary. During the six months ended June 30, 2002,
the Company has continued its reduced use of funds through improved expense
controls and capital expenditure policies. Due to the Company's current
liquidity sources and its decreased use of funds, the Company does not
anticipate the need for any additional external funding over the next twelve
months in order to satisfy cash requirements.
Activity in the allowance for loan losses consists of the following:
SIX MONTHS ENDED
JUNE 30,
-----------------------------
2002 2001
Balance, beginning of period $ 1,891,366 $ 1,943,741
Add:
Provision for loan losses 75,000 445,000
Recoveries of loans previously charged off 81,848 7,409
Less: Gross charge-offs:
Consumer/commercial loans (285,514) (98,728)
----------- -----------
Balance, end of period $ 1,762,700 $ 2,297,422
=========== ===========
Net charge-offs to total average loans outstanding 0.29% 0.16%
Allowance to total average loans outstanding 2.50% 2.05%
-13-
Allowance for loan losses at June 30, 2002 was $1,763,000, a decrease of
$128,000 from December 31, 2001. The Company's provision for loan losses for the
year was $75,000 and its net charge-offs were approximately $204,000. An
analysis of the allowance for loan losses is performed quarterly by management
to assess the appropriate levels of allowance for loan losses. This analysis is
performed to recognize specific reserves allocated to classified assets, assess
portfolio growth, and to monitor trends in loan delinquencies and charge-offs.
Specific reserves are established based upon review of individual borrowers
identified in the classified loan list, establishing the probability of loss
associated with such borrowers, including comparison of loan balances versus
estimated liquidation values of collateral based upon independent information
sources or appraisals performed by board-approved licensed appraisers.
Management establishes such specific reserves at or above minimum percentage
allocations established by the Office of Thrift Supervision ("OTS") guidelines
for each classification, including delinquent loans. The remaining pool of
loans, excluding those classified or delinquent, is the source for the general
loan loss reserve. Management evaluates this general reserve using loan loss
statistics by various types of loans, as published periodically by the OTS and
multiplying such loss percentages to the Bank's distribution of portfolio
balances. The calculated reserve is compared to the Bank's existing reserve to
establish the provision necessary to bring the actual reserve balance in
compliance with the findings of the allowance analysis.
During the third quarter of 2000, the Company completed an internal
investigation related to its former president. As a result of this investigation
the Bank reviewed all consumer secured, unsecured commercial, commercial
secured, commercial real estate and residential mortgage loans for which the
former president either acted as the loan officer, was involved through his
relationship or affiliation with the borrower, or was otherwise actively
involved in the loan. The following is a breakdown of loans identified in the
review which are classified as non-performing as of June 30, 2002:
June 30, 2002 December 31, 2001
Number of loans Loan Balance Number of loans Loan Balance
-------------------------------- --------------------------------
Residential mortgage 1 $112,408 3 $ 243,909
Consumer secured 2 20,298 2 8,544
Commercial secured 2 226,972 2 217,503
- -------- - ----------
Total 5 $359,678 7 $ 469,956
======== ==========
RESULTS OF OPERATIONS: Three Months Ended June 30, 2002
During the three month period ended June 30, 2002, the Company's net loss was
($2,650,000) compared to a ($353,000) net loss reported for the three month
period ended June 30, 2001. Of the Company's net loss, ($2,429,000) can be
attributed to the write-off of goodwill due to the adoption of SFAS# 142 and the
resulting cumulative effect of the change in accounting principle related to the
goodwill impairment. The Company's net loss before the change in accounting
principle was ($377,000) compared to ($559,000) for the three month period ended
June 30, 2001. The Company's comparative performance showed a decline in net
interest income before provision for loan loss of ($384,000), a decrease in the
provision for loan losses of ($400,000), a decrease in non-interest income of
($30,000), a reduction in non-interest expenses of ($196,000), and a decrease in
the income tax benefit of $51,000.
The reduction in net interest income before provision for loan losses resulted
from a decrease in interest income of ($1,078,000), partially offset by a
reduction in interest expense of ($694,000). These variances were impacted by
the sale of the Fort Wayne banking centers. In the sale, the Bank received
approximately $21,000,000 in cash. The cash was used to acquire investments,
which possessed lower yields than loans, which were sold with the branches,
resulting in lower interest income. Because approximately $32,000,000 in
deposits were retained by the Bank, interest expense did not reflect as
substantial a reduction when compared to interest income.
-14-
Interest income and fees from loans decreased from $2,304,000 for the three
month period ended June 30, 2001 to $1,252,000 for the three month period ended
June 30, 2002. This decrease was comprised of an unfavorable variance of
($860,000) due to lower average loan balances of $40,573,000 and an unfavorable
variance of ($198,000) due to a decrease of 111 basis points in the effective
yield on loans. A significant portion of the volume variance is reflective of
the sale of the loans related to the Fort Wayne banking centers. The reduction
in yield is a combination of loans which repriced as market rates were
declining, the impact of loans being placed in non-accruing status, and
production of new loans during a low rate cycle as compared to portfolio average
yields.
Interest income from investment securities increased $110,000 to $372,000 for
the three months ended June 30, 2002, as compared to the three month period
ended June 30, 2001. This increase results from a favorable variance of $251,000
from an increase in average investment balances of $16,622,000 and an
unfavorable variance of ($141,000) due to investment yields being 166 basis
points lower. The increased balances resulted from the excess liquidity
resulting from the Fort Wayne transaction and the subsequent investment
purchases to improve yields. The rate variance was the result of: the frequent
and numerous rate reductions enacted by the Federal Reserve, a high rate of
turnover due to increased prepayments on mortgage-backed securities, an increase
in bonds being called, incremental portfolio growth and replacement of
maturities and called securities with lower rate bonds.
Interest income from interest-bearing deposits held within other banks decreased
($128,000) from $158,000 for the three month period ended June 30, 2001 to
$30,000 for the three month period ended June 30, 2002. This decrease contained
an unfavorable variance of ($82,000) due to a decrease in average balances of
($7,834,000) and an unfavorable variance of ($46,000) due to a reduction in
yield from 4.18% to 1.66%. The decline in average balances resulted in a shift
to investment securities. The decline in yield is primarily due to the effect of
the rate reductions by the Federal Reserve Bank, and the immediate impact of
such reductions on liquid assets.
Interest expense on deposits decreased ($575,000) to $1,071,000 for the three
month period ended June 30, 2002, compared to $1,646,000 for the three month
period ended June 30, 2001. This decrease was comprised of favorable variances
of ($353,000) due to a decrease in average deposit balances of ($23,831,000) and
($222,000) due to a decrease in average rates on deposits from 5.13% to 4.09%.
This favorable rate variance was created by lower certificate rates on new and
renewed certificates, as well as reduced rates applied to core deposit products
such as interest-bearing checking, savings, and money market accounts. The
reduction in average deposit balances is a result of the Fort Wayne bank sale,
maturities of high rate promotional certificates of deposits and a decline in
public funds.
Interest expense on FHLB advances decreased ($118,000) from $152,000 for the
three-month period ended June 30, 2001 to $34,000 for the three month period
ended June 30, 2002. This reduction was the result of favorable variances of
($114,000) due to decreased average borrowing balances of ($7,500,000) and
($4,000) due to a reduction in rate from 6.05% to 5.44%.
For the three month period ended June 30, 2002, the provision for loan losses
was decreased to $0 from $75,000 for the three months ended March 31, 2002. The
higher levels of reserves for the three months ended December 31, 2001 reflected
significant deterioration in loans which required establishment of specific
allowances or increases in amounts previously reserved for specific borrowers.
During the second quarter of 2002, no material changes were observed in the
borrowers on the classified borrowers list, nor were there substantial net
charge-offs for the period.
Total non-interest income was $91,000 for the three-month period ended June 30,
2002, compared to $121,000 for the three month period ended June 30, 2001.
Service charges and fees were consistent fees when compared to the three month
period ended June 30, 2001. Mortgage broker fees declined approximately
($30,000) to $4,000 for the three months ended June 30, 2002, from $34,000 for
the three month period ended June 30, 2001.
-15-
Non-interest expenses totaled $1,051,000 for the three month period ended June
30, 2002, compared to $1,247,000 during the three month period ended June 30,
2001. Salaries and benefits for the three month period ended June 30, 2002 were
$359,000, a reduction of ($156,000) from the three month period ended June 30,
2001. Occupancy costs were reduced ($62,000) to $114,000 from $176,000 for the
three month period ended June 30, 2001. Both salaries and benefit expenses and
occupancy costs were significantly impacted by the sale of the Fort Wayne
banking offices. Professional fees for the three-month period were $106,000
compared to $67,000 for the three month period ended June 30, 2001, an increase
of $39,000. Advertising and promotional expenditures were reduced ($8,000) from
the three month period ended June 30, 2001, to $5,000, partially due to less
aggressive promotional efforts and to promotional efforts targeted to only one
geographic market. Costs associated with stationery, supplies and printing
increased by $8,000 to $20,000 from $12,000 for the three month period ended
June 30, 2001, primarily due to additional costs related to the printing of the
2001 annual report. Data processing costs decreased ($16,000) to $117,000 for
the three month period ended June 30, 2002. This decrease was the result of the
impact of elimination of volumes of transactions and accounts related to the
former Fort Wayne banking offices, as well as infrastructure costs required for
telecommunications between the remote sites and the main banking office located
in Shelbyville. Federal deposit insurance premiums increased $34,000 due to an
increase in the Bank's assessment rate.
RESULTS OF OPERATIONS: Six Months Ended June 30, 2002
During the six month period ended June 30, 2002, the Company's net loss
increased to ($2,826,598) compared to a net loss of ($508,000) during the six
month period ended June 30, 2001. Of the ($2,319,000) increase in net loss,
($2,429,000) can be attributed to the cumulative effect of the change in
accounting principle related to the goodwill impairment. Net loss before taxes
and the effect of the change in accounting principle decreased by $108,000 to a
net loss of ($684,000) compared to a net loss before tax of ($792,000) for the
six months ended June 30, 2001. The difference is comprised mostly of a decrease
in net interest income before provision for loan losses of ($841,000), a
decrease in provision of loan loss of ($370,000), a decrease in non-interest
income of ($51,000) offset by a reduction of ($629,000) in non-interest
expenses.
The reduction in net interest income before provision for loan losses resulted
from a decrease in interest income of ($2,125,000), partially offset by a
reduction in interest expense of ($1,283,000).
Interest income and fees from loans decreased ($2,109,000) from $4,696,000 for
the six month period ended June 30, 2001 to $2,587,000 for the six month period
ended June 30, 2002. This decrease was comprised of an unfavorable variance of
($1,736,000) due to lower average loan balances of $41,376,000 (in part due to
the Ft. Wayne sale) and an unfavorable variance of ($373,000) due to a decrease
in the effective yield on loans from 8.47% to 7.40%.
Interest income from investment securities increased from $561,000 to $710,000
for the six month period ended June 30, 2002, as compared to the six month
period ended June 30, 2001. This increase results in a favorable variance of
$685,000 due to an increase in the average investment balances of $12,592,000
and an unfavorable variance of ($536,000) due to investment yields being 155
basis points lower.
Interest income from interest-bearing deposits held within other banks decreased
($145,000) from $222,000 for the six month period ended June 30, 2001 to $77,000
for the six month period ended June 30, 2002. This decrease contains an
unfavorable variance of ($5,000) due to a lower average interest-bearing deposit
balance of ($237,000) and an unfavorable variance of ($140,000) due to a
reduction in yield from 4.51% to 1.61%.
Interest expense on deposits decreased ($1,043,000) to $2,233,000 for the six
month period ended June 30, 2002, compared to $3,276,000 for the six month
period ended June 30, 2001. This decrease is comprised of
-16-
favorable variances of ($605,000) due to a decrease in average deposit balances
of ($19,484,000) and ($438,000) due to a decrease in average rate on deposits
from 5.25% to 4.23%.
Interest expense on FHLB advances decreased ($241,000) from $314,000 for the
period ended June 30, 2001 to $73,000 for the six month period ended June 30,
2002. This reduction was the result of a favorable variance of ($230,000) due to
decrease average borrowing balances of ($7,338,000), and a favorable variance of
($11,000) due to a decrease in the average borrowing rate from 6.24% to 5.45%.
Total non-interest income was $203,000 for the six month period ended June 30,
2002, compared to $254,000 for the six month period ended June 30, 2001. Service
charges and fees were consistent compared to the six month period ended June 30,
2001. The Bank experienced a decrease of ($48,000) in mortgage broker fees
derived by residential mortgage origination generally due to the sale of the
Fort Wayne banking offices.
Non-interest expenses totaled $1,945,000 for the six month period ended June 30,
2002, compared to $2,574,000 during the six month period ended June 30, 2001. As
a result of the Fort Wayne banking offices sale, the Company's salary and
benefit expense declined $376,000 from $1,082,000 for the six month period ended
June 30, 2001 to $706,000 for the six month period ended June 30, 2002; in
addition expenses related to premises and equipment decreased $131,000 from
$361,000 for the six month period ended June 30, 2001 to $230,000 for the six
month period ended June 30, 2002. Data processing expenses declined $40,000 from
$260,000 for the six month period ended June 30, 2001 to $220,000 for the six
month period ended June 30, 2002, another impact of the Fort Wayne sale. Federal
Deposit Insurance increased $76,000 from $32,000 for the six month period ended
June 30, 2001 to $108,000 for the six month period ended June 30, 2002, as a
result of the Bank's increased assessment rate. The Company's officers and
directors continue to evaluate non-interest expenditures for additional
reductions to aid in improving Company performance.
CAPITAL RESOURCES AND LIQUIDITY
The Company is subject to regulation as a savings and loan holding company, and
is subject to certain restrictions in its dealings with the Bank. The Bank is
subject to the regulatory requirements applicable to a federal savings bank.
Current capital regulations require savings institutions to have minimum
tangible capital equal to 1.5% of total assets and a core capital ratio equal to
3.0% of total assets. Additionally, savings institutions are required to meet a
risk based capital ratio equal to 8.0% for risk-weighted assets, as defined. At
June 30, 2002, the Bank satisfied all capital requirements.
On June 30, 2002, the Blue River Bancshares, Inc. transferred $150,000 in
capital to the Bank. This additional capital infusion into the Bank was done in
anticipation of future loan growth. Further, the Bank's regulatory capital was
increased by an additional $128,000 due to a change in current tax regulations.
The following is a summary of the Bank's regulatory capital and capital
requirements at June 30, 2002 based on capital regulations currently in effect
for savings institutions.
-17-
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
Regulatory capital $6,787 $6,787 $7,648
Minimum capital requirement 1,666 3,331 5,446
------ ------ ------
Excess capital $5,121 $3,456 $2,202
====== ====== ======
Regulatory capital ratio 6.11% 6.11% 11.23%
Required capital ratio 1.50% 3.00% 8.00%
------ ------ ------
Ratio excess 4.61% 3.11% 3.23%
====== ====== ======
Further, on June 7, 2002, the Company entered into a Stock Purchase Agreement
with three individuals, which provides for the purchase of 321,089 shares of
common stock by the Purchasers at a price of $4.73 per share. The Agreement also
provides for a subsequent purchase of 535,148 shares of common stock to
individuals identified by the Purchasers at a price of $4.73 per share. The
total amount of capital raised by this private placement is expected to be
approximately $4,050,000. This private placement is subject to regulatory
approval, which is now pending and certain other customary conditions. The
shares will not be registered under the Securities Act of 1933 and may not be
offered or sold in the United States by the investors absent registration or an
applicable exemption from registration requirements. The Agreement further
provides that the Company intends to conduct a rights offering in the near
future in which its existing shareholders would receive non-transferable rights
to acquire shares in the offering.
Liquidity measures the Bank's ability to meet its savings withdrawals and
lending commitments. Management believes that the Bank's liquidity is adequate
to meet current requirements. The Bank maintains liquidity of at least 4% of net
withdrawable assets. At June 30, 2002, its regulatory liquidity ratio was
33.07%.
-18-
V. OTHER INFORMATION
Item 1. Legal Proceedings
There has been no change to matters discussed in Legal
Proceedings in the Company's Form 10-KSB as filed with the
Securities and Exchange Commission on April 1, 2002.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of the shareholders, held on May 7, 2002
in Shelbyville, Indiana, the following three items were
submitted to a vote of the shareholders.
Election of Directors - The following directors were elected for
a term of three years.
Vote Count
----------
FOR WITHHELD
--- --------
Peter G. DePrez 1,390,796 81,057
Lawrence T. Toombs 1,331,946 139,907
Approval of the 2002 Key Employee Stock Option Plan.
Vote Count
----------
FOR WITHHELD ABSTAIN BROKER NONVOTE
--- -------- ------- --------------
414,177 241,517 9,475 806,684
Ratification of the appointment of Independent Public
Accountants - Deloitte & Touche, LLP.
Vote Count
----------
FOR WITHHELD ABSTAIN
--- -------- -------
1,443,516 26,337 2,000
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
The Company filed a Form 8-K on June 10, 2002 with the Securities
and Exchange Commission announcing a Stock Purchase Agreement
between Blue River Bancshares and Russell Breeden III, Wayne C.
Ramsey and L. Gene Tanner.
* * * * *
-19-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf of the undersigned
thereto duly authorized.
Blue River Bancshares, Inc.
Date: August 13, 2002 By: /s/ Patrice M. Lima
-------------------
Patrice M. Lima, Vice President, Controller
-20-