UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2003
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number
0-24501
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
As of November 5, 2003, there were 2,406,150 shares of the Registrant's Common
Stock issued and outstanding.
Transitional Small Business Disclosure Format.
(Check one): Yes ( ) No (X)
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
INDEX
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited)
as of September 30, 2003 and December 31, 2002 3
Consolidated Statements of Operations (Unaudited) for the
three months ended September 30, 2003 and 2002 4
Consolidated Statements of Operations (Unaudited) for the
nine months ended September 30, 2003 and 2002 5
Consolidated Statements of Cash Flows (Unaudited) for the
nine months ended September 30, 2003 and 2002 6
Notes to Consolidated Financial Statements (Unaudited) 7-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-21
Item 3. Controls and Procedures 22
PART II. OTHER INFORMATION: 23
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 24
EXHIBIT INDEX 25
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
- --------------------------------------------------------------------------------
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
ASSETS
Cash and due from banks $ 1,310,905 $ 2,269,908
Interest-bearing deposits with banks 3,402,744 1,169,170
Investment securities available for sale 30,819,484 26,407,360
Investment securities held to maturity 244,752 258,721
Loans receivable, net 65,554,589 56,595,711
Stock of FHLB Indianapolis 2,208,600 2,153,000
Accrued interest receivable 777,658 582,016
Deferred income taxes 2,134,780 1,899,346
Premises and equipment, net 1,648,449 1,781,775
Real estate owned 1,785,448 1,627,505
Prepaid expenses and other assets 536,814 373,454
-------------- --------------
TOTAL ASSETS $ 110,424,223 $ 95,117,966
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits 85,443,343 73,732,754
FHLB advances 11,000,000 11,000,000
Accrued expenses and other liabilities 1,482,488 73,759
Accrued interest payable 525,469 438,675
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Total liabilities 98,451,300 85,245,188
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SHAREHOLDERS' EQUITY:
Common stock, without par value: 2,406,150 and 1,859,802 shares
issued and outstanding 20,463,460 17,980,344
Accumulated deficit (8,630,471) (8,598,851)
Unrealized gain on available for sale securities, net of income taxes 139,934 491,285
-------------- --------------
Total shareholders' equity 11,972,923 9,872,778
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 110,424,223 $ 95,117,966
============== ==============
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 SEPTEMBER 30, 2003 AND 2002
- --------------------------------------------------------------------------------
2003 2002
-------------- --------------
INTEREST INCOME:
Loans receivable $ 1,033,733 $ 1,205,307
Securities 339,687 340,289
Interest-bearing deposits 6,711 28,845
Dividends from FHLB 27,112 33,917
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Total interest income 1,407,243 1,608,358
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INTEREST EXPENSE:
Interest expense on deposits 490,743 960,929
Interest expense on FHLB and other borrowings 90,618 34,755
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Total interest expense 581,361 995,684
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NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 825,882 612,674
PROVISION FOR LOAN LOSSES 60,000 60,000
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 765,882 552,674
-------------- --------------
NON-INTEREST INCOME:
Service charges and fees 57,635 53,041
Gain (Loss) on sale of securities, loans and other assets 77,140 (30,200)
Other 42,741 45,774
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Total non-interest income 177,516 68,615
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NON-INTEREST EXPENSE:
Salaries and employee benefits 392,191 326,029
Premises and equipment 116,153 110,859
Federal deposit insurance 35,602 51,027
Data processing 98,834 274,050
Advertising and promotion 8,688 9,923
Bank fees and charges 13,423 15,291
Directors fees 33,450 33,150
Professional fees 75,152 90,867
Stationery, supplies and printing 14,733 9,999
Environmental 0 111,819
Other 112,739 105,957
-------------- --------------
Total non-interest expense 900,965 1,138,971
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INCOME (LOSS) BEFORE INCOME TAX BENEFIT 42,433 (517,682)
INCOME TAX BENEFIT 0 (211,394)
-------------- --------------
NET INCOME INCOME (LOSS) $ 42,433 $ (306,288)
============== ==============
Basic and diluted earnings (loss) per share $ 0.02 $ (0.18)
============== ==============
See notes to consolidated financial statements (unaudited).
-4-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
- --------------------------------------------------------------------------------
2003 2002
-------------- --------------
INTEREST INCOME:
Loans receivable $ 3,075,350 $ 3,792,151
Securities 857,590 1,050,565
Interest-bearing deposits 42,672 106,086
Dividends from FHLB 83,340 99,318
-------------- --------------
Total interest income 4,058,952 5,048,120
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INTEREST EXPENSE:
Interest expense on deposits 1,456,819 3,194,208
Interest expense on FHLB and other borrowings 259,702 107,982
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Total interest expense 1,716,521 3,302,190
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NET INTEREST INCOME BEFORE PROVISION FOR LOAN
LOSSES 2,342,431 1,745,930
PROVISION FOR LOAN LOSSES 180,000 135,000
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NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 2,162,431 1,610,930
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NON-INTEREST INCOME:
Service charges and fees 157,087 161,505
Gain on sale of securities, loans and other assets 275,948 68,841
Loss on disposal/impairment of premises and equipment 0 (100,000)
Other 146,424 141,219
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Total non-interest income 579,459 271,565
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NON-INTEREST EXPENSE:
Salaries and employee benefits 1,190,924 1,031,634
Premises and equipment 348,008 341,066
Federal deposit insurance 112,567 159,348
Data processing 333,705 493,976
Advertising and promotion 30,174 22,028
Bank fees and charges 40,079 50,434
Directors fees 100,350 91,050
Professional fees 258,527 276,078
Stationery, supplies and printing 39,308 52,597
Environmental 111,819
Other 319,869 454,294
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Total non-interest expense 2,773,511 3,084,324
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LOSS BEFORE INCOME TAX BENEFIT (31,621) (1,201,829)
INCOME TAX BENEFIT 0 (498,024)
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NET LOSS before cumulative effect of change in accounting principle $ (31,621) $ (703,805)
Cumulative effect of change in accounting principle 0 (2,429,081)
-------------- --------------
NET LOSS $ (31,621) $ (3,132,886)
============== ==============
Basic and diluted loss per share before change in accounting principle (0.01) (0.44)
Cumulative effect of change in accounting principle - $ (1.96)
-------------- --------------
Basic and diluted loss per share $ (0.01) $ (1.96)
============== ==============
See notes to consolidated financial statements (unaudited).
-5-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
- --------------------------------------------------------------------------------
2003 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (31,621) $ (3,132,886)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization 406,010 449,252
Cumulative effect of change in accounting principle - 2,429,081
Loss on disposal/impairment of premises and equipment - 100,000
Provision for loan losses 180,000 135,000
(Gain)/Loss on sales of available-for-sale securities (229,407) (4,200)
(Gain)/Loss on sales of premises and equipment and other assets (46,541) 1,088
Changes in assets and liabilities:
Accrued interest receivable (195,642) 28,203
Other assets (655,360) (498,250)
Other liabilities 1,495,523 1,381,385
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Net cash from operating activities 922,962 888,673
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CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations, net of principal repayments (9,332,406) 11,326,654
Proceeds from sale of real estate owned 512,671 -
Principal maturities collected on securities 6,534,467 7,877,734
Proceeds from sale of available-for-sale securities 9,482,230 4,830,120
Purchases of available-for-sale securities (20,963,669) (14,292,006)
Investment in FHLB Stock (55,600) -
Capital expenditures (19,789) (36,955)
-------------- --------------
Net cash (used in) from investing activities (13,842,096) 9,705,547
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CASH FLOWS FROM FINANCING ACTIVITIES:
FHLB advances and other borrowings 4,000,000 -
Payment of FHLB advances and other borrowings (4,000,000) (2,500,000)
Net change in deposits 11,710,589 (13,932,996)
Proceeds from issuance of stock, net offering costs of $101,110 and $64,627 2,483,116 1,401,148
-------------- --------------
Net cash (used in) from financing activities 14,193,705 (15,031,848)
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1,274,571 (4,437,628)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 3,439,078 15,037,328
-------------- --------------
CASH AND EQUIVALENTS, END OF PERIOD $ 4,713,649 $ 10,599,700
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 1,264,811 $ 2,430,964
See notes to consolidated financial statements (unaudited).
-6-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30,
2003 AND 2002
- --------------------------------------------------------------------------------
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, 2002 Annual Report to Shareholders.
The accompanying consolidated interim financial statements at September
30, 2003, and for the three months ended September 30, 2003 and 2002,
and the nine month periods ended September 30, 2003 and 2002, 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.
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. COMMON SHARE INFORMATION
Loss per share of common stock is based on the weighted average number
of basic shares and dilutive shares outstanding.
The following is a reconciliation of the weighted average common shares
for the basic and diluted loss per share computations:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2003 2002 2003 2002
Basic earnings (loss) per share:
Weighted average common shares 2,406,150 1,667,480 2,345,445 1,594,352
========= ========= ========= =========
Diluted earnings (loss) per share:
Weighted average common shares
and incremental shares 2,407,372 1,667,480 2,345,445 1,594,352
========= ========= ========= =========
During the nine months ended September 30, 2003 and 2002, there were no
incremental shares relating to the dilutive effect of stock options.
-7-
4. STOCK BASED COMPENSATION
At September 30, 2003, the Company has stock-based employee
compensation plans. The Company accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net loss
and loss per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2003 2002 2003 2002
Net income (loss):
Net income (loss) as reported $ 42,433 $ (306,288) $ (31,621) $ (3,132,886)
Deduct total stock based
employee compensation
expense determined under fair
value based method for all
awards, net of related
tax effects (3,965) (1,935) (71,733) (65,587)
-------------- -------------- -------------- --------------
Pro forma, net income (loss) $ 38,468 $ (308,223) $ (103,354) $ (3,198,473)
============== ============== ============== ==============
Net earnings (loss) per share:
Basic earnings (loss) per share $ 0.02 $ (0.18) $ (0.01) $ (1.96)
Diluted earnings (loss) per share $ 0.02 $ (0.18) $ (0.01) $ (1.96)
Pro forma earnings (loss) per share:
Basic earnings (loss) per share $ 0.02 $ (0.18) $ (0.04) $ (2.00)
Diluted earnings (loss) per share $ 0.02 $ (0.18) $ (0.04) $ (2.00)
5. INCOME TAXES
During the fourth quarter of 2002, the Company recorded a valuation
allowance against a portion of the deferred taxes because management
concluded that it was more likely than not that a portion of the
benefit associated with the deferred tax asset will not be realized.
The Company has recorded a valuation allowance for deferred tax
benefits that arose in the current year.
-8-
6. COMPREHENSIVE INCOME (LOSS)
In accordance with SFAS No. 130, reclassification adjustments have been
determined for all components of other comprehensive income.
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2003 2002
Net loss $ (31,621) $ (3,132,886)
Other comprehensive income before tax:
Net unrealized gains/(losses) on available-for-sale securities (353,836) 565,031
Less: reclassification adjustment for gains realized in net income (loss) (229,407) (4,200)
-------------- --------------
Other comprehensive income/(loss) before income taxes (583,243) 560,831
Income tax expense/(benefit) related to items of other
comprehensive income (loss) (231,892) 222,981
-------------- --------------
Other comprehensive income/(loss), net of tax (351,351) 337,850
-------------- --------------
Comprehensive Loss $ (382,972) $ (2,795,036)
============== ==============
7. NEW ACCOUNTING PRONOUNCEMENTS
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, was effective for the Company January 1, 2002.
Annual goodwill amortization of approximately $212,000 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 measurement of
impairment was considered necessary as the Company had several
consecutive quarters of losses.
Based on the pattern of losses and a significant reduction in the
market capitalization of the Company, an independent third party
valuation specialist performed a valuation analysis of the Company.
Management completed its assessment and determined that the goodwill
was impaired in accordance with SFAS 142 during the second quarter of
2002. The measurement of the impairment resulted in a reduction of
goodwill and a cumulative change in accounting principle of $2,429,081
recorded in the quarter ended June 30, 2002.
Statement of Financial Accounting Standards No. 148 ("SFAS 148"),
"Accounting for Stock-Based Compensation--Transition and Disclosure, an
amendment of FASB Statement No. 123," was issued in December 2002 and
is effective for fiscal years ending after December 15, 2002. SFAS 148
provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements
of Statement 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method on
reported results. Management has included the new disclosure
requirements in its consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". This Interpretation
elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee a liability for
the fair value of the obligation undertaken in issuing the guarantee.
The initial recognition and initial measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements
in this interpretation are effective for financial statements of
interim or annual periods ending
-9-
after December 15, 2002. Loan commitments and commercial letters of
credit are excluded from the scope of this interpretation. This
interpretation will not have a material impact on the Company's
consolidated financial statements.
Statement of Financial Accounting Standards No. 149 ("SFAS 149"),
"Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" was issued in April of 2003. SFAS 149 amends and clarifies
the accounting guidance on (1) derivative instruments (including
certain derivative instruments embedded in other contracts and (2)
hedging activities that fall within the scope of FASB Statement No. 133
(SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities". SFAS 149 amends 133 to reflect decisions that were made
(1) as part of the process undertaken by the Derivatives Implementation
Group (DIG), which necessitated amending SFAS 133; (2) in connection
with other projects dealing with financial instruments; and (3)
regarding implementation issues related to the application of the
definition of a derivative. SFAS 149 also amends certain other existing
pronouncements, which will result in more consistent reporting of
contracts that are derivatives in their entirety or that contain
embedded derivatives that warrant separate accounting. SFAS 149 is
effective (1) for contracts entered into or modified after June 30,
2003, with certain exceptions and (2) for hedging relationships
designated after June 30, 2002. The guidance is to be applied
prospectively. Management has determined that the effect of this new
standard on the consolidated financial statements is not material.
Statement of Financial Accounting Standards No. 150 ("SFAS 150"),
"Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity," was issued in May 2003 and is effective
for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS 150 establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). The requirements of SFAS
150 apply to issuers' classification and measurement of freestanding
financial instruments, including those that comprise more than one
option or forward contract. SFAS 150 does not apply to features that
are embedded in a financial instrument that is not a derivative in its
entirety. This statement will not have a material effect on the
Company's consolidated financial statements.
8. SEGMENT INFORMATION
In accordance with SFAS No. 131, the Company has disclosed all required
information relating to its one operating segment, Community Banking.
9. REGULATORY MATTERS
Blue River and the Bank's regulator, the Office of Thrift Supervision,
issued letters on September 22, 2003 which lifted the OTS' formal
designation of Blue River and the Bank as being in "troubled
condition." In a July 2000 and February 2001 letter, the OTS designated
Blue River and the Bank, respectively, to be in "troubled condition."
At that time, the OTS expressed supervisory concern relating to the
Bank's management, operating losses, interest rate risk sensitivity,
internal controls and loan documentation. After receiving the OTS
letters, management focused on compliance with the restrictions imposed
by the OTS letters and remediation of the concerns included in the OTS
letters.
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 the prior approval of
the OTS. The Bank's business plan and budget provides for reasonable
growth of the Bank utilizing the additional $1,500,000 of capital which
has been contributed to the Bank during the second and third quarter of
2002. However, there can be no assurances that the Bank will grow. In
fact, depending on business conditions, the Bank's size may decrease.
-10-
10. PRIVATE PLACEMENT
On June 7, 2002, the Company entered into a stock purchase agreement
with a group of investors for the sale of common stock. On September
17, 2002, the Company sold 309,889 shares of common stock at a price of
$4.73 per share, or approximately $1,466,000. In the aggregate, net
proceeds totaled $1,401,148. As part of the stock purchase agreement,
the Company sold in a subsequent closing 546,348 shares of the
Company's common stock to the investors from the previous private
placement and to individuals of high net worth identified by the
initial investors at a price of $4.73 per share, or approximately
$2,584,000 in the aggregate. The Company obtained shareholder approval
for the subsequent private placement of common stock in January 2003
and received gross proceeds of $2,584,000 in February 2003. Offering
costs were $101,110.
Pursuant to the stock purchase agreement, two of the investors, Russell
Breeden, III and Wayne C. Ramsey, were elected to the Board of
Directors of the Company for a term ending in 2003 and 2005,
respectively. At Blue River's annual meeting, the shareholders of Blue
River re-elected Mr. Breeden to serve as a director of Blue River for a
term ending in 2006. In addition, Mr. Breeden was appointed as chief
executive officer of Blue River in July, 2003.
11. ACQUISITION OF UNIFIED BANKING COMPANY
On June 9, 2003, Blue River and Unified Financial Services, Inc.
(Unified), Lexington, Kentucky, signed a stock purchase agreement
pursuant to which Blue River will acquire the outstanding shares of
Unified Banking Company, Lexington, Kentucky, a wholly-owned subsidiary
of Unified. Under the terms of the agreement, Blue River will acquire
all of the outstanding shares of common stock of Unified Banking
Company for $8.2 million in cash. The acquisition remains subject to
financing contingencies and certain other conditions provided in the
stock purchase agreement. The financing contingency requires that Blue
River obtain debt financing in the amount of $4.0 million. Blue River
has a commitment letter from a financial institution indicating its
commitment to provide Blue River with $4.0 million of financing. There
is no guarantee, however, that Blue River will receive such financing.
All necessary applications with the OTS have been approved and the
stockholders of Unified Financial Services, Inc., the holding company
of Unified Banking Company, approved the acquisition agreement between
Blue River and Unified Financial Services. In addition, if Blue River
does not raise a minimum of $3.5 million from the offerings, Blue River
will not be able to acquire Unified Banking Company. There is no
guarantee that Blue River will be able to raise $3.5 million from the
offerings. Blue River has the right at its sole discretion to cancel
these offerings at any time.
12. OFFERING OF SECURITIES
In September 2003, the Company's registration statement was declared
effective by the United States Securities and Exchange Commission. The
registration statement registers 1 million shares of Blue River's
common stock for a rights offering and a community offering. The
Company cannot anticipate the success of the offerings included within
the registration statement and the Company has the right at its sole
discretion to cancel these offerings at any time.
-11-
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
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. The estimate most susceptible to change in the near term is the
allowance for loan losses.
The Company's critical accounting policies include the following:
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. Income generated from the property, if any, is
recorded as a reduction in its carrying value.
Interest on real estate, commercial and installment 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. 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. In the event that a loan is
classified as impaired in accordance with FASB 114, "Accounting by Creditors for
Impairment of a Loan" before it is 90 days past due, the Company will
discontinue accruing interest unless the loan is well secured and in the process
of collection.
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 monthly by Bank
management to assess the appropriate levels of allowance for loan losses. This
analysis is performed to recognize specific reserves allocated to
-12-
classified assets, to monitor trends in loan delinquencies and charge-offs and
to consider portfolio growth. 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.
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.
The Company establishes valuation allowances in accordance with the provisions
of FASB Statement No. 109, "Accounting for Income Taxes". The Company
continually reviews the adequacy of the valuation allowance and will recognize
the benefits only as reassessment indicates that it is more likely than not that
the benefits will be realized.
FINANCIAL CONDITION:
The Company's total assets at September 30, 2003 were $110,424,000, an increase
of $15,306,000 from December 31, 2002. This increase was primarily due to an
increase in interest bearing deposits of $2,234,000 and an increase in available
for sale investments of $4,412,000 resulting from a surge of customer deposits
of $11,710,000. Loan volume also increased $8,959,000. Currently the Bank's
principal intention is to focus on loan production. In addition, net proceeds of
$2,483,000 resulting from the private placement of stock to two directors of the
Company and other accredited investors occurred during the first quarter of
2003. The Bank is strategically maintaining its "well capitalized" status while
continuing to focus on improving net interest income and overall profitability.
During the third quarter, the Bank's liquidity remained high. The Bank has
significantly increased its use of funds as a result of $26,361,000 in
maturities of the retained Fort Wayne certificates of deposit occurring during
2002 and 2003. These certificates of deposit were retained by the Bank as part
of the sale of its Fort Wayne banking centers in 2001. Due to the Company's
current liquidity sources, the Company does not anticipate the need for any
external funding to meet its operating needs for the next twelve months.
The investment portfolio balances have increased to $31,064,000 at September 30,
2003 from $26,666,000 at December 31, 2002. The Bank sold $7,482,000 of its
available-for-sale investments securities during the first second and third
quarters of 2003. These sales yielded a net gain of $229,000. The Bank purchased
$20,964,000 in available-for-sale securities. The net increase of sales and
purchases of investments was offset by maturity payments received of
approximately $726,000 per month of mortgage-backed-securities and two FHLB
Agency calls of $1,000,000 each. 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.
-13-
In addition to the increases in the investment portfolio, the Bank's
interest-bearing deposits with other banks increased $2,234,000 to $3,403,000 at
September 30, 2003 from $1,169,000 at December 31, 2002. These increases are
related primarily to increases in certificates of deposit.
The Bank's net loans increased $8,959,000 from December 31, 2002 to $65,555,000
at September 30, 2003. The Bank is concentrating on loan products that provide
the opportunity for shorter maturity terms and variable rate pricing in an
effort to continue to maintain its interest rate sensitivity position. The
Bank's primary objective is to originate loan growth. Continued growth is
expected to increase in the commercial lending market as the Bank will focus
more on this type of lending due to improved capital ratios of the Bank.
Commercial loans have increased $13,008,000 from December 31, 2002 to September
30, 2003 as the Company hired an experienced commercial lender during the fourth
quarter 2002. The Company also continues to concentrate its retail lending
efforts on home equity loans due to lower credit risks involved in loans secured
by the borrower's primary residence. The Bank will continue to monitor closely
its risk-weighted assets and risk-based capital to maximize returns while
striving to maintain the "well-capitalized" designation.
SEPTEMBER 30, DECEMBER 31,
2003 2002
Mortgages
One-to-four family $26,276,451 $27,503,516
Non Residential 14,830,103 16,658,767
Home equity loans 6,895,996 3,187,104
Consumer loans 4,394,348 6,757,173
Commercial loans, including participations 14,246,833 4,206,223
Less allowance for loan losses (1,089,142) (1,717,072)
----------- -----------
Total loans receivable, net $65,554,589 $56,595,711
=========== ===========
SEPTEMBER 30, DECEMBER 31,
2003 2002
Non-performing loans consist of the following:
Non-accrual loans $ 978,098 $ 2,055,796
Ninety (90) days past due 1,243,723 1,951,972
----------- -----------
Total non-performing loans $ 2,221,821 $ 4,007,768
=========== ===========
Non-performing loans to total loans 3.33% 6.87%
Under-performing assets are defined as: (1) loans in non-accrual status where
the ultimate collection of interest is uncertain but the principal is considered
collectible; (2) loans past due ninety days or more as to principal or interest
(and where continued accrual has not been specifically approved); and (3) loans
which have been renegotiated to provide a reduction or deferral of interest or
principal because of deterioration in the financial condition of the borrower.
At September 30, 2003, the Bank reported approximately $978,000 in non-accrual
loans, a decrease of ($1,078,000) from December 31, 2002, and approximately
$1,244,000 in loans ninety (90) days past due and still accruing, a decrease of
($708,000) from December 31, 2002. The Bank charged-off $888,000 of non-accrual
and (90) days past due loans during the first, second and third quarters of
2003. The Bank maintains a reserve for loan losses to cover losses incurred when
loans default. Loans are charged off when they are deemed uncollectible.
Loans in all categories are charged-off when the loan is 180 days past due or
when management determines the loan to be a loss.
-14-
Total liabilities at September 30, 2003 were $98,451,000, an increase of
$13,206,000, compared to $85,245,000 at December 31, 2002. Deposits at September
30, 2003 were $85,443,000 compared to $73,733,000 at December 31, 2002, an
increase of $11,710,000. The Bank continues to focus efforts on attracting
retail deposits. Additionally, during the second and third quarters of 2003, the
Bank increased its concentration in certificates of deposit with anticipation of
future loan growth.
Shareholders' equity at September 30, 2003 was $11,973,000, an increase of
$2,100,000 compared to December 31, 2002. This increase is the result of net
proceeds of $2,483,000 of the private placement of common stock in February 2003
offset by a reduction of ($351,000) of unrealized gains within the Company's
available-for-sale securities portfolio, net of income tax, combined with the
Company's net loss of ($32,000).
Activity in the allowance for loan losses consists of the following:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2003 2002
Balance, beginning of period $ 1,717,072 $ 1,891,366
Add:
Provision for loan losses 180,000 135,000
Recoveries of loans previously charged off 80,038 101,245
Less: Gross charge-offs:
Residential real estate loans (39,028) (134,090)
Consumer/commercial loans (848,940) (216,859)
----------- -----------
Balance, end of period $ 1,089,142 $ 1,776,662
=========== ===========
Net charge-offs to total average loans outstanding 1.34% 0.30%
Allowance to total average loans outstanding 1.81% 2.60%
-15-
Allowance for loan losses at September 30, 2003 was $1,089,000, a decrease of
($628,000) from December 31, 2002. The Company's provision for loan losses for
the year was $180,000 and its net charge-offs were approximately $808,000. The
reason for the decrease in the allowance was primarily due to the charge-offs of
two non-performing loans totaling $657,000 during the second quarter of 2003. An
analysis of the allowance for loan losses is performed monthly by Bank
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. Bank management establishes such specific reserves at or above
minimum percentage allocations established by the 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. Bank 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 since management believes this will be representative of future losses
inherent in the portfolio. 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
performed by Bank management.
RESULTS OF OPERATIONS: Three Months Ended September 30, 2003
During the three month period ended September 30, 2003, the Company's profit was
$42,000 compared to a ($306,000) net loss reported for the three month period
ended September 30, 2002. The Company's pre-tax profit was $42,000 compared to a
pre-tax loss of ($518,000) for the three month period ended September 30, 2002.
The Company's comparative performance showed an increase in net interest income
before provision for loan loss of $213,000, an increase in non-interest income
of $109,000, a decrease in non-interest expenses of ($238,000), and a decrease
in the income tax benefit of $211,000. The Company recorded a valuation reserve
for the tax benefit for the three month period ended September 30, 2003.
The increase in net interest income before provision for loan losses resulted
from a decrease in interest income of ($201,000), offset by a reduction in
interest expense of ($414,000). The decrease in interest income was due to a
decrease in the average balances of loans as a result of prior OTS restrictions
on loan growth and declining interest rates on loans and interest bearing
deposits. The variance of interest expense was partially the result of a
declining interest rate environment and the sale of the Fort Wayne banking
centers in December 2001. In the sale, the Bank received approximately
$21,000,000 in cash. Approximately $32,000,000 in fixed rate certificate of
deposits were retained by the Bank, of which $26,361,000 have since matured
resulting in the reduction of interest expense as the concentration of the
higher rate certificates of deposit mature and reprice at lower rates.
Interest income and fees from loans decreased from $1,205,000 for the three
month period ended September 30, 2002 to $1,034,000 for the three month period
ended September 30, 2003. This decrease was comprised of an unfavorable variance
of ($50,000) due to lower average loan balances of $2,692,000 and an unfavorable
variance of ($121,000) due to a decrease of 78 basis points in the effective
yield on loans. A significant portion of the volume variance is reflective of
the growth restrictions previously imposed by the OTS. The reduction in yield is
a combination of loans which repriced as market rates were declining and
production of new loans at lower rates compared to seasoned portfolio average
yields.
Interest income from investment securities decreased ($1,000) to $339,000 for
the three months ended September 30, 2003, as compared to the three month period
ended September 30, 2002. This decrease results from a favorable variance of
$26,000 from an increase in the average investment balances of $2,379,000 and an
unfavorable variance of ($27,000) due to investment yields being 33 basis points
lower. The average investment balances declined even though the Bank resumed
purchasing securities to improve its interest income in 2003. The offset was due
to accelerated repayment streams of mortgage-backed securities, the call option
of one agency security, and sales of corporate securities during the third
quarter 2003. 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
-16-
prepayments on mortgage-backed securities, increase in the dollar amount of
bonds being called, incremental portfolio growth and replacement of portfolio
runoff with lower interest rate bonds.
Interest income from interest-bearing deposits held with other banks decreased
($22,000) from $29,000 for the three month period ended September 30, 2002 to
$7,000 for the three month period ended September 30, 2003. This decrease
contained an unfavorable variance of ($16,000) due to a decrease in average
balances of ($3,784,000) and an unfavorable variance of ($6,000) due to a
reduction in yield from 1.67% to .87%. The decrease in average balances resulted
in a shift to purchasing 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.
Dividend income from FHLB stock decreased ($7,000) to $27,000 for the three
month period ended September 30, 2003, compared to $34,000 for the three month
period ended September 30, 2002. This decrease consisted of a favorable variance
of $1,000 due to an increase in the average balance of the stock as a portion of
the dividend was paid in the form of capital stock and an unfavorable variance
of ($8,000) due to the average rate declining from 6.25% to 4.88%.
Interest expense on deposits decreased ($470,000) to $491,000 for the three
month period ended September 30, 2003, compared to $961,000 for the three month
period ended September 30, 2002. This decrease was comprised of favorable
variances of ($212,000) due to a decrease in average deposit balances of
($19,629,000) and ($258,000) due to a decrease in average rates on deposits from
3.97% to 2.55%. 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
maturities of the retained high interest rate Fort Wayne certificates of
deposits, a decline in public funds offset by an increase of lower interest rate
certificate of deposits.
Interest expense on FHLB advances increased $56,000 from $35,000 for the
three-month period ended September 30, 2002 to $91,000 for the three month
period ended September 30, 2003. This increase was the result of an unfavorable
variance of $136,000 due to an increase in the average borrowing balance of
$9,932,000 resulting from the maturities of the Fort Wayne certificates of
deposits, and a favorable variance of ($80,000) due to a reduction in rate from
5.44% to 2.85%.
For the three month period ended September 30, 2003, the provision for loan
losses was $60,000 compared to $60,000 for the three month period ended
September 30, 2002.
Total non-interest income was $178,000 for the three-month period ended
September 30, 2003, compared to $69,000 for the three month period ended
September 30, 2002. Service charges and fees increased $5,000 for the three
month period ended September 30, 2003 compared to the three month period ended
September 30, 2002. Gains on sale of available-for-sale securities and other
assets increased $107,000. Other income decreased from $46,000 to $43,000 for
the three month period ended September 30, 2003.
Non-interest expenses totaled $901,000 for the three month period ended
September 30, 2003, compared to $1,139,000 during the three month period ended
September 30, 2002. Salaries and benefits for the three month period ended
September 30, 2003 were $392,000, an increase of $66,000 from the three month
period ended September 30, 2002. Occupancy costs were $116,000 an increase of
$5,000 from the three month period ended September 30, 2002. Professional fees
for the three-month period were $75,000 compared to $91,000 for the three month
period ended September 30, 2002, a decrease of ($16,000). Bank fees and charges
were reduced ($2,000) from the three month period ended September 30, 2002 to
$13,000. Director fees for the three month period ended September 30, 2003 were
unchanged from the three month period ended September 30, 2002. Costs associated
with stationery, supplies and printing increased by $5,000 to $15,000 from
$10,000 for the three month period ended September 30, 2002. Data processing
costs decreased ($175,000) to $99,000 for the three month period ended September
30, 2003. Many of these costs were associated with the data processing
conversion during the fourth quarter 2002 and were realized during the third
quarter 2002. In addition, the Company is currently benefiting from the impact
of this change as an improvement in the expense category. Federal deposit
insurance premiums decreased ($15,000) due to a decrease in the Bank's deposit
base relating to
-17-
the sale of the Fort Wayne branches. Advertising and promotions and other
expenses increased to $122,000 from $116,000 for three month period ended
September 30, 2002, an increase of $6,000. Environmental remediation expenses
during the three month period ended September 30, 2003 were zero compared to
$112,000 during the third quarter 2002.
RESULTS OF OPERATIONS: Nine Months Ended September 30, 2003
During the nine month period ended September 30, 2003, the Company's net loss
was ($32,000) compared to a ($3,133,000) net loss reported for the nine month
period ended September 30, 2002. Of the Company's net loss in 2002, ($2,429,000)
was attributable 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. Therefore, the Company's pre-tax loss of
($32,000) for the nine month period ended September 30, 2003 is compared to the
pre-tax loss of ($1,202,000) for the nine month period ended September 30, 2002
before the change in accounting principle. The Company's comparative performance
showed an increase in net interest income before provision for loan loss of
$596,000, an increase in the provision for loan losses of $45,000, an increase
in non-interest income of $308,000, a decrease in non-interest expenses of
($311,000), and a decrease in the income tax benefit of $498,000. The Company
recorded a valuation reserve for the tax benefit for the nine month period ended
September 30, 2003.
The increase in net interest income before provision for loan losses resulted
from a decrease in interest income of ($989,000), partially offset by a
reduction in interest expense of ($1,586,000).
Interest income and fees from loans decreased ($717,000) from $3,792,000 for the
nine month period ended September 30, 2003 to $3,075,000 for the nine month
period ended September 30, 2003. This decrease was comprised of an unfavorable
variance of ($564,000) due to lower average loan balances of $10,160,000 and an
unfavorable variance of ($153,000) due to a decrease in the effective yield on
loans from 7.42% to 7.07%.
Interest income from investment securities decreased ($193,000) from $1,051,000
for the nine month period ended September 30, 2002 to $858,000 for the nine
month period ended September 30, 2003. This decrease results in an unfavorable
variance of ($87,000) due to a decrease in the average investment balances of
($2,533,000) and an unfavorable variance of ($106,000) due to investment yields
being 50 basis points lower.
Interest income from interest-bearing deposits held within other banks decreased
($63,000) from $106,000 for the nine month period ended September 30, 2002 to
$43,000 for the nine month period ended September 30, 2003. This decrease
contains an unfavorable variance of ($41,000) due to a lower average
interest-bearing deposit balance of ($3,362,000) and an unfavorable variance of
($22,000) due to a reduction in yield from 1.62% to 1.06%.
Dividend income from FHLB stock decreased ($16,000) to $83,000 for the nine
month period ended September 30, 2003, compared to $99,000 for the nine month
period ended September 30, 2002. This decrease consisted of a favorable variance
of $2,000 due to an increase in the average balance of the stock as a portion of
the dividend was paid in the form of capital stock and an unfavorable variance
of ($18,000) due to the average rate declining from 6.17% to 5.12%.
Interest expense on deposits decreased ($1,737,000) to $1,457,000 for the nine
month period ended September 30, 2003, compared to $3,194,000 for the nine month
period ended September 30, 2002. This decrease is comprised of favorable
variances of ($1,077,000) due to a decrease in average deposit balances of
($30,462,000) relating to the maturities of the high interest yielding Fort
Wayne certificates of deposits and ($660,000) due to a decrease in average rate
on deposits from 4.15% to 2.69%.
Interest expense on FHLB advances increased $152,000 from $108,000 for the
period ended September 30, 2002 to $260,000 for the nine month period ended
September 30, 2003. This increase was the result of an unfavorable variance of
$452,000 due to an increase in the average borrowing balances of $8,864,000, and
a favorable variance of ($300,000) due to a decrease in the average borrowing
rate from 5.44% to 2.98%.
-18-
Total non-interest income was $579,000 for the nine month period ended September
30, 2003, compared to $271,000 for the nine month period ended September 30,
2002. Service charges and fees decreased ($4,000) for the nine month period
ended September 30, 2003 compared to the nine month period ended September 30,
2002, due to the decrease in the deposit base. Net gains on securities and other
assets increased by $207,000 for the nine month period ended September 30, 2003
when compared with the nine month period ended September 30, 2002. The Bank sold
$7,482,000 in its available for sale investment portfolio and recognized a gain
of $229,000 from these sales. The positive variance of $100,000 in the loss on
impaired assets represents the loss incurred on the Rampart branch facility
which was marked down to market value during the second quarter 2002. Other
non-interest income increased $5,000 from the nine month period ended September
30, 2002 when compared to the nine month period ended September 30, 2003.
Non-interest expenses totaled $2,774,000 for the nine month period ended
September 30, 2003, compared to $3,084,000 during the nine month period ended
September 30, 2002. Salaries and benefits for the nine month period ended
September 30, 2003 were $1,191,000, an increase of $159,000 compared to the nine
month period ended September 30, 2002. Occupancy costs were $348,000 an increase
of $7,000 from the nine month period ended September 30, 2002. Professional fees
for the nine month period were $259,000 compared to $276,000 for the nine month
period ended September 30, 2002, a decrease of ($17,000). Bank fees and charges
were reduced ($10,000) from the nine month period ended September 30, 2002 to
$40,000. Director fees for the nine month period ended September 30, 2003
increased $9,000 when compared to the nine month period ended September 30,
2002. Costs associated with stationery, supplies and printing decreased by
($13,000) to $39,000 from $52,000 for the nine month period ended September 30,
2002. Data processing costs decreased ($160,000) to $334,000 for the nine month
period ended September 30, 2003. The Company changed data processors in the
fourth quarter 2002. This decreased variance is in direct association with the
data processing conversion during the fourth quarter 2002 as many of the costs
were expensed during the third quarter 2002. In addition, the Company is
currently benefiting from the impact of this change as an improvement in the
expense category. Federal deposit insurance premiums decreased ($47,000) due to
a decrease in the Bank's deposit base relating to the sale of the Fort Wayne
branches. Advertising and promotions and other expenses decreased to $350,000
from $476,000 for nine month period ended September 30, 2002, a decrease of
($126,000). Environmental remediation expenses during the nine month period
ended September 30, 2003 were zero compared to $112,000 during the nine months
ended September 30, 2002.
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
September 30, 2003 the Bank satisfied all capital requirements.
On June 7, 2002, the Company entered into a stock purchase agreement with
Russell Breeden, III, Wayne C. Ramsey and L. Gene Tanner for the sale of common
stock. On September 17, 2002, the Company sold 309,889 shares of common stock at
a price of $4.73 per share or approximately $1,466,000 in the aggregate.
Proceeds received totaled $1,401,148. As part of the stock purchase agreement,
the Company obtained shareholder approval for a subsequent private placement of
common stock in January 2003. In February 2003, the Company sold 546,348 shares
of the Company's common stock to Russell Breeden, III and Wayne C. Ramsey,
directors of the Company and other accredited investors at a price of $4.73 per
share. The Company received net proceeds totaling $2,483,116.
-19-
At the time the Company was considering the private placements, the Company had
lost $2,176,000 in 2001 and $3,132,886 for the nine months ended September 30,
2002, $2,429,081 of which was primarily attributable to the change in accounting
principle related to the goodwill impairment. The Bank, at that time was
designated by the Office of Thrift Supervision to be in "troubled condition"; as
of September 22, 2003 that designation has been lifted. Prior to the private
placements, it was not expected that the Company would be restricted from growth
in order to maintain its well capitalized status. The Company believed that the
additional capital received by the Company in the private placements would
permit it to grow and become profitable much sooner than it otherwise would.
Pursuant to the stock purchase agreement with the investors, Russell Breeden,
III and Wayne C. Ramsey were elected to the Board of Directors of the Company
for a term ending in 2003 and 2005, respectively. Mr. Breeden was re-elected to
serve as a director for a term ending in 2006 at the annual meeting of
shareholders. Mr. Breeden was appointed by the Board of Directors as the chief
executive officer of Blue River in July, 2003.
On June 9, 2003, Blue River and Unified Financial Services, Inc. (Unified),
Lexington, Kentucky, signed a stock purchase agreement pursuant to which Blue
River will acquire the outstanding shares of Unified Banking Company, Lexington,
Kentucky, a wholly-owned subsidiary of Unified. Under the terms of the
agreement, Blue River will acquire all of the outstanding shares of common stock
of Unified Banking Company for $8.2 million in cash. The acquisition remains
subject to financing contingencies and certain other conditions provided in the
stock purchase agreement. The financing contingency requires that Blue River
obtain debt financing in the amount of $4.0 million. Blue River has a commitment
letter from a financial institution indicating its commitment to provide Blue
River with $4.0 million of financing. There is no guarantee, however, that Blue
River will receive such financing. All necessary applications with the OTS have
been approved and the stockholders of Unified Financial Services, Inc., the
holding company of Unified Banking Company, approved the acquisition agreement
between Blue River and Unified Financial Services. In addition, if Blue River
does not raise a minimum of $3.5 million from the offerings, Blue River will not
be able to acquire Unified Banking Company. There is no guarantee that Blue
River will be able to raise $3.5 million from the offerings. Blue River has the
right at its sole discretion to cancel these offerings at any time.
In September 2003, the SEC declared effective a registration statement filed by
Blue River registering 1 million shares of common stock for a rights and
community offering. The Company is currently conducting the rights offering and
intends to conduct the community offering for any shares that are not subscribed
for in the rights offering. The Company cannot anticipate the success of the
rights and community offerings and the Company has the right at its sole
discretion to cancel these offerings at any time.
The following is a summary of the Bank's regulatory capital and capital
requirements at September 30, 2003 based on capital regulations currently in
effect for savings institutions.
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
Regulatory capital $ 6,909 $ 6,909 $ 7,767
Minimum capital requirement 1,615 3,229 5,475
------- ------- -------
Excess capital $ 5,294 $ 3,680 $ 2,292
======= ======= =======
Regulatory capital ratio 6.42% 6.42% 11.35%
Required capital ratio 1.50% 3.00% 8.00%
------- ------- -------
Ratio excess 4.92% 3.42% 3.35%
======= ======= =======
Liquidity measures the Bank's ability to meet its savings withdrawals and
lending commitments. Management believes that the Bank's liquidity is adequate
to meet current requirements. The Bank maintains liquidity of at least 4% of net
withdrawable assets. At September 30, 2003, its regulatory liquidity ratio was
17.54%.
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The Company's liquidity position is the primary source of additional capital for
infusion into its banking subsidiary. Due to the Company's current liquidity
sources, the Company does not anticipate the need for any external funding to
meet its operating needs for the next twelve months.
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PART I - ITEM 3
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's
principal executive officer and principal financial officer have
concluded that the Company's disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as
amended), based on their evaluation of these controls and procedures as
of the end of the period covered by this Form 10-QSB, are effective.
(b) Changes in Internal Controls. There have been no significant changes in
the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the
evaluation thereof, including any corrective actions with regard to
significant deficiencies and material weaknesses.
(c) Limitations on the Effectiveness of Controls. Our management, including
our CEO and Controller, does not expect that our disclosure controls
and internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of
fraud, if any within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by
management override of the control.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there only can
be reasonable assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, control
may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because
of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
(d) CEO and Controller Certifications. Appearing as an exhibit to this
report, there are Certifications of the CEO and Controller. The
Certifications are required in accord with Section 302 of the
Sarbanes-Oxley Act of 2002 (the "Section 302 Certifications"). This
Item of this report, which you are currently reading is the information
concerning the evaluation referred to in the Section 302 Certifications
and this information should be read in conjunction with the Section 302
Certifications for a more complete understanding of the topics
presented.
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PART II
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 16, 2003.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits to this Form 10-QSB are listed in the
attached Exhibit Index.
(b) Reports on Form 8-K.
During the quarter ended September 30, 2003, Blue
River filed the following report on Form 8-K: a Form
8-K dated August 21, 2003, reporting Blue River's
financial results for the second quarter 2003.
* * * * *
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf of the undersigned, thereto duly
authorized.
Blue River Bancshares, Inc.
Date: November 5, 2003 By: /s/ Patrice M. Lima
-------------------------------------------
Patrice M. Lima, Vice President, Controller
(Principal Financial Officer & Chief
Accounting Officer)
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EXHIBIT INDEX
Document Description
Exhibit No.
- -----------
31.1 Certification of the Principal Executive Officer pursuant to Rule 15d-14(a) of the 1934 Act.
31.2 Certification of Principal Financial Officer pursuant to Rule 15d-14(a) of the 1934 Act.
32.1 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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