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 March 31, 2004
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
-------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
29 East Washington Street
Shelbyville, Indiana 46176
-------------------- -----
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code:
(317) 398-9721
As of May 13, 2004, there were 3,406,150 shares of the Registrant's Common Stock
issued and outstanding.
Transitional Small Business Disclosure Format.
(Check one): Yes ___ No [X]
BLUE RIVER BANCSHARES, INC.
TABLE OF CONTENTS
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited)
as of March 31, 2004 and December 31, 2003 3
Consolidated Statements of Operations and Comprehensive Income
(Unaudited) for three months ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows (Unaudited) for the
three months ended March 31, 2004 and 2003 5
Notes to Consolidated Financial Statements (Unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-18
Item 3. Controls and Procedures 19
PART II. OTHER INFORMATION: 20
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 21
EXHIBIT INDEX 22
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
AS OF MARCH 31, 2004 AND DECEMBER 31, 2003
MARCH 31, DECEMBER 31,
2004 2003
ASSETS
Cash and due from banks $ 2,623,003 $ 6,609,803
Interest-bearing deposits with banks 4,598,059 1,192,500
--------------- --------------
Cash and cash equivalents 7,221,062 7,802,303
--------------- --------------
Investment securities available for sale 40,791,281 48,825,911
Investment securities held to maturity 24,309 134,663
Loans receivable, net of allowance for loan losses 140,049,056 126,985,289
of $1,674,693 and $1,681,005
Stock of FHLB 2,804,200 2,765,500
Accrued interest receivable 923,037 1,008,822
Deferred income taxes 2,636,184 2,749,610
Premises and equipment, net 2,230,235 2,288,022
Real estate owned 1,566,369 2,052,223
Prepaid expenses and other assets 376,137 798,306
Core deposit intangible, net 410,641 427,066
Goodwill 2,972,743 2,972,743
--------------- --------------
TOTAL ASSETS $ 202,005,254 $ 198,810,458
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits 165,068,881 160,685,890
FHLB advances and other borrowings 15,304,789 16,878,276
Term debt 4,000,000 4,000,000
Accrued expenses and other liabilities 655,553 715,253
Accrued interest payable 357,156 302,745
--------------- --------------
Total liabilities 185,386,379 182,582,164
--------------- --------------
SHAREHOLDERS' EQUITY:
Common stock, without par value: 3,406,150 shares issued
and outstanding 24,645,162 24,647,617
Accumulated deficit (8,272,885) (8,499,910)
Unrealized gain on securities available for sale net of deferred taxes 246,598 80,587
--------------- --------------
Total shareholders' equity 16,618,875 16,228,294
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 202,005,254 $ 198,810,458
=============== ==============
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BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
2004 2003
INTEREST INCOME:
Loans receivable $ 1,872,899 $ 1,025,166
Securities 446,758 255,084
Interest-bearing deposits 5,858 14,501
Dividends from FHLB 33,451 28,000
-------------- --------------
Total interest income 2,358,966 1,322,751
-------------- --------------
INTEREST EXPENSE:
Interest expense on deposits 626,194 490,982
Interest expense on borrowings 188,574 84,075
-------------- --------------
Total interest expense 814,768 575,057
-------------- --------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 1,544,198 747,694
PROVISION FOR LOAN LOSSES 97,500 60,000
-------------- --------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,446,698 687,694
-------------- --------------
NON-INTEREST INCOME:
Service charges and fees 76,944 51,819
Gain on sale of securities 97,563 21,228
Other 146,957 90,579
-------------- --------------
Total non-interest income 321,464 163,626
-------------- --------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 649,384 389,740
Premises and equipment 207,132 115,255
Federal deposit insurance 12,511 43,280
Data processing 150,645 128,481
Advertising and promotion 17,797 11,898
Bank fees and charges 23,660 13,298
Directors fees 58,450 33,450
Professional fees 112,560 72,898
Stationery, supplies and printing 30,981 10,496
Core deposit intangible 16,425 -
Other 261,592 82,535
-------------- --------------
Total non-interest expense 1,541,137 901,331
-------------- --------------
NET INCOME (LOSS) BEFORE INCOME TAX BENEFIT 227,025 (50,011)
INCOME TAX EXPENSE (BENEFIT) - -
-------------- --------------
NET INCOME (LOSS) $ 227,025 $ (50,011)
============== ==============
COMPREHENSIVE INCOME (LOSS) $ 393,036 $ (141,919)
============== ==============
Basic and diluted earnings (loss) per share $ 0.07 $ (0.02)
============== ==============
See notes to consolidated financial statements (unaudited).
-4-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 227,025 $ (50,011)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization 526,231 149,437
Provision for loan losses 97,500 60,000
FHLB stock dividend (38,700) -
(Gain) on sales of securities (97,563) (21,228)
(Gain) on sales other real estate owned (35,848) (19,821)
Changes in assets and liabilities:
Accrued interest receivable 85,785 (21,959)
Other assets 424,921 288,143
Other liabilities (5,289) 651,177
-------------- --------------
Net cash from operating activities 1,184,062 1,035,738
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan funded, net of collections (13,226,780) (345,025)
Principal maturities collected on available for sale securities 2,294,689 2,676,713
Principal maturities collected on held to maturity securities 110,354 2,307
Proceeds from sales of real estate owned 521,702 76,745
Purchase of premises and equipment (15,898) -
Proceeds from sales of securities available-for-sale 9,575,112 1,165,213
Purchases of securities available-for-sale (3,499,490) -
-------------- --------------
Net cash from investing activities (4,240,311) 3,575,953
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock, net of offering costs of $101,110 - 2,483,116
Additional offering costs from proceeds of rights offering (2,455) -
Repayment of FHLB advances and other borrowings (40,258,487) -
Proceeds from FHLB advances and other borrowings 38,685,000 -
Net increase in deposits 4,050,950 1,137,822
-------------- --------------
Net cash from financing activities 2,475,008 3,620,938
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (581,241) 8,232,629
CASH AND EQUIVALENTS, Beginning of period 7,802,303 3,439,078
-------------- --------------
CASH AND EQUIVALENTS, End of period $ 7,221,062 $ 11,671,707
============== ==============
See notes to consolidated financial statements (unaudited).
-5-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
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
subsidiaries Shelby County Bank and Unified Banking Company (collectively
the "Banks") and the wholly owned subsidiaries of Shelby County Bank. A
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, 2003 Annual Report to Shareholders.
The accompanying consolidated interim financial statements at March 31,
2004, and for the three months ended March 31, 2004 and 2003 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.
In accordance with SFAS No. 131, the Company has disclosed all required
information relating to its one operating segment, community banking.
2. DESCRIPTION OF BUSINESS
The Banks provide 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 and to the city of
Lexington, and Fayette County, Kentucky through one office located in
Lexington, Kentucky.
The Banks are subject to competition from other financial institutions and
other financial services providers and are regulated by certain federal
agencies and undergo periodic examinations by those regulatory
authorities.
On September 22, 2003, the Office of Thrift Supervision (the "OTS") issued
a letter to Shelby County Bank indicating their "troubled condition"
status (previously imposed by the OTS on July 10, 2000) had been lifted,
and that restrictions associated with the "troubled condition" status had
been removed. In a separate letter dated September 22, 2003, the OTS
informed the Company that its "troubled condition" status (previously
imposed by the OTS on February 7, 2001) had been lifted, and associated
restrictions no longer applied.
3. ACQUISITION
On November 17, 2003, the Company acquired 100% of the issued and
outstanding shares of stock of Unified Banking Company, a federal savings
association with its principal office in Lexington, Kentucky from Unified
Financial Services, Inc. The results of operations and financial position
of Unified Banking Company were included in the Company's consolidated
financial statements beginning November 1, 2003 as if the transaction was
effective November 1, 2003.
In connection with the acquisition, the Company paid cash of $8,200,000 to
Unified Financial Services and $344,863 in acquisition related costs. As a
condition of the acquisition, Unified Financial Services and certain of
its affiliates are required to maintain an aggregate minimum amount of
$8.5 million in non-interest bearing deposits at Unified Banking Company
through November 2006.
-6-
The acquisition was accounted for under the purchase method of accounting,
and accordingly, the net assets were recorded at their estimated fair
values at the date of acquisition. Fair value adjustments on the assets
acquired and liabilities assumed are being amortized over the estimated
useful lives of the related assets and liabilities. The excess of the
purchase price over the estimated fair value of the underlying net assets
of $2,972,743 was allocated to goodwill and is not deductible for tax
purposes. Additionally, a core deposit intangible of $438,016 was
recognized and is being amortized over approximately seven years. The fair
value of the net assets acquired was based on preliminary estimates and
may be revised at a later date.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
Cash and cash equivalents $ 1,757,709
Investments 22,124,689
Loans receivable, net of allowance of $633,297 57,382,493
Other assets 1,539,652
Core deposit intangible 438,016
Goodwill 2,972,743
------------
Total assets acquired $ 86,215,302
------------
Deposits $ 73,364,574
Borrowed funds 3,931,924
Other liabilities 373,941
------------
Total liabilities acquired $ 77,670,439
------------
Net assets acquired $ 8,544,863
============
4. COMMON SHARE INFORMATION
Earnings (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 earnings (loss) per share computations:
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
2004 2003
Basic earnings per share:
Weighted average common shares 3,406,150 2,197,355
========= =========
Diluted earnings per share:
Weighted average common shares 3,406,150 2,197,355
Dilutive effect of stock options 7,926 -
--------- ---------
Weighted average common shares and incremental shares 3,414,076 2,197,355
========= =========
During the three months ended March 31, 2003, there were no incremental
shares relating to the dilutive effect of stock options. As of March 31,
2004, 122,350 Options were not considered in the calculation of the
dilutive effect of stock options as they were anti-dilutive.
-7-
5. STOCK BASED COMPENSATION
At March 31, 2004, the Company had 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 (loss), 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 income (loss) and earnings (loss) per share
if the company had applied the fair value recognition provisions of SFAS
123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation.
2004 2003
Net income (loss):
Net income (loss) as reported $ 227,025 $ (50,011)
Deduct total stock based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (19,863) (17,589)
--------- ---------
Pro forma, net income (loss) $ 207,162 $ (67,600)
========= =========
Net earnings (loss) per share:
Basic earnings (loss) per share $ 0.07 $ (0.02)
Diluted earnings (loss) per share $ 0.07 $ (0.02)
Pro forma earnings (loss) per share:
Basic earnings (loss) per share $ 0.06 $ (0.03)
Diluted earnings (loss) per share $ 0.06 $ (0.03)
6. INCOME TAXES
During the fourth quarter of 2002, the Company recorded a valuation
allowance against a portion of the deferred tax assets because management
believed it was more likely than not that a portion of the benefit
associated with the deferred tax asset would not be realized. The Company
recorded a reduction in its valuation allowance to offset a decline in the
deferred tax assets, resulting in no income tax expense for the three
months ended March 31, 2004. The Company has generated federal and state
operating losses carryforwards totaling $4.5 million. The net operating
loss carryforwards, if unused will begin to expire in 2018 through 2023.
7. NEW ACCOUNTING PRONOUNCEMENTS
There are currently no newly issued accounting pronouncements which would
have a material impact on the Company's financial statements.
-8-
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management' discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this
discussion should be read in conjunction with the unaudited condensed
consolidated financial statements and accompanying notes thereto.
FORWARD LOOKING STATEMENTS
Further, this Quarterly Report on Form 10-QSB may contain certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this report which express "belief",
"intention", "expectation", "prospects", as well as other statements which are
not historical fact, are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve risk and uncertainties which may cause actual results to
differ materially from those in such statements. Some of the factors that may
generally cause actual results to differ materially from projection, forecasts,
estimates and expectations include, but are not limited to (i) changes in the
interest rate environment, (ii) competitive pressures among financial
institutions, (iii) general economic conditions on local or national levels,
(iv) political developments, wars or other hostilities may disrupt or increase
volatility in securities markets, (v) legislative or regulatory changes, (vi)
changes in prepayment speeds of loans or securities, (vii) changes in loan sale
volumes, charge-offs and loan loss provisions, (viii) changes in legal or
regulatory proceedings, and (ix) the impact of reputation risk created by these
developments on such matters as business generation or retention. Such
statements reflect the current view of the Company and the Banks 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 Banks.
COMPANY OVERVIEW
Blue River Bancshares, Inc. (the "Company") is a holding company for its
principal banking subsidiaries, Shelby County Bank and Unified Banking Company.
The Company's net income is derived principally from the operating results of
its banking subsidiaries. The principal sources of the Company's revenue are
interest and fees on loans; deposit service charges; interest on security
investments; and, origination fees on mortgage loans brokered. The Banks'
lending activity consists of short-to-medium-term consumer and commercial loans,
including home equity lines of credit; personal loans for home improvement,
autos and other consumer goods; residential real estate loans; and, commercial
real estate and operating loans. Funding activities at the subsidiary Banks
include a full range of deposit accounts, including demand deposits; NOW
accounts; money market accounts; and certificates of deposit. Also, funding is
supplemented with deposits gathered from local and state governments and through
borrowings from the Federal Home Loan Banks. The Company maintains a four
million dollar loan from a commercial bank.
Shelby County Bank is a federally charter savings bank located in Shelbyville,
Indiana and Unified Banking Company is a federally chartered savings bank
located in Lexington, Kentucky. The Banks provide full-service banking to
businesses and residents within their communities and surrounding areas. The
Banks place particular emphasis on serving its clients with a broad range of
services delivered by experienced professionals concerned with building strong
and long-term relationships.
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
-9-
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.
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 SFAS 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.
An analysis of the allowance for loan losses is performed monthly by the Banks'
management to assess the appropriate levels of allowance for loan losses. This
analysis is performed to recognize specific reserves allocated to classified
assets, to monitor trends in loan delinquencies and charge-offs and to consider
portfolio composition. Specific reserves are established based upon review of
individual borrowers identified in the classified loan list, establishing the
probable incurred losses 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. 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, or the Banks' historical losses and
multiplying such loss percentages to the Banks' distribution of portfolio
balances. The calculated reserve is compared to the Banks' existing reserve to
establish the provision necessary to bring the actual reserve balance in
compliance with the findings of the allowance analysis.
The Company establishes valuation allowances in accordance with the provisions
of SFAS 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.
MANAGEMENT OVERVIEW
Overview of Financial Condition at March 31, 2004 and December 31, 2003
On a consolidated basis, the Company's total assets as of March 31, 2004 were
$202,005,000 compared to total assets of $198,810,000 at December 31, 2003. As
of March 31, 2004, gross loans were $141,724,000 compared to December 31, 2003,
gross loans of $128,666,000. Deposits were $165,069,000 at March 31, 2004
compared to $160,686,000 as of December 31, 2003. Total capital was $16,619,000
at March 31, 2004 compared to $16,228,000 at December 31, 2003. Outstanding
shares of common stock were 3,406,150 as of March 31, 2004.
Overview of Results of Operations for the Three Months Ended March 31, 2004 and
2003
For the quarter ended March 31, 2004, the Company's net consolidated income was
$227,000. This compares to a consolidated net loss of ($50,000) for the same
period of 2003. Basic earnings per share were
-10-
$0.07 for the quarter ended March 31, 2004 compared to ($0.02) loss per share
for the quarter ended March 31, 2003. Weighted average outstanding shares
(basic) for the first quarter of 2004 were 3,406,150 compared to 2,197,355 for
the first quarter of 2003. The Company previously recorded a valuation allowance
against its deferred tax asset in 2002. The Company recorded a reduction in its
valuation allowance to offset a decline in deferred tax assets, resulting in no
income tax expense for the quarter ended March 31, 2004 as well as the year
ended December 31, 2003. Additionally, the Company benefited from recognizing
required purchase accounting treatment based on the acquisition of Unified
Banking Company.
Interest income for the three months ended March 31, 2004 was $2,359,000
compared to $1,323,000 for the three months ended March 31, 2003. Interest
expense increased to $815,000 for the period ended March 31, 2004 compared to
total interest expense of $575,000 for the same period in 2003. The first
quarter of 2004 was the first full quarter of consolidated reporting including
Unified Banking Company.
Net interest income before loan loss provision for the three months ended March
31, 2004 was $1,544,000 as compared to $748,000 for the same period in 2003, or
a 106% increase. Non-interest income for the three months ended March 31, 2004
was $321,000 as compared to $164,000 for the same period in 2003, or a 96%
increase.
Non-interest expense increased to $1,541,000 for the three months ended March
31, 2004 from $901,000 for the same period of 2003.
The increase in interest income in the three month period ending March 31, 2004,
when compared to the same period of 2003 is attributed to an increase of
$888,000 in interest income from Unified Banking Company, which was acquired in
November, 2003, and an interest income increase of $148,000 from loan growth
offset by declining yields at Shelby County Bank.
The increase in interest expense for the three month period ended March 31,
2004, when compared to the same period of 2003, included interest expense of
$247,000 associated with the addition of Unified Banking Company, offset by a
decrease in interest expense of ($7,000) at Shelby County Bank.
The increase in non-interest income of $157,000 from March 31, 2004 compared to
March 31, 2003 was comprised of $100,000 gains on sales of securities; $41,000
gains on sales of other assets; $63,000 in secondary market mortgage loan fees;
and $7,000 in service charges and fees on deposit accounts at Unified Banking
Company. Fees on deposits accounts and other fees for Blue River and Shelby
County Bank increased $13,000, offset by a decrease of ($67,000) in gains on
sales of securities, and other assets at Shelby County Bank.
FINANCIAL CONDITION
On November 17, 2003 the Company completed its acquisition of 100% of the issued
and outstanding shares of common stock of Unified Banking Company, a federal
savings bank with its principal office in Lexington, Kentucky, from Unified
Financial Services, Inc. The aggregate purchase price of $8.2 million was
determined through a competitive bidding process, which was subject to certain
adjustments made through arm's length negotiations during the due diligence
investigation of Unified Banking Company. The Company financed the purchase
price through a combination of cash on hand, an offering of its common stock to
its existing shareholders of 1,000,000 shares at $4.50 per share and a loan from
the Union Federal Bank of Indianapolis in the amount of $4,000,000. To secure
the loan, the capital stock of the Banks has been pledged to Union Federal Bank.
The Company operates Unified Banking Company separately from its other savings
bank subsidiary, Shelby County Bank. At the time of the acquisition, Unified
Banking Company had $81 million in assets, 17 full time employees and 2 part
time employees.
The Company's total assets at March 31, 2004 were $202,005,000, an increase of
$3,195,000 from December 31, 2003. The increase is primarily an increase in
loans due to growth, which was offset by a decline in securities
available-for-sale allowed to enhance liquidity and capital, and a decrease in
other real estate
-11-
owned. The increase in loans was $13,064,000, offset by a decrease in securities
available-for-sale of ($8,035,000) and a decrease in other real estate owned of
($486,000). During the first quarter 2004, the Banks focused their efforts on
commercial loan production to improve interest income, and in home equity
lending in order to strengthen its Qualified Thrift Lender ("QTL") ratios. The
Banks are strategically maintaining their "well capitalized" status while
continuing to focus on improving net interest income and overall profitability.
The investment portfolio balances have decreased to $40,791,000 at March 31,
2004 from $48,826,000 at December 31, 2003. In an effort to improve risk-based
capital and manage liquidity, the Banks sold $9,575,000 of their available for
sale investment securities during the first quarter of 2004. These sales yielded
a net gain of $98,000. Repayments of approximately $802,000 per month of the
mortgage-backed-securities have also contributed to the decline in investments.
The Banks have continued to invest primarily in agency securities and
mortgage-backed securities. Both of these investment products receive favorable
risk-based capital treatment.
The Banks' interest-bearing deposits within other banks increased $3,405,000 to
$4,598,000 from $1,193,000 at December 31, 2003. The Company's liquidity levels
are sufficient to meet its operating needs. The Company's liquidity position is
the primary source of additional capital for infusion into its banking
subsidiaries. As noted above, the Company raised approximately $6.6 million from
stock offerings in 2003. The Company then contributed additional capital to
Unified Banking Company in an amount equal to $500,000 during the fourth quarter
of 2003 and an additional $200,000 during the first quarter 2004. Due to the
Company's current liquidity sources and its increased use of funds, the Company
does not anticipate the need for any additional external funding over the next
twelve months.
The Banks' net loans increased $13,064,000 from December 31, 2003 to
$140,049,000 at March 31, 2004. The Banks are concentrating on loan products
that provide the opportunity for shorter maturity terms and variable rate
pricing in an effort to continue to improve its interest rate sensitivity.
However, the Banks are making efforts to originate enough loan volume to
stabilize the portfolio holdings. Future growth is expected to increase in the
commercial lending market. Shelby County Bank's capital ratios have improved due
to the private placements of the Company's common stock during the third quarter
of 2002 and the first quarter of 2003 and the Company's rights offering in the
fourth quarter of 2003. The Banks will continue to monitor closely their
risk-weighted assets and risk-based capital to maximize returns while striving
to maintain the "well-capitalized" designation.
LOANS RECEIVABLE
MARCH 31, DECEMBER 31,
2004 2003
Residential mortgage loans:
One-to-four family $ 46,029,662 $ 40,826,997
Non Residential 34,243,120 29,624,474
Home equity loans 25,204,717 20,646,169
Consumer loans 8,295,759 9,122,657
Commercial loans, including participations 27,950,491 28,445,997
------------ ------------
Total gross loans 141,723,749 128,666,294
------------ ------------
Less allowance for loan losses (1,674,693) (1,681,005)
------------ ------------
Total loans receivable, net $140,049,056 $126,985,289
============ ============
-12-
NON-PERFORMING LOANS
MARCH 31, DECEMBER 31,
2004 2003
Non-performing loans consist of the following:
Non-accrual loans $ 1,263,571 $ 901,298
Ninety (90) days past due 1,138,916 1,094,005
------------ ------------
Total non-performing loans $ 2,402,487 $ 1,995,303
============ ============
Non-performing loans to total loans 1.70% 1.55%
Non-performing assets are defined as: (1) loans in non-accrual status where the
ultimate collection of interest is uncertain; (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 March 31, 2004, the Banks reported
approximately $1,264,000 of impaired loans, an increase of $362,000 from
December 31, 2003, and $1,139,000 in loans ninety (90) days past due, an
increase of $45,000 from December 31, 2003. The Banks maintain 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.
Total liabilities at March 31, 2004 were $185,386,000, an increase of $2,804,000
compared to $182,582,000 at December 31, 2003. Deposits at March 31, 2004 were
$165,069,000 compared to $160,686,000 at December 31, 2003, an increase of
$4,383,000. As a result of this increase, other borrowings have decreased
($1,573,000) to $15,305,000 at March 31, 2004 from $16,878,000 at December 31,
2003. Management continues to emphasize the benefits of gathering
non-certificate depository funding as a means of decreasing the Banks' overall
funding costs, improving levels of fee income derived from depository
relationships, and encouraging a stronger relationship with its customer base.
By acquiring primary transaction accounts, the Banks are less susceptible to
loss of accounts during periods of volatile interest rates.
Shareholders' equity at March 31, 2004 was $16,619,000, an increase of $391,000
compared $16,228,000 at December 31, 2003. The change in equity resulted from
the net income of $227,000, an increase of $166,000 from an improvement in the
fair value of the Company's available-for-sale investment portfolio, offset by
($2,000) of additional capital expenses from the rights offering during the
fourth quarter of 2003 related to the acquisition of Unified Banking Company.
Activity in the allowance for loan losses consists of the following:
-13-
THREE MONTHS ENDED
MARCH 31,
---------------------------
2004 2003
Balance, beginning of period $ 1,681,005 $ 1,717,072
Add:
Provision for loan losses 97,500 60,000
Recoveries of loans previously charged off 723 2,716
Less gross charge-offs: - -
Residential real estate loans
Consumer/commercial loans (104,535) (2,261)
------------ ------------
Balance, end of period $ 1,674,693 $ 1,777,527
============ ============
Net charge-offs to total average loans outstanding 0.08% 0.00%
Allowance for loan losses at March 31, 2004 was $1,675,000, a decrease of
($6,000) from December 31, 2003. The Company's provision for loan losses for the
quarter was $98,000 and its net charge-offs were approximately $104,000.
RESULTS OF OPERATIONS: Three Months Ended March 31, 2004
During the three month period ended March 31, 2004, the Company's net income was
$227,000 compared to a net loss of ($50,000) reported for the three month period
ended March 31, 2003. The income tax expense/ benefit was $0 for the three month
period ended March 31, 2004 and for the three month period ended March 31, 2003.
In December 2002, the Company recognized a valuation allowance of $760,000
pertaining to the recoverability of its deferred tax assets. Management
concluded that it was more likely than not that a portion of the benefit
associated with the deferred tax asset would not be realized, and no further tax
benefit was recorded in the first quarter of 2003. The Company recorded a
reduction in its valuation allowance to offset a decline in deferred tax assets,
resulting in no income tax expense for the quarter ended March 31, 2004 as well
as the year ended December 31, 2003.
The Company's comparative performance showed an increase in net interest income
before provision for loan losses of $796,000, an increase in the provision for
loan losses of $37,000, an increase in non-interest income of $158,000, and an
increase in non-interest expenses of $640,000.
The increase in net interest income before provision for loan losses resulted
from an increase in interest income of $1,036,000, offset by an increase in
interest expense of $240,000. The increase in interest income was primarily due
to the acquisition of Unified Banking Company and accounts for $888,000 of this
increase, with $148,000 from loan growth and investment portfolio increases at
Shelby County Bank. The major variance in interest expense of $247,000 can also
be attributed to Unified Banking Company offset by a decrease in interest
expense of ($7,000) at Shelby County Bank.
Interest income and fees from loans increased from $1,025,000 for the three
month period ended March 31, 2003 to $1,873,000 for the three month period ended
March 31, 2004. This increase was comprised of a favorable variance of
$1,432,000 due to higher average loan balances of $77,139,000 of which
$59,000,000 can be attributed to the acquisition Unified Banking Company and an
unfavorable variance of ($584,000) due to a decrease of 176 basis points in the
effective yield on loans. The reduction in yield was largely due to increased
balances in variable rate products, as well as lower yields on new loans
originated during a period of rapidly falling market interest rates. The overall
yield on loans fell to 5.65% from 7.41%.
-14-
Interest income from investment securities increased $191,000 to $447,000 for
the three months ended March 31, 2004, when compared to the three month period
ended March 31, 2003. This increase results from a favorable variance of
$235,000 from an increase in average investment balances of $22,494,000, of
which $19,547,000 can be attributed to Unified Banking Company and an
unfavorable variance of ($44,000) due to investment yields being 37 basis points
lower. The rate variance was the result of decreasing interest rates, a high
rate of turnover due to increased prepayments on mortgage-backed securities, and
incremental portfolio growth and replacement of portfolio runoff with lower rate
bonds. In order to improve interest rate sensitivity, liquidity and capital
during the first quarter 2004, Unified Banking Company sold $8,422,000 of its
available-for-sale U.S. government agency securities and were replaced in part
with $3,500,000 in available-for-sale U.S. treasury bills as these investments
receive a favorable risk-based capital treatment. There were also principal
payment reductions in the mortgage backed securities of ($2,405,000) during the
period ended March 31, 2004.
Interest expense on deposits increased $135,000 to $626,000 for the three month
period ended March 31, 2004, compared to $491,000 for the three month period
ended March 31, 2003. This increase was comprised of an unfavorable variance of
$709,000 due to an increase in average deposit balances of $133,508,000, of
which $118,592,000 can be attributed to Unified Banking Company and a favorable
variance of ($574,000) due to a decrease in average rates on deposits from 2.89%
to 1.79%. 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 increase in average deposit balances is primarily the result of the
acquisition of Unified Banking Company. Additionally, increases in certificates
of deposits were used as funding sources and to offset maturities of high rate
promotional certificates of deposits.
Interest expense on FHLB advances and other borrowings increased $104,000 from
$84,000 for the three-month period ended March 31, 2003 to $186,000 for the
three month period ended March 31, 2004. This increase was the result of an
unfavorable variance of $93,000 due to an increase in the average borrowing
balance of $11,947,000, of which $4,000,000 can be attributed to the acquisition
of Unified Banking Company in the fourth quarter of 2003. In order to finance a
portion of this acquisition, the Company borrowed $4,000,000 and incurred
$50,000 in interest expense during the first quarter of 2004 related to this
borrowing. An additional volume variance of $6,146,000 can also be attributed to
Unified Banking Company. An unfavorable variance of $11,000 is due to an
increase in rate from 3.06% to 3.25%.
For the three month period ended March 31, 2004, the provision for loan losses
was $98,000 compared to $60,000 for the three month period ended March 31, 2003.
Total non-interest income was $321,000 for the three-month period ended March
31, 2004 compared to $164,000 for the three month period ended March 31, 2003.
Of this increase, $211,000 can be attributed to the acquisition of Unified
Banking Company, primarily the result of $141,000 in gains on available-for-sale
securities and other assets, $63,000 in secondary market mortgage loan fees, and
$7,000 from service charges and fees on deposit accounts and other fees. Service
charges and fees on deposit accounts and other fees for Blue River and Shelby
County Bank increased $14,000 for the three month period ended March 31, 2004
compared to the three month period ended March 31, 2003. These increases for the
three month period ended March 31, 2004 were offset by a decrease of ($68,000)
in net gains on available-for-sale securities and other assets at Shelby County
Bank when compared to the three month period ended March 31, 2003.
Non-interest expenses totaled $1,541,000 for the three month period ended March
31, 2004, compared to $901,000 during the three month period ended March 31,
2003. Of the increase of $640,000, $608,000 can be attributed to Unified Banking
Company. Salaries and benefits for the three month period ended March 31, 2004
were $649,000, an increase of $260,000 from the three month period ended March
31, 2003. Of this increase, $281,000 is attributable to Unified Banking Company
offset by a decrease of ($21,000) at Shelby County Bank. When compared to the
three month period ended March 31, 2003, occupancy costs increased $92,000, of
which $89,000 can be attributed to Unified Banking Company. Professional fees
for the three-month period were $113,000 compared to $73,000 for the three month
period ended March 31, 2003, an increase of $40,000. This increase results from
$51,000 at Unified Banking Company offset by a decrease of
-15-
($11,000) at Shelby County Bank when compared to the three month period ended
March 31, 2003. Bank fees and charges increased $11,000 from the three month
period ended March 31, 2003 to $24,000. An increase of $9,000 in bank fees and
charges are attributed to Unified Banking Company. Director fees for the three
month period ended March 31, 2004 were $58,000 compared to $33,000 for the three
month period ended March 31, 2003, this increase of $25,000 is all related to
Unified Banking Company. Costs associated with stationery, supplies and printing
increased by $21,000 to $31,000 from $10,000 for the three month period ended
March 31, 2003. Of this increase, $7,000 can be attributed to Unified Banking
Company and $14,000 to Shelby County Bank and Blue River as costs associated for
printing of the annual report and proxy statement were accrued for during the
first quarter of 2004. Data processing costs increased $22,000 to $151,000 for
the three month period ended March 31, 2004. An increase in data processing
costs of $38,000 are attributable to Unified Banking Company offset by a
decrease of ($16,000) at Shelby County Bank. The Company changed data processors
for Shelby County Bank in the fourth quarter 2002. As a result of this change
and additional data processing conversion costs during the first quarter of
2003, the Company's data processing costs for Shelby County Bank have been
reduced. Federal deposit insurance premiums decreased ($30,000) to $13,000 for
the period ended March 31, 2004. A decrease of ($33,000) is due to a decrease in
Shelby County Bank's FDIC's risk classification, this was offset by $3,000 of
FDIC insurance expense attributable to Unified Banking Company. As a result of
the acquisition of Unified Banking Company and the associated purchase
accounting, Unified Banking Company has a core deposit intangible. The 2004
amortization expense for this core deposit intangible was $16,000. Other
expenses including advertising and promotion increased to $279,000 from $94,000
for the period ended March 31, 2004. The majority of this increase or $96,000 is
attributable to Shelby County Bank and $89,000 to Unified Banking Company. Of
the increase at Shelby County Bank, $42,000 is due to related third party loan
costs associated with the growth of the loan portfolio and $23,000 due to
increased insurance premiums. The additional $31,000 is reflective of increases
in various other expenses.
CAPITAL RESOURCES AND LIQUIDITY
The Company and the Banks are subject to various capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. The Board of Directors of the
Company has set as an objective to maintain capital levels required for
qualification as "well-capitalized". The capital ratios of the Banks have been
diminished due to two primary factors: accumulated operating losses and the
disallowance of the Bank's deferred tax assets in determining regulatory capital
ratios.
Capital amounts and classification are also subject to qualitative judgments by
regulators involving capital components, risk weights and other factors. The
risk weights assigned to various financial instruments are taken into
consideration in setting operating parameters related to the mix of loans and
investments with the objective to maximize earnings attained through the use of
available equity capital.
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. At March 31,
2004, the Banks satisfied all capital requirements.
-16-
The following table sets forth the actual and minimum capital amounts and ratios
of Shelby County Bank as of March 31, 2004:
SHELBY COUNTY BANK
TOTAL
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
(DOLLARS IN THOUSANDS)
For Capital Adequacy Purposes:
Bank Amount $ 7,162 $ 7,162 $ 8,140
Required Amount 1,729 3,458 6,259
-------- ------- ----------
Excess $ 5,433 $ 3,704 $ 1,881
======== ======= ==========
Bank Ratio 6.21% 6.21% 10.40%
Required Ratio 1.50% 3.00% 8.00%
-------- ------- ----------
Ratio Excess 4.71% 3.21% 2.40%
======== ======= ==========
The following table sets forth the actual and minimum capital amounts and ratios
of Unified Banking Company as of March 31, 2004:
UNIFIED BANKING COMPANY
TOTAL
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
(DOLLARS IN THOUSANDS)
For Capital Adequacy Purposes:
Bank Amount $ 6,300 $ 6,300 $ 6,986
Required Amount 1,211 2,421 5,135
-------- ------- ----------
Excess $ 5,089 $ 3,879 $ 1,851
======== ======= ==========
Bank Ratio 7.81% 7.81% 10.88%
Required Ratio 1.50% 3.00% 8.00%
-------- ------- ----------
Ratio Excess 6.31% 4.81% 2.88%
======== ======= ==========
Liquidity measures the Banks' ability to meet its savings withdrawals and
lending commitments. Management believes that the Banks' liquidity is adequate
to meet current requirements. The Banks maintain liquidity of at least 4% of net
withdrawable assets. At March 31, 2004, Shelby County Bank's regulatory
liquidity ratio was 12.79% and Unified Banking Company's regulatory liquidity
ratio was 17.96%.
The Company's liquidity position is the primary source of additional capital for
infusion into its banking subsidiaries. During the three months March 31, 2004,
the Banks have significantly increased their use of funds as a result of
increased loan demand, maturities of higher interest rate certificates of
deposit. Due to the Company's current liquidity sources, the private placement
of common stock during the third quarter 2002, a subsequent private placement
which occurred during the first quarter of 2003 and the rights offering and
borrowing related to the acquisition of Unified Banking Company in the fourth
quarter of 2003, the Company does not anticipate the need for any additional
external funding over the next twelve months.
-17-
The primary function of liquidity and interest rate sensitivity management is to
provide for and assure an ongoing flow of funds that is adequate to meet all
current and future financial needs of the Banks. Such financial needs include
funding credit commitments, satisfying deposit withdrawal requests, purchasing
property and equipment and paying operating expenses. The funding sources of
liquidity are principally the maturing assets, payments on loans issued by the
Banks, net deposit growth, and other borrowings. The purpose of liquidity
management is to match sources of funds with anticipated customer borrowings and
withdrawals and other obligations along with ensuring a dependable funding base.
Alternative sources of liquidity include acquiring jumbo certificates resulting
from local government bidding, liquidation of marketable investment securities,
sales and/or securitization of pools of loans, and additional draws against
available credit at the FHLB.
-18-
PART I - ITEM 3
CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation
(the "Evaluation"), under the supervision and with the participation of our
Chief Executive Officer ("CEO") and Controller, of the effectiveness of the
design and operation of our disclosure controls and procedures ("Disclosure
Controls"). Based on the Evaluation, our CEO and Controller concluded that,
subject to the limitations noted below, our Disclosure Controls are effective in
timely alerting them to material information required to be included in our
periodic SEC reports.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in our internal controls during the
quarter ended March 31, 2004.
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 errors 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 can only 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.
CEO AND CONTROLLER CERTIFICATIONS
Appearing as exhibits 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.
-19-
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
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) The Company filed a Form 8-K on February 25, 2004, with the
Securities and Exchange Commission announcing changes in the
Company's Certifying Accountants. Effective February 23, 2004,
the audit committee of the Board of Directors of the Company
notified Deloitte & Touche LLP, its independent public
accountants of their dismissal effective upon the filing of the
Company's Form 10-KSB for the year ended December 31, 2003.
Further, the Company also announced the engagement of the
accounting firm of Crowe Chizek and Company LLC as the
independent public accountants of the Company for the year ending
December 31, 2004.
(c) The Company filed a Form 8-K/A on March 4, 2004, with the
Securities and Exchange Commission amending the Form 8-K filed
with the Securities and Exchange Commission on February 25, 2004.
The amendment includes a comment letter from Deloitte & Touche
LLP filed as an exhibit regarding the change in certifying
accountant.
(d) The Company filed a Form 8-K on March 30, 2004, with the
Securities and Exchange Commission announcing the Company's
results of operation and financial condition for the year ended
December 31, 2003.
* * * * *
-20-
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on behalf of the undersigned, thereto duly authorized.
Blue River Bancshares, Inc.
Date: May 12, 2004 By: /s/ Patrice M. Lima
----------------------------------
Patrice M. Lima, Vice President,
Controller
(Principal Financial Officer &
Chief Accounting Officer)
-21-
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
-22-