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, 2005
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
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
----- -----
As of November 14, 2005 there were 3,507,150 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
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets (Unaudited)
as of September 30, 2005 and December 31, 2004 3
Consolidated Statements of Operations and Comprehensive Income
(Unaudited) for the three months ended September 30, 2005 and 2004 4
Consolidated Statements of Operations and Comprehensive Income
(Unaudited) for the nine months ended September 30, 2005 and 2004 5
Consolidated Statements of Cash Flows (Unaudited) for the
nine months ended September 30, 2005 and 2004 6
Notes to Consolidated Financial Statements (Unaudited) 7-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-25
Item 3. Controls and Procedures 26
PART II. OTHER INFORMATION: 27-28
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity 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
SIGNATURE PAGE 29
EXHIBIT INDEX 30
PART 1 FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(UNAUDITED)
ASSETS
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 14,395,379 $ 3,572,243
Interest-bearing deposits 2,862,710 1,542,765
------------ ------------
Total cash and cash equivalents 17,258,089 5,115,008
Securities available for sale 25,674,196 32,361,376
Securities held to maturity 17,187 19,073
Loans receivable, net of allowance for loan losses of
$1,688,331 and $1,919,193 162,988,513 155,508,075
Restricted stock, at cost 3,003,300 2,896,400
Deferred income taxes, net 2,817,155 2,650,679
Premises and equipment, net 1,927,193 1,992,349
Other real estate owned 477,465 1,415,351
Accrued interest receivable and other assets 1,564,539 1,128,719
Core deposit intangible 327,583 379,306
Goodwill 3,159,051 3,159,051
------------ ------------
TOTAL ASSETS $219,214,271 $206,625,387
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Interest bearing deposits $160,192,333 $151,358,006
Non-interest bearing deposits 19,922,168 18,972,486
Fed funds purchased -- 427,000
Advances from FHLB 15,365,784 15,091,393
Note payable 6,000,000 4,000,000
Accrued interest and other liabilities 1,057,043 992,237
------------ ------------
Total liabilities 202,537,328 190,841,122
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 2,000,000 shares
authorized, none issued -- --
Common stock, no par value, 15,000,000 shares authorized, 3,507,150
and 3,406,150 shares issued and outstanding 25,129,517 24,635,162
Accumulated deficit (8,107,380) (8,782,422)
Accumulated other comprehensive (loss) (345,194) (68,475)
------------ ------------
Total shareholders' equity 16,676,943 15,784,265
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $219,214,271 $206,625,387
============ ============
See accompanying notes to consolidated financial statements.
-3-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004
2005 2004
---------- ----------
(RESTATED)
INTEREST INCOME:
Loans receivable $2,719,563 $2,199,880
Securities 300,051 355,329
Interest-bearing deposits 39,701 21,536
Dividends from FHLB 35,487 32,875
---------- ----------
Total interest income 3,094,802 2,609,620
---------- ----------
INTEREST EXPENSE:
Interest expense on deposits 1,027,034 866,730
Interest expense on FHLB and other borrowings 252,587 190,675
---------- ----------
Total interest expense 1,279,621 1,057,405
---------- ----------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
1,815,181 1,552,215
PROVISION FOR LOAN LOSSES 45,500 175,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,769,681 1,377,215
---------- ----------
NON-INTEREST INCOME:
Service charges and fees 157,537 99,166
Secondary market mortgage fees 150,475 109,139
Gain on sale of other real estate owned and other assets 103,465 2,107
Gain on sale of securities 34,055 16,563
Other 30,801 57,677
---------- ----------
Total non-interest income 476,333 284,652
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 972,122 804,118
Premises and equipment 198,905 215,247
Federal deposit insurance 13,093 12,770
Data processing 155,664 147,696
Advertising and promotion 50,847 39,626
Bank fees and charges 26,254 27,382
Directors fees 25,900 57,150
Professional fees 166,935 92,313
Stationery, supplies and printing 35,063 29,401
Merger expense -- 152,853
Core deposit intangible 17,241 17,241
Other 176,061 210,189
---------- ----------
Total non-interest expense 1,838,085 1,805,986
---------- ----------
INCOME (LOSS) BEFORE INCOME TAX 407,929 (144,119)
INCOME TAX EXPENSE (BENEFIT) -- --
---------- ----------
NET INCOME (LOSS) $ 407,929 $ (144,119)
========== ==========
COMPREHENSIVE INCOME $ 111,614 $ 174,651
========== ==========
Basic earnings (loss) per share $ 0.12 $ (0.04)
========== ==========
Diluted earnings (loss) per share $ 0.12 $ (0.04)
========== ==========
See accompanying notes to consolidated financial statements.
-4-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004
2005 2004
---------- ----------
(RESTATED)
INTEREST INCOME:
Loans receivable $7,564,947 $6,070,191
Securities 954,464 1,142,286
Interest-bearing deposits 132,923 38,573
Dividends from FHLB 97,987 93,951
---------- ----------
Total interest income 8,750,321 7,345,001
---------- ----------
INTEREST EXPENSE:
Interest expense on deposits 2,920,705 2,301,778
Interest expense on FHLB and other borrowings 653,911 560,239
---------- ----------
Total interest expense 3,574,616 2,862,017
---------- ----------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 5,175,705 4,482,984
PROVISION FOR LOAN LOSSES 150,500 370,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,025,205 4,112,984
---------- ----------
NON-INTEREST INCOME:
Service charges and fees 376,970 289,082
Secondary market mortgage fees 422,194 286,105
Gain on the sale of other real estate owned and other assets 34,185 46,434
Gain on sale of securities 34,055 121,731
Other 119,739 133,042
---------- ----------
Total non-interest income 987,143 876,394
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,752,146 2,324,920
Premises and equipment 588,264 646,365
Federal deposit insurance 42,497 37,689
Data processing 465,730 446,587
Advertising and promotion 131,537 78,502
Bank fees and charges 79,656 76,012
Directors fees 108,500 174,650
Professional fees 445,740 335,105
Stationery, supplies and printing 90,530 103,667
Merger expense 73,171 152,853
Core deposit intangible 51,723 52,267
Other 507,812 631,354
---------- ----------
Total non-interest expense 5,337,306 5,059,971
---------- ----------
INCOME (LOSS) BEFORE INCOME TAX 675,042 (70,593)
INCOME TAX EXPENSE (BENEFIT) -- --
---------- ----------
NET INCOME (LOSS) $ 675,042 $ (70,593)
========== ==========
COMPREHENSIVE INCOME (LOSS) $ 398,324 $ (88,346)
========== ==========
Basic earnings (loss) per share $ 0.20 $ (0.02)
========== ==========
Diluted earnings (loss) per share $ 0.20 $ (0.02)
========== ==========
See accompanying notes to consolidated financial statements.
-5-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004
2005 2004
------------ ------------
(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 675,042 $ (70,593)
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and purchase accounting amortization 134,240 1,081,280
Net amortization (accretion) of securities 30,356 250,814
Provision for loan losses 150,500 370,000
FHLB stock dividends (69,400) (100,500)
(Gain) on sale of securities available for sale (34,055) (121,731)
(Gain) on sale of other real estate owned (33,949) (35,849)
Changes in assets and liabilities:
Accrued interest receivable 85,694 56,309
Other assets (521,046) 385,403
Accrued interest payable and other liabilities 64,806 211,910
------------ ------------
Net cash from operating activities 482,188 2,027,043
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan funded, net of collections (8,148,857) (23,559,985)
Maturities and paydowns of securities available for sale 3,846,565 9,212,046
Maturities and paydowns of securities held to maturity 1,886 114,605
Proceeds from sales of securities available-for-sale 2,401,119 19,573,584
Purchases of securities available-for-sale -- (13,893,204)
Purchases of restricted stock (37,500) --
Purchase of premises and equipment (126,321) (61,884)
Proceeds from sale of real estate owned 1,216,335 108,715
------------ ------------
Net cash from investing activities (846,773) (8,506,123)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock, net of offering costs of $10,645 494,355 --
Additional offering costs from proceeds of rights offering -- (26,331)
Proceeds from note payable 2,000,000 --
Net change in fed funds purchased (427,000) --
Repayment of FHLB advances (39,409,747) (82,319,450)
Proceeds from FHLB advances 39,697,287 81,104,443
Net increase in deposits 10,152,771 15,137,883
------------ ------------
Net cash from financing activities 12,507,666 13,896,545
------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 12,143,081 7,417,465
CASH AND EQUIVALENTS, Beginning of period 5,115,008 7,802,303
------------ ------------
CASH AND EQUIVALENTS, End of period $ 17,258,089 $ 15,219,768
============ ============
See accompanying notes to consolidated financial statements
-6-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 2005 AND 2004
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 Paramount Bank (formerly known as
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, 2004 Annual Report
to Shareholders.
The accompanying consolidated interim financial statements at September 30,
2005, and for the three and nine months ended September 30, 2005 and 2004
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
Shelby County Bank's 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 Paramount
Bank's 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.
3. RESTATEMENT OF DEFERRED LOAN COSTS AND FEES ON HOME EQUITY LOANS
During the 2004 year end audit of the financial statements, it was
determined that the Company was incorrectly accounting for deferred loan
fees and costs on home equity loans. This resulted in a $178,000 reduction
in 2004 net income. Subsequently, the Company determined that it needed to
restate its 2004 quarterly financials to reflect the $178,000 reduction in
net income to properly document the full effect of the accounting error on
each of the quarters in 2004. The Company has determined that the earnings
reported during 2004 will be reduced by $41,000 for the first quarter,
$55,000 for the second quarter and $52,000 for the third quarter. This
information is provided in detail in the following tables for the three
months ended March 31, 2004, June 30, 2004 and September 30, 2004 and for
the six months ended June 30, 2004 and for the nine months ended September
30, 2004.
-7-
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2004 JUNE 30, 2004 SEPTEMBER 30, 2004
--------------------------- --------------------------- ---------------------------
AS PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED REPORTED AS RESTATED
------------- ----------- ------------- ----------- ------------- -----------
Net Income (Loss) $ 227,025 $ 185,843 $ (56,877) $ (112,317) $ (92,206) $ (144,119)
Interest Income 2,358,966 2,354,288 2,390,671 2,381,095 2,625,497 2,609,620
Net Interest Income before
the Provision for Loan Losses 1,544,198 1,539,520 1,400,830 1,391,254 1,568,092 1,552,215
Non Interest Expense 1,541,137 1,577,641 1,630,484 1,676,348 1,769,950 1,805,986
Basic earnings (loss) per share 0.07 0.05 (0.02) (0.03) (0.03) (0.04)
Diluted earnings (loss) per share 0.07 0.05 (0.02) (0.03) (0.03) (0.04)
SIX MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 2004 SEPTEMBER 30, 2004
--------------------------- ---------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
------------- ----------- ------------- -----------
Net Income (Loss) $ 170,148 $ 73,526 $ 77,943 $ (70,593)
Interest Income 4,749,637 4,735,383 7,375,132 7,345,001
Net Interest Income before
the Provision for Loan Losses 2,945,028 2,930,774 4,513,115 4,482,984
Non Interest Expense 3,171,621 3,253,989 4,941,566 5,059,971
Basic earnings (loss) per share 0.05 0.02 0.02 (0.02)
Diluted earnings (loss) per share 0.05 0.02 0.02 (0.02)
4. COMMON SHARE INFORMATION
Earnings 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 per share computations:
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2005 2004
--------- ---------
Basic earnings per share:
Weighted average common shares 3,507,150 3,406,150
========= =========
Diluted earnings per share:
Weighted average common shares 3,507,150 3,406,150
Dilutive effect of stock options 1,006 --
--------- ---------
Weighted average common shares and incremental shares 3,508,156 3,406,150
========= =========
-8-
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2005 2004
--------- ----------
(RESTATED)
Basic earnings per share:
Weighted average common shares 3,460,905 3,406,150
========= =========
Diluted earnings per share:
Weighted average common shares 3,460,905 3,406,150
Dilutive effect of stock options 985 --
--------- ---------
Weighted average common shares and incremental shares 3,461,890 3,406,150
========= =========
For the three month and nine month periods ended September 30, 2005,
163,850 stock options were not considered in the calculation of the
dilutive effect of stock options as they were anti-dilutive. During the
three and nine months ended September 30, 2004, there were no incremental
shares relating to the dilutive effect of stock options due net losses for
the periods.
5. STOCK BASED COMPENSATION
At September 30, 2005, 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, 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 and earnings 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.
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2005 2004
-------- ----------
(RESTATED)
Net income (loss):
Net income (loss) as reported $407,929 $(144,119)
Deduct total stock based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects and reversals of
prior period expense due to forfeitures (5,755) (8,175)
-------- ---------
Pro forma, net income (loss) $402,174 $(152,294)
======== =========
Net earnings (loss) per share:
Basic earnings (loss) per share $ 0.12 $ (0.04)
Diluted earnings (loss) per share $ 0.12 $ (0.04)
Pro forma earnings (loss) per share:
Basic earnings (loss) per share $ 0.12 $ (0.04)
Diluted earnings (loss) per share $ 0.12 $ (0.04)
-9-
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2005 2004
-------- ----------
(RESTATED)
Net income (loss):
Net income (loss) as reported $675,042 $(70,593)
Deduct total stock based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects 13,489 (24,526)
-------- --------
Pro forma, net income (loss) $688,531 $(95,119)
======== ========
Net earnings (loss) per share:
Basic earnings (loss) per share $ 0.20 $ (0.02)
Diluted earnings (loss) per share $ 0.20 $ (0.02)
Pro forma earnings (loss) per share:
Basic earnings (loss) per share $ 0.20 $ (0.03)
Diluted earnings (loss) per share $ 0.20 $ (0.03)
6. INCOME TAXES
The Company maintains a valuation allowance against a portion of the
deferred tax assets because management believes it is more likely than not
that a portion of the benefit associated with the deferred tax asset will
not be realized. During 2005 and 2004, management's estimate of the
deferred tax asset realization did not change significantly and the Company
recorded changes in its valuation allowance to offset changes in the
deferred tax assets, resulting in no income tax expense for 2005 or 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 2020 through 2024.
7. NEW ACCOUNTING PRONOUNCEMENTS BUT NOT YET EFFECTIVE
FAS 123, Revised, requires all public companies to record compensation cost
for stock options provided to employees in return for employee service. The
cost is measured at the fair value of the options when granted, and this
cost is expensed over the employee service period, which is normally the
vesting period of the options. This will apply to awards granted or
modified after the first quarter or year beginning after December 15, 2005.
Compensation cost will also be recorded for prior option grants that vest
after the date of adoption. The effect on results of operations will depend
on the level of future option grants and the calculation of the fair value
of the options granted at such future date, as well as the vesting periods
provided, and cannot currently be predicted. Existing options that will
vest after adoption date are expected to result in additional compensation
expense of approximately $27,000 in 2006. There will be no significant
effect on financial position as total equity will not change.
8. PRIVATE PLACEMENT
On April 26, 2005, the Board of Directors of the Company approved the offer
and sale of up to $600,000 worth of its common stock to certain accredited
investors, including, without limitation, the officers and directors of the
Company in a private placement under Section 4(2) of the Securities Act of
1933 and Rule 506 of Regulation D promulgated thereunder. On April 29,
2005, the price of $5.00 per share was determined by the Executive
Committee of the Board of Directors of the Company. Subsequently, the
Company sold 101,000 shares of common stock at a price of $5.00 per share,
or $505,000 in gross proceeds. Offerings costs as of September 30, 2005
were $10,645. The private placement closed on May 6, 2005.
-10-
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's 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
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 that 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. The Company undertakes no duty to
update any forward looking statement to reflect events or circumstances after
the date on which the forward looking statement is made or to reflect the
occurrence of unanticipated events.
COMPANY OVERVIEW
The Company is a holding company for its principal banking subsidiaries, Shelby
County Bank and Paramount Bank. 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 $6,000,000 loan from a commercial bank.
Shelby County Bank is a federally chartered savings bank located in Shelbyville,
Indiana and Paramount Bank 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 their clients with a broad range of services
delivered by experienced professionals concerned with building strong and
long-term relationships.
-11-
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles 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 Company's critical accounting policies include the following:
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, FDIC, the Banks' historical losses or by the
Chief Credit Officer's recommendations and by multiplying such loss percentages
to the Banks' distribution of portfolio balances since management believes this
will be representative of losses inherent in the portfolio. 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.
A valuation allowance reduces deferred tax assets to the amount management
believes is more likely than not to be realized. In evaluating the realization
of deferred tax assets, management considers the likelihood that sufficient
taxable income of appropriate character will be generated within carry forward
periods, including consideration of available tax planning strategies. During
2005 and 2004, management's estimate of deferred tax asset realization did not
change significantly, and the valuation allowance was adjusted to offset the net
change in deferred tax assets during the periods.
MANAGEMENT OVERVIEW
Overview of Financial Condition at September 30, 2005 and December 31, 2004
On a consolidated basis, the Company's total assets as of September 30, 2005
were $219,214,000 compared to total assets of $206,625,000 at December 31, 2004.
As of September 30, 2005, gross loans were $164,677,000 compared to gross loans
of $157,427,000 at December 31, 2004. Deposits were $180,115,000 at September
30, 2005 compared to $170,330,000 at December 31, 2004. Total capital was
$16,677,000 at September 30, 2005 compared to $15,784,000 at December 31, 2004.
Outstanding shares of common stock were 3,507,150 as of September 30, 2005 and
3,406,150 as of December 31, 2004.
The Company has continued to be asset sensitive, with a large amount of variable
rate loans tied to prime, and the Company is benefiting from the prime rate
increases. The additional capital generated in the second quarter from the
private placement of its common stock and subsequent borrowing of $2,000,000
from Union Federal Bank has allowed Shelby County Bank to maintain its momentum
of growing quality loans and improving net interest income. During the remainder
of 2005, the Company believes loan balances will continue to increase net
interest income, without reducing credit quality. The Company has reached a
sustainable level of core earnings, from which the Banks can continue to grow.
The anticipated increase in the loan portfolio should prove effective in
achieving a meaningful return on shareholder's equity. Management and staff at
both Shelby County Bank and Paramount Bank will continue to work diligently at
implementing growth plans and strategies as the Company expects significant
results from these actions for the remainder of this year and in the years to
come.
-12-
Overview of Results of Operations for the Three Months Ended September 30, 2005
and 2004
For the quarter ended September 30, 2005, the Company's net consolidated income
was $408,000. This compares to a consolidated net loss of $144,000 for the same
period of 2004. Basic earnings per share was $0.12 for the quarter ended
September 30, 2005 compared to a loss of $0.04 per share for the quarter ended
September 30, 2004. Weighted average outstanding shares (basic) for the third
quarter of 2005 were 3,507,150 and 3,406,150 for the third quarter of 2004. The
Company benefited from amortization of purchase accounting adjustments from the
acquisition of Paramount Bank. For the three month period ended September 30,
2005, income has been increased $58,000 as a result of net accretion of purchase
accounting adjustments on loans, deposits and borrowings. However, this benefit
will be decreasing in the future.
Net interest income before the provision for loan losses for the three months
ended September 30, 2005 increased approximately 16.9% from the period ended
September 30, 2004. This increase can be attributed to a rising interest rate
environment with the prime lending rate increasing from 4.75% to 6.75%. The
Banks will continue to benefit from the increases in the prime interest rate as
a large amount of the loan portfolio has variable rates. Another factor
contributing to the increase was increased loan growth at Shelby County Bank
during 2004 and during the third quarter of 2005.
Overall non-interest income increased 67% for the three month period ended
September 30, 2005 compared to the three month period ended September 30, 2004.
Primarily this increase was comprised of an increase in net gains on the sale of
available-for-sale securities, other real estate owned and other assets.
Additionally, the Banks increased their fee structures during the third quarter
of 2005 on deposit accounts thus service charges on deposit accounts increased.
There were also increases in secondary market mortgage loan fees.
Overall non-interest expense increased less than 2% for the three months ended
September 30, 2005 compared to the same period of 2004. The increases were
primarily due to additional professional expenses incurred in the third quarter
of 2005 related to the costs to pursue litigation on past due loans and manage
and reduce real estate owned. The Company reduced this non-earning asset
category by $563,000 during the third quarter of 2005 and expects to further
reduce this category during the fourth quarter of 2005. Salaries and benefits
have increased for the three months ended September 30, 2005 compared to the
same period of 2004 due to staffing additions at both Shelby County Bank and
Paramount Bank and the reclassification of both the Chief Executive of the
Company's and the Chairman of the Board of Shelby County Bank's compensation
from director fees to salaries. These salary increases were accompanied by a
reduction in director fees for these two individuals over the periods. Paramount
Bank incurred increased expenses in advertising and promotion for the three
months ended September 30, 2005 compared to the three months ended September 30,
2004. These additional costs were the result of increased efforts to promote and
advertise the Bank in its local market area. A major offset to the increases in
non-interest expense was the decrease of merger related costs relating to the
terminated merger with Heartland Bancshares, Inc. as these expenses occurred
during the third quarter of 2004. In addition, in the fourth quarter of 2004,
the Banks formally negotiated enhanced, more cost effective insurance contracts.
This benefit reduced other non-interest expense.
-13-
Overview of Results of Operations for the Nine Months Ended September 30, 2005
and 2004
For the nine month period ended September 30, 2005, the Company's net
consolidated income was $675,000. This compares to a net consolidated loss of
$71,000 for the same period of 2004. Basic earnings per share were $0.20 for the
nine months ended September 30, 2005 compared to a loss of $0.02 per share for
the nine months ended September 30, 2004. Weighted average outstanding shares
(basic) for the first three quarters of 2005 were 3,460,905 compared to
3,406,150 for the first three quarters of 2004. The Company benefited from
amortization of purchase accounting adjustments from the acquisition of
Paramount Bank. For the nine month period ended September 30, 2005, income has
been increased $199,000 as a result of net accretion of purchase accounting
adjustments on loans, deposits and borrowings. However, this benefit will be
decreasing in future quarters beginning in the first quarter of 2006.
Net interest income before loan loss provision for the nine months ended
September 30, 2005 was $5,176,000 as compared to $4,483,000 for the same period
in 2004, or a 15.5% increase. The increase in net interest income for the nine
month period ending September 30, 2005, when compared to the same period of 2004
can be attributed to a rising interest rate environment with the prime lending
rate increasing from 4.75% to 6.75%. The Banks will continue to benefit from the
increases in the prime interest rate as a large amount of the loan portfolio has
variable rates.
Non-interest income for the nine months ended September 30, 2005 was $987,000 as
compared to $876,000 for the same period in 2004, or a 12.6% increase. The
improvement was comprised primarily of increases in secondary market mortgage
loan fees and service charges on deposit accounts as both Banks increased
service charges during the third quarter of 2005.
Non-interest expense increased to $5,337,000 for the nine months ended September
30, 2005 from $5,060,000 for the same period of 2004. This increase was
primarily due to additional professional expenses incurred in 2005 related to
the costs to pursue litigation on past due loans and to manage and reduce real
estate owned. The Company reduced this non-earning asset category by $938,000
since December 31, 2004 and expects to further reduce this category during the
remainder of 2005. Salaries and benefits have increased for the nine months
ended September 30, 2005 compared to the same period of 2004 due to staffing
additions at both Shelby County Bank and Paramount Bank and the reclassification
of both the Chief Executive Officer of the Company's and for the Chairman of the
Board of Directors of Shelby County Bank's compensation from director fees to
salaries. These salary increases were accompanied by a reduction in director
fees for these two individuals over the periods. Paramount Bank incurred
increased expenses in advertising and promotion for the nine months ended
September 30, 2005 compared to the nine months ended September 30, 2004. These
additional costs were the result of increased efforts to promote and advertise
the bank in its local market area. Offsetting these increases, there was a
reduction in merger related expenses with regard to the terminated merger with
Heartland Bancshares, Inc. Additionally, in the fourth quarter of 2004, the
Banks formally negotiated enhanced, more cost effective insurance contracts
which reduced other non-interest expense.
-14-
FINANCIAL CONDITION
The Company's total assets at September 30, 2005 were $219,214,000, an increase
of $12,589,000 from December 31, 2004. Primarily the change consists of an
increase in cash and cash equivalents of $12,143,000, an increase in net loans
of $7,481,000 offset by a decrease in securities available-for-sale of
$6,687,000 and a decrease in other real estate owned of $938,000. During the
first and second quarters of 2005, Shelby County Bank slowed loan growth to
continue to focus its efforts on maintaining its "well capitalized" status. By
the end of the quarter ended June 30, 2005, the Company raised $505,000 in gross
proceeds through the sale of its common stock in a private placement and
borrowed an additional $2,000,000 from Union Federal Bank of Indianapolis. The
Company then invested $1,800,000 into Shelby County Bank. The remaining monies
are held by the Company as additional working capital. During the end of the
third quarter 2004, it was necessary for Shelby County Bank to participate
$4,000,000 of its commercial loan and home equity loan portfolios to other
banks. This was accomplished in order to continue its "well capitalized" status.
The Banks are strategically maintaining their "well capitalized" status while
continuing to focus on improving net interest income and overall profitability.
With the additional capital, Shelby County Bank has been able to resume and
maintain its momentum of growing quality loans and improving net interest
income.
The investment portfolio balances have decreased to $25,691,000 at September 30,
2005 from $32,380,000 at December 31, 2004. There was a sale of a GNMA mortgage
backed available-for-sale security of $2,401,000 with a recognized gain of
$34,000 and a $1,000,000 call of a U.S. Agency available-for-sale security which
contributed to the decline in investments. Additional decreases in the
investments were due to average repayments of approximately $316,000 per month
on the mortgage-backed-securities. There were also temporary decreases in the
market value of available-for-sale securities of $444,000. The proceeds from the
sale, call and repayments were replaced by liquid funds to help improve "well
capitalized" ratios. In the future the Banks will continue to invest primarily
in GNMA mortgage-backed securities. These investment products receive favorable
risk-based capital treatment.
The Banks' interest-bearing deposits within other banks increased $1,320,000 to
$2,863,000 from $1,543,000 at December 31, 2004. Cash and due from banks
increased to $14,395,000 from $3,572,000 at December 31, 2004. The large amount
of funds within other banks was temporary and was primarily the result of one
large depositor at Shelby County Bank who held a significant deposit at
September 30, 2005 and who subsequently disbursed these funds to other entities.
The Company's liquidity position is the primary source of additional capital for
infusion into its banking subsidiaries. During the year ended December 31, 2004,
the Banks had significantly increased their use of borrowed funds as a result of
increased loan demand and maturities of higher interest rate certificates of
deposit. Due to the Company's liquidity needs, the Company borrowed an
additional $2,000,000 in external funding in order to resume loan growth at
Shelby County Bank. In addition, a private placement was authorized by the Board
of Directors in April 2005 and completed in May 2005 in order to increase the
Company's capital. The private placement raised gross proceeds of $505,000 of
capital, the offering costs were $11,000.
The Banks' net loans increased $7,481,000 from December 31, 2004 to $162,989,000
at September 30, 2005. During the first and second quarters of 2005, Shelby
County Bank slowed loan growth to maintain its "well capitalized" status.
However, as a result of the additional capital, loan growth accelerated in the
commercial lending market as well as in the home equity market during the third
quarter of 2005. These loan products provide the opportunity for increased
profitability and continued improvement in interest rate sensitivity while
maintaining the Bank's "well capitalized" status.
-15-
LOANS RECEIVABLE
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
Real Estate Mortgage Loans:
One-to-four family $ 43,126,793 $ 44,643,438
Non Residential 41,453,858 32,578,619
Home equity loans 35,379,487 33,852,662
Consumer loans 12,608,965 9,076,135
Commercial loans, including participations 32,107,741 37,276,414
------------ ------------
Total gross loans 164,676,844 157,427,268
Less allowance for loan losses (1,688,331) (1,919,193)
------------ ------------
Total loans receivable, net $162,988,513 $155,508,075
============ ============
NON-PERFORMING LOANS
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
Non-performing loans consist of the following:
Non-accrual loans $1,217,390 $ 462,473
Ninety (90) days past due 1,002,441 1,445,792
---------- ----------
Total non-performing loans $2,219,831 $1,908,265
========== ==========
Non-performing loans to total loans 1.35% 1.21%
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 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, 2005, the Banks reported
approximately $1,217,000 of non-accrual loans and $1,002,000 in loans ninety
days or more past due. This is an increase in non-accrual loans of $755,000 from
December 31, 2004 and a decrease in past due loans of $443,000 from December 31,
2004. The increase in non-accrual loans was the result of moving ninety day past
due loans to non-accrual status and the addition of several loans totaling
$715,000 placed on non-accrual status at Paramount Bank. These increases were
offset by a decrease in non-accrual loans which were removed from non-accrual,
partially charged off and moved to other real estate. The primary reason for the
decrease in past due loans ninety days or more was the result of partially
charging off and moving one loan of $234,000 from this category to other real
estate owned. In addition, there were other loans that were removed from ninety
days past due as a result of renewals and payoffs. There is an increase in the
non-performing loans to total gross loans from 1.21% at December 31, 2004 to
1.35% at September 30, 2005. The Banks maintain a reserve for loan losses to
cover losses incurred when loans default. Loans in all categories are
charged-off when they are deemed uncollectible.
-16-
Activity in the allowance for loan losses consists of the following:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2005 2004
---------- ----------
Balance, beginning of period $1,919,193 $1,681,005
Add:
Provision for loan losses 150,500 370,000
Recoveries of loans previously charged off 37,413 54,239
Less gross charge-offs:
Residential real estate loans (82,207) (128,479)
Consumer/commercial loans (336,568) (179,463)
---------- ----------
Balance, end of period $1,688,331 $1,797,302
========== ==========
Net charge-offs to total average loans outstanding (annualized) 0.72% 0.54%
Allowance to total average loans outstanding 1.07% 1.24%
The allowance for loan losses at September 30, 2005 was $1,688,000, a decrease
of $231,000 from December 31, 2004. The Company's provision for loan losses for
the year was $150,000 and its net charge-offs were approximately $381,000. 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.
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. 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, FDIC, the Banks' historical losses or by the Chief Credit Officer's
recommendations and by multiplying such loss percentages to the Banks'
distribution of portfolio balances since management believes this will be
representative of losses inherent in the portfolio. 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 performed by management. The reason for the decrease in the
allowance was primarily due to the charge off of loans that had been previously
allocated in the allowance and management's analysis of the allowance in
determining the necessity for a monthly provision. The allowance to total
average loans outstanding decreased to 1.07% for the nine month period ended
September 30, 2005 compared to 1.24% for the nine month period ended September
30, 2004. For the nine month period ended September 30, 2005, the allowance to
total average loans outstanding decreased 24 basis points from 1.31% at December
31, 2004.
Total liabilities at September 30, 2005 were $202,537,000, an increase of
$11,696,000 compared to $190,841,000 at December 31, 2004. Deposits at September
30, 2005 were $180,115,000 compared to $170,330,000 at December 31, 2004, an
increase of $9,785,000. However, this deposit increase was temporary and was
primarily the result of one large depositor at Shelby County Bank who held a
significant deposit at September 30, 2005 and who subsequently disbursed these
funds to other entities. Other borrowings have increased by $275,000 to
$15,366,000 at September 30, 2005 from $15,091,000 at December 31, 2004. The
note payable increased $2,000,000 to $6,000,000 at September 30, 2005 from
$4,000,000 at December 31, 2004. The additional borrowing was completed during
the quarter ended June 30, 2005 and subsequently $1,800,000 was invested at
Shelby County Bank to improve its regulatory capital ratios. 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
-17-
depository relationships, and encouraging a stronger relationship with its
customer base. By acquiring primarily transaction accounts, the Banks are less
susceptible to loss of accounts during periods of volatile interest rates.
Shareholders' equity at September 30, 2005 was $16,677,000, an increase of
$893,000 compared to $15,784,000 at December 31, 2004. The change in equity
resulted from net income of $675,000, additional capital of $505,000; net of
offering costs of $11,000, as a result of the private placement and a decrease
of $276,000 from a temporary decline in the fair value of the Company's
available-for-sale investment portfolio.
RESULTS OF OPERATIONS: Three Months Ended September 30, 2005
During the three month period ended September 30, 2005, the Company's net income
was $408,000 compared to a net loss of $144,000 reported for the three month
period ended September 30, 2004. There was no income tax expense for the three
month period ended September 30, 2005 and for the three month period ended
September 30, 2004. The Company maintains a valuation allowance on a portion of
its deferred tax assets. During 2005 and 2004, management's estimate of the
deferred tax asset realization did not change significantly and the Company
recorded changes in its valuation allowance to offset a change in the deferred
tax assets, resulting in no income tax expense for 2005 or 2004.
The Company's comparative performance showed an increase in net interest income
before provision for loan losses of $263,000, a decrease in the provision for
loan losses of $129,000, an increase in non-interest income of $192,000, and an
increase in non-interest expenses of $32,000.
The increase in net interest income before provision for loan losses resulted
from an increase in interest income of $485,000, offset by an increase in
interest expense of $222,000. The increase in loan interest income was partially
due to loan growth in 2004 and in the third quarter of 2005, however the key
increase was due to the prime interest rate increases in the latter half of 2004
and in 2005. Increases of $21,000 in interest income on interest bearing
deposits and dividends from FHLB were primarily the effect of interest rate
increases. These increases were offset by decreases of $55,000 in the investment
interest income as a result of decreased volume. The major variance in interest
expense of $160,000 is attributed to increases in the rates of primarily
certificates of deposit which accounts for $130,000. Additionally, interest
expense on borrowings increased $62,000 and was largely the result of an
increase in the interest rates of those borrowings.
Interest income and fees from loans increased from $2,200,000 for the three
month period ended September 30, 2004 to $2,720,000 for the three month period
ended September 30, 2005. This increase was comprised of a favorable variance of
$72,000 due to higher average loan balances of $4,915,000, and a favorable
variance of $448,000 due to an increase of 113 basis points in the effective
yield on loans. The increase in yield was largely due to increases in the prime
interest rate, increased balances in variable rate products, as well as higher
yields on new loans originated during the period. The overall yield on loans
increased to 6.85% for the three month period ended September 30, 2005 from
5.72% for the three month period ended September 30, 2004.
Interest income from investment securities decreased $55,000 to $300,000 for the
three months ended September 30, 2005, when compared to the three month period
ended September 30, 2004. This decrease resulted from an unfavorable variance of
$68,000 from a decrease in average investment balances of $6,334,000. These
decreases were due to maturities, repayments of mortgage-backed-securities,
sales and calls occurring in 2004 and 2005 and were the result of efforts to
improve interest rate sensitivity, risk-based capital, manage liquidity and
concentrate on loan growth. The unfavorable variance due to volume was offset by
an increased variance of $13,000 due to investment yields being 15 basis points
higher over the prior period ended September 30, 2004. During the three month
period ended September 30, 2005, there were principal payment reductions in the
mortgage-backed-securities of $1,004,000 and a sale of a GNMA mortgage backed
available-for-sale security of $2,401,000. The Company recognized a gain of
$34,000 from
-18-
this sale. The Banks will continue to invest primarily in agency securities and
mortgage-backed securities. Both of these investment products receive favorable
risk-based capital treatment.
Interest expense on deposits increased $160,000 to $1,027,000 for the three
month period ended September 30, 2005, compared to $867,000 for the three month
period ended September 30, 2004. This increase was comprised of a favorable
variance of $30,000 due to a decrease in average deposit balances of $3,440,000
primarily in certificates of deposit, and an unfavorable variance of $190,000
due to an increase in average rates on deposits from 2.33% to 2.83%. This
unfavorable rate variance was created by higher certificate rates on new
certificates of deposit, as well as increased rates applied to core deposit
products such as savings and money market accounts.
Interest expense on FHLB advances and other borrowings increased $62,000 from
$191,000 for the three-month period ended September 30, 2004 to $253,000 for the
three month period ended September 30, 2005. This increase was the result of a
favorable variance of $16,000 due to a decrease in the average borrowing balance
of $1,983,000 and an unfavorable variance of $78,000 due to an increase in
interest rates from 3.08% to 4.43%.
For the three month period ended September 30, 2005, the provision for loan
losses was $46,000 compared to $175,000 for the three month period ended
September 30, 2004. The decrease of $129,000 is primarily attributed to Shelby
County Bank. There was no provision for loan losses at Shelby County Bank for
the three month period ended September 30, 2005. Management determined by
analysis that the Bank's reserve was provided for adequately. Please refer to
the additional information related to the allowance for loan losses in the
financial condition discussion.
Total non-interest income was $476,000 for the three-month period ended
September 30, 2005 compared to $285,000 for the three month period ended
September 30, 2004. Of this increase, $18,000 can be attributed to the result of
net gains on securities available-for-sale occurring during the period ended
September 30, 2005 of $34,000 compared to $16,000 in net gains on securities
available-for-sale during the period ended September 30, 2004. There were also
net increases in other income from sales of other assets of $101,000.
Additionally, there were increases of $41,000 in secondary market mortgage loan
fees and $58,000 from service charges and fees on deposit accounts. Offsetting
these increases, there were decreases in other income of $26,000, in part the
result of a sale of a building owned by the Company during the fourth quarter of
2004 and which resulted in the reduction of $8,000 in rental income for the
three months ended September 30, 2005, compared to the three months ended
September 30, 2004.
Non-interest expenses totaled $1,838,000 for the three month period ended
September 30, 2005, compared to $1,806,000 during the three month period ended
September 30, 2004.
-19-
Changes in non-interest expenses consist of the following:
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------- CHANGE FROM
2005 2004 2004
---------- ---------- -----------
(RESTATED)
Salaries and employee benefits $ 972,122 $ 804,118 $ 168,004
Occupancy 198,905 215,247 (16,342)
Federal deposit insurance 13,093 12,770 323
Data Processing 155,664 147,696 7,968
Advertising and promotion 50,847 39,626 11,221
Bank fees and charges 26,254 27,382 (1,128)
Director Fees 25,900 57,150 (31,250)
Professional Fees 166,935 92,313 74,622
Stationery, supplies and printing 35,063 29,401 5,662
Core deposit intangible 17,241 17,241 --
Merger costs -- 152,853 (152,853)
Other Expenses 176,061 210,189 (34,128)
---------- ---------- ---------
$1,838,085 $1,805,986 $ 32,099
========== ========== =========
Major fluctuations in non-interest expense include an increase in salaries and
employee benefits of $168,000. This increase is primarily due to additions to
staff, salary increases and the reclassification of the director fees of both
the Chief Executive of the Company and the Chairman of the Board at Shelby
County Bank to salaries. Advertising and promotion expenses have increased
$11,000 from the three months ended September 30, 2004 to the three months ended
September 30, 2005 due to an increase of $10,000 in these expenses at Paramount
Bank associated with management's attention to promoting and marketing the Bank
in its local area. Professional fees have increased by $75,000 as the Banks have
retained legal counsel to pursue litigation regarding past due loans and non
accruing assets, these costs are associated with those efforts. Increases in
non-interest expense were offset by $153,000 in merger costs for the period
ended September 30, 2004 that were not incurred in 2005 associated with the
terminated merger with Heartland Bancshares, Inc. Occupancy also decreased
$16,000 when comparing the two periods. A primary reason for the reduction was
the result of a sale of a property owned by the Company in the fourth quarter of
2004 and the $4,000 in occupancy costs associated with maintaining that property
during the three months ended September 30, 2004. Other reductions in occupancy
were due to fixed assets becoming fully depreciated during 2004 and the first
quarter ended March 31, 2005. Additionally, director fees have decreased $31,000
for the period ended September 30, 2005 compared to the period ended September
30, 2004. This is the result of a change in the role of some directors who
previously served on both Blue River Bancshares' Board of Directors as well as
Shelby County Bank's Board of Directors and who currently only serve at the bank
level. Additionally as stated previously, compensation for the Chief Executive
of the Company and the Chairman of the Board of Shelby County Bank has changed
from directors fees to salaries during the second quarter ended June 30, 2005.
Director's fees will be increasing in the future however, as there are current
vacancies on Board of Directors of Shelby County Bank and the Company.
RESULTS OF OPERATIONS: Nine Months Ended September 30, 2005
During the nine month period ended September 30, 2005, the Company's net income
was $675,000 compared to a net loss of $71,000 reported for the nine month
period ended September 30, 2004. There was no income tax expense for the nine
month period ended September 30, 2005 and for the nine month period ended
September 30, 2004. The Company maintains a valuation allowance on a portion of
its deferred tax assets.
-20-
During 2005 and 2004, management's estimate of the deferred tax asset
realization did not change significantly and the Company recorded changes in its
valuation allowance to offset a change in the deferred tax assets, resulting in
no income tax expense for 2005 or 2004.
The Company's comparative performance showed an increase in net interest income
before provision for loan losses of $693,000, a decrease in the provision for
loan losses of $219,000, an increase in non-interest income of $111,000, and an
increase in non-interest expenses of $277,000.
The increase in net interest income before provision for loan losses resulted
from an increase in interest income of $1,405,000, offset by an increase in
interest expense of $713,000. The increase in loan interest income was primarily
due to loan growth in 2004 and in the third quarter of 2005, and prime interest
rate increases in the latter half of 2004 and in 2005. Increases of $98,000 in
interest income on interest bearing deposits and dividends from FHLB were
primarily the effect of interest rate increases. These increases were offset by
decreases of $188,000 in the investment interest income primarily the result of
decreased volume. The major variance in interest expense is attributed primarily
to increased rates on certificates of deposit. Additionally, interest expense on
borrowings increased by a net $94,000 and was predominantly the result of an
increase in the interest rates of those borrowings, as volume actually
decreased.
Interest income and fees from loans increased from $6,070,000 for the nine month
period ended September 30, 2004 to $7,565,000 for the nine month period ended
September 30, 2005. This increase was comprised of a favorable variance of
$601,000 due to higher average loan balances of $13,483,000, and a favorable
variance of $894,000 due to an increase of 79 basis points in the effective
yield on loans. The increase in yield was largely due to increases in the prime
interest rate, increased balances in variable rate products, as well as higher
yields on new loans originated during the period. The overall yield on loans
increased to 6.41% for the nine month period ended September 30, 2005 from 5.62%
for the nine month period ended September 30, 2004.
Interest income from investment securities decreased $188,000 to $954,000 for
the nine months ended September 30, 2005, when compared to the nine month period
ended September 30, 2004. This decrease resulted from an unfavorable variance of
$300,000 from a decrease in average investment balances of $9,602,000. These
decreases were due to maturities, calls, repayments of
mortgage-backed-securities and sales occurring in 2004 and 2005 and were the
result of efforts to improve interest rate sensitivity, risk-based capital,
manage liquidity and concentrate on loan growth. The unfavorable variance due to
volume was offset by a favorable variance of $112,000 due to investment yields
being 41 basis points higher over the prior period ended September 30, 2004.
During the nine month period ended September 30, 2005, there were principal
payment reductions in the mortgage-backed-securities of $2,848,000, a sale of a
GNMA mortgage backed available-for-sale security in the amount of $2,401,000
with a recognized gain of $34,000 and a $1,000,000 call of a U.S Agency
available-for-sale security. The Banks will continue to invest primarily in
agency securities and mortgage-backed securities. Both of these investment
products receive favorable risk-based capital treatment.
Interest expense on deposits increased $619,000 to $2,921,000 for the nine month
period ended September 30, 2005, compared to $2,302,000 for the nine month
period ended September 30, 2004. This increase was comprised of an unfavorable
variance of $113,000 due to a net increase in the average deposit balances of
$4,509,000, primarily in certificates of deposit and savings accounts, offset by
a decrease in the average deposit balances of money market and NOW accounts, and
an unfavorable variance of $506,000 due to an increase in average rates on
deposits from 2.14% to 2.64%. This unfavorable rate variance was created by
higher certificate rates on new certificates of deposit, as well as increased
rates applied to core deposit products such as savings and money market
accounts. Additionally, increases in certificates of deposit, specifically at
Shelby County Bank were used as funding sources to offset maturities of high
rate promotional certificates of deposits.
Interest expense on FHLB advances and other borrowings increased $94,000 from
$560,000 for the nine month period ended September 30, 2004 to $654,000 for the
nine month period ended September 30, 2005. This increase was the result of a
favorable variance of $69,000 due to a decreased volume of the average
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borrowing balance of $2,673,000 and an unfavorable variance of $163,000 due to
an increase in interest rates from 3.18% to 4.19%.
For the nine month period ended September 30, 2005, the provision for loan
losses was $151,000 compared to $370,000 for the nine month period ended
September 30, 2004. The decrease of $219,000 is primarily attributed to Shelby
County Bank. There was no provision for loan losses at Shelby County Bank for
the nine month period ended September 30, 2005. Management determined by
analysis that the Bank's reserve was provided for adequately. Please refer to
the additional information related to the allowance for loan losses in the
financial condition discussion.
Total non-interest income was $987,000 for the nine month period ended September
30, 2005 compared to $876,000 for the nine month period ended September 30,
2004. There was an increase of $136,000 in secondary market mortgage loan fees
and an $88,000 increase from service charges and fees on deposit accounts.
During 2005, Shelby County Bank actively pursued mortgage loans to be sold in
the secondary market to generate fee income in this category. In addition, both
Paramount Bank and Shelby County Bank increased service charges on deposit
accounts during the third quarter of 2005. Offsetting these increases, there
were decreases in other income which in part was the result of a sale of a
building owned by the Company during the fourth quarter of 2004 and which
resulted in the reduction of $23,000 in rental income. Other decreases of
$30,000 in other income were primarily due to a decrease in wire transfer fees
and letter of credit fees. However, these decreases in other income were offset
by an increase in other income on other real estate owned of $40,000 which
occurred in the second quarter of 2005. In addition, when comparing the two
periods, there were net decreases on gains on sales of other real estate owned
and other assets of $12,000 and in net gains on sales of available-for-sale
securities of $88,000.
Non-interest expenses totaled $5,337,000 for the nine month period ended
September 30, 2005, compared to $5,060,000 during the nine month period ended
September 30, 2004.
Changes in non-interest expenses consist of the following:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2005 2004 CHANGE FROM 2004
---------- ---------- ----------------
(RESTATED)
Salaries and employee benefits $2,752,146 $2,324,920 $ 427,226
Occupancy 588,264 646,365 (58,101)
Federal deposit insurance 42,497 37,689 4,808
Data Processing 465,730 446,587 19,143
Advertising and promotion 131,537 78,502 53,035
Bank fees and charges 79,656 76,012 3,644
Director Fees 108,500 174,650 (66,150)
Professional Fees 445,740 335,105 110,635
Stationery, supplies and printing 90,530 103,667 (13,137)
Core deposit intangible 51,723 52,267 (544)
Merger costs 73,171 152,853 (79,682)
Other Expenses 507,812 631,354 (123,542)
---------- ---------- ---------
$5,337,306 $5,059,971 $ 277,335
========== ========== =========
Major fluctuations in non-interest expense include an increase in salaries and
employee benefits of $427,000. This increase is in part due to decreased loan
growth at Shelby County Bank for the first and second quarters of 2005 and the
impact on deferred salary costs related to that slowed growth. Other increases
to salaries were the result of additions to staff, salary increases and the
reclassification of the director fees of both the Chief Executive of the Company
and the Chairman of the Board at Shelby County Bank to salaries. Advertising and
promotion expenses have increased $53,000 from the nine months ended September
30,
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2004 to the nine months ended September 30, 2005 due to an increase of $45,000
in these expenses at Paramount Bank associated with management's attention to
promoting and marketing the Bank in its local area. Professional fees have
increased by $111,000 primarily at Paramount Bank as the Bank has retained legal
counsel to pursue litigation regarding past due loans, these costs are
associated with those efforts. Increases in non-interest expense were offset by
other expenses which decreased $124,000, primarily the result of decreases in
the Banks' insurance premiums. Merger costs related to the terminated merger
with Heartland Bancshares, Inc. have decreased $80,000. The 2005 costs related
to this merger occurred during the first and second quarters of 2005. Occupancy
decreased $58,000 when comparing the two periods. A primary reason for this
reduction was the result of a sale of a property owned by the Company in the
fourth quarter of 2004 and the $13,000 in occupancy costs associated with
maintaining that property during the nine months ended September 30, 2004. Other
reductions in occupancy were due to fixed assets becoming fully depreciated
during 2004 and the first quarter ended March 31, 2005. Stationary and supplies
as well decreased $13,000 as there is a concentrated effort at the Banks to
reduce such expenses as they relate to cost containment. Additionally, director
fees have decreased $66,000 for the nine month period ended September 30, 2005
compared to the nine month period ended September 30, 2004. This is the result
of a change in the role of some directors who previously served on both Blue
River Bancshares' Board of Directors as well as Shelby County Bank's Board of
Directors and who currently only serve at the bank level. Additionally as stated
previously, compensation for the Chief Executive of the Company and Chairman of
the Board of Shelby County Bank has changed from directors fees to salaries
during the second quarter ended September 30, 2005. Director's fees will be
increasing in the future however, as there are current vacancies on the Board of
Directors of Shelby County Bank and the Company.
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 due to these primary
factors: increased loan growth at Shelby County Bank during 2004, continued
operating losses and the disallowance of the Banks' deferred tax assets in
determining regulatory capital ratios.
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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 September
30, 2005, the Banks satisfied all capital requirements. 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.
The following table sets forth the actual and minimum capital amounts to be
adequately capitalized and ratios of Shelby County Bank as of September 30,
2005:
For Capital Adequacy Purposes:
SHELBY COUNTY BANK
-------------------------------
TOTAL
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
(DOLLARS IN THOUSANDS)
Bank Amount $10,584 $10,584 $11,543
Required Amount 2,117 4,234 7,880
------- ------- -------
Excess $ 8,467 $ 6,350 $ 3,663
======= ======= =======
Bank Ratio 7.50% 7.50% 11.72%
Required Ratio 1.50% 3.00% 8.00%
------- ------- -------
Ratio Excess 6.00% 4.50% 3.72%
======= ======= =======
The following table sets forth the actual and minimum capital amounts to be
adequately capitalized and ratios of Paramount as of September 30, 2005:
For Capital Adequacy Purposes:
PARAMOUNT BANK
-------------------------------
TOTAL
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
(DOLLARS IN THOUSANDS)
Bank Amount $6,374 $6,374 $7,102
Required Amount 1,089 2,177 4,806
------ ------ ------
Excess $5,285 $4,197 $2,296
====== ====== ======
Bank Ratio 8.78% 8.78% 11.82%
Required Ratio 1.50% 3.00% 8.00%
------ ------ ------
Ratio Excess 7.27% 5.77% 3.56%
====== ====== ======
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Liquidity measures the Banks' ability to meet their savings withdrawals and
lending commitments. Management believes that the Banks' liquidity is adequate
to meet current requirements.
The Company's liquidity position is the primary source of additional capital for
infusion into its banking subsidiaries. During the nine months ended September
30, 2005, the Banks have significantly increased their use of funds as a result
of loan demand and maturities of higher interest rate certificates of deposit.
Due to the Company's recent liquidity needs, the Company borrowed an additional
$2,000,000 from an external funding source during the quarter ended June 30,
2005 and subsequently contributed $1,800,000 of capital to its subsidiary,
Shelby County Bank to fund growth for its current operations. The Company does
not anticipate the need for any additional capital over the next twelve months
as a result of this borrowing and the private placement which was authorized by
the Board of Directors in April 2005 and completed in May 2005, and which raised
a net aggregate of $494,000 of capital after offering costs.
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.
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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, our
Disclosure Controls were effective at the Reasonable Assurance Level, as
described below, as of the end of the period covered by this report.
CHANGES IN INTERNAL CONTROLS
There were no changes in the Company's internal control over financial reporting
that occurred during the quarterly period ended September 30, 2005 that have
materially affected, or are reasonably likely to affect, the Company's internal
control over financial reporting.
REASONABLE ASSURANCE LEVEL OF 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.
-26-
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity 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
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Item 5. Other Information
None
Item 6. Exhibits
The exhibits to this Form 10-QSB are listed in the attached Exhibit
Index.
* * * * * *
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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: November 14, 2005 By: /s/ Patrice M. Lima
------------------------------------
Patrice M. Lima, Vice President,
Controller
(Principal Financial Officer &
Chief Accounting Officer)
-29-
EXHIBIT INDEX
Document Description
Exhibit No.
- -----------
31.1 Certification of 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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