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, 2006
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 May 10, 2006 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 March 31, 2006 and December 31, 2005 3
Consolidated Statements of Income and Comprehensive Income
(Unaudited) for the three months ended March 31, 2006 and
2005 4
Consolidated Statements of Cash Flows (Unaudited) for the
three months ended March 31, 2006 and 2005 5
Notes to Consolidated Financial Statements (Unaudited) 6-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-20
Item 3. Controls and Procedures 21
PART II. OTHER INFORMATION: 22
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 23
EXHIBIT INDEX 24
PART 1 FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
AS OF MARCH 31, 2006 AND DECEMBER 31, 2005
MARCH 31, DECEMBER 31,
2006 2005
------------ ------------
ASSETS
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 4,225,355 $ 7,955,266
Interest-bearing deposits 2,566,651 12,221,600
------------ ------------
Total cash and cash equivalents 6,792,006 20,176,866
Securities available for sale 23,674,667 24,720,805
Securities held to maturity 15,494 16,019
Loans receivable, net of allowance for loan losses of
$1,627,987 and $1,575,511 167,274,393 162,416,186
Stock in FHLB, at cost 2,982,300 2,974,100
Restricted stock, at cost 37,500 37,500
Deferred income taxes, net 3,264,154 3,312,203
Premises and equipment, net 2,214,679 1,970,992
Other real estate owned 168,430 468,666
Accrued interest receivable and other assets 1,700,061 1,678,703
Core deposit intangible 293,101 310,342
Goodwill 3,159,051 3,159,051
------------ ------------
TOTAL ASSETS $211,575,836 $221,241,433
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Interest bearing deposits $148,886,762 $154,367,308
Non-interest bearing deposits 19,031,118 24,391,830
Fed funds purchased 803,000 --
Advances from FHLB 18,337,428 17,826,422
Note payable 6,000,000 6,000,000
Accrued interest and other liabilities 955,006 1,185,898
------------ ------------
Total liabilities 194,013,314 203,771,458
------------ ------------
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 shares issued and outstanding 25,136,398 25,129,517
Accumulated deficit (6,980,853) (7,209,062)
Accumulated other comprehensive income/(loss) (593,023) (450,480)
------------ ------------
Total shareholders' equity 17,562,522 17,469,975
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $211,575,836 $221,241,433
============ ============
See accompanying notes to consolidated financial statements.
-3-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2006 AND 2005
2006 2005
---------- ----------
INTEREST INCOME:
Loans receivable $2,996,888 $2,347,844
Securities 262,915 335,087
Interest-bearing deposits 85,015 32,387
Dividends from FHLB 35,397 31,118
---------- ----------
Total interest income 3,380,215 2,746,436
---------- ----------
INTEREST EXPENSE:
Interest expense on deposits 1,172,059 914,761
Interest expense on FHLB and other borrowings 291,074 176,551
---------- ----------
Total interest expense 1,463,133 1,091,312
---------- ----------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 1,917,082 1,655,124
PROVISION FOR LOAN LOSSES 68,000 52,500
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,849,082 1,602,624
---------- ----------
NON-INTEREST INCOME:
Service charges and fees 163,111 101,027
Secondary market mortgage fees 100,139 125,328
Gain (loss) on sale of other real estate owned
and other assets (12,758) 4,903
Other 57,037 32,806
---------- ----------
Total non-interest income 307,529 264,064
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 977,147 835,872
Premises and equipment 197,324 188,521
Federal deposit insurance 14,666 16,242
Data processing 162,890 154,786
Advertising and promotion 51,622 40,536
Bank fees and charges 26,366 25,823
Directors fees 26,400 53,850
Professional fees 134,122 93,970
Stationery, supplies and printing 18,506 19,140
Merger expense -- 69,335
Core deposit intangible 17,241 17,241
Other 161,231 147,638
---------- ----------
Total non-interest expense 1,787,515 1,662,954
---------- ----------
INCOME BEFORE INCOME TAX 369,096 203,734
INCOME TAX EXPENSE 140,887 --
---------- ----------
NET INCOME $ 228,209 $ 203,734
========== ==========
COMPREHENSIVE INCOME (LOSS) $ 85,666 $ (145,292)
========== ==========
Basic and diluted earnings per share $ 0.07 $ 0.06
========== ==========
See accompanying notes to consolidated financial statements.
-4-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2006 AND 2005
2006 2005
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 228,209 $ 203,734
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and purchase accounting amortization 124,672 24,166
Net amortization (accretion) of securities 10,709 9,908
Provision for loan losses 68,000 52,500
FHLB stock dividends (8,200) (31,000)
(Gain) loss on sale of other real estate owned and
other assets 12,758 (30,672)
Stock compensation expense 6,881 --
Changes in assets and liabilities:
Accrued interest receivable (1,200) 77,121
Other assets 120,728 (165,426)
Accrued interest payable and other liabilities (230,892) 69,494
------------ -----------
Net cash from operating activities 331,665 209,825
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan funded, net of collections (5,020,778) 1,605,649
Maturities and paydowns of securities available for sale 800,049 1,877,398
Maturities and paydowns of securities held to maturity 524 635
Purchase of premises and equipment (310,899) (28,279)
Proceeds from sale of real estate owned 298,970 117,648
------------ -----------
Net cash from investing activities (4,232,134) 3,573,051
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in fed funds purchased 803,000 (427,000)
Net change in short term FHLB advances 515,389 55,515
Net increase (decrease) in deposits (10,802,780) 1,583,265
------------ -----------
Net cash from financing activities (9,484,391) 1,211,780
------------ -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (13,384,860) 4,994,656
CASH AND EQUIVALENTS, Beginning of period 20,176,866 5,115,008
------------ -----------
CASH AND EQUIVALENTS, End of period $ 6,792,006 $10,109,664
============ ===========
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 PERIODS ENDED MARCH 31, 2006 AND 2005
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 (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, 2005 Annual Report to Shareholders.
The accompanying consolidated interim financial statements at March 31,
2006, and for the three months ended March 31, 2006 and 2005 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. 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
MARCH 31,
--------------------------
2006 2005
--------- ---------
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 2,794 1,092
--------- ---------
Weighted average common shares and incremental
shares 3,509,944 3,407,242
========= =========
-6-
For the three months ended March 31, 2006, and the three months ended March
31, 2005, 152,450 and 166,360 stock options were not considered in the
calculation of the dilutive effect of stock options as they were
anti-dilutive.
4. STOCK BASED COMPENSATION
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123R, "Share Based Payment." The Company
elected to use the modified prospective transition method; therefore, prior
period results were not restated. Prior to the adoption of SFAS 123R,
stock-based compensation expense related to stock options was not
recognized in the results of operations if the exercise price was at least
equal to the market value of the common stock on the grant date, in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". Prior to 2006, 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.
MARCH 31,
2005
---------
Net income:
Net income as reported $203,734
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 23,441
--------
Pro forma, net income $227,175
========
Net earnings per share:
Basic earnings per share $ 0.06
Diluted earnings per share $ 0.06
Pro forma earnings per share:
Basic earnings per share $ 0.07
Diluted earnings per share $ 0.07
SFAS 123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized as compensation expense over
the service period (generally the vesting period) in the consolidated
financial statements based on their fair values. Under the modified
prospective method, awards that were granted, modified, or settled on or
after January 1, 2006 are measured and accounted for in accordance with
SFAS 123R. Unvested stock options that were granted prior to January 1,
2006 will continue to be accounted for in accordance with SFAS 123, except
that all options are recognized in the results of operations over the
remaining vesting periods. The impact of forfeitures that may occur prior
to vesting is also estimated and considered in the amount recognized.
The Company has adopted separate stock option plans for Directors of the
Company and subsidiaries (the 1997 Directors' Stock Option Plan and the
2000 Directors' Stock Option Plan) and the officers and key employees of
the Company and subsidiaries (the 1997 Key Employee Stock Option Plan, 2000
Key Employee Stock Option Plan and the 2002 Key Employee Stock Option
Plan). The Company has also adopted a plan for the directors, officers and
key employees of the Company and its subsidiaries (the 2004 Stock Option
Plan). The Company has reserved a total of 62,400 shares
-7-
pursuant to the Directors' Stock Option Plans and 103,000 shares pursuant
to the Key Employee Stock Option Plans. The maximum number of shares to be
delivered upon exercise of all options granted under the 2004 Plan will not
exceed seven percent of the outstanding shares of the Company, from time to
time less the number of shares covered by outstanding or exercised options
under the Key Employees Stock Option Plans or the Directors' Stock Option
Plans.
The option exercise price per share for the 1997 Directors' Stock Option
Plan is the greater of $12.00 per share or the fair value of a share on the
date of grant. The option exercise price for the 2000 Director's Stock
Option Plan is the greater of $8.27 per share or the fair value of a share
on the date of the grant. The option exercise price for the Key Employee
Stock Option Plans is the fair value of a share on the date of grant. The
option exercise price per share for each nonqualified stock option grant
will not be less than the fair market value of the shares on the date on
which the option was granted.
The stock options granted under the Directors' Stock Option Plans and the
Key Employee Stock Option Plans are exercisable at any time within the
maximum term of five years for incentive stock options and ten years for
non-qualified stock options of the Key Employee Stock Option Plans and
fifteen years under the Directors' Stock Option Plans from the grant date.
The options are nontransferable and are forfeited upon termination of
employment or as a director.
The fair value of stock options is estimated at the grant date using the
Black Scholes Option Pricing Model. This model requires a number of
assumptions, including expected dividend yields, expected stock price
volatility, risk-free interest rates and an expected life of the options.
Although the assumptions are used to reflect management's best projection,
they involve uncertainties based on market conditions generally outside the
control of the Company. If future market conditions are different than the
presumptions used, stock-based employee compensation expense could be
considerably different.
No dividend yield was assumed as we currently do not pay cash dividends on
our common stock. The weighted average volatility for the current period
was developed using historical volatility for periods equal to the expected
life of the options. An increase in the weighted average volatility
assumption will increase stock compensation expense. The risk-free interest
rate was developed using the U.S. Treasury yield curve for periods equal to
the expected life of the options on the grant date. An increase in the
risk-free interest rate will increase stock compensation expense. The
expected option life currently used in the pricing model for all awards is
the vesting period of the option, or five years. In the future, the Company
will monitor more closely the average period of vesting in order to make
more detailed assumptions of the expected life of the options.
The following table summarizes the assumptions used to calculate the
weighted average volatility, risk-free interest rates, expected life and
the fair value of the stock option grants for the three months ended March
31, 2006 and March 31, 2005:
MARCH 31, MARCH 31,
2006 2005
--------- ---------
Weighted average volatility 28.8% 30.1%
Risk-free interest rate 5.25% 3.72%
Expected life (in years) 5.0 5.0
Weighted average fair value of options granted $1.86 $1.79
-8-
The following is an analysis of the activity for the quarter ended March
31, 2006 and the stock options outstanding and exercisable at the end of
the quarter:
WEIGHTED
AVERAGE
OPTIONS SHARES EXERCISE PRICE
------- ------- --------------
Outstanding at December 31, 2005 181,450 $8.04
Granted 18,500 $5.25
Forfeited or expired (500) $6.00
Outstanding at March 31, 2006 199,450 $7.79
-------
Exercisable at March 31, 2006 137,750 $8.58
-------
The weighted average remaining term for both the outstanding and
exercisable stock options was 6.8 years at March 31, 2006. The aggregate
intrinsic value at March 31, 2006 was $170,000 for stock options
outstanding and $97,000 for stock options exercisable. The intrinsic value
for stock options is calculated based on the exercise price of the
underlying awards and the market price of our common stock as of the
reporting date. As of March 31, 2006, the Company expensed approximately
$7,000 pre-tax in stock based employee compensation and anticipates an
additional compensation expense of $20,000 during 2006. The remaining
unrecognized compensation expense of $56,000 will be recognized through the
year ending December 31, 2010 in accordance with SFAS 123R.
5. INCOME TAXES
In the year ended December 31, 2002, the Company recorded a valuation
allowance against a portion of the deferred tax asset because at that time
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 changes in its valuation allowance to offset changes in
the deferred tax asset, resulting in no income tax expense through the
period ended September 30, 2005. In the fourth quarter 2005, management
concluded that the valuation allowance on the deferred tax asset was no
longer necessary given the Company's sustained income and growth through
the year and projected net income in the future, and the remaining
valuation allowance was fully reversed. The Company has generated federal
net operating loss carryforwards of approximately $4.5 million. The net
operating loss carryforwards, if unused will expire in 2020 through 2024.
The Company has generated net state operating loss carryforwards of
approximately $4.4 million which, if unused, will expire in 2015 through
2019.
6. 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 March 31, 2006 were
$10,645. The private placement closed on May 6, 2005.
-9-
7. SUBSEQUENT EVENT
The Company established a new Delaware trust subsidiary, Blue River
Bancshares Trust I, which completed the sale of $7 million of trust
preferred securities on April 20, 2006. Blue River Bancshares Trust I
issued the trust preferred securities at a rate equal to the three-month
LIBOR rate plus 1.55%. The trust preferred securities mature in 30 years
and may be called without penalty on or after June 30, 2011. Blue River
Bancshares Trust I simultaneously issued 217 of the trust's common
securities to the Company for a purchase price of $217,000, which, together
with the trust preferred securities, constitutes all of the issued and
outstanding securities of the trust. Blue River Bancshares Trust I used the
proceeds from the sale of the trust preferred securities to purchase the
Company's unsecured junior subordinated deferrable interest notes due June
30, 2036 (the "Debenture"). The net proceeds from the offering were used by
the Company to pay all amounts due under and terminated, its $6 million
credit facility with Union Federal Bank of Indianapolis, under the Credit
Agreement dated as of November 19, 2003, as amended December 30, 2004 by
the First Amendment to Credit Agreement, March 30, 2005 by the Second
Amendment to Credit Agreement and June 30, 2005 by the Third Amendment to
Credit Agreement. The obligations evidenced by the Credit Agreement were
scheduled to mature on June 30, 2008. In conjunction with the termination
of the Credit Agreement, all collateral securing the obligations under the
Credit Agreement, including the capital stock of Shelby County Bank and
Paramount Bank was released. The additional proceeds will be used for
general corporate purposes.
The Debenture was issued pursuant to a Junior Subordinated Indenture
between the Company and Wilmington Trust Company dated April 20, 2006, (the
"Indenture"). The interest payments by the Company will be used by the
trust to pay the quarterly distributions to the holders of the trust
preferred securities. The Indenture permits the Company to redeem the
Debenture after June 30, 2011.
The terms of the trust preferred securities are governed by an Amended and
Restated Trust Agreement, dated April 20, 2006 between the Company, as
Depositor, Wilmington Trust Company, as property trustee, Wilmington Trust
Company, as Delaware trustee, and the Administrators named therein.
Pursuant to a Guarantee Agreement dated April 20, 2006, between the Company
and Wilmington Trust Company, the Company has guaranteed the payment of
distributions and payments on liquidation or redemption of the trust
preferred securities. The obligations of the Company under the Guarantee
Agreement are unsecured and subordinate to all of the Company's senior
debt.
The offering of the trust preferred securities was conducted pursuant to a
Placement Agreement dated April 20, 2006 between the Company, Blue River
Bancshares Trust I, and J. P. Morgan Securities, Inc. The Company did not
pay any fees or commissions to the placement agent.
In accordance with FASB Interpretation No. 46 (as revised in December
2003), the trust will not be consolidated with the Company. Accordingly,
the Company will not report the securities issued by the trust as
liabilities, and instead will report as liabilities the subordinated
debentures issued by the Company and held by the trust.
-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. Shelby County Bank and Paramount Bank are
collectively referred to as the "Banks". 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. At March 31, 2006, the Company maintained a $6,000,000 loan from a
commercial bank. This loan was paid in its entirety on April 20, 2006 with the
proceeds of Subordinated Debentures (see Note 7 to the Consolidated Financial
Statements included herein).
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 its 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.
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 pools of loans, excluding those classified or
delinquent are analyzed for the general loan loss reserve. Management evaluates
this general reserve using loan loss statistics by various types of loans,
including statistics published periodically by the OTS and FDIC, the Banks'
historical losses and recommendations by the Chief Credit Officer. Appropriate
loss percentages are applied 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. In the
past, the Company maintained a valuation allowance against its deferred tax
asset, however in the fourth quarter of 2005, management concluded that the
remaining valuation allowance on the deferred tax assets was no longer necessary
given the Company's sustained income and growth through the year and projected
net income in the future. A net tax benefit of $430,000 was recognized on
December 31, 2005 as a result of the reversal of the tax valuation allowance.
MANAGEMENT OVERVIEW
OVERVIEW OF FINANCIAL CONDITION AT MARCH 31, 2006 AND DECEMBER 31, 2005
On a consolidated basis, the Company's total assets as of March 31, 2006 were
$211,576,000 compared to total assets of $221,241,000 at December 31, 2005. As
of March 31, 2006, gross loans were $168,902,000 compared to gross loans of
$163,992,000 at December 31, 2005. Deposits were $167,918,000 at March 31, 2006
compared to $178,759,000 at December 31, 2005. Total capital was $17,563,000 at
March 31, 2006 compared to $17,470,000 at December 31, 2005. Outstanding shares
of common stock were 3,507,150 as of March 31, 2006 and December 31, 2005. The
book value per share was $5.01 at March 31, 2006 versus $4.98 at December 31,
2005.
Even though the Company continues to be fairly asset sensitive and has benefited
from the past increases in the prime lending rate, management will attempt to
reduce this sensitivity in the future. With the issuance of the Subordinated
Debentures in April 2006 (see Note 7 to the Consolidated Financial Statements
included herein), the Company fully retired $6,000,000 of bank debt with the
remaining balance of the proceeds of the issuance to be used for general
corporate purposes. The initial interest rate on the Subordinated Debt is 6.63%,
which will float for five years with 3 month LIBOR plus a margin of 155 basis
points. The interest rate on the retired bank debt was equal to the prime
interest rate plus a margin, which varied, but was recently prime plus 50 basis
points. The Company continues to focus on maintaining its momentum of growing
quality loans and improving net interest income. During 2006, 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
-12-
the loan portfolio should prove effective in achieving a 10 - 12% pretax return
on shareholder's equity, during 2006 or 2007.
Management believes it can continue to improve return on equity by following
this strategy and prudently managing non interest expenses. The Banks are
strategically maintaining their "well capitalized" status while continuing to
concentrate on improving net interest income and overall profitability, without
taking undue interest rate risk. Management and staff at both Shelby County Bank
and Paramount Bank will continue to work diligently at implementing loan growth
plans and strategies; emphasizing the benefits of gathering non-certificate
depository funding as means of decreasing the Banks' overall funding costs;
improving levels of fee income derived from depository relationships and
encouraging a stronger relationship with their customer base. The issuance of
the subordinated debt will allow additional liquidity at the holding company
level, and together with improved profitability, the Company will review the
possibility of commencing dividend payments to its shareholders either during
this year or in 2007.
OVERVIEW OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND
2005
NET INCOME:
For the quarter ended March 31, 2006, the Company's net income was $228,000.
This compares to a net income of $204,000 for the same period of 2005. The 2005
results had no federal or state income tax expense and the 2006 results included
federal and state tax expense of $141,000. The Company had an increase in pretax
income of 81% for the quarter ended March 31, 2006 compared to the three month
period ended March 31, 2005. Basic and fully diluted earnings per share were
$0.07 for the quarter ended March 31, 2006 compared to $0.06 per share for the
quarter ended March 31, 2005. Weighted average outstanding shares (basic) for
the first quarter of 2006 were 3,507,150 and 3,406,150 for the first quarter of
2005.
NET INTEREST INCOME:
Net interest income before the provision for loan losses for the three months
ended March 31, 2006 increased approximately 15.8% from the period ended March
31, 2005. This increase can be attributed to a rising interest rate environment
with the prime lending rate increasing from 5.75% to 7.75%. 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 primarily at Shelby County Bank.
NON-INTEREST INCOME:
Overall non-interest income increased 16% for the three month period ended March
31, 2006 compared to the three month period ended March 31, 2005. Primarily this
increase was comprised of service charges and other fees, as the Banks increased
their fee structures during the third quarter of 2005 on deposit accounts. These
increases were offset by a decrease in secondary market mortgage loan fees and
net losses on the disposition of other real estate and other assets versus net
gains during the period ended March 31, 2005.
NON-INTEREST EXPENSE:
Overall non-interest expense increased by approximately 7.5% for the three
months ended March 31, 2006 compared to the same period of 2005. Salaries and
benefits have increased for the three months ended March 31, 2006 compared to
the same period of 2005 due to the reclassification of the director's fees of
both the Chief Executive Officer of the Company and the Chairman of the Board of
Shelby County Bank to salaries during the second quarter of 2005. These salary
increases were accompanied by a reduction in director fees for these two
individuals over the periods. Additional professional expenses were 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 $300,000
during the first quarter of 2006. Expenses in advertising and promotion
increased for the three months ended March 31, 2006 compared to the three months
ended March 31, 2005. These additional costs were the result of increased
efforts primarily at Paramount Bank to promote
-13-
and advertise the Bank in its local market area. A major offset to the increases
in non-interest expense was the absence of merger related costs relating to the
terminated merger with Heartland Bancshares, Inc., as the majority of this
expense category occurred during the first quarter of 2005.
INCOME TAXES:
The income tax provision for the three months ended March 31, 2006 was $141,000
with an effective rate of 38.2% compared to no income tax expense for the three
months ended March 31, 2005. Prior year's changes in the valuation allowance
offset tax expense; however with last year's decision to reverse the valuation
allowance on the Company's deferred tax asset, the Company has now recognized
tax expense against current earnings.
FINANCIAL CONDITION
The Company's total assets at March 31, 2006 were $211,576,000, a decrease of
$9,665,000 from December 31, 2005. This decrease is primarily the result of a
decrease in cash equivalents and was the result of a decrease in deposits offset
by an increase in loans. Cash and cash equivalents declined $13,385,000 to
$6,792,000 at March 31 2006 compared to $20,177,000 at year-end 2005. Securities
available-for-sale and held-to-maturity decreased $1,047,000 to $23,690,000 at
March 31, 2006 compared to $24,737,000 at year-end 2005. Loans, net of the
allowance for loan losses increased $4,858,000 to $167,274,000 at March 31, 2006
compared to $162,416,000 at December 31, 2005. Other real estate owned declined
$300,000 to $168,000 at March 31, 2005 compared to $468,000 at year-end 2005.
Total deposits at March 31, 2006 decreased $10,841,000 to $167,918,000 compared
to $178,759,000 in total deposits at December 31, 2005. This decrease is
primarily the result of a decrease of one large deposit account at Paramount
Bank which has significant volatility in the amount of overnight deposits which
they maintain. Demand accounts decreased $5,361,000 while NOW, savings, money
market and certificates of deposits declined $5,480,000 as well. FHLB advances
increased $1,314,000 to $19,140,000 at March 31, 2006 compared to $17,826,000 at
December 31, 2005. Shareholders' equity at March 31, 2006 was $17,563,000, an
increase of $93,000 compared to $17,470,000 at December 31, 2005. The change in
equity resulted from net income of $228,000, stock compensation expense of
$7,000 and a decrease of $142,000 from a temporary decline in the fair value of
the Company's available-for-sale investment portfolio.
LOANS:
The following comparative table shows loans receivable by major categories at
March 31, 2006 and December 31, 2005:
LOANS RECEIVABLE
MARCH 31, DECEMBER 31,
2006 2005
------------ ------------
Real Estate Mortgage Loans:
One-to-four family $ 48,695,453 $ 47,751,168
Non Residential 40,638,614 39,440,479
Home equity loans 34,584,936 35,027,100
Consumer loans 11,511,697 11,323,347
Commercial loans, including participations 33,471,680 30,449,603
------------ ------------
Total gross loans 168,902,380 163,991,697
Less allowance for loan losses (1,627,987) (1,575,511)
------------ ------------
Total loans receivable, net $167,274,393 $162,416,186
============ ============
-14-
NON-PERFORMING LOANS:
The following table is an analysis of the Company's non-performing loans at
March 31, 2006 and December 31, 2005.
NON-PERFORMING LOANS
MARCH 31, DECEMBER 31,
2006 2005
---------- ------------
Non-performing loans consist of the following:
Non-accrual loans $2,082,310 $1,402,768
Ninety (90) days past due 872,556 1,265,281
---------- ----------
Total non-performing loans $2,954,866 $2,668,049
========== ==========
Non-performing loans to total loans 1.75% 1.63%
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 March 31, 2006, the Banks reported
approximately $2,082,000 of non-accrual loans and $873,000 in loans ninety days
or more past due. This is an increase in non-accrual loans of $680,000 from
December 31, 2005 and a decrease in past due loans of $393,000 from December 31,
2005. The increase in non-accrual loans was the primarily the result of an
addition of $625,000 in new non-accrual loans and the reclassification of
$296,000 in ninety day past due loans to non-accrual status, offset by $241,000
in charge-offs and repayments. The primary reason for the decrease in past due
loans ninety days or more was the result of the $296,000 shift that occurred
between the ninety day past due loans and non-accrual loans, $327,000 in other
loans that were removed from ninety days past due as a result of renewals and
payoffs, and the addition of $230,000 of loans in this category. There was an
increase in the non-performing loans to total gross loans from 1.63% at December
31, 2005 to 1.75% at March 31, 2006. 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.
Activity in the allowance for loan losses consists of the following:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2006 2005
---------- ----------
Balance, beginning of period $1,575,511 $1,919,193
Add:
Provision for loan losses 68,000 52,500
Recoveries of loans previously charged off 1,666 20,738
Less gross charge-offs:
Residential real estate loans -- --
Consumer/commercial loans (17,190) (14,920)
---------- ----------
Balance, end of period $1,627,987 $1,977,511
========== ==========
Net charge-offs to total average loans outstanding (annualized) 0.00% 0.00%
Allowance to total average loans outstanding 0.96% 1.27%
-15-
The allowance for loan losses at March 31, 2006 was $1,628,000, an increase of
$52,000 from December 31, 2005 and a decrease of $350,000 since March 31, 2005.
The Company's provision for loan losses for the quarter was $68,000 and its net
charge-offs were approximately $16,000. 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. The Company reviews impaired and Watch List
loans on a case-by-case basis to allocate a specific dollar amount of reserves
based on available repayment sources and collateral, whereas all other loans are
reserved for based on assigned reserve percentages evaluated by loan pools.
Reserve percentages for loan pools are based on the Company's loss history,
adjusted for trends and environmental factors. The loan pools utilized by the
Company are construction, residential real estate, commercial, commercial real
estate, home equity, and consumer.
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 decrease in the allowance since
March 31, 2005 was the result of a decline in general allocations on other loan
pools due to improving trends and the Bank's improved historical losses,
including consideration of the composition of loss history by pool.
The Company experienced a period of extremely high losses in the past, largely
focused in 2001. Since that period, loss experience has improved, and the impact
of this high loss history has gradually reduced the allowance calculation by
increasing subsequent periods of lower loss experience. During 2005, and the
first quarter 2006, specific allocations were considered adequate based on the
individual analysis of all impaired and watch list loans. The increase in
non-performing loans since December 31, 2005, primarily in non-accruing loans,
was considered in developing the specific allocations to the provision during
the period ended March 31, 2006.
Since December 31 2005, the Company's allowance for loan losses and related
provision expense increased because allocations for both specific loans and loan
pools increased. Specific allocations totaled $904,000 at March 31, 2006
compared to $853,000 at December 31, 2005, and pooled allocations were $509,000
at March 31, 2006 compared to $492,000 at December 31, 2005. The increase in the
specific allocations is attributable to an increase in the total watch listed
loans, while the increase in the pooled allocations is the result of an increase
in loan balances. Net charge-offs of $16,000 for the period offset the increase
in the allowance. While there were increases to the allowance from December 31,
2005 to March 31, 2006, there is an overall decline in the total loan loss
allowance since March 31, 2005. This is partially attributable to previous
problem loans reaching resolution, some of which resulted in charge-offs in
2005. A portion of these charge-offs were previously provided for in the
allowance, and the effect on specific allocations from the resolution of these
loans and improvement in other loans has been larger than the effect of new or
increased allocations on other problem loans.
For the three month period ended March 31, 2006, the allowance to total loans
outstanding decreased to .96% compared to 1.27% for the three month period ended
March 31, 2005 and was unchanged compared to the twelve months ended December
31, 2005.
-16-
RESULTS OF OPERATIONS: THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31, 2005
The following table sets forth, for the three month periods ended March 31, 2006
and March 31, 2005, information regarding the total dollar amount of interest
income of the Company from interest-earning assets and their average yields; the
total dollar amount of interest expense on interest-bearing liabilities and
their average cost; net interest income; interest-rate spread; net interest
margin; and the ratio of average interest-earning assets to average
interest-bearing liabilities.
QUARTER ENDED MARCH 31, 2006 QUARTER ENDED MARCH 31, 2005
---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Interest Earning Assets:
Investment securities $ 24,277 $ 263 4.33% $ 31,249 $ 335 4.29%
Interest-bearing deposits 8,105 85 4.19% 5,917 32 2.16%
FHLB & restricted stock 3,012 35 4.65% 2,915 31 4.25%
Loans (1) 164,682 2,997 7.28% 156,268 2,348 6.01%
-------- ------ ---- -------- ------ ----
Total earning assets 200,076 3,380 6.76% 196,349 2,746 5.59%
-------- ------ ---- -------- ------ ----
Interest and Non-Interest Bearing Liabilities:
Savings accounts 12,564 68 2.16% 8,500 25 1.18%
Non-interest bearing demand accounts 23,463 -- 0.00% -- 0.00%
NOW accounts 16,709 29 0.69% 15,809 25 0.63%
Money market accounts 34,757 293 3.37% 19,986 81 1.62%
Certificates of deposit 85,203 782 3.67% 106,661 783 2.94%
-------- ------ ---- -------- ------ ----
Total interest bearing deposits 149,233 1,172 3.40% 150,956 914 2.58%
Borrowings 22,753 291 5.12% 18,509 177 3.83%
-------- ------ ---- -------- ------ ----
Total interest bearing liabilities $171,986 1,463 $169,465 1,091
======== ------ ======== ------
Net interest income $1,917 $1,655
====== ======
Interest-rate spread (2) 3.36% 3.01%
---- ----
Net interest margin (3) 3.83% 3.37%
---- ----
Ratio of average interest-bearing assets
to average interest-bearing
liabilities 1.16 1.16
(1) Includes principal balances of non-accruing loans. Interest on non-accruing
loans is not included.
(2) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average rate of interest-bearing
liabilities.
(3) Net interest margin is net interest income divided by average
interest-earning assets.
For the three month period ended March 31, 2006, the provision for loan losses
was $68,000 compared to $52,500 for the three month period ended March 31, 2005.
Please refer to the additional information related to the allowance for loan
losses in the financial condition discussion.
Total non-interest income was $308,000 for the three-month period ended March
31, 2006 compared to $264,000 for the three month period ended March 31, 2005.
Of this increase, $62,000 can be attributed to service charges and fees as the
Banks raised their service charges on deposit accounts during the third quarter
of 2005. There were also net increases in other income of $24,000. These
increases were offset by a decrease of $24,000 in secondary market mortgage loan
fees due to the rising interest rate environment. Another factor contributing to
the decrease included net losses of $13,000 on the disposition of other real
estate and other assets versus net gains of $5,000 during the period ended March
31, 2005.
Non-interest expenses totaled $1,788,000 for the three month period ended March
31, 2006, compared to $1,663,000 during the three month period ended March 31,
2005.
-17-
Changes in non-interest expenses consist of the following:
THREE MONTHS ENDED
MARCH 31,
----------------------- CHANGE FROM
2006 2005 2005
---------- ---------- -----------
Salaries and employee benefits $ 977,147 $ 835,872 $141,275
Occupancy 197,324 188,521 8,803
Federal deposit insurance 14,666 16,242 (1,576)
Data Processing 162,890 154,786 8,104
Advertising and promotion 51,622 40,536 11,086
Bank fees and charges 26,366 25,823 543
Director Fees 26,400 53,850 (27,450)
Professional Fees 134,122 93,970 40,152
Stationery, supplies and printing 18,506 19,140 (634)
Core deposit intangible 17,241 17,241 --
Merger costs -- 69,335 (69,335)
Other Expenses 161,231 147,638 13,593
---------- ---------- --------
$1,787,515 $1,662,954 $124,561
========== ========== ========
Major fluctuations in non-interest expense include an increase in salaries and
employee benefits of $141,000. This increase is primarily the reclassification
of the director fees during the second quarter of 2005 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 March 31, 2005 to the three months ended March 31, 2006 due
to an increase of $11,000 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 $40,000 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 $69,000 in merger costs for the period ended March 31, 2005
associated with the terminated merger with Heartland Bancshares, Inc.
Additionally, director fees have decreased $27,000 for the period ended March
31, 2006 compared to the period ended March 31, 2005. 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 the Boards
of Directors of Shelby County Bank and the Paramount Bank.
-18-
CAPITAL RESOURCES AND LIQUIDITY
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".
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,
2006, 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 March 31, 2006:
SHELBY COUNTY BANK
------------------------------------------------------------------
MINIMUM FOR FDICIA REGULATIONS
ACTUAL CAPITAL CAPITAL ADEQUACY TO BE "WELL CAPITALIZED"
------------------ ------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- ----- --------- -----
Tangible capital ratio $11,518,000 8.9% $1,940,000 1.5% $6,466,000 5.0%
Core capital to average assets 11,518,000 8.9% 5,173,000 4.0% 6,466,000 5.0%
Tier 1 capital to risk weighted assets 11,518,000 11.6% 3,967,000 4.0% 5,950,000 6.0%
Total capital to risk weighted assets 12,325,000 12.4% 7,934,000 8.0% 9,917,000 10.0%
-19-
The following table sets forth the actual and minimum capital amounts to be
adequately capitalized and ratios of Paramount Bank as of March 31, 2006:
PARAMOUNT BANK
------------------------------------------------------------------
MINIMUM FOR FDICIA REGULATIONS
ACTUAL CAPITAL CAPITAL ADEQUACY TO BE "WELL CAPITALIZED"
------------------ ------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- ----- --------- -----
Tangible capital ratio $6,644,000 8.6% $1,154,000 1.5% $3,846,000 5.0%
Core capital to average assets 6,644,000 8.6% 3,076,000 4.0% 3,846,000 5.0%
Tier 1 capital to risk weighted assets 6,644,000 10.3% 2,572,000 4.0% 3,859,000 6.0%
Total capital to risk weighted assets 7,448,000 11.6% 5,145,000 8.0% 6,431,000 10.0%
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 three months ended March 31,
2006, Paramount Bank had high rate, long term certificates of deposit, which
matured. Rather than match all of their competitor's rates, Paramount Bank
replaced these certificates with alternative funding sources. Shelby County Bank
has recently obtained deposits from many local governmental entities. These
deposits are subject to significant volatility and Shelby County Bank must
maintain alternative sources of funding, in order to satisfy large withdrawals.
In an effort to reduce our borrowing costs and provide additional funds, the
Company established a new Delaware trust subsidiary, Blue River Bancshares Trust
I, which completed the sale of $7,000,000 of trust preferred securities on April
20, 2006 (See Note 7 to the Consolidated Financial Statements included herein).
Six million dollars of the net proceeds from the offering were used by the
Company to pay all amounts due under and terminated, its $6 million credit
facility with Union Federal Bank of Indianapolis. The additional proceeds will
be used for general corporate purposes. The Company does not anticipate the need
for any additional external funding over the next twelve months.
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.
-20-
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 quarter ended March 31, 2006 that have materially
affected, or 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.
-21-
PART II
OTHER INFORMATION
Item 6. Exhibits
The exhibits to this Form 10-QSB are listed in the attached Exhibit Index.
******
-22-
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 10, 2006 By: /s/ Patrice M. Lima
------------------------------------
Patrice M. Lima, Vice President,
Controller
(Principal Financial Officer & Chief
Accounting Officer)
-23-
EXHIBIT INDEX
Exhibit No. Document Description
- ----------- --------------------
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
-24-