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 June 30, 2007
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 August 8, 2007 there were 3,456,201 shares of the Registrant's Common
Stock 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 June 30, 2007 and December 31, 2006 3
Consolidated Statements of Income and Comprehensive Income
(Unaudited) for the three months ended June 30, 2007 and
2006 4
Consolidated Statements of Income and Comprehensive Income
(Unaudited) for the six months ended June 30, 2007 and 2006 5
Consolidated Statements of Cash Flows (Unaudited) for the
six months ended June 30, 2007 and 2006 6
Notes to Consolidated Financial Statements (Unaudited) 7-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-22
Item 3. Controls and Procedures 23
PART II. OTHER INFORMATION:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits 25
SIGNATURE PAGE 26
EXHIBIT INDEX 27
PART 1 FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF JUNE 30, 2007 AND DECEMBER 31, 2006
JUNE 30, DECEMBER 31,
2007 2006
------------ ------------
ASSETS
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 3,352,984 $ 4,525,905
Interest-bearing deposits 2,176,418 5,187,485
------------ ------------
Total cash and cash equivalents 5,529,402 9,713,390
Securities available for sale 20,250,077 21,906,818
Securities held to maturity 12,261 13,661
Loans receivable, net of allowance for loan losses of $2,031,205 and
$1,896,618 197,745,044 181,875,004
Stock in FHLB and other restricted stock, at cost 2,401,700 2,401,700
Current and deferred income taxes, net 2,894,426 2,901,625
Premises and equipment, net 2,064,994 2,178,238
Other real estate owned 397,000 232,740
Accrued interest receivable and other assets 1,923,861 1,890,536
Core deposit intangible 206,896 241,378
Goodwill 3,159,051 3,159,051
------------ ------------
TOTAL ASSETS $236,584,712 $226,514,141
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Interest bearing deposits $171,192,543 $156,687,627
Non-interest bearing deposits 20,581,384 27,425,491
Advances from FHLB 18,019,530 16,037,854
Subordinated debt 7,217,000 7,217,000
Accrued interest and other liabilities 2,083,434 1,326,104
------------ ------------
Total liabilities 219,093,891 208,694,076
------------ ------------
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, 3,466,526 and 3,507,150 shares outstanding 25,172,421 25,157,039
Treasury Stock - 40,624 and 0 shares (233,541)
Accumulated deficit (6,857,686) (6,889,272)
Accumulated other comprehensive (loss) (590,373) (447,702)
------------ ------------
Total shareholders' equity 17,490,821 17,820,065
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $236,584,712 $226,514,141
============ ============
See accompanying notes to consolidated financial statements (unaudited).
-3-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2007 AND 2006
2007 2006
---------- ----------
INTEREST INCOME:
Loans receivable $3,974,344 $3,261,374
Securities 236,911 262,561
Interest-bearing deposits 25,248 37,845
Dividends from FHLB and other 28,097 42,758
---------- ----------
Total interest income 4,264,600 3,604,538
---------- ----------
INTEREST EXPENSE:
Interest expense on deposits 1,765,984 1,324,225
Interest expense on FHLB and other borrowings 358,892 270,335
---------- ----------
Total interest expense 2,124,876 1,594,560
---------- ----------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 2,139,724 2,009,978
PROVISION FOR LOAN LOSSES 410,000 214,987
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,729,724 1,794,991
---------- ----------
NON-INTEREST INCOME:
Service charges and fees 113,174 150,001
Secondary market mortgage fees 40,021 67,182
(Loss) on sale and impairment of other real estate owned and other assets (75,116) (83,295)
Other 53,063 76,167
---------- ----------
Total non-interest income 131,142 210,055
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 979,588 959,268
Premises and equipment 239,445 205,619
Federal deposit insurance, KY state tax and OTS assessment 63,276 54,334
Data processing 175,075 175,477
Advertising and promotion 17,565 44,969
Bank fees and charges 26,313 27,553
Directors fees 31,700 27,600
Professional fees 110,802 150,636
Stationery, supplies and printing 30,226 35,479
Reorganization expense 4,509 --
Core deposit intangible 17,241 17,241
Other 157,663 128,380
---------- ----------
Total non-interest expense 1,853,403 1,826,556
---------- ----------
INCOME BEFORE INCOME TAX 7,463 178,490
INCOME TAX EXPENSE 6,221 66,888
---------- ----------
NET INCOME $ 1,242 $ 111,602
========== ==========
COMPREHENSIVE (LOSS) $ (141,429) $ (105,451)
========== ==========
Basic and diluted earnings per share $ 0.00 $ 0.03
========== ==========
See accompanying notes to consolidated financial statements (unaudited).
-4-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2007 AND 2006
2007 2006
---------- ----------
INTEREST INCOME:
Loans receivable $7,708,562 $6,258,261
Securities 474,837 525,475
Interest-bearing deposits 56,221 122,861
Dividends from FHLB and other 61,138 78,155
---------- ----------
Total interest income 8,300,758 6,984,752
---------- ----------
INTEREST EXPENSE:
Interest expense on deposits 3,329,212 2,496,282
Interest expense on FHLB and other borrowings 657,925 561,410
---------- ----------
Total interest expense 3,987,137 3,057,692
---------- ----------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 4,313,621 3,927,060
PROVISION FOR LOAN LOSSES 564,081 282,987
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,749,540 3,644,073
---------- ----------
NON-INTEREST INCOME:
Service charges and fees 224,040 313,112
Secondary market mortgage fees 73,523 167,321
(Loss) on sale and impairment of other real estate owned and other assets (75,116) (96,053)
Other 103,653 133,212
---------- ----------
Total non-interest income 326,100 517,592
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,030,841 1,936,412
Premises and equipment 488,858 402,944
Federal deposit insurance, KY state tax and OTS assessment 113,087 110,306
Data processing 349,894 338,367
Advertising and promotion 43,298 96,592
Bank fees and charges 51,770 53,918
Directors fees 63,100 54,000
Professional fees 255,178 284,759
Stationery, supplies and printing 63,510 63,775
Reorganization expense 4,509 --
Core deposit intangible 34,482 34,482
Other 276,306 238,515
---------- ----------
Total non-interest expense 3,774,833 3,614,070
---------- ----------
INCOME BEFORE INCOME TAX 300,807 547,595
INCOME TAX EXPENSE 120,169 207,774
---------- ----------
NET INCOME $ 180,638 $ 339,821
========== ==========
COMPREHENSIVE INCOME (LOSS) $ 37,967 $ (19,785)
========== ==========
Basic and diluted earnings per share $ 0.05 $ 0.10
========== ==========
See accompanying notes to consolidated financial statements (unaudited).
-5-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2007 AND 2006
2007 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 180,638 $ 339,821
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and purchase accounting amortization 179,446 289,931
Net amortization (accretion) of securities 8,714 18,559
Provision for loan losses 564,081 282,987
FHLB stock dividends (16,700)
Loss on sale and impairment of other real estate owned and other assets 75,116 96,053
Stock compensation expense 15,382 13,761
Changes in assets and liabilities:
Accrued interest receivable and other assets 16,430 (34,929)
Accrued interest payable and other liabilities 722,746 (117,589)
------------ ------------
Net cash from operating activities 1,762,553 871,894
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded, net of collections (16,597,393) (9,932,394)
Maturities and paydowns of securities available-for-sale 1,422,386 1,372,571
Maturities and paydowns of securities held to maturity 1,400 1,430
Purchase of premises and equipment (42,467) (361,081)
Proceeds from sale of premises and equipment -- 3,047
Proceeds from sale of real estate owned -- 298,970
------------ ------------
Net cash from investing activities (15,216,074) (8,617,457)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (149,054) --
Treasury stock purchases (233,541)
Repayment of note payable -- (6,000,000)
Proceeds from subordinated debt -- 7,217,000
Net change in fed funds purchased -- 1,541,000
Net change in short term FHLB advances 1,990,442 (6,251,550)
Net increase (decrease) in deposits 7,661,686 (3,279,635)
------------ ------------
Net cash from financing activities 9,269,533 (6,773,185)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (4,183,988) (14,518,748)
CASH AND EQUIVALENTS, Beginning of period 9,713,390 20,176,866
------------ ------------
CASH AND EQUIVALENTS, End of period $ 5,529,402 $ 5,658,118
============ ============
See accompanying notes to consolidated financial statements (unaudited).
-6-
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE PERIODS ENDED JUNE 30, 2007 AND 2006
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, 2006 Annual Report to Shareholders.
The accompanying consolidated interim financial statements at June 30,
2007, and for the three and six months ended June 30, 2007 and 2006 are
unaudited and have been prepared in accordance with instructions to Form
10-QSB. In the opinion of management, the financial statements include all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows
for such periods.
In accordance with SFAS No. 131, the Company has disclosed all required
information relating to its one operating segment, community banking.
2. DESCRIPTION OF BUSINESS
The Banks provide financial services to south central Indiana through its
main office in Shelbyville, three other full service branches in
Shelbyville, Morristown, and St. Paul, and a recently opened loan
production office located in Fishers, Indiana, and to the city of
Lexington, and Fayette County, Kentucky through one office located in
Lexington, Kentucky.
The Banks are subject to competition from other financial institutions and
other financial services providers and are regulated by certain federal
agencies and undergo periodic examinations by those regulatory authorities.
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
JUNE 30,
---------------------
2007 2006
--------- ---------
Basic earnings per share:
Weighted average common shares 3,486,268 3,507,150
========= =========
Diluted earnings per share:
Weighted average common shares 3,486,268 3,507,150
Dilutive effect of stock options 3,395 8,718
--------- ---------
Weighted average common shares and incremental shares 3,489,663 3,515,868
========= =========
-7-
FOR THE
SIX MONTHS ENDED
JUNE 30,
---------------------
2007 2006
--------- ---------
Basic earnings per share:
Weighted average common shares 3,496,651 3,507,150
========= =========
Diluted earnings per share:
Weighted average common shares 3,496,651 3,507,150
Dilutive effect of stock options 3,640 5,574
--------- ---------
Weighted average common shares and incremental shares 3,500,291 3,512,724
========= =========
For the three and six months ended June 30, 2007, 176,400 stock options
were not considered in the calculation of the dilutive effect of stock
options as they were anti-dilutive. For the three and six months ended June
30, 2006, 89,450 and 112,950 stock options were not considered in the
calculation of the dilutive effect of stock options as they were
anti-dilutive.
4. STOCK BASED COMPENSATION
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 are 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 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.
The weighted average volatility for the current period was developed using
historical volatility for periods equal to the expected life of the
options. The risk-free interest rate was developed using U.S. Treasury
yields for periods equal to the expected life of the options on the grant
date. The expected life is currently based upon the contractual term and
the vesting life of the options. The post-vesting termination behavior is
based on historical data. In the future, the Company will monitor the
average period of vesting in order to adjust assumptions of the expected
life of the options as well as the post-vesting termination rate.
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 six months ended June 30,
2007 and 2006.
-8-
JUNE 30, JUNE 30,
2007 2006
-------- --------
Weighted average volatility 27.3% 28.8%
Risk-free interest rate 4.76% 5.25%
Expected life (in years) 7.0 5.0
Weighted average fair value of options granted $ 2.40 $ 1.86
Number of options granted 24,000 18,500
As of June 30, 2007, the Company expensed approximately $15,000 pre-tax in
stock based employee compensation. The remaining un- recognized
compensation expense of $75,000 will be recognized through the year ending
December 31, 2011 in accordance with SFAS 123R.
5. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109
(FIN 48), which prescribes a recognition threshold and measurement
attribute for a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after December 15, 2006.
The Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes ("FIN 48"), on January 1, 2007.
The adoption of FIN 48 had no affect on the Company's financial statements.
The Company has no unrecognized tax benefits and does not anticipate any
increase in unrecognized benefits during 2007 relative to any tax positions
taken prior to January 1, 2007. Should the accrual of any interest or
penalties relative to unrecognized tax benefits be necessary, it is the
Company's policy to record such accruals in its income taxes accounts; no
such accruals exist as of January 1, 2007 or as of June 30, 2007. The
Company and its subsidiaries file a consolidated U.S. federal income tax
return and combined unitary returns in the states of Indiana and Kentucky.
These returns are subject to examination by taxing authorities for all
years after 2002.
6. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE
In September 2006, the FASB issued Statement No. 157, Fair Value
Measurements. This Statement defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value
measurements. This Statement establishes a fair value hierarchy about the
assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset. The
standard is effective for fiscal years beginning after November 15, 2007.
The Company has not completed its evaluation of the impact of the adoption
of this standard.
In February 2007, the FASB issued Statement No. 159, The Fair Value of
Option for Financial Assets and Financial Liabilities-including an
amendment of FASB Statement No. 115 which is effective as of the beginning
of the first fiscal year that begins on or after November 15, 2007,
provided that the Company also elects to apply the provisions of FASB
Statement No. 157, Fair Value Measurements. The Company has not completed
its evaluation of the impact of the adoption of this standard.
7. DIVIDENDS
On April 24, 2007 a quarterly dividend of $.0225 per share was declared by
the Board of Directors, payable June 1, 2007, to the shareholders of record
as of May 15, 2007.
On July 24, 2007 a quarterly dividend of $.0250 per share was declared by
the Board of Directors, payable September 1, 2007, to the shareholders of
record as of August 15, 2007.
-9-
8. STOCK REPURCHASE
On April 24, 2007, the Board of Directors approved the immediate
implementation of a stock repurchase program. Under the stock repurchase
program, the Company may repurchase up to 50,000 shares of its common
stock, which represents approximately 1.425% of the Company's outstanding
common stock. Shares will be repurchased from time-to-time in the open
market or in privately negotiated transactions in accordance with
applicable federal and state securities and banking laws and regulations.
The extent to which the Company repurchases shares of its common stock and
the timing of such repurchases will depend upon stock price, general
economic and market conditions and other corporate considerations. The
repurchase program may be terminated or suspended at any time by resolution
of the Board of Directors. As of June 30, 2007, the Company had repurchased
40,624 shares of its common stock.
On July 24, 2007, the Company amended the Stock Repurchase Plan of April
24, 2007 to increase the number of shares of stock that may be purchased
from 50,000 shares to 200,000 shares in addition to the 9,376 shares
remaining under the program, as previously approved. The 209,376 shares
represent approximately 6.04% of Blue River's outstanding common stock.
9. CHARTER SALE
On September 18, 2006, the Company entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement") with FirstAtlantic
Financial Holdings, Inc. ("FirstAtlantic"). The Reorganization Agreement
provided for the transfer of all operating assets of Paramount Bank to
Shelby County Bank in an inter-company transaction and for the sale of the
stock and charter of Paramount Bank to FirstAtlantic in consideration of a
$1,675,000 cash payment.
The Reorganization Agreement was subsequently amended on June 13, 2007 to
(i) extend the date after which either the Company or FirstAtlantic could
terminate the Reorganization Agreement from June 30, 2007 until July 15,
2007 and for up to four additional one-week extensions; and (ii) make the
$500,000 of earnest money deposit paid to the Company by FirstAtlantic
fully non-refundable. In consideration of each one-week extension of the
closing date after July 15, 2007, FirstAtlantic agreed to pay the Company
$25,000, with one-half of such payment to be applied to the purchase price
under the Reorganization Agreement. As a result of the amendments, the
earnest money deposit was disbursed in full to the Company on June 29, 2007
and applied against the purchase price under the Reorganization Agreement.
On July 20, 2007, the Company completed the transactions contemplated by
the Reorganization Agreement. As a result, the Company transferred the
capital stock of Paramount Bank to FirstAtlantic in consideration of a cash
payment in an amount equal to $1,687,500. The sale did not include the
transfer of any operations, facilities or personnel of Paramount Bank which
will continue to be owned by the Company and serve the Lexington, Kentucky
market. The operating assets of Paramount were transferred to SCB Bank
(f/k/a Shelby County Bank), in an inter-company transaction immediately
prior to the effectiveness of the sale. The Company intends to operate
Paramount Bank as a division of SCB Bank under its current name. Further,
to reflect the broad geographic area served, Blue River changed the
corporate title of Shelby County Bank to SCB Bank effective upon the
closing of the charter sale. SCB Bank will do business in Shelbyville,
Indiana market under the name of Shelby County Bank, a division of SCB
Bank.
-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 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
June 30, 2007, the Company maintains $7,217,000 of Subordinated Debentures.
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.
In anticipation of the completion of the transactions contemplated by the
Reorganization Agreement (see Note 9 to the Consolidated Financial Statements
(Unaudited) included herein) the Charter and By-Laws of Shelby County Bank were
amended to change the Bank's corporate title to "SCB Bank." The title change
became effective immediately following the closing of the Reorganization
Agreement on July 20, 2007. Paramount Bank will continue to do business in
-11-
its current markets as a division of SCB Bank under the name "Paramount Bank".
SCB Bank will do business in its current markets under the name "Shelby County
Bank."
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 allocations 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 allowance. Management
evaluates this general allowance 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 future losses
inherent in the portfolio. The calculated allocations are compared to the Banks'
existing allocations to establish the provision necessary to bring the actual
allowance 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 a portion of 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.
MANAGEMENT OVERVIEW
OVERVIEW OF FINANCIAL CONDITION AT JUNE 30, 2007 AND DECEMBER 31, 2006
On a consolidated basis, the Company's total assets as of June 30, 2007 were
$236,585,000 compared to total assets of $226,514,000 at December 31, 2006. As
of June 30, 2007, gross loans were $199,776,000 compared to gross loans of
$183,772,000 at December 31, 2006. Deposits were $191,774,000 at June 30, 2007
compared to $184,113,000 at December 31, 2006. Total capital was $17,491,000 at
June 30, 2007 compared to $17,820,000 at December 31, 2006. Outstanding shares
of common stock were 3,466,526 as of June 30, 2007 and 3,507,150 as of December
31, 2006. The book value per share was $5.05 at June 30, 2007 and $5.08 at
December 31, 2006.
The Company continued a pattern of growth during the three month period ended
June 30, 2007. Loan balances increased by 8.7% from December 31, 2006. The
Company continues to focus on credit quality and maintaining its momentum of
developing quality loans to improve net interest income and increased
shareholder value. During the second quarter of 2007, the pretax income was
below the anticipated level. This was primarily due to impairment expense to
reduce the value of a repossessed asset acquired during foreclosure, and
increases needed in the allowance for loan losses to reserve for, or charge off
a small number of problem loans. In 2006, the Company implemented improved
procedures for the approval, underwriting and originating of loans at Paramount
Bank. Management believes this has shown positive results and will continue to
reduce the need to provide for future loan problems.
-12-
In the long term, the Company's focal point continues to be premier community
focused bank operations in both markets, by developing a strong flow of net
interest income concentrating on the growth of quality loans and by prudently
managing non interest expense thereby increasing shareholder value during the
remainder of this year and in future years.
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 at both
divisions of SCB Bank; Shelby County Bank in Indiana and Paramount Bank in
Kentucky, 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.
In July of 2006, the Company announced the commencement of dividend payments to
its shareholders. Subsequent dividends were announced in October of 2006,
January of 2007, April of 2007 and July of 2007. The Company will continue to
review the possibility of future dividend payments to its shareholders during
the remainder of 2007 and beyond.
With the sale of Paramount Bank's charter to FirstAtlantic Financial Holdings,
Inc., on July 20, 2007 (see Note 9 to the Consolidated Financial Statements
(Unaudited) included herein) the Company received gross proceeds of $1,687,500.
The primary use for the cash payment will be used to repurchase up to 209,376
shares of the outstanding stock.
OVERVIEW OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
2007 AND 2006
For the three months ended June 30, 2007, the Company's net income was $1,000.
This compares to a net income of $112,000 for the same period of 2006. The
Company had a decrease in pretax income of 96% for the quarter ended June 30,
2007 compared to the quarter ended June 30, 2006. This is primarily the result
of an increase in the provision for loan losses and a decrease in non-interest
income (see further discussion below). Basic and fully diluted earnings per
share were $0.00 for the quarter ended June 30, 2007 compared to $0.03 per share
for the quarter ended June 30, 2006. Weighted average outstanding shares (basic)
were 3,486,268 for the second quarter of 2007 and 3,507,150 for the same period
in 2006.
The income tax provision for the three months ended June 30, 2007 was $6,000 and
$67,000 for the three months ended June 30, 2006.
For the six months ended June 30, 2007, the Company's net income was $181,000.
This compares to a net income of $340,000 for the same period of 2006. The
Company had a decrease in pretax income of 47% for the six months ended June 30,
2007 compared to the six month period ended June 30, 2006. This is primarily the
result of an increase in the provision for loan losses and a decrease in
non-interest income (see further discussion below). Basic and fully diluted
earnings per share were $0.05 for the six months ended June 30, 2007 compared to
$0.10 per share for the six months ended June 30, 2006. Weighted average
outstanding shares (basic) were 3,496,651 for the six months ended 2007 and
3,507,150 for the same period in 2006.
The income tax provision for the six months ended June 30, 2007 was $120,000
with an effective rate of 39.9% compared to $208,000 in income tax expense for
the sixth months ended June 30, 2006 with an effective rate of 37.9%.
FINANCIAL CONDITION
The Company's total assets at June 30, 2007 were $236,585,000, an increase of
$10,071,000 from December 31, 2006. This increase is primarily the result of an
increase in net loans of $15,870,000 and was mainly offset by a decrease in cash
and cash equivalents and an increase in deposits and in borrowings at the FHLB.
Cash and cash equivalents declined $4,184,000 to $5,529,000 at June 30, 2007
compared to $9,713,000 at year-end 2006. Securities available-for-sale and
held-to-maturity decreased $1,658,000 to $20,262,000 at June 30, 2007 compared
to $21,920,000 at year-end 2006 and is the result of principal reductions in the
-13-
mortgage backed securities. Loans, net of the allowance for loan losses
increased $15,870,000 to $197,745,000 at June 30, 2007 compared to $181,875,000
at December 31, 2006. Other real estate increased $164,000 to $397,000 at June
30, 2007 compared to $233,000 at year-end 2006. Total deposits at June 30, 2007
increased $7,661,000 to $191,774,000 compared to $184,113,000 in total deposits
at December 31, 2006. Demand, money market and savings accounts decreased while
certificates of deposits, primarily brokered certificates of deposits increased
to fund the loan growth. The $6,844,000 decrease in demand accounts is primarily
the result of the loss of one large deposit account at Paramount Bank which had
significant volatility in the amount of overnight deposits maintained. FHLB
advances increased $1,982,000 to $18,020,000 at June 30, 2007 compared to
$16,038,000 at December 31, 2006. This increase also funded loan growth. The
Banks will continue to strategically review other means of funding sources to
keep pace with loan growth. Shareholders' equity at June 30, 2007 was
$17,491,000, a decrease of $329,000 compared to $17,820,000 at December 31,
2006. The change in equity resulted from net income of $181,000, stock
compensation expense of $15,000, $148,000 in dividends paid to the Company's
shareholders during the first quarter and second quarter of 2007, treasury stock
of $234,000 and a decrease of $143,000 from a 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
June 30, 2007 and December 31, 2006:
LOANS RECEIVABLE
JUNE 30, DECEMBER 31,
2007 2006
------------ ------------
Real Estate Mortgage Loans:
One-to-four family $ 59,161,269 $ 52,892,428
Non Residential 46,577,251 46,928,914
Home equity loans 39,325,896 36,997,433
Consumer loans 11,656,229 9,843,237
Commercial loans, including participations 43,055,604 37,109,610
------------ ------------
Total gross loans 199,776,249 183,771,622
Less allowance for loan losses (2,031,205) (1,896,618)
------------ ------------
Total loans receivable, net $197,745,044 $181,875,004
============ ============
NON-PERFORMING LOANS:
The following table is an analysis of the Company's non-performing loans at June
30, 2007 and December 31, 2006.
NON-PERFORMING LOANS
JUNE 30, DECEMBER 31,
2007 2006
---------- ------------
Non-performing loans consist of the following:
Non-accrual loans $4,459,401 $2,531,382
Ninety (90) days past due 1,514,160 1,857,596
---------- ----------
Total non-performing loans $5,973,561 $4,388,978
========== ==========
Non-performing loans to total loans 2.99% 2.39%
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
-14-
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 June 30, 2007, the
Company reported approximately $4,459,000 of non-accrual loans and $1,514,000 in
loans ninety days or more past due. This is an increase in non-accrual loans of
$1,928,000 from December 31, 2006 and a decrease in past due loans of $343,000
from December 31, 2006. The increase in non-accrual loans was primarily the
result of an addition of $1,765,000 in new non-accrual loans and the
reclassification of $695,000 in ninety day past due loans to non-accrual status.
These increases were offset by $368,000 in charge-offs and repayments and a
$164,000 non-accrual loan that was transferred to other real estate. The
decrease in past due loans ninety days or more was the result of an additional
$1,099,000 of loans in this category offset by the $695,000 shift that occurred
from the ninety day past due loans to non-accrual loans, and $747,000 in other
loans that were removed from ninety days past due as a result of renewals,
payoffs and payments received that would bring these loans current. There was an
increase in the non-performing loans to total gross loans from 2.39% at December
31, 2006 to 2.99% at June 30, 2007. The Banks maintain an allowance 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:
SIX MONTHS ENDED
JUNE 30,
-----------------------
2007 2006
---------- ----------
Balance, beginning of period $1,896,618 $1,575,511
Add:
Provision for loan losses 564,081 282,987
Recoveries of loans previously charged off 8,919 10,873
Less gross charge-offs:
Residential real estate loans (367,076) --
Consumer/commercial loans (71,337) (143,125)
---------- ----------
Balance, end of period $2,031,205 $1,726,246
========== ==========
Net charge-offs to total average loans outstanding (annualized) 0.11% 0.16%
Allowance to total average loans outstanding 1.02% 1.03%
-15-
The allowance for loan losses at June 30, 2007 was $2,031,000, an increase of
$135,000 from December 31, 2006 and an increase of $305,000 since June 30, 2006.
The Company's provision for loan losses for the six months ending June 30, 2007
was $564,000 and its net charge-offs were approximately $429,000. 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 allocations based on available repayment sources and
collateral, whereas all other loans are allocated based on assigned allocation
percentages evaluated by loan pools. Allowance 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 allocations 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 allowance. Management evaluates this general allowance
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 allocations
are compared to the Banks' existing allocations to establish the provision
necessary to bring the actual allowance balance in compliance with the findings
of the allowance analysis performed by management.
Since December 31, 2006, the Company's allowance for loan losses increased
$135,000. This was the result of an additional $564,000 in loan loss provision
expense primarily related to a few problem real estate loans. Increases to the
provision were offset by improvements in historical loss allocations. The
Company charged off $367,000 in real estate loans and $71,000 in consumer loans
during the six months ended June 30, 2007. One real estate loan was charged down
$32,000 and the remaining fair market value was transferred to other real
estate. There were also recoveries of $9,000 during the period of previously
charged-off loans. Specific allocations totaled $1,428,000 at June 30, 2007
compared to $1,263,000 at December 31, 2006. The increase in specific
allocations was due primarily to one unsecured loan that is now fully allocated
and the reallocation of pooled allowances to specific allowances due to an
increase in total watch listed loans. Pooled allocations increased to $437,000
at June 30, 2007 from $428,000 at December 31, 2006 primarily as a result of
loan growth.
For the six month period ended June 30, 2007, the allowance to total average
gross loans outstanding decreased to 1.02% compared to 1.03% for the six month
period ended June 30, 2007 and decreased eight basis points compared to the
twelve months ended December 31, 2006.
RESULTS OF OPERATIONS: THREE MONTHS ENDED JUNE 30, 2007 AND JUNE 30, 2006
Net interest income before the provision for loan losses for the three months
ended June 30, 2007 increased approximately 6.5% from the period ended June 30,
2006. The net increase can be attributed primarily to loan growth and increased
other loan fee income and in part due to the average prime lending rate
increasing from 7.98% to 8.25% over the two periods. However, the full impact of
this increase was largely offset by the increased funding expense associated
with the loss of a large demand deposit account maintained at Paramount Bank
since the acquisition of Unified Banking Company (n/k/a Paramount Bank) in 2003.
Under the terms of the purchase agreement in 2003, this deposit was required to
remain at Paramount Bank until early 2007; this was the first full quarter after
the loss of this deposit and its replacement with higher cost funding. The Banks
have benefited from past increases in the prime lending rate.
The following table sets forth, for the three month periods ended June 30, 2007
and June 30, 2006, 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
-16-
average cost; net interest income; interest-rate spread; net interest margin;
and the ratio of average interest-earning assets to average interest-bearing
liabilities.
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2007 JUNE 30, 2006
---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Interest Earning Assets:
Investment securities $ 21,082 $ 237 4.50% $ 23,482 $ 263 4.48%
Interest-bearing deposits 2,132 25 4.69% 3,353 38 4.53%
FHLB & restricted stock 2,402 28 4.66% 3,020 43 5.70%
Loans (1) 195,646 3,975 8.12% 170,228 3,261 7.66%
-------- ------ ---- -------- ------ ----
Total earning assets 221,262 4,265 7.71% 200,083 3,605 7.20%
-------- ------ ---- -------- ------ ----
Interest Bearing Liabilities:
Savings accounts 11,756 68 2.31% 12,116 68 2.24%
NOW accounts 17,027 29 0.68% 17,171 30 0.70%
Money market accounts 28,371 301 4.24% 35,709 348 3.90%
Certificates of deposit 110,667 1,368 4.94% 86,086 879 4.08%
-------- ------ ---- -------- ------ ----
Total interest bearing deposits 167,821 1,766 4.21% 151,082 1,325 3.51%
Borrowings 27,196 359 5.28% 21,379 270 5.05%
-------- ------ ---- -------- ------ ----
Total interest bearing liabilities $195,017 2,125 $172,461 1,595
======== ------ ======== ------
Net interest income $2,140 $2,010
====== ======
Interest-rate spread (2) 3.35% 3.50%
---- ----
Net interest margin (3) 3.87% 4.01%
---- ----
Ratio of average interest-bearing assets to
average interest-bearing liabilities 1.13 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 June 30, 2007, the provision for loan losses
was $410,000 compared to $215,000 for the three month period ended June 30,
2006. Please refer to the additional information related to the allowance for
loan losses in the financial condition discussion.
Overall non-interest income decreased 37.6% for the three month period ended
June 30, 2007 compared to the three month period ended June 30, 2006. Total
non-interest income was $131,000 for the three month period ended June 30, 2007
compared to $210,000 for the three month period ended June 30, 2006. Primarily
there was a decrease of $37,000 in service charges and fees related to the
closure of deposit accounts that had produced a high volume of overdraft
charges. Another factor contributing to the decrease was a decline in secondary
market mortgage loan fees of $27,000 due to a reduction of emphasis on mortgage
originations. During the three month period ended June 30, 2007, there was a
$75,000 charge to reduce the value of an asset acquired during foreclosure and
during the same period of 2006 there was a charge of $83,000 on the disposition
of other real estate and a write off an investment in "The Bank's Insurance
Agency", a bank insurance company in which the Company had invested. This three
year old joint venture sold various insurance products and was formed by several
Indiana community banks.
Non-interest expenses totaled $1,853,000 for the three month period ended June
30, 2007, compared to $1,827,000 during the three month period ended June 30,
2006. Overall non-interest expense increased less than 1.50% for the three
months ended June 30, 2007 compared to the same period of 2006.
-17-
Changes in non-interest expenses consist of the following:
THREE MONTHS ENDED
JUNE 30,
----------------------- CHANGE FROM
2007 2006 2006
---------- ---------- -----------
Salaries and employee benefits $ 979,588 $ 959,268 $ 20,320
Occupancy 239,445 205,619 33,826
Federal deposit insurance, KY state tax
and OTS assessment 63,276 54,334 8,942
Data Processing 175,075 175,477 (402)
Advertising and promotion 17,565 44,969 (27,404)
Bank fees and charges 26,313 27,553 (1,240)
Director Fees 31,700 27,600 4,100
Professional Fees 110,802 150,636 (39,834)
Stationery, supplies and printing 30,226 35,479 (5,253)
Core deposit intangible 17,241 17,241 --
Reorganization costs 4,509 -- 4,509
Other Expenses 157,663 128,380 29,283
---------- ---------- --------
$1,853,403 $1,826,556 $ 26,847
========== ========== ========
Major fluctuations in non-interest expense from the three months ended June 30,
2006 to the three months ended June 30, 2007 include a net increase of $20,000
in salaries and employee benefits. This was due to the addition of two
commercial lenders and the associated employment fees related to the opening of
the loan production office in Fishers, Indiana, offset by some staff reductions.
Occupancy expenses increased $34,000 related to the implementation of a new
computer system and information technology upgrades at Shelby County Bank during
the third quarter of 2006, and building renovations at this location during the
fourth quarter of 2006, both of which increased depreciation in 2007. Other
expenses increased $29,000, and was primarily the result of increased customer
related credit card losses. Increases in non-interest expense were offset by a
decrease of $40,000 in professional fees and $27,000 in advertising and
promotion expenses. Professional fees decreased primarily due to reduction in
fees associated with the costs to pursue litigation on other real estate owned
and some recaptures of fees related to those properties. Advertising and
promotion expenses decreased as a result of cost containment measures in that
area.
RESULTS OF OPERATIONS: SIX MONTHS ENDED JUNE 30, 2007 AND JUNE 30, 2006
Net interest income before the provision for loan losses for the six months
ended June 30, 2007 increased approximately 9.8% from the period ended June 30,
2006. This increase can be attributed primarily to loan growth and increased
other loan fee income, and in part due to the average prime lending rate
increasing from 7.43% to 8.25% over the two periods. However, the full impact of
this increase was largely offset by the increased funding expense associated
with the loss of a large demand deposit account maintained at Paramount Bank
since the acquisition in 2003. Under the terms of the purchase agreement in
2003, this deposit was required to remain at Paramount Bank until early 2007.
The true impact of the loss of this deposit occurred during the second quarter
of 2007 resulting in its replacement with higher cost funding. The Banks have
benefited from past increases in the prime lending rate.
-18-
The following table sets forth, for the three month periods ended June 30, 2007
and June 30, 2006, 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.
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2007 JUNE 30, 2006
---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Interest Earning Assets:
Investment securities $ 21,365 $ 475 4.45% $ 23,877 $ 526 4.41%
Interest-bearing deposits 2,345 56 4.78% 5,720 123 4.30%
FHLB & restricted stock 2,402 61 5.08% 3,016 78 5.17%
Loans (1) 191,045 7,709 8.07% 167,574 6,258 7.47%
-------- ------ ---- -------- ------ ----
Total earning assets 217,157 8,301 7.65% 200,187 6,985 6.98%
-------- ------ ---- -------- ------ ----
Interest Bearing Liabilities:
Savings accounts 11,786 136 2.31% 12,339 136 2.20%
NOW accounts 16,829 57 0.68% 16,941 59 0.70%
Money market accounts 30,465 641 4.21% 35,234 641 3.64%
Certificates of deposit 103,506 2,495 4.82% 78,994 1,660 4.20%
-------- ------ ---- -------- ------ ----
Total interest bearing deposits 162,586 3,329 4.10% 143,508 2,496 3.48%
Borrowings 25,164 658 5.23% 22,052 562 5.10%
-------- ------ ---- -------- ------ ----
Total interest bearing liabilities $187,750 3,987 $165,560 3,058
======== ------ ======== ------
Net interest income $4,314 $3,927
====== ======
Interest-rate spread (2) 3.40% 3.29%
---- ----
Net interest margin (3) 3.97% 3.92%
---- ----
Ratio of average interest-bearing assets to
average interest-bearing liabilities 1.16 1.21
(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 six month period ended June 30, 2007, the provision for loan losses was
$564,000 compared to $283,000 for the six month period ended June 30, 2006.
Please refer to the additional information related to the allowance for loan
losses in the financial condition discussion.
Overall non-interest income decreased $192,000 for the six month period ended
June 30, 2007 compared to the six month period ended June 30, 2006. Total
non-interest income was $326,000 for the six month period ended June 30, 2007
compared to $518,000 for the six month period ended June 30, 2006. Primarily
there was a decrease of $94,000 or 56% in secondary market mortgage fees due to
a reduction of emphasis on mortgage originations. Another factor contributing to
the decrease was a decline of $89,000 in service charges and fees related to the
closure of deposit accounts that had produced a high volume of overdraft
charges. Other income was also down $30,000. Offsetting the decreases there were
$75,000 in net losses on the disposition and impairment of other assets during
the period ending June 30, 2007 versus net losses of $96,000 during the six
month period ended June 30, 2006. The $75,000 impairment loss was related to a
write down of a repossessed asset for the period ended June 30, 2007. The
majority of the net losses of $96,000 on other assets during the six month
period ended June 30, 2006 was related to the liquidation and total write off of
"The Bank's Insurance Agency".
-19-
Overall non-interest expense increased by approximately 4.5% for the six months
ended June 30, 2007 compared to the same period of 2006. Non-interest expenses
totaled $3,775,000 for the six month period ended June 30, 2007, compared to
$3,614,000 during the six month period ended June 30, 2006.
Changes in non-interest expenses consist of the following:
SIX MONTHS ENDED
JUNE 30,
----------------------- CHANGE FROM
2007 2006 2006
---------- ---------- -----------
Salaries and employee benefits $2,030,841 $1,936,412 $ 94,429
Occupancy 488,858 402,944 85,914
Federal deposit insurance, KY state tax
and OTS assessment 113,087 110,306 2,781
Data Processing 349,894 338,367 11,527
Advertising and promotion 43,298 96,592 (53,294)
Bank fees and charges 51,770 53,918 (2,148)
Director Fees 63,100 54,000 9,100
Professional Fees 255,178 284,759 (29,581)
Stationery, supplies and printing 63,510 63,775 (265)
Core deposit intangible 34,482 34,482 --
Reorganization costs 4,509 -- 4,509
Other Expenses 276,306 238,515 37,791
---------- ---------- --------
$3,774,833 $3,614,070 $160,763
========== ========== ========
Major fluctuations in non-interest expense from the six months ended June 30,
2006 to the six months ended June 30, 2007 include a net increase of $94,000 in
salaries and employee benefits. This was due to the addition of two commercial
lenders and the associated employment fees related to the opening of the loan
production office in Fishers, Indiana, offset by some staff reductions.
Occupancy expenses increased $86,000 related to the implementation of a new
computer system and information technology upgrades at Shelby County Bank during
the third quarter of 2006, and building renovations at this location during the
fourth quarter of 2006, both of which increased depreciation in 2007 as well as
atypical weather-related occupancy expenses during the first quarter of 2007.
Other expenses increased $38,000, and was primarily the result of increased
customer related credit card losses. Increases in non-interest expense were
offset by a decrease of $53,000 in advertising and promotion expenses and a
decline in professional fees of $30,000.
Advertising and promotion expenses decreased as a result of cost containment
measures in that area. Professional fees decreased primarily due to reduction in
fees associated with the costs to pursue litigation on other real estate owned
and some recaptures of fees related to those properties.
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.
-20-
Current capital regulations require savings institutions to have minimum
tangible capital equal to 1.5% of total assets, a core capital ratio equal to
4.0 %, and 3.0% for banks with a composite rating of "1" and total risk-based
capital of 8%. Additionally, savings institutions are required to meet a risk
based capital ratio equal to 8.0% for risk-weighted assets. At June 30, 2007,
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 June 30, 2007:
SHELBY COUNTY BANK
---------------------------------------- FDICIA REGULATIONS
MINIMUM FOR TO BE
ACTUAL CAPITAL CAPITAL ADEQUACY "WELL CAPITALIZED"
------------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----- ---------- ----- ---------- -----
Tangible capital ratio $12,632,000 8.6% $2,200,000 1.5% N/A N/A
Core capital to average assets 12,632,000 8.6% 5,865,000 4.0% 7,332,000 5.0%
Tier 1 capital to risk weighted assets 12,632,000 11.1% N/A N/A 7,148,000 6.0%
Total capital to risk weighted assets 13,101,000 10.6% 9,531,000 8.0% 11,913,000 10.0%
The following table sets forth the actual and minimum capital amounts to be
adequately capitalized and ratios of Paramount Bank as of June 30, 2007:
PARAMOUNT BANK
--------------------------------------- FDICIA REGULATIONS
MINIMUM FOR TO BE
ACTUAL CAPITAL CAPITAL ADEQUACY "WELL CAPITALIZED"
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- ----- --------- -----
Tangible capital ratio $6,922,000 8.1% $1,285,000 1.5% N/A N/A
Core capital to average assets 6,922,000 8.1% 3,428,000 4.0% 4,285,000 5.0%
Tier 1 capital to risk weighted assets 6,922,000 9.5% N/A N/A 4,369,000 6.0%
Total capital to risk weighted assets 7,834,000 10.8% 5,825,000 8.0% 7,282,000 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 first and second quarters of
2007, the Banks significantly increased their use of funds as a result of
increased loan demand and decreases in non-interest bearing deposits, primarily
at Paramount Bank. There was a large decline in a deposit account at Paramount
Bank which has considerable volatility in the amount of overnight deposits which
they maintain. Paramount Bank had to replace these deposits with borrowings.
Shelby County Bank has continued to obtain 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 continue loan
growth and satisfy large withdrawals. As a result of the funds generated through
the issuance of the Subordinated Debentures in April, 2006, the $1,687,500 in
gross proceeds that the Company received in July of 2007 as a result of the sale
of the charter of Paramount Bank, and increased borrowing capabilities because
of the reorganization of the Banks (see Note 9 to the Consolidated Financial
Statements (Unaudited) included herein), the Company does not anticipate the
need for any additional external funding over the next twelve months. The
Company estimates third quarter pretax expenses related to the sale of Paramount
Bank's charter to be approximately $300,000.
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At the holding company level, the Company uses cash to pay dividends to
shareholders. At June 30, 2007, the sources of funding for the holding company
include dividends from Shelby County Bank. The Company's bank subsidiaries are
subject to regulation and may be limited in its ability to pay dividends or
otherwise transfer funds to the holding company. During the first and second
quarters of 2007, the Company declared and paid cash dividends totaling
$148,000. Subsequently, the Company declared a cash dividend during the third
quarter of 2007 and expects the cash dividends to total $87,000.
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 Chief Financial Officer ("CFO"), of the
effectiveness of the design and operation of our disclosure controls and
procedures ("Disclosure Controls"). Based on the Evaluation, our CEO and CFO
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 June 30, 2007 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 CFO, 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 CFO CERTIFICATIONS
Appearing as exhibits to this report there are Certifications of the CEO and
CFO. 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.
-23-
PART II
OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Stock Repurchased During the Second Quarter of 2007
(d) Maximum Number
(c) Total Number of (or Approximate Dollar
(a) Total Shares Purchased as Value) of Shares that May
Number of (b) Average Part of Publicly Yet Be Purchased Under
Shares Price Paid Announced Plans or Programs
Period Purchased per Share Plans or Programs (dollars in thousands)
- ---------------- --------- ----------- ------------------- -------------------------
April 1-30, 2007 -0- $ 0 -0- 50,000
May 1-31, 2007 38,779 $6.06 38,779 11,221
June 1-30, 2007 1,845 $6.25 1,845 9,376
------ ----- ------
Totals 40,624 $6.11 40,624
====== ===== ======
The Stock Repurchase Program, which was announced April 26, 2007,
originally authorized the repurchase of up to 50,000 shares of the
Corporations common stock. The Stock Repurchase Program was amended on July
24, 2007 to authorize the purchase up to 200,000 shares in addition to the
previously authorized amount. The Stock Repurchase Program has no
expiration date.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of the shareholders, held on May 31, 2007, in
addition to the election of two directors to serve a three year term
expiring in 2010, the shareholders voted upon one board proposal contained
in Blue River's Proxy Statement dated April 30, 2007.
Russell Breeden, III, Steven R. Abel, Wendell L. Bernard, Wayne C. Ramsey
John R. Owens, Robert J. Salyers and John Eckart all continue as directors
of the Company.
The Board nominees were elected as directors with the following vote:
Nominee For Withheld
- -------- --------- --------
John Robert Owens 3,112,957 106,262
Robert J. Salyers 3,124,062 95,157
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The Board proposal was approved with the following vote:
Abstentions
(Other Than Broker
Broker Non-
Proposal For Against Non-Votes) Votes
- -------- --------- ------- ----------- ------
Ratification of the
Appointment of Crowe
Chizek and Company LLC
as the Independent Registered
Public Accounting Firm for the
fiscal year 2007. 3,132,568 76,692 9,959 -0-
Item 6. Exhibits
The exhibits to this Form 10-QSB are listed in the attached Exhibit Index.
******
-25-
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: August 8, 2007 By: /s/ Sarita S. Grace
------------------------------------
Sarita S. Grace, Senior Vice President
and Chief Financial Officer
(Principal Accounting Officer)
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EXHIBIT INDEX
Document Description
Exhibit No.
- -----------
2.1 Amendment to Agreement and Plan of Reorganization, dated June 13,
2007 (Incorporated by reference to the Company's Form 8-K, filed
on June 18, 2007)
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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