1
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20552
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES ACT OF 1934
For the quarterly Period Ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________to____________
Commission File Number
O-19445
SHELBY COUNTY BANCORP
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 35-1832715
- - ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
29 East Washington Street
Shelbyville, Indiana 46176
- - ------------------------------- ----------
(Address of principal executive (Zip Code)
office)
Registrant's telephone number, including area code:
(317) 398-9721
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X . No .
------ ------
As of June 15, 1998, there were 175,950 shares of the Registrant's Common Stock
issued and outstanding.
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SHELBY COUNTY BANCORP AND SUBSIDIARY
INDEX
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Page
Number
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements
of Financial Condition as of
March 31, 1998 (Unaudited)
and September 30, 1997. 3
Consolidated Statements
of Earnings for the three
months ended March 31, 1998
and 1997 (Unaudited) 4
Consolidated Statements of
Earnings for the six months
ended March 31, 1998 and
1997 (Unaudited) 5
Consolidated Statements of Cash Flows
for the six months ended
March 31, 1998 and 1997 (Unaudited) 6
Notes to Consolidated
Financial Statements (Unaudited) 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
PART II. OTHER INFORMATION 15
SIGNATURE PAGE 16
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SHELBY COUNTY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
March 31, September 30,
1998 1997
---- ----
ASSETS
Cash $ 730,019 663,335
Interest-bearing Deposits 9,407 1,772,848
Investment Securities Available for Sale 8,089,139 7,886,663
Investment Securities Held to
Maturity (market value: $761,275
and $806,995) 745,085 808,817
Loans Receivable, Net 85,133,188 76,037,920
Accrued Interest Receivable on
Investment Securities 105,929 133,053
Stock of FHLB of Indianapolis 998,900 920,200
Accrued Interest Receivable on Loans 553,673 486,247
Premises and Equipment 1,749,559 1,774,961
Real Estate Owned 36,727 36,727
Prepaid Expenses and Other Assets 313,093 88,607
----------- ----------
TOTAL ASSETS $98,464,719 90,609,378
----------- ----------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Liabilities:
Deposits $70,533,461 64,633,384
FHLB Advance & Other Borrowings 19,625,790 18,057,629
Accrued Interest on Deposits 127,294 126,484
Income Taxes Payable -0- 70,789
Deferred Income Taxes 478,617 333,912
Accrued Expenses and Other
Liabilities 353,252 215,858
----------- ----------
TOTAL LIABILITIES $91,118,414 83,438,056
----------- ----------
SHAREHOLDERS' EQUITY:
Common Stock, without par value:
Shares authorized of 5,000,000;
Shares issued and outstanding of 175,950 $ 1,358,123 1,358,123
Retained earnings-substantially restricted 5,145,456 5,187,531
Unrealized Appreciation on
Investment Securities Available for Sale 842,726 625,668
----------- ----------
TOTAL SHAREHOLDERS' EQUITY $ 7,346,305 7,171,322
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $98,464,719 90,609,378
----------- ----------
See accompanying notes to consolidated financial statements.
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SHELBY COUNTY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended
March 31,
-----------------------------
1998 1997
---- ----
Interest Income:
Loans Receivable $ 1,709,583 1,483,667
Mortgage-Backed Securities 31,689 65,019
Interest-Bearing Deposits 35,022 46,069
Investment Securities 78,186 58,936
Dividends from FHLB 18,152 14,033
----------- ----------
Total Interest Income 1,872,632 1,667,724
----------- ----------
Interest Expense on FHLB Advances 251,785 243,091
Interest Expense on Deposits & Loans 849,635 766,848
----------- ----------
Total Interest Expense 1,101,420 1,009,939
----------- ----------
Net Interest Income 771,212 657,785
Provision for Loan Losses 405,000 27,000
----------- ----------
Net Interest Income After
Provision for Loan Losses 366,212 630,785
----------- ----------
Non-Interest Income:
Service Charges and Fees 60,546 59,601
Other 57,591 23,254
----------- ----------
Total Non-Interest Income 118,137 82,855
----------- ----------
Non-Interest Expense:
Salaries and Employee Benefits 240,461 244,340
Premises and Equipment 63,551 64,958
Federal Deposit Insurance 33,392 8,944
Data Processing 69,141 61,457
Advertising 27,114 25,566
Bank Fees and Charges 12,576 23,029
Other 322,353 99,471
----------- ----------
Total Non-Interest Expense 768,588 527,765
----------- ----------
Earnings Before Income Taxes (284,239) 185,875
Income Taxes (112,039) 65,843
----------- ----------
NET EARNINGS (172,200) 120,032
----------- ----------
BASIC EARNINGS PER SHARE $(.98) $.68
DILUTIVE EARNINGS PER SHARE $(.98) $.67
See accompanying notes to consolidated financial statements.
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SHELBY COUNTY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Six Months Ended
March 31,
-----------------------------
1998 1997
---- ----
Interest Income:
Loans Receivable $ 3,382,187 $ 2,922,909
Mortgage-Backed Securities 79,818 135,498
Interest-Bearing Deposits 97,310 67,756
Investment Securities 143,628 117,812
Dividends from FHLB 36,707 26,269
----------- -----------
Total Interest Income 3,739,650 3,270,244
----------- -----------
Interest Expense on FHLB Advances 520,206 388,693
Interest Expense on Deposits & Loans 1,698,251 1,524,856
----------- -----------
Total Interest Expense 2,218,457 1,913,549
----------- -----------
Net Interest Income 1,521,193 1,356,695
Provision for Loan Losses 435,000 50,000
----------- -----------
Net Interest Income After
Provision for Loan Losses 1,086,193 1,306,695
----------- -----------
Non-Interest Income:
Service Charges and Fees 123,620 119,341
Other 95,266 48,368
----------- -----------
Total Non-Interest Income 218,886 167,709
----------- -----------
Non-Interest Expense:
Salaries and Employee Benefits 481,218 488,129
Premises and Equipment 126,536 130,175
Federal Deposit Insurance 55,411 35,214
Data Processing 143,782 121,961
Advertising 51,464 60,864
Bank Fees and Charges 25,900 45,793
Other 417,632 190,463
----------- -----------
Total Non-Interest Expense 1,301,943 1,072,599
----------- -----------
Earnings Before Income Taxes 3,136 401,805
Income Taxes 1,223 152,845
----------- -----------
NET EARNINGS 1,913 248,960
----------- -----------
BASIC EARNINGS PER SHARE $ .01 $ 1.41
DILUTIVE EARNINGS PER SHARE $ .01 $ 1.39
See accompanying notes to consolidated financial statements.
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SHELBY COUNTY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
March 31,
-----------------------------
1998 1997
---- ----
Cash Flows From Operating Activities:
Net Earnings $ 1,913 248,960
Adjustments to Reconcile Net Earnings
To Net Cash Provided By Operating
Activities:
Depreciation and Amortization 81,765 78,467
Net Deferred Loan Origination Fees (1,032) 7,214
Provision For Loan Losses 435,000 50,000
Gain on Sale of Securities AFS 23,809 4,156
Change in Accrued Int. Rec. 27,124 (2,057)
Change in Other Assets (295,275) (19,613)
Change in Other Liabilities 138,205 (300,199)
----------- -----------
Net Cash Provided by (Used) Operating Act. 411,509 66,928
Cash Flows From Investing Activities:
Loans Funded Net of Collections (9,596,660) (4,314,871)
Purchase of Securities Available for Sale (4,513,507) (1,374,562)
Maturities of Securities Available for Sale 236,310 304,522
Maturities of Securities Held to Maturity 61,163 138,114
Purchase of FHLB Stock (78,700) (104,900)
Purchase of Premises and Equipment (40,520) (31,981)
Disposals of Premises and Equipment -0- 21,154
Proceeds From Sale of Securities AFS 4,399,399 1,152,057
----------- -----------
Net Cash Used in Invest. Act. (9,532,515) (4,210,467)
----------- -----------
Cash Flows from Financing Activities:
FHLB Advances 1,575,000 4,500,000
Dividends Paid (43,988) (35,178)
Net Change in Deposits 5,900,077 567,357
Repayment of FHLB Advance & Other Borrowings (6,840) -0-
----------- -----------
Net Cash Provided by Financing
Activities 7,424,249 5,032,179
----------- -----------
Net Decrease in Cash and Cash Equivalents (1,696,757) 888,640
----------- -----------
Cash and Cash Equivalents at Beginning of Period 2,436,183 4,923,276
----------- -----------
Cash and Cash Equivalents at End of Period $ 739,426 5,811,916
----------- -----------
Supplemental Cash Flow Information:
Interest Paid $ 1,682,362 1,536,393
----------- -----------
Income Taxes Paid $ 190,000 100,000
----------- -----------
See accompanying notes to consolidated financial statements.
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SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FIANCIAL STATEMENTS
(Unaudited)
Note 1 Basis of Presentation
The consolidated financial statements include the accounts of Shelby County
Bancorp (the "Corporation") and its subsidiary Shelby County Savings Bank, FSB
(the "Bank"). A summary of significant accounting policies is set forth in
Note 1 of Notes to Consolidated Financial Statements included in the September
30, 1997 Annual Report to Shareholders.
The consolidated interim financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information
and footnotes necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles.
The consolidated interim financial statements at March 31, 1998 and for the
three months and six months ended March 31, 1998 and 1997 have not been audited
by independent accountants, but reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for
such periods.
Note 2 Proposed Acquisition of Shelby County Bancorp
On February 5, 1998, Shelby County Bancorp and Blue River Bancshares , Inc.
entered into an Agreement of Affiliation and Merger into Blue River Bancshares,
Inc. as amended and restated on March 12, 1998, and as amended on June 2, 1998.
Under the terms of the Merger Agreement, each outstanding share of common
stock of the Corporation will be converted into the right to receive $56 from
Blue River Bancshares, Inc. The merger will be accounted for as a purchase.
Note 3 Earnings per Share
Shelby County Bancorp has implemented Statement of Financial Accounting
Standards 128, "Earnings per Share" (EPS) which is effective for interim and
annual periods ending after December 15, 1997, which requires the presentation
of basic and dilutive earnings per share. Accordingly, these amounts appear on
the financial statements in this Form 10-Q. EPS have been computed on the
basis of the weighted average number of common shares outstanding and the
dilutive effect of stock options not exercised during the periods presented
using the treasury stock method. The weighted average number of shares
outstanding for use in the basic EPS computations was 175,950 for the three
months ended March 31, 1998 and 1997. The weighted average number of shares
for use in the dilutive EPS computations was 181,282 and 179,605 for the three
months ended March 31, 1998 and 1997, respectively. The weighted average
number of shares outstanding for use in the basic EPS computations was 175,950
for the six months ended March 31, 1998 and 1997. The weighted average number
of shares for use in the dilutive EPS computations was 181,282 and 179,605 for
the six months ended March 31, 1998 and 1997, respectively.
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SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIS\DATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 Stock Option Plan
The Corporation has adopted a stock option plan whereby 17,250 shares of
authorized but unissued common stock were reserved for future issuance upon the
exercise of stock options granted to key employees and directors. Options for
12,075 shares at an option price of $10 per share have been granted under the
plan. Three thousand four hundred and fifty shares of stock have been issued
under the plan as of March 31, 1998. Options for 1,725 shares at an option price
of $18 per share have also been granted under the plan. Through March 31, 1998,
3,450 options have been exercised, leaving 13,800 unexercised options.
Note 5 Dividends
On March 16, 1998, the Board of Directors declared a quarterly cash dividend of
$.125 per share. The dividend was paid April 13, 1998 to shareholders of
record as of March 30, 1998.
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SHELBY COUNTY BANCORP AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements throughout this section regarding the Corporation's and
the Bank's financial position, business strategy and plans and objectives of
management for future operations are forward-looking statements rather than
historical or current facts. When used in this section, words such as
"anticipate," "believe," "estimate," "expect," "intend" and similar
expressions, as they relate to the Corporation and the Bank or their respective
managements, identify forward-looking statements. Such forward-looking
statements are based on the beliefs of the management of the Corporation and
the Bank as well as assumptions made by and information currently available to
the management of the Corporation and the Bank. Such statements are inherently
uncertain, and there can be no assurance that the underlying assumptions will
prove to be valid. Actual results could differ materially from those
contemplated by the forward-looking statements as a result of certain factors,
including but not limited to competitive factors and pricing pressures, changes
in legal and regulatory requirements, technological change, product development
risks and general economic conditions, including, but not limited to, changes
in interest rates, loss of deposits and loans to other savings and financial
institutions, substantial changes in financial markets, substantial changes in
real estate values and the real estate market and unanticipated results in
pending legal proceedings. Such statements reflect the current view of the
Corporation and the Bank with respect to future events and are subject to these
and other risks, uncertainties and assumptions relating to the operations,
results of operation, growth strategy and liquidity of the Corporation and the
Bank.
(a) Financial Condition:
Total assets at March 31, 1998, were $98,465,000, an increase of
$7,856,000 from total assets of $90,609,000 at September 30, 1997. The most
significant increases in assets were in net loans receivable and interest
bearing deposits. Total net loans receivable increased from $76,038,000 at
September 30, 1997 to $85,133,000 at March 31, 1998. Interest bearing deposits
decreased from $1,773,000 at September 30, 1997 to $9,000 at March 31, 1998.
Mortgage loans increased from $61,634,000 at September 30, 1997 to $69,295,000
at March 31, 1998. Consumer loans increased from $14,732,000 at September 30,
1997 to $16,570,000 at March 31, 1998. The increase in mortgage loans is
attributed to a very strong local economy and loan demand. The two branches
that were opened in 1995 have contributed over $8,143,000 in mortgage and
consumer lending.
March 31, 1998 September 30, 1997
-------------- ------------------
Domestic:
Commercial, Financial, Agricultural $ 4,462,699 $ 3,929,127
Real Estate-Construction 1,148,161 1,054,522
Real Estate-Mortgage 72,236,322 63,901,769
Installment Loans to Individuals 7,286,006 7,152,502
------------ ------------
TOTAL $ 85,133,188 $ 76,037,920
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SHELBY COUNTY BANCORP AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Total deposits at September 30, 1997 of $64,633,000 increased to
$70,533,000 at March 31, 1998. This increase in deposits is primarily due to
an increase in certificates of deposit and checking accounts.
March 31, 1998 September 30, 1997
-------------- ------------------
Non-Accrual Loans $ 672,572 $ 416,601
Real Estate Owned-net 36,727 36,727
Troubled Debt Restructurings -0- -0-
Total Non-Performing Loans $ 709,299 $ 454,328
Non-Performing Loans to Total Assets 72% .50%
SCSB generally places loans on a nonaccrual status when the loans become
contractually past due 90 days or more. At September 30, 1997, all $416,601 of
nonaccrual loans were residential loans. For the year ended September 30,
1997, the income that would have been recorded had the non-accrual loans not
been in a non-performing status was approximately $31,359, compared to actual
income recorded of $20,667. At March 31, 1998, all 672,572 of nonaccrual loans
were residential loans. For the period ended March 31, 1998, the income that
would have been recorded had the non-accrual loans not been in a non-performing
status was approximately $26,478, compared to actual income recorded of
$15,298.
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SHELBY COUNTY BANCORP AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
For the Six Months
Ended For Year Ended
March 31, 1998 September 30, 1997
------------------ ------------------
Balance of allowance at beginning
of period $ 391,677 $ 325,900
Add:
Provision for loan losses 435,000 104,000
Recoveries of loans previously charged off 4,462 1,146
Less gross charge-offs:
Residential real estate loans -0- -0-
Consumer loans -0- 39,369
Gross charge-offs 116,659 39,369
Balance of allowance at end of period $ 714,480 391,677
Net charge-offs to total average loans
outstanding 0.14% .02%
Allowance at end of period to total
average loans outstanding 0.83% .52%
In connection with an ongoing Office of Thrift Supervision safety and
soundness examination, the OTS has requested the Bank increase its allowance
for loan losses as of March 31, 1998. While management notes that none of the
commercial real estate or commercial loans are non-performing at this time,
that type or lending has increased over the last two years. Accordingly, the
Bank's lending risks have increased because commercial real estate and
commercial loans are generally believed to more risky than other types of
lending such as residential mortgage lending. Therefore, the Bank has
increased its provision for loan losses of $50,000 for the six months ended
March 31, 1997 to $435,000 for the six months ended March 31, 1998.
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SHELBY COUNTY BANCORP AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(b) Results of Operations:
During the three month period ended March 31, 1998, net earnings
decreased to $(172,000) (basic EPS of $(.98) per share) compared to net
earnings of $120,000 (basic EPS of $.68 per share) during the three month
period ended March 31, 1997. The decrease in earnings is primarily the result
of an increase in the provision for loan losses of $378,000 for the three months
ended March 31, 1998.
Net interest income was $491,000, after provision for loan losses, for the
three months ended March 31, 1998, compared to $631,000 for the three months
ended March 31, 1997. The interest rate margin for the three months ended
March 31, 1998 was 3.16%, compared to 3.16% for the same period one year ago.
Interest income increased from $1,668,000 for the three months ended March
31, 1997 to $1,873,000 for the three months ended March 31, 1998. Interest
expense for the three month period ended March 31, 1998 was $1,101,000 compared
to $1,010,000 for the three months ended March 31, 1997. This increase is
primarily attributed to the increase in deposit accounts.
Total non-interest income was $118,000 for the three months ended March
31, 1998, compared to $83,000 for the same period in 1997.
Non-interest expense totaled $623,000 for the quarter ended March 31, 1998
compared to $528,000 for the same period in the prior year. The primary
increase in non-interest expense relates to the costs incurred in connection
with the proposed acquisition of the company.
During the six period ended March 31, 1998, net earnings decreased to
$2,000 (basic EPS of $.01 per share) compared to net earnings of $249,000
(basic EPS of $1.41 per share) during the six month period ended March 31,
1997. The decrease in earnings is primarily the result of an increase in
loan loss reserves of $385,000 for the six months ended March 31, 1998 and the
establishment of an approximately $150,000 reserve for an environmental matter.
(See "Subsequent Events" below.)
Net interest income was $1,086,000, after provision for loan losses, for
the six months ended March 31, 1998, compared to $1,307,000 for the six months
ended March 31, 1997. The interest rate margin for the six months ended March
31, 1998 was 3.23%, compared to 3.29% for the same period one year ago.
Interest income increased from $3,270,000 for the six months ended March
31, 1997 to $3,740,000 for the six months ended March 31, 1998. Interest
expense for the six month period ended March 31, 1998 was $2,219,000 compared
to $1,914,000 for the six months ended March 31, 1997. This increase is
primarily attributed to the increase in deposit accounts.
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SHELBY COUNTY BANCORP AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Total non-interest income was $219,000 for the six months ended March 31,
1998, compared to $168,000 for the same period in 1997.
Non-interest expense totaled $1,302,000 for the six months ended March 31,
1998 compared to $1,072,000 for the same period in the prior year. The primary
increase in non-interest expense relates to the costs incurred in connection
with the proposed acquisition of the company.
(c) Capital Resources and Liquidity
The Corporation is subject to regulation as a savings and loan holding
company, and is subject to certain restrictions in its dealings with the Bank.
The Bank is subject to the regulatory requirements applicable to a federal
savings bank.
Current capital regulations required savings institutions to have minimum
tangible capital equal to 1.5% to total assets and a core capital ratio equal
to 4% 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, 1998, the Bank satisfied its capital requirements.
The following is a summary of the Bank's regulatory capital and capital
requirements at March 31, 1998 based on capital regulations currently in effect
for savings institutions.
Tangible Core Risk-based
Capital Capital Capital
----------- ----------- -----------
Regulatory Capital $ 5,671,000 $ 5,671,000 $ 6,385,000
Minimum Capital Requirement 1,459,000 3,835,000 5,748,000
----------- ----------- -----------
Excess Capital $ 4,212,000 $ 1,836,000 $ 637,000
Regulatory Capital Ratio 5.91% 5.91% 8.89%
Required Capital Ratio 1.50% 4.00% 8.00%
Liquidity measures the Bank's ability to meet its savings withdrawals and
lending commitments. Management believes that the Bank's liquidity is adequate
to meet current requirements, such as the funding of $3,205,000 in loan
commitments as of March 31, 1998. The Bank maintains liquidity of at least 4%
of net withdrawable assets. At March 31, 1998, its regulatory liquidity ratio
was 6.07%.
A Year 2000 Committee has been established by the Corporation consisting
of officers and employees of the Corporation to address problems which could
arise from the forthcoming Year 2000 rollover. The Committee is charged with
providing regular reports to the Board of Directors detailing progress in this
area. Based on progress by the
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SHELBY COUNTY BANCORP AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Committee to date, it is not anticipated that the Year 2000 rollover will
present material financial or operational burdens for the Corporation.
SUBSEQUENT EVENTS
On May 6, 1998, in connection with a routine periodic examination,
the Office of Thrift Supervision (the "OTS") advised the Bank that,
until certain corrective actions are undertaken, the Bank should cease all
commercial real estate and commercial lending. The OTS noted several
supervisory concerns including loan documents which fail to clearly establish
repayment terms, loans priced below market rates and extended maturities at
fixed rates, failure to perform and document proper credit analysis and
reliance on overstated collateral values. In light of the pending acquisition
of the Bank by Blue River Bancshares, Inc. ("Blue River") (which currently is
expected to close in June or July, although there can be no guarantee that the
transaction will close then or at a later date), the Board of Directors of the
Bank has determined to cease all such lending while the transaction is pending.
The Bank is addressing certain of the OTS' concerns while the Merger is
pending, such as the documentation issue, and Blue River has engaged a
consultant to assist in addressing the OTS' concerns, is developing a new
commercial real estate and commercial lending policy, and is coordinating with
the OTS to address any remaining issues so that the Bank will be permitted to
resume commercial real estate and commercial lending at the closing of the
Merger. Management does not expect that ceasing to make such loans during that
interim period will have a material adverse effect on the net earnings of the
Bank because (i) the time period involved is expected to be only a few months,
(ii) residential mortgage lending, the Bank's primary lending vehicle, remains
quite strong, and (iii) the interest rate margins which the Bank had been
experiencing in its commercial real estate and commercial lending had been
relatively comparable to other forms of lending. Also, management does not
anticipate that any of its corrective actions undertaken while the Merger is
pending will have any quantifiable impact on operations.
In connection therewith, the OTS has requested that the Bank increase its
allowance for loan losses as of March 31, 1998. While management notes that
none of the commercial real estate or commercial loans are non-performing at
this time, that type of lending has increased over the last two years.
Accordingly, the Bank's lending risks have increased because commercial real
estate and commercial loans are generally believed to be more risky than other
types of lending such as residential mortgage lending. Therefore, the Bank
increased its provision for loan losses of $50,000 for the six months ended
March 31, 1997 to $435,000 for the six months ended March 31, 1998.
Specifically, management noted that, since September 30, 1997, several
items had occurred which, in management's opinion, supported the increase in
the provision for loan losses. For instance, during the six month period, a
savings account (which became overdrawn by $52,000) was reclassified as a
loan, and was charged-off. Also, an $80,000 loan was determined to be
classified as of March 31, 1998 due to a customer bankruptcy, and therefore
management determined that an additional $80,000 should be added to the
provision for loan losses. During that six month period, past due residential
mortgage loans increased from $416,000 at September 30, 1997 to $673,000 at
March 31, 1998. In management's opinion, this increase in loans 90 days or
more delinquent justified a $120,000 addition to the loan loss reserve. From
September 30, 1997 to March 31, 1998, commercial and commercial real estate
loans increased approximately $500,000. Accordingly, management believed that
5% of that increase, or $25,000, should be added to the provision for loan
losses so that the provision's allocation to commercial and commercial real
estate loans remained proportionate to the aggregate amount of those types of
loans outstanding. In addition, management has usually reserved $10,000 per
month (or $60,000 during these six months) for loan losses inherent in the loan
portfolio. The remainder of the $435,000 provision for loan losses during the
six months was attributable to a more conservative approach taken by the OTS in
evaluating the loan portfolio and, which in light of the Bank's current lending
activities, was appropriate in management's opinion.
During the last several years, certain environmental monitoring and
remediation has occurred at the Bank's St. Paul branch location and an
adjoining property (which adjoining property was transferred to an unrelated
third party in 1995). At the conclusion of those environmental efforts, it was
determined that no further environmental remediation was necessary at that
time. Since then, the Indiana Department of Environmental Management ("IDEM")
has initiated Indiana's Voluntary Remediation Program (the "VRP"). Pursuant to
the VRP, a parcel of real property may be "submitted" and, after successful
completion of testing and monitoring by the applicant and review by IDEM, the
Indiana Governor's office will issue a Certificate of Completion and a
Covenant Not to Sue. In connection with the proposed acquisition of the Bank
and at the request of Blue River Bancshares, Inc., the Bank agreed in April to
begin the process to submit the St. Paul branch location into the VRP.
Accordingly, the Bank engaged an environmental consultant to assist.
As mentioned above, when deciding to begin the process, management of the
Bank, based upon prior environmental reports and remediation efforts, believed
that the environmental consultant would only need to undertake monitoring (and
not any remediation) in connection with the VRP. However, after undertaking
preliminary testing, the consultant informed the Bank that remediation would be
necessary to remove certain liquid phase hydrocarbons (i.e., petroleum-based
liquids). Accordingly, management asked the consultant to propose what
remediation would be necessary and to estimate the expected cost. The
consultant did so on May 18, 1998, and estimated the remediation and costs
associated with the VRP to be $157,920. The Bank has reserved approximately
$150,000 in its income statement for the periods ending March 31, 1998. (It
should be noted that the expected amount of time for the VRP, including
expected monitoring, is approximately three (3) years.)
It should be noted that the environmental consultant has only provided an
estimate, and the actual total costs may be different. In addition, certain
costs which may be incurred may not be estimated in the proposal. However, at
this time management does not believe material additional expenditures in
connection with this matter will be necessary during the foreseeable future.
The Bank's actions are voluntary, and have not been required by any
governmental agency or body. Accordingly, the Bank reserves the right not to
proceed with the VRP as to the St. Paul branch property, although management
intents to so proceed at this time. Except for the VRP, no administrative,
legal, or other proceeding is pending in connection with this matter and, to
the knowledge of management, none is threatened.
There are no other known trends, events, or uncertainties, including
current recommendations by regulatory authorities, that should have, or that
are reasonably likely to have a material effect on the liquidity, capital
resources, or operations of Shelby County Bancorp.
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II. OTHER INFORMATION
Item 1. Legal Proceedings
The Bank is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Bank is a party to legal
proceedings wherein it enforces its security interest in mortgage loans made
by it.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk exposures that
affect the quantitative or qualitative disclosures presented as of the preceding
fiscal year in the Corporation's Annual Report on Form 10-K.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 2--Amendment to Amended and Restated Agreement of
Affiliation and Merger, dated June 2, 1998, by and among
Shelby County Bancorp, Blue River Bancshares, Inc. and Shelby
County Savings Bank, FSB.
b) Report on 8-K--Dated March 16, 1998, whereby the Corporation
filed the Amended and Restated Agreement of Affiliation and
Merger, dated March 12, 1998, by and among Shelby County
Bancorp, Blue River Bancshares, Inc. and Shelby County
Savings Bank, FSB.
c) Exhibit 27--Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed and its behalf by the
undersigned thereunto duly authorized.
SHELBY COUNTY BANCORP
Date: June 16, 1998 By /s/ Rodney L. Meyerholtz
-------------------------
Rodney L. Meyerholtz
President
Date: June 16, 1998 By /s/ Jack D. Disser
-------------------------
Jack D. Disser
Treasurer
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