-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HQogAyvx8ssDV7cL5cgklxX6Uy2Gaj9tcBsYudx2Ob5Xqia6HB0SNR0SyF8DO2qy 2wjqKsRxgCYsCdIf35TtDQ== 0000950137-07-007492.txt : 20070515 0000950137-07-007492.hdr.sgml : 20070515 20070515092140 ACCESSION NUMBER: 0000950137-07-007492 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070515 DATE AS OF CHANGE: 20070515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLUE RIVER BANCSHARES INC CENTRAL INDEX KEY: 0001055870 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 352016637 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-24501 FILM NUMBER: 07849629 BUSINESS ADDRESS: STREET 1: 29 EAST WASHINGTON STREET CITY: SHELBYVILLE STATE: IN ZIP: 46176 BUSINESS PHONE: 3173927700 10QSB 1 c15257e10qsb.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-QSB (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 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 May 15, 2007 there were 3,507,150 shares of the Registrant's Common Stock issued and outstanding. Transitional Small Business Disclosure Format. (Check one): Yes No x ---- ---- BLUE RIVER BANCSHARES, INC. TABLE OF CONTENTS
PAGE NUMBER ------ PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Consolidated Balance Sheets (Unaudited) as of March 31, 2007 and December 31, 2006 3 Consolidated Statements of Income and Comprehensive Income (Unaudited) for the three months ended March 31, 2007 and 2006 4 Consolidated Statements of Cash Flows (Unaudited) for the 5 three months ended March 31, 2007 and 2006 Notes to Consolidated Financial Statements (Unaudited) 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-20 Item 3. Controls and Procedures 21 PART II. OTHER INFORMATION: 21 Item 1. Legal Proceedings Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other information Item 6. Exhibits SIGNATURE PAGE 22 EXHIBIT INDEX 23
PART 1 FINANCIAL STATEMENTS ITEM 1. FINANCIAL STATEMENTS BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF MARCH 31, 2007 AND DECEMBER 31, 2006 - --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, ASSETS 2007 2006 ASSETS: Cash and cash equivalents: Cash and due from banks $ 4,359,995 $ 4,525,905 Interest-bearing deposits 418,823 5,187,485 ------------- ------------- Total cash and cash equivalents 4,778,818 9,713,390 Securities available for sale 21,194,366 21,906,818 Securities held to maturity 13,224 13,661 Loans receivable, net of allowance for loan losses of $1,921,623 and $1,896,618 192,134,030 181,875,004 Stock in FHLB and other restricted stock, at cost 2,401,700 2,401,700 Current and deferred income taxes, net 2,738,676 2,901,625 Premises and equipment, net 2,117,242 2,178,238 Other real estate owned 397,000 232,740 Accrued interest receivable and other assets 1,946,555 1,890,536 Core deposit intangible 224,137 241,378 Goodwill 3,159,051 3,159,051 ------------- ------------- TOTAL ASSETS $ 231,104,799 $ 226,514,141 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Interest bearing deposits $ 161,206,207 $ 156,687,627 Non-interest bearing deposits 23,166,707 27,425,491 Fed funds purchased 2,342,000 - Advances from FHLB 17,986,013 16,037,854 Subordinated debt 7,217,000 7,217,000 Accrued interest and other liabilities 1,173,421 1,326,104 ------------- ------------- Total liabilities 213,091,348 208,694,076 ------------- ------------- 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 and outstanding 25,164,599 25,157,039 Accumulated deficit (6,780,018) (6,889,272) Accumulated other comprehensive (loss) (371,130) (447,702) ------------- ------------- Total shareholders' equity 18,013,451 17,820,065 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 231,104,799 $ 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 MARCH 31, 2007 AND 2006 - --------------------------------------------------------------------------------
2007 2006 INTEREST INCOME: Loans receivable $ 3,734,219 $ 2,996,888 Securities 237,926 262,915 Interest-bearing deposits and other 30,973 85,015 Dividends from FHLB and other equity securities 33,041 35,397 ----------- ----------- Total interest income 4,036,159 3,380,215 ----------- ----------- INTEREST EXPENSE: Interest expense on deposits 1,563,229 1,172,059 Interest expense on FHLB and other borrowings 299,031 291,074 ----------- ----------- Total interest expense 1,862,260 1,463,133 ----------- ----------- NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 2,173,899 1,917,082 PROVISION FOR LOAN LOSSES 154,081 68,000 ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,019,818 1,849,082 ----------- ----------- NON-INTEREST INCOME: Service charges and fees 110,866 163,111 Secondary market mortgage fees 33,504 100,139 Gain on sale and impairment of other real estate owned and other assets - (12,758) Other 50,591 57,037 ----------- ----------- Total non-interest income 194,961 307,529 ----------- ----------- NON-INTEREST EXPENSE: Salaries and employee benefits 1,051,254 977,147 Premises and equipment 249,412 197,324 Federal deposit insurance, KY state tax and OTS assessment 49,811 55,971 Data processing 174,820 162,890 Advertising and promotion 25,734 51,622 Bank fees and charges 25,457 26,366 Directors fees 31,400 26,400 Professional fees 144,376 134,122 Stationery, supplies and printing 22,785 18,506 Core deposit intangible 17,241 17,241 Other 129,145 119,926 ----------- ----------- Total non-interest expense 1,921,435 1,787,515 ----------- ----------- INCOME BEFORE INCOME TAX 293,344 369,096 INCOME TAX EXPENSE 113,948 140,887 ----------- ----------- NET INCOME $ 179,396 $ 228,209 =========== =========== COMPREHENSIVE INCOME $ 255,968 $ 85,666 =========== =========== Basic and diluted earnings per share $ 0.05 $ 0.07 =========== ===========
See accompanying notes to consolidated financial statements (unaudited). -4- BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2007 AND 2006 - --------------------------------------------------------------------------------
2007 2006 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 179,396 $ 228,209 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 91,371 124,672 Net amortization (accretion) of securities 6,694 10,709 Provision for loan losses 154,081 68,000 FHLB stock dividends - (8,200) Loss on sale/disposal/impairment of premises, equipment and other assets - 12,758 Stock compensation expense 7,560 6,881 Changes in assets and liabilities: Accrued interest receivable and other assets 57,928 119,528 Accrued interest payable and other liabilities (152,682) (230,892) ------------ ------------ Net cash from operating activities 344,348 331,665 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Loans funded, net of collections (10,576,910) (5,020,778) Maturities and paydowns of securities available-for-sale 831,332 800,049 Maturities and paydowns of securities held to maturity 437 524 Purchase of premises and equipment (18,665) (310,899) Proceeds from sale of real estate owned - 298,970 ------------ ------------ Net cash from investing activities (9,763,806) (4,232,134) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid (70,143) - Net change in fed funds purchased 2,342,000 803,000 Net change in short term FHLB advances 1,952,542 515,389 Net increase (decrease) in deposits 260,487 (10,802,780) ------------ ------------ Net cash from financing activities 4,484,886 (9,484,391) ------------ ------------ NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (4,934,572) (13,384,860) CASH AND EQUIVALENTS, Beginning of period 9,713,390 20,176,866 ------------ ------------ CASH AND EQUIVALENTS, End of period $ 4,778,818 $ 6,792,006 ============ ============
See accompanying notes to consolidated financial statements (unaudited). -5- BLUE RIVER BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AS OF AND FOR THE PERIODS ENDED MARCH 31, 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 March 31, 2007, and for the three months ended March 31, 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 MARCH 31, ---------------------------- 2007 2006 Basic earnings per share: Weighted average common shares 3,507,150 3,507,150 ========= ========= Diluted earnings per share: Weighted average common shares 3,507,150 3,507,150 Dilutive effect of stock options 3,878 2,794 --------- --------- Weighted average common shares and incremental shares 3,511,028 3,509,944 ========= =========
-6- For the three months ended March 31, 2007 and March 31, 2006, 176,450 and 152,450 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. Although the assumptions are used to reflect management's best estimate, they involve uncertainties based on market conditions generally outside the control of the Company. If future market conditions are different than the assumptions used, stock-based employee compensation expense could be considerably different. The weighted average volatility for the current period was developed using historical volatility for periods equal to the expected life of the options. An increase in the weighted average volatility assumption will increase stock compensation expense. The risk-free interest rate was developed using U.S. Treasury yields for periods equal to the expected life of the options on the grant date. An increase in the risk-free interest rate will increase stock compensation expense. The expected 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. -7- The following table summarizes the assumptions used to calculate the weighted average volatility, risk-free interest rates, expected life and the fair value of the stock option grants for the three months ended March 31, 2007 and 2006.
MARCH 31, MARCH 31, 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 March 31, 2007, the Company expensed approximately $8,000 pre-tax in stock based employee compensation. The remaining un-recognized compensation expense of $82,000 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. 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. -8- 7. DIVIDENDS On January 23, 2007 a quarterly dividend of $.02 per share was declared by the Board of Directors, payable March 1, 2007, to the shareholders of record as of February 15, 2007. 8. SUBSEQUENT EVENTS 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. Also 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. 9. PROPOSED CHARTER SALE On September 19, 2006, the Company entered into an Agreement and Plan of Reorganization with FirstAtlantic Financial Holdings, Inc. The Agreement provides for the transfer of all operating assets of Paramount Bank, a wholly-owned subsidiary of the Company in an inter-company transaction with another of the Company's wholly-owned subsidiaries, Shelby County Bank. The Agreement also provides for the sale of the charter of Paramount Bank to FirstAtlantic Financial Holdings, Inc. through a stock sale. In consideration thereof, FirstAtlantic Financial Holdings will make a cash payment to the Company in the amount of $1,675,000. After regulatory approval and following the completion of the transaction, the Company will operate Paramount Bank as a division of Shelby County Bank. The Company anticipates completing the transaction during the second quarter of 2007. -9- 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 projections, forecasts, estimates and expectations include, but are not limited to (i) changes in the interest rate environment, (ii) competitive pressures among financial institutions, (iii) general economic conditions on local or national levels, (iv) political developments, wars or other hostilities that may disrupt or increase volatility in securities markets, (v) legislative or regulatory changes, (vi) changes in prepayment speeds of loans or securities, (vii) changes in loan sale volumes, charge-offs and loan loss provisions, (viii) changes in legal or regulatory proceedings, and (ix) the impact of reputation risk created by these developments on such matters as business generation or retention. Such statements reflect the current view of the Company and the Banks with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity of the Company and the Banks. The Company undertakes no duty to update any forward looking statement to reflect events or circumstances after the date on which the forward looking statement is made or to reflect the occurrence of unanticipated events. COMPANY OVERVIEW The Company is a holding company for its principal banking subsidiaries, Shelby County Bank and Paramount Bank. Shelby County Bank and Paramount Bank are collectively referred to as the "Banks". The Company's net income is derived principally from the operating results of its banking subsidiaries. The principal sources of the Company's revenue are interest and fees on loans; deposit service charges; interest on security investments; and origination fees on mortgage loans brokered. The Banks' lending activity consists of short-to-medium-term consumer and commercial loans, including home equity lines of credit; personal loans for home improvement, autos and other consumer goods; residential real estate loans; and commercial real estate and operating loans. Funding activities at the subsidiary Banks include a full range of deposit accounts, including demand deposits; NOW accounts; money market accounts; and certificates of deposit. Also, funding is supplemented with deposits gathered from local and state governments and through borrowings from the Federal Home Loan Banks. The Company maintains $7,217,000 of Subordinated Debentures. On April 20, 2006, the Company paid off its $6,000,000 loan in its entirety to a commercial bank with the proceeds from the 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 its clients with a broad range of services delivered by experienced professionals concerned with building strong and long-term relationships. -10- 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 MARCH 31, 2007 AND DECEMBER 31, 2006 On a consolidated basis, the Company's total assets as of March 31, 2007 were $231,105,000 compared to total assets of $226,514,000 at December 31, 2006. As of March 31, 2007, gross loans were $194,056,000 compared to gross loans of $183,772,000 at December 31, 2006. Deposits were $184,373,000 at March 31, 2007 compared to $184,113,000 at December 31, 2006. Total capital was $18,013,000 at March 31, 2007 compared to $17,820,000 at December 31, 2006. Outstanding shares of common stock were 3,507,150 as of March 31, 2007 and December 31, 2006. The book value per share was $5.14 at March 31, 2007 and $5.08 at December 31, 2006. The Company continued a pattern of growth during the three month period ended March 31, 2007. Loan balances increased by 5.5% from December 31, 2006. The Company continues to focus on credit quality and is maintaining its momentum of growing quality loans thereby improving net interest income in order to provide the foundation for increased shareholder value. During the first quarter of 2007, the pretax income was below the anticipated level. The Company did not achieve its net income goal primarily due to increased professional fee expenses associated with the proposed charter sale (see Note 9 to the Consolidated Financial Statements (Unaudited) included herein) along with 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 in the approval, underwriting, originating and structuring of the loan processes at Paramount Bank and believes this will reduce the need to provide for loan problems in the future. The Company will continue to focus on exceeding a 10% pretax return on shareholders' equity this year and in 2008, by concentrating on the growth of quality loans, increasing net interest income, and lowering non interest expense. -11- Management believes it can continue to improve return on equity by following this strategy and prudently managing non interest expenses. The Banks are strategically maintaining their "well capitalized" status while continuing to concentrate on improving net interest income and overall profitability, without taking undue interest rate risk. Management and staff at both Shelby County Bank and Paramount Bank will continue to work diligently at implementing loan growth plans and strategies; emphasizing the benefits of gathering non-certificate depository funding as means of decreasing the Banks' overall funding costs; improving levels of fee income derived from depository relationships and encouraging a stronger relationship with their customer base. 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 and April of 2007. The Company will continue to review the possibility of future dividend payments to its shareholders during 2007 and beyond. With the proposed sale of Paramount Bank's charter to FirstAtlantic Financial Holdings, Inc., (see Note 9 to the Consolidated Financial Statements (Unaudited) included herein) expected during the second quarter of 2007, the Company anticipates net proceeds of approximately $1,525,000. At this time management is considering several uses for the cash payment, however no final decisions have been made. OVERVIEW OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 For the three months ended March 31, 2007, the Company's net income was $179,000. This compares to a net income of $228,000 for the same period of 2006. The Company had a decrease in pretax income of 21% for the quarter ended March 31, 2007 compared to the quarter ended March 31, 2006. This is primarily the result of the following: a decrease in secondary market mortgage fee income due to a slowed market environment; a decrease in service charges on deposit accounts; an increase in the allowance for loan losses; increases in salaries and benefits as the result of the employment of two new lenders and associated employment fees; and costs associated with occupancy due to the purchase of a new computer system, information technology upgrades and unusual weather-related expenses at Shelby County Bank. These negative factors to income were offset by an increase in net interest income as the result of continued loan growth. Basic and fully diluted earnings per share were $0.05 for the quarter ended March 31, 2007 compared to $0.07 per share for the quarter ended March 31, 2006. Weighted average outstanding shares (basic) were 3,507,150 for the first quarter of 2007 and 2006. The income tax provision for the three months ended March 31, 2007 was $114,000 and $141,000 for the three months ended March 31, 2006 with effective rates of 38.8% and 38.2% respectively. FINANCIAL CONDITION The Company's total assets at March 31, 2007 were $231,105,000, an increase of $4,591,000 from December 31, 2006. This increase is primarily the result of an increase in net loans of $10,259,000 and was mainly offset by a decrease in cash and cash equivalents of $4,934,000 and an increase in other borrowings of $4,290,000. Cash and cash equivalents declined $4,934,000 to $4,779,000 at March 31, 2007 compared to $9,713,000 at year-end 2006. Securities available-for-sale and held-to-maturity decreased $713,000 to $21,208,000 at March 31, 2007 compared to $21,921,000 at year-end 2006 and is the result of principal reductions in the mortgage backed securities. Loans, net of the allowance for loan losses increased $10,259,000 to $192,134,000 at March 31, 2007 compared to $181,875,000 at December 31, 2006. Other real estate increased $164,000 to $397,000 at March 31, 2007 compared to $233,000 at year-end 2006. Total deposits at March 31, 2007 increased $260,000 to $184,373,000 compared to $184,113,000 in total deposits at December 31, 2006. Demand accounts decreased $4,259,000 offset by a net increase of $4,519,000 in NOW, savings, money market and certificates of deposits. The decrease in demand accounts is primarily the result of a decrease of one large deposit account at Paramount Bank which has significant volatility in the amount of overnight deposits maintained. FHLB advances and fed funds purchased increased $4,290,000 to $20,328,000 at March 31, 2007 compared to $16,038,000 at December 31, 2006. This increase funded the loan growth which occurred during the three month period ended March 31, 2007. The Banks will continue -12- to strategically review other means of funding sources to keep pace with loan growth. Shareholders' equity at March 31, 2007 was $18,013,000, an increase of $193,000 compared to $17,820,000 at December 31, 2006. The change in equity resulted from net income of $179,000, stock compensation expense of $8,000, a $70,000 dividend paid to the Company's shareholders during the first quarter of 2007 and an increase of $76,000 from an improvement in the fair value of the Company's available-for-sale investment portfolio. LOANS: The following comparative table shows loans receivable by major categories at March 31, 2007 and December 31, 2006:
LOANS RECEIVABLE MARCH 31, DECEMBER 31, 2007 2006 Real Estate Mortgage Loans: One-to-four family $ 57,033,039 $ 52,892,428 Non Residential 49,223,967 46,928,914 Home equity loans 37,789,658 36,997,433 Consumer loans 10,135,418 9,843,237 Commercial loans, including participations 39,873,571 37,109,610 ------------- ------------- Total gross loans 194,055,653 183,771,622 Less allowance for loan losses (1,921,623) (1,896,618) ------------- ------------- Total loans receivable, net $ 192,134,030 $ 181,875,004 ============= =============
-13- NON-PERFORMING LOANS: The following table is an analysis of the Company's non-performing loans at March 31, 2007 and December 31, 2006.
NON-PERFORMING LOANS MARCH 31, DECEMBER 31, 2007 2006 Non-performing loans consist of the following: Non-accrual loans $3,026,332 $2,531,382 Ninety (90) days past due 1,338,333 1,857,596 ---------- ---------- Total non-performing loans $4,364,665 $4,388,978 ========== ========== Non-performing loans to total loans 2.25% 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 has been specifically approved); and (3) loans which have been renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial condition of the borrower. At March 31, 2007, the Company reported approximately $3,026,000 of non-accrual loans and $1,338,000 in loans ninety days or more past due. This is an increase in non-accrual loans of $495,000 from December 31, 2006 and a decrease in past due loans of $519,000 from December 31, 2006. The increase in non-accrual loans was primarily the result of an addition of $125,000 in new non-accrual loans and the reclassification of $675,000 in ninety day past due loans to non-accrual status. These increases were offset by $141,000 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 $540,000 of loans in this category offset by the $675,000 shift that occurred from the ninety day past due loans to non-accrual loans, and $384,000 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 a decrease in the non-performing loans to total gross loans from 2.39% at December 31, 2006 to 2.25% at March 31, 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. -14- Activity in the allowance for loan losses consists of the following:
THREE MONTHS ENDED MARCH 31, ----------------------------- 2007 2006 Balance, beginning of period $ 1,896,618 $ 1,575,511 Add: Provision for loan losses 154,081 68,000 Recoveries of loans previously charged off 7,419 1,666 Less gross charge-offs: Residential real estate loans (75,062) - Consumer/commercial loans (61,433) (17,190) ----------- ----------- Balance, end of period $ 1,921,623 $ 1,627,987 =========== =========== Net charge-offs to total average loans outstanding (annualized) 0.02% 0.00% Allowance to total gross loans outstanding 0.99% 0.96%
The allowance for loan losses at March 31, 2007 was $1,922,000, an increase of $25,000 from December 31, 2006 and an increase of $294,000 since March 31, 2006. The Company's provision for loan losses for the three months ending March 31, 2007 was $154,000 and its net charge-offs were approximately $129,000. 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. -15- Since December 31, 2006, the Company's allowance for loan losses increased $25,000. This was the result of an additional $154,000 in loan loss provision expense primarily related to one unsecured loan which is now fully allocated and additional increases to special allowances for other problem loans, offset by improvements in historical loss allocations. The Company charged off $43,000 in one real estate loan and $61,000 in consumer loans during the quarter ended March 31, 2007. These loans were fully allocated at December 31, 2006. Another 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 $7,000 during the period of previously charged-off loans. Specific allocations totaled $1,495,000 at March 31, 2007 compared to $1,339,000 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 the total watch listed loans. These pooled allocations decreased to $230,000 at March 31, 2007 from $352,000 at December 31, 2006. For the three month period ended March 31, 2007, the allowance to total average gross loans outstanding increased to 1.03% compared to .96% for the three month period ended March 31, 2006 and decreased seven basis points compared to the twelve months ended December 31, 2006. -16- RESULTS OF OPERATIONS: THREE MONTHS ENDED MARCH 31, 2007 AND MARCH 31, 2006 Net interest income before the provision for loan losses for the three months ended March 31, 2007 increased approximately 13.4% from the period ended March 31, 2006. This increase can be attributed primarily to loan growth and increased other loan fee income, and in part due to the prime lending rate increasing from 7.75% to 8.25%. The Banks have benefited from past increases in the prime lending rate, however they will not benefit as much in the future if the prime lending rate would increase, as the Banks have reduced asset sensitivity. The following table sets forth, for the three month periods ended March 31, 2007 and March 31, 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.
THREE MONTHS ENDED MARCH 31, 2007 THREE MONTHS ENDED MARCH 31, 2006 ---------------------------------------------------------------------- AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) Interest Earning Assets: Investment securities $ 21,650 $ 238 4.40% $ 24,277 $ 263 4.33% Interest-bearing deposits and other 3,961 31 3.13% 8,105 85 4.19% FHLB and other equity securities 2,402 33 5.50% 3,012 35 4.65% Loans (1) 186,126 3,734 8.02% 164,682 2,997 7.28% -------- -------- ------ -------- -------- ------ Total earning assets 214,139 4,036 7.54% 200,076 3,380 6.76% -------- -------- ------ -------- -------- ------ Interest and Non-Interest Bearing Liabilities: Savings accounts 11,813 68 2.30% 12,564 68 2.16% NOW accounts 16,632 28 0.67% 16,709 29 0.69% Money market accounts 32,581 339 4.16% 34,757 293 3.37% Certificates of deposit 96,268 1,128 4.69% 85,203 782 3.67% -------- -------- ------ -------- -------- ------ Total interest bearing deposits 157,294 1,563 3.97% 149,233 1,172 3.14% Borrowings 23,105 299 5.18% 22,753 291 5.12% -------- -------- ------ -------- -------- ------ Total interest bearing liabilities $180,399 1,862 $171,986 1,463 ======== -------- ======== -------- Net interest income $ 2,174 $ 1,917 ======== ======== Interest-rate spread (2) 3.41% 3.36% ------ ------ Net interest margin (3) 4.06% 3.83% ------ ------ Ratio of average interest-bearing assets to average interest-bearing liabilities 1.19 1.16
(1) Includes principal balances of non-accruing loans. Interest on non-accruing loans is not included. (2) Interest-rate spread represents the difference between the average yield on interest-earning assets and the average rate of interest-bearing liabilities. (3) Net interest margin is net interest income divided by average interest-earning assets. For the three month period ended March 31, 2007, the provision for loan losses was $154,000 compared to $68,000 for the three month period ended March 31, 2006. Please refer to the additional information related to the allowance for loan losses in the financial condition discussion. -17- Overall non-interest income decreased 37% for the three month period ended March 31, 2007 compared to the three month period ended March 31, 2006. Total non-interest income was $195,000 for the three month period ended March 31, 2007 compared to $308,000 for the three month period ended March 31, 2006. Primarily there was a decrease of $67,000 in secondary market mortgage loan fees due to the reduction of emphasis on mortgage originations. Another factor contributing to the decrease was a decline in service charges and fees related to the closure of deposit accounts that had produced a high volume of overdraft charges. Non-interest expenses totaled $1,921,000 for the three month period ended March 31, 2007, compared to $1,788,000 during the three month period ended March 31, 2006. Overall non-interest expense increased 7.5% for the three months ended March 31, 2007 compared to the same period of 2006. Changes in non-interest expenses consist of the following:
THREE MONTHS ENDED CHANGE FROM MARCH 31, 2006 ----------------------------------------------- 2007 2006 Salaries and employee benefits $1,051,254 $ 977,147 $ 74,107 Occupancy 249,412 197,324 52,088 Federal deposit insurance, KY state tax and OTS 49,811 55,971 (6,160) Data Processing 174,820 162,890 11,930 Advertising and promotion 25,734 51,622 (25,888) Bank fees and charges 25,457 26,366 (909) Director Fees 31,400 26,400 5,000 Professional Fees 144,376 134,122 10,254 Stationery, supplies and printing 22,785 18,506 4,279 Core deposit intangible 17,241 17,241 - Other Expenses 129,145 119,926 9,219 ---------- ---------- ---------- $1,921,435 $1,787,515 $ 133,920 ========== ========== ==========
Major fluctuations in non-interest expense from the three months ended March 31, 2006 to the three months ended March 31, 2007 include an increase of $74,000 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. Occupancy expenses increased $52,000 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 unusual weather-related occupancy expenses during the first quarter of 2007. There were also increases in professional fees associated with the proposed charter sale (see Note 9 to the Consolidated Financial Statements (Unaudited) included herein). -18- CAPITAL RESOURCES AND LIQUIDITY The Banks are subject to various capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. The Board of Directors of the Company has set as an objective to maintain capital levels required for qualification as "well-capitalized". Capital amounts and classification are also subject to qualitative judgments by regulators involving capital components, risk weights and other factors. The risk weights assigned to various financial instruments are taken into consideration in setting operating parameters related to the mix of loans and investments with the objective to maximize earnings attained through the use of available equity capital. Current capital regulations require savings institutions to have minimum tangible capital equal to 1.5% of total assets, 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 March 31, 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 March 31, 2007:
SHELBY COUNTY BANK --------------------------------------------------------------------------------- ACTUAL CAPITAL MINIMUM FOR CAPITAL ADEQUACY FDICIA REGULATIONS ------------------------- ------------------------------------------------------- TO BE "WELL CAPITALIZED" -------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO Tangible capital ratio $12,540,000 8.9% $ 2,115,000 1.5% N/A N/A Core capital to average assets 12,540,000 8.9% 5,639,000 4.0% 7,048,000 5.0% Tier 1 capital to risk weighted assets 12,540,000 11.0% N/A N/A 6,845,000 6.0% Total capital to risk weighted assets 13,116,000 11.5% 9,126,000 8.0% 11,408,000 10.0%
The following table sets forth the actual and minimum capital amounts to be adequately capitalized and ratios of Paramount Bank as of March 31, 2007:
PARAMOUNT BANK --------------------------------------------------------------------------------- ACTUAL CAPITAL MINIMUM FOR CAPITAL ADEQUACY FDICIA REGULATIONS ------------------------- ------------------------------------------------------- TO BE "WELL CAPITALIZED" -------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO Tangible capital ratio $ 7,032,000 8.2% $ 1,283,000 1.5% N/A N/A Core capital to average assets 7,032,000 8.2% 3,421,000 4.0% 4,277,000 5.0% Tier 1 capital to risk weighted assets 7,032,000 9.5% N/A N/A 4,428,000 6.0% Total capital to risk weighted assets 7,845,000 10.6% 5,904,000 8.0% 7,380,000 10.0%
-19- 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 quarter 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, and the $1,525,000 in net proceeds that the Company anticipates receiving during the second quarter of 2007 as a result of the sale of the charter of Paramount Bank (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. At the holding company level, the Company uses cash to pay dividends to shareholders. At March 31, 2007, the sources of funding for the holding company include dividends from its subsidiary, 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 quarter of 2007, the Company declared and paid cash dividends totaling $70,000. Subsequently, the Company declared a cash dividend during the second quarter of 2007 and expects the cash dividends to total $79,000. 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. -20- PART I -- ITEM 3 CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this report, we carried out an evaluation (the "Evaluation"), under the supervision and with the participation of our Chief Executive Officer ("CEO") and Controller, of the effectiveness of the design and operation of our disclosure controls and procedures ("Disclosure Controls"). Based on the Evaluation, our CEO and Controller concluded that, our Disclosure Controls were effective at the Reasonable Assurance level as described below as of the end of the period covered by this report. CHANGES IN INTERNAL CONTROLS There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2007 that have materially affected, or reasonably likely to affect, the Company's internal control over financial reporting. REASONABLE ASSURANCE LEVEL OF THE EFFECTIVENESS OF CONTROLS Our management, including our CEO and Controller, does not expect that our Disclosure Controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can only be reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. CEO AND CONTROLLER CERTIFICATIONS Appearing as exhibits to this report there are Certifications of the CEO and Controller. The Certifications are required in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This Item of this report, which you are currently reading is the information concerning the Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented. -21- PART II OTHER INFORMATION Item 6. Exhibits The exhibits to this Form 10-QSB are listed in the attached Exhibit Index. ****** -22- SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on behalf of the undersigned, thereto duly authorized. Blue River Bancshares, Inc. Date: May 15, 2007 By: /s/ Patrice M. Lima -------------------------- Patrice M. Lima, Vice President, Controller (Principal Financial Officer & Chief Accounting Officer) -23- EXHIBIT INDEX Document Description Exhibit No. - ----------- 3(i)(a) Articles of Incorporation (Incorporated by reference to the Registrant's Amendment No. 4 to the Registration Statement on Form SB-2, File No. 333-48269 filed on June 22, 1998) 3(i)(b) Amendment to Articles of Incorporation, adopted May 13, 2004 (Incorporated by reference to the Registrant's Form 10-QSB, filed on August 16, 2004) 3(ii) Amended and Restated By-Laws (Incorporated by reference to the Registrant's Form 10-QSB, filed on August 16, 2004) 31.1 Certification of Principal Executive Officer pursuant to Rule 15d-14(a) of the 1934 Act. 31.2 Certification of Principal Financial Officer pursuant to Rule 15d-14(a) of the 1934 Act. 32.1 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -24-
EX-31.1 2 c15257exv31w1.txt CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION I, Russell Breeden, III, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Blue River Bancshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: May 15, 2007 By: /s/ Russell Breeden, III ---------------------------- Russell Breeden, III, Chief Executive Officer Chairman of the Board and President (Principal Executive Officer) -25- EX-31.2 3 c15257exv31w2.txt CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION I, Patrice M. Lima, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Blue River Bancshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: May 15, 2007 By: /s/ Patrice M. Lima ---------------------------------- Patrice M. Lima, Vice President and Controller (Principal Financial Officer) -26- EX-32.1 4 c15257exv32w1.txt 906 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Blue River Bancshares, Inc. (the "Company") on Form 10-QSB for the quarter ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Russell Breeden, III, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed for any other purpose. /s/ Russell Breeden, III - ------------------------ Russell Breeden, III Chief Executive Officer Chairman of the Board and President May 15, 2007 -27- EX-32.2 5 c15257exv32w2.txt 906 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Blue River Bancshares, Inc. (the "Company") on Form 10-QSB for the quarter ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Patrice M. Lima, Vice President and Controller, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed for any other purpose. /s/ Patrice M. Lima - ------------------- Patrice M. Lima Vice President and Controller May 15, 2007 -28-
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