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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
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: 001-15933
BLUE VALLEY BAN CORP
(Exact name of registrant as specified in its charter)
KANSAS 48-1070996
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11935 RILEY 66225-6128
OVERLAND PARK, KANSAS
(Address of principal executive
offices) (Zip Code)
Registrant's telephone number, including area code: (913) 338-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Guarantee with respect to the Trust Preferred American Stock Exchange
Securities, $8.00 par value, of BVBC Capital Trust I
Securities registered pursuant to Section 12(g) of the Act: None
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 reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by checkmark whether the registrant is an accelerated filer.
Yes [ ] No [X]
As of February 29, 2004 the registrant had 2,279,611 shares of Common
Stock ($1.00 par value) outstanding, of which 1,191,526 shares were held by
non-affiliates. The aggregate market value of the common shares of the
registrant held by non-affiliates, computed based on the June 30, 2003 closing
price of the stock, was approximately $33.4 million.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
1. Part III - Proxy Statement for the 2004 Annual Meeting of
Stockholders
BLUE VALLEY BAN CORP
FORM 10-K INDEX
Page No.
PART I.
Item I. Business 2
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 38
Item 9A. Controls and Procedures 39
PART III.
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 39
Item 14. Principal Accounting Fees and Services 40
PART IV.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 41
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PART I
ITEM 1: BUSINESS
THE COMPANY AND SUBSIDIARIES
Blue Valley Ban Corp. ("Blue Valley", the "Company") is a bank holding
company organized in 1989. In 2001, Blue Valley elected to become a financial
holding company and such status was granted. The Company's wholly-owned
subsidiary, Bank of Blue Valley (the "Bank") was also organized in 1989 to
provide banking services to closely-held businesses and their owners,
professionals and residents in Johnson County, Kansas, a high growth,
demographically attractive area within the Kansas City, Missouri - Kansas
Metropolitan Statistical Area (the "MSA"). The focus of Blue Valley has been to
take advantage of the current and anticipated growth in our market area as well
as to serve the needs of small and mid-sized commercial borrowers - customers
that we believe currently are underserved as a result of banking consolidation
in the industry generally and within our market specifically. In addition, Blue
Valley originates residential mortgages nationwide through the Bank's
InternetMortgage.com website.
We have experienced significant internal growth since our inception. We
currently have six banking center locations in Johnson County, Kansas, including
our main office and a mortgage operations office in Overland Park, both of which
include lobby banking centers, full-service offices in Olathe and Shawnee,
Kansas, and supermarket banking facilities in Leawood and Shawnee, Kansas. We
are nearing completion of a full service banking center located at 135th and
Mission Road in Leawood, Kansas. This location is scheduled to open during the
second quarter of 2004.
Our lending activities focus on commercial lending and residential
mortgage origination services, and to a lesser extent, consumer lending. We
strive to identify, develop and maintain diversified lines of business which
provide acceptable returns on a risk-adjusted basis. Our primary lines of
business consist of commercial and industrial lending, commercial real estate
lending, construction lending, indirect lending, leasing, and residential
mortgage lending and origination services.
We also seek to develop lines of business which diversify our revenue
sources, increase our non-interest income and offer additional value-added
services to our customers. We develop these new lines of business while
monitoring related risk factors. The growth experienced in 2003 and 2002 in our
residential mortgage origination services provides an example of the benefits
that we have gained through diversification. This growth has largely been
attained in a favorable low interest rate environment. Management recognizes
that future increases in interest rates could have a detrimental impact on the
revenues generated by this business and we seek to manage this business to
enable us to minimize this detrimental impact where possible. In addition to
fees generated in conjunction with our lending activities, we derive
non-interest income by providing mortgage origination services, deposit and cash
management services, investment brokerage services and trust services.
In addition to the Bank, we have four wholly-owned subsidiaries: Blue
Valley Building Corp., which owns the building and property that comprise our
headquarters and mortgage operations facility in Overland Park, Kansas, the
banking center at 135th and Mission Road in Leawood, Kansas, and one other
property intended for future use; Blue Valley Insurance Services, Inc., an
insurance agency created to offer insurance products to our customers; and BVBC
Capital Trust I and BVBC Capital Trust II, which were created to offer the
Company's trust preferred securities and to purchase our junior subordinated
debentures.
OUR MARKET AREA
We operate primarily as a community bank, serving the banking needs of
small and medium-sized companies and individuals in the Kansas City MSA
generally, and in suburban Johnson County, in particular. Our trade area
generally consists of Johnson County, Kansas. We believe that coupling our
strategy of providing exceptional customer service and local decision making
with attractive market demographics has led to a rate of growth which exceeds
the national total asset and deposit growth rates of the banking industry as
well as the growth experienced locally by many of our competitors.
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The income levels and growth rate of Johnson County, Kansas compare
favorably to national averages. Johnson County's population growth rate ranks in
the top 2% of counties nationally, and its per capita income ranks in the top 1%
of counties nationally. Johnson County is also a significant banking market in
the State of Kansas and in the Kansas City MSA. According to available industry
data, as of June 30, 2003, total deposits in Johnson County, including those of
banks, thrifts and credit unions, were approximately $10.3 billion, which
represented 22.90% of total deposits in the state of Kansas and 35.61% of total
deposits in the Kansas City MSA.
As our founders anticipated, the trade area surrounding our main
banking facility in Overland Park has become one of the most highly developed
retail areas in the Kansas City MSA. Our Olathe, Kansas branch is located
approximately 10 miles west of our main office. We opened our Olathe branch in
1994 when we acquired the deposits of a branch of a failed savings and loan
association. We made this acquisition because it was located in a contiguous
market area and we believed that it represented a stable deposit base. The
Shawnee, Kansas banking facilities are approximately 20 miles northwest of our
headquarters location. We opened our Shawnee grocery branch for the convenience
of our existing customers in Shawnee, and to expand our market presence in
Shawnee. During the first quarter of 2001, construction of our freestanding
banking facility in Shawnee, Kansas was completed and operations commenced. The
Leawood, Kansas grocery branch is approximately 5 miles southeast of our
headquarters location. We opened our Leawood grocery branch during October of
2002 to provide us a physical presence and expand our market penetration in
Leawood. In 2002, we also acquired land for a 20,000 square foot branch and
office building in Leawood, which we anticipate will open in the second quarter
of 2004. During 2003 we acquired an office building approximately 1 mile
northwest of our headquarters location. At this location, we consolidated our
mortgage operations and opened a banking facility.
LENDING ACTIVITIES
Overview. Our principal loan categories include commercial, commercial
real estate, construction, leasing and residential mortgages. We also offer a
variety of consumer loans. Our primary source of interest income is interest
earned on our loan portfolio. As of December 31, 2003, our loans represented
approximately 67.77% of our total assets, our legal lending limit to any one
borrower was $14.2 million, and our largest single borrower as of that date had
outstanding loans of $12.8 million.
We have been successful in expanding our loan portfolio because of the
commitment of our staff and the economic growth in our area of operation. Our
staff has significant experience in lending and has been successful in offering
our products to both potential customers and existing customers. We believe that
we have been successful in maintaining our customers because of our staff's
attentiveness to their financial needs and the development of personal
relationships with them. We strive to become a strategic business partner with
our customers, not just a source of funds.
We conduct our lending activities pursuant to the loan policies adopted
by our board of directors. These policies currently require the approval of our
loan committee of all commercial credits in excess of $600,000 and all real
estate credits in excess of $1.0 million. Credits up to $600,000 on commercial
loans and $1.0 million on real estate loans can be approved by the Bank's
President. Our management information systems and loan review policies are
designed to monitor lending sufficiently to ensure adherence to our loan
policies. The following table shows the composition of our loan portfolio at
December 31, 2003.
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LOAN PORTFOLIO
AS OF DECEMBER 31, 2003
-----------------------
AMOUNT PERCENT
(DOLLARS IN THOUSANDS)
Commercial $ 109,818 25.86%
Commercial real estate 87,438 20.59
Construction 123,445 29.08
Leases 22,175 5.22
Residential real estate 27,017 6.37
Consumer 29,701 6.99
Home equity 25,026 5.89
---------- ------
Total loans and leases 424,620 100.00%
Less allowance for loan losses 7,051
----------
Loans receivable, net $ 417,569
----------
Commercial loans. As of December 31, 2003, approximately $109.8
million, or 25.86%, of our loan portfolio represented commercial loans. The Bank
has developed a strong reputation in the servicing of small business and
commercial loans. We have expanded this portfolio through the addition of
commercial lending staff, their business development efforts and our reputation.
Commercial loans have historically been a significant portion of our loan
portfolio and we expect to continue our emphasis on this loan category.
The Bank's commercial lending activities historically have been
directed to small and medium-sized companies in or near Johnson County, Kansas,
with annual sales generally between $100,000 and $20 million. The Bank's
commercial customers are primarily firms engaged in manufacturing, service,
retail, construction, distribution and sales with significant operations in our
market areas. The Bank's commercial loans are primarily secured by real estate,
accounts receivable, inventory and equipment, and the Bank may seek to obtain
personal guarantees for its commercial loans. As of December 31, 2003,
approximately 10.59% of our commercial loans had outstanding balances in excess
of $300,000, and these loans accounted for 65.79% of the total carrying value of
our commercial loan portfolio. The Bank primarily underwrites its commercial
loans on the basis of the borrowers' cash flow and ability to service the debt,
as well as the value of any underlying collateral and the financial strength of
any guarantors.
Approximately $8.9 million, or 8.06%, of our commercial loans are Small
Business Administration (SBA) loans, of which $6.6 million is government
guaranteed. The SBA guarantees the repayment of a portion of the principal on
these loans, plus accrued interest on the guaranteed portion of the loan. Under
the federal Small Business Act, the SBA may guarantee up to 85% of qualified
loans of $150,000 or less and up to 75% of qualified loans in excess of
$150,000, up to a maximum guarantee of $1.0 million. We are an active SBA lender
in our market area and have been approved to participate in the SBA Certified
Lender Program.
Commercial lending is subject to risks specific to the business of each
borrower. In order to address these risks, we seek to understand the business of
each borrower, place appropriate value on any personal guarantee or collateral
pledged to secure the loan, and structure the loan amortization to maintain the
value of any collateral during the term of the loan.
Commercial real estate loans. The Bank also makes loans to provide
permanent financing for retail and office buildings, multi-family properties and
churches. As of December 31, 2003, approximately $87.4 million, or 20.59%, of
our loan portfolio represented commercial real estate loans. Our commercial real
estate loans are underwritten on the basis of the appraised value of the
property, the cash flow of the underlying property, and the financial strength
of any guarantors.
Risks inherent in commercial real estate lending are related to the
market value of the property taken as collateral, the underlying cash flows and
documentation. Commercial real estate lending involves more risk than
residential lending because loan balances may be greater and repayment is
dependent on the borrower's operations.
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We attempt to mitigate these risks by carefully assessing property values,
investigating the source of cash flow servicing the loan on the property and
adhering to our lending and underwriting policies and procedures.
Construction loans. Our construction loans include loans to developers,
home building contractors and other companies and consumers for the construction
of single-family homes, land development, and commercial buildings, such as
retail and office buildings and multi-family properties. As of December 31,
2003, approximately $123.4 million, or 29.08%, of our loan portfolio represented
real estate construction loans. The builder and developer loan portfolio has
been a consistent and profitable component of our loan portfolio over our
fourteen-year history. We attribute this success to our expertise, availability
and prompt service. The Bank's experience and reputation in this area have
grown, thereby enabling it to focus on relationships with a smaller number of
larger builders and increasing the total value of the Bank's real estate
construction portfolio. Construction loans are made to qualified builders to
build houses to be sold following construction, pre-sold houses and model
houses. These loans are generally underwritten based upon several factors,
including the experience and current financial condition of the borrowing
entity, amount of the loan to appraised value, and general conditions of the
housing market. Construction loans are also made to individuals for whom houses
are being constructed by builders with whom the Bank has an existing
relationship. Such loans are made on the basis of the individual's financial
condition, the loan to value ratio, the reputation of the builder, and whether
the individual will be pre-qualified for permanent financing.
Risks related to construction lending include assessment of the market
for the finished product, reasonableness of the construction budget, ability of
the borrower to fund cost overruns, and the borrower's ability to liquidate and
repay the loan at a point when the loan-to-value ratio is the greatest. We seek
to manage these risks by, among other things, ensuring that the collateral value
of the property throughout the construction process does not fall below
acceptable levels, ensuring that funds disbursed are within parameters set by
the original construction budget, and properly documenting each construction
draw.
Lease financing. Our lease portfolio includes capital leases that we
have originated and leases that we have acquired from brokers or third parties.
As of December 31, 2003, our lease portfolio totaled $22.2 million or 5.22%, of
our total loan portfolio, consisting of $16.5 million principal amount of leases
originated by us and $5.7 million principal amount of leases that we purchased.
We provide lease financing for a variety of equipment and machinery, including
office equipment, heavy equipment, telephone systems, tractor trailers and
computers. Lease terms are generally from three to five years. Management
believes this area is attractive because of its ability to provide a source of
both interest and fee income. Our leases are generally underwritten based upon
several factors, including the overall credit worthiness, experience and current
financial condition of the lessee, the amount of the financing to collateral
value, and general conditions of the market.
The primary risks related to our lease portfolio are the value of the
underlying collateral and specific risks related to the business of each
borrower. To address these risks, we attempt to understand the business of each
borrower, value the underlying collateral appropriately and structure the loan
amortization to ensure that the value of the collateral exceeds the lease
balance during the term of the lease.
Residential real estate loans. Our residential real estate loan
portfolio consists primarily of first and second mortgage loans on residential
properties. As of December 31, 2003, $27.0 million, or 6.37%, of our loan
portfolio represented residential mortgage loans. The terms of these loans
typically include 2-5 year balloon payments based on a 15 to 30 year
amortization, and accrue interest at a fixed or variable rate. By offering these
products, we can offer credit to individuals who are self-employed or have
significant income from partnerships or investments. These individuals are often
unable to satisfy the underwriting criteria permitting the sale of their
mortgages into the secondary market. Due to interest rate risk considerations,
we generally sell our fixed rate residential mortgage loans in the secondary
market.
In addition, we also originate residential mortgage loans with the
intention of selling these loans in the secondary market. During 2003, we
originated approximately $1.5 billion of residential mortgage loans, and we sold
approximately $1.6 billion in the secondary market. We originate conventional
first mortgage loans through our internet website as well as through referrals
from real estate brokers, builders, developers, prior customers and media
advertising. We have offered customers the ability to apply for mortgage loans
and to pre-qualify for mortgage loans over the Internet since 1999. In 2001, we
expanded our internet mortgage application capacity with the acquisition of the
internet domain name InternetMortgage.com and created a separate National
Mortgage
5
division. The timing of this expansion allowed us to establish this division in
a relatively low-rate environment, and reap the benefits of a significant
increase in mortgage originations and refinancing experienced since 2001. The
origination of a mortgage loan from the date of initial application through
closing normally takes 15 to 60 days. We acquire forward commitments from
investors on mortgage loans that we intend to sell into the secondary market to
reduce market risk on mortgage loans in the process of origination and those
held for sale.
Our mortgage loan credit review process is consistent with the
standards set by traditional secondary market sources. We review appraised value
and debt service ratios, and we gather data during the underwriting process in
accordance with various laws and regulations governing real estate lending.
Loans originated by the Bank are sold with servicing released to increase
current income and reduce the costs associated with retaining servicing rights.
Commitments are obtained from the appropriate investor on a loan-by-loan basis
on a 30, 45 or 60-day delivery commitment. Interest rates are committed to the
borrower when a rate commitment is obtained from the investor. Loans are funded
by the Bank and purchased by the investor within 30 days following closing
pursuant to commitments obtained at the time of origination. We sell
conventional conforming loans and all loans that are non-conforming as to credit
quality to secondary market investors for cash on a non-recourse basis.
Consequently, foreclosure losses on all sold loans are generally the
responsibility of the investor and not that of the Bank.
As with other loans to individuals, the risks related to residential
mortgage loans include primarily the value of the underlying property and the
financial strength and employment stability of the borrower. We attempt to
manage these risks by performing a pre-funding underwriting that consists of the
verification of employment and utilizes a detailed checklist of loan
qualification requirements, including the source and amount of down payments,
bank accounts, existing debt and overall credit.
Consumer and other loans. As of December 31, 2003, our consumer and
other loans totaled $29.7 million, or 6.99%, of our total loan portfolio. A
substantial part of this amount consisted of installment loans to individuals in
our market area. Installment lending offered directly by the Bank in our market
area includes automobile loans, recreational vehicle loans, home improvement
loans, unsecured lines of credit and other loans to professionals, people
employed in education, industry and government, as well as retired individuals
and others. A significant portion of our consumer loan portfolio consists of
indirect automobile loans offered through automobile dealerships located
primarily in our trade area. As of December 31, 2003, approximately $20.0
million, or 4.71%, of our loan portfolio represented indirect installment loans.
Our loans made through this program generally represent loans to purchase new
automobiles. There are currently 22 dealerships participating in this program.
Since 1999, we have offered customers the ability to apply for consumer
loans, personal lines of credit and overdraft protection lines of credit over
the Internet through our electronic banking services. To date, consumer loan
applications received over the Internet have not represented a material amount
of our consumer loan portfolio. Our consumer and other loans are underwritten
based on the borrower's income, current debt, past credit history, collateral,
and the reputation of the originating dealership with respect to indirect
automobile loans.
Consumer loans are subject to the same risks as other loans to
individuals, including the financial strength and employment stability of the
borrower. In addition, some consumer loans are subject to the additional risk
that the loan is not secured by collateral. For some of the loans that are
secured, the underlying collateral may be rapidly depreciating and not provide
an adequate source of repayment if we are required to repossess the collateral.
We attempt to mitigate these risks by requiring a down payment and carefully
verifying and documenting the borrower's credit quality, employment stability,
monthly income, and with respect to indirect automobile loans, understanding and
documenting the value of the collateral and the reputation of the originating
dealership.
INVESTMENT ACTIVITIES
The objectives of our investment policy are to:
- secure the safety of principal;
- provide adequate liquidity;
6
- provide securities for use in pledging for public funds or
repurchase agreements; and
- maximize after-tax income.
We invest primarily in direct obligations of the United States,
obligations guaranteed as to principal and interest by the United States,
obligations of agencies of the United States and bank-qualified obligations of
state and local political subdivisions. In order to ensure the safety of
principal, we typically do not invest in mortgage-backed securities, corporate
debt, or other securities even though they are permitted by our investment
policy. In addition, we enter into federal funds transactions with our principal
correspondent banks, and depending on our liquidity position, act as a net
seller or purchaser of these funds. The sale of federal funds is effectively
short-term loans from us to other banks; while conversely, the purchase of
federal funds is effectively short-term loans from other banks to us.
DEPOSIT SERVICES
The principal sources of funds for the Bank are core deposits from the
local market areas surrounding the Bank's offices, including demand deposits,
interest-bearing transaction accounts, money market accounts, savings deposits
and time deposits of less than $100,000. Transaction accounts include
interest-bearing and non-interest-bearing accounts, which provide the Bank with
a source of fee income and cross-marketing opportunities as well as a low-cost
source of funds. Since 2001, the Bank has realized a significant level of
deposit growth from commercial checking accounts. While these accounts do not
earn interest, many of them receive an earnings credit on their average balance
to offset the cost of other services provided by the Bank. The Bank also offers
two types of short-term investment accounts. The Bank's money market account is
a daily access account that bears a higher rate than a personal interest-bearing
checking account and allows for limited check-writing ability. A significant
portion of our deposit growth during 2003 and 2002 has been attributable to our
Money Management Account, or "short-term parking account." The Money Management
Account provides a hybrid of the features available from a traditional money
market account and a traditional time deposit. The account requires a minimum
balance of $10,000 and allows for daily deposits but limits withdrawals to the
first day and the 15th day of each month. This account typically pays a tiered
rate of interest which is higher than a customer could receive on a traditional
money market account but lower than the rates generally available on time
deposits. We believe that the trade-off to depositors between higher interest
rates but more limited access to withdrawals has proven to be an attractive
product in our market areas and provides us with a more attractive source of
funds than other alternatives such as Federal Home Loan Bank borrowings, as it
provides us with the potential to cross-sell additional services to these
account holders. Time and savings accounts also provide a relatively stable and
low cost source of funding. The Bank's Funds Management policy also allows for
acceptance of brokered deposits which can be utilized to support the growth of
the Bank. As of December 31, 2003, the Bank had $35.8 million in brokered
deposits, and the Bank does not anticipate brokered deposits becoming a
significant percentage of its deposit base; however, we continue to evaluate
their potential role in the Bank's overall funding and liquidity strategies. In
pricing deposit rates, management considers profitability, the matching of term
lengths with assets, the attractiveness to customers and rates offered by our
competitors.
INVESTMENT BROKERAGE SERVICES
In 1999, the Bank began offering investment brokerage services through
an unrelated broker-dealer. These services are currently offered at our Overland
Park, Shawnee and Olathe locations. Two individuals responsible for providing
these services are joint employees of the Bank and the registered broker-dealer.
Investment brokerage services provide a source of fee income for the Bank. In
2003, the amount of our fee income generated from investment brokerage services
was $270,000.
TRUST SERVICES
We began offering trust services in 1996. Until 1999, the Bank's trust
services were offered exclusively through the employees of an unaffiliated trust
company. The Bank hired a full-time officer in 1999 to develop the Bank's trust
business. Trust services are marketed to both existing Bank customers and new
customers. We believe that the ability to offer trust services as a part of our
complement of financial services to new customers of the Bank
7
presents a significant cross-marketing opportunity. The services currently
offered by the Bank's trust department include the administration of
self-directed individual retirement accounts, qualified retirement plans,
custodial and directed trust accounts. As of December 31, 2003, the Bank's trust
department administered 195 accounts, with assets under management of
approximately $90.4 million. Trust services provide the Bank with a source of
fee income and additional deposits. In 2003, the amount of our fee income from
trust services was $217,000.
COMPETITION
We encounter competition primarily in seeking deposits and in obtaining
loan customers. The level of competition for deposits in our market area and
nationally is high. Our principal competitors for deposits are other financial
institutions within a few miles of our locations, including other banks, savings
institutions and credit unions. Competition among these institutions is based
primarily on interest rates offered, the quality of service provided, and the
convenience of banking facilities. Additional competition for depositors' funds
comes from U.S. government securities, private issuers of debt obligations and
other providers of investment alternatives for depositors.
We compete in our lending, investment brokerage and trust activities
with other financial institutions, such as banks and thrift institutions, credit
unions, automobile financing companies, mortgage companies, securities firms,
investment companies and other finance companies. Many of our competitors are
not subject to the same extensive federal regulations that govern bank holding
companies and federally insured banks and state regulations governing
state-chartered banks. As a result, these non-bank competitors have some
advantages over us in providing certain products and services. Many of the
financial institutions with which we compete are larger and possess greater
financial resources, name recognition and market presence.
EMPLOYEES
As of December 31, 2003, the Bank had approximately 261 full-time
employees. Blue Valley, Blue Valley Building Corp., BVBC Capital Trust I, BVBC
Capital Trust II and Blue Valley Investment Corp. did not have any employees.
Blue Valley Insurances Services, Inc. had 2 full-time employees as of December
31, 2003. None of the employees of the Company's subsidiaries are subject to a
collective bargaining agreement. We consider the Company's subsidiaries'
relationship with their employees to be excellent.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For each of our directors and our executive officers, we have set forth
below their ages as of December 31, 2003, and their principal positions.
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Name Age Positions
- ---- --- ---------
Directors
Robert D. Regnier ................................. 55 President, Chief Executive Officer and Chairman of the
Board of Directors of Blue Valley; President, Chief
Executive Officer and Director of the Bank
Donald H. Alexander................................ 65 Director of Blue Valley and the Bank
Wayne A. Henry, Jr................................. 51 Director of Blue Valley
C. Ted McCarter.................................... 67 Director of Blue Valley and Chairman of the Board of
Directors of the Bank
Thomas A. McDonnell................................ 58 Director of Blue Valley
Additional Directors of the Bank
Harvey S. Bodker................................... 68 Director of the Bank
Suzanne E. Dotson.................................. 58 Director of the Bank
Charles H. Hunter.................................. 61 Director of the Bank
Executive Officers who are not Directors
Mark A. Fortino.................................... 37 Senior Vice President and Chief Financial Officer of
the Bank; Treasurer of Blue Valley
Ralph J. Schramp................................... 54 Senior Vice President - Commercial Lending and
Business Development for the Bank
Sheila Stokes...................................... 42 Senior Vice President - Retail Division of the Bank
REGULATION AND SUPERVISION
Blue Valley and its subsidiaries are extensively regulated under both
federal and state laws. Laws and regulations to which Blue Valley and the Bank
are subject govern, among other things, the scope of business, investments,
reserve levels, capital levels relative to operations, the nature and amount of
collateral for loans, the establishment of branches, mergers and consolidations
and the payment of dividends. These laws and regulations are intended primarily
to protect depositors, not stockholders. Any change in applicable laws or
regulations may have a material effect on Blue Valley's business and prospects,
and legislative and policy changes may affect Blue Valley's operations. Blue
Valley cannot predict the nature or the extent of the effects on its business
and earnings that fiscal or monetary policies, economic controls or new federal
or state legislation may have in the future.
The following references to statutes and regulations affecting Blue
Valley and the Bank are brief summaries only and do not purport to be complete
and are qualified in their entirety by reference to the statutes and
regulations.
APPLICABLE LEGISLATION
The enactment of legislation described below has significantly affected
the banking industry generally and will have an on-going effect on Blue Valley
and its subsidiaries.
GRAMM-LEACH-BLILEY ACT. The Gramm-Leach-Bliley Act was signed into law
on November 12, 1999. This major banking legislation expands the permissible
activities of bank holding companies such as Blue Valley by permitting them to
engage in activities, or affiliate with entities that engage in activities, that
are "financial in nature." Activities that the Act expressly deems to be
financial in nature include, among other things, securities and insurance
underwriting and agency, investment management and merchant banking. The Federal
Reserve and the Treasury Department, in cooperation with one another, determine
what additional activities are "financial in nature." With certain exceptions,
the Gramm-Leach-Bliley Act similarly expands the authorized activities of
subsidiaries of
9
national banks. The provisions of the Gramm-Leach-Bliley Act authorizing the
expanded powers became effective March 11, 2000.
Bank holding companies that intend to engage in activities that are
"financial in nature" must elect to become "financial holding companies."
Financial holding company status is only available to a bank holding company if
all of its affiliated depository institutions are "well capitalized" and "well
managed," based on applicable banking regulations, and have a Community
Reinvestment Act rating of at least "a satisfactory record of meeting community
credit needs." Financial holding companies and banks may continue to engage in
activities that are financial in nature only if they continue to satisfy the
well capitalized and well managed requirements. Bank holding companies that do
not elect to be financial holding companies or that do not qualify for financial
holding company status may engage only in non-banking activities deemed "closely
related to banking" prior to adoption of the Gramm-Leach-Bliley Act. In 2001,
Blue Valley elected to become a financial holding company.
The Act also calls for "functional regulation" of financial services
businesses in which functionally regulated subsidiaries of bank holding
companies will continue to be regulated by the regulator that ordinarily has
supervised their activities. As a result, state insurance regulators will
continue to oversee the activities of insurance companies and agencies, and the
Securities and Exchange Commission will continue to regulate the activities of
broker-dealers and investment advisers, even where the companies or agencies are
affiliated with a bank holding company. Federal Reserve authority to examine and
adopt rules regarding functionally regulated subsidiaries is limited.
The Gramm-Leach-Bliley Act imposed an "affirmative and continuing"
obligation on all financial service providers (not just banks and their
affiliates) to safeguard consumer privacy and requires federal and state
regulators, including the Federal Reserve and the FDIC, to establish standards
to implement this privacy obligation. With certain exceptions, the Act prohibits
banks from disclosing to non-affiliated parties any non-public personal
information about customers unless the bank has provided the customer with
certain information and the customer has had the opportunity to prohibit the
bank from sharing the information with non-affiliates. The new privacy
obligations became effective July 1, 2001.
The Gramm-Leach-Bliley Act has been and may continue to be the subject
of extensive rule making by federal banking regulators and others.
ECONOMIC GROWTH AND REGULATORY PAPERWORK REDUCTION ACT OF 1996. The
Economic Growth and Regulatory Paperwork Reduction Act of 1996 became law on
September 30, 1996. This Act streamlined the non-banking activities application
process for well-capitalized and well-managed bank holding companies by
permitting qualified bank holding companies to commence an approved non-banking
activity without prior notice to the Federal Reserve, although written notice is
required within 10 days after commencing the activity. Also, the Act reduced the
prior notice period to 12 days in the event of any non-banking acquisition or
share purchase, assuming the size of the acquisition does not exceed 10% of
risk-weighted assets of the acquiring bank holding company and the consideration
does not exceed 15% of a bank holding company's Tier 1 capital.
BANK HOLDING COMPANY REGULATION
Blue Valley is a registered bank holding company subject to periodic
examination by the Federal Reserve and required to file periodic reports of its
operations and such additional information as the Federal Reserve may require.
INVESTMENTS AND ACTIVITIES. A bank holding company must obtain approval
from the Federal Reserve before:
- Acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after
the acquisition, it would own or control more than 5% of the
shares of the bank or bank holding company (unless it already owns
or controls the majority of the shares);
- Acquiring all or substantially all of the assets of another bank
or bank holding company; or
10
- Merging or consolidating with another bank holding company.
The Federal Reserve will not approve any acquisition, merger or
consolidation that would have a substantially anticompetitive result unless the
anticompetitive effects of the proposed transaction are clearly outweighed by a
greater public interest in meeting the convenience and needs of the community to
be served. The Federal Reserve also considers capital adequacy and other
financial and managerial factors in reviewing acquisitions or mergers.
With certain exceptions, a bank holding company is also prohibited
from:
- Acquiring or retaining direct or indirect ownership or control of
more than 5% of the voting shares of any company that is not a
bank or bank holding company; and
- Engaging, directly or indirectly, in any business other than that
of banking, managing and controlling banks or furnishing services
to banks and their subsidiaries.
Bank holding companies may, however, engage in businesses found by the
Federal Reserve to be "financial in nature," as describe above. As a financial
holding company, Blue Valley is authorized to engage in the expanded activities
permitted under the Gramm-Leach-Bliley Act as long as it continues to qualify
for financial holding company status.
Finally, subject to certain exceptions, the Bank Holding Company Act
and the Change in Bank Control Act, and the Federal Reserve's implementing
regulations, require Federal Reserve approval prior to any acquisition of
"control" of a bank holding company, such as Blue Valley. In general, a person
or company is presumed to have acquired control if it acquires 10% of the
outstanding shares of a bank or bank holding company and is conclusively
determined to have acquired control if it acquires 25% or more of the
outstanding shares of a bank or bank holding company.
SOURCE OF STRENGTH. The Federal Reserve expects Blue Valley to act as a
source of financial strength and support for the Bank and to take measures to
preserve and protect the Bank in situations where additional investments in the
Bank may not otherwise be warranted. The Federal Reserve may require a bank
holding company to terminate any activity or relinquish control of a non-bank
subsidiary (other than a non-bank subsidiary of a bank) upon the Federal
Reserve's determination that the activity or control constitutes a serious risk
to the financial soundness or stability of any subsidiary depository institution
of the bank holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself of any
bank or non-bank subsidiary if the agency determines that divestiture may aid
the depository institution's financial condition. Blue Valley Building Corp.,
Blue Valley Insurance Services, Inc., BVBC Capital Trust I and BVBC Capital
Trust II are Blue Valley's only direct subsidiaries that are not banks.
CAPITAL REQUIREMENTS. The Federal Reserve uses capital adequacy
guidelines in its examination and regulation of bank holding companies and
banks. If the capital falls below minimum guideline levels, a bank holding
company, among other things, may be denied approval to acquire or establish
additional banks or non-bank businesses. The Federal Reserve's capital
guidelines establish a risk-based requirement expressed as a percentage of total
risk-weighted assets and a leverage requirement expressed as a percentage of
total assets. The risk-based requirement consists of a minimum ratio of total
capital to total risk-weighted assets of 8%, of which at least one-half must be
Tier 1 capital (which consists principally of stockholders' equity). The
leverage requirement consists of a minimum ratio of Tier 1 capital to total
assets of 3%.
The risk-based and leverage standards presently used by the Federal
Reserve are minimum requirements, and higher capital levels may be required if
warranted by the particular circumstances or risk profiles of individual banking
organizations. Further, any banking organization experiencing or anticipating
significant growth would be expected to maintain capital ratios, including
tangible capital positions, which is Tier 1 capital less all intangible assets,
well above the minimum levels.
DIVIDENDS. The Federal Reserve has issued a policy statement concerning
the payment of cash dividends by bank holding companies. The policy statement
provides that a bank holding company experiencing earnings
11
weaknesses should not pay cash dividends exceeding its net income or which could
only be funded in ways that weakened the bank holding company's financial
health, such as by borrowing. Also, the Federal Reserve possesses enforcement
powers over bank holding companies and their non-bank subsidiaries to prevent or
remedy actions that represent unsafe or unsound practices or violations of
applicable statutes and regulations. Among these powers is the ability to
proscribe the payment of dividends by banks and bank holding companies.
BANK REGULATIONS
The Bank operates under a Kansas state bank charter and is subject to
regulation by the Kansas Banking Department and the Federal Reserve Bank. The
Kansas Banking Department and the Federal Reserve Bank regulate or monitor all
areas of the Bank's operations, including capital requirements, issuance of
stock, declaration of dividends, interest rates, deposits, record keeping,
establishment of branches, acquisitions, mergers, loans, investments, borrowing,
security devices and procedures and employee responsibility and conduct. The
Kansas Banking Department places limitations on activities of the Bank including
the issuance of capital notes or debentures and the holding of real estate and
personal property and requires the Bank to maintain a certain ratio of reserves
against deposits. The Kansas Banking Department requires the Bank to file a
report annually showing receipts and disbursements of the Bank, in addition to
any periodic report requested.
DEPOSIT INSURANCE. The FDIC, through its Bank Insurance Fund, insures
the Bank's deposit accounts to a maximum of $100,000 for each insured depositor.
The FDIC, through its Savings Association Insurance Fund, insures certain
deposit accounts acquired by the Bank in 1994 from a branch of a failed savings
institution. These deposit accounts are insured to a maximum of $100,000 for
each insured depositor. The FDIC bases deposit insurance premiums on the
perceived risk each bank presents to its deposit insurance fund. In addition,
all Bank Insurance Fund-insured and Savings Association Insurance Fund-insured
institutions currently pay an assessment based on insured deposits to service
debt issued by the Financing Corporation, a federal agency established to
finance the recapitalization of the former Federal Savings and Loan Insurance
Corporation. The FDIC may terminate the deposit insurance of any insured
depository institution if the FDIC determines, after a hearing, that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, order, or any condition imposed in writing by, or
written agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of insurance
if the institution has no tangible capital. Management is not aware of any
activity or condition that could result in termination of the deposit insurance
of the Bank.
CAPITAL REQUIREMENTS. The FDIC has established the following minimum
capital standards for state-chartered, insured non-member banks, such as the
Bank: (1) a leverage requirement consisting of a minimum ratio of Tier 1 capital
to total assets of 3%; and (2) a risk-based capital requirement consisting of a
minimum ratio of total capital to total risk-weighted assets of 8%, at least
one-half of which must be Tier 1 capital. These capital requirements are minimum
requirements, and higher capital levels may be required if warranted by the
particular circumstances or risk profiles of individual institutions.
The federal banking regulators also have broad power to take "prompt
corrective action" to resolve the problems of undercapitalized institutions. The
extent of the regulators' powers depends upon whether the institution in
question is "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Under the
prompt corrective action rules, an institution is:
- "Well-capitalized" if the institution has a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater, and a leverage ratio of 5% or greater,
and the institution is not subject to an order, written
agreement, capital directive, or prompt corrective action
directive to meet and maintain a specific capital level for
any capital measure;
- "Adequately capitalized" if the institution has a total
risk-based capital ratio of 8% or greater, a Tier 1 risk-based
capital ratio of 4% or greater, and a leverage ratio of 4% or
greater;
- "Undercapitalized" if the institution has a total risk-based
capital ratio that is less than 8%, a Tier 1 risk-based
capital ratio that is less than 4%, or a leverage ratio that
is less than 4%;
12
- "Significantly undercapitalized" if the institution has a
total risk-based capital ratio that is less than 6%, a Tier 1
risk-based capital ratio that is less than 3%, or a leverage
ratio that is less than 3%; and
- "Critically undercapitalized" if the institution has a ratio
of tangible equity to total assets that is equal to or less
than 2%.
The federal banking regulators must take prompt corrective action with
respect to capital deficient institutions. Depending upon the capital category
to which an institution is assigned, the regulators' corrective powers include:
- Placing limits on asset growth and restrictions on activities,
including the establishing of new branches;
- Requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired;
- Restricting transactions with affiliates;
- Restricting the interest rate the institution may pay on
deposits;
- Requiring that senior executive officers or directors be
dismissed;
- Requiring the institution to divest subsidiaries;
- Prohibiting the payment of principal or interest on
subordinated debt; and
- Appointing a receiver for the institution.
Companies controlling an undercapitalized institution are also required
to guarantee the subsidiary institution's compliance with the capital
restoration plan subject to an aggregate limitation of the lesser of 5% of the
institution's assets at the time it received notice that it was undercapitalized
or the amount of the capital deficiency when the institution first failed to
meet the plan. The Federal Deposit Insurance Act generally requires the
appointment of a conservator or receiver within 90 days after an institution
becomes critically undercapitalized.
As of December 31, 2003, the Bank had capital in excess of the
requirements for a "well-capitalized" institution.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT. The Bank, having
over $500 million in total assets, is subject to numerous reporting requirements
of Section 112 of the Federal Deposit Insurance Corporation Act (FDICIA 112).
The primary purpose of FDICIA 112 is to provide a framework for early risk
identification in financial management through independent audits, more
stringent reporting requirements and an effective system of internal controls.
INSIDER TRANSACTIONS. The Bank is subject to restrictions on extensions
of credit to executive officers, directors, principal stockholders or any
related interest of these persons. Extensions of credit must be made on
substantially the same terms, including interest rates and collateral as the
terms available for third parties and must not involve more than the normal risk
of repayment or present other unfavorable features. The Bank is also subject to
lending limits and restrictions on overdrafts to these persons.
COMMUNITY REINVESTMENT ACT REQUIREMENTS. The Community Reinvestment Act
(CRA) of 1977 requires that, in connection with examinations of financial
institutions within their jurisdiction, the federal banking regulators must
evaluate the record of the financial institutions in meeting the credit needs of
their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those banks. These factors are
also considered in evaluating mergers, acquisitions and applications to open a
branch or facility. In its most recent CRA examination dated June 10, 2002, the
Bank received a rating of "Satisfactory."
13
STATE BANK ACTIVITIES. With limited exceptions, FDIC-insured state
banks, like the Bank, may not make or retain equity investments of a rate or in
an amount that are not permissible for national banks and also may not engage as
a principal in any activity that is not permitted for a national bank or its
subsidiary, respectively, unless the bank meets, and continues to meet, its
minimum regulatory capital requirements and the FDIC determines that the
activity would not pose a significant risk to the deposit insurance fund of
which the bank is a member.
REGULATIONS GOVERNING EXTENSIONS OF CREDIT. The Bank is subject to
restrictions on extensions of credit to Blue Valley and on investments in Blue
Valley's securities and using those securities as collateral for loans. These
regulations and restrictions may limit Blue Valley's ability to obtain funds
from the Bank for its cash needs, including funds for acquisitions and for
payment of dividends, interest and operating expenses. Further, the Bank Holding
Company Act and Federal Reserve regulations prohibit a bank holding company and
its subsidiaries from engaging in various tie-in arrangements in connection with
extensions of credit, leases or sales of property or furnishing of services.
RESERVE REQUIREMENTS. The Federal Reserve requires all depository
institutions to maintain reserves against their transaction accounts. Reserves
of 3% must be maintained against net transaction accounts of $6.6 million to
$45.4 million plus 10% must be maintained against that portion of net
transaction accounts in excess $45.4 million (subject to adjustment by the
Federal Reserve). The balances maintained to meet the reserve requirements
imposed by the Federal Reserve may be used to satisfy liquidity requirements.
OTHER REGULATIONS
Interest and various other charges collected or contracted for by the
Bank are subject to state usury laws and other federal laws concerning interest
rates. The Bank's loan operations are also subject to federal laws applicable to
credit transactions. The federal Truth in Lending Act governs disclosures of
credit terms to consumer borrowers. The Home Mortgage Disclosure Act of 1975
requires financial institutions to provide information to enable the public and
public officials to determine whether a financial institution is fulfilling its
obligation to help meet the housing needs of the community it serves. The Equal
Credit Opportunity Act prohibits discrimination on the basis of race, creed or
other prohibited factors in extending credit. The Fair Credit Reporting Act of
1978 governs the use and provision of information to credit reporting agencies.
The Fair Debt Collection Act governs the manner in which consumer debts may be
collected by collection agencies. The various federal agencies charged with the
responsibility of implementing these federal laws have adopted various rules and
regulations. The deposit operations of the Bank are also subject to the Right to
Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds Transfer
Act, and Regulation E issued by the Federal Reserve to implement that Act, which
govern automatic deposits to and withdrawals from the use of ATMs and other
electronic banking services.
ITEM 2: PROPERTIES
The Company's principal office occupies 2.40 acres of ground on the
corner of 119th and Riley streets in Overland Park, Kansas. The construction of
the building was completed in 1994 and consists of 38,031 square feet. The
building and land are subject to third-party mortgage indebtedness in the
original principal amount of $2.5 million. As of December 31, 2003, the
outstanding principal amount of this indebtedness was $1.3 million.
In 2001, our Olathe, Kansas location was moved to a more suitable
property occupying 0.41 acres of ground on the corner of Santa Fe and Ridgeview
Streets. The building consists of 2,580 square feet on the main floor, plus
basement storage.
Our Shawnee, Kansas office currently occupies 425 square feet in a
grocery store located at Highway K-7 and 55th Street. The lease for this space
bears a primary term through December 2004. Our free-standing facility in
Shawnee, Kansas is also located at Highway K-7 and 55th Street and was completed
during the first quarter of 2001. The building consists of 4,000 square feet and
occupies 0.85 acres of land.
14
In January 2003, we purchased a 55,000 square foot building located on
the northwest corner of College Boulevard and Lowell in Overland Park, Kansas.
This building occupies 3.10 acres of ground and is leased to the Bank. The Bank
consolidated its mortgage operations and operates a small branch at this
facility.
Our current Leawood, Kansas banking center opened in 2002 and occupies
400 square feet in a grocery store located at 135th Street and Mission Road. The
lease for this space bears a primary term through June, 2005. Additionally, in
2001 we purchased undeveloped land on the corner of 135th Street and Mission
Road for the purposes of constructing a full-service banking center within a
two-story 20,000 square foot office building. We are nearing the completion of
the building and anticipate the banking center will open in the second quarter
of 2004.
In 1998, we purchased approximately 1.34 acres of undeveloped land on
the corners of K-68 and US 69 Highway in Louisburg, Kansas, just south of
Johnson County for potential future development as a full-service branch.
ITEM 3: LEGAL PROCEEDINGS
We are involved from time to time in routine litigation incidental to
our business. We are not a party to any pending litigation that is likely to
have a material adverse effect on our consolidated financial condition, results
of operations or cash flows.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET FOR COMMON STOCK
We are a reporting company under the Securities Exchange Act as a
result of a trust preferred securities offering we completed during July 2000.
Shares of our common stock have traded on the Over-The-Counter Bulletin Board
since July 2002 under the symbol "BVBC." As of February 29, 2004, there were
approximately 136 stockholders of record of our common stock. The following
table sets forth the high and low prices of the Company's common stock based on
close quotations provided by Yahoo.com. These prices reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
2003 2002
Fiscal Period High Low High Low
First Quarter $ 25.84 $ 20.53 $ n.a. $ n.a.
Second Quarter 27.83 22.42 n.a. n.a.
Third Quarter 29.82 26.34 26.66 16.82
Fourth Quarter 30.07 24.85 22.51 20.03
DIVIDENDS
During December 2003, our board of directors declared a cash dividend
on our common stock. A $0.15 per share dividend was paid on January 30, 2004, to
stockholders of record on December 31, 2003. During December 2002, our board of
directors declared a cash dividend of $0.10 per share of common stock and the
dividend was paid on January 15, 2003 to stockholders of record on December 31,
2002.
Because our consolidated net income consists largely of the net income
of the Bank, our ability to pay dividends on our common stock is subject to our
receipt of dividends from the Bank. The ability of the Bank to pay dividends to
us, and our ability to pay dividends to our stockholders, are regulated by
federal banking laws. In addition, if we elect to defer interest payments on our
outstanding junior subordinated debentures, we will be prohibited from paying
dividends on our common stock during such deferral.
Our board of directors intends to declare future dividends subject to
limitations imposed by regulatory capital guidelines in addition to
consideration of the Company's profitability and liquidity.
16
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents our consolidated financial data as of and
for the five years ended December 31, 2003, and should be read in conjunction
with the consolidated financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," each
of which is included elsewhere in this Form 10-K. The selected statements of
condition and statements of income data, insofar as they relate to the five
years in the five-year period ended December 31, 2003, have been derived from
our audited consolidated financial statements.
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SELECTED STATEMENT OF INCOME DATA
Interest income:
Loans, including fees .............................. $ 28,293 $ 26,857 $ 27,921 $ 26,733 $ 20,422
Federal funds sold and interest-bearing deposits ... 49 297 679 777 431
Securities ......................................... 2,070 3,405 4,541 3,607 2,755
------------ ------------ ------------ ------------ ------------
Total interest income ........................... 30,412 30,559 33,141 31,117 23,608
------------ ------------ ------------ ------------ ------------
Interest expense:
Interest-bearing demand deposits ................... 165 388 815 872 644
Savings and money market deposit accounts .......... 2,204 2,711 4,846 5,726 3,156
Other time deposits ................................ 6,935 7,759 9,775 7,555 6,032
Funds borrowed ..................................... 4,245 3,368 2,958 2,543 1,372
------------ ------------ ------------ ------------ ------------
Total interest expense .......................... 13,549 14,226 18,394 16,696 11,204
------------ ------------ ------------ ------------ ------------
Net interest income ............................. 16,863 16,333 14,747 14,421 12,404
Provision for loan losses ............................. 1,350 2,920 2,400 1,950 2,144
------------ ------------ ------------ ------------ ------------
Net interest income after provision for loan
losses ........................................ 15,513 13,413 12,347 12,471 10,260
------------ ------------ ------------ ------------ ------------
Non-interest income:
Loans held for sale fee income ..................... 19,866 16,690 6,931 1,154 1,623
NSF charges & service fees ......................... 1,283 1,026 836 655 553
Other service charges .............................. 924 821 796 963 659
Realized gain on available-for-sale securities ..... - 193 500 - 3
Other income ....................................... 463 281 203 284 186
------------ ------------ ------------ ------------ ------------
Total non-interest income ....................... 22,536 19,011 9,266 3,056 3,024
Non-interest expense:
Salaries and employee benefits ..................... 19,670 16,437 10,063 5,856 4,578
Occupancy .......................................... 3,137 2,101 1,574 1,124 894
FDIC and other insurance ........................... 174 161 140 177 113
General & administrative ........................... 6,304 5,417 3,933 3,136 3,095
------------ ------------ ------------ ------------ ------------
Total non-interest expense ...................... 29,285 24,116 15,710 10,293 8,680
------------ ------------ ------------ ------------ ------------
Income before income taxes ......................... 8,764 8,308 5,903 5,234 4,604
Income tax provision ............................ 3,130 2,912 1,960 1,757 1,521
------------ ------------ ------------ ------------ ------------
Net income ...................................... $ 5,634 $ 5,396 $ 3,943 $ 3,477 $ 3,083
============ ============ ============ ============ ============
PER SHARE DATA
Basic earnings ..................................... $ 2.51 $ 2.48 $ 1.82 $ 1.62 $ 1.45
Diluted earnings ................................... 2.43 2.40 1.77 1.59 1.42
Dividends .......................................... 0.15 0.10 - - -
Book value basic (at end of period) ................ 17.64 15.47 13.11 11.12 8.83
Weighted average common shares outstanding:
Basic .......................................... 2,244,930 2,178,803 2,165,030 2,141,523 2,131,372
Diluted ........................................ 2,320,840 2,252,929 2,222,166 2,191,305 2,166,008
Dividend payout ratio .............................. 5.98% 4.04% -% -% -%
17
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SELECTED FINANCIAL CONDITION DATA
(AT END OF PERIOD):
Total securities ...................................... $ 105,736 $ 61,364 $ 77,676 $ 78,503 $ 48,646
Total mortgage loans held for sale .................... 18,297 119,272 41,853 1,207 952
Total loans ........................................... 424,620 380,082 334,075 287,669 250,410
Total assets .......................................... 626,485 605,183 492,023 414,667 332,613
Total deposits ........................................ 470,495 423,787 394,245 338,221 268,145
Funds borrowed ........................................ 111,153 141,381 65,174 49,917 43,177
Total stockholders' equity ............................ 40,198 34,344 28,525 23,815 18,869
Trust assets under administration ..................... 90,389 44,245 41,571 35,268 19,436
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Net interest margin (1) ......................... 3.01% 3.35% 3.51% 4.35% 4.77%
Non-interest income to average assets ........... 3.62 3.55 2.02 0.84 1.06
Non-interest expense to average assets .......... 4.71 4.51 3.43 2.84 3.04
Net overhead ratio (2) .......................... 1.08 0.95 1.41 2.00 1.98
Efficiency ratio (3) ............................ 74.33 68.23 65.42 58.89 56.26
Return on average assets (4) .................... 0.91 1.01 0.86 0.96 1.08
Return on average equity (5) .................... 14.85 17.34 15.26 16.84 17.43
Asset Quality Ratios:
Non-performing loans to total loans ............. 0.72% 0.29% 0.92% 0.86% 0.21%
Allowance for possible loan losses to:
Total loans ................................... 1.66 1.82 1.58 1.54 1.52
Non-performing loans .......................... 230.79 618.29 171.96 179.47 710.80
Net charge-offs to average total loans .......... 0.30 0.36 0.51 0.49 0.32
Non-performing assets to total assets ........... 0.50 0.18 0.62 0.60 0.16
Balance Sheet Ratios:
Loans to deposits ............................... 90.25% 89.69% 84.74% 85.05% 93.39%
Average interest-earning assets to average
interest-bearing liabilities .................. 114.61 115.64 114.50 113.30 116.11
Capital Ratios:
Total equity to total assets .................... 6.42% 5.67% 5.80% 5.74% 5.67%
Total capital to risk-weighted assets ratio ..... 12.41 10.13 10.69 11.95 8.07
Tier 1 capital to risk-weighted assets ratio .... 10.04 8.82 8.87 9.51 6.82
Tier 1 capital to average assets ratio .......... 8.31 7.74 7.17 7.47 5.80
Average equity to average assets ratio .......... 6.10 5.82 5.64 5.70 6.20
- ---------------------
(1) Net interest income, on a full tax-equivalent basis, divided by average
interest-earning assets.
(2) Non-interest expense less non-interest income divided by average total
assets.
(3) Non-interest expense divided by the sum of net interest income plus
non-interest income.
(4) Net income divided by average total assets.
(5) Net income divided by average common equity.
18
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following presents management's discussion and analysis of our
financial condition and results of operations as of the dates and for the
periods indicated. You should read this discussion in conjunction with our
"Selected Consolidated Financial Data," our consolidated financial statements
and the accompanying notes, and the other financial data contained elsewhere in
this report.
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. The Company
intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and is including this statement for purposes of
those safe harbor provisions. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and expectations of
the Company, can generally be identified by use of the words "believe,"
"expect," "intend," "anticipate," "estimate," "project," or similar expressions.
The Company is unable to predict the actual results of its future plans or
strategies with certainty. Factors which could have a material adverse effect on
the operations and future prospects of the Company include, but are not limited
to, fluctuations in market rates of interest and loan and deposit pricing; a
deterioration of general economic conditions or the demand for housing in the
Company's market areas; a deterioration in the demand for mortgage financing;
legislative or regulatory changes; adverse developments in the Company's loan or
investment portfolio; any inability to obtain funding on favorable terms; the
loss of key personnel; significant increases in competition; and the possible
dilutive effect of potential acquisitions or expansions. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements.
CRITICAL ACCOUNTING POLICIES
Please refer to Note 1 of our consolidated financial statements where
we present a listing and discussion of our most significant accounting policies.
After a review of these policies, we determined that accounting for the
allowance for loan losses, income taxes, and stock-based compensation are deemed
critical accounting policies because of the valuation techniques used, and the
sensitivity of certain financial statement amounts to the methods, as well as
the assumptions and estimates, underlying these policies. Accounting for these
critical areas requires the most subjective and complex judgments that could be
subject to revision as new information becomes available.
As presented in Note 1 and Note 3 to the consolidated financial
statements, the allowance for loan losses represents management's estimate of
probable credit losses inherent in the loan portfolio as of the balance sheet
date. This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available. The
adequacy of the allowance is analyzed monthly based on internal loan reviews and
qualitative measurements of our loan portfolio. Management assesses the adequacy
of the allowance for loan losses based upon a number of factors including, among
others:
- analytical reviews of loan loss experience in relationship to
outstanding loans and commitments;
- unfunded loan commitments;
- problem and non-performing loans and other loans presenting
credit concerns;
- trends in loan growth, portfolio composition and quality;
- appraisals of the value of collateral; and
- management's judgment with respect to current economic
conditions and their impact on the existing loan portfolio.
The Bank computes its allowance by assigning specific reserves to
impaired loans, plus a general reserve based on loss factors applied to the rest
of the loan portfolio. The specific reserve on impaired loans is computed as the
amount of the loan in excess of the present value of the estimated future cash
flows discounted at the loan's effective interest rate, or based on the loan's
observable market value or the fair value of the collateral if the loan is
19
collateral dependent. The general reserve loss factors are determined based on
such items as management's evaluation of risk in the portfolio, local economic
conditions, and historical loss experience. To further assist in confirming the
results of the above-described allowance computation, during 1999, the Bank
refined its risk grading system by developing associated reserve factors for
each risk grade.
The income tax amounts in Note 7 to the consolidated financial
statements reflect the current period income tax expense for all periods
presented, as well as future tax liabilities and benefits associated with
differences in timing of expenses and income recognition for book and tax
accounting purposes. Our current tax liability and expense amounts are
determined using estimates and these estimates are subject to review and
possible revision by taxing authorities.
We discuss our accounting for stock-based compensation in greater
detail in Note 1 to our consolidated financial statements. Included in Note 1 is
the effect on our net income in the event we change our accounting of stock
options to the guidance presented by Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" from our current policy, which
follows Accounting Principles Board Opinion No. 25.
OVERVIEW
Net income for 2003 was $5.6 million, a $238,000, or 4.41% increase
over the $5.4 million earned in 2002. The principal contributors to our increase
in net income during 2003 were increases in net interest and non-interest
income. Diluted earnings per share increased 1.25% to $2.43 for the year ended
December 31, 2003 from $2.40 in the previous year. The Company's returns on
average assets and average stockholders' equity for 2003 were 0.91% and 14.85%,
compared to 1.01% and 17.34%, respectively, for 2002.
Net interest income for 2003 was $16.9 million compared to $16.3
million earned during 2002. The increase of $530,000 or 3.24% was primarily the
result of an increase in earning assets.
Non-interest income increased 18.54% to $22.5 million in 2003 from
$19.0 million in 2002. Non-interest income to average assets increased to 3.62%
in 2003 from 3.55% in 2002. The expansion of the Company's mortgage capabilities
coupled with continued declines in market interest rates resulted in a
significant increase in the number of residential mortgage loans originated and
sold in 2003 compared to 2002. This resulted in higher origination fees during
2003 than during 2002. However, increases in market rates, which occurred during
the second half of 2003, resulted in lower loans held for sale fee income.
Future market interest rate fluctuations and their resultant impact on loans
held for sale fee income are difficult to project or quantify; however, it is
likely that a future rise in interest rates would have a detrimental impact on
mortgage loan refinancing and lower loans held for sale fee income.
Total assets for the Company at December 31, 2003, were $626.5 million,
an increase of $21.3 million, or 3.51%, from $605.2 million at December 31,
2002. Deposits and stockholders' equity at December 31, 2003 were $470.5 million
and $40.2 million, compared with $423.8 million and $34.3 million at December
31, 2002, increases of $46.7 million, or 11.02%, and $5.9 million, or 17.04%,
respectively.
Loans at December 31, 2003 totaled $424.6 million, an increase of $44.5
million, or 11.71%, compared to December 31, 2002. The loan to deposit ratio at
December 31, 2003 was 90.25% compared to 89.69% at December 31, 2002. The
increase in the loan to deposit ratio was due to loan growth, which, on a
relative basis, slightly outpaced deposit growth. Our funding philosophy for
loans not held for sale has been to primarily increase deposits from retail and
commercial deposit sources and secondarily use other borrowing sources as
necessary to fund loans within the limits of the Bank's capital base.
Our low level of non-performing assets reflects the Bank's conservative
underwriting policies and aggressive management of impaired loans and has
resulted in low levels of nonaccrual loans. Over the five years ended December
31, 2003, our non-performing loans to total loans ratio has averaged 0.69%. As
of December 31, 2003, our ratio of non-performing loans to total loans was
0.72%, which was slightly above the historical average. Our non-performing
credit relationships are regularly reviewed and closely monitored. Our
philosophy has been to value non-performing loans at their estimated collectible
value and to aggressively manage these situations. Generally, the Bank maintains
its allowance for loan losses in excess of its non-performing loans. Over the
five years ended December 31, 2003, our ratio of allowance for loan losses to
non-performing loans has exceeded
20
170.00%. As of December 31, 2003, our ratio of allowance for loan losses to
non-performing loans was 230.79%, compared to 618.29% at December 31, 2002.
The net charge-off ratio has averaged 0.40% for the five years ended
December 31, 2003. Our net charge-off ratio for the year ended December 31, 2003
was 0.30%, which was significantly below our historical average. The Bank
continues to aggressively manage defaults in the loan portfolio in a softer
economic environment. Management intends to vigorously pursue collection of all
charged-off leases and loans.
NET INTEREST INCOME
A primary component of our net income is our net interest income. Net
interest income is determined by the spread between the fully tax equivalent
(FTE) yields we earn on our interest-earning assets and the rates we pay on our
interest-bearing liabilities, as well as the relative amounts of such assets and
liabilities. FTE net interest margin is determined by dividing FTE net interest
income by average interest-earning assets.
Years ended December 31, 2003 and 2002. FTE net interest income for
2003 increased to $17.2 million from $16.7 million in 2002, a $487,000, or
2.92%, increase.
FTE interest income for 2003 was $30.7 million, a decrease of $190,000,
or 0.62%, from $30.9 million in 2002, primarily as a result of continued asset
repricing in the current low interest rate environment. The yield on average
interest-earning assets fell to 5.38%, as compared to 6.21% in 2002, a decline
of 83 basis points. Average interest earning assets increased $73.3 million, or
14.73%, during 2003. Due to the increase in earning asset volume, loan interest
and fee income increased to $28.3 million in 2003 from $26.9 million in 2002, or
5.34%. Interest income on investment securities decreased by $1.4 million, or
36.77%, in 2003 compared to the prior year. The decline in market interest rates
caused many of the securities in our portfolio to be called. Generally, the
resultant return in principal was reinvested at lower yields; consequently, the
overall impact on the portfolio has been a decline in the yield in 2003 compared
to the prior year. The effect of the increase in earning assets was generally
offset by the decrease in yield.
Interest expense for 2003 was $13.5 million, down $677,000, or 4.76%,
from $14.2 million in 2002. The decrease results from a decline in the yields
paid on our interest bearing liabilities, primarily interest-bearing deposits.
Although total average interest bearing liabilities increased $67.9 million or
15.76% during 2003 mostly due to the increases in money market and time deposits
and FHLB borrowings, the yield on our total average interest bearing liabilities
and deposits decreased to 2.72% and 2.50%, respectively, in 2003 compared to
3.31% and 3.08% in 2002, respectively, decreases of 59 and 58 basis points,
respectively.
Years ended December 31, 2002 and 2001. FTE net interest income for
2002 increased to $16.7 million from $15.1 million in 2001, a $1.6 million, or
10.27%, increase.
FTE interest income for 2002 was $30.9 million, a decrease of $2.6
million, or 7.80%, from $33.5 million in 2001, primarily as a result of
continued decreases in market interest rates during 2002. The yield on average
interest-earning assets fell to 6.21%, as compared to 7.79% in 2001, a decline
of 158 basis points. Average interest earning assets increased $67.4 million or
15.67% during 2002. Due to the decrease in yields, loan interest and fee income
decreased slightly to $26.9 million in 2002 from $27.9 million in 2001, or
3.81%. Interest income on investment securities decreased by $1.2 million, or
23.77% in 2002 compared to the prior year. The decline in market interest rates
caused many of the securities in our portfolio to be called. Some of the
resultant return in principal has been reinvested; however, the overall impact
on the portfolio has been a decline in the balance and yield in 2002 compared to
the prior year.
Interest expense for 2002 was $14.2 million, down $4.2 million, or
22.66%, from $18.4 million in 2001. The decrease results from a decline in the
yields paid on our interest bearing liabilities, primarily interest-bearing
deposits. The yield on our total average interest bearing liabilities and
deposits decreased to 3.31% and 3.08%, respectively, in 2002 compared to 4.89%
and 4.81% in 2001, respectively, decreases of 158 and 173 basis points,
respectively. Total interest bearing liabilities increased $54.6 million or
14.52% during 2002. This increase was attributable mainly to the increases in
savings, money market and time deposits and FHLB borrowings.
21
Average Balance Sheets. The following table sets forth for the periods
and as of the dates indicated, information regarding our average balances of
assets and liabilities as well as the dollar amounts of interest income from
interest-earning assets and interest expense on interest-bearing liabilities and
the resultant yields or costs. Ratio, yield and rate information are based on
average daily balances where available; otherwise, average monthly balances have
been used. Nonaccrual loans are included in the calculation of average balances
for loans for the periods indicated.
AVERAGE BALANCES, YIELDS AND RATES
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2003 2002
-------------------------------- ---------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- ---------- ------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Federal funds sold .................................. $ 5,500 $ 49 0.89% $ 18,171 $ 297 1.63%
Investment securities - taxable ..................... 55,259 1,489 2.69 51,273 2,741 5.34
Investment securities - non-taxable (1) ............. 12,885 881 6.84 14,526 1,007 6.93
Mortgage loans held for sale ........................ 86,808 4,460 5.14 63,866 3,937 6.17
Loans, net of unearned discount and fees ............ 410,593 23,833 5.80 349,879 22,920 6.55
---------- ---------- ---------- ----------
Total earning assets .......................... 571,045 30,712 5.38 497,715 30,902 6.21
---------- ---------- ---------- ----------
Cash and due from banks - non-interest bearing ...... 30,453 22,910
Allowance for possible loan losses .................. (7,592) (5,547)
Premises and equipment, net ......................... 16,388 9,380
Other assets ........................................ 12,129 10,546
---------- ----------
Total assets .................................. $ 622,423 $ 535,004
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits-interest bearing:
Interest-bearing demand accounts ................ $ 26,415 $ 165 0.63% $ 29,779 $ 388 1.30%
Savings and money market deposits ............... 150,503 2,204 1.46 146,132 2,711 1.86
Time deposits ................................... 195,599 6,935 3.55 176,762 7,759 4.39
---------- ---------- ---------- ----------
Total interest-bearing deposits ............... 372,517 9,304 2.50 352,673 10,858 3.08
---------- ---------- ---------- ----------
Short-term borrowings ............................... 44,230 451 1.02 21,722 266 1.22
Long-term debt ...................................... 81,499 3,794 4.66 55,993 3,102 5.54
---------- ---------- ---------- ----------
Total interest-bearing liabilities ............ 498,246 13,549 2.72 430,388 14,226 3.31
---------- ---------- ---------- ----------
Non-interest bearing deposits ....................... 81,269 69,550 53,324
Other liabilities .................................. 4,959 3,952
Stockholders' equity .............................. 37,949 31,114
---------- ----------
Total liabilities and stockholders' equity .... $ 622,423 $ 535,004
========== ==========
Net interest income/spread ........................ $ 17,163 2.66% $ 16,676 2.90%
========== ==== ========== ====
Net interest margin................................ 3.01% 3.35%
==== ====
YEAR ENDED DECEMBER 31,
------------------------------------------
2001
------------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST RATE
------------ ------------ -------
(DOLLARS IN THOUSANDS)
ASSETS
Federal funds sold .................................. $ 15,269 $ 679 4.45%
Investment securities - taxable ..................... 59,010 3,811 6.46
Investment securities - non-taxable (1) ............. 15,782 1,105 7.00
Mortgage loans held for sale ........................ 29,505 1,752 5.94
Loans, net of unearned discount and fees ............ 310,727 26,169 8.42
------------ ------------
Total earning assets .......................... 430,293 33,516 7.79
------------ ------------
Cash and due from banks - non-interest bearing ...... 16,224
Allowance for possible loan losses .................. (4,809)
Premises and equipment, net ......................... 7,435
Other assets ........................................ 9,133
------------
Total assets .................................. $ 458,276
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits-interest bearing:
Interest-bearing demand accounts ................ $ 31,441 $ 815 2.59%
Savings and money market deposits ............... 131,492 4,846 3.69
Time deposits ................................... 158,078 9,775 6.18
------------ ------------
Total interest-bearing deposits ............... 321,011 15,436 4.81
------------ ------------
Short-term borrowings ............................... 21,862 667 3.05
Long-term debt ...................................... 32,937 2,291 6.96
------------ ------------
Total interest-bearing liabilities ............ 375,810 18,394 4.89
------------ ------------
Non-interest bearing deposits ....................... 53,324
Other liabilities .................................. 3,295
Stockholders' equity .............................. 25,847
------------
Total liabilities and stockholders' equity .... $ 458,276
============
Net interest income/spread ........................ $ 15,122 2.88%
============ ====
Net interest margin................................ 3.51%
====
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%. For
the three years ended December 31, 2003, 2002 and 2001, the tax equivalency
adjustment amounted to $300,000, $343,000, and 186,000, respectively
22
Analysis of Changes in Net Interest Income Due to Changes in Interest
Rates and Volumes. The following table presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the increase
or decrease related to changes in balances and changes in interest rates. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to:
- changes in volume, reflecting changes in volume multiplied by
the current period rate; and
- changes in rate, reflecting changes in rate multiplied by the
prior period volume.
CHANGES IN INTEREST INCOME AND EXPENSE VOLUME AND RATE
VARIANCES
YEAR ENDED DECEMBER 31,
2003 COMPARED TO 2002 2002 COMPARED TO 2001
CHANGE CHANGE CHANGE CHANGE
DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL
RATE VOLUME CHANGE RATE VOLUME CHANGE
------------ ------------ ------------ ------------ ------------ ------------
Federal funds sold $ (135) $ (113) $ (248) $ (429) $ 47 $ (382)
Investment securities -
taxable (1,359) 107 (1,252) (657) (414) (1,071)
Investment securities -
non-taxable (1) (14) (112) (126) (11) (87) (98)
Mortgage loans held for
sale (656) 1,179 523 67 2,118 2,185
Loans, net of unearned
discount (2,611) 3,524 913 (5,813) 2,565 (3,248)
------------ ------------ ------------ ------------ ------------ ------------
Total interest income (4,775) 4,585 (190) (6,843) 4,229 (2,614)
------------ ------------ ------------ ------------ ------------ ------------
Interest-bearing demand
accounts (202) (21) (223) (405) (22) (427)
Savings and money market
deposits (571) 64 (507) (2,407) 272 (2,135)
Time deposits (1,492) 668 (824) (2,836) 820 (2,016)
Short-term borrowings (45) 230 185 (399) (2) (401)
Long-term debt (495) 1,187 692 (466) 1,277 811
------------ ------------ ------------ ------------ ------------ ------------
Total interest expense (2,805) 2,128 (677) (6,513) 2,345 (4,168)
------------ ------------ ------------ ------------ ------------ ------------
Net interest income $ (1,970) $ 2,457 $ 487 $ (330) $ 1,884 $ 1,554
============ ============ ============ ============ ============ ============
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%.
PROVISION FOR LOAN LOSSES
We make provisions for loan losses in amounts management deems
necessary to maintain the allowance for loan losses at an appropriate level.
During the year ended December 31, 2003, we provided $1.4 million for loan
losses, as compared to $2.9 million for the year ended December 31, 2002, a
decrease of $1.6 million, or 53.77%. During 2003, our provision for loan losses
decreased due to an overall improvement in credit quality, as indicated by the
decline in total impaired loans to $10.2 million at December 31, 2003 from $11.7
million at December 31, 2002. The provision for 2002 had been increased due to
risks associated with one commercial credit. The loan portfolio increased to
$424.6 million in 2003 from $380.1 million in 2002, or 11.71%. The provision for
loan losses increased to $2.9 million in 2002 from $2.4 million in 2001, or
21.67%, while the loan portfolio increased to $380.1 million in 2002 from $334.1
million in 2001, or 13.77%.
The allowance for loan losses as a percentage of loans was 1.66% at
December 31, 2003, as compared to 1.82% in 2002 and 1.58% in 2001. The decrease
in this percentage from December 31, 2002 was primarily due to the increased
provision for 2002 discussed in the previous paragraph. Therefore, with the
exception of the increase in the 2002 allowance, the December 31, 2003
percentage is consistent with previous years as displayed in the
23
Summary of Loan Loss Experience and Related Information table on page 29. We
increased the allowance for loan losses in 2003, 2002 and 2001 based upon an
analysis of several factors, including the impairment and general reserve factor
analysis referred to in our Critical Accounting Policies and changes in the loan
mix. Total impaired loans decreased to $10.2 million with a related reserve of
$1.5 million at December 31, 2003 compared to $11.7 million and $1.8 million,
respectively, at December 31, 2002. General reserve factors, which are applied
to categories of unimpaired loans, resulted in a decrease in the overall general
reserve percentage to 1.34% at December 31, 2003 compared to 1.38% at December
31, 2002. The overall general reserve percentage at December 31, 2001 was 1.17%.
The decrease in the general reserve factor in 2003 is attributable to changes in
the loan portfolio mix, with larger relative amounts of loans in loan categories
bearing lower general reserve factors.
Due to the factors discussed above and the growth in our commercial
real estate and construction loan portfolios, the overall result was a higher
allowance for loan losses at December 31, 2003 compared with December 31, 2002.
The allowance for loan losses represents our best estimate of probable losses
that have been incurred as of the respective balance sheet dates.
NON-INTEREST INCOME
The following table describes the items of our non-interest income for
the periods indicated:
NON-INTEREST INCOME
YEAR ENDED DECEMBER 31
--------------------------------
2003 2002 2001
---------- ---------- ----------
(IN THOUSANDS)
Loans held for sale fee income ........................ $ 19,866 $ 16,690 $ 6,931
NSF charges and service fees .......................... 1,283 1,026 836
Other service charges ................................. 924 821 796
Net realized gains on sales of investment securities .. - 193 500
Other income .......................................... 463 281 203
---------- ---------- ----------
Total non-interest income ....................... $ 22,536 $ 19,011 $ 9,266
========== ========== ==========
Non-interest income increased to $22.5 million, or 18.54%, during 2003,
from $19.0 million during 2002. This increase is attributable to increases in
loans held for sale fee income of $3.2 million and NSF charges and services fees
of $257,000. We experienced growth in our loans held for sale income due to the
expansion of our national and local mortgage capabilities concurrent with
favorable conditions for residential mortgage origination and refinancing.
Mortgage originations and refinancing continued to flourish due to the low
interest rate environment which began in 2001 and persisted through 2003. The
volume of closed residential mortgages grew to over $1.5 billion in 2003 from
$1.3 billion and $640 million in 2002 and 2001, respectively. However, mortgage
rates increased modestly during the second half of 2003, and the volume of
mortgage refinancing activity declined dramatically. Other service charge
income, which includes trust services income, investment brokerage income,
merchant bankcard processing and debit card processing income, increased by
$103,000 or 12.54% from 2002 to 2003. In 2002, we took advantage of
opportunities to mitigate the risk of long-term rate volatility in our
available-for-sale investment portfolio by selling some of our longer-term
bonds. Due to the yield environment when we sold the securities, we realized
$193,000 of net gains on the sales in 2002. Sustainability of the level of our
loans held for sale fee income is primarily dependent upon the persistence of
the low interest rate environment, and secondarily dependent on our ability to
develop new products and alternative delivery channels. Future growth of other
non-interest income categories is dependent upon new product development, and
growth in our customer base.
Non-interest income increased to $19.0 million, or 105.17%, during
2002, from $9.3 million during 2001. This increase is attributable to increases
in loans held for sale fee income of $9.8 million and NSF charges and services
fees of $190,000. We experienced significant growth in our loans held for sale
income due to the expansion of our national and local mortgage capabilities
concurrent with favorable conditions for residential mortgage origination and
refinancing. Mortgage originations and refinancing continued to flourish due to
the low interest rate environment which began in 2001 and persisted through
2002. Other service charge income, which includes trust
24
services income, investment brokerage income, merchant bankcard processing and
debit card processing income, remained relatively unchanged from 2001. In 2002
and 2001, we took advantage of opportunities to mitigate the risk of long-term
rate volatility in our available-for-sale investment portfolio by selling some
of our longer-term bonds. Due to the yield environment when we sold the
securities, we realized $193,000 and $500,000 of net gains on the sales in 2002
and 2001, respectively.
NON-INTEREST EXPENSE
The following table describes the items of our non-interest expense for
the periods indicated.
NON-INTEREST EXPENSE
YEAR ENDED DECEMBER 31
------------------------------------
2003 2002 2001
---------- ---------- ----------
(IN THOUSANDS)
Salaries and employee benefits .... $ 19,670 $ 16,437 $ 10,063
Occupancy ......................... 3,137 2,101 1,574
FDIC and other insurance expense .. 174 161 140
General and administrative ........ 6,304 5,417 3,933
---------- ---------- ----------
Total non-interest expenses .. $ 29,285 $ 24,116 $ 15,710
========== ========== ==========
Non-interest expense increased to $29.3 million, or 21.43%, during
2003, as compared to $24.1 million in the prior year. This increase is primarily
attributable to increases in salaries and employee benefits and occupancy
expenses, consistent with the Company's growth. Our salaries and employee
benefits expense increased to $19.7 million in 2003, or 19.66%, from $16.4
million in 2002, mainly due to volume-related growth in incentive compensation
related to mortgage origination activity as well as additional staff to
facilitate our growth. We manage our staffing levels to accommodate the volume
of our business. During 2003, FTEs fluctuated from approximately 257 to 313, and
ended the year at approximately 263. The fluctuations in our staffing levels
were primarily attributable to fluctuations in the volume of mortgage
originations during the year. Occupancy expenses increased to $3.1 million, or
49.30% in 2003, from $2.1 million in 2002, primarily due to the addition of our
7900 College facility and higher telecommunication and depreciation expenses
related to our growth and expansion. General and administrative expenses
increased $887,000 to $6.3 million in 2003, compared to $5.4 million in 2002,
principally due to increased marketing, postage/courier, and loan processing
fees associated with the increased volume in the Company's mortgage origination
departments. Future increases in non-interest expense are dependent upon
continued growth of the Company, especially our mortgage origination business.
Non-interest expense increased to $24.1 million, or 53.51%, during
2002, as compared to $15.7 million in the prior year. This increase was
primarily attributable to increases in salaries and employee benefits and
occupancy expenses, consistent with the Company's growth. Our salaries and
employee benefits expense increased to $16.4 million in 2002, or 63.34%, from
$10.1 million in 2001, as we hired additional staff to facilitate our growth. We
had 262 full-time equivalent employees at December 31, 2002 compared to 217 at
December 31, 2001. Many areas of the Company added employees to manage growth.
Occupancy expenses increased to $2.1 million, or 33.48% in 2002, from $1.6
million in 2001, primarily due to increases in depreciation, rent, telephone
expenses, and repairs and maintenance as the Company expanded its infrastructure
to facilitate growth. General and administrative expenses increased $1.5 million
to $5.4 million in 2002, compared to $3.9 million in 2001, principally due to
increased marketing, postage/courier, and loan processing fees associated with
the increased volume in the Company's mortgage origination departments.
INCOME TAXES
Our income tax expense during 2003 was $3.1 million, compared to $2.9
million during 2002, and $2.0 million during 2001. These increases reflect our
higher earnings for the current and previous fiscal years. Our
25
consolidated effective income tax rates of 35.71%, 35.05% and 33.20% for the
three respective years ended December 31, 2003 varies from the statutory rate
principally due to the effects of state income taxes and interest income earned
on our municipal securities portfolio which is generally tax-exempt for federal
income tax purposes.
FINANCIAL CONDITION
Lending Activities. Our loan portfolio is a key source of income, and
since our inception, has been a principal component of our revenue growth. Our
loan portfolio reflects an emphasis on construction, commercial and commercial
real estate, residential real estate, personal lending and leasing. We emphasize
commercial lending to professionals, businesses and their owners. Commercial
loans and loans secured by commercial real estate accounted for 46.45% of our
total loans at December 31, 2003, 43.40% of our total loans at December 31,
2002, and 44.62% of our total loans at year end 2001. These loans increased at
an 18.41% compound annual rate during the three-year period ended December 31,
2003.
Loans were $424.6 million at December 31, 2003, an increase of $44.5
million, or 11.71%, compared to December 31, 2002. Loans at December 31, 2002
were $380.1 million, an increase of $46.0 million, or 13.77%, compared to
December 31, 2001. Increases in deposits and Federal Home Loan Bank borrowings
facilitated our loan growth during 2003. The loan to deposit ratio increased to
90.25%, compared to 89.69% at December 31, 2002, and 84.74% at December 31,
2001.
We experienced increases in most loan categories during 2003. The
growth of our commercial, commercial real estate and residential real estate
portfolios is a result of the economic growth and development of our market
area, coupled with the efforts and experience of our lending staff. The Company
targets consumer lending lines of business in an effort to more broadly
diversify our risk across multiple lines of business. Historically, a
significant portion of the growth in our personal lending lines was attributable
to growth in our indirect automobile loan portfolio. In 2003, additional sales
officers cultivated additional dealer relationships as well as additional
business from existing dealers and our indirect loan portfolio grew by $7.9
million or 64.67%. The growth in 2003 reversed a two-year decline which started
in 2001 when we encountered significant competition from national finance
companies offering below market rate financing incentives. We also encountered a
considerable number of early pay-offs within other categories of our consumer
loan portfolio due to customer refinancing, resulting in an overall net increase
of $2.9 million in the consumer loan portfolio.
The following table sets forth the composition of our loan portfolio by
loan type as of the dates indicated. The amounts in the following table are
shown net of discounts and other deductions.
AS OF DECEMBER 31,
-----------------------------------------------------------------
2003 2002 2001
-------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
Commercial ................ $ 109,818 25.86% $ 93,658 24.64% $ 85,311 25.54%
Commercial real estate .... 87,438 20.59 71,295 18.76 63,756 19.08
Construction .............. 123,445 29.08 127,071 33.43 93,656 28.03
Leases .................... 22,175 5.22 22,600 5.95 24,221 7.25
Residential real estate ... 27,017 6.37 21,581 5.68 24,460 7.32
Consumer .................. 29,701 6.99 26,750 7.04 29,895 8.96
Home equity ............... 25,026 5.89 17,127 4.50 12,776 3.82
---------- ------ --------- ------ --------- ------
Total loans and
leases ............... 424,620 100.00% 380,082 100.00% 334,075 100.00%
====== ====== ======
Less allowance for
loan losses ............. 7,051 6,914 5,267
---------- --------- ---------
Loans receivable, net ..... $ 417,569 $ 373,168 $ 328,808
========== ========= =========
AS OF DECEMBER 31,
------------------------------------------
2000 1999
-------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- --------- -------
(DOLLARS IN THOUSANDS)
Commercial ................ $ 76,556 26.61% $ 64,552 25.78%
Commercial real estate .... 42,267 14.69 26,617 10.63
Construction .............. 59,733 20.76 41,007 16.38
Leases .................... 25,302 8.81 30,416 12.14
Residential real estate ... 37,290 12.96 33,251 13.28
Consumer .................. 35,864 12.47 44,747 17.87
Home equity ............... 10,657 3.70 9,820 3.92
---------- ------ --------- ------
Total loans and
leases ............... 287,669 100.00% 250,410 100.00%
====== ======
Less allowance for
loan losses ............. 4,440 3,817
---------- ---------
Loans receivable, net ..... $ 283,229 $ 246,593
========== =========
Collateral and Concentration. At December 31, 2003, 2002 and 2001,
substantially all of our loans were collateralized with real estate, inventory,
accounts receivable and/or other assets or were guaranteed by the Small Business
Administration. Loans to individuals and businesses in the construction industry
totaled $123.4 million, or 29.08%, of total loans, as of December 31, 2003. The
Bank does not have any other concentrations of loans to individuals or
businesses involved in a single industry totaling 5% of total loans. The Bank's
lending limit under
26
federal law to any one borrower was $14.2 million at December 31, 2003. The
Bank's largest single borrower, net of participations, at December 31, 2003 had
outstanding loans of $12.8 million.
The following table presents the aggregate maturities of loans in each
major category of our loan portfolio as of December 31, 2003, excluding the
allowance for loan and valuation losses. Additionally, the table presents the
dollar amount of all loans due more than one year after December 31, 2003 which
have predetermined interest rates (fixed) or adjustable interest rates
(variable). Actual maturities may differ from the contractual maturities shown
below as a result of renewals and prepayments or the timing of loan sales.
MATURITIES AND SENSITIVITIES OF LOANS TO
CHANGES IN INTEREST RATES
AS OF DECEMBER 31, 2003
---------------------------------------------------------------------------
MORE THAN ONE YEAR
-----------------------
LESS THAN ONE TO OVER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL FIXED VARIABLE
---------- ---------- --------- ---------- ---------- ----------
(IN THOUSANDS)
Commercial Real Estate ..... $ 13,506 $ 60,208 $ 13,724 $ 87,438 $ 32,281 $ 41,651
Commercial ................. 53,083 49,458 7,277 109,818 14,637 42,098
Construction ............... 97,179 23,347 2,917 123,445 4,330 21,934
NON-PERFORMING ASSETS
Non-performing assets consist primarily of loans past due 90 days or
more, nonaccrual loans and foreclosed real estate. The following table sets
forth our non-performing assets as of the dates indicated:
AS OF DECEMBER 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Real estate loans:
Past due 90 days or more ........................ $ 337 $ 54 $ - $ 206 $ -
Nonaccrual ...................................... 1,991 582 824 499 -
Installment loans:
Past due 90 days or more ........................ 4 - 33 - -
Nonaccrual ...................................... - - 13 37 87
Credit cards and related plans:
Past due 90 days or more ........................ 39 23 - - -
Nonaccrual ...................................... - - - - -
Commercial and all other loans:
Past due 90 days or more ........................ 117 - 76 24 50
Nonaccrual ...................................... 318 233 752 1,326 375
Lease financing receivables:
Past due 90 days or more ........................ - 3 - - -
Nonaccrual ...................................... 249 223 1,365 382 25
Debt securities and other assets (excluding
other real estate owned and other repossessed
assets):
Past due 90 days or more ........................ - - - - -
Nonaccrual ...................................... - - - - -
---------- ---------- ---------- ---------- ----------
Total non-performing loans ..................... 3,055 1,118 3,063 2,474 537
---------- ---------- ---------- ---------- ----------
Foreclosed assets held for sale ....................... 416 614 49 334 186
---------- ---------- ---------- ---------- ----------
Total non-performing assets .................... $ 3,471 $ 1,732 $ 3,112 $ 2,808 $ 723
========== ========== ========== ========== ==========
Total non-performing loans to total loans ............. 0.72% 0.29% 0.92% 0.86% 0.21%
Total non-performing loans to total assets ............ 0.50 0.18 0.62 0.60 0.16
Allowance for loan losses to non-performing loans ..... 230.79 618.29 171.96 179.47 710.80
Non-performing assets to loans and foreclosed
assets held for sale ................................. 0.82 0.46 0.93 0.97 0.29
27
NON-PERFORMING ASSETS
Impaired Loans. A loan is considered impaired when it is probable that
we will not receive all amounts due according to the contractual terms of the
loan. This includes loans that are delinquent 90 days or more, nonaccrual loans,
and certain other loans identified by management. Accrual of interest is
discontinued, and interest accrued and unpaid is removed, at the time the loans
are delinquent 90 days or when management believes that full collection of
principal and interest under the original loan contract is unlikely to occur.
Interest is recognized for nonaccrual loans only upon receipt, and only after
all principal amounts are current according to the terms of the contract.
Impaired loans totaled $10.2 million at December 31, 2003, $11.7
million at December 31, 2002, and $8.4 million at December 31, 2001, with
related allowances for loan losses of $1.5 million, $1.8 million, and $1.5
million, respectively.
Total interest income of $736,000, $699,000 and $923,000 was recognized
on average impaired loans of $11.7 million, $9.6 million and $6.6 million for
2003, 2002 and 2001, respectively. Included in this total is cash basis interest
income of $67,000, $46,000 and $202,000 recognized on nonaccrual impaired loans
during 2003, 2002 and 2001, respectively.
Allowance For Loan Losses. The allowance for loan losses is increased
by provisions charged to expense and reduced by loans charged off, net of
recoveries. The adequacy of the allowance is analyzed monthly based on internal
loan reviews and quality measurements of our loan portfolio. The Bank computes
its allowance by assigning specific reserves to impaired loans, and then applies
a general reserve based on a loss factor applied to the rest of the loan
portfolio. The loss factor is determined based on such items as management's
evaluation of risk in the portfolio, local economic conditions, and historical
loss experience. Specific allowances are accrued on specific loans evaluated for
impairment for which the basis of each loan, including accrued interest, exceeds
the discounted amount of expected future collections of interest and principal
or, alternatively, the fair value of the loan collateral.
The following table sets forth information regarding changes in our
allowance for loan and valuation losses for the periods indicated.
28
SUMMARY OF LOAN LOSS EXPERIENCE
AND RELATED INFORMATION
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period ......................... $ 6,914 $ 5,267 $ 4,440 $ 3,817 $ 2,341
Loans charged-off:
Commercial real estate ........................... 395 323 -- -- --
Residential real estate .......................... -- -- 5 -- --
Commercial ....................................... 802 323 1,015 343 567
Personal ......................................... 68 66 80 153 47
Home equity ...................................... 10 -- -- -- --
Construction ..................................... -- -- -- -- --
Leases ........................................... 279 870 836 1,034 158
-------- -------- -------- -------- --------
Total loans charged-off ..................... 1,554 1,582 1,936 1,530 772
Recoveries:
Commercial real estate ........................... 10 1 -- -- --
Residential real estate .......................... -- -- 5 -- --
Commercial ....................................... 77 123 119 104 90
Personal ......................................... 35 23 41 46 2
Home equity ...................................... -- -- -- -- --
Construction ..................................... -- -- -- -- --
Leases ........................................... 219 162 198 53 12
-------- -------- -------- -------- --------
Total recoveries ....................................... 341 309 363 203 104
-------- -------- -------- -------- --------
Net loans charged-off .................................. 1,213 1,273 1,573 1,327 668
Provision for loan losses .............................. 1,350 2,920 2,400 1,950 2,144
-------- -------- -------- -------- --------
Balance at end of period ............................... $ 7,051 $ 6,914 $ 5,267 $ 4,440 $ 3,817
======== ======== ======== ======== ========
Loans outstanding: .....................................
Average ..................................... $410,593 $349,879 $310,727 $268,227 $206,310
End of period ............................... 424,620 380,082 334,075 287,669 250,410
Ratio of allowance for loan losses to loans outstanding:
Average ..................................... 1.72% 1.98% 1.70% 1.66% 1.85%
End of period ............................... 1.66 1.82 1.58 1.54 1.52
Ratio of net charge-offs to:
Average loans ............................... 0.30 0.36 0.51 0.49 0.32
End of period loans ......................... 0.29 0.33 0.47 0.46 0.27
The following table shows our allocation of the allowance for loan
losses by specific category at the end of each of the periods shown. Management
attempts to allocate specific portions of the allowance for loan losses based on
specifically identifiable problem loans. However, the allocation of the
allowance to each category is not necessarily indicative of future losses and
does not restrict the use of the allowance to absorb losses in any category.
29
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
As of December 31,
-----------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-----------------------------------------------------------------------------------------
% of Total % of Total % of Total % of Total % of Total
Amount Allowance Amount Allowance Amount Allowance Amount Allowance Amount Allowance
-----------------------------------------------------------------------------------------
Commercial $2,899 41.12% $3,012 43.56% $1,181 22.42% $1,687 38.00% $1,206 31.60%
Commercial real estate 1,161 16.47 1,008 14.58 888 16.86 485 10.92 268 7.02
Construction 1,581 22.42 1,405 20.32 1,070 20.32 672 15.14 454 11.89
Leases 690 9.78 813 11.76 1,440 27.34 526 11.84 559 14.65
Residential real estate 273 3.87 293 4.24 400 7.59 399 8.99 364 9.53
Consumer 288 4.09 256 3.70 210 3.99 547 12.32 843 22.09
Home equity 159 2.25 127 1.84 78 1.48 124 2.79 123 3.22
--------------- --------------- --------------- -------------- ---------------
Total $7,051 100.00% $6,914 100.00% $5,267 100.00% $4,440 100.00% $3,817 100.00%
=============== =============== =============== ============== ===============
Investment securities. The primary objectives of our investment
portfolio are to secure the safety of principal, to provide adequate liquidity
and to provide securities for use in pledging for public funds or repurchase
agreements. Income is a secondary consideration. As a result, we generally do
not invest in mortgage-backed securities and other higher yielding investments.
Total investment securities increased by $44.4 million or 72.31% during
2003, as we reinvested significant liquidity generated by the reduction in our
loans held for sale balance during the fourth quarter of the year.
As of December 31, 2003, all of the securities in our investment
portfolio were classified as available for sale in order to provide us with an
additional source of liquidity when necessary, and as pledging requirements will
permit.
The following table presents the composition of our available for sale
investment portfolio by major category at the dates indicated.
INVESTMENT SECURITIES PORTFOLIO COMPOSITION
AT DECEMBER 31,
------------------------------
2003 2002 2001
-------- -------- --------
(IN THOUSANDS)
U.S. government agency securities..... $ 93,790 $ 47,579 $ 62,050
State and municipal obligations ...... 11,452 13,785 15,626
Equity and other ..................... 494 - -
-------- -------- --------
Total ..................... $105,736 $ 61,364 $ 77,676
======== ======== ========
The following table sets forth the maturities, carrying value or fair
value (in the case of investment securities available for sale), and average
yields for debt securities in our investment portfolio at December 31, 2003.
Yields are presented on a tax equivalent basis. Expected maturities will differ
from contractual maturities due to unscheduled repayments.
Under our investment policy, not more than 10% of the Bank's capital
may be invested in the tax-exempt general obligation bonds of any single issuer.
30
MATURITY OF INVESTMENTS IN DEBT SECURITIES AVAILABLE FOR SALE
MORE THAN TEN
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS YEARS
----------------- ----------------- ----------------- -----------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
U.S. government .......................
agency securities...................... $ - -% $ 93,790 2.49% $ - -% $ - -%
State and municipal
obligations....................... 922 4.63 7,253 4.76 3,276 4.83 - -
Mortgage-backed
securities........................ - - - - - - - -
Other securities....................... - - - - - - - -
-------- ------- -------- ------- -------- ------- -------- -------
Total available for sale.......... $ 922 4.63% $101,043 2.65% $ 3,276 4.83% $ - -%
======== ======= ======== ======= ======== ======= ======== =======
TOTAL INVESTMENT SECURITIES
---------------------------
CARRYING FAIR AVERAGE
VALUE VALUE YIELD
-------- -------- -------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
U.S. government .......................
agency securities...................... $ 93,790 $ 93,790 2.49%
State and municipal
obligations....................... 11,451 11,451 4.77
Mortgage-backed
securities........................ - - -
Other securities....................... - - -
-------- -------- -------
Total available for sale.......... $105,241 $105,241 2.74%
======== ======== =======
Deposits. Deposits grew by $46.7 million, or 11.02%, for the year ended
December 31, 2003, compared to 2002 year-end. The primary source of deposit
growth in 2003 was in money management and time deposit balances, which
increased by $29.2 million and $35.5 million, respectively. The increase in the
money management balances during 2003 was primarily attributable to a change in
the rate offered on our money management account to a tiered rate structure;
whereby larger customer deposit balances earned a higher rate of interest. The
increase in time deposit balances was primarily due to increases in brokered
time deposit balances. During 2003, the brokered time deposit market offered
attractive rates during a period when our liquidity requirements afforded us the
opportunity to take advantage of this low-cost funding source. We have
traditionally offered market-competitive rates on our time deposit products and
believe they provide us with a more attractive source of funds than other
alternatives such as Federal Home Loan Bank borrowings, due to our ability to
cross-sell additional services to these account holders. Our strategy to grow
our deposits includes opening additional branches in markets management deems
underserved, offering new products, and obtaining brokered deposits as allowed
by our board of directors.
The following table sets forth the balances for each major category of
our deposit accounts and the weighted-average interest rates paid for
interest-bearing deposits for the periods indicated:
DEPOSITS
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------- ------------------------------- -------------------------------
(DOLLARS IN THOUSANDS)
PERCENT WEIGHTED PERCENT WEIGHTED PERCENT WEIGHTED
OF AVERAGE OF AVERAGE OF AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
Demand .................... $ 74,717 15.88% --% $ 86,591 20.43% --% $ 74,229 18.83% --%
Savings ................... 7,740 1.64 0.62 6,037 1.42 1.39 5,050 1.28 2.54
Interest-bearing demand ... 26,260 5.58 0.63 30,747 7.26 1.30 28,397 7.20 2.59
Money Market .............. 30,594 6.50 0.68 33,932 8.01 1.30 30,427 7.72 2.67
Money Management .......... 126,037 26.79 1.79 96,837 22.85 2.05 93,462 23.71 4.04
Time Deposits ............. 205,147 43.61 3.55 169,643 40.03 4.39 162,680 41.26 4.81
-------- ------ -------- ------ -------- ------
Total deposits.. $470,495 100.00% $423,787 100.00% $394,245 100.00%
======== ====== ======== ====== ======== ======
The following table sets forth the amount of our time deposits that are
greater than $100,000 by time remaining until maturity as of December 31, 2003:
31
AMOUNTS AND MATURITIES OF
TIME DEPOSITS OF $100,000 OR MORE
AS OF DECEMBER 31, 2003
---------------------------
WEIGHTED AVERAGE
AMOUNT RATE PAID
-------- ----------------
(DOLLARS IN THOUSANDS)
Three months or less ..................... $ 32,215 1.83%
Over three months through six months ..... 9,532 2.77
Over six months through twelve months .... 25,709 2.38
Over twelve months ....................... 39,213 4.20
-------- ----
Total ......................... $106,669 2.92%
======== ====
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Liquidity is measured by a financial institution's ability
to raise funds through deposits, borrowed funds, capital, or the sale of
marketable assets, such as residential mortgage loans or a portfolio of SBA
loans. Other sources of liquidity, including cash flow from the repayment of
loans, are also considered in determining whether liquidity is satisfactory.
Liquidity is also achieved through growth of core deposits and liquid assets,
and accessibility to the money and capital markets. The funds are used to meet
deposit withdrawals, maintain reserve requirements, fund loans and operate the
organization. Core deposits, defined as demand deposits, interest-bearing
transaction accounts, savings deposits and time deposits less than $100,000
(excluding brokered deposits), were 76.20% of our total deposits at December 31,
2003, and 82.54% and 83.32% of total deposits at December 31, 2002 and 2001,
respectively. Generally, the Company's funding strategy is to utilize Federal
Home Loan Bank borrowings to fund originations of mortgage loans held for sale
and fund balances generated by other lines of business with deposits. In
addition, the Company uses other forms of short-term borrowings for cash
management and liquidity management purposes on a limited basis. These forms of
borrowings include federal funds purchased and revolving lines of credit. The
Company's Asset-Liability Management Committee utilizes a variety of liquidity
monitoring tools, including an asset/liability modeling service, to analyze and
manage the Company's liquidity.
The Bank is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks governed and regulated by the
Federal Housing Finance Board. The Federal Home Loan Banks provide a central
credit facility for member institutions. The Bank, as a member of the FHL Bank
of Topeka, is required to acquire and hold shares of capital stock in the FHL
Bank of Topeka in an amount at least equal to 1.00% of the aggregate principal
amount of its unpaid residential mortgage loans or 5.00% of our total
outstanding FHLB advances. The Bank is currently in compliance with this
requirement, with a $6.6 million investment in stock of the FHL Bank of Topeka
as of December 31, 2003. During 2003 and 2002, the Bank took advantage of some
special advances from the FHLB to supplement its funding base. The Bank had
$62.5 million and $52.5 million in outstanding long-term advances from the FHL
Bank of Topeka at December 31, 2003 and 2002, respectively.
Management has established internal guidelines and analytical tools to
measure liquid assets, alternative sources of liquidity, as well as relevant
ratios concerning asset levels and purchased funds. These indicators are
reported to the board of directors monthly, and at December 31, 2003, the Bank
was within the established guidelines.
The following table sets forth a summary of our short-term borrowings
during and as of the end of each period indicated.
32
SHORT-TERM BORROWINGS
AVERAGE WEIGHTED WEIGHTED
AMOUNT AMOUNT MAXIMUM AVERAGE AVERAGE
OUTSTANDING OUTSTANDING OUTSTANDING INTEREST RATE INTEREST RATE
AT DURING THE AT ANY DURING THE AT PERIOD
PERIOD END PERIOD (1) MONTH END PERIOD END
----------- ----------- ----------- ------------- -------------
(DOLLARS IN THOUSANDS)
At or for the year ended December 31, 2003:
Federal Home Loan Bank borrowings ... $ -- $15,118 $40,000 1.29% --%
Federal Funds purchased ............. -- 3,674 11,000 1.22 --
Repurchase agreements ............... 22,648 23,264 25,661 0.60 0.50
------- ------- ---- ----
Total ......................... $22,648 $42,056 0.90 0.50
======= =======
At or for the year ended December 31, 2002:
Federal Home Loan Bank borrowings ... $35,000 $ 2,236 $35,000 1.95% 1.28%
Federal Funds purchased ............. 10,000 1,043 10,000 1.93 1.81
Repurchase agreements ............... 23,688 16,962 23,688 1.08 0.67
------- ------- ---- ----
Total ......................... $68,688 $20,241 1.22 0.80
======= =======
At or for the year ended December 31, 2001:
Federal Home Loan Bank borrowings ... $ -- $ 2,985 $ 5,000 6.37% --%
Federal Funds purchased ............. -- -- -- -- --
Note Payable-other .................. -- 231 1,000 6.00 --
Repurchase agreements ............... 17,173 17,246 20,862 2.37 1.07
------- ------- ---- ----
Total ......................... $17,173 $20,462 2.43 1.07
======= =======
- -----------
(1) Calculations are based on daily averages where available and monthly
averages otherwise.
Capital Resources. At December 31, 2003, our total stockholders' equity
was $40.2 million, and our equity to asset ratio was 6.41%. At December 31,
2002, our total stockholders' equity was $34.3 million and our equity to asset
ratio was 5.67%.
During 2003, BVBC Capital Trust II (BVBC Trust II), a Delaware business
trust formed by Blue Valley, completed the sale of $7.5 million of its trust
preferred securities bearing interest at LIBOR + 3.25%. BVBC Trust II also
issued common securities to Blue Valley and used the proceeds from the offering
to purchase $7,732,000 in principal amount of junior subordinated debentures,
bearing interest at LIBOR + 3.25%, due in 2033 issued by Blue Valley. The junior
subordinated debentures are the sole assets of BVBC Trust II and are eliminated,
along with the related income statement effects, in the consolidated financial
statements. The proceeds were retained by Blue Valley for general corporate
purposes, including additional investments from time to time in the subsidiaries
of the Company in the form of additional capital to fund expansion. The trust
preferred securities meet the criteria to be considered regulatory capital,
subject to limitations defined in note (1) to the risk-based capital table on
the following page.
The Federal Reserve Board's risk-based guidelines establish a
risk-adjusted ratio, relating capital to different categories of assets and
off-balance sheet exposures, such as loan commitments and standby letters of
credit. These guidelines place a strong emphasis on tangible stockholder's
equity as the core element of the capital base, with appropriate recognition of
other components of capital. At December 31, 2003, our Tier 1 capital ratio was
10.04%, while our total risk-based capital ratio was 12.41%, both of which
exceed the capital minimums established in the risk-based capital requirements.
33
CONTRACTUAL OBLIGATIONS
Our known contractual obligations outstanding as of December 31, 2003
are presented below.
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
LESS THAN 1 MORE THAN 5
TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
------- ----------- --------- --------- -----------
Long-term Debt Obligations $87,706 $613 $1,347 $31,520 $54,226
Operating Lease Obligations 171 146 25
------- ---- ------ ------- -------
Total $87,877 $759 $1,372 $31,520 $54,226
======= ==== ====== ======= =======
Our risk-based capital ratios at December 31, 2003, 2002 and 2001 are
presented below.
RISK-BASED CAPITAL
DECEMBER 31,
2003 2002 2001
(DOLLARS IN THOUSANDS)
Tier 1 capital
Stockholders' equity ........................................................ $ 40,198 $ 34,344 $ 28,525
Intangible assets ........................................................... (1,128) (1,281) (1,433)
Unrealized (appreciation) depreciation on available-for-sale securities ..... (570) (785) (831)
Trust preferred securities (1) .............................................. 13,210 11,187 9,231
--------- --------- ---------
Total Tier 1 capital ................................................ 51,710 43,465 35,492
--------- --------- ---------
Tier 2 capital
Qualifying allowance for loan losses ........................................ 6,448 6,171 5,002
Trust preferred securities(1) ............................................... 5,790 313 2,269
--------- --------- ---------
Total Tier 2 capital ................................................ 12,238 6,484 7,271
--------- --------- ---------
Total risk-based capital ............................................ $ 63,948 $ 49,949 $ 42,763
========= ========= =========
Risk weighted assets ......................................................... $ 515,201 $ 492,922 $ 399,923
========= ========= =========
Ratios at end of period
Total capital to risk-weighted assets ratio ................................. 12.41% 10.13% 10.69%
Tier 1 capital to average assets ratio
(leverage ratio) ........................................................ 8.31% 7.74% 7.17%
Tier 1 capital to risk-weighted assets
ratio ................................................................... 10.04% 8.82% 8.87%
Minimum guidelines
Total capital to risk-weighted assets ratio ................................. 8.00% 8.00% 8.00%
Tier 1 capital to average assets ratio
(leverage ratio) ........................................................ 4.00% 4.00% 4.00%
Tier 1 capital to risk-weighted assets
ratio ................................................................... 4.00% 4.00% 4.00%
- ----------
(1) Federal Reserve guidelines for calculation of Tier 1 capital limits the
amount of cumulative trust preferred securities which can be included
in Tier 1 capital to 25% of total Tier 1 capital (Tier 1 capital before
reduction of intangibles). At December 31, 2003, approximately $13.2
million of the trust preferred securities have been included as Tier 1
capital. The balance of the trust preferred securities have been
included as Tier 2 capital.
34
INFLATION
The consolidated financial statements and related data presented in
this report have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, substantially all
of our assets and liabilities are monetary in nature. As a result, interest
rates have a more significant impact on our performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as prices of goods and services. Additional
discussion of the impact of interest rate changes is included in Item 7A:
Qualitative and Quantitative Disclosure About Market Risk. In addition, we
disclose the estimated fair value of our financial instruments in accordance
with Statement of Financial Accounting Standards No. 107. See Note 15 to the
consolidated financial statements included in this report.
OFF-BALANCE SHEET ARRANGEMENTS
The Company enters into off-balance sheet arrangements in the ordinary
course of business. Our off-balance sheet arrangements generally are limited to
commitments to extend credit, mortgage loans in the process of origination and
forward commitments to sell those mortgage loans, letters of credit and lines of
credit.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the agreement.
They generally have fixed expiration dates or other termination clauses. The
commitments extend over varying periods of time with the majority being
disbursed within a one-year period. Since a portion of the commitments may
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary, is based on management's credit evaluation of the counterparty.
Collateral held varies, but may include accounts receivable, inventory,
property, plant and equipment, commercial real estate and residential real
estate. At December 31, 2003, the Company had outstanding commitments to
originate loans aggregating approximately $32,913,000.
Mortgage loans in the process of origination represent amounts that the
Company plans to fund within a normal period of 60 to 90 days and which are
intended for sale to investors in the secondary market. Forward commitments to
sell mortgage loans are obligations to deliver loans at a specified price on or
before a specified future date. The Bank acquires such commitments to reduce
market risk on mortgage loans in the process of origination and mortgage loans
held for sale. Total mortgage loans in the process of origination amounted to
$47,965,000 and mortgage loans held for sale amounted to $18,297,000 at December
31, 2003 and combined had related forward commitments to sell mortgage loans
amounted to approximately $66,2626,000 at December 31, 2003 respectively.
Mortgage loans in the process of origination represent commitments to originate
loans at fixed rates.
Letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers. The Company had total outstanding letters of
credit amounting to $20,228,000 at December 31, 2003.
Lines of credit are agreements to lend to a customer as long as there
is no violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may expire
without being drawn upon, the total unused lines do not necessarily represent
future cash requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management's credit evaluation of the counterparty. Collateral held
varies, but may include accounts receivable, inventory, property, plant and
equipment, commercial real estate and residential real estate.
35
Management uses the same credit policies in granting lines of credit as it does
for on-balance sheet instruments. At December 31, 2003 unused lines of credit
borrowings aggregated approximately $131,995,000.
FUTURE ACCOUNTING REQUIREMENTS
The Financial Accounting Standards Board recently issued its
Interpretation No. 46 (FIN 46 revised), Consolidation of Variable Interest
Entities. This new Interpretation addresses consolidation by business
enterprises of variable interest entities, which have one or more of the
following characteristics:
1. The equity investment at risk is not sufficient to
permit the entity to finance its activities without
additional subordinated financial support provided by
other parties, including the equity holders.
2. The equity investors lack one or more of the
following essential characteristics of a controlling
financial interest:
a. The direct or indirect ability to
make decisions about the entity's
activities through voting rights or
similar rights;
b. The obligation to absorb the
expected losses of the entity; or,
c. The right to receive the expected
residual returns of the entity.
3. The equity investors have voting rights that are not
proportionate to their economic interests, and the
activities of the entity involve or are conducted on
behalf of an investor with a disproportionately small
voting interest.
The Company's initial application of the Interpretation will require
deconsolidation of the Company's investment in BVBC Capital Trusts I and II,
which we do not anticipate will have a material impact on the financial
statements of the Company. The Company will apply FIN 46 (revised) in our first
reporting period ending after March 15, 2004.
ITEM 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
As a continuing part of our financial strategy, we attempt to manage
the impact of fluctuations in market interest rates on our net interest income.
This effort entails providing a reasonable balance between interest rate risk,
credit risk, liquidity risk and maintenance of yield. Our funds management
policy is established by our Bank Board of Directors and monitored by our
Asset/Liability Management Committee. Our funds management policy sets standards
within which we are expected to operate. These standards include guidelines for
exposure to interest rate fluctuations, liquidity, loan limits as a percentage
of funding sources, exposure to correspondent banks and brokers, and reliance on
non-core deposits. Our funds management policy also establishes the reporting
requirements to our Bank Board of Directors. Our investment policy complements
our funds management policy by establishing criteria by which we may purchase
securities. These criteria include approved types of securities, brokerage
sources, terms of investment, quality standards, and diversification.
We use an asset/liability modeling service to analyze the Company's
current sensitivity to instantaneous and permanent changes in interest rates.
The system simulates the Company's asset and liability base and projects future
net interest income results under several interest rate assumptions. This allows
management to view how changes in interest rates will affect the spread between
the yield received on assets and the cost of deposits and borrowed funds.
The asset/liability modeling service is also used to analyze the net
economic value of equity at risk under instantaneous shifts in interest rates.
The "net economic value of equity at risk" is defined as the market value of
assets less the market value of liabilities plus/minus the market value of any
off-balance sheet positions. By effectively looking at the present value of all
future cash flows on or off the balance sheet, the net economic value of equity
modeling takes a longer-term view of interest rate risk.
36
We strive to maintain a position that changes in interest rates will
not affect net interest income or the economic value of equity by more than 5%,
per 50 basis points. The following table sets forth the estimated percentage
change in our net interest income over the next twelve-month period and our
economic value of equity at risk at December 31, 2003 based on the indicated
instantaneous and permanent changes in interest rates.
NET INTEREST NET ECONOMIC
INCOME VALUE OF
CHANGES IN INTEREST RATES (NEXT 12 MONTHS) EQUITY AT RISK
- ------------------------- ---------------- --------------
300 basis point rise 33.49% 5.44%
200 basis point rise 22.83% 4.07%
100 basis point rise 12.25% 2.35%
Base Rate Scenario - -
25 basis point decline (4.64%) (0.94%)
50 basis point decline (9.21%) (2.15%)
75 basis point decline (15.26%) (3.71%)
The above table indicates that, at December 31, 2003, in the event of a
sudden and sustained increase in prevailing market rates, our net interest
income would be expected to increase as our assets would be expected to reprice
quicker than our liabilities, while a decrease in rates would indicate just the
opposite. Generally, in the decreasing rate scenarios, not only would adjustable
rate assets (loans) reprice to lower rates faster than our liabilities, but our
liabilities - long-term Federal Home Loan Bank of Topeka (FHLB) advances and
existing time deposits - would not decrease in rate as much as market rates. In
addition, fixed rate loans might experience an increase in prepayments, further
decreasing yields on earning assets and causing net interest income to decrease.
Another consideration with a rising interest rate scenario is the impact on
mortgage loan refinancing, which would likely decline, leading to lower loans
held for sale fee income, though the impact is difficult to quantify or project.
The above table also indicates that, at December 31, 2003, in the event
of a sudden decrease in prevailing market rates, the economic value of our
equity would decrease. Given our current asset/liability position, a 25, 50 or
75 basis point decline in interest rates will result in a lower economic value
of our equity as the change in estimated loss on liabilities exceeds the change
in estimated gain on assets in these interest rate scenarios. Currently, under a
falling rate environment, the Company's estimated market value of loans could
increase as a result of fixed rate loans, net of possible prepayments. The
estimated market value of investment securities could also rise as our portfolio
contains higher yielding securities. However, the estimated market value
increase in fixed rate loans and investment securities is offset by time
deposits unable to reprice to lower rates immediately and fixed-rate callable
advances from FHLB. The likelihood of advances being called in a decreasing rate
environment is diminished resulting in the advances existing until final
maturity, which has the effect of lowering the economic value of equity.
The following table summarizes the anticipated maturities or repricing
of our interest-earning assets and interest-bearing liabilities as of December
31, 2003, based on the information and assumptions set forth below.
37
INTEREST-RATE SENSITIVITY ANALYSIS
Expected Maturity Date
--------------------------------------------------------------------------------------
Fiscal Year Ending December 31,
--------------------------------------------------------
0-90 Days 91-365 Days 2004 2005 2006 2007
----------- ----------- ----------- ----------- ----------- -----------
INTEREST-EARNING ASSETS:
Fixed Rate Loans ................... $ 5,908 $ 11,292 $ 17,200 $ 22,254 $ 31,727 $ 15,168
Average Interest Rate .......... 5.92% 7.58% 7.01% 7.78% 6.90% 8.12%
Variable Rate Loans ................ 311,171 5,394 316,565 -- -- --
Average Interest Rate .......... 4.73% 5.79% 4.75% -- -- --
Fixed Rate Investments ............. 200 722 922 49,628 33,615 15,646
Average Interest Rate .......... 4.66% 4.62% 4.63% 2.07% 2.92% 3.56%
Variable Rate Investments .......... -- -- -- -- -- --
Average Interest Rate .......... -- -- -- -- -- --
Federal Funds Sold ................. 29,400 -- 29,400 -- -- --
Average Interest Rate .......... 0.90% -- 0.90% -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets $ 346,679 $ 17,408 $ 364,087 $ 71,882 $ 65,342 $ 30,814
=========== =========== =========== =========== =========== ===========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand ............ $ 26,260 $ -- $ 26,260 $ -- $ -- $ --
Average Interest Rate .......... 0.38% -- 0.38% -- -- --
Savings and money market ........... 165,335 -- 165,335 -- -- --
Average Interest Rate .......... 1.58% -- 1.58% -- -- --
Time deposits ...................... 43,313 52,008 95,321 27,950 18,646 36,352
Average Interest Rate .......... 2.01% 2.56% 2.31% 3.49% 4.63% 4.69%
Funds borrowed ..................... 23,599 461 24,060 653 694 20,736
Average Interest Rate .......... 0.46% 6.04% 0.57% 6.04% 6.05% 1.71%
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities ................. $ 258,507 $ 52,469 $ 310,976 $ 28,603 $ 19,340 $ 57,088
=========== =========== =========== =========== =========== ===========
CUMULATIVE:
Rate sensitive assets (RSA) .... $ 346,679 $ 364,070 $ 364,087 $ 435,969 $ 501,311 $ 532,125
Rate sensitive liabilities (RSL) 258,507 310,976 310,976 339,579 358,919 416,007
GAP (GAP = RSA - RSL) .............. 88,172 53,094 53,110 96,390 142,392 116,118
RSA/RSL ............................ 134.11% 117.07% 117.08% 128.38% 139.67% 127.91%
RSA/Total assets ................... 57.28 60.16 60.16 72.04 82.84 87.93
RSL/Total assets ................... 42.72 51.39 51.39 56.11 59.31 68.74
GAP/Total assets ................... 14.57 8.77 8.78 15.93 23.53 19.19
GAP/RSA ............................ 25.43 14.58 14.59 22.11 28.40 21.82
Expected Maturity Date
-----------------------------------------
2008 Thereafter Total
----------- ----------- -----------
INTEREST-EARNING ASSETS:
Fixed Rate Loans ................... $ 27,875 $ 5,077 $ 119,302
Average Interest Rate .......... 6.40% 14.30% 7.43%
Variable Rate Loans ................ -- -- 316,565
Average Interest Rate .......... -- -- 4.75%
Fixed Rate Investments ............. 2,155 3,276 105,242
Average Interest Rate .......... 4.78% 4.83% 2.74%
Variable Rate Investments .......... -- -- --
Average Interest Rate .......... -- -- --
Federal Funds Sold ................. -- -- 29,400
Average Interest Rate .......... -- -- 0.90%
----------- ----------- -----------
Total interest-earning assets $ 30,030 $ 8,353 $ 570,508
=========== =========== ===========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand ............ $ -- $ -- $ 26,260
Average Interest Rate .......... -- -- 0.38%
Savings and money market ........... -- -- 165,335
Average Interest Rate .......... -- -- 1.58%
Time deposits ...................... 7,155 19,760 205,184
Average Interest Rate .......... 3.88% 4.21% 3.34%
Funds borrowed ..................... 10,784 54,225 111,153
Average Interest Rate .......... 5.20% 5.41% 3.66%
----------- ----------- -----------
Total interest-bearing
liabilities ................. $ 17,939 $ 73,985 $ 507,932
=========== =========== ===========
CUMULATIVE:
Rate sensitive assets (RSA) .... $ 562,155 $ 570,508 $ 570,508
Rate sensitive liabilities (RSL) 433,946 507,932 507,932
GAP (GAP = RSA - RSL) .............. 128,209 62,577 62,577
RSA/RSL ............................ 129.54% 112.32%
RSA/Total assets ................... 92.89 94.27
RSL/Total assets ................... 71.70 83.93
GAP/Total assets ................... 21.19 10.34
GAP/RSA ............................ 22.81 10.97
Certain assumptions are contained in the above table which affect the
presentation. Although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities lag behind changes
in market interest rates.
Disclosures about fair values of financial instruments, which reflect
changes in market prices and rates, can be found in note 15 to the consolidated
financial statements included in this report.
ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS OF BLUE VALLEY BAN CORP
See index to Blue Valley Ban Corp financial statements on page F-1.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No items are reportable.
38
ITEM 9A: CONTROLS AND PROCEDURES
Management, including the Company's Chief Executive Officer and
Treasurer, conducted an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as of December 31,
2003. Based upon the evaluation, management concluded that the Company's
disclosure controls and procedures are effective to ensure that all material
information requiring disclosure in this annual report was made known to them in
a timely manner.
The Company made no significant changes in internal controls over
financial reporting or in other factors that could materially affect the
Company's internal control over financial reporting.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors and executive officers is
included in the Company's Proxy Statement for the 2004 Annual Meeting of
Stockholders and is hereby incorporated by reference.
Information regarding the Bank's directors and executive officers is
included in Part I of this Form 10-K under the caption "Directors and Executive
Officers of the Registrant."
The Company has adopted a code of conduct that applies to our senior
financial officers. Information regarding our code of conduct can be obtained by
contacting us directly at:
Investor Relations
11935 Riley
Overland Park, KS 66213
913.338.1000
Email: ir@bankbv.com
ITEM 11: EXECUTIVE COMPENSATION
This information is included in the Company's Proxy Statement for the
2004 Annual Meeting of Stockholders and is hereby incorporated by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is included in the Company's Proxy Statement for the
2004 Annual Meeting of Stockholders and is hereby incorporated by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank periodically makes loans to our executive officers and
directors, the members of their immediate families and companies that they are
affiliated with. As of December 31, 2003, the Bank had aggregate loans
39
outstanding to such persons of approximately $6.0 million, which represented
14.87% of our stockholders' equity of $40.2 million on that date. These loans:
- were made in the ordinary course of business;
- were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for
comparable transactions with other persons; and
- did not involve more than the normal risk of collectibility or
present other unfavorable features.
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
This information is included in the Company's Proxy Statement for the
2004 Annual Meeting of Stockholders and is hereby incorporated by reference.
40
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 and 2. Financial Statements and any Financial Statement Schedules
The financial statements and financial statement schedules listed in
the accompanying index to consolidated financial statements and
financial statement schedules are filed as part of this Form 10-K.
(b) Reports on Form 8-K
On October 10th, 2003, Blue Valley filed a report on Form 8-K covering
the press release for the Company's third quarter 2003 earnings.
On December 15th, 2003, Blue Valley filed a report on Form 8-K covering
the press release for the Company's dividend declaration.
(c) Exhibits
3.1 Amended and Restated Articles of Incorporation of Blue Valley
Ban Corp.*
3.2 Bylaws, as amended, of Blue Valley Ban Corp.*
4.1 1998 Equity Incentive Plan.*
4.2 1994 Stock Option Plan.*
4.3 Form of Indenture of Blue Valley Ban Corp.**
4.4 Form of Junior Subordinated Debentures, due September 30,
2030.**
4.5 Certificate of Trust of BVBC Capital Trust I.*
4.6 Form of Amended and Restated Trust Agreement of BVBC Capital
Trust I.**
4.7 Form of Cumulative Preferred Security Certificate for BVBC
Capital Trust I.*
4.8 Form of Trust preferred securities Guarantee Agreement of Blue
Valley Ban Corp relating to the Cumulative Trust preferred
securities.*
4.9 Form of Agreement as to Expenses and Liabilities.*
4.10 Form of Indenture dated April 10, 2003, between Blue Valley
Ban Corp and Wilmington Trust Company
4.11 Amended and Restated Declaration of Trust dated April 10, 2003
4.12 Guarantee Agreement dated April 10, 2003
4.13 Fee Agreement dated April 10, 2003
4.14 Specimen of Floating Rate Junior Subordinated Debt Security
10.1 Promissory Note of Blue Valley Building dated July 15, 1994.*
41
10.2 Mortgage, Assignment of Leases and Rents and Security
Agreement between Blue Valley Building and Businessmen's
Assurance Company of America, dated July 15, 1994.*
10.3 Assignment of Leases and Rents between Blue Valley Building
and Businessmen's Assurance Company of America dated July 15,
1994.*
11.1 Statement regarding computation of per share earnings. Please
see p. F-12.
21.1 Subsidiaries of Blue Valley Ban Corp.
23.3 Consent of BKD, LLP.
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Treasurer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer and Treasurer
pursuant to 18 U.S.C. Section 1350
* Filed with the Commission on April 10, 2000 as an Exhibit to
Blue Valley's Registration Statement on Form S-1, Amendment
No. 1, File No. 333-34328. Exhibit incorporated herein by
reference.
** Filed with the Commission on June 29, 2000 as an Exhibit to
Blue Valley's Registration Statement on Form S-1, Amendment
No. 3, File No. 333-34328. Exhibit incorporated herein by
reference.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 18, 2004 By: /s/ Robert D. Regnier
------------------------------------------------
Robert D. Regnier, President,
Chief Executive Officer and Director
Date: March 18, 2004 By: /s/ Mark A. Fortino
------------------------------------------------
Mark A. Fortino, Treasurer and
Principal Financial and Accounting Officer
Date: March 18, 2004 By: /s/ Donald H. Alexander
------------------------------------------------
Donald H. Alexander, Director
Date: March 18, 2004 By: /s/ Wayne A. Henry, Jr.
------------------------------------------------
Wayne A. Henry, Jr., Director
Date: March 18, 2004 By: /s/ C. Ted McCarter
------------------------------------------------
C. Ted McCarter, Director
Date: March 18, 2004 By: /s/ Thomas A. McDonnell
------------------------------------------------
Thomas A. McDonnell, Director
43
BLUE VALLEY BAN CORP
DECEMBER 31, 2003, 2002 AND 2001
CONTENTS
Page
----
INDEPENDENT ACCOUNTANTS' REPORT................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets............................................ F-3
Statements of Income...................................... F-5
Statements of Stockholders' Equity........................ F-6
Statements of Cash Flows.................................. F-7
Notes to Financial Statements............................. F-8
F-1
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Blue Valley Ban Corp
Overland Park, Kansas
We have audited the accompanying consolidated balance sheets of Blue Valley
Ban Corp (the "Company") as of December 31, 2003 and 2002, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Blue Valley
Ban Corp as of December 31, 2003 and 2002, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2003
in conformity with accounting principles generally accepted in the United States
of America.
/s/ BKD, LLP
Kansas City, Missouri
February 13, 2004
F-2
BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(dollars in thousands, except share data)
ASSETS
2003 2002
---- ----
Cash and due from banks $ 21,317 $ 27,755
Federal funds sold 29,400 -
----------- -----------
Cash and cash equivalents 50,717 27,755
Available-for-sale securities 105,736 61,364
Mortgage loans held for sale 18,297 119,272
Loans, net of allowance for loan losses of $7,051 and $6,914 in 2003 and
2002, respectively 417,569 373,168
Premises and equipment, net 18,250 10,277
Foreclosed assets held for sale, net 416 614
Interest receivable 1,923 2,014
Deferred income taxes 1,302 1,688
Prepaid expenses and other assets 3,593 2,541
Federal Home Loan Bank stock, Federal Reserve Bank stock, and
other securities 7,554 5,209
Core deposit intangible asset, at amortized cost 1,128 1,281
----------- -----------
Total Assets $ 626,485 $ 605,183
=========== ===========
See Notes to Consolidated Financial Statements
F-3
BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2003 2002
---- ----
LIABILITIES
Demand deposits $ 74,717 $ 86,591
Savings, NOW and money market deposits 190,631 167,553
Time deposits 205,147 169,643
----------- -----------
Total Deposits 470,495 423,787
Federal funds purchased and other interest-bearing liabilities 23,447 36,830
Short-term debt - 35,000
Long-term debt 87,706 69,551
Interest payable and other liabilities 4,639 5,671
----------- -----------
Total Liabilities 586,287 570,839
----------- -----------
STOCKHOLDERS' EQUITY
Capital stock
Common stock, par value $1 per share;
Authorized 15,000,000 shares; issued and outstanding
2003 - 2,279,161 shares; 2002 - 2,222,711 shares 2,279 2,223
Additional paid-in capital 7,404 6,284
Retained earnings 30,344 25,052
Unearned compensation (399) -
Accumulated other comprehensive income
Unrealized appreciation on available-for-sale securities,
net of income taxes of $380 in 2003 and $523 in 2002 570 785
----------- -----------
Total Stockholders' Equity 40,198 34,344
----------- -----------
Total Liabilities and Stockholders' Equity $ 626,485 $ 605,183
=========== ===========
See Notes to Consolidated Financial Statements
F-4
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(dollars in thousands, except per share data)
2003 2002 2001
---- ---- ----
INTEREST INCOME
Interest and fees on loans $ 28,293 $ 26,857 $ 27,921
Federal funds sold 49 297 679
Available-for-sale securities 2,070 3,405 4,422
Held-to-maturity securities - - 119
-------------- -------------- --------------
Total Interest Income 30,412 30,559 33,141
-------------- -------------- --------------
INTEREST EXPENSE
Interest-bearing demand deposits 165 388 815
Savings and money market deposit accounts 2,204 2,711 4,846
Other time deposits 6,935 7,759 9,775
Federal funds purchased and other interest-bearing
liabilities 195 223 462
Short-term debt 256 43 205
Long-term debt 3,794 3,102 2,291
-------------- -------------- --------------
Total Interest Expense 13,549 14,226 18,394
-------------- -------------- --------------
NET INTEREST INCOME 16,863 16,333 14,747
PROVISION FOR LOAN LOSSES 1,350 2,920 2,400
-------------- -------------- --------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 15,513 13,413 12,347
-------------- -------------- --------------
NONINTEREST INCOME
Loans held for sale fee income 19,866 16,690 6,931
Service fees 2,207 1,847 1,632
Realized gains on sales of securities - 193 500
Other income 463 281 203
-------------- -------------- --------------
Total Noninterest Income 22,536 19,011 9,266
-------------- -------------- --------------
NONINTEREST EXPENSE
Salaries and employee benefits 19,670 16,437 10,063
Net occupancy expense 3,137 2,101 1,574
Other operating expense 6,478 5,578 4,073
-------------- -------------- --------------
Total Noninterest Expense 29,285 24,116 15,710
-------------- -------------- --------------
INCOME BEFORE INCOME TAXES 8,764 8,308
PROVISION FOR INCOME TAXES 3,130 2,912 1,960
-------------- -------------- --------------
NET INCOME $ 5,634 $ 5,396 $ 3,943
============== ============== ==============
BASIC EARNINGS PER SHARE $ 2.51 $ 2.48 $ 1.82
============== ============== ==============
DILUTED EARNINGS PER SHARE $ 2.43 $ 2.40 $ 1.77
============== ============== ==============
DIVIDENDS PER SHARE $ 0.15 $ 0.10 $ -
============== ============== ==============
See Notes to Consolidated Financial Statements
F-5
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(dollars in thousands, except share data)
Accumulated
Additional Other
Comprehensive Common Paid-In Retained Unearned Comprehensive
Income Stock Capital Earnings Compensation Income Total
------------- ------ ---------- -------- ------------ -------------- -----
BALANCE, DECEMBER 31, 2000 $2,142 $ 5,277 $15,935 $ - $ 461 $23,815
Issuance of 33,456 shares of common stock 33 364 397
Net income $3,943 3,943 3,943
Change in unrealized appreciation on
available-for-sale securities, net
of income taxes of $246 370 370 370
------ ------ ------- ------- --------- ------ -------
$4,313
======
BALANCE, DECEMBER 31, 2001 $2,175 $ 5,641 $19,878 $ - $ 831 $28,525
====== ======= ======= ========= ====== =======
Issuance of 47,535 shares of common stock 48 643 691
Dividends on common stock ($0.10 per
share) (222) (222)
Net income 5,396 5,396 5,396
Change in unrealized appreciation on
available-for-sale securities, net
of income taxes of $(30) (46) (46) (46)
------ ------ ------- ------- --------- ------ -------
$5,350
======
BALANCE, DECEMBER 31, 2002 $2,223 $ 6,284 $25,052 $ - $ 785 $34,344
====== ======= ======= ========= ====== =======
Issuance of 56,450 shares of common stock 56 1,120 (399) 777
Dividends on common stock ($0.15 per share) (342) (342)
Net income 5,634 5,634 5,634
Change in unrealized appreciation on
available-for-sale securities, net
of income taxes of $(143) (215) (215) (215)
------ ------ ------- ------- --------- ------ -------
$5,419
======
BALANCE, DECEMBER 31, 2003 $2,279 $ 7,404 $30,344 $ (399) $ 570 $40,198
====== ======= ======= ========= ====== =======
December 31, December 31, December 31,
2003 2002 2001
---- ---- ----
Reclassification Disclosure
Unrealized appreciation (depreciation) on available-for-sale
securities, net of income taxes of $(143), $47 and $446 for the
periods ended December 31, 2003, 2002 and 2001, respectively $ (215) $ 70 $ 670
Less: reclassification adjustments for appreciation included in net
income, net of income taxes of $0, $77 and $200 for the periods
ended December 31, 2003, 2002 and 2001, respectively - (116) (300)
--------- ------------ -------
Change in unrealized appreciation on available-for-sale
securities, net of income taxes (credit) of $(143), $(30), and $246 for
the periods ended December 31, 2003, 2002 and 2001,
respectively $ (215) $ (46) $ 370
========= ============ =======
See Notes to Consolidated Financial Statements
F-6
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(dollars in thousands)
2003 2002 2001
---------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,634 $ 5,396 $ 3,943
Adjustments to reconcile net income to net cash flow from
operating activities:
Depreciation and amortization 1,579 1,114 848
Amortization of premiums and discounts on securities 38 42 24
Provision for loan losses 1,350 2,920 2,400
Deferred income taxes 529 (754) (212)
Net gain on sales of available-for-sale securities - (193) (500)
Net loss on sale of foreclosed assets 58 121 -
Net (gain) loss on sale of premises and equipment (18) 35 (5)
Originations of loans held for sale (1,544,916) (1,305,219) (641,332)
Proceeds from the sale of loans held for sale 1,645,891 1,227,800 600,686
Changes in:
Interest receivable 91 500 546
Prepaid expenses and other assets (1,353) (617) (87)
Interest payable and other liabilities (1,374) 1,370 1,365
---------- ---------- ----------
Net cash provided by (used in) operating activities 107,509 (76,485) (32,324)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net originations of loans (46,439) (58,127) (53,295)
Proceeds from sales of loan participations - 9,135 4,946
Purchase of premises and equipment (9,099) (3,060) (1,445)
Proceeds from sale of premises and equipment 18 12 11
Proceeds from the sale of foreclosed assets 828 1,026 655
Proceeds from maturities of held-to-maturity securities - - 2,000
Proceeds from sales of available-for-sale securities - 13,183 16,400
Proceeds from maturities of available-for-sale securities 80,168 65,198 33,875
Purchases of available-for-sale securities (124,936) (61,994) (50,357)
Purchases of Federal Home Loan Bank stock, Federal Reserve
Bank stock, and other securities (2,345) (2,625) (1,926)
Proceeds from the sale of Federal Home Loan Bank stock,
Federal Reserve Bank stock, and other securities - 893 -
Net cash acquired in branch acquisition - - 1,604
---------- ---------- ----------
Net cash used in investing activities (101,805) (36,359) (74,532)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, money market, NOW and savings
accounts 11,204 22,579 31,279
Net increase in time deposits 35,504 6,963 22,162
Repayments of long-term debt (4,670) (162) (150)
Proceeds from long-term debt 22,825 22,095 19,500
Net proceeds (payments) on short-term debt (35,000) 35,000 (5,000)
Proceeds from sale of common stock 777 691 397
Net increase (decrease) in federal funds purchased and other
interest-bearing liabilities (13,382) 19,274 907
---------- ---------- ----------
Net cash provided by financing activities 17,258 106,440 69,095
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,962 2,596 (10,761)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 27,755 25,159 35,920
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 50,717 $ 27,755 $ 25,159
========== ========== ==========
SUPPLEMENTAL CASH FLOWS INFORMATION
Loans transferred to foreclosed assets held for sale $ 688 $ 1,712 $ 370
Restricted stock issued $ 399 $ - $ -
Cash dividends declared on common stock $ 342 $ - $ -
Interest paid $ 13,195 $ 14,638 $ 18,443
Income taxes paid (net of refunds) $ 4,771 $ 2,535 $ 2,693
See Notes to Consolidated Financial Statements
F-7
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is a holding company for Bank of Blue Valley (the Bank), Blue
Valley Building Corporation, Blue Valley Insurance Services, Inc., BVBC Capital
Trust I and BVBC Capital Trust II through 100% ownership of each.
The Bank is primarily engaged in providing a full range of banking and
mortgage services to individual and corporate customers in southern Johnson
County, Kansas. The Bank also originates mortgages nationwide on the internet
through its National Mortgage division. The Bank is subject to competition from
other financial institutions. The Bank also is subject to the regulation of
certain federal and state agencies and undergoes periodic examinations by those
regulatory authorities.
The Blue Valley Building Corporation is primarily engaged in leasing real
property at its facilities in Overland Park, Kansas and owning other properties
intended for future use.
BVBC Capital Trust I and II are Delaware business trusts created in 2000
and 2003, respectively, to offer trust preferred securities and to purchase the
Company's prior subordinated debentures. The Trusts have terms of 35 years, but
may dissolve earlier as provided in their trust agreements.
OPERATING SEGMENT
The Company provides community banking services through its subsidiary
bank, including such products and services as loans; time deposits, checking and
savings accounts; mortgage originations; trust services; and investment
services. These activities are reported as a single operating segment.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for loan losses and
the valuation of foreclosed assets held for sale, management obtains independent
appraisals for significant properties.
F-8
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Management believes that the allowances for loan losses and the valuation
of foreclosed assets held for sale are adequate. While management uses available
information to recognize losses on loans and foreclosed assets held for sale,
changes in economic conditions may necessitate revision of these estimates in
future years. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowances for loan
losses and valuation of foreclosed assets held for sale. Such agencies may
require the Company to recognize additional losses based on their judgments of
information available to them at the time of their examination.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Blue Valley
Ban Corp and its 100% owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents. At December 31, 2003, cash
equivalents consisted of federal funds sold.
The Bank is required to maintain reserve funds in cash and/or on deposit
with the Federal Reserve Bank. The reserve required at December 31, 2003 was
$750,000.
INVESTMENT IN DEBT SECURITIES
Available-for-sale securities, which include any security for which the
Company has no immediate plan to sell, but which may be sold in the future, are
carried at fair value. Realized gains and losses, based on amortized cost of the
specific security, are included in other income. Unrealized gains and losses are
recorded, net of related income tax effects, in stockholders' equity. Premiums
and discounts are amortized and accreted, respectively, to interest income using
a method which approximates the level-yield method over the period to maturity.
Interest on investments in debt securities is included in income when
earned.
OTHER INVESTMENTS
The Company, as a member of the Federal Home Loan Bank (FHLB) and
Federal Reserve Bank (FRB) systems, is required to maintain an investment in
capital stock of both the FHLB and FRB. No ready market exists for either stock,
and the stocks have no quoted market value. Such stock is recorded at cost.
F-9
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of cost or fair
value, determined using an aggregate basis. Write-downs to fair value are
recognized as a charge to earnings at the time the decline in value occurs.
Forward commitments to sell mortgage loans are acquired to reduce market risk on
mortgage loans in the process of origination and mortgage loans held for sale.
Amounts paid to investors to obtain forward commitments, if any, are deferred
until such time as the related loans are sold. The fair values of the forward
commitments are not recognized in the financial statements if their terms match
those of the underlying mortgage. Gains and losses resulting from sales of
mortgage loans are recognized when the respective loans are sold to investors.
Gains and losses are determined by the difference between the selling price and
the carrying amount of the loans sold, net of discounts collected or paid,
commitment fees paid and considering a normal servicing rate. Fees received from
borrowers to guarantee the funding of mortgage loans held for sale are
recognized as income or expense when the loans are sold or when it becomes
evident that the commitment will not be used.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-offs are reported at their
outstanding principal balance adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
ALLOWANCE FOR LOAN LOSSES
The allowance is management's estimate of probable losses which have
occurred as of the balance sheet date based on management's evaluation of risk
in the loan portfolio. The allowance for loan losses is increased by provisions
charged to expense and reduced by loans charged off when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance.
The adequacy of the allowance is evaluated on a monthly basis by management
based on management's periodic review of the collectibility of the loans in
consideration of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available. The
Bank computes its allowance by assigning specific reserves to impaired loans,
and then applies general reserve factors to the rest of the loan portfolio. A
loan is considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management when determining impairment include
payment status, collateral value and probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as
F-10
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of
delay, the reason for the delay, the borrower's prior payment record and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan-by-loan basis by either the present value of
expected future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price or the fair value of the collateral if the loan
is collateral dependent.
PREMISES AND EQUIPMENT
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line method over the
estimated useful lives of the assets.
FORECLOSED ASSETS HELD FOR SALE
Assets acquired by foreclosure or in settlement of debt and held for sale
are valued at their estimated fair value as of the date of foreclosure, and a
related valuation allowance is provided for estimated costs to sell the assets.
Management evaluates the value of foreclosed assets held for sale periodically
and increases the valuation allowance for any subsequent declines in fair value.
Increases in the valuation allowance and gains/losses on sales of foreclosed
assets are included in non-interest expenses, net.
CORE DEPOSIT INTANGIBLE ASSETS
Unamortized core deposit intangible assets aggregated $1,128,000 and
$1,281,000 (originally $2,576,000) at December 31, 2003 and 2002, respectively,
and have been amortized over a 15-year period using the straight-line method.
Amortization expense related to core deposit intangible assets was $152,000 for
each of the years 2003, 2002 and 2001.
FEE INCOME
Loan origination fees, net of direct origination costs, are recognized as
income using the level-yield method over the term of the loans.
RECLASSIFICATION
Certain reclassifications have been made to the 2002 and 2001 financial
statements to conform to the 2003 financial statement presentation. These
reclassifications had no effect on net income.
F-11
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effect
of differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average
number of shares outstanding during each year. Diluted earnings per share is
computed using the weighted average common shares and all potential dilutive
common shares outstanding during the year.
The computation of per share earnings is as follows:
2003 2002 2001
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Net income $ 5,634 $ 5,396 $ 3,943
---------- ---------- ----------
Average common shares outstanding 2,244,930 2,178,803 2,165,030
Average common share stock options outstanding 75,910 74,126 57,136
---------- ---------- ----------
Average diluted common shares 2,320,840 2,252,929 2,222,166
---------- ---------- ----------
Basic earnings per share $ 2.51 $ 2.48 $ 1.82
========== ========== ==========
Diluted earnings per share $ 2.43 $ 2.40 $ 1.77
========== ========== ==========
F-12
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for the plan and no compensation cost has
been recognized. Had compensation cost for the Company's stock options issued
under its Equity Incentive Plan been determined based on the fair value at the
grant dates using the minimum value method under Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated as follows:
2003 2002 2001
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income As reported $ 5,634 $ 5,396 $ 3,943
Pro forma $ 5,618 $ 5,344 $ 3,864
Basic earnings per share As reported $ 2.51 $ 2.48 $ 1.82
Pro forma $ 2.50 $ 2.45 $ 1.78
Diluted earnings per share As reported $ 2.43 $ 2.40 $ 1.77
Pro forma $ 2.42 $ 2.37 $ 1.74
The fair value of options granted is estimated on the date of the grant
using the minimum value method with the following weighted-average assumptions:
2003 2002 2001
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Dividend per Share $ 0.15 $ 0.10 $ -
Risk-Free Interest Rate 1.75% 1.75% 4.00%
Expected Life of Options 2 years 2 years 2 years
Weighted-average fair value of options granted
during the year $ - $ 49 $ 108
======== ======== ========
The expected life of options outstanding is based on the historical
experience of the Company. During 2003, the Company issued no stock options.
F-13
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 2: INVESTMENT IN DEBT SECURITIES
The amortized cost and approximate fair value of available-for-sale
securities are as follows:
December 31, 2003
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
--------- --------- --------- ---------
(dollars in thousands)
U.S. Government agencies $ 93,408 $ 471 $ (89) $ 93,790
State and political subdivisions 10,878 573 - 11,451
Equity and other 500 - (5) 495
--------- --------- --------- ---------
$ 104,786 $ 1,044 $ (94) $ 105,736
========= ========= ========= =========
December 31, 2002
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
--------- --------- ---------- ----------
(dollars in thousands)
U.S. Government agencies $46,998 $ 581 $ - $47,579
State and political subdivisions 13,057 728 - 13,785
------- ------- ------- -------
$60,055 $ 1,309 $ - $61,364
======= ======= ======= =======
Maturities of available-for-sale debt instruments at December 31, 2003:
Amortized Approximate
Cost Fair Value
--------- -----------
(dollars in thousands)
In one year or less $ 905 $ 922
After one through five years 100,321 101,043
After five through ten years 3,060 3,276
-------- --------
$104,286 $105,242
======== ========
F-14
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 2: INVESTMENT IN DEBT SECURITIES (CONTINUED)
The book value and approximate fair value of securities pledged as
collateral to secure public deposits amounted to $45,159,000 at December 31,
2003 and $45,570,000 at December 31, 2002.
The Company enters into sales of securities under agreements to
repurchase. The amounts deposited under these agreements represent short-term
borrowings and are reflected as a liability in the consolidated balance sheets.
The securities underlying the agreements are book-entry securities. During the
period, securities held in safekeeping were pledged to the depositors under a
written custodial agreement that explicitly recognizes the depositors' interest
in the securities. At December 31, 2003, or at any month end during the period,
no material amount of agreements to repurchase securities sold was outstanding
with any individual entity. Securities sold under agreements to repurchase
averaged $23,264,000 and $16,962,000 during 2003 and 2002, and the maximum
amounts outstanding at any month-end were $24,574,000 and $23,688,000,
respectively. The carrying value of securities pledged to secure agreements to
repurchase amounted to $28,178,000 and $28,357,000 at December 31, 2003 and
2002, respectively.
Gross gains of $0, $193,000 and $514,000 were realized in 2003, 2002
and 2001, respectively, and gross losses of $0, $0 and $14,000 were realized in
2003, 2002 and 2001, respectively, from sales of available-for-sale securities.
Certain investments in debt securities are reported in the financial
statements at an amount less than their historical cost. Total fair value of
these investments at December 31, 2003 was $23,897,000, or approximately 23% of
the Company's investment in debt securities portfolio. These declines primarily
result from fluctuations in market yields.
Based on evaluation of available information and evidence, particularly
recent volatility in market yields on debt securities, management believes the
declines in fair value for these securities are temporary.
Should the impairment of any of these become other than temporary, the
cost basis of the investment will be reduced and the resulting loss recognized
in net income in the period in which the other-than-temporary impairment is
identified. At December 31, 2003, the Company owned no securities with gross
unrealized losses outstanding longer than 12 months.
F-15
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at December 31, 2003 and 2002 include the
following:
2003 2002
-------- --------
(dollars in thousands)
Commercial $109,818 $ 93,658
Commercial real estate 87,438 71,295
Construction 123,445 127,071
Leases 22,175 22,600
Residential real estate 27,017 21,581
Personal 29,701 26,750
Home equity 25,026 17,127
-------- --------
Total loans 424,620 380,082
Less: Allowance for loan losses 7,051 6,914
-------- --------
Net loans $417,569 $373,168
======== ========
Activity in the allowance for loan losses was as follows:
2003 2002 2001
------- ------- -------
(dollars in thousands)
Balance, beginning of year $ 6,914 $ 5,267 $ 4,440
Provision charged to expense 1,350 2,920 2,400
Losses charged off, net of recoveries
of $341,000, $309,000 and $363,000
for 2003, 2002 and 2001, respectively (1,213) (1,273) (1,573)
------- ------- -------
Balance, end of year $ 7,051 $ 6,914 $ 5,267
======= ======= =======
Impaired loans totaled $10,192,000 and $11,679,000 at December 31, 2003
and 2002, respectively, with related allowances for loan losses of $1,497,000
and $1,830,000, respectively. At December 31, 2003 and 2002, accruing loans
delinquent 90 days or more totaled $497,000 and $89,000 respectively.
Non-accrual loans were $2,558,000 and $1,038,000 at December 31, 2003 and 2002,
respectively.
Total interest income of $736,000, $699,000 and $923,000 was recognized
on average impaired loans of $11,746,000, $9,585,000 and $6,630,000 for 2003,
2002 and 2001, respectively. Included in this total is cash-basis interest
income of $67,000, $46,000 and $202,000 recognized on impaired loans on
nonaccrual during 2003, 2002 and 2001, respectively.
F-16
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 4: PREMISES AND EQUIPMENT
Major classifications of these assets are as follows:
2003 2002
------- -------
(dollars in thousands)
Land $ 1,820 $ 1,777
Building and improvements 13,400 5,624
Furniture and equipment 5,115 4,200
Land improvements, net 1,876 1,876
------- -------
22,211 13,477
Less accumulated depreciation 3,961 3,200
------- -------
Total premises and equipment $18,250 $10,277
======= =======
NOTE 5: INTEREST-BEARING DEPOSITS
Interest-bearing time deposits in denominations of $100,000 or more
were $106,669,000 on December 31, 2003 and $65,700,000 on December 31, 2002. The
Company acquires brokered deposits in the normal course of business. At December
31, 2003 and 2002, brokered deposits of $35,805,000 and $12,200,000,
respectively, were included in the Company's time deposit balance.
At December 31, 2003, the scheduled maturities of time deposits are as
follows:
(dollars in thousands)
2004 $ 95,410
2005 27,821
2006 18,648
2007 36,350
2008 and thereafter 26,918
-----------
$ 205,147
===========
F-17
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 6: OPERATING LEASES
Blue Valley Building Corp. leases office space to others under
noncancellable operating leases expiring in 2004. Minimum future rent receivable
under noncancellable operating leases at December 31, 2003 was $143,000.
The Company leases space from others under noncancellable operating
leases expiring in various years through 2005. Consolidated rental and operating
lease expenses were $154,000 in 2003, $236,000 in 2002 and $82,000 in 2001.
Minimum rental commitments payable under noncancellable operating leases at
December 31, 2003 are as follows:
(dollars in thousands)
2004 $ 146
2005 25
--------
Future minimum lease payable $ 171
========
NOTE 7: INCOME TAXES
The provision for income taxes consists of the following:
2003 2002 2001
------- ------- ------
(dollars in thousands)
Taxes currently payable $ 2,601 $ 3,666 $ 2,172
Deferred income taxes 529 (754) (212)
------- ------- -------
$ 3,130 $ 2,912 $ 1,960
======= ======= =======
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
2003 2002 2001
------- ------- -------
(dollars in thousands)
Computed at the statutory
rate (34%) $ 2,980 $ 2,825 $ 2,007
Increase (decrease) resulting from:
Tax-exempt interest (225) (235) (248)
Stock options (30) (25) (59)
State income taxes 232 293 194
Other 173 54 66
------- ------- -------
Actual tax provision $ 3,130 $ 2,912 $ 1,960
======= ======= =======
F-18
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 7: INCOME TAXES (CONTINUED)
The tax effects of temporary differences related to deferred taxes
shown on the December 31, 2003 and 2002 consolidated balance sheets are as
follows:
2003 2002
------- -------
(dollars in thousands)
Deferred tax assets:
Allowance for loan losses $ 2,135 $ 2,028
Accrued compensated absences 41 58
Mark to market - Mortgage loans held for sale 82 390
------- -------
2,258 2,476
------- -------
Deferred tax liabilities:
Accumulated depreciation (363) (184)
Accumulated appreciation on available-for-
sale securities (380) (523)
Other (213) (81)
------- -------
(956) (788)
------- -------
Net deferred tax asset $ 1,302 $ 1,688
======= =======
NOTE 8: SHORT-TERM DEBT
Short-term debt at December 31, 2003 and 2002 consisted of the
following components:
2003 2002
-------- -------
(dollars in thousands)
Federal Home Loan Bank advance (A) $ - $35,000
-------- -------
Total short-term debt $ - $35,000
======== =======
(A) Payable on demand; collateralized by various assets including
mortgage-backed loans.
F-19
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 9: LONG TERM DEBT
Long-term debt at December 31, 2003 and 2002 consisted of the following
components:
2003 2002
------- -------
(dollars in thousands)
Note payable - other (A) $ 1,281 $ 1,456
Note payable - bank (B) - 4,095
Note payable - bank (C) 4,925 -
Federal Home Loan Bank advances (D) 62,500 52,500
Trust Preferred Securities - BVBC Capital Trust I (E) 11,500 11,500
Trust Preferred Securities - BVBC Capital Trust II (F) 7,500 -
------- -------
Total long-term debt $87,706 $69,551
======= =======
(A) Due in August 2009; payable in monthly installments of $23,175
including interest at 7.5%; collateralized by land, building
and assignment of future rents.
(B) Borrowing under $10 million revolving line of credit; interest
only at the fed funds rate + 1.68% due quarterly until 2003,
when the outstanding principal balance is due; collateralized
by common stock of the Company's subsidiary bank.
(C) Due in December 2012, payable in quarterly installments of
principal plus interest at the Federal Funds Rate plus 1.68%;
collateralized by common stock of the Company's subsidiary
bank.
(D) Due in 2007, 2008, 2010, 2011 and 2013; collateralized by
various assets including mortgage-backed loans. The interest
rates on the advances range from 1.55% to 5.682%.
(E) Due in 2030; interest only at 10.375% due quarterly; fully and
unconditionally guaranteed by the Company on a subordinated
basis to the extent that the funds are held by the Trust.
(F) Due in 2033; interest only at LIBOR + 3.25% due quarterly;
fully and unconditionally guaranteed by the Company on a
subordinated basis to the extent that the funds are held by
the Trust. Subordinated to the trust preferred securities (E)
due in 2030.
Aggregate annual maturities of long-term debt at December 31, 2003 are
as follows:
(dollars in thousands)
2004 $ 613
2005 653
2006 694
2007 20,736
2008 10,784
Thereafter 54,226
----------
$ 87,706
==========
F-20
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 10: REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by 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 Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below). Management believes, as of December 31, 2003,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject.
As of December 31, 2003, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Company and the Bank's actual capital amounts and ratios are also
presented in the table.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
AS OF DECEMBER 31, 2003: (dollars in thousands)
Total Capital
(to Risk Weighted Assets)
Consolidated $63,948 12.41% $41,216 8.00% N/A
======= ===== ======= ====
Bank Only $55,957 11.20% $39,973 8.00% $49,967 10.00%
======= ===== ======= ==== ======= =====
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated $51,710 10.04% $20,608 4.00% N/A
======= ===== ======= ====
Bank Only $49,702 9.95% $19,987 4.00% $29,980 6.00%
======= ===== ======= ==== ======= =====
Tier 1 Capital
(to Average Assets)
Consolidated $51,710 8.31% $24,897 4.00% N/A
======= ===== ======= ====
Bank Only $49,702 8.15% $24,382 4.00% $30,478 5.00%
======= ===== ======= ==== ======= =====
F-21
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 10: REGULATORY MATTERS (CONTINUED)
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
AS OF DECEMBER 31, 2002: (dollars in thousands)
Total Capital
(to Risk Weighted Assets)
Consolidated $ 49,949 10.13% $ 39,434 8.00% N/A
======== ===== ======== ====
Bank Only $ 49,128 10.12% $ 38,840 8.00% $ 48,550 10.00%
======== ===== ======== ==== ======== =====
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated $ 43,465 8.82% $ 19,717 4.00% N/A
======== ===== ======== ====
Bank Only $ 43,049 8.87% $ 19,420 4.00% $ 29,130 6.00%
======== ===== ======== ==== ======== =====
Tier 1 Capital
(to Average Assets)
Consolidated $ 43,465 7.74% $ 22,471 4.00% N/A
======== ===== ======== ====
Bank Only $ 43,049 7.79% $ 22,113 4.00% $ 27,642 5.00%
======== ===== ======== ==== ======== =====
The Bank is subject to certain restrictions on the amounts of dividends
that it may declare without prior regulatory approval. At December 31, 2003,
approximately $17,421,000 of retained earnings were available for dividend
declaration without prior regulatory approval.
NOTE 11: TRANSACTIONS WITH RELATED PARTIES
At December 31, 2003 and 2002, the Company had loans outstanding to
executive officers, directors and to companies in which the Bank's executive
officers or directors were principal owners, in the amounts of $5,976,000 and
$8,083,000, respectively. Related party transactions for 2003 and 2002 were as
follows:
2003 2002
-------- ------
(dollars in thousands)
Balance, beginning of year $ 8,083 $ 10,133
New loans 2,582 4,351
Repayments and reclassifications (4,689) (6,401)
-------- --------
Balance, end of year $ 5,976 $ 8,083
======== ========
In management's opinion, such loans and other extensions of credit and
deposits were made in the ordinary course of business and were made on
substantially the same terms (including interest rates and collateral) as those
prevailing at the time for comparable transactions with other persons. Further,
in management's opinion, these loans did not involve more than the normal risk
of collectibility or present other unfavorable features.
F-22
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 12: PROFIT SHARING PLAN
The Company's profit sharing plan covers substantially all employees.
Contributions to the plan are determined annually by the Board of Directors, and
participant interests are vested over a period from two to six years of service.
Company contributions charged to expense for 2003, 2002 and 2001 were $320,000,
$527,000 and $292,000, respectively.
NOTE 13: EQUITY INCENTIVE COMPENSATION
The Company has an Equity Incentive Plan (the "Plan") which allows the
Company to issue equity incentive compensation awards to its employees and
directors in the forms of stock options, restricted shares or deferred share
units.
Under the fixed option provisions of the Plan, the Company may grant
options that vest two years from the date of grant to its employees for shares
of common stock. At December 31, 2003, the Company had 247,759 shares available
to be granted (options granted prior to 1998 were subject to an earlier plan
with similar terms). The exercise price of each option is intended to equal the
fair value of the Company's stock on the date of grant, and maximum terms are 10
years.
During 2003, the Company granted no stock options, but did grant 13,275
shares of restricted common stock. Recipients of the restricted stock grant vest
in the stock after three years from the date of the grant. The basis of the
restricted shares granted, equal to the fair value of the Company's stock on the
date of grant, will be amortized to compensation expense ratably over the three
year vesting period. There were no forfeitures of restricted stock during 2003.
A summary of the status of option shares under the plan at December 31,
2003, 2002 and 2001, and changes during the years then ended, is presented
below:
2003 2002 2001
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding, beginning of year 235,575 $ 17.02 235,760 $ 14.77 224,716 $ 12.86
Granted - - 51,600 25.00 73,500 19.50
Exercised (41,675) 17.77 (45,035) 14.25 (32,456) 11.70
Forfeited (5,600) 22.30 (6,750) 17.94 (30,000) 15.37
------- ------- -------
Outstanding, end of year 188,300 $ 16.70 235,575 $ 17.02 235,760 $ 14.77
======= ======= =======
Options exercisable, end of year 164,350 $ 15.49 172,525 $ 15.26 171,760 $ 13.44
======= ======= =======
The weighted-average remaining contractual life of option shares at
December 31, 2003 was 6.67 years. Exercise prices ranged from $3.75 to $25.00.
Information about options outstanding and exercisable as of December 31, 2003 is
set forth in the following table.
F-23
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 13: EQUITY INCENTIVE COMPENSATION (CONTINUED)
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------
Weighted Weighted
Number Average Weighted Number Average
Range of Outstanding Remaining Average Exercisable Exercise
Exercise Prices at 12/31/03 Contractual Life Exercise Price at 12/31/03 Price
--------------- ----------- ----------- -------------- ----------- -----
$ 3.75 to $ 3.75 10,000 1 year $ 3.75 10,000 $ 3.75
5.10 to 5.10 3,000 2 years 5.10 3,000 5.10
6.25 to 6.25 7,000 3 years 6.25 7,000 6.25
7.50 to 7.50 9,000 4 years 7.50 9,000 7.50
11.25 to 11.25 16,400 5 years 11.25 16,400 11.25
14.38 to 14.38 19,700 6 years 14.38 19,700 14.38
16.50 to 16.50 33,350 7 years 16.50 33,350 16.50
19.50 to 19.50 51,500 8 years 19.50 51,500 19.50
25.00 to 25.00 38,350 9 years 25.00 14,400 25.00
- ----------------------------------------------------------------------------------------------------------
188,300 164,350
==========================================================================================================
NOTE 14: OTHER INCOME/EXPENSE
Other operating expenses consist of the following:
2003 2002 2001
------ ------ ------
(dollars in thousands)
Advertising $1,277 $ 920 $ 732
Data processing 556 530 441
Professional fees 810 628 379
Other expense 3,835 3,500 2,521
------ ------ ------
Total $6,478 $5,578 $4,073
====== ====== ======
Other income consists of the following:
2003 2002 2001
---- ---- ----
(dollars in thousands)
Rental income $154 $142 $140
Other income 309 139 63
---- ---- ----
Total $463 $281 $203
==== ==== ====
NOTE 15: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term instruments, the carrying amount approximates fair
value.
F-24
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 15: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
AVAILABLE-FOR-SALE SECURITIES
Fair values for available-for-sale securities, which also are the
amounts recognized in the consolidated balance sheets, equal quoted market
prices if available. If quoted market prices are not available, fair values are
estimated based on quoted market prices of similar securities.
MORTGAGE LOANS HELD FOR SALE
For homogeneous categories of loans, such as mortgage loans held for
sale, fair value is estimated using the quoted market prices for securities
backed by similar loans, adjusted for differences in loan characteristics.
LOANS
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. Loans with
similar characteristics were aggregated for purposes of the calculations. The
carrying amount of accrued interest approximates its fair value.
DEPOSITS
The fair value of demand deposits, savings accounts, NOW accounts and
certain money market deposits is the amount payable on demand at the reporting
date (i.e., their carrying amount). The fair value of fixed maturity time
deposits is estimated using a discounted cash flow calculation that applies the
rates currently offered for deposits of similar remaining maturities. The
carrying amount of accrued interest payable approximates its fair value.
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE AND OTHER LIABILITIES
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
SHORT-TERM AND LONG-TERM DEBT
Rates currently available to the Company for debt with similar terms
and remaining maturities are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT, LETTERS OF CREDIT AND LINES OF CREDIT
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
For fixed rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair value
of letters of credit and lines of credit is based on fees currently charged for
similar agreements or on
F-25
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 15: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
the estimated cost to terminate or otherwise settle the obligations with the
counterparties at the reporting date.
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments were
calculated by discounting expected cash flows, which method involves significant
judgments by management and uncertainties. Fair value is the estimated amount at
which financial assets or liabilities could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
Because no market exists for certain of these financial instruments, and because
management does not intend to sell these financial instruments, the Company does
not know whether the fair values shown below represent values at which the
respective financial instruments could be sold individually or in the aggregate.
2003 2002
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(dollars in thousands)
Financial assets:
Cash and cash equivalents $ 50,717 $ 50,717 $ 27,755 $ 27,755
Available-for-sale securities 105,736 105,736 61,364 61,364
Mortgage loans held for sale 18,297 18,301 119,272 119,269
Interest receivable 1,923 1,923 2,014 2,014
Loans, net of allowance for loan losses 417,569 421,350 373,168 377,958
Financial liabilities:
Deposits 470,495 471,704 423,787 426,827
Federal funds purchased and other interest-
bearing liabilities 23,447 23,447 36,830 36,830
Short-term debt - - 35,000 35,000
Long-term debt 87,706 91,628 69,551 74,359
Interest payable 1,309 1,309 911 911
Unrecognized financial instruments (net of amortization):
Commitments to extend credit - - - -
Letters of credit - - - -
Lines of credit - - - -
Forward commitments - - - -
F-26
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 16: COMMITMENTS AND CREDIT RISKS
The Company extends credit for commercial real estate mortgages,
residential mortgages, working capital financing and consumer loans to
businesses and residents principally in southern Johnson County. The Bank also
purchases indirect leases from various leasing companies throughout Kansas and
Missouri.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require a payment of a fee. Since a portion of the commitments may
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary, is based on management's credit evaluation of the counterparty.
Collateral held varies, but may include accounts receivable, inventory,
property, plant and equipment, commercial real estate and residential real
estate.
At December 31, 2003 and 2002, the Company had outstanding commitments to
originate loans aggregating approximately $32,913,000 and $24,836,000,
respectively. The commitments extend over varying periods of time with the
majority being disbursed within a one-year period. Loan commitments at fixed
rates of interest amounted to $6,650,000 and $1,211,000 at December 31, 2003 and
2002, respectively, with the remainder at floating market rates.
Mortgage loans in the process of origination represent amounts that the
Company plans to fund within a normal period of 60 to 90 days and which are
intended for sale to investors in the secondary market. Forward commitments to
sell mortgage loans are obligations to deliver loans at a specified price on or
before a specified future date. The Bank acquires such commitments to reduce
market risk on mortgage loans in the process of origination and mortgage loans
held for sale.
Total mortgage loans in the process of origination amounted to $47,965,000
and $126,471,000 and mortgage loans held for sale amounted to $18,297,000 and
$119,272,000 at December 31, 2003 and 2002, respectively. Related forward
commitments to sell mortgage loans amounted to approximately $66,2626,000 and
$245,743,000 at December 31, 2003 and 2002, respectively. Mortgage loans in the
process of origination represent commitments to originate loans at fixed rates.
Letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
The Company had total outstanding letters of credit amounting to
$20,228,000 and $10,943,000 at December 31, 2003 and 2002, respectively.
F-27
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 16: COMMITMENTS AND CREDIT RISKS (CONTINUED)
Lines of credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may expire
without being drawn upon, the total unused lines do not necessarily represent
future cash requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management's credit evaluation of the counterparty. Collateral held
varies, but may include accounts receivable, inventory, property, plant and
equipment, commercial real estate and residential real estate. Management uses
the same credit policies in granting lines of credit as it does for on-balance
sheet instruments.
At December 31, 2003 and 2002, unused lines of credit borrowings aggregated
approximately $131,995,000 and $113,709,000, respectively.
Additionally, the Company periodically has excess funds, which are loaned
to other banks as federal funds sold. At December 31, 2003, federal funds sold
totaling $29,400,000 and $0, respectively, were loaned to various banks, as
approved by the Board of Directors, with the largest balance at any one bank
being $25,400,000.
NOTE 17: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents the unaudited results of operations for the
past two years by quarter. See discussion on earnings per share in "Note 1:
Nature of Operations and Summary of Significant Accounting Policies" in the
Company's Consolidated Financial Statements.
2003 2002
----------------------------------------- -----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Operations
Net interest income after provision
for loan losses $ 3,436 $ 4,402 $ 3,792 $ 3,883 $ 3,295 $ 3,552 $ 3,322 $ 3,244
Noninterest income 3,595 6,637 6,606 5,698 6,196 5,312 3,931 3,572
Noninterest expense 5,902 8,713 7,858 6,812 7,323 6,316 5,437 5,040
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes 1,129 2,326 2,540 2,769 2,168 2,548 1,816 1,776
Income taxes 393 831 913 993 769 892 635 616
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 736 $ 1,495 $ 1,627 $ 1,776 $ 1,399 $ 1,656 $ 1,181 $ 1,160
======== ======== ======== ======== ======== ======== ======== ========
Net Income per Share Data
Basic $ 0.32 $ 0.66 $ 0.73 $ 0.80 $ 0.64 $ 0.76 $ 0.54 $ 0.53
======== ======== ======== ======== ======== ======== ======== ========
Diluted $ 0.31 $ 0.64 $ 0.71 $ 0.77 $ 0.61 $ 0.74 $ 0.53 $ 0.52
======== ======== ======== ======== ======== ======== ======== ========
Balance Sheet
Total assets $626,485 $621,428 $628,110 $591,409 $605,183 $559,105 $534,767 $529,923
Total loans, net 417,569 406,127 406,954 396,531 373,168 351,943 341,386 331,035
Shareholders' equity 40,198 39,629 38,342 36,248 34,344 32,663 30,891 29,342
F-28
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 17: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
The above unaudited financial information reflects all adjustments that
are, in the opinion of management, necessary to present a fair statement of the
results of operations for the interim periods presented.
NOTE 18: NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued its
Interpretation No. 46 (FIN 46 revised), Consolidation of Variable Interest
Entities. This new Interpretation addresses consolidation by business
enterprises of variable interest entities, which have one or more of the
following characteristics:
1. The equity investment at risk is not sufficient to
permit the entity to finance its activities without
additional subordinated financial support provided by
other parties, including the equity holders.
2. The equity investors lack one or more of the
following essential characteristics of a controlling
financial interest:
a. The direct or indirect ability to make
decisions about the entity's activities
through voting rights or similar rights;
b. The obligation to absorb the expected losses
of the entity; or,
c. The right to receive the expected residual
returns of the entity.
3. The equity investors have voting rights that are not
proportionate to their economic interests, and the
activities of the entity involve or are conducted on
behalf of an investor with a disproportionately small
voting interest.
The Company's initial application of the Interpretation will require
deconsolidation of the Company's investment in BVBC Capital Trusts I and II,
which we do not anticipate will have a material impact on the financial
statements of the Company. The Company will apply FIN 46 (revised) in our first
reporting period ending after March 15, 2004.
F-29
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 19: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 2002
---------- ----------
(In thousands)
ASSETS
Cash and cash equivalents $ 806 $ 330
Investments in subsidiaries:
Bank of Blue Valley 51,400 45,114
Blue Valley Building Corp. 11,863 4,075
Blue Valley Insurance Services, Inc. 46 -
BVBC Capital Trust I 356 356
BVBC Capital Trust II 232 -
Other assets 2,279 1,844
---------- ----------
Total Assets $ 66,982 $ 51,719
========== ==========
LIABILITIES
Long-term debt $ 4,925 $ 4,095
Trust preferred securities 19,588 11,856
Other liabilities 2,270 1,424
---------- ----------
Total Liabilities 26,783 17,375
---------- ----------
STOCKHOLDERS' EQUITY
Common stock 2,279 2,223
Additional paid-in capital 7,404 6,284
Retained earnings 30,344 25,052
Unearned compensation (399) -
Unrealized appreciation on available-for-sale securities,
net of income taxes of $380 and $523 at 2003 and 2002, respectively 570 785
---------- ----------
Total Stockholders' Equity 40,198 34,344
---------- ----------
Total Liabilities and Stockholders' Equity $ 66,982 $ 51,719
========== ==========
F-30
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 19: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---------- ---------- ----------
(In thousands)
Income
Dividends from subsidiaries $ 445 $ 137 $ 37
Other income 39 3 29
---------- ---------- ----------
484 140 66
Expenses 2,189 1,588 1,375
---------- ---------- ----------
Loss before income taxes and equity in
undistributed net income of subsidiaries (1,705) (1,448) (1,309)
Credit for income taxes (716) (539) (446)
---------- ---------- -----------
Loss before equity in undistributed net income
of subsidiaries (989) (909) (863)
Equity in undistributed net income of subsidiaries 6,623 6,305 4,806
---------- ---------- ----------
Net income $ 5,634 $ 5,396 $ 3,943
========== ========== ==========
F-31
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 19: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---------- ---------- ----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,634 $ 5,396 $ 3,943
Items not requiring (providing) cash:
Deferred income taxes 82 30 181
Equity in undistributed income of subsidiaries (6,623) (6,305) (4,806)
Changes in:
Other assets (517) (431) (80)
Other liabilities 504 571 (50)
---------- ---------- ----------
Net cash used in operating activities (920) (739) (812)
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Capital contributed to subsidiary (7,943) (2,018) (2,875)
Net collections of loans - - 300
---------- ---------- ----------
Net cash used in investing activities (7,943) (2,018) (2,575)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt (4,495) - -
Proceeds from long-term debt 13,057 2,095 2,000
Proceeds from sale of common stock 777 691 397
---------- ---------- ----------
Net cash provided by financing activities 9,339 2,786 2,397
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 476 29 (990)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 330 301 1,291
---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 806 $ 330 $ 301
========== ========== ==========
F-32