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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
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 checkmark whether the registrant is an accelerated filer. Yes
[ ] No [X]
As of June 30, 2004, the latest practicable date, the registrant had
2,306,111 shares of Common Stock ($1.00 par value) outstanding.
BLUE VALLEY BAN CORP
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Independent Accountants' Report......................................................... 3
Consolidated Balance Sheets - June 30, 2004 (unaudited) and December 31, 2003........... 4
Consolidated Statements of Income (unaudited) -
three months and six months ended June 30, 2004 and 2003.............................. 6
Consolidated Statements of Stockholders' Equity (unaudited) -
six months ended June 30, 2004 and 2003 .............................................. 7
Consolidated Statements of Cash Flows (unaudited) -
six months ended June 30, 2004 and 2003............................................... 8
Notes to Consolidated Financial Statements (unaudited) -
six months ended June 30, 2004 and 2003............................................... 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................................ 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................... 23
ITEM 4. CONTROLS AND PROCEDURES............................................................ 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................. 26
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................................... 26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................... 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................ 26
ITEM 5. OTHER INFORMATION.................................................................. 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................... 27
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee,
Board of Directors and Shareholders
Blue Valley Ban Corp
Overland Park, Kansas 66225
We have reviewed the accompanying consolidated balance sheet of Blue Valley Ban
Corp as of June 30, 2004, and the related consolidated statements of income for
the three-month and six-month periods ended June 30, 2004 and 2003 and the
consolidated statements of stockholders' equity and cash flows for the six-month
periods ended June 30, 2004 and 2003. These interim financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
the standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet as of December 31, 2003 and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended (not presented
herein), and in our report dated February 13, 2004 we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 2003 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ BKD, LLP
Kansas City, Missouri
July 25, 2004
3
BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
(dollars in thousands, except share data)
ASSETS
DECEMBER 31,
JUNE 30, 2004 2003
------------- ------------
(Unaudited)
Cash and due from banks $ 22,840 $ 21,317
Federal funds sold 18,000 29,400
------------- ------------
Cash and cash equivalents 40,840 50,717
Available-for-sale securities 83,834 106,036
Mortgage loans held for sale 27,390 18,297
Loans, net of allowance for loan losses of $7,390
and $7,051 in 2004 and 2003, respectively 448,785 417,569
Premises and equipment 20,160 18,250
Foreclosed assets held for sale, net - 416
Interest receivable 1,900 1,923
Deferred income taxes 2,258 1,302
Prepaid expenses and other assets 3,270 3,593
Federal Home Loan Bank stock, Federal Reserve Bank stock
and other securities 7,864 7,842
Core deposit intangible asset, at amortized cost 1,052 1,128
------------- ------------
Total assets $ 637,353 $ 627,073
============= ============
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
4
BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
JUNE 30, 2004 2003
------------- ------------
(Unaudited)
LIABILITIES
Deposits
Demand $ 78,836 $ 74,717
Savings, NOW and money market 213,851 190,631
Time 186,304 205,147
------------- ------------
Total deposits 478,991 470,495
Other interest-bearing liabilities 24,504 23,447
Long-term debt 86,800 88,294
Interest payable and other liabilities 5,670 4,639
------------- ------------
Total liabilities 595,965 586,875
------------- ------------
STOCKHOLDERS' EQUITY
Capital stock
Common stock, par value $1 per share;
authorized 15,000,000 shares; issued and outstanding
2004 - 2,306,111 shares; 2003 - 2,279,161 shares 2,306 2,279
Additional paid-in capital 7,745 7,404
Retained earnings 31,735 30,344
Unearned compensation (329) (399)
Accumulated other comprehensive income
Unrealized appreciation (depreciation) on available-for-sale
securities, net of income taxes (credit) of $(46) in
2004 and $380 in 2003 (69) 570
------------- ------------
Total stockholders' equity 41,388 40,198
------------- ------------
Total liabilities and stockholders' equity $ 637,353 $ 627,073
============= ============
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
5
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(dollars in thousands, except share data)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
INTEREST INCOME
Interest and fees on loans $ 6,869 $ 7,285 $ 13,714 $ 14,332
Federal funds sold 49 7 92 13
Available-for-sale securities 526 523 1,181 1,105
----------- ----------- ----------- -----------
Total interest income 7,444 7,815 14,987 15,450
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest-bearing demand deposits 43 49 72 90
Savings and money market deposit accounts 714 569 1,363 970
Other time deposits 1,629 1,753 3,310 3,467
Federal funds purchased and other
interest-bearing liabilities 35 57 65 116
Short-term debt - 29 - 160
Long-term debt 987 966 1,987 1,772
----------- ----------- ----------- -----------
Total interest expense 3,408 3,423 6,797 6,575
----------- ----------- ----------- -----------
NET INTEREST INCOME 4,036 4,392 8,190 8,875
PROVISION FOR LOAN LOSSES 300 600 650 1,200
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,736 3,792 7,540 7,675
----------- ----------- ----------- -----------
NONINTEREST INCOME
Loans held for sale fee income 3,390 5,900 5,886 11,005
Service fees 649 557 1,214 1,074
Realized gain (loss) on available-for-sale
securities (82) - 133 -
Other income 146 149 282 225
----------- ----------- ----------- -----------
Total noninterest income 4,103 6,606 7,515 12,304
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits 4,505 5,405 8,404 10,077
Net occupancy expense 833 805 1,600 1,463
Other operating expense 1,573 1,648 3,070 3,130
----------- ----------- ----------- -----------
Total noninterest expense 6,911 7,858 13,074 14,670
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 928 2,540 1,981 5,309
PROVISION FOR INCOME TAXES 247 913 590 1,906
----------- ----------- ----------- -----------
NET INCOME $ 681 $ 1,627 $ 1,391 $ 3,403
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.30 $ 0.73 $ 0.61 $ 1.53
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE $ 0.29 $ 0.71 $ 0.59 $ 1.48
=========== =========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
6
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(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, 2002 $ 2,223 $ 6,284 $ 25,052 $ - $ 785 $ 34,344
Issuance of 31,025 shares
of common stock -- 31 591 -- -- 622
Net income 3,403 -- -- 3,403 -- 3,403
Change in unrealized
appreciation on
available-for-sale
securities, net of
income tax credit of
$(18) (27) -- -- -- (27) (27)
------------- -------- ---------- -------- ------------ ------------- --------
$ 3,376
=============
BALANCE, JUNE 30, 2003 $ 2,254 $ 6,875 $ 28,455 $ - $ 758 $ 38,342
======== ========== ======== ============ ============= ========
Issuance of 25,425 shares
of common stock -- 25 529 -- (399) -- 155
Net income 2,231 -- -- 2,231 -- 2,231
Dividends on common stock
($0.15 per share) (342) (342)
Change in unrealized
appreciation on
available-for-sale
securities, net of
income taxes of $(125) (188) -- -- -- (188) (188)
------------- -------- ---------- -------- ------------ ------------- --------
$ 2,043
=============
BALANCE, DECEMBER 31, 2003 $ 2,279 $ 7,404 $ 30,344 $ (399) $ 570 $ 40,198
======== ========== ======== ============ ============= ========
Issuance of 26,950 shares
of common stock -- 27 341 -- -- -- 368
Net income 1,391 -- -- 1,391 -- -- 1,391
Restricted stock earned -- -- -- 70 -- 70
Change in unrealized
appreciation on
available-for-sale
securities, net of
income tax credit of
$(426) (639) -- -- -- -- (639) (639)
------------- -------- ---------- -------- ------------ ------------- --------
$ 752
=============
BALANCE, JUNE 30, 2004 $ 2,306 $ 7,745 $ 31,735 $ (329) $ (69) $ 41,388
======== ========== ======== ============ ============= ========
DECEMBER 31,
JUNE 30, 2004 2003 JUNE 30,2003
------------- ----------- ------------
RECLASSIFICATION DISCLOSURE
Unrealized appreciation (depreciation) on available-for-sale securities, net
of income taxes (credit) of $(373), $(125), and $(18) for the periods
ended June 30, 2004, December 31, 2003
and June 30, 2003, respectively $ (559) $ (188) $ (27)
Less: reclassification adjustments for appreciation included in
net income, net of income taxes of $53, $0, and $0 for the periods ended
June 30, 2004, December 31, 2003 and June 30,
2003, respectively 80 - -
------------- ----------- ------------
Change in unrealized appreciation on available-for-sale
securities, net of income tax credit of $(426), $(125), and $(18) for the
periods ended June 30, 2004, December 31, 2003
and June 30, 2004, respectively $ (639) $ (188) $ (27)
============= =========== ============
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
7
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(dollars in thousands, except share data)
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,391 $ 3,403
Adjustments to reconcile net income to net cash flow from
operating activities:
Depreciation and amortization 882 708
Amortization (accretion) of premiums and discounts on
securities (10) 18
Provision for loan losses 650 1,200
Deferred income taxes - (1)
Net realized gain on available-for-sale securities (133) -
Net loss on sale of foreclosed assets 62 5
Net loss (gain) on sale of premises and equipment 5 (18)
Restricted stock earned 70 -
Originations of loans held for sale (499,863) (857,343)
Proceeds from the sale of loans held for sale 490,771 875,565
Changes in
Interest receivable 23 51
Prepaid expenses and other assets (401) (275)
Interest payable and other liabilities 1,031 (1,885)
------------- -------------
Net cash provided by (used in) operating activities (5,522) 21,428
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net originations of loans (34,930) (35,028)
Proceeds from sales of loan participations 3,053 -
Purchase of premises and equipment (2,527) (7,011)
Proceeds from the sale of premises and equipment - 18
Proceeds from the sale of foreclosed assets 364 104
Proceeds from sales of available-for-sale securities 6,210 -
Proceeds from maturities of available-for-sale securities 37,047 56,528
Purchases of available-for-sale securities (21,977) (58,032)
Proceeds from the sale or maturities of Federal Home Loan Bank
stock, Federal Reserve Bank stock, and other securities 95 -
Purchases of Federal Home Loan Bank stock, Federal Reserve Bank
stock, and other securities (117) (750)
------------- -------------
Net cash used in investing activities (12,782) (44,171)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, money market,
NOW and savings accounts 27,339 14,584
Net increase (decrease) in time deposits (18,843) 32,002
Repayments of long-term debt (1,494) (4,381)
Proceeds from long-term debt - 22,825
Net payments on short-term debt - (35,000)
Proceeds from sale of common stock 368 622
Net increase (decrease) in other borrowings 1,057 (9,217)
------------- -------------
Net cash provided by financing activities 8,427 21,435
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS (9,877) (1,308)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 50,717 27,755
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 40,840 $ 26,447
============= =============
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
8
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the Company's consolidated financial position as of June 30, 2004, and the
consolidated results of its operations, changes in stockholders' equity
and cash flows for the periods ended June 30, 2004 and 2003, and are of a
normal recurring nature.
Certain information and note disclosures normally included in the
Company's annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
have been omitted. These consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes
thereto included in the Company's December 31, 2003 Form 10-K filed with
the Securities and Exchange Commission. Certain reclassifications to prior
year amounts have been made to conform to current year presentation.
The results of operations for the period are not necessarily indicative of
the results to be expected for the full year.
The Company applies Accounting Principles Board No. 25 and related
Interpretations in accounting for its stock option plan and no
compensation cost has been recognized. Pro forma compensation costs for
the Company's plan are determined based on the fair value at the option
grant dates using the minimum value method under Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-based Compensation."
During the period ended June 30, 2004, the Company issued no stock
options; consequently, reported and pro forma net income were identical.
During the period ended June 30, 2004, the Company applied the provisions
of Financial Accounting Standards Board Interpretation 46 (Revised),
Consolidation of Variable Interest Entities, to its trust preferred
securities. The primary impact of this change was to report the Company's
subordinated debt to the trust on the face of the accompanying balance
sheet rather than the minority interest in the trust, as previously
presented. This change has been made for all periods presented. This
change did not have a material impact on the Company's total assets,
liabilities, stockholders' equity or results of operations.
The report of BKD, LLP commenting upon their review accompanies the
consolidated financial statements included in Item 1 of Part I.
NOTE 2: 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 period.
The computation of per share earnings for the three and six-months ended
June 30, 2004 and 2003 is as follows:
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
9
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(amounts in thousands, except (amounts in thousands, except
share and per share data) share and per share data)
Net income, as reported $ 681 $ 1,627 $ 1,391 $ 3,403
Add: Total stock-based employee compensation
recognized in net income, net of income taxes
of $14 and $24 for the three- and six-month
periods ended June 30, 2004, respectively 26 - 46 -
Less: Total stock-based compensation cost
determined under the fair value based method,
net of income tax credit of $(14) and $(24) for
the three- and six-month periods ended
June 30, 2004, respectively (26) - (46) -
----------- ----------- ----------- -----------
Pro forma net income $ 681 $ 1,627 $ 1,391 $ 3,403
=========== =========== =========== ===========
Average common shares outstanding 2,300,818 2,235,736 2,292,697 2,230,606
Average common share stock options outstanding 55,211 71,162 61,580 72,852
----------- ----------- ----------- -----------
Average diluted common shares 2,356,029 2,306,898 2,354,277 2,303,458
=========== =========== =========== ===========
Basic earnings per share $ 0.30 $ 0.73 $ 0.61 $ 1.53
=========== =========== =========== ===========
Diluted earnings per share $ 0.29 $ 0.71 $ 0.59 $ 1.48
=========== =========== =========== ===========
NOTE 3: LONG-TERM DEBT
Long-term debt at June 30, 2004 and December 31, 2003, consisted of the
following components:
DECEMBER 31,
JUNE 30, 2004 2003
------------- ------------
(Unaudited)
(in thousands)
Note Payable - other (A) $ - $ 1,281
Note Payable - bank (B) 4,712 4,925
Federal Home Loan Bank advances (C) 62,500 62,500
Trust Preferred Securities - BVBC Capital Trust I (D) 11,856 11,856
Trust Preferred Securities - BVBC Capital Trust II (E) 7,732 7,732
------------- ------------
Total long-term debt $ 86,800 $ 88,294
============= ============
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
10
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
(A) Due in August 2009, payable in monthly installments of
$23,175, plus interest at 7.5%; collateralized by land,
building and assignment of future rents. This note was paid
off during the first quarter of 2004.
(B) 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. The interest rate on this note has been fixed by the use
of a swap agreement (see Note 4).
(C) 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%.
(D) 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.
(E) 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 (D)
due in 2030.
Aggregate annual maturities of long-term debt at June 30, 2004 are as
follows:
(in thousands)
July 1 to December 31, 2004 $ 212
2005 450
2006 475
2007 20,500
2008 10,530
Thereafter 54,633
--------------
$ 86,800
==============
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
11
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
NOTE 4: DERIVATIVE FINANCIAL INSTRUMENTS
As a strategy to reduce the exposure to the risk of changes in future cash
flows due to interest rate fluctuations, the Company entered into an
interest rate swap agreement for a portion of its floating rate debt (see
Note 3). The agreement provides for the Company to receive interest from
the counterparty at the note's variable rate and to pay interest to the
counterparty at a fixed rate of 5.45% on the notional amount over the term
of the note. Under the agreement, the Company pays or receives the net
interest amount quarterly, with the quarterly settlements included in
interest expense.
Management has designated the interest rate swap agreement as a cash flow
hedging instrument. The hedge was fully effective through June 30, 2004.
Under the cash flow hedging method, the effective portion of the gain or
loss related to the derivative is recognized as a component of other
comprehensive income. The ineffective portion, if any, is recognized in
current earnings.
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
GENERAL
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are largely proscribed by
accounting principles generally accepted in the United States of
America. After a review of our 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
these financial statement amounts to the methods, as well as the
assumptions and estimates underlying these balances. Accounting for
these critical areas requires the most subjective and complex
judgments that could be subject to revision as new information
becomes available. There have not been any material changes in our
critical accounting policies since December 31, 2003. Further
description of our critical accounting policies can be found in our
Annual Report on Form 10-K for the year ended December 31, 2003.
RESULTS OF OPERATIONS
Three months ended June 30, 2004 and 2003. Net income for the
quarter ended June 30, 2004, was $681,000, compared to net income of
$1.6 million for the quarter ended June 30, 2003, representing a
decrease of $946,000, or 58.15%. Diluted earnings per share
decreased 59.16% to $0.29 during the second quarter of 2004 from
$0.71 in the same period of 2003. The Company's annualized return on
average assets and average stockholders' equity for the three-month
period ended June 30, 2004 were 0.43% and 6.64%, compared to 1.07%
and 17.59%, respectively, for the same period in 2003, decreases of
59.82% and 62.26%, respectively.
The principal contributing factors to our decrease in net income in
the current year second quarter from the prior year were a decrease
in net interest income resulting from lower yields on earnings
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
assets and a decrease in non-interest income resulting from a
decline in loans held for sale fee income. The strong demand for
residential mortgage loan originations, particularly refinancing,
experienced by the Company since 2001 decelerated as mortgage
interest rates rose during the second half of 2003. The effects of
lower mortgage origination volume continued into the second quarter
of 2004 and had an adverse impact on our net income.
Six months ended June 30, 2004 and 2003. Net income for the six
months ended June 30, 2004 was $1.4 million, compared to net income
of $3.4 million for the six-month period ended June 30, 2003,
representing a decrease of $2.0 million, or 59.13%. Diluted earnings
per share decreased 60.14% to $0.59 during the six months ended June
30, 2004 from $1.48 in the same period of 2003. The Company's
annualized return on average assets and average stockholders' equity
for the six-month period ended June 30, 2004 were 0.45% and 6.85%,
compared to 1.15% and 18.86%, respectively, for the same period in
2003, decreases of 60.87% and 63.68%, respectively.
The principal contributing factors to our decrease in net income
from the six months ended June 30, 2003 to the current year were a
decrease in non-interest income, specifically loans held for sale
fee income, and a decrease in net interest income resulting from a
change in the mix of earning assets.
NET INTEREST INCOME
Fully tax equivalent (FTE) net interest income for the three-month
period ended June 30, 2004 was $4.1 million, a decrease of $368,000
or 8.24%, from $4.5 million for the three-month period ended June
30, 2003.
FTE interest income for the current year second quarter was $7.5
million, a decrease of $384,000, or 4.87%, from $7.9 million in the
prior year second quarter. This decrease was primarily a result of
an overall decrease in yields on earning assets. Yields on average
earning assets declined from the second quarter of 2003 to the
current period by 41 basis points to 5.14% in the second quarter of
2003, compared to 5.55% in the prior year second quarter. The 41
basis point decrease in yield resulted primarily from a change in
the mix of earning assets coupled with decreases in market interest
rates during 2003 and the impact of the low interest rates on new
and repriced assets during 2003 and 2004. Partially offsetting the
decrease in yield on average earning assets was a $16.3 million, or
2.85%, increase in average earning assets.
Interest expense for the current year second quarter was $3.4
million, unchanged from $3.4 million in the prior year second
quarter. The rate paid on average interest-bearing liabilities
declined 13 basis points to 2.67% during the quarter ended June 30,
2004 compared to 2.80% for the quarter ended June 30, 2003. The
primary cause for this decline was the overall decline in market
interest rates and the impact of the low interest rates on new and
repriced liabilities during 2003 and 2004. The effect of this
decline was offset by an increase in average interest-bearing
liabilities. For the current year second quarter, average
interest-bearing deposits increased by $27.5 million, or 7.40% from
the prior year while other interest-bearing liabilities, comprised
of short-term borrowings and long-term debt, decreased by $6.5
million or 5.40% from the prior year.
FTE net interest income for the six-month period ended June 30, 2004
was $8.3 million, a decrease of $712,000 or 7.89%, from $9.0 million
for the six-month period ended June 30, 2003.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FTE interest income for the six months ended June 30, 2004 was $15.1
million, a decrease of $490,000, or 3.14%, from $15.6 million for
the six months ended June 30, 2003. This decrease primarily resulted
from a change in the mix of earning assets as well as lower yields
on average earning assets. The yield on average earning assets
declined 40 basis points to 5.25% for the first six months of 2004,
compared to 5.65% for the first six months of 2003. The 40 basis
point decrease in yield resulted primarily from decreases in market
interest rates during 2003 and the impact of the low interest rates
on new and repriced assets during 2003 and 2004. Partially
offsetting the decrease in yield was an increase in average earning
asset volume. Average earning asset volume increased from June 30,
2003 to the current period by $20.1 million, or 3.60%.
Interest expense for the six-month period ended June 30, 2004 was
$6.8 million, an increase of $222,000, or 3.37%, from $6.6 million
in the same period of the prior year. The increase is attributable
to an increase in average interest-bearing liabilities. Average
interest-bearing deposits increased by $40.6 million, or 11.45% from
the prior year while other interest-bearing liabilities, comprised
of short-term borrowings and long-term debt, decreased by $9.3
million or 7.64%. Partially offsetting the effect of increased
average interest-bearing liabilities was a decline in rates paid on
average interest-bearing liabilities during the first six months of
2004. The primary cause for this decline was the overall decline in
market interest rates and the impact of low interest rates on new
and repriced liabilities during 2003 and 2004. The rate paid on
total average interest-bearing liabilities decreased 10 basis points
to 2.69% during the six-month period ended June 30, 2004 compared to
2.79% during the same period in 2003.
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 FTE 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.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
AVERAGE BALANCES, YIELDS AND RATES
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------
2004 2003
---------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- -------- ------- --------- -------- -------
ASSETS
Federal funds sold........................ $ 20,865 $ 92 0.88% $ 2,520 $ 13 1.04%
Investment securities - taxable........... 72,093 931 2.59 50,798 802 3.18
Investment securities - non-taxable (1)... 10,978 379 6.92 13,456 459 6.89
Mortgage loans held for sale.............. 31,554 786 5.00 87,885 2,205 5.06
Loans, net of unearned discount and fees.. 441,858 12,928 5.87 402,616 12,127 6.07
--------- -------- --------- --------
Total earning assets.................... 577,348 15,116 5.25 557,275 15,606 5.65
--------- -------- --------- --------
Cash and due from banks - non-interest
bearing................................... 20,673 19,810
Allowance for possible loan losses........ (7,339) (7,549)
Premises and equipment, net............... 19,213 15,334
Other assets.............................. 18,015 14,253
--------- ---------
Total assets............................ $ 627,910 $ 599,123
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits-interest bearing:
Interest-bearing demand accounts.......... $ 27,193 $ 72 0.53% $ 27,296 $ 90 0.67%
Savings and money market deposits......... 176,088 1,363 1.55 139,028 970 1.41
Time deposits............................. 191,934 3,310 3.46 188,280 3,467 3.71
--------- -------- --------- --------
Total interest-bearing deposits......... 395,215 4,745 2.41 354,605 4,527 2.57
--------- -------- --------- --------
Short-term borrowings..................... 25,460 65 0.51 46,005 276 1.21
Long-term debt ........................... 86,713 1,987 4.59 75,440 1,772 4.74
--------- -------- --------- --------
Total interest-bearing liabilities ..... 507,388 6,797 2.69 476,050 6,575 2.79
--------- -------- --------- --------
Non-interest bearing deposits............. 75,003 81,795
Other liabilities ........................ 4,701 4,902
Stockholders' equity...................... 40,818 36,377
--------- ---------
Total liabilities and stockholders' equity $ 627,910 $ 599,123
========= =========
Net interest income/spread ............... $ 8,319 2.56% $ 9,031 2.86%
======== ======= ======== =======
Net interest margin....................... 2.89% 3.27%
- ----------------------
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 prior 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
SIX MONTHS ENDED JUNE 30,
2004 COMPARED TO 2003
---------------------------------
CHANGE CHANGE
DUE TO DUE TO TOTAL
RATE VOLUME CHANGE
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Federal funds sold................................................ $ (2) $ 81 $ 79
Investment securities - taxable................................... (156) 285 129
Investment securities - non-taxable (1)........................... 2 (82) (80)
Mortgage loans held for sale...................................... (28) (1,391) (1,419)
Loans, net of unearned discount .................................. (451) 1,252 801
--------- --------- ---------
Total interest income.................................. (635) 145 (490)
--------- --------- ---------
Interest-bearing demand accounts.................................. (18) - (18)
Savings and money market deposits................................. 102 291 393
Time deposits..................................................... (213) 56 (157)
Short-term borrowings............................................. (159) (52) (211)
Long-term debt.................................................... (56) 271 215
--------- --------- ---------
Total interest expense................................. (344) 566 222
--------- --------- ---------
Net interest income............................................... $ (291) $ (421) $ (712)
========= ========= =========
- -----------------
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PROVISION FOR LOAN LOSSES
The provision for loan losses for the second quarter of 2004 was
$300,000, compared to $600,000 for the same period of 2003. For the
six-months ended June 30, 2004 and 2003, the provision was $650,000
and $1.2 million, respectively. The decrease in the provision for
loan losses recorded in the three- and six-month periods ended June
30, 2004 compared to the same periods in the prior year was the
result of improvements in the overall credit exposure in the loan
portfolio. The Company's credit administration function performs
monthly analyses on the loan portfolio to assess and report on risk
levels, delinquencies, an internal ranking system and overall credit
exposure. Management and the Board of Directors reviews the
allowance for loan losses monthly, considering such factors as
current and projected economic conditions, loan growth, the
composition of the loan portfolio, loan trends and classifications,
and other factors. We make provisions for loan losses in amounts
that management deems necessary to maintain the allowance for loan
losses at an appropriate level.
NON-INTEREST INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2004 2003 2004 2003
------- -------- ------- --------
(IN THOUSANDS)
Loans held for sale fee income................... $ 3,390 $ 5,900 $ 5,886 $ 11,005
NSF charges and service fees..................... 341 320 671 610
Other service charges............................ 308 237 543 464
Realized (loss) gain on investment securities.... (82) - 133 -
Other income .................................... 146 149 282 225
------- -------- ------- --------
Total non-interest income.................. $ 4,103 $ 6,606 $ 7,515 $ 12,304
======= ======== ======= ========
Non-interest income decreased $2.5 million, or 37.89%, to $4.1
million during the three-month period ended June 30, 2004, from $6.6
million during the three-month period ended June 30, 2003.
Non-interest income for the six-months ended June 30, 2004 was $7.5
million, a decrease of $4.8 million, or 38.93%, from $12.3 million
for the six-months ended June 30, 2003. These decreases are
attributable primarily to decreases in loans held for sale fee
income. Loans held for sale fee income decreased $2.5 million, or
42.55%, and $5.1 million, or 46.52%, for the three-month and
six-month periods ended June 30, 2004, respectively. During 2002 and
the first half of 2003, we experienced significant growth in our
loans held for sale fee income due to the expansion of our National
and Local mortgage divisions concurrent with a relatively low
interest rate environment. The low interest rate environment
resulted in a surge of mortgage refinancing activity. However,
during the second half of 2003 and early in the first half of 2004,
mortgage interest rates increased causing a decline in the volume of
mortgage origination activity, particularly refinancing volume.
During the second quarter of 2004, the Company recorded an $82,000
charge for an other-than-temporary impairment on an equity
investment. In addition, during the first quarter of 2004, we took
advantage of opportunities to mitigate the risk of longer-term rate
volatility in our available-for-sale investment portfolio and sold
approximately $6 million of available-for-sale investment securities
and realized $215,000 in gains on the sales.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NON-INTEREST EXPENSE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2004 2003 2004 2003
------- -------- ------- --------
(IN THOUSANDS)
Salaries and employee benefits............ $ 4,505 $ 5,405 $ 8,404 $ 10,077
Occupancy................................. 833 805 1,600 1,463
FDIC and other insurance expense.......... 60 58 121 119
General and administrative ............... 1,513 1,590 2,949 3,011
------- -------- ------- --------
Total non-interest expense.......... $ 6,911 $ 7,858 $13,074 $ 14,670
======= ======== ======= ========
Non-interest expense decreased to $6.9 million, or 12.06%, during
the three-month period ended June 30, 2004 and to $13.1 million, or
10.88%, during the six-month period ended June 30, 2004, from $7.9
million and $14.7 million in the prior year periods, respectively.
These decreases are attributable primarily to a decrease in salaries
and employee benefits expense which decreased $900,000, or 16.66%,
during the second quarter of 2004 and $1.7 million, or 16.61%,
during the six-month period ended June 30, 2004, compared to the
prior year periods. Salaries and employee benefits expense decreased
due to decreased volume-based incentive compensation in our mortgage
operations. We had 277 full-time equivalent employees at June 30,
2004 compared to 296 at June 30, 2003.
FINANCIAL CONDITION
Total assets for the Company at June 30, 2004, were $637.4 million,
an increase of $10.3 million, or 1.63%, compared to $627.1 million
at December 31, 2003. Deposits and stockholders' equity at June 30,
2004, were $479.0 million and $41.4 million, respectively, compared
with $470.5 million and $40.2 million, respectively, at December 31,
2003, increases of $8.5 million, or 1.80%, and $1.2 million, or
2.96%, respectively.
Loans at June 30, 2004 totaled $456.2 million, reflecting an
increase of $31.6 million, or 7.43%, compared to December 31, 2003.
The loan to deposit ratio at June 30, 2004 was 93.69% compared to
88.75% at December 31, 2003.
Mortgage loans held for sale at June 30, 2004 totaled $27.4 million,
an increase of $9.1 million, or 49.69% compared to December 31,
2003. The Company's principal funding source for mortgage loans held
for sale is deposits and advances from the Federal Home Loan Bank.
Advance availability with the Federal Home Loan Bank is determined
quarterly and at June 30, 2004, approximately $20.1 million was
available. The Company's Federal Home Loan Bank advance availability
fluctuates depending on levels of available collateral, which
includes mortgage loans held for sale.
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:
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NON-PERFORMING ASSETS
AS OF
------------------------------------
JUNE 30, DECEMBER 31,
2004 2003 2003
--------- --------- ------------
(Dollars in thousands)
REAL ESTATE LOANS:
Past due 90 days or more $ 419 $ 1,060 $ 337
Nonaccrual 2,461 589 1,991
INSTALLMENT LOANS:
Past due 90 days or more 18 3 4
Nonaccrual -- 5 --
CREDIT CARDS AND RELATED PLANS:
Past due 90 days or more -- 61 39
Nonaccrual -- -- --
COMMERCIAL (TIME AND DEMAND) AND ALL OTHER LOANS:
Past due 90 days or more 222 3,130 117
Nonaccrual 1,689 1,579 318
LEASE FINANCING RECEIVABLES:
Past due 90 days or more -- -- --
Nonaccrual 364 421 249
DEBT SECURITIES AND OTHER ASSETS (EXCLUDE OTHER REAL ESTATE
OWNED AND OTHER REPOSSESSED ASSETS):
Past due 90 days or more -- -- --
Nonaccrual -- -- --
--------- --------- ------------
Total non-performing loans 5,173 6,849 3,055
FORECLOSED ASSETS HELD FOR SALE -- 547 416
--------- --------- ------------
Total non-performing assets $ 5,173 $ 7,396 $ 3,471
========= ========= ============
Total nonperforming loans to total loans 1.13% 1.67% 0.72%
Total nonperforming loans to total assets 0.81% 1.09% 0.50%
Allowance for loan losses to nonperforming loans 142.86% 115.00% 230.79%
Nonperforming assets to loans and foreclosed assets
held for sale 1.13% 1.80% 0.82%
As of June 30, 2004, non-performing loans equaled 1.13% of total
loans, reflecting an increase in non-performing loans from December
31, 2003. Although total nonperforming loans at June 30, 2004
increased compared to December 31, 2003, the overall credit exposure
in the Company's total loan portfolio continued to improve;
consequently, the Company recorded a lower provision for loan losses
during the six month period ending June 30, 2004 compared to the six
month period ending June 30, 2003 The level of loans charged-off
decreased during the second quarter of 2004, as evidenced by the
decrease in our ratio of net charge-offs to average loans, to 0.14%
for the period ending June 30, 2004 compared to 0.30% for the period
ending December 31, 2003. We closely monitor non-performing credit
relationships and our philosophy has been to value non-performing
loans at their estimated collectible value and to aggressively
manage these situations. Generally, the Company maintains its
allowance for loan losses in excess of its non-performing
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
loans. As of June 30, 2004, our ratio of allowance for loan losses
to non-performing loans was 142.86%.
The following table sets forth information regarding changes in our
allowance for loan and valuation losses for the periods indicated.
SUMMARY OF LOAN LOSS EXPERIENCE
AND RELATED INFORMATION
AS OF AND FOR THE
-----------------------------------------
SIX MONTHS ENDED
JUNE 30, YEAR ENDED
------------------------- DECEMBER 31,
2004 2003 2003
---------- ----------- ------------
(Dollars in thousands)
BALANCE AT BEGINNING OF PERIOD $ 7,051 $ 6,914 $ 6,914
LOANS CHARGED-OFF
Commercial real estate -- 159 395
Residential real estate -- -- --
Commercial 386 124 802
Personal 50 40 68
Home Equity -- -- 10
Construction -- -- --
Leases 58 81 279
---------- ----------- ------------
Total loans charged-off 494 404 1,554
---------- ----------- ------------
RECOVERIES:
Commercial real estate 7 5 10
Residential real estate 48 2 --
Commercial 14 50 77
Personal 33 24 35
Home Equity -- -- --
Construction -- -- --
Leases 81 86 219
---------- ----------- ------------
Total recoveries 183 166 341
---------- ----------- ------------
NET LOANS CHARGED-OFF 311 238 1,213
PROVISION FOR LOAN LOSSES 650 1,200 1,350
---------- ----------- ------------
BALANCE AT END OF PERIOD $ 7,390 $ 7,876 $ 7,051
========== =========== ============
LOANS OUTSTANDING:
Average $ 441,858 $ 402,616 $ 410,593
End of period 456,175 414,830 424,620
RATIO OF ALLOWANCE FOR LOAN LOSSES TO
LOANS OUTSTANDING:
Average 1.67% 1.96% 1.72%
End of period 1.62% 1.90% 1.66%
RATIO OF ANNUALIZED NET CHARGE-OFFS TO
Average loans 0.14% 0.12% 0.30%
End of period loans 0.14% 0.12% 0.29%
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The allowance for loan losses as a percent of total loans decreased
slightly to 1.62% as of June 30, 2004, compared to 1.66% at December
31, 2003. As of June 30, 2004, net charge-offs equaled 0.14% of
average total loans on an annualized basis.
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
81.96% and 82.54% of our total deposits at June 30, 2004, and
December 31, 2003, 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.
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 June 30, 2004, the Bank was within the established guidelines.
At June 30, 2004, our total stockholders' equity was $41.4 million
and our equity to asset ratio was 6.49%. At June 30, 2004, our Tier
1 capital ratio was 9.61% compared to 10.04% at December 31, 2003,
while our total risk-based capital ratio was 11.88% compared to
12.41% at December 31, 2003. As of June 30, 2004, we had capital in
excess of the requirements for a "well-capitalized" institution.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.
We strive to maintain a position such that current 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 the Bank of Blue
Valley's net interest income over the next twelve month period and
net economic value of equity at risk at June 30, 2004 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 19.95% 0.82%
200 basis point rise 13.64% 0.61%
100 basis point rise 7.26% 0.50%
Base Rate Scenario - -
25 basis point decline (3.92%) 0.25%
50 basis point decline (9.66%) 0.48%
75 basis point decline (13.13%) 0.74%
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The above table indicates that, at June 30, 2004, 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 table also indicates that, at June 30, 2004, in the event of a
sudden increase or decrease in prevailing market rates, the current
net economic value of our equity would increase. Given our current
asset/liability position, a 25, 50 or 75 basis point decline in
interest rates will result in a higher economic value of our equity
as the change in estimated gain on assets exceeds the change in
estimated loss on liabilities 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
fixed-rate securities. However, the estimated market value increase
in fixed rate loans and investment securities is partially 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.
24
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Item 307 of Regulation S-K promulgated under the
Securities Act of 1933, as amended, and within 90 days of the date
of this Quarterly Report on Form 10-Q, the Chief Executive Officer
and Chief Financial Officer of the Company (the "Certifying
Officers") have conducted evaluations of the Company's disclosure
controls and procedures. As defined under Sections 13a-14(c) and
15d-14(c) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the term "disclosure controls and procedures" means
controls and other procedures of an issuer that are designed to
ensure that information required to be disclosed by the issuer in
the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under
the Exchange Act is accumulated and communicated to the issuer's
management, including its principal executive officer or officers
and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions
regarding required disclosure. The Certifying Officers have reviewed
the Company's disclosure controls and procedures and have concluded
that those disclosure controls and procedures are effective as of
the date of this Quarterly Report on Form 10-Q. In compliance with
Section 302 of the Sarbanes-Oxley Act of 2002, (18 U.S.C. 1350),
each of the Certifying Officers executed an Officer's Certification
included in this Quarterly Report on 10-Q.
As of the date of this Quarterly Report on Form 10-Q, there have not
been any significant changes in the Company's internal controls or
in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
25
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 19, 2004, the Company held its Annual Meeting of
Stockholders. There were 2,296,911 shares outstanding and entitled
to vote at the Annual Meeting, of which 1,640,543 shares were
represented in person or by proxy. The following items were
submitted at the Annual Meeting for consideration by the
stockholders:
1. Election of Directors
Wayne A. Henry, Jr. was elected at the Annual Meeting to serve
a three year term or until his successor is duly elected and
qualified. The voting results for both were as follows:
Shares Voted For: 1,640,518
Shares Voted Against 25
Shares Abstained 0
The directors of the Company whose terms of office extended
beyond the date of the Annual Meeting include:
Don H. Alexander
C. Ted McCarter
Thomas A. McDonnell
Robert D. Regnier
2. The Company's 2004 Employee Stock Purchase Plan was approved
The voting results were as follows:
Shares Voted For: 1,609,083
Shares Voted Against 31,460
Shares Abstained 0
ITEM 5. OTHER INFORMATION
Not applicable
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PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(F) EXHIBITS
11. Computation of Earnings Per Share. Please see p. 9.
15. Letter regarding Unaudited Interim Financial Information
31.1 Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350
31.2 Certification of the Treasurer pursuant to 18 U.S.C.
Section 1350
32.1 Certification of the Chief Executive Officer and
Treasurer pursuant to 18 U.S.C. Section 1350
(G) REPORTS ON FORM 8-K
On April 14, 2004, Blue Valley filed a report on Form 8-K
covering the press release for the Company's first quarter
2004 earnings.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLUE VALLEY BAN CORP
Date: August 13, 2004 By: /s/ Robert D. Regnier
----------------------------------
Robert D. Regnier, President and
Chief Executive Officer
Date: August 13, 2004 By: /s/ Mark A. Fortino
----------------------------------
Mark A. Fortino, Treasurer
28