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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, 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
OVERLAND PARK, KANSAS 66225-6128
(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 American Stock Exchange
Preferred 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 28, 2005 the registrant had 2,335,071 shares of Common Stock
($1.00 par value) outstanding, of which 1,128,092 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, 2004 closing
price of the stock, was approximately $30.5 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Part III - Proxy Statement for the 2005 Annual Meeting of Stockholders
BLUE VALLEY BAN CORP
FORM 10-K INDEX
Page No.
--------
PART I.
Item 1. 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, Related
Stockholder Matters and Issuer Purchases of Equity
Securities 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
Item 9B. Other Information 39
PART III.
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 40
Item 13. Certain Relationships and Related Transactions 40
Item 14. Accountant Fees and Services 41
PART IV.
Item 15. Exhibits, Financial Statement Schedules 41
1
PART I
ITEM 1: BUSINESS
THE COMPANY AND SUBSIDIARIES
Blue Valley Ban Corp. ("Blue Valley" or 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 has established a national presence by originating 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 Leawood, Olathe and
Shawnee, Kansas, and a supermarket banking facility in Leawood, Kansas.
Our lending activities focus on commercial lending and residential mortgage
origination services, and to a lesser extent, consumer lending and leasing. 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 lending, commercial real estate lending,
construction lending, lease financing, residential real estate lending, consumer
lending, and home equity loans.
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 or existing lines of business
while monitoring related risk factors. 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 buildings and real property that comprise
our headquarters, mortgage operations facility and the Leawood banking center;
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. On December 31, 2004, Blue
Valley Insurance Services, Inc. ceased operations as we decided not to further
pursue this line of business at this time.
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.
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, 2004, total deposits in Johnson
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County, including those of banks, thrifts and credit unions, were approximately
$11.3 billion, which represented 24.37% of total deposits in the state of Kansas
and 36.44% of total deposits in the Kansas City MSA.
As our founders anticipated, the trade area surrounding our main banking
facility in Overland Park, Kansas 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 facility is approximately 20 miles northwest of our
headquarters location. We entered into the Shawnee, Kansas market in 1999 with
the opening of a grocery store branch. During the first quarter of 2001,
construction of our freestanding banking facility in Shawnee, Kansas was
completed and operations commenced, and then in 2004, we merged our Shawnee,
Kansas grocery store branch into our Shawnee, Kansas freestanding branch. 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. During the second quarter of 2004, we completed construction of our
freestanding banking facility in Leawood, Kansas and operations commenced.
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, 2004, our loans represented approximately
75.39% of our total assets, our legal lending limit to any one borrower was
$15.5 million, and our largest single borrower as of that date had outstanding
loans of $9.5 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 professional
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 or a combination of two senior loan management officers. 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, 2004.
3
LOAN PORTFOLIO
AS OF DECEMBER 31, 2004
-----------------------
AMOUNT PERCENT
-------- -------
(DOLLARS IN THOUSANDS)
Commercial ....................... $117,604 23.19%
Commercial real estate ........... 126,205 24.88
Construction ..................... 130,631 25.76
Residential real estate .......... 30,886 6.09
Leases ........................... 21,203 4.18
Consumer ......................... 48,950 9.65
Home equity ...................... 31,691 6.25
-------- ------
Total loans and leases ........ 507,170 100.00%
Less allowance for loan losses ... 7,333
--------
Loans receivable, net ............ $499,837
--------
Commercial loans. As of December 31, 2004, approximately $117.6 million, or
23.19%, of our loan portfolio represented commercial loans. The Bank has
developed a strong reputation in providing and servicing 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, 2004,
approximately 10.87% of our commercial loans had outstanding balances in excess
of $300,000, and these loans accounted for 66.72% 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 $9.3 million, or 7.87%, of our commercial loans are Small
Business Administration (SBA) loans, of which $6.8 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, 2004, approximately $126.2 million, or 24.88%, 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.
4
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,
2004, approximately $130.6 million, or 25.76%, 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
fifteen-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.
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, 2004, $30.9 million, or 6.09%, 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.
In addition, we also originate residential mortgage loans with the
intention of selling these loans in the secondary market. During 2004, we
originated approximately $883.4 million of residential mortgage loans, and we
sold approximately $857.6 million 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 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 from 2001 through 2003. While the volume of mortgage originations
and refinancing declined in 2004, we continued to take advantage of the national
presence established in previous years and originate residential mortgage loans
on our InternetMortgage.com website. 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 interest rate risk on mortgage loans to
be sold in the secondary market.
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 purchasing 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
5
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.
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, 2004, our lease portfolio totaled $21.2 million, or 4.18% of our
total loan portfolio, consisting of $15.2 million principal amount of leases
originated by us and $6.0 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.
Consumer loans. As of December 31, 2004, our consumer loans totaled $49.0
million, or 9.65% 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, 2004, approximately $39.8 million, or 7.82%, of our loan portfolio
represented indirect installment loans. Our loans made through this program
generally represent loans to purchase new or late model automobiles. There are
currently 29 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.
Home equity loans. As of December 31, 2004, our home equity loans totaled
$31.7 million, or 6.25% of our total loan portfolio. Home equity loans are
generally secured by second liens on residential real estate and are
underwritten in a similar manner as our consumer loans.
6
INVESTMENT ACTIVITIES
The objectives of our investment policy are to:
- secure the safety of principal;
- provide adequate liquidity;
- 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 2004 and 2003 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
customer base and source of funding. Because of the nature and behavior of these
deposit products, management reviews and analyzes our pricing strategy in
comparison not only to competitor rates, but versus other alternative funding
sources to determine the most advantageous source. 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, 2004, the Bank had $471,000
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.
7
INVESTMENT BROKERAGE SERVICES
In 1999, the Bank began offering investment brokerage services through an
unrelated broker-dealer. These services are currently offered at all of our
locations. Four 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 2004, the amount of our
fee income generated from investment brokerage services was $326,000.
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 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, and custodial and directed
trust accounts. As of December 31, 2004, the Bank's trust department
administered 229 accounts, with assets under management of approximately $118.1
million. Trust services provide the Bank with a source of fee income and
additional deposits. In 2004, the amount of our fee income from trust services
was $304,000.
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
At December 31, 2004, the Bank had approximately 278 full-time employees.
Blue Valley, Blue Valley Building Corp., BVBC Capital Trust I, BVBC Capital
Trust II, Blue Valley Insurance Services, and Blue Valley Investment Corp. did
not have any employees. None of the Bank's employees 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, 2004, and their principal positions.
8
Name Age Positions
- ---- --- ---------
Directors
Robert D. Regnier ......................... 56 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........................ 66 Director of Blue Valley and the Bank
Wayne A. Henry, Jr......................... 52 Director of Blue Valley
C. Ted McCarter............................ 68 Director of Blue Valley and Chairman of the Board of
Directors of the Bank
Thomas A. McDonnell........................ 59 Director of Blue Valley
Additional Directors of the Bank
Harvey S. Bodker........................... 69 Director of the Bank
Suzanne E. Dotson.......................... 58 Director of the Bank
Charles H. Hunter.......................... 62 Director of the Bank
Executive Officers who are not Directors
Mark A. Fortino............................ 38 Senior Vice President and Chief Financial Officer of
the Bank; Chief Financial Officer of Blue Valley
Ralph J. Schramp........................... 55 Senior Vice President - Commercial Lending and
Business Development for the Bank
Gary L. Sherrer............................ 64 Senior Vice President - Mortgage Division of the Bank
Sheila Stokes.............................. 43 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."
9
With certain exceptions, the Gramm-Leach-Bliley Act similarly expands the
authorized activities of subsidiaries of 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.
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);
10
- Acquiring all or substantially all of the assets of another bank or
bank holding company; or
- 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.,
BVBC Capital Trust I and BVBC Capital Trust II are Blue Valley's only active
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.
11
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 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;
12
- "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%;
- "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, 2004, 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
13
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 1, 2004, the Bank received a rating of
"Satisfactory."
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 $7.0 million to
$47.6 million plus 10% must be maintained against that portion of net
transaction accounts in excess $47.6 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 incurred in December
2004 in the original principal amount of $2.8 million. As of December 31, 2004,
the outstanding principal amount of this indebtedness was $2.8 million.
In 2001, our Olathe, Kansas banking center was moved to a more suitable
property occupying 0.41 acres of ground on the southwest corner of Santa Fe and
Ridgeview streets. The building consists of 2,580 square feet on the main floor,
plus basement storage. We still own the old banking center property which is on
the northwest corner of
14
Santa Fe and Ridgeview streets and occupies 0.94 acres of ground. That building
consists of 4,116 square feet and we are actively marketing this property for
sale.
Our facility in Shawnee, Kansas is 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.
In January 2003, we purchased a 55,000 square foot building on 3.10 acres
of ground located on the northwest corner of College Boulevard and Lowell in
Overland Park, Kansas. The Bank consolidated its mortgage operations and
operates a small branch at this facility. The building and land are subject to
third-party mortgage indebtedness incurred in December 2004 in the original
principal amount of $4.7 million. As of December 31, 2004, the outstanding
principal amount of this indebtedness was $4.7 million.
During the second quarter of 2004 we opened a 7,000 square foot
full-service banking center within a two-story 20,000 square foot office
building on the corner of 135th Street and Mission Road in Leawood, Kansas. We
also operate a 400 square foot banking center in a grocery store at 135th Street
and Mission Road. The lease for this space bears a primary term through June,
2005.
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. We no longer
believe this market is strong enough to support another bank franchise and we
are actively marketing this property for sale.
ITEM 3: LEGAL PROCEEDINGS
On October 13th, 2004, we became a defendant in a lawsuit filed in the
United States District Court, Kansas District by one current mortgage loan
originator and twenty three former mortgage loan originators. The plaintiffs are
claiming that the Bank did not compensate them appropriately for overtime hours
worked in accordance with the Fair Labor Standards Act. While the plaintiffs'
claims total $5.6 million, we believe the Company has meritorious defenses to
the claims made and we intend to vigorously defend against these claims. In the
fourth quarter of 2004, the Company took a $550,000 charge recording a liability
for the estimated potential cost of this litigation. We currently do not
anticipate any significant additional financial impact from this litigation.
Other than this claim, there are no other pending legal proceedings that are
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, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
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 28, 2005, there were approximately
199 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 closing stock
price 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.
2004 2003
--------------- ---------------
Fiscal Period High Low High Low
- ------------- ------ ------ ------ ------
First $27.00 $25.10 $25.84 $20.53
Second 27.95 23.75 27.83 22.42
Third 27.00 26.00 29.82 26.34
Fourth 26.75 24.00 30.07 24.85
DIVIDENDS
Our board of directors declared cash dividends on our common stock as
follows:
DECLARATION DATE AMOUNT PER SHARE RECORD DATE PAY DATE
---------------- ---------------- ----------- --------
December 16, 2002 $0.10 December 31, 2002 January 15, 2003
December 15, 2003 $0.15 December 31, 2003 January 30, 2004
December 17, 2004 $0.20 December 31, 2004 January 31, 2005
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, is 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. At December 31, 2004,
approximately $12,695,000 of retained earnings were available for dividend
declaration without prior regulatory approval.
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 FINANCIAL DATA
The following table presents our consolidated financial data as of and for
the five years ended December 31, 2004, 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, 2004, have been derived from
our audited consolidated financial statements.
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SELECTED STATEMENT OF INCOME DATA
Interest income:
Loans, including fees .............................. $ 29,245 $ 28,293 $ 26,857 $ 27,921 $ 26,733
Federal funds sold and interest-bearing deposits ... 157 49 297 679 777
Securities ......................................... 2,301 2,070 3,405 4,541 3,607
---------- ---------- ---------- ---------- ----------
Total interest income ........................... 31,703 30,412 30,559 33,141 31,117
---------- ---------- ---------- ---------- ----------
Interest expense:
Interest-bearing demand deposits ................... 169 165 388 815 872
Savings and money market deposit accounts .......... 2,932 2,204 2,711 4,846 5,726
Other time deposits ................................ 7,297 6,935 7,759 9,775 7,555
Funds borrowed ..................................... 4,115 4,245 3,368 2,958 2,543
---------- ---------- ---------- ---------- ----------
Total interest expense .......................... 14,513 13,549 14,226 18,394 16,696
---------- ---------- ---------- ---------- ----------
Net interest income ............................. 17,190 16,863 16,333 14,747 14,421
Provision for loan losses ............................. 1,965 1,350 2,920 2,400 1,950
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan
losses ....................................... 15,225 15,513 13,413 12,347 12,471
---------- ---------- ---------- ---------- ----------
Non-interest income:
Loans held for sale fee income ..................... 10,358 19,866 16,690 6,931 1,154
NSF charges & service fees ......................... 1,326 1,283 1,026 836 655
Other service charges .............................. 1,115 924 821 796 963
Realized gain on available-for-sale securities ..... 524 -- 193 500 --
Other income ....................................... 617 463 281 203 284
---------- ---------- ---------- ---------- ----------
Total non-interest income ....................... 13,940 22,536 19,011 9,266 3,056
---------- ---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits ..................... 16,670 19,670 16,437 10,063 5,856
Occupancy .......................................... 3,433 3,137 2,101 1,574 1,124
FDIC and other insurance ........................... 175 174 161 140 177
General & administrative ........................... 6,292 6,304 5,417 3,933 3,136
---------- ---------- ---------- ---------- ----------
Total non-interest expense ...................... 26,570 29,285 24,116 15,710 10,293
---------- ---------- ---------- ---------- ----------
Income before income taxes ......................... 2,595 8,764 8,308 5,903 5,234
Income tax provision ............................ 665 3,130 2,912 1,960 1,757
---------- ---------- ---------- ---------- ----------
Net income ...................................... $ 1,930 $ 5,634 $ 5,396 $ 3,943 $ 3,477
========== ========== ========== ========== ==========
PER SHARE DATA
Basic earnings ..................................... $ 0.84 $ 2.51 $ 2.48 $ 1.82 $ 1.62
Diluted earnings ................................... 0.82 2.43 2.40 1.77 1.59
Dividends .......................................... 0.20 0.15 0.10 -- --
Book value basic (at end of period) ................ 17.78 17.64 15.47 13.11 11.12
Weighted average common shares outstanding:
Basic ........................................... 2,302,564 2,244,930 2,178,803 2,165,030 2,141,523
Diluted ......................................... 2,360,061 2,320,840 2,252,929 2,222,166 2,191,305
Dividend payout ratio .............................. 23.80% 5.98% 4.04% --% --%
17
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SELECTED FINANCIAL CONDITION DATA
(AT END OF PERIOD):
Total securities .................................... $ 66,350 $106,036 $ 61,720 $ 78,032 $ 78,859
Total mortgage loans held for sale .................. 44,144 18,297 119,272 41,853 1,207
Total loans ......................................... 507,170 424,620 380,082 334,075 287,669
Total assets ........................................ 672,717 627,073 605,539 492,379 415,023
Total deposits ...................................... 522,646 470,495 423,787 394,245 338,221
Funds borrowed ...................................... 102,469 111,741 141,737 65,530 50,273
Total stockholders' equity .......................... 41,384 40,198 34,344 28,525 23,815
Trust assets under administration ................... 118,074 90,389 44,245 41,571 35,268
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Net interest margin (1) .......................... 2.91% 3.01% 3.35% 3.51% 4.35%
Non-interest income to average assets ............ 2.16 3.62 3.55 2.02 0.84
Non-interest expense to average assets ........... 4.11 4.71 4.51 3.43 2.84
Net overhead ratio (2) ........................... 1.96 1.08 0.95 1.41 2.00
Efficiency ratio (3) ............................. 85.35 74.33 68.23 65.42 58.89
Return on average assets (4) ..................... 0.30 0.91 1.01 0.86 0.96
Return on average equity (5) ..................... 4.69 14.85 17.34 15.26 16.84
Asset Quality Ratios:
Non-performing loans to total loans .............. 0.86% 0.72% 0.29% 0.92% 0.86%
Allowance for possible loan losses to:
Total loans ................................... 1.45 1.66 1.82 1.58 1.54
Non-performing loans .......................... 168.60 230.79 618.29 171.96 179.47
Net charge-offs to average total loans ........... 0.36 0.30 0.36 0.51 0.49
Non-performing loans to total assets ............. 0.65 0.50 0.18 0.62 0.60
Balance Sheet Ratios:
Loans to deposits ................................ 97.04% 90.25% 89.69% 84.74% 85.05%
Average interest-earning assets to average
interest-bearing liabilities .................. 114.38 114.61 115.64 114.50 113.30
Capital Ratios:
Total equity to total assets ..................... 6.15% 6.42% 5.67% 5.80% 5.74%
Total capital to risk-weighted assets ratio ...... 11.15 12.41 10.13 10.69 11.95
Tier 1 capital to risk-weighted assets ratio ..... 9.00 10.04 8.82 8.87 9.51
Tier 1 capital to average assets ratio ........... 8.45 8.31 7.74 7.17 7.47
Average equity to average assets ratio ........... 6.37 6.10 5.82 5.64 5.70
- ----------
(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; potential
unfavorable results of litigation, 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
19
effective interest rate, or based on the loan's observable market value or the
fair value of the collateral if the loan is 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
2004 was a challenging year for the Company. During the first half of the
year, the Company endured a low short term interest rate environment which
compressed our net interest margin. In addition, longer term interest rates
increased slightly and stabilized which curtailed mortgage refinancings. This
had an adverse effect on the mortgage origination side of our business,
resulting in lower origination volumes and declining fee income. In 2004 we
continued to grow loans and deposits at a robust pace and, associated with this
loan growth, we increased our provision for loan and lease losses. In addition,
accrued litigation costs, incremental costs associated with the opening of our
Leawood, Kansas banking center, and other costs weighed on our financial
performance. We expect some of these costs to be nonrecurring. During the second
half of 2004, we experienced an increase in our net interest margin as five 25
basis point increases in the prime lending rate had a positive effect and eased
the compression in our net interest margin. We expect that any further increases
in the prime lending rate will continue to have a positive effect on our net
interest margin.
Net income for 2004 was $1.9 million, a $3.7 million, or 65.75% decrease
from the $5.6 million earned in 2003. Diluted earnings per share decreased
66.26% to $0.82 for the year ended December 31, 2004 from $2.43 in the previous
year. The Company's returns on average assets and average stockholders' equity
for 2004 were 0.30% and 4.69%, compared to 0.91% and 14.85%, respectively, for
2003.
Net interest income for 2004 was $17.2 million compared to $16.9 million
earned during 2003. The increase of $327,000 or 1.93% was primarily the result
of an increase in earning assets.
The provision for loan losses in 2004 was $2.0 million compared to $1.4
million in 2003. The increase in the provision in 2004 was essentially the
result of an increase in loans, net charge-offs, and non-performing loans during
2004.
Non-interest income decreased 38.15% to $13.9 million in 2004 from $22.5
million in 2003. Increases in market interest rates and other demand factors
resulted in a significant industry-wide decline in the volume of residential
mortgage loans originated in 2004 compared to 2003, particularly refinancing
volume. We experienced a similar trend which resulted in lower origination fees
during 2004 than during 2003. 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 further increases in interest rates will
have a detrimental impact on mortgage loan refinancing and lower loans held for
sale fee income.
Total assets for the Company at December 31, 2004, were $672.7 million, an
increase of $45.6 million, or 7.27%, from $627.1 million at December 31, 2003.
Deposits and stockholders' equity at December 31, 2004 were $522.6 million and
$41.4 million, compared with $470.5 million and $40.2 million at December 31,
2003, increases of $52.2 million, or 11.08%, and $1.2 million, or 2.95%,
respectively.
20
Loans at December 31, 2004 totaled $507.2 million, an increase of $82.6
million, or 19.44%, compared to December 31, 2003. The loan to deposit ratio at
December 31, 2004 was 97.04% compared to 90.25% at December 31, 2003. The
increase in the loan to deposit ratio was due to loan growth which, on a
relative basis, 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.
Historically, our ratio of total non-performing assets to total assets
reflects the Bank's conservative underwriting policies and aggressive management
of impaired loans and has resulted in low levels of nonaccrual loans. For the
five years ended December 31, 2004, our average year-end ratio of non-performing
loans to total loans was 0.82%. As of December 31, 2004, our ratio of
non-performing loans to total loans was 0.86%, 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. As of December 31, 2004, our ratio of
allowance for loan losses to non-performing loans was 168.60%, compared to
230.79% at December 31, 2003.
The average net charge-off ratio was 0.40% for the five years ended
December 31, 2004. Our net charge-off ratio for the year ended December 31, 2004
was 0.36%, which was below our historical average. The Bank continues to
aggressively manage defaults in the loan portfolio. Management intends to
vigorously pursue collection of all charged-off 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, 2004 and 2003. FTE net interest income for 2004
increased to $17.4 million from $17.2 million in 2003, a $221,000, or 1.29%,
increase.
FTE interest income for 2004 was $31.9 million, an increase of $1.2
million, or 3.86%, from $30.7 million in 2003, as a result of growth in earning
assets. Average interest earning assets increased $24.1 million, or 4.22%,
during 2004. Due to the increase in earning asset volume, loan interest and fee
income increased to $29.2 million in 2004 from $28.3 million in 2002, or 3.36%.
Interest income on investment securities increased by $125,000, or 5.27%, in
2004 compared to the prior year. The yield on average interest-earning assets
fell to 5.36%, as compared to 5.38% in 2003, a decline of 2 basis points.
Interest expense for 2004 was $14.5 million, up $964,000, or 7.11%, from
$13.5 million in 2003. The increase resulted from an increase in the level of
interest bearing liabilities, primarily interest-bearing deposits, as well as an
increase in the overall rate paid on our average interest-bearing liabilities.
Total average interest bearing liabilities increased $22.1 million or 4.44%
during 2004 mostly due to increases in money market and time deposits. The rate
paid on our total average interest bearing liabilities increased to 2.79% in
2004 compared to 2.72% in 2003, an increase of 7 basis points. This increase
resulted from increases in rates paid on savings deposits, money market
deposits, time deposits, and long-term debt.
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
21
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 resulted from a decline in the rates 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 rate 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.
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 rates 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,
-------------------------------------------------------------------------------------
2004 2003 2002
--------------------------- --------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Federal funds sold ........................ $ 15,077 $ 157 1.04% $ 5,500 $ 49 0.89% $ 18,171 $ 297 1.63%
Investment securities - taxable ........... 72,830 1,926 2.64 55,259 1,489 2.69 51,273 2,741 5.34
Investment securities - non-taxable (1) ... 8,206 569 6.93 12,885 881 6.84 14,526 1,007 6.93
Mortgage loans held for sale .............. 35,219 1,813 5.15 86,808 4,460 5.14 63,866 3,937 6.17
Loans, net of unearned discount and
fees (2) ............................... 463,833 27,432 5.91 410,593 23,833 5.80 349,879 22,920 6.55
-------- ------- -------- ------- -------- -------
Total earning assets ................ 595,165 31,897 5.36 571,045 30,712 5.38 497,715 30,902 6.21
-------- ------- -------- ------- -------- -------
Cash and due from banks - non-interest
bearing ................................ 21,152 30,453 22,910
Allowance for possible loan losses ........ (7,434) (7,592) (5,547)
Premises and equipment, net ............... 19,613 16,388 9,380
Other assets .............................. 17,366 12,129 10,546
-------- -------- --------
Total assets ........................ $645,862 $622,423 $535,004
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits-interest bearing:
Interest-bearing demand accounts ....... $ 28,268 $ 169 0.60% $ 26,415 $ 165 0.63% $ 29,779 $ 388 1.30%
Savings and money market deposits ...... 182,468 2,932 1.61 150,503 2,204 1.46 146,132 2,711 1.86
Time deposits .......................... 202,649 7,297 3.60 195,599 6,935 3.55 176,762 7,759 4.39
-------- ------- -------- ------- -------- -------
Total interest-bearing deposits ..... 413,385 10,398 2.52 372,517 9,304 2.50 352,673 10,858 3.08
-------- ------- -------- ------- -------- -------
Short-term borrowings ..................... 26,734 211 0.79 44,230 451 1.02 21,722 266 1.22
Long-term debt ............................ 80,226 3,904 4.87 81,499 3,794 4.66 55,993 3,102 5.54
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities ...................... 520,345 14,513 2.79 498,246 13,549 2.72 430,388 14,226 3.31
-------- ------- -------- ------- -------- -------
Non-interest bearing deposits ............. 79,171 81,269 69,550
Other liabilities ......................... 5,202 4,959 3,952
Stockholders' equity ...................... 41,144 37,949 31,114
-------- -------- --------
Total liabilities and
stockholders' equity ............. $645,862 $622,423 $535,004
======== ======== ========
FTE net interest income/spread ............ $17,384 2.57% $17,163 2.66% $16,676 2.90%
======= ==== ======= ==== ======= ====
FTE net interest margin ................... 2.91% 3.01% 3.35%
==== ==== ====
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%.
For the three years ended December 31, 2004, 2003 and 2002, the tax
equivalency adjustment amounted to $194,000, $300,000, and 343,000,
respectively.
(2) Includes average balances and income from loans on nonaccrual status
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,
-------------------------------------------------------
2004 COMPARED TO 2003 2003 COMPARED TO 2002
-------------------------- --------------------------
CHANGE CHANGE CHANGE CHANGE
DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL
RATE VOLUME CHANGE RATE VOLUME CHANGE
------ ------- ------- ------- ------ -------
Federal funds sold $ 8 $ 100 $ 108 $ (135) $ (113) $ (248)
Investment securities -
taxable (28) 465 437 (1,359) 107 (1,252)
Investment securities -
non-taxable (1) 12 (324) (312) (14) (112) (126)
Mortgage loans held for
sale 8 (2,655) (2,647) (656) 1,179 523
Loans, net of unearned
discount 451 3,148 3,599 (2,611) 3,524 913
----- ------- ------- ------- ------ -------
Total interest income 451 734 1,185 (4,775) 4,585 (190)
----- ------- ------- ------- ------ -------
Interest-bearing demand
accounts (7) 11 4 (202) (21) (223)
Savings and money market
deposits 214 514 728 (571) 64 (507)
Time deposits 108 254 362 (1,492) 668 (824)
Short-term borrowings (102) (138) (240) (45) 230 185
Long-term debt 172 (62) 110 (495) 1,187 692
----- ------- ------- ------- ------ -------
Total interest expense 385 579 964 (2,805) 2,128 (677)
----- ------- ------- ------- ------ -------
Net interest income $ 66 $ 155 $ 221 $(1,970) $2,457 $ 487
===== ======= ======= ======= ====== =======
(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, 2004, we provided $2.0 million for loan losses, as compared
to $1.4 million for the year ended December 31, 2003, an increase of $615,000,
or 45.56%. During 2004, our provision for loan losses increased due to overall
growth in the loan portfolio as well as an increase in net charge-offs and
impaired loans. The loan portfolio increased 19.44% to $507.2 million in 2004
from $424.6 million at December 31, 2003. Total impaired loans increased 26.05%
to $12.8 million at December 31, 2004, with a related reserve of $1.8 million,
from $10.2 million at December 31, 2003, with a related reserve of $1.5 million.
Net charge-offs increased to $1.7 million in 2004 from $1.2 million in 2003.
During 2003, the provision decreased due to management's assessment of an
overall improvement in credit quality of the loan portfolio. The provision for
loan losses decreased to $1.3 million in 2003 from $2.9 million in 2002, or
53.77%, while the loan portfolio increased to $424.6 million in 2003 from $380.1
million in 2002, or 11.71%.
The allowance for loan losses as a percentage of loans was 1.45% at
December 31, 2004, as compared to 1.66% in 2003 and 1.82% in 2002. The decrease
in this percentage from December 31, 2003 was primarily due to
23
net charge-offs as well as modifications by management to the general reserve
factors applied to unimpaired loans. The general reserve factors are
periodically reviewed by management and during 2004 were lowered based on an
assessment of the Company's historical charge-off experience for certain loan
categories as well as improvements in the ability of the Company's loan review
process to identify credit quality deterioration on a timely basis. The general
reserve factor at December 31, 2004 was 1.13%. The general reserve factor at
December 31, 2003 was 1.34%, essentially unchanged from the factor as of
December 31, 2002 of 1.38%.
Overall, we increased the total balance of the allowance for loan losses in
2004 and 2003 based upon an analysis of several factors, including an analysis
of impaired loans, the general reserve factor analysis referred to in our
Critical Accounting Policies and changes in the loan mix. 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
---------------------------
2004 2003 2002
------- ------- -------
(IN THOUSANDS)
Loans held for sale fee income ..................... $10,358 $19,866 $16,690
NSF charges and service fees ....................... 1,326 1,283 1,026
Other service charges .............................. 1,115 924 821
Realized gains on available for
sale securities, net ............................ 524 -- 193
Other income ....................................... 617 463 281
------- ------- -------
Total non-interest income ....................... $13,940 $22,536 $19,011
======= ======= =======
Non-interest income decreased to $13.9 million, or 38.14%, during 2004,
from $22.5 million during 2003. This decrease is attributable to a decrease in
loans held for sale fee income of $9.5 million. We experienced a decline in our
loans held for sale fee income due to a decline in residential mortgage
origination and refinancing resulting from higher interest rates. The volume of
closed residential mortgages fell to $883.4 million in 2004 from $1.5 billion
and $1.3 billion in 2003 and 2002, respectively. Sustainability of the level of
our loans held for sale fee income is primarily dependent upon the interest rate
environment, and secondarily dependent on our ability to develop new products
and alternative delivery channels. Other service charge income, which includes
trust services income, investment brokerage income, merchant bankcard processing
and debit card processing income, increased by $191,000 or 20.67% from 2003 to
2004. In 2004, we realized $524,000 of net gains on the sale of
available-for-sale securities. We took advantage of opportunities to mitigate
the risk of long-term rate volatility in our available-for-sale investment
portfolio and also provide a funding source for loan growth by selling some of
our longer-term bonds. 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 $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-
24
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.
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
---------------------------
2004 2003 2002
------- ------- -------
(IN THOUSANDS)
Salaries and employee benefits ..... $16,670 $19,670 $16,437
Occupancy .......................... 3,433 3,137 2,101
FDIC and other insurance expense ... 175 174 161
General and administrative ......... 6,292 6,304 5,417
------- ------- -------
Total non-interest expenses ..... $26,570 $29,285 $24,116
======= ======= =======
Non-interest expense decreased 9.27% to $26.6 million during 2004, as
compared to $29.3 million in the prior year primarily due to a decrease in
salaries and employee benefits. Our salaries and employee benefits expense
decreased 15.25% to $16.7 million in 2004 from $19.7 million in 2003, mainly due
to a decline in incentive compensation related to mortgage origination activity,
which was partially offset by the increase in staffing costs from the opening of
our Leawood banking center as well as a $550,000 accrued expense recorded in
2004 to reflect the estimated potential cost of litigation related to claimed
violations of the Fair Labor Standards Act (see Item 3). Occupancy expenses
increased 9.43% to $3.4 million in 2004 from $3.1 million in 2003, primarily due
to the opening of our Leawood banking center in May 2004 and the incremental
costs associated with the operation of our College Boulevard facility for a full
year.
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 278. 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.
INCOME TAXES
Our income tax expense during 2004 was $665,000, compared to $3.1 million
during 2003, and $2.9 million during 2002. The decrease in 2004 reflects our
lower earnings for the current fiscal year as well as the Company's recognition
of tax reserves provided in prior tax years. Our consolidated effective income
tax rates of 25.63%, 35.71% and 35.05% for the three years ended December 31,
2004, 2003, and 2002, respectively, 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.
25
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 commercial and commercial real estate,
construction, lease financing, residential real estate, consumer and home equity
lending. We emphasize commercial lending to professionals, businesses and their
owners. Commercial loans and loans secured by commercial real estate accounted
for 48.07% of our total loans at December 31, 2004, 46.45% of our total loans at
December 31, 2003, and 43.40% of our total loans at December 31, 2002. These
loans increased at an 17.82% compound annual rate during the three-year period
ended December 31, 2004.
Loans were $507.2 million at December 31, 2004, an increase of $82.6
million, or 19.44%, compared to December 31, 2003. Loans at December 31, 2003
were $424.6 million, an increase of $44.5 million, or 11.71%, compared to
December 31, 2002. We funded our loan growth during 2004 by selling
available-for-sale securities and increasing deposits. The loan to deposit ratio
increased to 97.04%, compared to 90.25% at December 31, 2003, and 89.69% at
December 31, 2002.
We experienced increases in most loan categories during 2004. 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 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 2004, sales officers cultivated additional dealer
relationships as well as additional business from existing dealers and our
indirect loan portfolio grew by $19.8 million or 98.82%. The growth, which began
in 2003, reversed a two-year decline when we encountered significant competition
from national finance companies offering below market rate financing incentives.
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,
------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------ ------------------ ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Commercial .............. $117,604 23.19% $109,818 25.86% $ 93,658 24.64% $ 85,311 25.54% $ 76,556 26.61%
Commercial real
estate ............... 126,205 24.88 87,438 20.59 71,295 18.76 63,756 19.08 42,267 14.69
Construction ............ 130,631 25.76 123,445 29.08 127,071 33.43 93,656 28.03 59,733 20.76
Lease financing ......... 21,203 4.18 22,175 5.22 22,600 5.95 24,221 7.25 25,302 8.81
Residential real
estate ............... 30,886 6.09 27,017 6.37 21,581 5.68 24,460 7.32 37,290 12.96
Consumer ................ 48,950 9.65 29,701 6.99 26,750 7.04 29,895 8.96 35,864 12.47
Home equity ............. 31,691 6.25 25,026 5.89 17,127 4.50 12,776 3.82 10,657 3.70
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans and
leases ............ 507,170 100.00% 424,620 100.00% 380,082 100.00% 334,075 100.00% 287,669 100.00%
====== ====== ====== ====== ======
Less allowance for
loan losses .......... 7,333 7,051 6,914 5,267 4,440
-------- -------- -------- -------- --------
Loans receivable, net ... $499,837 $417,569 $373,168 $328,808 $283,229
======== ======== ======== ======== ========
Collateral and Concentration. Management monitors concentrations of loans
to individuals or businesses involved in a single industry over 5% of total
loans. At December 31, 2004, 2003 and 2002, 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 $130.6 million,
or 25.76%, of total loans, as of December 31, 2004. The Bank does not have any
other concentrations of loans to individuals or businesses involved in a single
industry exceeding 5% of total loans. The Bank's lending limit under federal law
to any one borrower was $15.5 million at December 31, 2004. The Bank's largest
single borrower, net of participations, at December 31, 2004 had outstanding
loans of $9.5 million.
The following table presents the aggregate maturities of loans in each
major category of our loan portfolio as of December 31, 2004, excluding the
allowance for loan and valuation losses. Additionally, the table presents the
26
dollar amount of all loans due more than one year after December 31, 2004 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, 2004
------------------------------------------------------------------
MORE THAN ONE YEAR
LESS THAN ONE TO OVER FIVE ------------------
ONE YEAR FIVE YEARS YEARS TOTAL FIXED VARIABLE
--------- ---------- --------- -------- ------- --------
(IN THOUSANDS)
Commercial ................ $57,505 $51,255 $ 8,844 $117,604 $20,348 $39,751
Commercial Real Estate .... 24,208 82,260 19,737 126,205 51,130 50,867
Construction .............. 97,022 30,935 2,674 130,631 5,942 27,667
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:
NON-PERFORMING ASSETS
AS OF DECEMBER 31,
-----------------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Commercial and all other loans:
Past due 90 days or more ........................ $ 2,008 $ 118 $ 1 $ 9 $ 24
Nonaccrual ...................................... 543 318 234 752 1,326
Commercial real estate loans:
Past due 90 days or more ........................ -- -- -- -- --
Nonaccrual ...................................... 158 -- 175 322 274
Construction loans:
Past due 90 days or more ........................ -- -- -- -- --
Nonaccrual ...................................... -- 487 -- -- --
Lease financing:
Past due 90 days or more ........................ 1 -- 3 -- --
Nonaccrual ...................................... 80 249 223 1,364 383
Residential real estate loans:
Past due 90 days or more ........................ 153 336 -- -- 206
Nonaccrual ...................................... 1,315 437 407 503 224
Consumer loans:
Past due 90 days or more ........................ 17 42 22 100 --
Nonaccrual ...................................... -- -- 13 13 37
Home equity loans:
Past due 90 days or more ........................ -- -- -- -- --
Nonaccrual ...................................... 75 1,068 40 -- --
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 ................... 4,350 3,055 1,118 3,063 2,474
------- ------- ------- ------- -------
Foreclosed assets held for sale .................... 2,645 416 614 49 334
------- ------- ------- ------- -------
Total non-performing assets .................. $ 6,995 $ 3,471 $1,732 $ 3,112 $ 2,808
======= ======= ======= ======= =======
Total non-performing loans to total loans .......... 0.86% 0.72% 0.29% 0.92% 0.86%
Total non-performing loans to total assets ......... 0.65 0.49 0.18 0.62 0.60
Allowance for loan losses to non-performing loans .. 168.60 230.79 618.29 171.96 179.47
Non-performing assets to loans and foreclosed
assets held for sale ............................ 1.37 0.82 0.46 0.93 0.97
27
Non-performing assets. Non-performing assets increased to $7.0 million at
December 31, 2004 from $3.5 million at December 31, 2003. The increase related
primarily to increases in commercial and all other loans, residential real
estate loans and foreclosed assets held for sale. Commercial and all other loans
past due 90 days or more increased to $2.0 million at December 31, 2004, $1.7
million of which related to loans in process of renegotiation as of that date.
Subsequent to year-end, the loans were renewed and restored to a current status.
Residential real estate loans on a nonaccrual status increased to $1.3 million
as of December 31, 2004. $434,000 of this increase was due to mortgage loans
repurchased from investors as part of a $9 million repurchase by the Company
from secondary market investors. The Company repurchased the loans when it
discovered that they had been underwritten with documentation altered by a
former employee. The Company funded the $9 million repurchase with existing
liquidity. The balance of $2.6 million of foreclosed assets held for sale
pertains to one residential real estate property which the Company has marketed
and anticipates selling during 2005.
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 $12.8 million at December 31, 2004, $10.2 million at
December 31, 2003, and $11.7 million at December 31, 2002, with related
allowances for loan losses of $1.8 million, $1.5 million, and $1.8 million,
respectively.
Total interest income of $745,000, $736,000 and $699,000 was recognized on
average impaired loans of $13.8 million, $11.7 million and $9.6 million for
2004, 2003 and 2002, respectively. Included in this total is cash basis interest
income of $46,000, $67,000 and $46,000 recognized on nonaccrual impaired loans
during 2004, 2003 and 2002, 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
general reserves, based on loss factors, to the remainder of the loan portfolio.
The loss factors are 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,
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period.......... $ 7,051 $ 6,914 $ 5,267 $ 4,440 $ 3,817
Loans charged-off:
Commercial loans..................... 1,665 802 323 1,015 343
Commercial real estate loans......... -- 395 323 -- --
Construction loans................... -- -- -- -- --
Lease financing...................... 220 279 870 836 1,034
Residential real estate loans........ 18 -- -- 5 --
Consumer loans....................... 80 68 66 80 153
Home equity loans ................... -- 10 -- -- --
-------- -------- -------- -------- --------
Total loans charged-off........... 1,983 1,554 1,582 1,936 1,530
Recoveries:
Commercial loans..................... 41 77 123 119 104
Commercial real estate loans......... 7 10 1 -- --
Construction loans................... -- -- -- -- --
Lease financing...................... 166 219 162 198 53
Residential real estate loans........ 48 -- -- 5 --
Consumer loans....................... 38 35 23 41 46
Home equity loans.................... -- -- -- -- --
-------- -------- -------- -------- --------
Total recoveries........................ 300 341 309 363 203
-------- -------- -------- ---------- ---------
Net loans charged-off................... 1,683 1,213 1,273 1,573 1,327
Provision for loan losses............... 1,965 1,350 2,920 2,400 1,950
-------- -------- -------- -------- --------
Balance at end of period................ $ 7,333 $ 7,051 $ 6,914 $ 5,267 $ 4,440
======== ======== ======== ======== ========
Loans outstanding:
Average........................... $463,833 $410,593 $349,879 $310,727 $268,227
End of period..................... 507,170 424,620 380,082 334,075 287,669
Ratio of allowance for loan losses to
loans outstanding:
Average........................... 1.58% 1.72% 1.98% 1.70% 1.66%
End of period..................... 1.45 1.66 1.82 1.58 1.54
Ratio of net charge-offs to:
Average loans..................... 0.36 0.30 0.36 0.51 0.49
End of period loans............... 0.33 0.29 0.33 0.47 0.46
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,
--------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------ ------------------ ------------------ ------------------ ------------------
% of Total % of Total % of Total % of Total % of Total
Amount Allowance Amount Allowance Amount Allowance Amount Allowance Amount Allowance
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
Commercial $3,016 41.13% $2,899 41.12% $3,012 43.56% $1,181 22.42% $1,687 38.00%
Commercial real estate 1,432 19.53 1,161 16.47 1,008 14.58 888 16.86 485 10.92
Construction 1,475 20.11 1,581 22.42 1,405 20.32 1,070 20.32 672 15.14
Lease financing 583 7.95 690 9.78 813 11.76 1,440 27.34 526 11.84
Residential real estate 209 2.85 273 3.87 293 4.24 400 7.59 399 8.99
Consumer 404 5.51 288 4.09 256 3.70 210 3.99 547 12.32
Home equity 214 2.92 159 2.25 127 1.84 78 1.48 124 2.79
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $7,333 100.00% $7,051 100.00% $6,914 100.00% $5,267 100.00% $4,440 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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 decreased by $39.7 million or 37.43% during
2004, as we utilized the liquidity provided by maturing securities to fund our
loan growth. In doing so, we took advantage of opportunities to mitigate the
risk of longer-term rate volatility in our available-for-sale investment
portfolio and sold approximately $20.7 million of available-for-sale securities,
realizing $524,000 in net gains on those sales.
As of December 31, 2004, 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 permitted.
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,
----------------------------
2004 2003 2002
------- -------- -------
(IN THOUSANDS)
U.S. government agency securities ... $63,561 $ 93,790 $47,579
State and municipal obligations ..... 2,133 11,451 13,785
Equity and other .................... 656 795 --
------- -------- -------
Total ............................ $66,350 $106,036 $61,364
======= ======== =======
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, 2004. Yields are
presented on a tax equivalent basis. Expected maturities will differ from
contractual maturities due to unscheduled repayments.
30
MATURITY OF INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS
------------------ ------------------ ------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
U.S. government ...........
agency securities ...... $21,853 1.82% $41,708 2.92% $-- --%
State and municipal
obligations ............ 849 4.66 1,284 4.62 -- --
Equity and other
securities with no
defined maturity ....... -- -- -- -- -- --
------- ---- ------- ---- --- ---
Total available
for sale ............ $22,702 1.92% $42,992 2.97% $-- --%
======= ==== ======= ==== === ===
MORE THAN TEN TOTAL INVESTMENT
YEARS SECURITIES
------------------ ----------------------------
CARRYING AVERAGE CARRYING FAIR AVERAGE
VALUE YIELD VALUE VALUE YIELD
-------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
U.S. government ...........
agency securities ...... $-- --% $63,561 $63,561 2.54%
State and municipal
obligations ............ -- -- 2,133 2,133 4.63
Equity and other
securities with no
defined maturity ....... -- -- 656 656 2.95
--- --- ------- ------- ----
Total available
for sale ............ $-- --% $66,412 $66,350 2.61%
=== === ======= ======= ====
Deposits. Deposits grew by $52.2 million, or 11.08%, for the year ended
December 31, 2004, compared to 2003 year-end. The primary source of deposit
growth in 2004 was in money management and time deposit balances, which
increased by $29.5 million and $12.6 million, respectively. The increase in the
money management balances during 2004 was primarily attributable to the
attractiveness of our money management account's tiered rate structure; whereby
larger customer deposit balances earned a higher rate of interest. The increase
in time deposit balances was primarily due to a promotional product with an
attractive rate and term offered during the third quarter of 2004. 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. However, we continue to
analyze alternative strategies to grow our deposits including opening additional
banking centers in markets management considers underserved, offering new
products, and obtaining brokered deposits as allowed by our Funds Management
policy and as deemed prudent by management and 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,
------------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------ ------------------------------ ------------------------------
(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 ..................... $ 84,764 16.22% --% $ 74,717 15.88% --% $ 86,591 20.43% --%
Savings .................... 9,100 1.74 0.49 7,740 1.64 0.62 6,037 1.42 1.39
Interest-bearing demand .... 36,342 6.95 0.59 26,260 5.58 0.63 30,747 7.26 1.30
Money Market ............... 30,139 5.77 0.42 30,594 6.50 0.68 33,932 8.01 1.30
Money Management ........... 144,523 27.65 1.93 126,037 26.79 1.79 96,837 22.85 2.05
Time Deposits .............. 217,778 41.67 3.60 205,147 43.61 3.55 169,643 40.03 4.39
-------- ------ -------- ------ -------- ------
Total deposits .......... $522,646 100.00% $470,495 100.00% $423,787 100.00%
======== ====== ======== ====== ======== ======
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, 2004:
31
AMOUNTS AND MATURITIES OF
TIME DEPOSITS OF $100,000 OR MORE
AS OF DECEMBER 31, 2004
--------------------------
WEIGHTED AVERAGE
AMOUNT RATE PAID
------- ----------------
(DOLLARS IN THOUSANDS)
Three months or less .................... $ 8,357 2.27%
Over three months through six months .... 5,532 2.61
Over six months through twelve months ... 17,590 2.95
Over twelve months ...................... 64,340 4.21
------- ----
Total ................................ $95,819 3.71%
======= ====
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 81.56% of our total deposits at December 31, 2004, and 76.20%
and 82.54% of total deposits at December 31, 2003 and 2002, respectively.
Generally, the Company's funding strategy is to utilize FHLBank borrowings to
fund originations of mortgage loans held for sale and fund balances generated by
other lines of business with deposits. Advance availability with the FHLBank is
determined quarterly and at December 31, 2004, approximately $44.4 million was
available. The Company's FHLBank advance availability fluctuates depending on
levels of available collateral, which includes mortgage loans held for sale. 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 FHLBank of
Topeka, is required to acquire and hold shares of capital stock in the FHLBank
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 $6.9
million investment in stock of the FHLBank of Topeka as of December 31, 2004.
During 2004 and 2003, the Bank took advantage of some special advances from the
FHLB to supplement its funding base. The Bank had $48.5 million and $62.5
million in outstanding long-term advances from the FHLBank of Topeka at December
31, 2004 and 2003, 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.
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
WEIGHTED
AVERAGE AVERAGE WEIGHTED
AMOUNT AMOUNT MAXIMUM INTEREST AVERAGE
OUTSTANDING OUTSTANDING OUTSTANDING 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, 2004:
Federal Home Loan Bank borrowings .......... $ -- $ 510 $ 6,000 2.26% --%
Federal Funds purchased .................... -- 1,107 -- 1.96 --
Repurchase agreements ...................... 21,118 24,100 25,134 0.65 1.28
------- ------- ---- ----
Total ................................... $21,118 $25,717 0.73 1.28
======= =======
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
======= =======
- ----------
(1) Calculations are based on daily averages where available and monthly
averages otherwise.
Capital Resources. At December 31, 2004, our total stockholders' equity was
$41.4 million, and our equity to asset ratio was 6.15%. At December 31, 2003,
our total stockholders' equity was $40.2 million and our equity to asset ratio
was 6.41%.
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, 2004, our Tier 1 capital ratio was 9.00%, while our
total risk-based capital ratio was 11.15%, both of which exceed the capital
minimums established in the risk-based capital requirements.
CONTRACTUAL OBLIGATIONS
Our known contractual obligations outstanding as of December 31, 2004 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 $80,088 $873 $1,971 $18,195 $59,049
Operating Lease Obligations 32 32 -- -- --
------- ---- ------ ------- -------
Total $80,120 $905 $1,971 $18,195 $59,049
======= ==== ====== ======= =======
33
Our risk-based capital ratios at December 31, 2004, 2003 and 2002 are
presented below.
RISK-BASED CAPITAL
DECEMBER 31,
2004 2003 2002
-------- ------------ --------
(DOLLARS IN THOUSANDS)
Tier 1 capital
Stockholders' equity ..................... $ 41,384 $ 40,198 $ 34,344
Intangible assets ........................ (976) (1,128) (1,281)
Unrealized (appreciation) depreciation
on available-for-sale securities ...... 257 (570) (785)
Trust preferred securities (1) ........... 13,880 13,210 11,187
-------- -------- --------
Total Tier 1 capital ............... 54,545 51,710 43,465
-------- -------- --------
Tier 2 capital
Qualifying allowance for loan losses ..... 7,333 6,448 6,171
Trust preferred securities(1) ............ 5,708 5,790 313
-------- -------- --------
Total Tier 2 capital ............... 13,041 12,238 6,484
-------- -------- --------
Total risk-based capital ........... $ 67,586 $ 63,948 $ 49,949
======== ======== ========
Risk weighted assets ..................... $605,886 $515,201 $492,922
======== ======== ========
Ratios at end of period
Total capital to risk-weighted assets
ratio ................................. 11.15% 12.41% 10.13%
Tier 1 capital to average assets ratio
(leverage ratio) ...................... 8.45% 8.31% 7.74%
Tier 1 capital to risk-weighted assets
ratio ................................. 9.00% 10.04% 8.82%
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, 2004, approximately $13.8
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.
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 17 to the consolidated
financial statements included in this report.
34
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, 2004, the Company had outstanding commitments to
originate loans aggregating approximately $36,980,000.
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
$57,378,000 and mortgage loans held for sale amounted to $44,144,000 at December
31, 2004 and combined had related forward commitments to sell mortgage loans
amounted to approximately $101,522,000 at December 31, 2004 respectively.
Mortgage loans in the process of origination represent commitments to originate
loans at both fixed and variable 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 $13,604,000 at December 31, 2004.
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, 2004 unused lines of credit borrowings
aggregated approximately $168,840,000.
RECENT AND FUTURE ACCOUNTING REQUIREMENTS
In 2003, the Financial Accounting Standards Board ("FASB") 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,
35
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 required
deconsolidation of the Company's investment in BVBC Capital Trusts I and II, and
did not have a material impact on the financial statements of the Company.
In December 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), Share Based Payment, which
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services, and focuses primarily on
accounting for transactions in which an entity obtains employee services. The
SFAS requires a public entity to measure the cost of employee services received
in exchange for its equity instruments based on the fair value at the grant date
(with limited exceptions) and recognize that cost over the service period. SFAS
123 (revised 2004) revises SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." The provisions of SFAS 123 (revised 2004) will be effective for
the Company's first interim reporting period beginning after June 15, 2005. The
Company does not believe that the adoption of SFAS 123 (revised 2004) will have
a material impact on the consolidated financial statements.
In March 2004, the FASB Emerging Issues Task Force (EITF) reached consensus
on Issue 03-01 (EITF 03-01), "The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments." EITF 03-01, as originally proposed,
included new guidance for evaluating and recording impairment losses on debt and
equity investments available for sale as well as disclosure requirements about
impairments which have not been recognized as other-than temporary. In
September, 2004, the FASB deferred the effective date of the EITF's guidance on
evaluating and recognizing an other-than-temporary impairment. This deferral did
not, however, change the disclosure guidance effective for fiscal years ending
after December 15, 2003. The deferred guidance, when issued, may impact the
Company's financial reporting including the assessment and accounting treatment
for declines in market value of debt securities.
In December, 2003, the Accounting Standards Executive Committee (AcSEC) of
the American Institute of Certified Public Accountants (AICPA) issued SOP 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3
addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from a purchaser's initial investment in loans or
debt securities acquired in a transfer if those differences are attributable, at
least in part, to credit quality. It includes loans acquired individually, in
pools or as part of business combinations and does not apply to loans originated
by the entity. SOP 03-3 prohibits the recognition of the excess of contractual
cash flows as an adjustment of yield, loss accrual or valuation allowance at the
time of purchase, requires that subsequent increases in expected cash flows be
recognized prospectively through an adjustment of yield and requires that
subsequent decreases in expected cash flows be recognized as an impairment. The
SOP also prohibits the creation or transfer of an acquiree's valuation allowance
to an acquirer's in the initial accounting of loans acquired in a transfer. SOP
03-3 is effective for loans and debt securities acquired by the Company in years
beginning after December 15, 2004. The Company does not believe that the
adoption of SOP 03-3 will have a material impact on the consolidated financial
statements.
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
36
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 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, 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 29.50% 1.81%
200 basis point rise 18.67% 1.28%
100 basis point rise 9.75% 0.71%
Base Rate Scenario -- --
25 basis point decline (2.71%) 0.37%
50 basis point decline (5.54%) 0.70%
100 basis point decline (12.32%) 1.33%
The above table indicates that, at December 31, 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 above table also indicates that, at December 31, 2004, in the event of
a sudden decrease in prevailing market rates, the economic value of our equity
would increase. Given our current asset/liability position, a 25, 50 or 100
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 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.
37
The following table summarizes the anticipated maturities or repricing of
our interest-earning assets and interest-bearing liabilities as of December 31,
2004, based on the information and assumptions set forth below.
INTEREST-RATE SENSITIVITY ANALYSIS
Expected Maturity Date
------------------------------------------------------------------------------------------
Fiscal Year Ending December 31,
------------------------------------------------
0-90 91-365
Days Days 2005 2006 2007 2008 2009 Thereafter Total
-------- -------- -------- -------- -------- -------- -------- ---------- --------
INTEREST-EARNING ASSETS:
Fixed Rate Loans .............. $ 11,855 $ 21,141 $ 32,996 $ 33,604 $ 29,501 $ 27,584 $ 37,175 $ 16,850 $177,710
Average Interest Rate ...... 6.13% 6.95% 6.66% 6.41% 7.01% 6.51% 6.05% 9.02% 6.74%
Variable Rate Loans ........... 361,763 4,508 366,271 -- -- -- -- -- 366,271
Average Interest Rate ...... 5.57% 5.41% 5.56% -- -- -- -- -- 5.56%
Fixed Rate Investments ........ 2,445 20,256 22,701 32,564 9,215 1,214 -- -- 65,694
Average Interest Rate ...... 1.96% 1.93% 1.94% 2.07% 3.17% 4.08% --% --% 2.21%
Variable Rate Investments ..... -- -- -- -- -- -- -- -- --
Average Interest Rate ...... -- -- -- -- -- -- -- -- --
Federal Funds Sold ............ 2,500 -- 2,500 -- -- -- -- -- 2,500
Average Interest Rate ...... 1.90% -- 1.90% -- -- -- -- -- 1.90%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning
assets ............... $378,563 $ 45,905 $424,468 $ 66,168 $ 38,716 $ 28,798 $ 37,175 $ 16,850 $612,175
======== ======== ======== ======== ======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand ....... $ 36,314 $ -- $ 36,314 $ -- $ -- $ -- $ -- $ -- $ 36,314
Average Interest Rate ...... 0.88% -- 0.88% -- -- -- -- -- 0.88%
Savings and money market ...... 183,790 -- 183,790 -- -- -- -- -- 183,790
Average Interest Rate ...... 1.74% -- 1.74% -- -- -- -- -- 1.74%
Time deposits ................. 23,767 38,140 61,907 25,508 88,223 7,095 11,661 23,384 217,778
Average Interest Rate ...... 2.46% 2.83% 2.69% 4.04% 4.24% 3.89% 4.18% 4.07% 3.74%
Funds borrowed ................ 22,568 686 23,254 960 1,011 11,068 7,127 59,049 102,469
Average Interest Rate ...... 1.25% 5.32% 1.37% 5.32% 5.32% 5.15% 3.04% 5.41% 4.30%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities .......... $266,439 $ 38,826 $305,265 $ 26,468 $ 89,234 $ 18,163 $ 18,788 $ 82,433 $540,351
======== ======== ======== ======== ======== ======== ======== ======== ========
CUMULATIVE:
Rate sensitive assets
(RSA) ................... $378,563 $424,468 $424,468 $490,636 $529,352 $558,150 $595,326 $612,175 $612,175
Rate sensitive liabilities
(RSL) ................... 266,439 305,265 305,265 331,733 420,967 439,130 457,918 540,351 540,351
GAP (GAP = RSA - RSL) ... 112,124 119,203 119,203 158,903 108,385 119,020 137,407 71,824 71,824
RSA/RSL ....................... 142.08% 139.05% 139.05% 147.90% 125.75% 127.10% 130.01% 113.29%
RSA/Total assets .............. 56.27 63.10 63.10 72.93 78.69 82.97 88.50 91.00
RSL/Total assets .............. 39.61 45.38 45.38 49.31 62.58 65.28 68.07 80.32
GAP/Total assets .............. 16.67 17.72 17.72 23.62 16.11 17.69 20.43 10.68
GAP/RSA ....................... 29.62 28.08 28.08 32.39 20.48 21.32 23.08 11.73
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 17 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 Chief
Financial Officer, conducted an evaluation of the effectiveness of the design
and operation of the Company's disclosure controls and procedures as of December
31, 2004. 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.
ITEM 9B: OTHER INFORMATION
None
39
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 2005 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. A copy of 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 2005
Annual Meeting of Stockholders and is hereby incorporated by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
This information is included in the Company's Proxy Statement for the 2005
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, 2004, the Bank had aggregate loans outstanding to such
persons of approximately $14.2 million, which represented 34.30% of our
stockholders' equity of $41.4 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.
40
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
This information is included in the Company's Proxy Statement for the 2005
Annual Meeting of Stockholders and is hereby incorporated by reference.
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1 and 2. Financial Statements and any Financial Statement Schedules
(b) 3. 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.The exhibits listed
in the accompanying exhibit index are filed as part of this Form 10-K.
(c) None
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 ***
41
4.14 Specimen of Floating Rate Junior Subordinated Debt Security ***
10.1 Promissory Note of Blue Valley Building dated July 15, 1994. *
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 Rule
13a-14(a)/15d-14(a)
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
* 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.
*** Filed with the Commission on March 19, 2004 as an Exhibit to Blue Valley's
Annual Report on Form 10-K. 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, 2005 By: /s/ Robert D. Regnier
------------------------------------
Robert D. Regnier, President,
Chief Executive Officer and Director
Date: March 18, 2005 By: /s/ Mark A. Fortino
------------------------------------
Mark A. Fortino, Chief Financial
Officer
Date: March 18, 2005 By: /s/ Donald H. Alexander
------------------------------------
Donald H. Alexander, Director
Date: March 18, 2005 By: /s/ Wayne A. Henry, Jr.
------------------------------------
Wayne A. Henry, Jr., Director
Date: March 18, 2005 By: /s/ C. Ted McCarter
------------------------------------
C. Ted McCarter, Director
Date: March 18, 2005 By: /s/ Thomas A. McDonnell
------------------------------------
Thomas A. McDonnell, Director
43
BLUE VALLEY BAN CORP
DECEMBER 31, 2004, 2003 AND 2002
CONTENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.................. 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
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2004. 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 of the Public
Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2004
in conformity with accounting principles generally accepted in the United States
of America.
/s/ BKD, LLP
----------------------------------------
Kansas City, Missouri
February 18, 2005
F-2
BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(dollars in thousands, except share data)
ASSETS
2004 2003
-------- --------
Cash and due from banks $ 19,994 $ 21,317
Federal funds sold 2,500 29,400
-------- --------
Cash and cash equivalents 22,494 50,717
Available-for-sale securities 66,350 106,036
Mortgage loans held for sale 44,144 18,297
Loans, net of allowance for loan losses of $7,333 and $7,051
in 2004 and 2003, respectively 499,837 417,569
Premises and equipment, net 19,988 18,250
Foreclosed assets held for sale, net 2,645 416
Interest receivable 2,375 1,923
Deferred income taxes 2,383 1,302
Prepaid expenses and other assets 3,538 3,593
Federal Home Loan Bank stock, Federal Reserve Bank stock,
and other securities 7,987 7,842
Core deposit intangible asset, at amortized cost 976 1,128
-------- --------
Total assets $672,717 $627,073
======== ========
See Notes to Consolidated Financial Statements
F-3
BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2004 2003
-------- --------
LIABILITIES
Deposits
Demand $ 84,764 $ 74,717
Savings, NOW and money market 220,104 190,631
Time 217,778 205,147
-------- --------
Total deposits 522,646 470,495
Other interest-bearing liabilities 22,381 23,447
Long-term debt 80,088 88,294
Interest payable and other liabilities 6,218 4,639
-------- --------
Total liabilities 631,333 586,875
-------- --------
STOCKHOLDERS' EQUITY
Capital stock
Common stock, par value $1 per share;
Authorized 15,000,000 shares; issued and outstanding
2004 - 2,327,086 shares; 2003 - 2,279,161 shares 2,327 2,279
Additional paid-in capital 8,099 7,404
Retained earnings 31,809 30,344
Unearned compensation (594) (399)
Accumulated other comprehensive income
Unrealized appreciation (depreciation) on available-for-sale securities,
net of income taxes (credit) of $(171) in 2004 and $380 in 2003 (257) 570
-------- --------
Total stockholders' equity 41,384 40,198
-------- --------
Total liabilities and stockholders' equity $672,717 $627,073
======== ========
See Notes to Consolidated Financial Statements
F-4
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(dollars in thousands, except per share data)
2004 2003 2002
------- ------- -------
INTEREST INCOME
Interest and fees on loans $29,245 $28,293 $26,857
Federal funds sold 157 49 297
Available-for-sale securities 2,301 2,070 3,405
------- ------- -------
Total interest income 31,703 30,412 30,559
------- ------- -------
INTEREST EXPENSE
Interest-bearing demand deposits 169 165 388
Savings and money market deposit accounts 2,932 2,204 2,711
Other time deposits 7,297 6,935 7,759
Federal funds purchased and other interest-bearing liabilities 186 195 223
Short-term debt 25 256 43
Long-term debt 3,904 3,794 3,102
------- ------- -------
Total interest expense 14,513 13,549 14,226
------- ------- -------
NET INTEREST INCOME 17,190 16,863 16,333
PROVISION FOR LOAN LOSSES 1,965 1,350 2,920
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,225 15,513 13,413
------- ------- -------
NONINTEREST INCOME
Loans held for sale fee income 10,358 19,866 16,690
Service fees 2,441 2,207 1,847
Gains on available for sale securities, net 524 -- 193
Other income 617 463 281
------- ------- -------
Total noninterest income 13,940 22,536 19,011
------- ------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 16,670 19,670 16,437
Net occupancy expense 3,433 3,137 2,101
Other operating expense 6,467 6,478 5,578
------- ------- -------
Total noninterest expense 26,570 29,285 24,116
------- ------- -------
INCOME BEFORE INCOME TAXES 2,595 8,764 8,308
PROVISION FOR INCOME TAXES 665 3,130 2,912
------- ------- -------
NET INCOME $ 1,930 $ 5,634 $ 5,396
======= ======= =======
BASIC EARNINGS PER SHARE $ 0.84 $ 2.51 $ 2.48
======= ======= =======
DILUTED EARNINGS PER SHARE $ 0.82 $ 2.43 $ 2.40
======= ======= =======
DIVIDENDS PER SHARE $ 0.20 $ 0.15 $ 0.10
======= ======= =======
See Notes to Consolidated Financial Statements
F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(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, 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 (credit) of $(30) (46) (46) (46)
------ ------ ------ ------- ----- ----- -------
BALANCE, DECEMBER 31, 2002 $5,350 $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 (credit) of $(143) (215) (215) (215)
------ ------ ------ ------- ----- ----- -------
BALANCE, DECEMBER 31, 2003 $5,419 $2,279 $7,404 $30,344 $(399) $ 570 $40,198
====== ====== ====== ======= ===== ===== =======
Issuance of 47,925 shares of common stock 48 695 (338) 405
Dividends on common stock ($0.20 per
share) (465) (465)
Net income 1,930 1,930 1,930
Restricted stock earned, net of forfeitures 143 143
Change in unrealized appreciation on
available-for-sale securities, net
of income taxes (credit) of $(552) (827) (827) (827)
------ ------ ------ ------- ----- ----- -------
BALANCE, DECEMBER 31, 2004 $1,103 $2,327 $8,099 $31,809 $(594) $(257) $41,384
====== ====== ====== ======= ===== ===== =======
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
Reclassification Disclosure
Unrealized appreciation (depreciation) on available-for-sale securities, net
of income taxes (credit) of $(342), $(143) and $47 for the periods ended
December 31, 2004, 2003 and 2002, respectively $(513) $(215) $ 70
Less: reclassification adjustments for appreciation included in net
income, net of income taxes of $210, $0 and $77 for the periods
ended December 31, 2004, 2003 and 2002, respectively (314) -- (116)
----- ----- -----
Change in unrealized appreciation on available-for-sale
securities, net of income taxes (credit) of $(552), $(143), and $(30) for
the periods ended December 31, 2004, 2003 and 2002, respectively $(827) $(215) $ (46)
===== ===== =====
See Notes to Consolidated Financial Statements
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(dollars in thousands)
2004 2003 2002
--------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,930 $ 5,634 $ 5,396
Adjustments to reconcile net income to net cash
flow from operating activities:
Depreciation and amortization 1,863 1,579 1,114
Amortization (accretion) of premiums and
discounts on securities (28) 38 42
Provision for loan losses 1,965 1,350 2,920
Deferred income taxes (530) 529 (754)
Stock dividend on FHLB securities (240) -- --
Net gain on available-for-sale securities (524) -- (193)
Net loss on sale of foreclosed assets 104 58 121
Net (gain) loss on sale of premises and equipment 5 (18) 35
Restricted stock earned and forfeited 143 -- --
Originations of loans held for sale (883,406) (1,544,916) (1,305,219)
Proceeds from the sale of loans held for sale 857,560 1,645,891 1,227,800
Changes in:
Interest receivable (452) 91 500
Prepaid expenses and other assets (305) (1,353) (617)
Interest payable and other liabilities 1,114 (1,374) 1,370
--------- ----------- -----------
Net cash provided by (used in) operating activities (20,801) 107,509 (67,485)
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net originations of loans (90,650) (46,439) (58,127)
Proceeds from sales of loan participations 3,635 -- 9,135
Purchase of premises and equipment (3,094) (9,099) (3,060)
Proceeds from sale of premises and equipment -- 18 12
Proceeds from the sale of foreclosed assets 448 828 1,026
Proceeds from sales of available-for-sale securities 21,270 -- 13,183
Proceeds from maturities of available-for-sale securities 49,564 80,168 65,198
Purchases of available-for-sale securities (31,974) (124,936) (61,994)
Purchases of Federal Home Loan Bank stock, Federal
Reserve Bank stock, and other securities -- (2,345) (2,625)
Proceeds from the sale of Federal Home Loan Bank stock,
Federal Reserve Bank stock, and other securities 95 -- 893
--------- ----------- -----------
Net cash used in investing activities (50,706) (101,805) (36,359)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, money market, NOW 39,520 11,204 22,579
and savings accounts
Net increase in time deposits 12,631 35,504 6,963
Repayments of long-term debt (21,706) (4,670) (162)
Proceeds from long-term debt 13,500 22,825 22,095
Net proceeds (payments) on short-term debt -- (35,000) 35,000
Proceeds from sale of common stock 405 777 691
Net increase (decrease) in federal funds purchased and other
interest-bearing liabilities (1,066) (13,382) 19,274
--------- ----------- -----------
Net cash provided by financing activities 43,284 17,258 106,440
--------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (28,223) 22,962 2,596
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 50,717 27,755 25,159
--------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 22,494 $ 50,717 $ 27,755
========= =========== ===========
SUPPLEMENTAL CASH FLOWS INFORMATION
Loans transferred to foreclosed assets held for sale $ 2,781 $ 688 $ 1,712
Restricted stock issued $ 338 $ 399 $ --
Cash dividends declared on common stock $ 465 $ 342 $ --
Interest paid $ 14,511 $ 13,195 $ 14,638
Income taxes paid (net of refunds) $ 635 $ 4,771 $ 2,535
See Notes to Consolidated Financial Statements.
F-7
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
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 residential mortgages locally and
nationwide through its InternetMortgage.com website. 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 and Leawood, Kansas.
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.
Blue Valley Insurance Services, Inc. was an insurance agency offering
insurance products to our customers. During December 2004, the Company ceased
all the operations within this entity.
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.
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.
F-8
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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, 2004, 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, 2004 was
$806,000.
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.
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.
F-9
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 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 $976,000 and
$1,128,000 (originally $2,576,000) at December 31, 2004 and 2003, respectively,
and are 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 2004, 2003 and 2002. Expected amortization for each of the
next five years is $152,000 and $216,000 in total thereafter.
F-10
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 2003 and 2002 financial
statements to conform to the 2004 financial statement presentation. These
reclassifications had no effect on net income. During the period ended December
31, 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.
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:
2004 2003 2002
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
Net income, as reported $ 1,930 $ 5,634 $ 5,396
---------- ---------- ----------
Add: Total stock-based employee compensation
recognized in net income, net of income
taxes of $44 for the year ended December 31, 2004 84 -- --
Less: Total stock-based compensation cost
determined under the fair value based method,
net of income tax credit of $(44) for the year
ended December 31, 2004 (84) -- --
---------- ---------- ----------
Pro forma net income $ 1,930 $ 5,634 $ 5,396
========== ========== ==========
Average common shares outstanding 2,302,564 2,244,930 2,178,803
Average common share stock options outstanding 57,497 75,910 74,126
---------- ---------- ----------
Average diluted common shares 2,360,061 2,320,840 2,252,929
---------- ---------- ----------
Basic earnings per share $ 0.84 $ 2.51 $ 2.48
========== ========== ==========
Diluted earnings per share $ 0.82 $ 2.43 $ 2.40
========== ========== ==========
F-11
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
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:
2004 2003 2002
------ ------ ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net income As reported $1,930 $5,634 $5,396
Pro forma $1,930 $5,618 $5,344
Basic earnings per share As reported $ 0.84 $ 2.51 $ 2.48
Pro forma $ 0.84 $ 2.50 $ 2.45
Diluted earnings per share As reported $ 0.82 $ 2.43 $ 2.40
Pro forma $ 0.82 $ 2.42 $ 2.37
The expected life of options outstanding is based on the historical
experience of the Company. During 2004 and 2003, the Company issued no stock
options. The fair value of options granted in 2002 was estimated at $49,000 on
the date of the grant using the minimum value method with an assumed dividend
per share of $0.10, risk-free interest rate of 1.75% and an expected life of two
years.
NOTE 2: AVAILABLE-FOR-SALE SECURITIES
The amortized cost and approximate fair value of available-for-sale
securities are as follows:
December 31, 2004
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
--------- ---------- ---------- -----------
(dollars in thousands)
U.S. Government agencies $63,950 $ 6 $(395) $63,561
State and political subdivisions 2,110 23 -- 2,133
Equity and other 718 -- (62) 656
------- --- ----- -------
$66,778 $29 $(457) $66,350
======= === ===== =======
F-12
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 2: AVAILABLE-FOR-SALE SECURITIES (CONTINUED)
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 800 -- (5) 795
-------- ------ ---- --------
$105,086 $1,044 $(94) $106,036
======== ====== ==== ========
Maturities of available-for-sale debt instruments at December 31, 2004:
Amortized Approximate
Cost Fair Value
--------- -----------
(dollars in thousands)
In one year or less $22,843 $22,701
After one through five years 43,217 42,993
After five years -- --
------- -------
Total 66,060 65,694
------- -------
Equity and other securities 718 656
------- -------
$66,778 $66,350
======= =======
The book value and approximate fair value of securities pledged as
collateral to secure public deposits amounted to $58,594,000 at December 31,
2004 and $45,159,000 at December 31, 2003.
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, 2004, 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
$24,100,000 and $23,264,000 during 2004 and 2003, and the maximum amounts
outstanding at any month-end were $25,134,000 and $25,661,000, respectively. The
carrying value of securities pledged to secure agreements to repurchase amounted
to $33,761,000 and $28,178,000 at December 31, 2004 and 2003, respectively.
Gross gains of $606,000, $0 and $193,000 were realized in 2004, 2003 and
2002, respectively, and no gross losses were realized in 2004, 2003 and 2002,
respectively, from sales of available-for-sale securities. During 2004, the
Company recorded an $82,000 loss on an investment security for an impairment
which was determined to be other than temporary.
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, 2004 was $56,571,000, or approximately 86% of
the Company's investment in debt securities portfolio. 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
F-13
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 2: AVAILABLE-FOR-SALE SECURITIES (CONTINUED)
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, 2004 and 2003, the Company owned securities with a fair value of
$18.8 million and $0, respectively, which had gross unrealized losses
outstanding longer than 12 months of $159,000 and $0, respectively. All of the
securities with unrealized losses outstanding longer than 12 months at December
31, 2004 were U.S. Government Agency securities.
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at December 31, 2004 and 2003 include the following:
2004 2003
-------- --------
(dollars in
thousands)
Commercial loans $117,604 $109,818
Commercial real estate loans 126,205 87,438
Construction loans 130,631 123,445
Lease financing 21,203 22,175
Residential real estate loans 30,886 27,017
Consumer loans 48,950 29,701
Home equity loans 31,691 25,026
-------- --------
Total loans 507,170 424,620
Less: Allowance for loan losses 7,333 7,051
-------- --------
Net loans $499,837 $417,569
======== ========
Activity in the allowance for loan losses was as follows:
2004 2003 2002
------- ------- -------
(dollars in thousands)
Balance, beginning of year $ 7,051 $ 6,914 $ 5,267
Provision charged to expense 1,965 1,350 2,920
Losses charged off, net of recoveries
of $300,000, $341,000 and $309,000
for 2004, 2003 and 2002, respectively (1,683) (1,213) (1,273)
------- ------- -------
Balance, end of year $ 7,333 $ 7,051 $ 6,914
======= ======= =======
Impaired loans totaled $12,847,000 and $10,192,000 at December 31, 2004 and
2003, respectively, with related allowances for loan losses of $1,754,000 and
$1,497,000, respectively. At December 31, 2004 and 2003, accruing loans
delinquent 90 days or more totaled $2,179,000 and $497,000 respectively.
Non-accrual loans were $2,171,000 and $2,558,000 at December 31, 2004 and 2003,
respectively.
Total interest income of $745,000, $736,000 and $699,000 was recognized on
average impaired loans of $13,841,000, $11,746,000 and $9,585,000 for 2004, 2003
and 2002, respectively. Included in this total is cash-basis interest income of
$46,000, $67,000 and $46,000 recognized on impaired loans on nonaccrual during
2004, 2003 and 2002, respectively.
F-14
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 4: PREMISES AND EQUIPMENT
Major classifications of these assets are as follows:
2004 2003
------- -------
(dollars in
thousands)
Land $ 4,724 $ 1,820
Building and improvements 14,375 13,400
Furniture and equipment 5,853 5,115
Land improvements, net 285 1,876
------- -------
25,237 22,211
Less accumulated depreciation 5,249 3,961
------- -------
Total premises and equipment $19,988 $18,250
======= =======
NOTE 5: INTEREST-BEARING DEPOSITS
Interest-bearing time deposits in denominations of $100,000 or more were
$95,819,000 on December 31, 2004 and $106,669,000 on December 31, 2003. The
Company acquires brokered deposits in the normal course of business. At December
31, 2004 and 2003, brokered deposits of $471,000 and $35,805,000, respectively,
were included in the Company's time deposit balance.
At December 31, 2004, the scheduled maturities of time deposits are as
follows:
(dollars in thousands)
2005 $ 61,901
2006 25,037
2007 88,224
2008 7,093
2009 12,137
2010 and thereafter 23,386
--------
$217,778
========
NOTE 6: OPERATING LEASES
Blue Valley Building Corp. leases office space to others under
noncancellable operating leases expiring in various years through 2012. Minimum
future rent receivable under noncancellable operating leases at December 31,
2004 was as follows:
(dollars in thousands)
2005 $ 325
2006 179
2007 179
2008 126
2009 78
2010 and thereafter 220
------
$1,107
======
F-15
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 6: OPERATING LEASES (CONTINUED)
The Company leases space from others under noncancellable operating leases
expiring in 2005. The minimum rental commitment payable under these
noncancellable operating leases at December 31, 2004 was $32,000. Consolidated
rental and operating lease expenses were $289,000 in 2004, $289,000 in 2003 and
$236,000 in 2002.
NOTE 7: INCOME TAXES
The provision for income taxes consists of the following:
2004 2003 2002
------ ------ ------
(dollars in thousands)
Taxes currently payable $1,195 $2,601 $3,666
Deferred income taxes (530) 529 (754)
------ ------ ------
$ 665 $3,130 $2,912
====== ====== ======
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
2004 2003 2002
----- ------ ------
(dollars in thousands)
Computed at the statutory
rate (34%) $ 882 $2,980 $2,825
Increase (decrease) resulting from:
Tax-exempt interest (167) (225) (235)
State income taxes 103 232 293
Other (153) 143 29
----- ------ ------
Actual tax provision $ 665 $3,130 $2,912
===== ====== ======
The tax effects of temporary differences related to deferred taxes shown on
the December 31, 2004 and 2003 consolidated balance sheets are as follows:
F-16
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 7: INCOME TAXES (CONTINUED)
2004 2003
------ ------
(dollars in
thousands)
Deferred tax assets:
Allowance for loan losses $2,597 $2,135
Accrued compensated absences 41 41
Accumulated depreciation on available-for-
sale securities 171 --
Mark to market - Mortgage loans held for sale 139 82
Other 269 --
------ ------
3,217 2,258
------ ------
Deferred tax liabilities:
Accumulated depreciation (696) (363)
Accumulated appreciation on available-for-
sale securities -- (380)
FHLBank stock basis (138) --
Other -- (213)
------ ------
(834) (956)
------ ------
Net deferred tax asset $2,383 $1,302
====== ======
NOTE 8: SHORT TERM DEBT
The Company has an $8 million operating line of credit with a bank bearing
a variable interest rate of the Federal Funds rate plus 1.68%. The line of
credit is secured by stock in the Company's subsidiary bank and matures during
2005. As of December 31, 2004 and 2003, the Company had no outstanding balance
on this line of credit.
NOTE 9: LONG TERM DEBT
Long-term debt at December 31, 2004 and 2003 consisted of the following
components:
2004 2003
------- -------
(dollars in
thousands)
Note payable - other (A) $ -- $ 1,281
Note payable - bank (B) 4,500 4,925
Note payable - Blue Valley Building Corp. (C) 7,500 --
Federal Home Loan Bank advances (D) 48,500 62,500
Subordinated Debentures - BVBC Capital Trust I (E) 11,856 11,856
Subordinated Debentures - BVBC Capital Trust II (F) 7,732 7,732
------- -------
Total long-term debt $80,088 $88,294
======= =======
F-17
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 9: LONG TERM DEBT (CONTINUED)
(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. 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 at 5.45% by the use of a swap agreement (see
Note 9).
(C) Two notes due in 2017; payable in monthly installments totaling
$70,084 including interest at 5.19%; collateralized by land,
buildings, and assignment of future rents.
(D) Due in 2008, 2009, 2010, 2011 and 2013; collateralized by various
assets including mortgage-backed loans. The interest rates on the
advances range from 1.84% to 5.682%. Federal Home Loan Bank advance
availability is determined quarterly and at December 31, 2004,
approximately $44,383,000 was available.
(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. The Company may
prepay the subordinated debentures beginning in 2005, in whole or in
part, at their face value plus accrued interest.
(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
subordinated debentures (E) due in 2030. The Company may prepay the
Trust Preferred Securities beginning in 2008, in whole or in part, at
their face value plus accrued interest.
Aggregate annual maturities of long-term debt at December 31, 2004 are as
follows:
(dollars in thousands)
2005 $ 873
2006 960
2007 1,011
2008 11,068
2009 7,127
Thereafter 59,049
-------
$80,088
=======
NOTE 10: 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 9). The
agreement provides for the Company to receive interest from the counterparty at
an amount which offsets 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 December 31, 2004.
Under the cash flow hedging method, the effective portion of the
F-18
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 10: DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
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.
NOTE 11: 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, 2004, that
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 2004, 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
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
AS OF DECEMBER 31, 2004: (dollars in thousands)
Total Capital
(to Risk Weighted Assets)
Consolidated $67,586 11.15% $48,471 8.00% N/A
======= ===== ======= ====
Bank Only $62,180 10.58% $47,031 8.00% $58,789 10.00%
======= ===== ======= ==== ======= =====
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated $54,545 9.00% $24,235 4.00% N/A
======= ===== ======= ====
Bank Only $54,847 9.33% $23,515 4.00% $35,273 6.00%
======= ===== ======= ==== ======= =====
Tier 1 Capital
(to Average Assets)
Consolidated $54,545 8.45% $25,834 4.00% N/A
======= ===== ======= ====
Bank Only $54,847 8.43% $26,031 4.00% $32,539 5.00%
======= ===== ======= ==== ======= =====
F-19
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 11: REGULATORY MATTERS (CONTINUED)
To Be Well Capitalized
Under Prompt
For Capital 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%
======= ===== ======= ==== ======= =====
The Bank is subject to certain restrictions on the amounts of dividends
that it may declare without prior regulatory approval. At December 31, 2004,
approximately $12,695,000 of retained earnings were available for dividend
declaration without prior regulatory approval.
NOTE 12: TRANSACTIONS WITH RELATED PARTIES
At December 31, 2004 and 2003, 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 $14,195,000 and
$5,976,000, respectively. Related party transactions for 2004 and 2003 were as
follows:
2004 2003
------- -------
(dollars in
thousands)
Balance, beginning of year $ 5,976 $ 8,083
New loans 10,270 2,582
Repayments and reclassifications (2,051) (4,689)
------- -------
Balance, end of year $14,195 $ 5,976
======= =======
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-20
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 13: PROFIT SHARING AND 401(K) PLANS
The Company's profit sharing and 401(k) plans cover substantially all
employees. Contributions to the profit sharing plan are determined annually by
the Board of Directors, and participant interests are vested over a five-year
period. The Company's 401(k) plan permits participants to make contributions by
salary reduction, based on which the Company matches a ratable portion. The
Company's matching contributions to the 401(k) plan are vested immediately.
Combined Company contributions charged to expense for 2004, 2003 and 2002 were
$658,000, $681,000 and $527,000, respectively.
NOTE 14: 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, 2004, the Company had 235,634 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 2004 and 2003, the Company granted no stock options, but did grant
14,100 and 13,275 shares of restricted common stock, respectively. Recipients of
the restricted stock grant who are employees vest in the stock after three years
from the date of the grant. Recipients of the restricted stock grant who are
Directors vest in the stock after three years for the 2003 grant and two years
for the 2004 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 applicable vesting period. During 2004 and
2003, 500 and 0 shares of restricted stock were forfeited, respectively.
A summary of the status of option shares under the plan at December 31,
2004, 2003 and 2002, and changes during the years then ended, is presented
below:
2004 2003 2002
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
Outstanding, beginning of year 188,300 $16.70 235,575 $17.02 235,760 $14.77
Granted -- -- -- -- 51,600 25.00
Exercised (31,825) 10.96 (41,675) 17.77 (45,035) 14.25
Forfeited (1,475) 25.00 (5,600) 22.30 (6,750) 17.94
------- ------- -------
Outstanding, end of year 155,000 $17.80 188,300 $16.70 235,575 $17.02
======= ======= =======
Options exercisable, end of year 155,000 $17.80 164,350 $15.49 172,525 $15.26
======= ======= =======
F-21
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 14: EQUITY INCENTIVE COMPENSATION (CONTINUED)
The weighted-average remaining contractual life of option shares at
December 31, 2004 was 6.09 years. Exercise prices ranged from $5.10 to $25.00.
Information about options outstanding and exercisable as of December 31, 2004 is
set forth in the following table.
Options Outstanding and Exercisable
------------------------------------
Number Weighted
Outstanding Average Weighted
and Remaining Average
Range of Exercisable Contractual Exercise
Exercise Prices at 12/31/04 Life Price
--------------- ----------- ----------- --------
$ 5.10 to $ 5.10 3,000 1 year $ 5.10
6.25 to 6.25 7,000 2 years 6.25
7.50 to 7.50 5,000 3 years 7.50
11.25 to 11.25 11,200 4 years 11.25
14.38 to 14.38 17,325 5 years 14.38
16.50 to 16.50 29,600 6 years 16.50
19.50 to 19.50 45,000 7 years 19.50
25.00 to 25.00 36,875 8 years 25.00
-------
155,000
=======
NOTE 15: EMPLOYEE STOCK PURCHASE PLAN
The 2004 Blue Valley Ban Corp employee stock purchase plan ("ESPP")
provides the right to subscribe to 100,000 shares of common stock to
substantially all employees of the Company and subsidiaries, except those who
are 5% or greater shareholders of the Company. The purchase price for shares
under the plan is determined by the Company's Board of Directors (or a
designated Committee thereof) and was set to 85% of the market price on either
the grant date or the offering date, whichever is lower, for the plan year
beginning in February, 2004.
NOTE 16: OTHER INCOME/EXPENSE
Other operating expenses consist of the following:
2004 2003 2002
------ ------ ------
(dollars in thousands)
Advertising $1,315 $1,277 $ 920
Data processing 712 556 530
Professional fees 815 810 628
Other expense 3,625 3,835 3,500
------ ------ ------
Total $6,467 $6,478 $5,578
====== ====== ======
Other income consists of the following:
2004 2003 2002
---- ---- ----
(dollars in thousands)
Rental income $192 $154 $142
Other income 425 309 139
---- ---- ----
Total $617 $463 $281
==== ==== ====
F-22
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 17: 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.
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 the estimated cost to terminate or otherwise settle the
obligations with the counterparties at the reporting date.
F-23
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 17: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
2004 2003
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(dollars in thousands)
Financial assets:
Cash and cash equivalents $ 22,494 $ 22,494 $ 50,717 $ 50,717
Available-for-sale securities 66,350 66,350 106,036 106,036
Mortgage loans held for sale 44,144 44,144 18,297 18,301
Interest receivable 2,375 2,375 1,923 1,923
Loans, net of allowance for loan losses 499,837 497,809 417,569 421,350
Financial liabilities:
Deposits 522,646 521,936 470,495 471,704
Other bearing liabilities 22,381 22,381 23,447 23,447
Long-term debt 80,088 81,265 88,294 91,628
Interest payable 1,190 1,190 1,309 1,309
Unrecognized financial instruments (net of amortization):
Commitments to extend credit -- -- -- --
Letters of credit -- -- -- --
Lines of credit -- -- -- --
Forward commitments -- -- -- --
NOTE 18: 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, 2004 and 2003, the Company had outstanding commitments to
originate loans aggregating approximately $36,980,000 and $32,913,000,
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 $6,075,000 and $6,650,000 at December 31, 2004 and
2003, respectively, with the remainder at floating market rates.
F-24
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 18: COMMITMENTS AND CREDIT RISKS (CONTINUED)
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 $57,378,000
and $47,965,000 and mortgage loans held for sale amounted to $44,144,000 and
$18,297,000 at December 31, 2004 and 2003, respectively. Related forward
commitments to sell mortgage loans amounted to approximately $101,522,000 and
$66,262,000 at December 31, 2004 and 2003, respectively. Mortgage loans in the
process of origination represent commitments to originate loans at both fixed
and variable 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
$13,604,000 and $20,228,000 at December 31, 2004 and 2003, respectively.
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, 2004 and 2003, unused lines of credit borrowings aggregated
approximately $168,840,000 and $131,995,000, respectively.
Additionally, the Company periodically has excess funds, which are loaned
to other banks as federal funds sold. At December 31, 2004 and 2003, federal
funds sold totaling $2,500,000 and $29,400,000, respectively, were loaned to
various banks, as approved by the Board of Directors, with the largest balance
at any one bank being $2,500,000 and $25,400,000 on those dates, respectively..
F-25
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 19: 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.
2004 2003
----------------------------------------- -----------------------------------------
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 $ 3,821 $ 3,865 $ 3,736 $ 3,803 $ 3,436 $ 4,402 $ 3,792 $ 3,883
Noninterest income 3,155 3,270 4,103 3,412 3,595 6,637 6,606 5,698
Noninterest expense 7,069 6,428 6,911 6,162 5,902 8,713 7,858 6,812
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes (93) 707 928 1,053 1,129 1,129 2,326 2,540
Income taxes (99) 174 247 343 393 393 831 913
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 6 $ 533 $ 681 $ 710 $ 736 $ 1,495 $ 1,627 $ 1,776
======== ======== ======== ======== ======== ======== ======== ========
Net Income per Share Data
Basic $ 0.00 $ 0.23 $ 0.30 $ 0.31 $ 0.32 $ 0.66 $ 0.73 $ 0.80
======== ======== ======== ======== ======== ======== ======== ========
Diluted $ 0.00 $ 0.23 $ 0.29 $ 0.30 $ 0.31 $ 0.64 $ 0.71 $ 0.77
======== ======== ======== ======== ======== ======== ======== ========
Balance Sheet
Total assets $672,717 $669,892 $637,353 $626,036 $627,073 $622,015 $628,697 $591,764
Total loans, net 499,837 470,155 448,785 444,277 417,569 406,127 406,954 396,531
Stockholders' equity 41,384 42,028 41,388 41,150 40,198 39,627 38,342 36,248
Net income or the fourth quarter of 2004 was adversely affected by higher
noninterest expenses compared to the prior year period. The increase in
noninterest expense during the quarter relates primarily to nonrecurring accrued
expenses related to the cost of litigation, incremental costs associated with
the opening of the Leawood, Kansas Banking Center, and other expenses.
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 20: NEW ACCOUNTING STANDARDS
In 2003, the Financial Accounting Standards Board ("FASB") 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.
F-26
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 20: NEW ACCOUNTING STANDARDS (CONTINUED)
The Company's initial application of the Interpretation required deconsolidation
of the Company's investment in BVBC Capital Trusts I and II, and did not have a
material impact on the financial statements of the Company.
In December 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), Share Based Payment, which
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services, and focuses primarily on
accounting for transactions in which an entity obtains employee services. The
SFAS requires a public entity to measure the cost of employee services received
in exchange for its equity instruments based on the fair value at the grant date
(with limited exceptions) and recognize that cost over the service period. SFAS
123 (revised 2004) revises SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." The provisions of SFAS 123 (revised 2004) will be effective for
the Company's financial statements issued after June 15, 2005. The Company does
not believe that the adoption of SFAS 123 (revised 2004) will have a material
impact on the consolidated financial statements.
In March 2004, the FASB Emerging Issues Task Force (EITF) reached consensus
on Issue 03-01 (EITF 03-01), "The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments." EITF 03-01, as originally proposed,
included new guidance for evaluating and recording impairment losses on debt and
equity investments available for sale as well as disclosure requirements about
impairments which have not been recognized as other-than temporary. In
September, 2004, the FASB deferred the effective date of the EITF's guidance on
evaluating and recognizing an other-than-temporary impairment. This deferral did
not, however, change the disclosure guidance effective for fiscal years ending
after December 15, 2003. The deferred guidance, when issued, may impact the
Company's financial reporting including the assessment and accounting treatment
for declines in market value of debt securities.
In December, 2003, the Accounting Standards Executive Committee
(AcSEC) of the American Institute of Certified Public Accountants (AICPA) issued
SOP 03-3, Accounting for Certain Loans or Debt Securities Acquired in a
Transfer. SOP 03-3 addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from a purchaser's initial
investment in loans or debt securities acquired in a transfer if those
differences are attributable, at least in part, to credit quality. It includes
loans acquired individually, in pools or as part of business combinations and
does not apply to loans originated by the entity. SOP 03-3 prohibits the
recognition of the excess of contractual cash flows as an adjustment of yield,
loss accrual or valuation allowance at the time of purchase, requires that
subsequent increases in expected cash flows be recognized prospectively through
an adjustment of yield and requires that subsequent decreases in expected cash
flows be recognized as an impairment. The SOP also prohibits the creation or
transfer of an acquiree's valuation allowance to an acquirer's in the initial
accounting of loans acquired in a transfer. SOP 03-3 is effective for loans and
debt securities acquired by the Company in years beginning after December 15,
2004. The Company does not believe that the adoption of SOP 03-3 will have a
material impact on the consolidated financial statements.
NOTE 21: LEGAL PROCEEDINGS
On October 13th, 2004, we became a defendant in a lawsuit filed in the
United States District Court, Kansas District by one current mortgage loan
originator and twenty three former mortgage loan originators. The plaintiffs are
claiming that the Bank did not compensate them appropriately for overtime hours
worked in accordance with the Fair Labor Standards Act. While the plaintiffs'
claims total $5.6 million, we believe the Company has meritorious defenses to
the claims made and we intend to vigorously defend against these claims. In the
fourth quarter of 2004, the Company took a $550,000 charge recording a liability
for the estimated potential cost of this litigation. We currently do not
anticipate any significant additional financial impact from this litigation.
Other than this claim, there are no other pending legal proceedings that are
likely to have a material adverse effect on our consolidated financial
condition, results of operations or cash flows.
F-27
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 22: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
2004 2003
------- -------
(In thousands)
ASSETS
Cash and cash equivalents $ 2,058 $ 806
Investments in subsidiaries:
Bank of Blue Valley 55,566 51,400
Blue Valley Building Corp. 7,648 11,863
Blue Valley Insurance Services, Inc. 18 46
BVBC Capital Trust I 356 356
BVBC Capital Trust II 232 232
Other assets 2,781 2,279
------- -------
Total Assets $68,659 $66,982
======= =======
LIABILITIES
Long-term debt $ 4,500 $ 4,925
Subordinated debentures 19,588 19,588
Other liabilities 3,187 2,271
------- -------
Total Liabilities 27,275 26,784
------- -------
STOCKHOLDERS' EQUITY
Common stock 2,327 2,279
Additional paid-in capital 8,099 7,404
Retained earnings 31,809 30,344
Unearned compensation (594) (399)
Unrealized appreciation on available-for-sale
securities, net of income taxes of $380 and $523
at 2003 and 2002, respectively (257) 570
------- -------
Total Stockholders' Equity 41,384 40,198
------- -------
Total Liabilities and Stockholders' Equity $68,659 $66,982
======= =======
F-28
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 22: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
------- ------- ------
(In thousands)
Income
Dividends from subsidiaries $11,328 $ 445 $ 137
Other income 7 39 3
------- ------- ------
11,335 484 140
Expenses 2,514 2,189 1,588
------- ------- ------
Income (loss) before income taxes and equity in
undistributed net income of subsidiaries 8,821 (1,705) (1,448)
Credit for income taxes (1,086) (716) (539)
------- ------- ------
Income (loss) before equity in undistributed net income
of subsidiaries 9,907 (989) (909)
Equity in undistributed (distributions in excess of) net
income of subsidiaries (7,977) 6,623 6,305
------- ------- ------
Net income $ 1,930 $ 5,634 $5,396
======= ======= ======
F-29
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 22: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
------- ------- -------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,930 $ 5,634 $ 5,396
Items not requiring (providing) cash:
Deferred income taxes 836 82 30
Equity in undistributed income of subsidiaries 7,977 (6,623) (6,305)
Restricted stock earned 143 -- --
Changes in:
Other assets (1,338) (517) (431)
Other liabilities 451 504 571
------- ------- -------
Net cash provided by (used in) operating
activities 9,999 (920) (739)
------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES
Capital contributed to subsidiary (8,727) (7,943) (2,018)
------- ------- -------
Net cash used in investing activities (8,727) (7,943) (2,018)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt (425) (4,495) --
Proceeds from long-term debt -- 13,057 2,095
Proceeds from sale of common stock 405 777 691
------- ------- -------
Net cash provided by (used in) financing
activities (20) 9,339 2,786
------- ------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 1,252 476 29
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 806 330 301
------- ------- -------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 2,058 $ 806 $ 330
======= ======= =======
F-30