UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2003 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission File Number: 000-25081
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VAIL BANKS, INC. |
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(Exact name of registrant as specified in its charter) |
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Colorado |
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84-1250561 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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0015 Benchmark Road, Suite 300, P.O. Box 6580, Avon, Colorado 81620 |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code: (970) 476-2002
Securities registered pursuant to Section 12(b) of the Act: None
Name of exchange on which registered: None
Securities registered pursuant to Section 12(g) of the Act: Common stock, $1.00 par value per share.
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 ý No o.
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. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes o No ý.
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the registrant’s most recently completed second fiscal quarter: As of June 30, 2003, 5,489,139 shares of common stock, $1.00 par value, were issued and outstanding with an aggregate value of $41,475,493 held by non-affiliates (based on market value of $13.55 per share) (computed by reference to the price at which the common stock was sold.)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: As of February 29, 2004, there were issued and outstanding 5,298,093 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held May 17, 2004, are incorporated by reference into Part III.
VAIL BANKS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
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Vail Banks, Inc. (Vail Banks) is a bank holding company headquartered in Avon, Colorado with consolidated assets of $575.6 million at December 31, 2003. Vail Banks has three wholly-owned subsidiaries, WestStar Bank (WestStar), Vail Banks Statutory Trust I, and Vail Banks Statutory Trust II. Additionally, WestStar and Vail Banks own a 54.04% interest in Avon 56 Limited, a real estate partnership, and WestStar owns a 100% interest in First Western Mortgage Services, Inc. (First Western), a retail mortgage lending company. All entities are collectively referred to herein as the Company or Vail Banks. The Company intends to merge First Western into WestStar by the end of the second quarter 2004.
WestStar is a Colorado state bank with 22 retail offices located primarily in the “Western Slope” and “Front Range” regions of Colorado. It was formed in 1977 as a community bank to serve the local residents and businesses of Vail. In 1993, Vail Banks was formed as a bank holding company for WestStar. Vail Banks has maintained WestStar’s position as an institution offering a relatively broad range of convenient banking services delivered with personalized customer service.
The ‘‘Western Slope,’’ includes Summit County (which includes the Breckenridge, Keystone and Copper Mountain ski resorts), Grand County (which serves the Winter Park ski resort), Eagle County (which includes the Vail and Beaver Creek ski resorts), Delta County, Garfield County, Pitkin County (which serves the Aspen and Snowmass ski resorts), Mesa County, Montrose County, San Miguel County (which includes the town and ski resort of Telluride), and Routt County (which includes the town and ski resort of Steamboat Springs). The “Front Range”, includes Denver and Estes Park. These areas of Colorado are home to a variety of commercial, recreational, entertainment, and cultural enterprises.
The Western Slope has experienced growth in past years, primarily as a result of an expanding market for first and second homes, and summer and winter tourism. As the year-round population of this region has grown, local businesses have prospered by servicing this growth. Consequently, a large concentration of Vail Banks’ business is in construction lending and providing banking services for small-to-medium size businesses in its markets. To meet the growing needs of its customers and to prepare for future growth, Vail Banks has developed a strong infrastructure by expanding its computer technology and centralizing certain administrative, processing, accounting and other operational functions.
Vail Banks’ growth has been designed to maintain customer loyalty through continuity of operations and associates. Historically, shareholders of entities merged into Vail Banks, who are typically members of the local community, have elected to hold ownership stakes in Vail Banks after the merger. The additions of Bank of Telluride (founded in 1969), Western Colorado Bank (founded in 1950), Glenwood Independent Bank (founded in 1955) and United Valley Bank (founded in 1908) expanded Vail Banks’ presence in Western Slope and Front Range markets, as these were well-established community banks that had significant local sponsorship. Several directors of the Company, as well as both its Chairman and President, have been associated with WestStar for more than ten years. Additionally, several WestStar directors who previously served as directors of acquired institutions had been associated with those banks for more than ten years.
WestStar provides a relatively broad range of banking products and services to consumers and businesses in all of its retail offices. Retail offices are operated with the goal of offering individualized customer service and providing superior financial services. Many administrative operations, such as data processing, loan administration, account reconciliation and maintenance, accounting, compliance and broad policy decisions are centralized to ensure consistency, accuracy and efficiency
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and to allow our associates to concentrate on providing superior customer service. The managers and associates of each retail office focus on day-to-day customer service, business development and selling. Management of Vail Banks believes that this organizational structure allows retail offices to offer the individualized customer service of a community bank while maximizing the benefits of technological expertise, operating synergies and other administrative cost savings and efficiencies.
Vail Banks intends to enhance and solidify its position as a major provider of banking services for individuals and small-to-medium size businesses on the Western Slope and the Front Range. As a result of its significant investment in retail offices, technology and administration infrastructure, management believes that Vail Banks’ growth, both internally and by merger or acquisition, has been efficiently integrated.
Vail Banks believes that it will grow primarily through expansion of its existing market share and de novo establishment of retail offices. From December 1995 to December 2003, Vail Banks completed eight mergers and acquisitions and opened eight de novo branches.
During the past two years, the Company did not experience the same rate of growth that it had in prior years. Gross loans were $312.5 million at December 31, 2003 and $331.0 million at December 31, 2002, as compared to $391.7 million at December 31, 2001. This decrease was primarily due to the softening of the economy, a conservative underwriting policy and an internal focus on resolving problem loans. The Company believes these decreases were temporary and expects that loan volume will increase as the economy recovers.
Expansion of Existing Market Share. Vail Banks intends to increase its overall market share in its markets by solidifying relationships with current customers and attracting new customers who desire a local banking relationship. Management believes that this can be accomplished by (1) evaluating the needs of its existing and potential customers to determine ways to enhance services and products, (2) increasing the focus on sales training and motivating its associates, (3) providing personalized customer service, and (4) further implementing technological advances to make banking more efficient and convenient.
De Novo Establishment of Retail Offices. Vail Banks intends to continue to expand by opening new retail offices. Management believes that initially establishing a small presence in growing communities positions Vail Banks to expand with the community, thereby fostering a local identity with existing businesses and consumers in these communities, as well as offering new customers an alternative to impersonal, institutional banks. Additionally, management has committed to establishing additional banking locations to expand its presence in the Front Range market. Such offices will be opened over a period of years as market opportunities and availability of banking talent dictate.
Mergers and Acquisitions. Vail Banks’ merger and acquisition strategy will be a secondary approach for growth opportunities. Previously, Vail Banks increased its market share in its existing markets and attractive new markets by merging with well-established community banks. In assessing future mergers, Vail Banks will focus primarily on credit quality, financial performance, market share, management, location, community demographics, strength of the local economy, potential merger synergies and the terms of the transaction. Management believes that merging with established banks and then methodically integrating their operations into Vail Banks allows Vail Banks to offer its relatively broad range of products and services while maintaining the merged bank’s reputation and community ties. Vail Banks’ strategy is to streamline operations judiciously to optimize the balance between cost savings and minimizing the interruption of community-based services of the acquired bank.
Segment information is presented in accordance with Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About Segments of an Enterprise and Related Information. This standard is based on a management approach that requires segmentation based on the Company’s internal organization and internal monitoring of operations. During 2003 and 2002, the Company had two reportable segments, banking (WestStar) and mortgage origination (First Western). During 2001,
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the Company had only one segment, banking, that met the quantitative threshold for disclosure. The banking segment provides a full range of commercial and consumer banking products to customers including deposit products, commercial loans, real estate loans, consumer loans and other business services. The banking segment’s principal source of income is the net spread between the interest earned on loans and investment securities and the interest cost associated with the deposits and borrowings used to finance such loans and investments. The mortgage origination segment originates mortgage loans and sells them to investors in the secondary market. Its principal source of income is the origination and processing fees. These two segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and accordingly, requires different technology and marketing strategies.
Information about reportable segments and reconciliation of such information to the consolidated financial statements as of and for the years ended December 31, 2003, 2002 and 2001 is contained in “Notes to Consolidated Financial Statements—Note 23” contained in Item 15 of this Annual Report on Form 10-K. The accounting policies of the segments are the same as those described in the summary of significant accounting policies contained in “Notes to Consolidated Financial Statements—Note 1” contained in Item 15 of this Annual Report on Form 10-K. Management evaluates the performance of each segment based on profit or loss from operations. Certain administrative costs, however, are borne by the banking segment and are not allocated to the mortgage origination segment. Accordingly, the information presented is not necessarily indicative of the segments’ financial condition and results of operations had each been operating as independent entities. The measurements used in reporting these segments are the same as those reviewed monthly by executive management.
Parent company financial information is deemed to represent an overhead function rather than an operating segment. Also included in this category are expenses related to the guaranteed preferred beneficial interests in Vail Banks’ subordinated debentures (trust preferred securities).
The Company does not have a customer from whom it derives 10 percent or more of its revenues and operates in only one geographical area.
WestStar serves the banking needs of its business and consumer customers by providing a relatively broad range of commercial and consumer banking products and services in all of its communities. These products and services include short-term and medium-term loans, revolving credit facilities, accounts receivable financing, equipment financing, short-term commercial mortgage lending and mortgage broker services, installment loans, home improvement loans, short-term loans for the purchase or refinancing of principal residences or second homes, personal banking through internet and telephone access, safe deposit box services and various savings accounts, money market accounts, time certificates of deposit and checking accounts, automated teller machines, depository services, corporate cash management services and repurchase agreements. First Western originates mortgage loans and sells them to investors in the secondary market.
Lending. WestStar offers loans for business and consumer purposes and focuses its lending activities on individuals and small-to-medium size businesses. Lending activities are funded primarily from core deposits gathered in the local communities. Loan products are concentrated in relatively short-term, variable rate loans, with 48% of the loans at December 31, 2003 having remaining terms of less than one year. Collateral for loans is concentrated in real estate and operating business assets. First Western offers an array of residential mortgage products. The lending activities of the Company are not seasonal in nature.
Deposits. WestStar offers a relatively broad range of depository products including checking, savings and money market accounts, and certificates of deposit. Deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to statutory limits. Within ranges set by policies determined by WestStar’s executive management, regional presidents have local authority to determine the type, mix and pricing of the depository products offered to best compete in a retail office’s particular marketplace. Additionally, because many of WestStar’s markets are located in resort areas, deposits tend to trend upward during the ski season. However, increases in deposits in non-resort markets have reduced the overall impact of such seasonality.
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The banking business is highly competitive and the profitability of WestStar depends principally upon its ability to compete in its markets. WestStar competes with other banks, savings institutions, credit unions, finance companies, brokerage and investment banking firms, insurance companies, asset-based lenders and certain other nonfinancial institutions, including retail stores that offer credit programs and governmental organizations that offer financing programs. Many competitors of WestStar have much greater financial resources, greater name recognition and more offices than WestStar. Some of these entities and institutions are not subject to the same regulatory restrictions as WestStar. WestStar believes it has been able to compete effectively with its competitors by emphasizing customer service, technology and local decision-making, by establishing long-term customer relationships and building customer loyalty, and by providing products and services designed to address the specific needs of its customers.
The factors affecting competition include banking and financial services provided, customer service and responsiveness, customer convenience and office location. Vail Banks believes that WestStar will continue to compete successfully in its communities in which it operates and that its competitive strengths include its reputation for developing and retaining banking relationships, responsiveness to customer needs and individualized customer service, and skilled, resourceful associates. Vail Banks believes that large, institutional banks cannot or are unwilling to offer a high level of individualized customer service, and that WestStar’s customers and potential customers choose to bank with WestStar to take advantage of this attention while also receiving products and services at competitive prices. Vail Banks further believes that the community commitment and involvement of its associates and its commitment to providing quality financial services are factors that should allow it to continue to maintain and improve its competitive position.
First Western competes with both retail and internet mortgage brokers. These competitors may have greater financial or other resources than First Western. First Western has been able to compete effectively with its competitors due to its desirable array of mortgage products and its longevity in the mortgage origination business as well as the longevity of certain of its loan officers with First Western.
Vail Banks also faces competition in acquiring financial institutions. Colorado has experienced a significant consolidation of its banking industry, and many large holding companies with greater resources than Vail Banks (including several out-of-state holding companies) are pursuing acquisitions in Colorado. This competition affects the acquisition opportunities for Vail Banks and can affect the cost of such acquisitions.
The retail offices operate through a customer driven organization. Regional presidents operate with significant customer service-oriented local autonomy, within policies established by WestStar’s executive management, to provide financial services, make lending decisions, sell products and present a favorable impression of WestStar to the community in order to attract new customers and retain existing ones.
Administrative services, oversight and support to the retail offices, including data processing, accounting services, investments, credit policy formulation, loan administration, a customer service center, internet banking support, other customer service assistance, and audit and compliance review are centralized at the Vail Banks’ administrative center in Gypsum.
Management believes that by standardizing products, services and systems, and providing appropriate centralized support, retail office associates can concentrate on customer service and community relations. Management also believes that continued centralization of services benefits the individual retail offices by lowering expenses of administration and data processing services, streamlining credit administration and supervision, and facilitating compliance with the requirements of complex banking regulations. Vail Banks believes that autonomy at the retail office level allows its banking subsidiary to better serve customers in their respective communities, and thus enhances business opportunities and operations.
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Vail Banks’ use of advanced technology enables it to offer customers fast, efficient services and connects all of WestStar’s associates with on-line access to information concerning all customer account data. Additionally, advanced hardware and software have been installed that allow images to be taken of all items (checks, deposit tickets and payments). Once processed, the images are simultaneously associated with the appropriate customer’s account, where they are stored and retrieved to be printed with customer statements or delivered to the customer in the form of an electronic statement. An imaging system also allows, via a data network, instant access at all retail offices to loan files, customer signature cards and other data that was previously available only at the administrative center or the originating retail office. Vail Banks believes that its technology platform is among the most advanced for banks of its size in Colorado and provides it with the resources to continue to offer leading-edge services to customers.
As of February 29, 2004, the Company employed 242 persons, 231 on a full-time basis and 11 on a part-time basis. The Company is not a party to any collective bargaining agreement, and believes that its employee relations are good.
Need for Additional Financing
Vail Banks’ success may depend on its ability to obtain additional debt or equity funding. Vail Banks cannot assure that it will be successful in consummating any future financing transactions. Factors that could affect Vail Banks’ access to the capital markets, or the costs of such capital, include (1) changes in interest rates, (2) general economic conditions and the perception in the capital markets of Vail Banks’ business, (3) results of operations, (4) leverage, (5) financial condition and (6) business prospects. Each of these factors is to a large extent subject to economic, financial, competitive and other factors beyond Vail Banks’ control. Borrowing restrictions contained in certain regulations which apply to Vail Banks and WestStar may also have an effect on Vail Banks’ ability to obtain additional financing. Vail Banks’ future credit facilities may significantly restrict its ability to incur additional indebtedness. Vail Banks’ ability to repay any then outstanding indebtedness at maturity may depend on its ability to refinance such indebtedness. Its ability to refinance could be adversely affected if Vail Banks is not able to sell additional debt or equity securities on terms reasonably satisfactory to Vail Banks.
Local Economic Conditions
The success of Vail Banks depends to a significant extent upon general economic conditions in the communities it serves. Vail Banks primarily operates in the Western Slope region of Colorado. Some parts of the Western Slope are largely dependent on seasonal tourism that particularly affects small-to-medium size businesses. These businesses are a significant portion of Vail Banks’ customers. The seasonality of Vail Banks’ business in those areas results in fluctuations in deposit needs. Deposits tend to trend upward during the ski season.
In addition, a decline in the economy of the Western Slope region or the Front Range region, where the Company has operations, could have a material adverse effect on Vail Banks’ business. A decline could affect (1) the demand for new loans, (2) refinancing activity, (3) the ability of borrowers to repay outstanding loans, (4) the value of loan collateral and (5) loan volumes. A decline could also adversely affect asset quality and net income. See ‘‘Business—General’’ in this Item 1.
Dependence Upon Key Personnel
The continued success of Vail Banks substantially depends on the efforts of the directors and executive officers of Vail Banks. Vail Banks particularly depends on E.B. Chester, Jr., Lisa M. Dillon and Gary S. Judd. The success of Vail Banks depends in large part on the retention of these and other key management personnel. It also depends on Vail Banks’ ability to hire and retain additional qualified associates in the future. Neither Mr. Chester, Ms. Dillon, nor Mr. Judd have entered into employment agreements with Vail Banks. Vail Banks does not maintain key-person life insurance coverage on any of them.
Certain Anti-Takeover Provisions
Vail Banks’ Articles of Incorporation and Bylaws contain certain provisions that may delay, discourage or prevent an attempted acquisition or change in control of Vail Banks. These provisions include (1) a Board of Directors classified into three
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classes of directors with the directors of each class having staggered, three-year terms and providing for the removal of directors only for cause, (2) noncumulative voting for directors, and (3) the ability of the Board of Directors of Vail Banks to issue shares of preferred stock of Vail Banks without shareholder approval. The preferred stock may be issued upon any terms that the Board of Directors may determine. The issuance of preferred stock may provide desirable flexibility in connection with possible mergers, acquisitions and financings and may be used for other corporate purposes. However, the issuance of preferred stock may make it more difficult for a third party to acquire, or could discourage a third party from acquiring, a controlling interest in Vail Banks.
Government Regulation
The banking industry is regulated by federal and state regulatory authorities. Regulations substantially affect the business and financial results of all financial institutions and holding companies, including WestStar and Vail Banks. The Board of Governors of the Federal Reserve System (the Federal Reserve) supervises and regularly examines Vail Banks and WestStar. Additionally, the Colorado Division of Banking (CDB) supervises and regularly examines WestStar. Federal and state banking law regulates and limits Vail Banks’ credit extensions, securities purchases, dividend payments, acquisitions, branching and many other aspects of the banking business. Banking laws are designed primarily to protect depositors and customers, not investors. These laws include, among other things, (1) minimum capital requirements, (2) limitations on products and services offered, (3) geographical limits, (4) consumer credit regulations, (5) community investment requirements and (6) restrictions on transactions with affiliated parties.
Financial institution regulation has been the subject of significant legislation in recent years. This regulation may be the subject of further significant legislation in the future. Vail Banks has no control over changes in regulation. Vail Banks cannot predict the impact of changes in such regulations on Vail Banks’ business and profitability. Changes in regulation could adversely affect Vail Banks’ financial condition and results of operations. See ‘‘Supervision and Regulation’’ in this Item 1.
Competition
The banking business is highly competitive. The profitability of WestStar depends principally upon its ability to compete in its market areas. WestStar competes with other banks, savings institutions, credit unions, finance companies, brokerage and investment banking firms, insurance companies, asset-based lenders and certain other nonfinancial institutions, including retail stores which offer credit programs and governmental organizations that offer financing programs. Many competitors have greater financial and other resources than WestStar. WestStar has been able to compete effectively with other financial institutions by (1) emphasizing customer service, technology and local office decision-making, (2) establishing long-term customer relationships and building customer loyalty, and (3) providing products and services designed to address the specific needs of its customers. WestStar may not be able to continue to compete effectively in the future. In addition, First Western competes with both retail and internet mortgage brokers. These competitors may have greater financial or other resources than First Western. See ‘‘Business—Competition’’ in this Item 1.
Control by Management
As of February 29, 2004, the directors and executive officers of Vail Banks beneficially own approximately 49% of the outstanding common stock, 23% of which is beneficially owned by E.B. Chester, Jr., Chairman of Vail Banks. Accordingly, these persons will have substantial influence over the business, policies and affairs of Vail Banks, including the ability to potentially control the election of directors and other matters requiring shareholder approval by simple majority vote.
Interest Rate Risk
Vail Banks’ earnings depend to a great extent on its net interest income. Net interest income is the difference between interest income earned on loans and investments and the interest expense paid on deposits and other borrowings. The net interest margin is highly sensitive to many factors that are beyond Vail Banks’ control. These factors include general economic conditions and the policies of various governmental and regulatory authorities. Changes in the discount rate or targeted federal funds rate by the Federal Reserve usually lead to general changes in interest rates. These interest rate shifts affect Vail Banks’ interest income, interest expense and investment portfolio. Also, governmental policies, such as the creation of a tax deduction for individual retirement accounts, can increase savings and affect the cost of funds. From time to time, the interest rate structures of earning assets and liabilities may not be balanced, and a rapid increase or decrease in interest rates could have an adverse effect on the net interest margin and results of operations of Vail Banks. Vail Banks cannot predict the nature, timing and effect of any future changes in federal monetary and fiscal policies.
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The following discussion of statutes and regulations affecting bank holding companies and banks is a summary thereof and is qualified in its entirety by reference to such statutes and regulations. This explanation does not purport to describe state, federal or Nasdaq National Market supervision and regulation of general business corporations or Nasdaq listed companies.
General. Vail Banks is a registered bank holding company subject to regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the Act). Vail Banks is required to file financial information with the Federal Reserve periodically and is subject to periodic examination by the Federal Reserve.
The Act requires every bank holding company to obtain the Federal Reserve’s prior approval before (1) it may acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that it does not already control; (2) it or any of its non-bank subsidiaries may acquire all or substantially all of the assets of a bank; and (3) it may merge or consolidate with any other bank holding company. In addition, a bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of the voting shares of any company engaged in non-banking activities. This prohibition does not apply to activities listed in the Act or found by the Federal Reserve, by order or regulation, to be closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the Federal Reserve has determined by regulation or order to be closely related to banking include:
• making or servicing loans and certain types of leases;
• performing certain data processing services;
• acting as fiduciary or investment or financial advisor;
• providing brokerage services;
• underwriting bank eligible securities;
• underwriting debt and equity securities on a limited basis through separately capitalized subsidiaries; and
• making investments in corporations or projects designed primarily to promote community welfare.
Although the activities of bank holding companies have traditionally been limited to the business of banking and activities closely related or incidental to banking, the Gramm-Leach-Bliley Act relaxed the previous limitations, permitting bank holding companies to engage in a broader range of financial activities. Specifically, bank holding companies may now elect to become financial holding companies which may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. Among the activities that are deemed “financial in nature” are:
• lending, exchanging, transferring, investing for others or safeguarding money or securities;
• insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker with respect thereto;
• providing financial, investment, or economic advisory services, including advising an investment company;
• issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly; and
• underwriting, dealing in or making a market in securities.
A bank holding company may become a financial holding company under this statute only if each of its subsidiary banks is well capitalized, is well managed and has at least a satisfactory rating under the Community Reinvestment Act. A bank holding company that falls out of compliance with such requirements may be required to cease engaging in certain activities. Any bank holding company that does not elect to become a financial holding company remains subject to the current restrictions of the Bank Holding Company Act.
Under the Gramm-Leach-Bliley Act, the Federal Reserve Board serves as the primary “umbrella” regulator of financial holding companies with supervisory authority over each parent company and limited authority over its subsidiaries. The primary regulator of each subsidiary of a financial holding company will depend on the type of activity conducted by the subsidiary. For example, broker-dealer subsidiaries will be regulated largely by securities regulators and insurance subsidiaries will be regulated largely by insurance authorities.
Vail Banks cannot predict the full impact of this legislation and has no immediate plans to become a financial holding company.
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On October 26, 2001, the United States Congress adopted the USA Patriot Act of 2001 (Patriot Act) to combat terrorism. Under the Patriot Act, FDIC insured banks and commercial banks are required to increase their due diligence efforts for correspondent accounts and private banking customers. The Patriot Act requires WestStar to engage in additional record keeping and reporting, to obtain identification of account owners or customers of foreign bank account holders, and to restrict or prohibit certain correspondent accounts.
Vail Banks must also register with the CDB and file periodic information with the CDB. As part of such registration, the CDB requires information with respect to, among other matters, the financial condition, operations, management and intercompany relationships of Vail Banks and its subsidiary. The CDB may also require such other information as is necessary to ascertain whether the provisions of Colorado law and the regulations and orders issued thereunder by the CDB have been complied with, and the CDB may examine Vail Banks and its subsidiary.
Vail Banks is an “affiliate” of its banking subsidiary under the Federal Reserve Act, which imposes certain restrictions on (1) loans by WestStar to Vail Banks, (2) investments in the stock or securities of Vail Banks by its banking subsidiary, (3) its banking subsidiary’s taking the stock or securities of an “affiliate” as collateral for loans by it to a borrower and (4) the purchase of assets from Vail Banks by its banking subsidiary. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.
WestStar is a member of the Federal Reserve System and is subject to the supervision of and is regularly examined by the Federal Reserve. Furthermore, WestStar, as a state banking association organized under Colorado law, is subject to the supervision of, and is regularly examined by, the CDB. Both the Federal Reserve and the CDB must grant prior approval of any merger, consolidation or other corporate reorganization involving WestStar. A bank can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of a commonly controlled institution.
Payment of Dividends. Vail Banks is a legal entity separate and distinct from WestStar. Most of the revenues of Vail Banks result from dividends paid to it by WestStar. There are statutory and regulatory requirements applicable to the payment of dividends by WestStar, as well as by Vail Banks to its shareholders.
Under the regulations of the CDB and the Federal Reserve, approval of the regulators will be required if the total of all dividends declared by WestStar in any calendar year exceed the total of its net profits of that year combined with its retained net profits of the preceding two years, less any required transfers to a fund for the retirement of any preferred stock.
The payment of dividends by Vail Banks and WestStar may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending upon the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. Capital adequacy considerations could further limit the availability of dividends. Due to the high volume of dividends relative to earnings paid in earlier years, beginning in 2004, any dividend payments from WestStar to Vail Banks will require prior regulatory approval. Management believes that approval will be granted as long as WestStar maintains its well-capitalized regulatory status.
Monetary Policy. The results of operations of WestStar are affected by credit policies of monetary authorities, particularly the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of Vail Banks’ banking subsidiary.
Capital Adequacy. The Federal Reserve and the FDIC have implemented substantially identical risk-based rules for assessing bank and bank holding company capital adequacy. These regulations establish minimum capital standards in relation to assets and off-balance sheet exposures as adjusted for credit risk. Banks and bank holding companies are required to have (1) a minimum level of total capital (as defined) to risk-weighted assets of 8%; (2) a minimum Tier 1 capital (as defined below) to risk-weighted assets of 4%; and (3) a minimum shareholders’ equity to risk-weighted assets of 4%. In addition, the Federal Reserve and the FDIC have established a minimum 4% leverage ratio (Tier 1 capital to average assets) for all but the most highly rated banks and bank holding companies. ‘‘Tier 1 capital’’ generally consists of common equity not including unrecognized gains and losses on securities, minority interests in equity accounts of consolidated subsidiaries and certain
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perpetual preferred stock, less certain intangibles. The Federal Reserve and the FDIC use the leverage ratio in tandem with the risk-based ratio to assess the capital adequacy of banks and bank holding companies. The FDIC’s and the Federal Reserve’s capital adequacy standards also provide for the consideration of interest rate risk in the overall determination of a bank’s capital ratio, requiring banks with greater interest rate risk to maintain greater capital for the risk.
In addition, the FDIC regulations and Federal Reserve ‘‘prompt corrective action’’ provisions, designed to efficiently resolve failing financial institutions, set forth five regulatory zones in which all banks are placed largely based on their capital positions. Regulators are permitted to take increasingly harsh action as a bank’s financial condition declines. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s capital leverage ratio reaches 2%. Better-capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser capital ratios.
The FDIC and the Federal Reserve regulations implementing “prompt corrective action” place financial institutions in the following five categories based on capitalization ratios (1) a ‘‘well capitalized’’ institution has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and a leverage ratio of at least 5%; (2) an ‘‘adequately capitalized’’ institution has a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a leverage ratio of at least 4%; (3) an ‘‘undercapitalized’’ institution has a total risk-based capital ratio of under 8%, a Tier 1 risk-based capital ratio of under 4% or a leverage ratio of under 4%; (4) a ‘‘significantly undercapitalized’’ institution has a total risk-based capital ratio of under 6%, a Tier 1 risk-based capital ratio of under 3% or a leverage ratio of under 3%; and (5) a ‘‘critically undercapitalized’’ institution has a leverage ratio of 2% or less. Institutions in any of the three undercapitalized categories are prohibited from declaring dividends or making capital distributions without regulatory approval. The Federal Reserve regulations also establish procedures for ‘‘downgrading’’ an institution to a lower capital category based on supervisory factors other than capital.
Under the Federal Reserve’s regulations, both Vail Banks and WestStar met all capital adequacy requirements to which they were subject at December 31, 2003. Vail Banks had Tier 1 and total risk-based capital ratios of 11.50% and 13.72%, respectively, and a leverage ratio of 7.45%. WestStar was deemed to be “well capitalized” with Tier 1 and total risk-based capital ratios of 10.90% and 11.88%, respectively, and a leverage ratio of 7.04%. For further information, see “Notes to Consolidated Financial Statements—Note 18” contained in Item 15 of this Annual Report on Form 10-K.
Certain information regarding the executive officers of the Company is set forth in the following table and paragraphs.
|
Name |
|
Age |
|
Position |
|
E.B. Chester, Jr. |
|
61 |
|
Chairman of the Board |
|
|
|
|
|
|
|
Lisa M. Dillon |
|
50 |
|
Vice Chairman of the Board |
|
|
|
|
|
|
|
Gary S. Judd |
|
63 |
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
Peter G. Williston |
|
47 |
|
Senior Executive Vice President, Chief Financial Officer and Corporate Secretary |
|
|
|
|
|
|
|
Dan E. Godec |
|
48 |
|
President of WestStar Bank |
Mr. Chester, who formed Vail Banks through a series of acquisitions, has served as Chairman of the Board of Directors of Vail Banks since 1993 and the Chairman of the Board of Directors of WestStar since 1989. Currently, Mr. Chester also serves as Chairman of the Board of Directors of Camp International, Ltd., a supplier of database services to the commercial aviation industry, and as Manager of King Creek Ranch LLC, a ranching business.
Ms. Dillon has served as Vice Chairman of Vail Banks since July 2000. Ms. Dillon, who started her career with WestStar in 1979, served as President of Vail Banks from 1993 until January 2004, President of WestStar from 1989 to 1999 and as a director of WestStar since 1989.
Mr. Judd became a director of Vail Banks in May 2003. He was elected as President and Chief Executive Officer of Vail Banks in January 2004, and previously served as a Division President and President, Regional Operations, of WestStar since May 2003. Mr. Judd co-founded Vectra Bank in Colorado in 1989 and served as its President until January 2000. From
11
2000 to 2002, Mr. Judd was President and Chief Executive Officer of Metyor, Inc. Mr. Judd also spent 16 years with Citibank, N.A. in management positions in the United States and overseas.
Mr. Williston has served as the Senior Executive Vice President and Chief Financial Officer of Vail Banks since June 2000. Prior to joining Vail Banks, Mr. Williston was employed by Union Planters Bank in Memphis, Tennessee where he served as Senior Vice President and Regional Manager. Mr. Williston initially joined Union Planters Bank in 1983 and during his tenure there he also served as Senior Vice President and Controller, Vice President and Audit Department Manager, and Secretary to the Board of Directors. Mr. Williston is a certified public accountant.
Mr. Godec became a Director of Vail Banks in July 2000. Mr. Godec has served as the President and a director of WestStar since 1999 and as Chief Executive Officer of WestStar since 2000. Prior to becoming President of WestStar, Mr. Godec served as Senior Executive Vice President of WestStar from January to April 1999 and served as the Senior Vice President of WestStar from January 1996 to January 1999.
As of March 5, 2004, Vail Banks had 22 operating branch offices and an administrative center. Of these 23 properties, ten were leased and 13 were owned. Vail Banks also leased three properties previously occupied by WestStar branches for which WestStar was still obligated. Leases on these three closed branches expire between 2005 and 2006. Plans are currently underway to either terminate these leases or find tenants to sublease the properties. Vail Banks is currently in the construction phase for a new facility in Glenwood Springs to replace an existing branch office and in the design phase for a new retail office in Fruita. Vail Banks has also undertaken significant remodels of its retail offices in Avon and Norwood. All properties are located in Colorado and range in size from 450 square feet to 34,000 square feet. None of the properties owned by Vail Banks are encumbered. The aggregate annual lease payments for properties in 2003 were $1.3 million. Leases for the facilities expire at various periods through 2011 with options to renew through 2028. Vail Banks considers its properties adequate for its current needs.
On March 5, 2004, the Company sold its bank building in Vail, Colorado and is leasing back a portion of the space. The lease, which is being accounted for as an operating lease, has a term of five years with three five-year renewal options and will require future minimum lease payments aggregating approximately $881,000. The proceeds of the sale included a mortgage note receivable of $7.9 million due in 2024, with an interest rate of 5.13%.
Vail Banks and its banking subsidiary periodically are parties to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans and other issues incident to their business. Management does not believe that there is any pending or threatened proceeding against Vail Banks or its banking subsidiary which, if determined adversely, would have a material effect on the business, results of operations, or financial position of Vail Banks or its banking subsidiary.
No matters were submitted to security holders during the fourth quarter of fiscal year 2003.
12
Vail Banks’ common stock began trading on The NASDAQ Stock Market under the symbol “VAIL” on December 10, 1998. Prior to that time, there was no formal trading market for the common stock. The following table sets forth, for the periods indicated, the high and low bid prices of the common stock on The NASDAQ Stock Market.
|
|
|
Year Ended |
|
Year Ended |
|
||||||||
|
|
|
High |
|
Low |
|
High |
|
Low |
|
||||
|
First Quarter |
|
$ |
12.40 |
|
$ |
11.32 |
|
$ |
12.45 |
|
$ |
10.77 |
|
|
Second Quarter |
|
13.60 |
|
11.90 |
|
14.74 |
|
11.50 |
|
||||
|
Third Quarter |
|
14.84 |
|
13.51 |
|
13.99 |
|
11.44 |
|
||||
|
Fourth Quarter |
|
14.92 |
|
11.63 |
|
12.16 |
|
10.52 |
|
||||
As of February 13, 2004, there were 90 holders of record of the common stock. Investors who beneficially own common stock that is held in street name by brokerage firms or similar holders are not included in this number. Vail Banks believes there are approximately 2,000 beneficial holders of its common stock.
Cash dividends paid per share were as follows:
|
|
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
|
||
|
First Quarter |
|
$ |
0.06 |
|
$ |
0.05 |
|
|
Second Quarter |
|
0.06 |
|
0.05 |
|
||
|
Third Quarter |
|
0.07 |
|
0.06 |
|
||
|
Fourth Quarter |
|
0.07 |
|
0.06 |
|
||
Additionally, a cash dividend of $0.07 per share was declared on January 19, 2004 and paid on February 13, 2004 to shareholders of record on January 30, 2004.
Holders of common stock are entitled to receive dividends when, as and if declared by Vail Banks’ Board of Directors out of funds legally available therefore. The final determination of the timing, amount and payment of dividends on the common stock is at the discretion of the Board of Directors. The declaration of dividends will depend on conditions then existing, including Vail Banks’ profitability, financial condition, capital requirements, future growth plans and other relevant factors. The principal source of Vail Banks’ income is dividends received from WestStar. The payment of these dividends by WestStar is subject to certain restrictions imposed by the federal and state banking laws and regulations.
Vail Banks’ ability to pay cash dividends on the common stock is also subject to statutory restrictions, including banking regulations, and restrictions arising under the terms of securities or indebtedness which may be issued or incurred in the future. The terms of such securities or indebtedness may restrict payment of dividends on common stock until required payments and distributions are made on such securities or indebtedness. Under regulations of the CDB and the Federal Reserve, approval of the regulators will be required if the total of all dividends declared by any banking subsidiary in any year exceeds the total of its net profits of that year combined with its retained net profits of the preceding two years. Beginning in 2004, any dividend payments from WestStar to Vail Banks will require prior regulatory approval due to the high volume of dividends relative to earnings paid in earlier years. Management believes that approval will be granted as long as WestStar maintains its well-capitalized regulatory status. See ‘‘Supervision and Regulation’’ in Item 1.
13
ITEM 6. SELECTED FINANCIAL DATA.
The selected historical financial data set forth below should be read in conjunction with the “General,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Financial Statements and Notes to Consolidated Financial Statements” sections, as well other financial data contained elsewhere in this Annual Report on Form 10-K.
|
(dollars in thousands, except for share data) |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
EARNINGS (1) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net interest income |
|
$ |
21,498 |
|
$ |
25,408 |
|
$ |
28,835 |
|
$ |
27,553 |
|
$ |
24,214 |
|
|
Provision for loan losses |
|
578 |
|
382 |
|
800 |
|
1,047 |
|
455 |
|
|||||
|
Non-interest income |
|
11,142 |
|
12,024 |
|
11,397 |
|
8,095 |
|
3,970 |
|
|||||
|
Non-interest expense |
|
31,038 |
|
28,440 |
|
29,006 |
|
26,225 |
|
20,512 |
|
|||||
|
Net income |
|
714 |
|
5,613 |
|
6,103 |
|
4,956 |
|
4,424 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
PER SHARE DATA (1) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Basic earnings |
|
$ |
0.14 |
|
$ |
0.99 |
|
$ |
1.02 |
|
$ |
0.80 |
|
$ |
0.73 |
|
|
Diluted earnings |
|
0.13 |
|
0.95 |
|
1.00 |
|
0.79 |
|
0.73 |
|
|||||
|
Book value per common share at year end |
|
10.95 |
|
11.64 |
|
11.03 |
|
10.29 |
|
9.60 |
|
|||||
|
Tangible book value per common share at year end |
|
3.96 |
|
5.23 |
|
4.62 |
|
4.32 |
|
5.62 |
|
|||||
|
Closing market price |
|
11.94 |
|
12.00 |
|
10.90 |
|
10.38 |
|
9.88 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
AT YEAR END |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total assets |
|
$ |
575,610 |
|
$ |
554,263 |
|
$ |
555,331 |
|
$ |
563,271 |
|
$ |
464,282 |
|
|
Earning assets |
|
476,864 |
|
452,943 |
|
454,076 |
|
457,970 |
|
373,526 |
|
|||||
|
Loans |
|
311,774 |
|
331,003 |
|
391,725 |
|
427,136 |
|
336,735 |
|
|||||
|
Allowance for loan losses |
|
3,503 |
|
3,747 |
|
4,375 |
|
4,440 |
|
2,739 |
|
|||||
|
Non-interest bearing deposits |
|
101,305 |
|
97,383 |
|
103,730 |
|
99,609 |
|
86,991 |
|
|||||
|
Total deposits |
|
448,515 |
|
428,698 |
|
442,350 |
|
482,002 |
|
372,742 |
|
|||||
|
Shareholders’ equity |
|
57,859 |
|
66,772 |
|
63,456 |
|
66,430 |
|
58,295 |
|
|||||
|
Shares outstanding |
|
5,283,264 |
|
5,734,303 |
|
5,754,152 |
|
6,456,400 |
|
6,069,370 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
AVERAGE BALANCES |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total assets |
|
$ |
589,664 |
|
$ |
561,496 |
|
$ |
559,570 |
|
$ |
517,250 |
|
$ |
442,755 |
|
|
Earning assets |
|
494,134 |
|
465,750 |
|
460,807 |
|
420,421 |
|
359,552 |
|
|||||
|
Loans |
|
324,086 |
|
356,703 |
|
410,613 |
|
385,672 |
|
301,052 |
|
|||||
|
Non-interest bearing deposits |
|
94,512 |
|
98,122 |
|
98,439 |
|
89,458 |
|
86,377 |
|
|||||
|
Total deposits |
|
456,810 |
|
439,884 |
|
465,194 |
|
419,955 |
|
374,825 |
|
|||||
|
Shareholders’ equity |
|
62,457 |
|
65,150 |
|
63,865 |
|
62,268 |
|
56,154 |
|
|||||
|
Weighted average common shares outstanding-Basic |
|
5,220,221 |
|
5,651,737 |
|
5,965,374 |
|
6,205,669 |
|
6,040,618 |
|
|||||
|
Weighted average common shares outstanding-Diluted |
|
5,617,720 |
|
5,914,891 |
|
6,111,103 |
|
6,290,461 |
|
6,091,635 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
PERFORMANCE (1) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Return on assets |
|
0.12 |
% |
1.00 |
% |
1.09 |
% |
0.96 |
% |
1.00 |
% |
|||||
|
Return on equity |
|
1.14 |
|
8.62 |
|
9.56 |
|
7.96 |
|
7.88 |
|
|||||
|
Dividend payout ratio |
|
200 |
|
23 |
|
18 |
|
15 |
|
0 |
|
|||||
|
Cash dividends paid per share |
|
$ |
0.26 |
|
$ |
0.22 |
|
$ |
0.18 |
|
$ |
0.12 |
|
$ |
0.00 |
|
|
Net interest margin (2) |
|
4.46 |
% |
5.49 |
% |
6.30 |
% |
6.59 |
% |
6.78 |
% |
|||||
|
Efficiency ratio |
|
95 |
|
76 |
|
72 |
|
74 |
|
73 |
|
|||||
|
Loan to deposit ratio (at year end) |
|
70 |
|
77 |
|
89 |
|
89 |
|
90 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
ASSET QUALITY (at year end) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net charge-offs to average loans |
|
0.25 |
% |
0.28 |
% |
0.21 |
% |
0.10 |
% |
0.10 |
% |
|||||
|
Allowance for loan losses to loans |
|
1.12 |
|
1.13 |
|
1.12 |
|
1.04 |
|
0.81 |
|
|||||
|
Allowance for loan losses to non-performing loans (3) |
|
200.52 |
|
100.35 |
|
214.25 |
|
263.50 |
|
148.62 |
|
|||||
|
Non-performing assets to loan-related assets (4) (5) |
|
0.68 |
|
1.20 |
|
0.58 |
|
0.42 |
|
0.63 |
|
|||||
|
Risk assets to loan-related assets (5) (6) |
|
0.73 |
|
1.20 |
|
0.73 |
|
0.42 |
|
0.64 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
CAPITAL (at year end) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Equity to assets |
|
10.05 |
% |
12.05 |
% |
11.43 |
% |
11.79 |
% |
12.56 |
% |
|||||
|
Tangible equity to assets |
|
3.63 |
|
5.41 |
|
4.79 |
|
4.96 |
|
7.35 |
|
|||||
|
Leverage ratio (7) |
|
7.45 |
|
10.27 |
|
9.43 |
|
5.45 |
|
8.05 |
|
|||||
|
Tier 1 risk based capital (7) |
|
11.50 |
|
14.15 |
|
11.73 |
|
7.14 |
|
10.71 |
|
|||||
|
Total risk based capital (7) |
|
13.72 |
|
15.61 |
|
13.41 |
|
8.25 |
|
11.54 |
|
|||||
(1) During 2002, the Company implemented Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which eliminated goodwill amortization expense beginning January 1, 2002. The Company continued to amortize other intangible assets. For further information, see “Notes to Consolidated Financial Statements—Note 5” contained in Item 15 of this Annual Report on Form 10-K.
(2) Net interest margin is reported on a fully taxable equivalent basis.
(3) Non-performing loans consist of non-accrual and restructured loans.
(4) Non-performing assets consist of non-performing loans and foreclosed properties.
(5) Loan related assets consist of total loans and foreclosed properties.
(6) Risk assets consist of non-performing assets and loans 90 days or more past due but continuing to accrue interest.
(7) For further information, see “Notes to Consolidated Financial Statements—Note 18” contained in Item 15 of this Annual Report on Form 10-K.
14
The following section presents management’s review of the financial condition and operating results of Vail Banks, Inc. and its subsidiaries (collectively Vail Banks or the Company). It is intended to assist readers in evaluating Vail Banks’ performance. Certain reclassifications have been made to previous periods’ information to conform to the 2003 presentation. The following analysis should be read in conjunction with the Consolidated Financial Statements and accompanying notes as well as the selected financial information included elsewhere in this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
The preparation of consolidated 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 as of the date of the consolidated balance sheet and the reported amounts of revenues and expenses during the reporting period. The Securities and Exchange Commission has defined a company’s most critical accounting policies as those that are most important to the portrayal of its financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this decision, management has identified the following critical accounting policies and judgments. Although management believes its estimates and assumptions are reasonable, they are based upon information available when they are made. Actual results may differ significantly from these estimates under different assumptions or conditions.
Allowance for Loan Losses
The allowance for loan losses calculation process has two components. The first component represents the allowance for impaired loans computed in accordance with Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan (SFAS 114 Component). To determine the SFAS 114 Component, collateral dependent impaired loans are evaluated using internal analyses as well as third-party information, such as appraisals. If an impaired loan is unsecured, it is evaluated using a discounted cash flow of the payments expected over the life of the loan giving consideration to currently existing factors that would impact the amount or timing of the cash flows. The second component is the allowance calculated under SFAS No. 5, Accounting for Contingencies (SFAS 5 Component), and represents the estimated probable but undetected losses inherent within the portfolio due to uncertainties in economic conditions, delays in obtaining information about a borrower’s financial condition, delinquent loans that have not been determined to be impaired, trends in speculative construction real estate lending, results of internal and external loan reviews, and other factors. This component of the allowance is calculated by assigning a certain risk weighting, within a predetermined range, to each identified risk factor.
At December 31, 2003, an allowance for loan losses of $3.5 million has been provided. Management believes that this allowance is adequate to cover probable losses based on all currently available evidence. Future additions to the allowance may be required based on management’s continuing evaluation of the inherent risks in the portfolio. Additional provisions for loan losses may need to be recorded if the economy resumes a decline, asset quality deteriorates, or historical loss experience changes. Also, state or federal regulators, when reviewing Vail Banks’ loan portfolio in the future, may require Vail Banks to increase the allowance, which could adversely affect Vail Banks’ earnings. An analysis of the allowance for loan losses as well as its allocation among certain categories of the loan portfolio can be found in the “Financial Condition” section of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Accounting for Goodwill and Other Intangible Assets
In assessing the recoverability of goodwill and other intangible assets, Management must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates and related assumptions change in the future, Management may be required to record impairment charges not previously recorded. On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. This statement requires the Company to assess goodwill and intangible assets for impairment at a minimum annually, using a two-step process that begins with an estimation of the fair value of the reporting unit. The first step is a screen for impairment, and the second step measures the amount of any impairment.
15
The Company performed its annual goodwill impairment test during the fourth quarter of 2003 and determined that the goodwill was not impaired as of that date. The Company also performed an annual impairment test of other intangible assets, comprised of core deposit premium, during the fourth quarter of 2003. Due to the attrition of acquired deposit accounts, the Company determined that $543,000 of the remaining net book value was impaired and recorded this amount as additional amortization expense during 2003. The Company also reassessed the remaining useful life of the core deposit intangible asset at December 31, 2003 and determined that it had a remaining useful life of five years.
Deferred Income Taxes
SFAS No. 109, Accounting for Income Taxes requires Management to exercise judgment about its future results in assessing the realizability of its deferred tax assets. At December 31, 2003, the Company had gross deferred tax assets of $2.9 million. Management has determined that the likelihood of realization of these deferred tax assets is greater than 50%, and accordingly no valuation allowance has been recorded. If future taxable income differs from Management’s estimate, a valuation allowance may be required and will impact future net income.
Disclosures of Fair Value of Financial Instruments
SFAS No. 107, Disclosure about Fair Value of Financial Instruments requires the Company to disclose estimated fair values of its financial instruments. Fair value estimates are made at a specific point in time, based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments owned at December 31, 2003 and 2002 without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments, including deferred tax assets and premises and equipment. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in these estimates.
Net income for 2003 decreased $4.9 million, or 87%, to $714,000 from $5.6 million in 2002. This decrease was primarily due to a decrease in the net interest margin from 5.49% for 2002 to 4.46% for 2003 primarily because of reduced loan volumes and an increase in non-interest expense of $2.6 million, or 9%, to $31.0 million from $28.4 million in 2002. Net income for 2002 decreased $490,000, or 8%, to $5.6 million from $6.1 million in 2001. This decrease was primarily due to a decrease in the net interest margin from 6.30% for 2001 to 5.49% for 2002, which was partially offset by the cessation of goodwill amortization expense with the implementation of SFAS No. 142.
The return on average assets was 0.12% for the year ended December 31, 2003 compared to 1.00% for the year ended December 31, 2002 and 1.09% for the year ended December 31, 2001.
16
The return on average equity was 1.14% for the year ended December 31, 2003 compared to 8.62% for the year ended December 31, 2002 and 9.56% for the year ended December 31, 2001.
Assets increased by $21.3 million, or 4%, to $575.6 million during 2003. This increase was primarily due to an increase in cash, cash equivalents and investment securities of $47.2 million, offset by a decrease in loans held for sale generated by First Western of $7.4 million and a decrease in gross loans of $19.2 million. Assets decreased by $1.1 million, or less than 1%, to $554.3 million during 2002. This decrease was primarily due to a decrease in net loans of $60.1 million offset by an increase in cash, cash equivalents and investment securities of $59.9 million and an increase in loans held for sale generated by First Western of $2.9 million.
Pro Forma Operating Results
During June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other Intangible Assets, which provides guidance on accounting for goodwill and intangible assets after an acquisition has been completed. Specifically, all new and pre-existing goodwill will no longer be amortized, but instead will be tested for impairment on an annual basis. Amortization of other intangible assets will continue. The Company adopted the provisions of SFAS 142 on January 1, 2002 and determined that the net unamortized goodwill of $36.0 million was not impaired as of that date. Additionally, the Company reassessed the useful life of the core deposit intangible asset related to a previously acquired branch. The Company determined that as of January 1, 2002, the core deposit intangible asset had a remaining useful life of twelve years. Accordingly, the $890,000 unamortized balance as of January 1, 2002 was to be amortized to expense on a straight-line basis over twelve years. This reduction in remaining life resulted in additional core deposit intangible amortization expense of $34,000 ($22,000 after tax) for the year ended December 31, 2002 over the comparable period during 2001.
In addition to the transitional impairment test required as of January 1, 2002, SFAS 142 requires that an annual impairment test be performed. The Company performed this annual goodwill impairment test during the fourth quarter of 2003 and determined that the goodwill was not impaired as of that date. The Company also reviews its intangible assets (other than goodwill) for other-than-temporary impairment on an annual basis. If circumstances indicate that impairment may exist, recoverability of the asset is assessed based on expected undiscounted net cash flows. In addition to the impairment test performed on January 1, 2002 upon adoption of SFAS 142, the Company performed its annual impairment test of other intangible assets during the fourth quarter of 2003. Due to the attrition of acquired deposit accounts, the Company determined that $543,000 of the remaining net book value was impaired and recorded this amount as additional amortization expense during 2003. The Company also determined that as of December 31, 2003, the core deposit intangible asset had a remaining useful life of five years.
17
The following table presents comparative net income and earnings per share information as if goodwill amortization expense had not been recorded for 2001:
|
(in thousands, except share data) |
|
2003 |
|
2002 |
|
2001 |
|
||||
|
|
|
|
|
|
|
|
|
||||
|
NET INCOME |
|
|
|
|
|
|
|
||||
|
Reported net income |
|
$ |
714 |
|
$ |
5,613 |
|
$ |
6,103 |
|
|
|
Add back: Goodwill amortization |
|
— |
|
— |
|
1,621 |
|
||||
|
Adjusted net income |
|
$ |
714 |
|
$ |
5,613 |
|
$ |
7,724 |
|
|
|
|
|
|
|
|
|
|
|
||||
|
BASIC EARNINGS PER SHARE |
|
|
|
|
|
|
|
||||
|
Reported basic earnings per share |
|
$ |
0.14 |
|
$ |
0.99 |
|
$ |
1.02 |
|
|
|
Add back: Effect of goodwill amortization |
|
— |
|
— |
|
0.27 |
|
||||
|
Adjusted basic earnings per share |
|
$ |
0.14 |
|
$ |
0.99 |
|
$ |
1.29 |
|
|
|
|
|
|
|
|
|
|
|
||||
|
DILUTED EARNINGS PER SHARE |
|
|
|
|
|
|
|
||||
|
Reported diluted earnings per share |
|
$ |
0.13 |
|
$ |
0.95 |
|
$ |
1.00 |
|
|
|
Add back: Effect of goodwill amortization |
|
— |
|
— |
|
0.26 |
|
||||
|
Adjusted diluted earnings per share |
|
$ |
0.13 |
|
$ |
0.95 |
|
$ |
1.26 |
|
|
Net Interest Income
Net interest income continues to be Vail Banks’ principal source of income, representing the difference between interest and fees earned on loans and investments and interest paid on deposits and borrowings. In this discussion, Net Interest Income on a fully tax-equivalent basis (FTE) includes tax-exempt income, such as interest on securities of states and municipalities, increased to an amount that would have been earned had such income been taxable. This adjustment places taxable and nontaxable income on a common basis and permits comparisons of rates and yields.
18
The following table sets forth the average balances, interest income and expense, and average yields and rates for Vail Banks’ earning assets and interest bearing liabilities for the periods indicated on a fully tax-equivalent basis.
Average Balance Sheet and Net Interest Income Analysis
|
|
|
2003 |
|
2002 |
|
2001 |
|
||||||||||||||||||
|
(in thousands on a fully taxable |
|
Average |
|
Interest |
|
Average |
|
Average |
|
Interest |
|
Average |
|
Average |
|
Interest |
|
Average |
|
||||||
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Federal funds sold and other short-term investments |
|
$ |
68,244 |
|
$ |
690 |
|
1.01 |
% |
$ |
36,430 |
|
$ |
578 |
|
1.59 |
% |
$ |
15,352 |
|
$ |
622 |
|
4.05 |
% |
|
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Taxable |
|
71,987 |
|
2,222 |
|
3.09 |
|
57,104 |
|
2,882 |
|
5.05 |
|
23,112 |
|
1,405 |
|
6.08 |
|
||||||
|
Tax-exempt (1) |
|
22,485 |
|
1,717 |
|
7.64 |
|
8,453 |
|
497 |
|
5.88 |
|
6,518 |
|
501 |
|
7.69 |
|
||||||
|
Loans (2) (3) |
|
331,418 |
|
26,098 |
|
7.87 |
|
363,763 |
|
30,153 |
|
8.29 |
|
415,825 |
|
39,620 |
|
9.53 |
|
||||||
|
TOTAL EARNING ASSETS |
|
494,134 |
|
30,727 |
|
6.22 |
|
465,750 |
|
34,110 |
|
7.32 |
|
460,807 |
|
42,148 |
|
9.15 |
|
||||||
|
Non-earning assets |
|
95,530 |
|
|
|
|
|
95,746 |
|
|
|
|
|
98,763 |
|
|
|
|
|
||||||
|
TOTAL ASSETS |
|
$ |
589,664 |
|
|
|
|
|
$ |
561,496 |
|
|
|
|
|
$ |
559,570 |
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Interest bearing transaction accounts |
|
$ |
225,623 |
|
$ |
1,390 |
|
0.62 |
% |
$ |
231,690 |
|
$ |
1,620 |
|
0.70 |
% |
$ |
271,580 |
|
$ |
5,996 |
|
2.21 |
% |
|
Certificates of deposit |
|
136,675 |
|
3,254 |
|
2.38 |
|
110,072 |
|
3,450 |
|
3.13 |
|
95,175 |
|
4,902 |
|
5.15 |
|
||||||
|
TOTAL INTEREST BEARING DEPOSITS |
|
362,298 |
|
4,644 |
|
1.28 |
|
341,762 |
|
5,070 |
|
1.48 |
|
366,755 |
|
10,898 |
|
2.97 |
|
||||||
|
Securities sold under agreements to repurchase |
|
167 |
|
1 |
|
0.42 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
||||||
|
Short-term borrowings |
|
11,168 |
|
373 |
|
3.34 |
|
9,843 |
|
246 |
|
2.50 |
|
5,711 |
|
196 |
|
3.43 |
|
||||||
|
Long-term borrowings |
|
30,715 |
|
1,229 |
|
4.00 |
|
18,313 |
|
758 |
|
4.14 |
|
295 |
|
12 |
|
4.07 |
|
||||||
|
Trust preferred |
|
24,000 |
|
2,447 |
|
10.19 |
|
24,000 |
|
2,447 |
|
10.19 |
|
19,882 |
|
2,024 |
|
10.18 |
|
||||||
|
TOTAL INTEREST BEARING LIABILITIES |
|
428,348 |
|
8,694 |
|
2.03 |
|
393,918 |
|
8,521 |
|
2.16 |
|
392,643 |
|
13,130 |
|
3.34 |
|
||||||
|
Non-interest bearing demand deposits |
|
94,512 |
|
|
|
|
|
98,122 |
|
|
|
|
|
98,439 |
|
|
|
|
|
||||||
|
Other liabilities |
|
4,347 |
|
|
|
|
|
4,306 |
|
|
|
|
|
4,623 |
|
|
|
|
|
||||||
|
TOTAL LIABILITIES |
|
527,207 |
|
|
|
|
|
496,346 |
|
|
|
|
|
495,705 |
|
|
|
|
|
||||||
|
SHAREHOLDERS’ EQUITY |
|
62,457 |
|
|
|
|
|
65,150 |
|
|
|
|
|
63,865 |
|
|
|
|
|
||||||
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
$ |
589,664 |
|
|
|
|
|
$ |
561,496 |
|
|
|
|
|
$ |
559,570 |
|
|
|
|
|
|||
|
TOTAL DEPOSITS |
|
$ |
456,810 |
|
$ |
4,644 |
|
1.02 |
% |
$ |
439,884 |
|
$ |
5,070 |
|
1.15 |
% |
$ |
465,194 |
|
$ |
10,898 |
|
2.34 |
% |
|
FTE NET INTEREST INCOME / MARGIN (4) |
|
|
|
$ |
22,033 |
|
4.46 |
% |
|
|
$ |
25,589 |
|
5.49 |
% |
|
|
$ |
29,018 |
|
6.30 |
% |
|||
(1) Tax exempt securities have been adjusted to an FTE basis using a marginal tax rate of 37.0% in 2003 and 36.5% in 2002 and 2001.
(2) Loans are presented net of unearned income and include nonaccrual loans and loans held for sale.
(3) Interest income on loans includes loan fees of $2.6 million, $3.3 million, and $3.1 million for 2003, 2002 and 2001, respectively.
(4) FTE margin has been computed by dividing FTE net interest income by total earning assets.
19
The amount of net interest income is affected by changes in the volume and mix of earning assets and interest bearing liabilities and the interest yields and rates on these assets and liabilities. An analysis of how changes in volume and yields and rates affected net interest income for the years ended December 31, 2003, 2002 and 2001 is presented below.
Analysis of Changes in Net Interest Income*
|
|
|
2003 over 2002 |
|
2002 over 2001 |
|
||||||||||||||
|
(in thousands) |
|
Volume |
|
Yield/Rate |
|
Total |
|
Volume |
|
Yield/Rate |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Federal funds sold and other short-term investments |
|
$ |
504 |
|
$ |
(392 |
) |
$ |
112 |
|
$ |
854 |
|
$ |
(898 |
) |
$ |
(44 |
) |
|
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Taxable |
|
751 |
|
(1,411 |
) |
(660 |
) |
2,066 |
|
(589 |
) |
1,477 |
|
||||||
|
Tax exempt |
|
825 |
|
395 |
|
1,220 |
|
149 |
|
(153 |
) |
(4 |
) |
||||||
|
Loans |
|
(2,681 |
) |
(1,374 |
) |
(4,055 |
) |
(4,960 |
) |
(4,507 |
) |
(9,467 |
) |
||||||
|
Total interest income |
|
(601 |
) |
(2,782 |
) |
(3,383 |
) |
(1,891 |
) |
(6,147 |
) |
(8,038 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Interest bearing transaction accounts |
|
(42 |
) |
(188 |
) |
(230 |
) |
(881 |
) |
(3,495 |
) |
(4,376 |
) |
||||||
|
Certificates of deposit |
|
834 |
|
(1,030 |
) |
(196 |
) |
767 |
|
(2,219 |
) |
(1,452 |
) |
||||||
|
Securities sold under agreements to repurchase |
|
— |
|
1 |
|
1 |
|
— |
|
— |
|
— |
|
||||||
|
Short-term borrowings |
|
33 |
|
94 |
|
127 |
|
142 |
|
(92 |
) |
50 |
|
||||||
|
Long-term borrowings |
|
513 |
|
(42 |
) |
471 |
|
733 |
|
13 |
|
746 |
|
||||||
|
Trust preferred |
|
— |
|
— |
|
— |
|
419 |
|
4 |
|
423 |
|
||||||
|
Total interest expense |
|
1,338 |
|
(1,165 |
) |
173 |
|
1,180 |
|
(5,789 |
) |
(4,609 |
) |
||||||
|
Change in net interest income FTE |
|
$ |
(1,939 |
) |
$ |
(1,617 |
) |
$ |
(3,556 |
) |
$ |
(3,071 |
) |
$ |
(358 |
) |
$ |
(3,429 |
) |
*Fully taxable equivalent (FTE).
Notes: The change in interest that cannot be attributed to only a change in rate or a change in volume, but instead represents a combination of the two factors, has been allocated to the rate variance.
FTE net interest income decreased by $3.6 million, or 14% to $22.0 million for the year ended December 31, 2003 from $25.6 million for the year ended December 31, 2002. The net interest margin on an FTE basis was 4.46% for 2003 as compared to 5.49% for 2002. Net interest margin is influenced by the level and relative mix of earning assets, interest bearing liabilities, non-interest bearing liabilities and shareholders’ equity as well as the cost of interest bearing liabilities as compared to the yield on earnings assets. The decrease in net interest margin during 2003 was primarily due to (1) a $32.3 million decrease in average loan volumes since December 31, 2002 as a result of the soft economy, more conservative underwriting policies, and a temporary internal focus on resolving problem loans. This resulted in additional liquidity that the Company used to purchase lower yielding investments and to sell federal funds. (2) At the same time, the Company capitalized on the low interest rate environment and its wholesale funding source to extend fixed rate financing to several customers, thereby locking in a spread. These borrowings came at a higher interest cost than deposits. (3) Also contributing to the decrease in net interest margin was the 25 basis point interest rate cut implemented by the Federal Reserve during second quarter 2003 and the 50 basis point cut during November 2002. (4) Finally, the Company deferred more loan fees during 2003 compared with 2002. During 2003, the Company deferred $696,000 in loan fees versus $159,000 in 2002, reflecting a more conservative approach that more closely recognizes loan fee income over the lives of the related loans. A portion of the deferral also included fees on long-term loans now being funded with long-term borrowings, a substantial portion of which will be recognized as income in subsequent quarters.
FTE Interest income decreased $3.4 million, or 10% for 2003 as compared to 2002 despite the fact that earning assets increased $28.4 million or 6% during the same period. During 2003, the mix of earning assets continued to shift away from loans and more toward lower yielding investment securities and federal funds sold. Loans had a yield of 7.87% during 2003 as compared to the 4.17% yield on investment securities and 1.01% yield on federal funds sold. During 2003, average loans declined to 67% of earning assets as compared to 78% during 2002. As a result of this shift, the total yield on average earnings assets decreased 110 basis points to 6.22% for 2003, as compared to 7.32% for 2002.
20
Interest expense increased $173,000, or 2% for 2003 as compared to 2002 primarily due to an increase in interest-bearing liabilities of $29.4 million during this same period. The cost of interest-bearing liabilities during this period, however, decreased 13 basis points from 2.16% during 2002 to 2.03% for 2003. This decrease was primarily due to a decrease in the cost of interest-bearing deposits from 1.48% during 2002 as compared to 1.28% during 2003. The 25 basis point interest rate cut implemented by the Federal Reserve during second quarter 2003 and the 50 basis point cut during November 2002 contributed to this lower cost.
FTE Net interest income decreased by $3.4 million, or 12% to $25.6 million for the year ended December 31, 2002 from $29.0 million for the year ended December 31, 2001. The net interest margin on an FTE basis was 5.49% for 2002 as compared to 6.30% for 2001. The decrease in net interest margin during 2002 was primarily due to the multiple interest rate cuts implemented by the Federal Reserve throughout 2001 and in November 2002 as well as a shift in the mix of earning assets from loans to investments and federal funds sold, and in interest bearing liabilities from deposits to borrowings. During 2002, Vail Banks experienced increased liquidity as the result of a decrease in loan demand attributable to the soft economy and more conservative underwriting policies. In response, the Company completed a short-term leverage strategy that enabled it to add income by borrowing from the Federal Home Loan Bank (FHLB) and reinvesting those funds primarily in mortgage backed securities, resulting in a net spread. Although this strategy was designed to add net income, it did, however, have a somewhat negative impact on the net interest margin due to the smaller spread between rates offered on investments and charged on borrowings than would have been generated from the spread between loan and deposit rates.
FTE Interest income decreased $8.0 million, or 19% for 2002 as compared to 2001 despite the fact that earning assets increased $4.9 million or 1% during the same period. During 2002, the mix of earning assets shifted away from loans and more toward investment securities and federal funds sold. Loans had a yield of 8.29% during 2002 as compared to the 5.15% yield on investment securities and 1.59% yield on federal funds sold. However, during 2002, average loans declined to 78% of earning assets as compared to 90% during 2001. As a result of this shift, the total yield on average earning assets decreased 183 basis points to 7.32% for 2002, as compared to 9.15% for 2001.
Interest expense decreased $4.6 million, or 35% for 2002 as compared to 2001 despite the fact that interest-bearing liabilities increased $1.3 million during the same period. This decrease was primarily due to the full year impact of the 475 basis point decline in interest rates that occurred throughout 2001. As a result, the total cost of interest-bearing liabilities decreased 118 basis points to 2.16% for 2002, as compared to 3.34% for 2001. This decrease in cost of interest bearing liabilities, however, was not in proportion to the decrease in yield on average interest earning assets, resulting in an overall decrease in the net interest margin for 2002.
Provision for Loan Losses
The amount of the provision for loan losses is based on regular evaluations of the loan portfolio, with particular attention directed toward non-performing, delinquent, and other potential problem loans. During these evaluations, consideration is also given to such factors as management’s evaluation of specific loans, the level and composition of delinquent and non-performing loans, historical loan loss experience, results of examinations by regulatory agencies, external and internal asset review processes, the market value of collateral, the strength and availability of guarantees, concentrations of credit and other judgmental factors.
The provision for loan losses was $578,000 in 2003, compared to $382,000 in 2002 and $800,000 in 2001. The allowance for loan losses of $3.5 million as of December 31, 2003 decreased 7% from the $3.7 million level as of December 31, 2002 and represents 1.12% of total loans and 201% of non-performing loans as of December 31, 2003 as compared to 1.13% and 100%, respectively, at December 31, 2002. The Company believes that the current allowance for loan losses is adequate to absorb probable losses in the decreased loan portfolio (gross loans were $312.5 million at December 31, 2003 compared to $331.2 million at December 31, 2002) with a lower level of non-performing loans. During 2003, average loans decreased $32.6 million, or 9%, and non-performing loans decreased $2.0 million, or 53%. Net charge-offs during 2003 were $822,000, resulting in a net decrease in the allowance for loan losses of $244,000 compared to a net decrease of $628,000 during 2002 and a net increase of $65,000 in 2001. The decrease in the provision during 2002 was due to the Company’s determination during 2002 that the current allowance for loan losses was adequate to absorb probable losses in the decreased loan portfolio (gross loans were $331.2 million at December 31, 2002 compared to $391.7 million at December 31, 2001). At December 31, 2002, the allowance was 1.13% of total loans and 100% of non-performing loans. While non-performing loans increased significantly during 2002 (to $3.7 million at December 31, 2002 from $2.0 million at December 31, 2001) causing the allowance to non-performing loans ratio to decline, the majority of the non-accrual loans were real
21
estate secured, were recorded at net realizable value, and were subject to foreclosure or other collection proceedings that were underway.
Non-Interest Income
The following table sets forth Vail Banks’ non-interest income for the years indicated.
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
Mortgage broker fees |
|
$ |
4,936 |
|
$ |
4,943 |
|
$ |
4,075 |
|
|
Service charges on deposits |
|
3,080 |
|
3,495 |
|
3,968 |
|
|||
|
Other fee income |
|
1,164 |
|
1,812 |
|
1,900 |
|
|||
|
Rental income |
|
907 |
|
993 |
|
1,127 |
|
|||
|
Gain on sale of foreclosed properties |
|
540 |
|
138 |
|
8 |
|
|||
|
Other |
|
515 |
|
643 |
|
319 |
|
|||
|
Total non-interest income |
|
$ |
11,142 |
|
$ |
12,024 |
|
$ |
11,397 |
|
Non-interest income decreased $882,000, or 7%, to $11.1 million in 2003 from $12.0 million in 2002. This decrease was primarily due to a decrease in other fee income and service charges on deposits. Other fee income decreased $648,000, or 36%, from 2002 primarily due to the outsourcing of the Company’s merchant card program. During 2003, service charges on deposits decreased $415,000, or 12% due primarily to a decline in the number of insufficient funds charges. Rental income decreased during 2003 due to several tenant vacancies in rental properties owned by the Company.
Non-interest income grew $627,000, or 6%, to $12.0 million in 2002 from $11.4 million in 2001. This increase was primarily due to an increase in mortgage broker fees partially offset by a decrease in deposit related service charges. Mortgage broker fees increased $868,000, or 21%, from 2001 due to continued refinancing activity. During 2002, deposit related income decreased $473,000, or 12% due primarily to a decline in the number of deposit account overdrafts and to some degree a general decrease in the number of transaction accounts (interest and non-interest bearing checking accounts).
Non-Interest Expense
The following table sets forth Vail Banks’ non-interest expense for the years indicated.
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Salaries and employee benefits |
|
$ |
17,593 |
|
$ |
16,776 |
|
$ |
15,388 |
|
|
Occupancy |
|
3,737 |
|
3,153 |
|
3,025 |
|
|||
|
Furniture and equipment |
|
2,768 |
|
2,871 |
|
2,835 |
|
|||
|
Loss on sale, disposal or write-off of premises and equipment |
|
1,578 |
|
121 |
|
106 |
|
|||
|
Professional fees |
|
774 |
|
1,079 |
|
945 |
|
|||
|
Banking service fees |
|
659 |
|
639 |
|
774 |
|
|||
|
Telephone and data communications |
|
633 |
|
613 |
|
640 |
|
|||
|
Amortization of intangible assets |
|
617 |
|
74 |
|
1,661 |
|
|||
|
Marketing and promotions |
|
561 |
|
481 |
|
494 |
|
|||
|
Retail banking |
|
481 |
|
875 |
|
1,097 |
|
|||
|
Supplies and printing |
|
313 |
|
342 |
|
414 |
|
|||
|
Postage and freight |
|
221 |
|
270 |
|
329 |
|
|||
|
Litigation settlement |
|
150 |
|
— |
|
— |
|
|||
|
Other |
|
953 |
|
1,146 |
|
1,298 |
|
|||
|
Total non-interest expense |
|
$ |
31,038 |
|
$ |
28,440 |
|
$ |
29,006 |
|
22
Total non-interest expense increased $2.6 million during 2003, or 9%, from $28.4 million in 2002. The increase is primarily due to the write-off of premises and equipment, and increases in salaries and employee benefits, occupancy expense, amortization expense on intangible assets, the opening of a de novo branch in Denver during the second quarter 2003 and the settlement of litigation. These increases were partially offset by the reduction in retail banking expenses and the Company’s concerted efforts to reduce operational costs such as postage, supplies and professional fees.
Total non-interest expense decreased $566,000 during 2002, or 2%, from $29.0 million in 2001. The decrease is primarily due to the elimination of goodwill amortization effective January 1, 2002 and reductions in operational type costs such as postage, supplies and marketing. These expense reductions were offset by increasing costs of employee related expenses, occupancy expenses and professional fees as well as a full year of operating expenses for the Grand Junction branch that opened during third quarter 2001.
During 2003, the Company scrutinized its premises and equipment listing and determined that certain premises and equipment were no longer required for the efficient operation of the Company. These premises and equipment were written off during the fourth quarter of 2003 resulting in a pre-tax charge to income of $1.6 million.
Salaries and employee benefits expense increased $817,000 during 2003, or 5% from 2002. This increase is primarily due to the opening of a de novo branch in Denver during the second quarter 2003 which contributed an additional $577,000 of compensation expense. Additionally, stock based compensation expense increased $409,000 during 2003. During 2003, the Company recognized compensation expense of $171,000 related to grants of restricted stock in 2003. Additionally, an officer of the Company terminated his employment during 2003 and all of his restricted stock and stock options became fully vested as of December 31, 2003. The Company recognized additional compensation expense of $138,000 in 2003 related to these shares. Finally, during 2003 the Company accelerated the stock option vesting of a former officer of the Company and recognized additional compensation expense of $152,000.
Expenses associated with premises and equipment, including occupancy, furniture and equipment, rose $481,000 and $164,000 in 2003 and 2002, respectively. Increases in 2003 were primarily related to accrued lease termination costs for three closed branches, cost of living increases in facilities rent, increased common area maintenance charges for leased facilities, and the opening of a new branch in Denver during 2003. Increases in 2002 were primarily related to a full year of expense related to the Grand Junction branch opened in 2001, as well as cost of living increases in building rent and property taxes.
Amortization of intangible assets in 2003 rose $543,000, or 734% from 2002. The Company performed its annual impairment test of other intangible assets during the fourth quarter of 2003. Due to the attrition of acquired deposit accounts the Company determined that $543,000 of core deposit premium created by former acquisitions was determined to be impaired and recorded this amount as additional amortization expense during 2003. During 2001, amortization of intangible assets decreased $1.6 million, or 96%. This decrease was due to the elimination of goodwill amortization effective January 1, 2002 with the adoption of SFAS No. 142, Goodwill and Other Intangible Assets.
Retail banking expenses decreased 394,000, or 45%, from 2002. This decrease was due to the outsourcing of the merchant card program during first quarter 2003 that resulted in decreased merchant card expenses of $404,000 during 2003.
During third quarter 2003, the Company settled a lawsuit at a cost of $150,000. The lawsuit resulted from actions taken by a former officer at an acquired bank prior to the Company’s acquisition of such bank.
The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income and non-interest income and is a measure of the cost to generate a dollar of revenue. The efficiency ratio increased in 2003 to 95% from 76% in 2002 and 72% in 2001. The increase in 2003 was primarily due to the decline in revenue (net interest income plus non-interest income) of $4.8 million over 2002 while non-interest expenses increased $2.6 million during the same period. The increase in 2002 was largely due to the decline in revenue (net interest income plus non-interest income) of $2.8 million over 2001 while non-interest expenses only decreased $566,000 during the same period.
Income Taxes
Income tax expense as a percentage of pre-tax income was 30.3% for 2003 compared with 34.8% and 41.5% for 2002 and 2001, respectively. The amortization of goodwill recorded in 2001 was primarily non-deductible for income tax
23
purposes, thus affecting the effective tax rates. During 2003 and 2002, goodwill amortization was not recorded as a result of adopting SFAS No. 142 on January 1, 2002. Other intangibles continued to be amortized during 2003 and 2002. Excluding amortization of non-deductible goodwill for 2001, the effective tax rate in 2001 would have been 35.8%. During 2003, the Company had a significant increase in tax-exempt interest as a result of municipal bond purchases during 2003. This reduction in current income tax expense was offset by additional deferred tax expense associated with the adjustment of the tax bases of certain premises and equipment. A reconciliation of income tax expense to the amount computed by applying the statutory federal income tax rate to pre-tax income is provided in Note 10 of the Notes to Consolidated Financial Statements, contained in Item 15 of this Annual Report on Form 10-K.
Investments
At December 31, 2003, the carrying value of investment securities was $81.3 million, which was an increase of $19.3 million, or 31%, over $62.0 million at December 31, 2002. During this period, quality loan demand decreased while deposits continued to grow, resulting in additional funds to invest. These funds were invested in securities as well as overnight federal funds.
At December 31, 2002, the carrying value of investment securities was $62.0 million, which was an increase of $20.4 million, or 49%, over $41.9 million at December 31, 2001. During this period, quality loan demand decreased while deposits continued to grow, resulting in additional funds to invest. Additionally, the Company completed a short-term leverage strategy by borrowing from the Federal Home Loan Bank and reinvesting those funds primarily in mortgage backed securities.
Vail Banks’ investment policy is designed primarily to ensure liquidity and to meet pledging requirements and secondarily to provide acceptable investment income. Management’s focus is on maintaining a high-quality investment portfolio oriented primarily toward mortgage-backed and other government agency securities. The determination of the amount and maturity of securities purchased is a function of liquidity and income projections based on the existing, and expected, balance sheet and interest rate forecasts.
Vail Banks is required to account for investment securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. At the date of purchase, Vail Banks is required to classify debt and equity securities into one of three categories: held to maturity, trading, or available for sale. Investments in debt securities are classified as held to maturity and measured at amortized cost in the financial statements only if management has the positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and measured at fair value in the statements with unrealized gains and losses included in earnings. Since its inception, Vail Banks has not had any trading account activities. Investments not classified as either held to maturity or trading are classified as available for sale and measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, as a separate component of other comprehensive income until realized. Since the initial classification of its investment securities, Vail Banks has not transferred any investment securities between categories, nor has it sold any investment securities classified as held to maturity. The following tables set forth information regarding the investment composition of Vail Banks as of the dates indicated.
Investment Securities Available for Sale at December 31,
|
|
|
2003 |
|
2002 |
|
2001 |
|
||||||||||||
|
(in thousands) |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
||||||
|
U.S. Treasury |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
248 |
|
$ |
258 |
|
|
Government agencies |
|
20,869 |
|
20,813 |
|
13,299 |
|
13,323 |
|
6,465 |
|
6,634 |
|
||||||
|
State and municipal |
|
20,282 |
|
20,277 |
|
3,851 |
|
3,880 |
|
2,712 |
|
2,723 |
|
||||||
|
Mortgage-backed securities |
|
31,080 |
|
31,075 |
|
35,318 |
|
35,931 |
|
16,473 |
|
16,414 |
|
||||||
|
Agency preferred stock |
|
4,514 |
|
4,389 |
|
4,500 |
|
4,500 |
|
7,004 |
|
7,035 |
|
||||||
|
Trust preferred securities |
|
— |
|
— |
|
— |
|
— |
|
4,634 |
|
4,497 |
|
||||||
|
Total securities available for sale |
|
$ |
76,745 |
|
$ |
76,554 |
|
$ |
56,968 |
|
$ |
57,634 |
|
$ |
37,536 |
|
$ |
37,561 |
|
24
Investment Securities Held to Maturity at December 31,
|
|
|
2003 |
|
2002 |
|
2001 |
|
||||||||||||
|
(in thousands) |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
||||||
|
U.S. Treasury |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
Mortgage-backed securities |
|
370 |
|
397 |
|
684 |
|
731 |
|
998 |
|
1,033 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Total securities held to maturity |
|
$ |
370 |
|
$ |
397 |
|
$ |
684 |
|
$ |
731 |
|
$ |
998 |
|
$ |
1,033 |
|
Investments in Bank Stocks at December 31,
|
|
|
2003 |
|
2002 |
|
2001 |
|
||||||||||||
|
(in thousands) |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
||||||
|
Federal Home Loan Bank stock |
|
$ |
2,318 |
|
$ |
2,318 |
|
$ |
1,650 |
|
$ |
1,650 |
|
$ |
2,050 |
|
$ |
2,050 |
|
|
Federal Reserve Bank stock |
|
1,869 |
|
1,869 |
|
1,869 |
|
1,869 |
|
793 |
|
793 |
|
||||||
|
Bankers’ Bank of the West stock |
|
184 |
|
184 |
|
184 |
|
184 |
|
184 |
|
184 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Total investments in bank stocks |
|
$ |
4,371 |
|
$ |
4,371 |
|
$ |
3,703 |
|
$ |
3,703 |
|
$ |
3,027 |
|
$ |
3,027 |
|
The following tables set forth the estimated carrying value and approximate weighted average yield of the debt securities in the investment portfolio by type and contractual maturity at December 31, 2003. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities also provide a cash flow of principal and interest over time that is not reflected in the table below. Bank stocks are excluded from the table as they do not have stated maturity dates.
Maturities of Available for Sale Securities at December 31, 2003
|
|
|
Within 1 Year |
|
1 - 5 Years |
|
5 -10 Years |
|
Over 10 Years |
|
Total |
|
|||||||||||||||
|
(in thousands) |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
|||||
|
Government agencies |
|
$ |
— |
|
— |
% |
$ |
5,236 |
|
2.37 |
% |
$ |
1,796 |
|
4.03 |
% |
$ |
13,781 |
|
3.77 |
% |
$ |
20,813 |
|
3.44 |
% |
|
State and municipal (1) |
|
459 |
|
6.79 |
|
170 |
|
7.02 |
|
107 |
|
7.24 |
|
19,541 |
|
7.23 |
|
20,277 |
|
7.22 |
|
|||||
|
Mortgage-backed securities |
|
— |
|
— |
|
14 |
|
7.41 |
|
1,901 |
|
5.21 |
|
29,160 |
|
3.63 |
|
31,075 |
|
3.72 |
|
|||||
|
Agency preferred stock (1) |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
4,389 |
|
6.14 |
|
4,389 |
|
6.14 |
|
|||||
|
Total and weighted average yield |
|
$ |
459 |
|
6.79 |
% |
$ |
5,420 |
|
2.53 |
% |
$ |
3,804 |
|
4.71 |
% |
$ |
66,871 |
|
4.88 |
% |
$ |
76,554 |
|
4.71 |
% |
(1) Yields on tax-exempt obligations have been computed on a tax equivalent basis using a marginal tax rate of 37.06%.
Maturities of Held to Maturity Securities at December 31, 2003
|
|
|
Within 1 Year |
|
1 - 5 Years |
|
5 -10 Years |
|
Over 10 Years |
|
Total |
|
|||||||||||||||
|
(in thousands) |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Mortgage-backed securities |
|
$ |
— |
|
— |
% |
$ |
107 |
|
6.54 |
% |
$ |
— |
|
— |
% |
$ |
263 |
|
7.08 |
% |
$ |
370 |
|
6.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total and weighted average yield |
|
$ |
— |
|
— |
% |
$ |
107 |
|
6.54 |
% |
$ |
— |
|
— |
% |
$ |
263 |
|
7.08 |
% |
$ |
370 |
|
6.92 |
% |
25
Loans
Loan Portfolio Composition
The following table sets forth the composition of Vail Banks’ loan portfolio by type of loan at the dates indicated. Management believes that the balance sheet information as of the dates indicated should be read in conjunction with the average balance information in the tables above under the caption Average Balance Sheet and Net Interest Income Analysis. Vail Banks has followed a policy to manage the loan portfolio composition to mitigate risks in specific markets by diversifying the loan portfolio. However, Vail Banks does have a concentration of loans in the commercial, industrial and land category. As a result of seasonal trends in the retail, service and real estate markets, balances of commercial loans may fluctuate significantly.
Gross Loans Outstanding at December 31,
|
|
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
|||||||||||||||
|
(in thousands) |
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
|||||
|
Commercial, industrial, and land |
|
$ |
185,158 |
|
60 |
% |
$ |
203,932 |
|
61 |
% |
$ |
214,662 |
|
55 |
% |
$ |
206,959 |
|
49 |
% |
$ |
165,373 |
|
49 |
% |
|
Real estate-construction |
|
63,844 |
|
20 |
|
55,275 |
|
17 |
|
90,449 |
|
23 |
|
114,654 |
|
27 |
|
80,959 |
|
24 |
|
|||||
|
Real estate-mortgage |
|
57,602 |
|
18 |
|
62,188 |
|
19 |
|
68,898 |
|
18 |
|
78,482 |
|
18 |
|
59,898 |
|
18 |
|
|||||
|
Consumer |
|
5,940 |
|
2 |
|
9,767 |
|
3 |
|
17,716 |
|
4 |
|
27,041 |
|
6 |
|
30,505 |
|
9 |
|
|||||
|
Total |
|
$ |
312,544 |
|
100 |
% |
$ |
331,162 |
|
100 |
% |
$ |
391,725 |
|
100 |
% |
$ |
427,136 |
|
100 |
% |
$ |
336,735 |
|
100 |
% |
At December 31, 2003, gross loans were $312.5 million, which was a decrease of $18.6 million, or 6%, over $331.2 million at December 31, 2002. This decrease was primarily due to the continued softening of the economy, a continued conservative underwriting policy, and a temporary internal focus on resolving problem loans. At December 31, 2003, non-performing loans were $1.7 million, the lowest level during the past three years. At December 31, 2002, gross loans were $331.2 million, which was a decrease of $60.6 million, or 15%, over $391.7 million at December 31, 2001. This decrease was primarily due to the softening of the economy and a conservative underwriting policy.
Commercial, industrial, and land loans principally include loans to service, real estate and retail businesses and to a small degree, agricultural interests. These loans are primarily secured by real estate and operating business assets. Commercial, industrial and land loans are made on the basis of the repayment ability and financial strength of the borrower as well as the collateral securing the loans.
Real estate—construction loans principally include short-term loans to fund the construction of buildings and residences or to purchase land for planned and near-term commercial or residential development. These loans are primarily non-revolving lines of credit and are secured by real estate, typically well margined with a first security lien.
Real estate—mortgage loans principally include short-term financing for existing one-to-four family residences. The majority of these loans have maturities of less than five years. These loans are secured by the subject real estate, typically well margined with a first lien position.
Consumer loans to individuals principally include one-to-five year loans for consumer items, such as automobiles, motor homes and other goods. These loans are typically secured, at minimum, by the items being financed.
Banking officers are assigned various levels of credit extension approval authority based upon their respective levels of experience and expertise. Credit relationships exceeding $1.0 million are evaluated and acted upon by the Directors’ Credit Committee and are reported to the Board of Directors (Board) on a monthly basis. Vail Banks’ strategy for approving or disapproving extensions of credit is to follow a conservative credit policy and underwriting practices which include: (1) extending credit on a sound and collectible basis; (2) investing funds for the benefit of shareholders and the protection of depositors; (3) serving the needs of the community and Vail Banks’ general market area while obtaining a balance between maximum yield and minimum risk; (4) ensuring that primary and secondary sources of repayment are adequate in relation to
26
the amount of the credit extended; (5) developing and maintaining diversification in the loan portfolio as a whole and of the loans within each loan category; and (6) ensuring that each extension of credit is properly documented and, if appropriate, insurance coverage is adequate. Vail Banks’ credit review and compliance associates interact daily with commercial and consumer lenders to identify potential underwriting or technical exception variances. In addition, Vail Banks has placed increased emphasis on early identification of problem loans in an effort to aggressively seek resolution of such situations. Management believes that this strict adherence to conservative credit policy guidelines has contributed to Vail Banks’ reduced level of credit losses.
Loan Maturities
The following table presents loans by maturity in each major category at December 31, 2003. Actual maturities may differ from the contractual repricing maturities shown below as a result of renewals and prepayments. Loan renewals are evaluated in the same manner as new credit applications.
Gross Loan Maturities at December 31, 2003
|
(in thousands) |
|
Within 1 |
|
1 - 5 |
|
Over 5 |
|
Total |
|
||||
|
Commercial, industrial and land |
|
$ |
72,647 |
|
$ |
73,362 |
|
$ |
39,149 |
|
$ |
185,158 |
|
|
Real estate-construction |
|
47,348 |
|
16,496 |
|
— |
|
63,844 |
|
||||
|
Real estate-mortgage |
|
27,965 |
|
27,009 |
|
2,628 |
|
57,602 |
|
||||
|
Consumer |
|
3,101 |
|
2,572 |
|
267 |
|
5,940 |
|
||||
|
Total |
|
$ |
151,061 |
|
$ |
119,439 |
|
$ |
42,044 |
|
$ |
312,544 |
|
(a) Of the loans with maturities over one year, $124.0 million had adjustable interest rates and the remainder had fixed interest rates.
Non-Performing Assets
Non-performing assets consist of nonaccrual loans, restructured loans and foreclosed properties. When, in the opinion of management, a reasonable doubt exists as to the collectibility of interest, regardless of the delinquency status of the loan, the accrual of interest income is discontinued and interest accrued but uncollected during the current year is generally reversed through a charge to current year earnings. While the loan is on nonaccrual status, interest income is recognized only upon receipt and then only if, in the judgment of management, there is no reasonable doubt as to the collectibility of the principal balance. Loans 90 days or more delinquent generally are changed to nonaccrual status unless the loan is in the process of collection and management determines that full collection of principal and accrued interest is probable. Additional interest income that would have been recorded for nonaccrual loans had they been performing in accordance with their contractual requirements was $171,000 and $421,000 for the years ended December 31, 2003 and 2002. Actual interest income recorded for these loans was $186,000 and $180,000 for those years.
Restructured loans are those for which concessions, including reduction of interest rate below a rate otherwise available to the borrower or the deferral of interest or principal, have been granted due to the borrower’s weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur.
27
The following table sets forth information concerning the non-performing assets of Vail Banks as of the dates indicated.
Asset Quality at December 31,
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
|||||
|
Nonaccrual loans |
|
$ |
1,747 |
|
$ |
3,734 |
|
$ |
1,977 |
|
$ |
1,685 |
|
$ |
1,843 |
|
|
Restructured loans |
|
— |
|
— |
|
65 |
|
— |
|
— |
|
|||||
|
Total non-performing loans |
|
1,747 |
|
3,734 |
|
2,042 |
|
1,685 |
|
1,843 |
|
|||||
|
Foreclosed properties |
|
362 |
|
241 |
|
229 |
|
129 |
|
287 |
|
|||||
|
Total non-performing assets |
|
2,109 |
|
3,975 |
|
2,271 |
|
1,814 |
|
2,130 |
|
|||||
|
Loans 90 days or more past due and accruing |
|
164 |
|
6 |
|
604 |
|
— |
|
11 |
|
|||||
|
Total risk assets |
|
$ |
2,273 |
|
$ |
3,981 |
|
$ |
2,875 |
|
$ |
1,814 |
|
$ |
2,141 |
|
|
Non-performing loans to total loans |
|
0.56 |
% |
1.13 |
% |
0.52 |
% |
0.39 |
% |
0.55 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Non-performing assets to total loans plus foreclosed properties |
|
0.68 |
% |
1.20 |
% |
0.58 |
% |
0.42 |
% |
0.63 |
% |
|||||
|
Non-performing assets to total assets |
|
0.37 |
% |
0.72 |
% |
0.41 |
% |
0.32 |
% |
0.46 |
% |
|||||
|
Risk assets to total loans plus foreclosed properties |
|
0.73 |
% |
1.20 |
% |
0.73 |
% |
0.42 |
% |
0.64 |
% |
|||||
During 2003, the Company completed foreclosures and subsequent sales of real estate on several large loans that were on non-accrual at December 31, 2002, resulting in a decrease in non-performing loans and related ratios. The significant increase in the ratio of non-performing loans to total loans from 2001 to 2002 was primarily a result of the $1.8 million increase in non-accrual loans from 2001 compounded by a $60.7 million decrease in loans during that same time period. The increase in non-accrual loans was a result of the sluggish economy, however, the majority of the non-accrual loans are real estate secured, are recorded at net realizable value, and are subject to foreclosure or other collection proceedings that are underway. The decrease in loans was primarily due to the continued softening of the economy and a continued conservative underwriting policy.
Management believes Vail Banks is adequately collateralized to recover the majority of the balance of these nonaccrual loans. Management generally obtains and maintains appraisals on real estate collateral. Management is not aware of any adverse trends relating to Vail Banks’ loan portfolio, not reflected above.
28
Analysis of the Allowance for Loan Losses
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
|||||
|
Allowance at beginning of the year |
|
$ |
3,747 |
|
$ |
4,375 |
|
$ |
4,440 |
|
$ |
2,739 |
|
$ |
2,590 |
|
|
Charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Commercial, industrial and land |
|
530 |
|
1,101 |
|
337 |
|
160 |
|
86 |
|
|||||
|
Real estate-construction |
|
104 |
|
82 |
|
60 |
|
— |
|
— |
|
|||||
|
Real estate-mortgage |
|
275 |
|
101 |
|
142 |
|
3 |
|
50 |
|
|||||
|
Consumer |
|
192 |
|
356 |
|
457 |
|
255 |
|
245 |
|
|||||
|
Total charge-offs |
|
1,101 |
|
1,640 |
|
996 |
|
418 |
|
381 |
|
|||||
|
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Commercial, industrial and land |
|
170 |
|
584 |
|
63 |
|
2 |
|
58 |
|
|||||
|
Real estate-construction |
|
2 |
|
10 |
|
— |
|
— |
|
— |
|
|||||
|
Real estate-mortgage |
|
4 |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
Consumer |
|
103 |
|
36 |
|
68 |
|
30 |
|
17 |
|
|||||
|
Total recoveries |
|
279 |
|
630 |
|
131 |
|
32 |
|
75 |
|
|||||
|
Net charge-offs |
|
822 |
|
1,010 |
|
865 |
|
386 |
|
306 |
|
|||||
|
Provision for loan losses |
|
578 |
|
382 |
|
800 |
|
1,047 |
|
455 |
|
|||||
|
Allowance acquired through acquisitions |
|
— |
|
— |
|
— |
|
1,040 |
|
— |
|
|||||
|
Allowance at end of the year |
|
$ |
3,503 |
|
$ |
3,747 |
|
$ |
4,375 |
|
$ |
4,440 |
|
$ |
2,739 |
|
|
Net charge-offs to average loans outstanding during the period |
|
0.25 |
% |
0.28 |
% |
0.21 |
% |
0.10 |
% |
0.10 |
% |
|||||
|
Provision for loan losses to average loans outstanding during the period |
|
0.17 |
% |
0.11 |
% |
0.19 |
% |
0.27 |
% |
0.15 |
% |
|||||
|
Allowance for loan losses to total loans at year-end |
|
1.12 |
% |
1.13 |
% |
1.12 |
% |
1.04 |
% |
0.81 |
% |
|||||
The Company has established a formal process for determining an adequate Allowance. WestStar lending associates are responsible for ongoing reviews of the quality of the loan portfolio. During 2003, the Company established an internal loan review function that issues quarterly reports to the Audit Committee. State and federal regulatory agencies, as an integral part of their examination process, also review WestStar’s loans and its Allowance. A list containing problem loans is updated and reviewed by management and the Board monthly.
29
In order to comply with certain regulatory requirements, management has prepared the following allocation of Vail Banks’ allowance for loan losses among various categories of the loan portfolio for each of the years in the five-year period ended December 31, 2003. In management’s opinion, such allocation has, at best, a limited utility. It is based on management’s assessment as of a given point in time of the risk characteristics for each of the component parts of the total loan portfolio and is subject to changes as and when the risk factors of each such component part change. Such allocation is not indicative of either the specific amounts or the loan categories in which future charge-offs may be taken, nor should it be taken as an indicator of future loss trends. By presenting such allocation, management does not mean to imply that the allocation is exact or that the allowance has been precisely determined from such allocation. Additionally, during 2001, the Company changed its methodology for computing the allowance for loan losses, as discussed above. A significant portion of the SFAS 5 Component has not been allocated to each of the four categories specified in the table below, but rather represents loans in all four categories. It is represented by the term “cross-allocated” in the table below.
Allocation of the Allowance for Loan Losses
|
|
|
Amount |
|
|||||||||||||
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, industrial and land |
|
$ |
638 |
|
$ |
720 |
|
$ |
1,293 |
|
$ |
1,976 |
|
$ |
784 |
|
|
Real estate-construction |
|
669 |
|
613 |
|
409 |
|
949 |
|
513 |
|
|||||
|
Real estate-mortgage |
|
142 |
|
297 |
|
— |
|
765 |
|
642 |
|
|||||
|
Consumer |
|
359 |
|
285 |
|
544 |
|
516 |
|
380 |
|
|||||
|
Cross-allocated |
|
1,695 |
|
1,832 |
|
2,129 |
|
— |
|
— |
|
|||||
|
Unallocated |
|
— |
|
— |
|
— |
|
234 |
|
420 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,503 |
|
$ |
3,747 |
|
$ |
4,375 |
|
$ |
4,440 |
|
$ |
2,739 |
|
Deposits
Vail Banks’ primary source of funds has historically been in-market customer deposits. Deposit products are concentrated in business and personal checking accounts, including interest bearing and non-interest bearing accounts. Generally, deposits are short-term in nature with approximately 78% of deposits having a committed term less than three months and approximately 93% having a committed term of less than one year. Vail Banks’ resort locations experience a seasonality of deposits; however, deposits in non-resort-oriented markets help to mitigate such seasonality.
Total deposits were $448.5 million at December 31, 2003, a $19.8 million, or a 5%, increase from the balance at December 31, 2002. This increase was primarily related to a focused effort to gather funding in anticipation of a positive turnaround in the economy and greater loan demand. Additionally, the selective pricing of deposit products as well as the maturing of newer branches also contributed to the increase in deposits. Finally, public funds increased $12.4 million, or 21%, from December 31, 2002. Total deposits were $428.7 million at December 31, 2002, a $13.7 million, or a 3%, decrease from the balance at December 31, 2001. This decrease was primarily related to deposit attrition resulting from a decline in money market rates, offset by the introduction of a new short-term certificate of deposit (CD) product. This new CD enabled WestStar to attract new money as well as retain funds from maturing CD’s. Non-interest-bearing demand deposits comprised 22% of total deposits at December 31, 2003 and 23% of total deposits at both December 31, 2002 and 2001.
30
The following table sets forth the composition of Vail Banks’ deposits by type at December 31, 2003, 2002 and 2001.
|
|
|
2003 |
|
2002 |
|
2001 |
|
|||||||||
|
(in thousands) |
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Non-interest bearing demand |
|
$ |
101,305 |
|
22 |
% |
$ |
97,383 |
|
23 |
% |
$ |
103,730 |
|
23 |
% |
|
Interest bearing demand |
|
192,160 |
|
43 |
|
181,668 |
|
42 |
|
209,018 |
|
47 |
|
|||
|
Savings |
|
29,873 |
|
7 |
|
28,296 |
|
7 |
|
30,015 |
|
7 |
|
|||
|
Certificates of deposit |
|
125,177 |
|
28 |
|
121,351 |
|
28 |
|
99,587 |
|
23 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
448,515 |
|
100 |
% |
$ |
428,698 |
|
100 |
% |
$ |
442,350 |
|
100 |
% |
The following table presents average deposits by type during 2003, 2002 and 2001 and the related average interest rate paid by deposit type for each of those years.
|
|
|
2003 |
|
2002 |
|
2001 |
|
|||||||||
|
(in thousands) |
|
Amount |
|
Rate |
|
Amount |
|
Rate |
|
Amount |
|
Rate |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Non-interest bearing demand |
|
$ |
94,512 |
|
0.00 |
% |
$ |
98,122 |
|
0.00 |
% |
$ |
98,439 |
|
0.00 |
% |
|
Interest bearing demand |
|
195,611 |
|
0.67 |
|
201,269 |
|
0.76 |
|
239,888 |
|
2.34 |
|
|||
|
Savings |
|
30,012 |
|
0.27 |
|
30,421 |
|
0.32 |
|
31,692 |
|
1.19 |
|
|||
|
Certificates of deposit |
|
136,675 |
|
2.38 |
|
110,072 |
|
3.13 |
|
95,175 |
|
5.15 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
456,810 |
|
1.02 |
% |
$ |
439,884 |
|
1.15 |
% |
$ |
465,194 |
|
2.34 |
% |
The following table sets forth the amount and maturity of certificates of deposit that had balances equal to or greater than $100,000 at December 31, 2003, 2002 and 2001.
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
3 months or less |
|
$ |
11,721 |
|
$ |
15,690 |
|
$ |
18,736 |
|
|
3 - 6 months |
|
23,618 |
|
23,744 |
|
7,677 |
|
|||
|
6 - 12 months |
|
14,755 |
|
21,484 |
|
11,004 |
|
|||
|
Over 12 months |
|
19,105 |
|
3,819 |
|
2,465 |
|
|||
|
Total |
|
$ |
69,199 |
|
$ |
64,737 |
|
$ |
39,882 |
|
31
In the ordinary course of business, the Company has loans receivable from directors, executive officers and principal shareholders (holders of more than five percent of the outstanding shares of common stock) of the Company and their affiliates as follows:
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2003 |
|
$ |
4,733 |
|
|
New loans, including renewals** |
|
7,304 |
|
|
|
Payments, including renewals |
|
(798 |
) |
|
|
Balance at December 31, 2003 |
|
$ |
11,239 |
|
**Comprised of $6,354,000 of new loans and $950,000 relating to the repurchase of a loan participation.
Deposits from related parties held by WestStar at December 31, 2003 and 2002 amounted to $4.2 million and $3.4 million, respectively. Such loans and deposits are on the same terms and conditions as then prevailing at the time for comparable transactions with non-related parties.
On March 5, 2004, the Company sold the building in Vail, Colorado in which a retail office is located. Commissions related to the sale amounting to $261,000 were paid to two related parties.
Liquidity is a measure of the Company’s ability to meet its commitments and obligations with available funds. These commitments may include paying dividends to shareholders, funding new loans for borrowers, funding withdrawals by depositors, paying general and administrative expenses, and funding capital expenditures. Historically, the Company’s primary source of funds has been customer deposits. Scheduled loan repayments are also a relatively stable source of funds. Deposit inflows and unscheduled loan repayments, which are influenced by fluctuations in the general level of interest rates, returns available on other investments, competition, economic conditions and other factors, are relatively unstable. Other sources of liquidity include sale or maturity of investment securities and the ability to borrow funds. Company borrowing may be used on a short-term basis to compensate for reductions in other sources of funds (such as deposit inflows at less than projected levels). Company borrowing may also be used on a longer-term basis to support expanded lending and investing activities and to match the maturity or repricing intervals of assets.
Cash Flows
Net Cash from Operating Activities
During the year ended December 31, 2003, net cash of $12.0 million was provided by operating activities consisting primarily of net income of $714,000, non-cash expenses of $5.0 million and net decreases in operating assets and liabilities from 2002 of $6.3 million. Non-cash expenses consisted primarily of $2.4 million of depreciation and amortization expense on premises and equipment, a $1.6 million loss on sale, disposal or write-off of premises and equipment, $617,000 of intangible asset amortization, $579,000 of net amortization of premium on investment securities, a $578,000 loan loss provision, and $660,000 of stock compensation expense, offset by a $467,000 gain on sales of foreclosed properties, $465,000 of deferred income tax benefit, and $334,000 of deferred loan fee amortization. The net decrease in operating assets and liabilities was primarily due to a $7.4 million decrease in loans held for sale offset by a $955,000 increase in other assets. This decrease in loans held for sale during the last quarter of 2003 was primarily attributable to slowing mortgage refinancing activity.
During the year ended December 31, 2002, net cash of $6.6 million was provided by operating activities consisting primarily of net income of $5.6 million and non-cash expenses of $2.8 million, offset by net increases in operating assets and liabilities from 2001 of $1.8 million. Non-cash expenses consisted primarily of $2.3 million of depreciation and amortization expense on premises and equipment, $398,000 of net amortization of premium on investment securities and a $382,000 loan loss provision, offset by $416,000 of gains on sales of investment securities. The net increase in operating assets and liabilities was primarily due to a $2.9 million increase in loans held for sale offset by a $657,000 decrease in interest receivable and a $356,000 increase in interest payable and other liabilities. With favorable mortgage interest rates during 2002, refinancings continued to be strong, accounting for the increase in loans held for sale. The decline in the loan portfolio
32
during 2002 resulted in a related decline in the interest receivable on loans. The increase in interest payable and other liabilities was partly due to the $8.9 million increase in FHLB borrowings over December 31, 2001.
During the year ended December 31, 2001, net cash of $6.4 million was provided by operating activities consisting primarily of net income of $6.1 million and non-cash expenses of $5.2 million, offset by net increases in operating assets and liabilities from 2000 of $4.9 million. Non-cash expenses consisted primarily of $1.7 million of intangible amortization expense, $2.3 million of depreciation and amortization expense on premises and equipment, an $800,000 loan loss provision and $153,000 of deferred income tax expense. The net increase in operating assets and liabilities was primarily due to a $6.3 million increase in loans held for sale offset by an $854,000 decrease in interest receivable. With the multiple interest rate reductions during 2001, loans held for sale increased as a result of increased mortgage refinancings. Additionally, the decline in the loan portfolio and reduced interest rates resulted in a related decline in the interest receivable on loans.
Net Cash from Investing Activities
During 2003, net cash of $6.5 million was used by investing activities. These outflows consisted primarily of $78.0 million of purchases of investment securities and interest-bearing deposits in banks, and the purchase of $3.2 million of premises and equipment to begin construction of a new building in Glenwood Springs to replace an existing facility, to remodel several owned buildings and to upgrade equipment. These outflows were partially offset by the maturity and/or calls of $40.7 million of investment securities, $14.5 million from the sales of investment securities, a $14.3 million decrease in net loans, and $5.0 million from the sales of foreclosed properties.
During 2002, net cash of $40.5 million was provided by investing activities. These inflows consisted primarily of a $59.1 million decrease in net loans, the maturity and/or calls of $16.2 million of investment securities, $15.4 million from the sales or redemption of investment securities, and $2.8 million from the sales of premises and equipment. These inflows were partially offset by $51.4 million of purchases of investment securities and the purchase of $2.3 million of premises and equipment to construct and furnish a new building in Dillon to replace an existing facility, to construct tenant improvements and furnish a new leased facility in Glenwood Springs to replace an existing facility, and to upgrade equipment.
During 2001, net cash of $18.7 million was provided by investing activities. These inflows consisted primarily of the maturity and/or calls of $13.0 million of investment securities and a $34.1 million decrease in net loans. These inflows were partially offset by the $24.3 million purchase of investment securities and the purchase of $4.5 million of premises and equipment to construct and furnish the new Grand Junction branch opened during 2001, to construct a new building in Dillon to replace an existing facility, and to upgrade equipment.
Net Cash from Financing Activities
During 2003, net cash of $20.4 million was provided by financing activities consisting primarily of an increase in deposits of $19.8 million and the receipt of $9.5 million of net proceeds from short and long-term FHLB advances. These inflows were partially offset by the repurchase of $8.4 million of outstanding common stock of the Company, and the payment of dividends on common stock of $1.4 million.
During 2002, net cash of $7.7 million was used in financing activities consisting primarily of a decrease in deposits of $13.7 million, the repurchase of $1.9 million of outstanding common stock of the Company, and the payment of dividends on common stock of $1.3 million. These outflows were partially offset by the receipt of $8.9 million of net proceeds from short and long-term FHLB advances. The decrease in deposits was largely attributable to a decline in money market rates, offset by the introduction of a new short-term certificate of deposit product. This new product enabled WestStar to attract new money as well as retain funds from maturing certificates of deposit.
During 2001, net cash of $14.3 million was used in financing activities consisting primarily of a decrease in deposits of $39.7 million due to multiple rate cuts during 2001 and the withdrawal of a $15 million temporary deposit received during December 2000, the repayment of $10.4 million of short-term borrowings, the repurchase of $8.3 million of outstanding common stock of the Company, and the payment of dividends on common stock of $1.1 million. These outflows were partially offset by the receipt of $24.0 million of proceeds from the issuance of trust preferred securities and the receipt of $21.1 million of net proceeds from short and long-term FHLB advances.
33
Capital Expenditures
Capital expenditures for 2004 are estimated to be between $6 million and $7 million associated primarily with the construction of a new facility in Glenwood Springs to replace an existing facility, design and construction of a new retail office in Fruita, expansion or remodeling of existing facilities, and routine replacement and upgrades of furniture and equipment. The Company will fund these expenditures from various sources, including operating cash flows, retained earnings and borrowings.
Borrowings
The following table presents an analysis of the Company’s borrowing activities for the years indicated.
|
(in thousands) |
|
FHLB |
|
Federal Funds |
|
Line of Credit |
|
Total |
|
||||
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, |
|
$ |
39,461 |
|
$ |
907 |
|
$ |
— |
|
$ |
40,368 |
|
|
Average amount outstanding during the year |
|
41,883 |
|
167 |
|
— |
|
$ |
42,050 |
|
|||
|
Maximum amount outstanding at any month-end (a) |
|
45,951 |
|
907 |
|
— |
|
45,951 |
|
||||
|
Weighted average interest rate: |
|
|
|
|
|
|
|
|
|
||||
|
End of year |
|
3.95 |
% |
0.38 |
% |
0.00 |
% |
3.87 |
% |
||||
|
During year |
|
3.83 |
% |
0.42 |
% |
0.00 |
% |
3.82 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
2002 |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Balance at December 31, |
|
$ |
30,000 |
|
$ |
— |
|
$ |
— |
|
$ |
30,000 |
|
|
Average amount outstanding during the year |
|
28,156 |
|
— |
|
— |
|
28,156 |
|
||||
|
Maximum amount outstanding at any month-end (a) |
|
30,000 |
|
— |
|
— |
|
30,000 |
|
||||
|
Weighted average interest rate: |
|
|
|
|
|
|
|
|
|
||||
|
End of year |
|
3.68 |
% |
0.00 |
% |
0.00 |
% |
3.68 |
% |
||||
|
During year |
|
3.57 |
% |
0.00 |
% |
0.00 |
% |
3.57 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
2001 |
|
|
|
|
|
|
|
|
|
||||
|
Balance at December 31, |
|
$ |
21,100 |
|
$ |
— |
|
$ |
— |
|
$ |
21,100 |
|
|
Average amount outstanding during the year |
|
5,631 |
|
90 |
|
285 |
|
6,006 |
|
||||
|
Maximum amount outstanding at any month-end (a) |
|
21,100 |
|
0 |
|
2,000 |
|
21,100 |
|
||||
|
Weighted average interest rate: |
|
|
|
|
|
|
|
|
|
||||
|
End of year |
|
3.12 |
% |
0.00 |
% |
0.00 |
% |
3.12 |
% |
||||
|
During year |
|
3.12 |
% |
6.79 |
% |
9.00 |
% |
3.45 |
% |
||||
(a) The total maximum amount outstanding at any month-end does not necessarily represent the sum of the maximum for each of the components.
WestStar is a member of the FHLB of Topeka and, as a regular part of its business, obtains advances from the FHLB. Advances are collateralized by certain mortgage loans or deeds of trust as well as FHLB stock owned by WestStar. As of December 31, 2003, the authorized borrowing line totaled $98.8 million. Of this amount, $24.0 million was an irrevocable stand-by letter of credit pledged as collateral for uninsured public fund deposits, $10.8 million was outstanding as short-term
34
advances and $28.7 million was outstanding as long-term advances.The long-term advances mature from 2005 through 2018. Early repayment of advances will result in a prepayment penalty.
WestStar has established an unsecured, overnight federal funds line with Bankers’ Bank of the West (Bankers’ Bank) that expires on August 31, 2004. As of December 31, 2003, the authorized borrowing line totaled $42.1 million, with $0 outstanding.
WestStar has also established overnight federal funds lines with First Tennessee Bank, N.A. (First Tennessee) totaling $20.0 million. If drawn upon, $10.0 million will be a secured line and $10.0 million will be an unsecured line. These lines are subject to cancellation by First Tennessee at any time upon the occurrence of certain conditions. As of December 31, 2003, no amounts were outstanding under the lines.
During 2003, the Company established a federal funds line with Provident Bank totaling $5.0 million. As of December 31, 2003, no amounts were outstanding under this line.
Guaranteed Preferred Beneficial Interest in Company’s Subordinated Debt (Trust Preferred)
During February 2001, Vail Banks formed Vail Banks Statutory Trust I (Trust I), a wholly-owned subsidiary. On February 22, 2001, Trust I issued $16.5 million of 10.20% trust preferred securities (the Trust I Securities). Interest on the Trust I Securities is payable semi-annually. The Trust I Securities have a 30-year maturity and can be called beginning in February 2011. In connection with the issuance of the Trust I Securities, Vail Banks issued to Trust I $17.0 million principal amount of its 10.20% subordinated notes (the Trust I Notes), that are due in 2031 and can be called beginning in February 2011. Interest on the Trust I Notes is payable semi-annually to Trust I.
During March 2001, Vail Banks formed Vail Banks Statutory Trust II (Trust II), a wholly-owned subsidiary. On March 28, 2001, Trust II issued $7.5 million of 10.18% trust preferred securities (the Trust II Securities). Interest on the Trust II Securities is payable semi-annually. The Trust II Securities have a 30-year maturity and can be called beginning in March 2011. In connection with the issuance of the Trust II Securities, Vail Banks issued to Trust II $7.7 million principal amount of its 10.18% subordinated notes (the Trust II Notes), that are due in 2031 and can be called beginning in March 2011. Interest on the Trust II Notes is payable semi-annually to Trust II.
Dividends
Payment of dividends is at the discretion of the Board and is determined after taking into account earnings, capital levels, cash requirements, and the financial condition of Vail Banks and WestStar, as well as applicable government regulations and other relevant factors. The principal source of Vail Banks’ income is dividends from WestStar. There are statutory and regulatory requirements applicable to the payment of dividends by WestStar to Vail Banks, as well as by Vail Banks to its shareholders. Specifically, approval of the regulators will be required if the total of all dividends declared by any banking subsidiary in any year exceeds the total of its net profits of that year combined with its retained net profits of the preceding two years. Due to the high volume of dividends relative to earnings paid in earlier years, beginning in 2004, any dividend payments from WestStar to Vail Banks will require prior regulatory approval. Management believes that approval will be granted as long as WestStar maintains its well-capitalized regulatory status.
On January 19, 2004, the Board declared a regular quarterly dividend of $0.07 per share payable to Vail Banks’ shareholders of record on January 30, 2004. The dividend of $370,000 was paid on February 13, 2004.
Stock Repurchase Plan
At its meeting on January 19, 2004, the Company’s Board of Directors reauthorized the Company’s stock repurchase program that was originally approved in February 2001. The total amount of repurchases under the program, both previously completed and allowable up to January 2005, aggregate approximately $29 million. Since inception of the program through December 31, 2003, the Company has repurchased 1,535,380 shares at an average price of $12.10 per share, or approximately $19 million.
35
Off-Balance Sheet Arrangements
The Company is a party to credit related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit.
A commitment to extend credit is an agreement 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 payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the commitments do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment and income producing commercial properties.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Letters of credit are primarily used to facilitate a trade transaction and are issued with the intent that they will be utilized by the beneficiary as the instrument of payment for goods shipped. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Those commitments are primarily issued on behalf of local businesses.
The exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit and letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit underwriting procedures for making commitments and letters of credit as for on-balance-sheet instruments. United evaluates each customer’s creditworthiness on a case-by-case basis and the amount of collateral, if deemed necessary, is based on the credit evaluation. Collateral held varies, but may include unimproved and improved real estate, certificates of deposit, personal property or other acceptable collateral. All of these instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The total amounts of these instruments does not necessarily represent future cash requirements because a significant portion of these instruments often expire without being used.
The amounts outstanding under these financial instruments are described below as “Other Commercial Commitments.” We are not involved in off-balance sheet contractual relationships, other than those disclosed in this report, that could result in liquidity needs or other commitments or that could significantly impact earnings.
Contractual Obligations and Commercial Commitments
The following tables present the Company’s contractual obligations and commercial commitments as of December 31, 2003:
|
|
|
Payments Due by Period |
|
|||||||||||||
|
(in thousands) |
|
Total |
|
Less than1 |
|
1-3 years |
|
4-5 years |
|
After 5 years |
|
|||||
|
FHLB borrowings |
|
$ |
39,461 |
|
$ |
9,690 |
|
$ |
12,830 |
|
$ |
1,652 |
|
$ |
15,289 |
|
|
Trust preferred securities |
|
24,000 |
|
— |
|
— |
|
— |
|
24,000 |
|
|||||
|
Operating leases |
|
2,181 |
|
795 |
|
843 |
|
319 |
|
224 |
|
|||||
|
Total Contractual Cash Obligations |
|
$ |
65,642 |
|
$ |
10,485 |
|
$ |
13,673 |
|
$ |
1,971 |
|
$ |
39,513 |
|
36
|
|
|
Amount of Commitment Expiration per Period |
|
|||||||||||||
|
(in thousands) |
|
Total |
|
Less than 1 |
|
1-3 years |
|
4-5 years |
|
Over 5 years |
|
|||||
|
Commitments to extend credit (b) |
|
$ |
50,908 |
|
$ |
35,836 |
|
$ |
12,091 |
|
$ |
2,978 |
|
$ |
3 |
|
|
Customer letters of credit |
|
4,442 |
|
4,418 |
|
24 |
|
— |
|
— |
|
|||||
|
Total Commercial Commitments |
|
$ |
55,350 |
|
$ |
40,254 |
|
$ |
12,115 |
|
$ |
2,978 |
|
$ |
3 |
|
(a) Many of the commitments are expected to expire without being drawn upon. Thus the indicated commitments do not necessarily represent future cash requirements.
(b) Commitments to extend credit in the “4-5 years” category primarily represent home equity lines of credit which typically have a five year draw period.
As of December 31, 2003, the Company had cash and cash equivalents (including federal funds sold) of $100.9 million, interest-bearing deposits in banks of $2.0 million and investment securities of $81.3 million. Almost 94% of the Company’s investment portfolio is classified as available-for-sale and can be readily sold to meet liquidity needs. Based on current plans and business conditions, the Company expects that its cash, cash equivalents, investment securities and available borrowing capacity under its credit facilities, together with any amounts generated from operations, will be sufficient to meet the Company’s liquidity requirements for the next 12 months. However, there can be no assurance that the Company will not be required to seek other financing sooner or that such financing, if required, will be available on terms satisfactory to the Company.
Concentrations of credit risk arise when a number of counterparties have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in the economy or other conditions. The Company’s loan portfolio consists primarily of commercial and real estate loans located in Colorado, making the value of the portfolio susceptible to declines in real estate values and other changes in economic conditions in Colorado. The Company does not believe it has excessive exposure to any individual customer.
The banking industry is unique in that substantially all of the assets and liabilities are of a monetary nature. As a result, interest rates have a more profound effect on a bank’s performance than does inflation. Although there is not always a direct relationship between the movement in the prices of goods and services and changes in interest rates, increases in inflation generally lead to increases in interest rates. However, in short periods of time interest rates may not move in the same direction or magnitude as inflation.
Asset and Liability Management
Vail Banks’ earnings depend to a significant extent on its net interest income. Net interest income is the difference between interest income earned on loans and investments and the interest expense paid on deposits and other borrowings. The net interest margin is highly sensitive to many factors that are beyond Vail Banks’ control. These factors include competitive and general economic conditions and policies of various governmental and regulatory authorities. Changes in the discount rate or targeted federal funds rate by the Federal Reserve Bank usually lead to general changes in interest rates. These interest rate shifts affect Vail Banks’ interest income, interest expense and investment portfolio. Also, governmental policies, such as the creation of a tax deduction for individual retirement accounts, can increase savings and affect the cost of funds. From time to time, the interest rate structures of earning assets and liabilities may not be balanced, and a rapid increase or decrease in interest rates could have an adverse effect on the net interest margin and results of operations of Vail Banks. Vail Banks cannot predict the nature, timing and effect of any future changes in federal monetary and fiscal policies.
The liquidity position of Vail Banks is monitored by management and its Asset/Liability Committee. A principal function of asset/liability management is to coordinate the levels of interest-sensitive assets and liabilities to minimize net
37
interest income variances in times of fluctuating market interest rates. Interest-sensitive assets and liabilities are those that are subject to repricing in the near term, including both variable rate instruments and those fixed rate instruments which are approaching maturity. Changes in net interest income can occur when interest rates on interest sensitive assets, such as loans and investment securities, change in a different time period from that of the interest rates on liabilities, such as deposits. These differences, or “gaps,” provide an indication of the extent that net interest income may be affected by future changes in interest rates.
A positive gap exists when interest-sensitive assets exceed interest-sensitive liabilities and indicates that a greater volume of assets than liabilities will reprice during a given time period. With a positive gap, rising rate environments generally enhance earnings, while a declining rate environment has a tendency to depress earnings. Conversely, a negative gap exists when interest-sensitive liabilities exceed interest-sensitive assets. With a negative gap, rising rate environments usually depress earnings, while declining rate environments tend to enhance earnings.
The following table sets forth the interest rate sensitivity of Vail Banks’ assets and liabilities at December 31, 2003, and sets forth the repricing dates of Vail Banks’ interest-earning assets and interest-bearing liabilities as of that date, as well as Vail Banks’ interest rate sensitivity gap percentages for the periods presented. This table indicates Vail Banks will be in an asset sensitive or positive gap position for the twelve-month period ending December 31, 2004. During that period, $403.6 million of interest earning assets will reprice compared to $326.7 million of interest bearing liabilities. This asset sensitive position would generally indicate that Vail Banks’ net interest income would decrease should interest rates fall and increase should interest rates rise. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. In addition, the interest rate spread between an asset and its supporting liability can vary significantly while the timing of the repricing for both the asset and the liability remains the same. The table is based on assumptions as to when assets and liabilities will reprice in a changing interest rate environment, and since such assumptions can be no more than estimates, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may, in fact, mature or reprice at different times and at different volumes than those estimated. Also, the renewal or repricing of certain assets and liabilities can be discretionary and subject to competitive and other pressures. Therefore, the following table does not necessarily indicate the actual future impact of interest rate movements on Vail Banks’ net interest income. See Item 7A “Quantitative and Qualitative Disclosures About Market Risk” for additional information on interest rate risk faced by the Company.
38
Static Interest Rate Sensitivity at December 31, 2003
|
|
|
Maturing or Repricing |
|
|||||||||||||
|
(in thousands) |
|
1 - 90 |
|
91 Days |
|
1 Year |
|
Non-Sensitive |
|
Total |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Federal funds sold and interest earning deposits |
|
$ |
81,280 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
81,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Investment securities |
|
25,723 |
|
9,118 |
|
23,968 |
|
22,486 |
|
81,295 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Loans held for sale |
|
2,515 |
|
— |
|
— |
|
— |
|
2,515 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Loans |
|
255,560 |
|
29,425 |
|
24,722 |
|
2,067 |
|
311,774 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Non-earning assets |
|
— |
|
— |
|
— |
|
98,746 |
|
98,746 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total assets |
|
365,078 |
|
38,543 |
|
48,690 |
|
123,299 |
|
575,610 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Interest-bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Interest bearing checking |
|
88,191 |
|
— |
|
— |
|
— |
|
88,191 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Money market and other savings |
|
134,018 |
|
— |
|
— |
|
(176 |
) |
133,842 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Certificates of deposit |
|
25,867 |
|
66,836 |
|
32,273 |
|
201 |
|
125,177 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total interest bearing deposits |
|
248,076 |
|
66,836 |
|
32,273 |
|
25 |
|
347,210 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Securities sold under agreements to repurchase |
|
907 |
|
— |
|
— |
|
— |
|
907 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Short-term borrowings |
|
4,692 |
|
6,117 |
|
— |
|
— |
|
10,809 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Long-term borrowings |
|
— |
|
— |
|
18,780 |
|
9,872 |
|
28,652 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Trust preferred |
|
— |
|
— |
|
— |
|
24,000 |
|
24,000 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Non-interest bearing liabilities |
|
— |
|
— |
|
— |
|
105,470 |
|
105,470 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Minority interest |
|
— |
|
— |
|
— |
|
703 |
|
703 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Shareholders’ equity |
|
— |
|
— |
|
— |
|
57,859 |
|
57,859 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total liabilities and shareholders’ equity |
|
253,675 |
|
72,953 |
|
51,053 |
|
197,929 |
|
575,610 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Interest sensitivity gap |
|
$ |
111,403 |
|
$ |
(34,410 |
) |
$ |
(2,363 |
) |
$ |
(74,630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cumulative interest sensitivity gap |
|
$ |
111,403 |
|
$ |
76,993 |
|
$ |
74,630 |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cumulative gap as a percentage of total assets |
|
19.35 |
% |
13.38 |
% |
12.97 |
% |
|
|
|
|
|||||
Shareholders’ equity at December 31, 2003 decreased $8.9 million, or 13%, to $57.9 million from $66.8 million at December 31, 2002. During 2002, shareholders’ equity increased $3.3 million, or 5%, to $66.8 million from $63.5 million at December 31, 2001. The decrease in 2003 was primarily due to the repurchase of 651,000 shares of common stock during 2003 at a cost of $8.4 million and the payment of cash dividends on common stock of $1.4 million, partially offset by the retention of earnings of $714,000. The increase in 2002 was primarily due to the retention of earnings of $5.6 million offset by the repurchase of 156,600 shares of common stock during 2002 at a cost of $1.9 million and the payment of cash dividends on common stock of $1.3 million.
Vail Banks and WestStar are subject to various regulatory capital requirements administered by governmental banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct, material effect on Vail Banks’ performance. Vail Banks and WestStar must meet specific capital adequacy guidelines and WestStar must meet guidelines under the regulatory framework for prompt corrective action that together involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Vail Banks’ and WestStar’s capital amounts and classification are also
39
subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require Vail Banks and WestStar to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. See “Supervision and Regulation” in Item 1 for explanations of these terms and requirements.
As of December 31, 2003 and 2002, Vail Banks met all capital adequacy requirements to which it was subject. As of December 31, 2003, Vail Banks had Tier 1 and Total Risk-Based Capital ratios of 11.50% and 13.72%, respectively, and a Leverage ratio of 7.45%. As of December 31, 2002, Vail Banks had Tier 1 and Total Risk-Based Capital ratios of 14.15% and 15.61%, respectively, and a Leverage ratio of 10.27%.
As of December 31, 2003 and 2002, WestStar met all capital adequacy requirements to which it was subject. As of December 31, 2003, WestStar had Tier 1 and Total Risk-Based Capital ratios of 10.90% and 11.88%, respectively, and a Leverage ratio of 7.04%. As of December 31, 2002, WestStar had Tier 1 and Total Risk-Based Capital ratios of 13.64% and 14.65%, respectively, and a Leverage ratio of 9.88%.
During June 2002, the Financial Accounting Standards Board (the FASB) issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement is effective for exit or disposal activities initiated after December 31, 2002. These activities may include sale or termination of a line of business, the closure of business activities in a particular location, the relocation of business activities from one location to another, changes in management structure, and a fundamental reorganization that affects the nature and focus of operations. The statement addresses financial accounting and reporting for costs associated with exit or disposal activities and requires companies to recognize liabilities associated with exit or disposal activities at the time that they are incurred rather than at the date of a commitment to the exit or disposal plan. The Company adopted this standard on January 1, 2003. Adoption of this standard did not have an effect on the Company’s consolidated financial condition or results of operations.
In January 2003, the FASB issued Financial Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements (ARB 51), addresses consolidation by business enterprises where ownership interests in an entity may vary over time or in many cases, of special-purpose entities (SPE’s). To be consolidated for financial reporting, these SPE’s must have certain characteristics. ARB 51 requires that an enterprise’s consolidated financial statements include only subsidiaries in which the enterprise has a controlling financial interest. The Company plans to adopt FIN 46 on January 1, 2004. As a result of adoption, the Company will be required to deconsolidate its two unrelated business trusts that had been formed in 2001 to issue trust preferred securities. The Company does not expect there to be a cumulative effect on retained earnings or a change in its capital ratios as a result of this deconsolidation.
During April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003, except for certain circumstances, and for hedging relationships designated after June 30, 2003. The Company does not utilize derivative instruments or engage in hedging activities. Accordingly, adoption of this standard did not have an effect on the Company’s consolidated financial condition or results of operations.
During May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability when previously it was classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance of the statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The Company adopted this statement on July 1, 2003. Adoption of this statement did not have an effect on the Company’s consolidated financial condition or results of operations.
40
During December 2003, the FASB revised SFAS No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88, and 106. This statement is effective for fiscal years ending after December 31, 2003 and revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans. This statement retains the disclosure requirements contained in the original SFAS 132 and requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans. The Company adopted this statement during December 2003. Adoption of this standard did not have an effect on the Company’s consolidated financial condition or results of operations.
41
The tables below provide information about the Company’s financial instruments as of December 31, 2003 and 2002 that are sensitive to changes in interest rates.
|
|
|
Principal Amount Maturing in: |
|
|
|
|
|
||||||||||||||||||
|
(in thousands) |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
Thereafter |
|
Total |
|
Fair Value |
|
||||||||
|
INTEREST RATE SENSITIVE ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Federal funds sold and interest earning deposits |
|
$ |
81,280 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
81,280 |
|
$ |
81,280 |
|
|
Weighted average interest rate |
|
0.93 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.93 |
% |
|
|
||||||||
|
Adjustable-rate securities |
|
— |
|
— |
|
— |
|
500 |
|
231 |
|
46,299 |
|
47,030 |
|
46,884 |
|
||||||||
|
Weighted average interest rate (a) |
|
0.00 |
% |
0.00 |
% |
0.00 |
% |
2.25 |
% |
3.76 |
% |
3.65 |
% |
3.64 |
% |
|
|
||||||||
|
Fixed-rate securities |
|
454 |
|
2,577 |
|
2,102 |
|
5 |
|
107 |
|
24,840 |
|
30,085 |
|
30,067 |
|
||||||||
|
Weighted average interest rate (a) |
|
6.79 |
% |
2.30 |
% |
2.72 |
% |
7.52 |
% |
6.54 |
% |
6.83 |
% |
6.16 |
% |
|
|
||||||||
|
Investments in bank stocks |
|
— |
|
— |
|
— |
|
— |
|
— |
|
4,371 |
|
4,371 |
|
4,371 |
|
||||||||
|
Weighted average interest rate |
|
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
4.62 |
% |
4.62 |
% |
|
|
||||||||
|
Loans held for sale |
|
2,515 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
2,515 |
|
2,515 |
|
||||||||
|
Weighted average interest rate |
|
4.73 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
4.73 |
% |
|
|
||||||||
|
Adjustable-rate loans |
|
132,491 |
|
27,237 |
|
29,684 |
|
20,000 |
|
25,418 |
|
21,654 |
|
256,484 |
|
255,438 |
|
||||||||
|
Weighted average interest rate |
|
6.39 |
% |
6.38 |
% |
5.98 |
% |
6.46 |
% |
6.30 |
% |
6.32 |
% |
6.33 |
% |
|
|
||||||||
|
Fixed-rate loans |
|
18,570 |
|
7,443 |
|
3,041 |
|
1,681 |
|
4,935 |
|
20,390 |
|
56,060 |
|
57,569 |
|
||||||||
|
Weighted average interest rate |
|
6.51 |
% |
7.84 |
% |
8.93 |
% |
7.34 |
% |
6.10 |
% |
6.90 |
% |
6.95 |
% |
|
|
||||||||
|
Total interest rate sensitive assets |
|
$ |
235,310 |
|
$ |
37,257 |
|
$ |
34,827 |
|
$ |
22,186 |
|
$ |
30,691 |
|
$ |
117,554 |
|
$ |
477,825 |
|
$ |
478,124 |
|
|
Weighted average interest rate |
|
4.49 |
% |
6.39 |
% |
6.04 |
% |
6.43 |
% |
6.25 |
% |
5.41 |
% |
5.18 |
% |
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
INTEREST RATE SENSITIVE LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Interest-bearing checking, savings and money market accounts |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
222,033 |
|
$ |
222,033 |
|
$ |
222,033 |
|
|
Weighted average interest rate |
|
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.63 |
% |
0.63 |
% |
|
|
||||||||
|
Fixed-rate time deposits |
|
92,686 |
|
26,325 |
|
2,852 |
|
766 |
|
2,548 |
|
— |
|
125,177 |
|
126,139 |
|
||||||||
|
Weighted average interest rate |
|
1.92 |
% |
2.68 |
% |
3.14 |
% |
3.31 |
% |
3.22 |
% |
0.00 |
% |
2.14 |
% |
|
|
||||||||
|
Securities sold under agreements to repurchase |
|
907 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
907 |
|
907 |
|
||||||||
|
|
|
0.38 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.38 |
% |
|
|
||||||||
|
Fixed-rate borrowings |
|
9,690 |
|
6,465 |
|
6,365 |
|
990 |
|
662 |
|
15,289 |
|
39,461 |
|
39,906 |
|
||||||||
|
Weighted average interest rate |
|
3.60 |
% |
3.76 |
% |
4.25 |
% |
3.43 |
% |
4.15 |
% |
4.18 |
% |
3.96 |
% |
|
|
||||||||
|
Trust preferred |
|
— |
|
— |
|
— |
|
— |
|
— |
|
24,000 |
|
24,000 |
|
26,127 |
|
||||||||
|
Weighted average interest rate |
|
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
10.19 |
% |
10.19 |
% |
|
|
||||||||
|
Total interest rate sensitive liabilities |
|
$ |
103,283 |
|
$ |
32,790 |
|
$ |
9,217 |
|
$ |
1,756 |
|
$ |
3,210 |
|
$ |
261,322 |
|
$ |
411,578 |
|
$ |
415,112 |
|
|
Weighted average interest rate |
|
2.06 |
% |
2.89 |
% |
3.91 |
% |
3.38 |
% |
3.41 |
% |
1.71 |
% |
1.96 |
% |
|
|
||||||||
42
|
|
|
Principal Amount Maturing in: |
|
|
|
|
|
||||||||||||||||||
|
(in thousands) |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
Thereafter |
|
Total |
|
Fair Value
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
INTEREST RATE SENSITIVE ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Federal funds sold and interest earning deposits |
|
$ |
50,072 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
50,072 |
|
$ |
50,072 |
|
|
Weighted average interest rate |
|
1.09 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
1.09 |
% |
|
|
||||||||
|
Adjustable-rate securities |
|
— |
|
— |
|
— |
|
— |
|
2,001 |
|
26,451 |
|
28,452 |
|
28,565 |
|
||||||||
|
Weighted average interest rate (a) |
|
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
3.25 |
% |
5.08 |
% |
4.95 |
% |
|
|
||||||||
|
Fixed-rate securities |
|
851 |
|
458 |
|
5 |
|
1,119 |
|
116 |
|
26,651 |
|
29,200 |
|
29,800 |
|
||||||||
|
Weighted average interest rate (a) |
|
5.97 |
% |
5.26 |
% |
7.00 |
% |
5.36 |
% |
6.48 |
% |
5.79 |
% |
5.77 |
% |
|
|
||||||||
|
Investments in bank stocks |
|
— |
|
— |
|
— |
|
— |
|
— |
|
3,703 |
|
3,703 |
|
3,703 |
|
||||||||
|
Weighted average interest rate |
|
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
4.90 |
% |
4.90 |
% |
|
|
||||||||
|
Loans held for sale |
|
9,879 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
9,879 |
|
9,879 |
|
||||||||
|
Weighted average interest rate |
|
5.20 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
5.20 |
% |
|
|
||||||||
|
Adjustable-rate loans |
|
113,373 |
|
49,486 |
|
21,546 |
|
17,880 |
|
24,941 |
|
25,804 |
|
253,030 |
|
253,177 |
|
||||||||
|
Weighted average interest rate |
|
7.19 |
% |
6.39 |
% |
6.51 |
% |
6.13 |
% |
6.79 |
% |
7.35 |
% |
6.88 |
% |
|
|
||||||||
|
Fixed-rate loans |
|
23,911 |
|
19,501 |
|
11,212 |
|
7,472 |
|
2,875 |
|
13,002 |
|
77,973 |
|
81,246 |
|
||||||||
|
Weighted average interest rate |
|
8.50 |
% |
8.73 |
% |
8.36 |
% |
8.23 |
% |
7.38 |
% |
7.32 |
% |
8.27 |
% |
|
|
||||||||
|
Total interest rate sensitive assets |
|
$ |
198,086 |
|
$ |
69,445 |
|
$ |
32,763 |
|
$ |
26,471 |
|
$ |
29,933 |
|
$ |
95,611 |
|
$ |
452,309 |
|
$ |
456,442 |
|
|
Weighted average interest rate |
|
5.71 |
% |
7.04 |
% |
7.15 |
% |
6.69 |
% |
6.61 |
% |
6.19 |
% |
6.24 |
% |
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
INTEREST RATE SENSITIVE LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Interest-bearing checking, savings and money market accounts |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
209,964 |
|
$ |
209,964 |
|
$ |
209,964 |
|
|
Weighted average interest rate |
|
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.63 |
% |
0.63 |
% |
|
|
||||||||
|
Fixed-rate time deposits |
|
106,668 |
|
12,026 |
|
1,639 |
|
381 |
|
637 |
|
— |
|
121,351 |
|
122,215 |
|
||||||||
|
Weighted average interest rate |
|
2.55 |
% |
3.19 |
% |
3.75 |
% |
4.04 |
% |
3.42 |
% |
0.00 |
% |
2.64 |
% |
|
|
||||||||
|
Fixed-rate borrowings |
|
9,490 |
|
8,940 |
|
5,715 |
|
5,615 |
|
240 |
|
— |
|
30,000 |
|
31,039 |
|
||||||||
|
Weighted average interest rate |
|
2.91 |
% |
3.77 |
% |
3.99 |
% |
4.46 |
% |
4.80 |
% |
0.00 |
% |
3.68 |
% |
|
|
||||||||
|
Trust preferred |
|
— |
|
— |
|
— |
|
— |
|
— |
|
24,000 |
|
24,000 |
|
25,208 |
|
||||||||
|
Weighted average interest rate |
|
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
10.19 |
% |
10.19 |
% |
|
|
||||||||
|
Total interest rate sensitive liabilities |
|
$ |
116,158 |
|
$ |
20,966 |
|
$ |
7,354 |
|
$ |
5,996 |
|
$ |
877 |
|
$ |
233,964 |
|
$ |
385,315 |
|
$ |
388,426 |
|
|
Weighted average interest rate |
|
2.58 |
% |
3.44 |
% |
3.94 |
% |
4.43 |
% |
3.80 |
% |
1.61 |
% |
2.10 |
% |
|
|
||||||||
(a) These interest rates are not adjusted to reflect tax equivalent yields.
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which the Company is exposed is interest rate risk arising from the instruments and transactions into which the Company enters. These include loans, securities available for sale, deposit liabilities, and borrowings. Interest rate risk occurs when interest-sensitive assets and liabilities reprice at different times as market interest rates change. Interest-sensitive assets and liabilities are those that are subject to repricing in the near term, including both variable rate instruments and those fixed rate instruments that are approaching maturity. For example, if fixed-rate assets are funded with floating-rate debt, the spread between asset and liability rates will decline or turn negative if rates increase. Additionally, interest rate risk results from changing spreads between asset and liability rates.
Interest rate risk is managed by the Company’s Asset/Liability Committee. The principal objective of asset/liability management is to manage the levels of interest-sensitive assets and liabilities to minimize net interest income fluctuations in times of fluctuating market interest rates. To effectively measure and manage interest rate risk, the Company uses computer simulations that determine the impact on net interest income of numerous interest rate scenarios, balance sheet trends and strategies. These simulations cover the following financial instruments: short-term financial instruments, investment securities, loans, deposits, and borrowings. These simulations incorporate assumptions about balance sheet dynamics, such as loan and deposit growth and pricing, changes in funding mix, and asset and liability repricing and maturity characteristics. Simulations are run under various interest rate scenarios to determine the impact on net income and capital. From these computer simulations, interest rate risk is quantified and appropriate strategies are developed and implemented. As of December 31, 2003, the Company has never used interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate exposures.
During 2004, the Company faces risk primarily from the possibility of lower interest rates. This is because during 2003, Vail Banks experienced increased liquidity as the result of a decrease in loan demand and an increase in deposits. The
43
increase in liquidity was used to invest in investment securities and short-term federal funds sold. This increased liquidity position increased the asset sensitivity of the balance sheet and has made Vail Banks more sensitive to changes in interest rates at December 31, 2003 than at December 31, 2002. Given the Company’s interest rate gap position at December 31, 2003, if rates fall, asset yields will decline faster than the cost of interest bearing liabilities, leading to a decline in the margin. The extent of this decline will depend on the degree to which retail deposit rates change relative to market rates.
The reduction in short-term rates by the Federal Reserve during 2001, 2002 and 2003 effectively repriced a significant portion of the Company’s loan portfolio. While it also produced an opportunity to reduce funding costs, at the current level of interest rates, further reductions in funding costs may be more limited.
The response to this item is included in Part III, Item 15 of this Annual Report on Form 10-K.
Company management, including the Vice Chairman and Chief Financial Officer, supervised and participated in an evaluation of the Company’s disclosure controls and procedures (as defined in rules of the Securities and Exchange Commission) as of December 31, 2003. Based on, and as of the date of, that evaluation, the Company’s chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures were effective in accumulating and communicating information to management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosures of that information under the Securities and Exchange Commission’s rules and forms and that the disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports that are filed or submitted under the Securities and Exchange Act of 1934, as amended, are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
The information contained under the headings “Information About Nominees and Continuing Directors”, “Code of Ethical Conduct” and “Compliance with Section 16(a) of the Exchange Act” in the definitive Proxy Statement to be used in connection with the solicitation of proxies for Vail Banks’ annual meeting of shareholders to be held on May 17, 2004, to be filed with the Securities and Exchange Commission (SEC), is incorporated herein by reference. Information regarding executive officers is included in “Executive Officers of Vail Banks” in Item 1 of this Annual Report on Form 10-K.
The information contained under the heading “Executive Compensation” in the definitive proxy statement to be used in connection with the solicitation of proxies for Vail Banks’ annual meeting of shareholders to be held on May 17, 2004, to be filed with the SEC, is incorporated herein by reference.
The information contained under the heading “Beneficial Ownership of Securities” and “Equity Compensation Plan Information” in the definitive proxy statement to be used in connection with the solicitation of proxies for Vail Banks’ annual meeting of shareholders to be held on May 17, 2004, to be filed with the SEC, is incorporated herein by reference.
44
The information contained under the heading “Certain Relationships and Related Transactions” in the definitive proxy statement to be used in connection with the solicitation of proxies for Vail Banks’ annual meeting of shareholders to be held on May 17, 2004, to be filed with the SEC, is incorporated herein by reference.
The information contained under the heading “Information Concerning Vail Banks’ Independent Public Accountants” in the definitive proxy statement to be used in connection with the solicitation of proxies for Vail Banks’ annual meeting of shareholders to be held on May 17, 2004, to be filed with the SEC, is incorporated herein by reference.
The following consolidated financial statements and notes thereto of Vail Banks begin on page F-1 of this Annual Report on Form 10-K.
45
Exhibits
The following exhibits are required to be filed with this Annual Report on Form 10-K by Item 601 of Regulation S-K.
|
Exhibit |
|
Description of Exhibit |
|
3.1 |
|
Amended and Restated Articles of Incorporation of the Registrant* |
|
3.2 |
|
Amended and Restated Bylaws of the Registrant* |
|
10.1 |
|
Stock Incentive Plan, as amended*(1) |
|
10.2 |
|
Change in Control Severance Payment Agreement between the Company and Peter G. Williston, dated July 5, 2000***(1) |
|
10.3 |
|
Change in Control Severance Payment Agreement by and between Vail Banks and E.B. Chester, dated November 19, 1999**(1) |
|
10.4 |
|
Change in Control Severance Payment Agreement by and between Vail Banks and Lisa M. Dillon, dated November 19, 1999**(1) |
|
10.5 |
|
Form of Restricted Stock Award Agreement****(1) |
|
10.6 |
|
Change in Control Severance Payment Agreement by and between Vail Banks and Dan E. Godec, dated August 18, 2003*****(1) |
|
10.7 |
|
Change in Control Severance Payment Agreement by and between Vail Banks and Gary S. Judd, dated August 18, 2003*****(1) |
|
10.8 |
|
Agreement for the sale of the Vail Bank Building, dated March 5, 2004 |
|
14 |
|
Conflict of Interest and Code of Ethics Policy |
|
21.1 |
|
Subsidiaries of the Registrant |
|
23.1 |
|
Consent of Dalby, Wendland & Co., P.C., dated March 26, 2004 |
|
24.1 |
|
Power of Attorney (on signature page) |
|
31.1 |
|
Certification by Gary S. Judd, Chief Executive Officer and President of the Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.2 |
|
Certification by Peter G. Williston, Senior Executive Vice President and Chief Financial Officer of the Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32.1 |
|
Certification by Gary S. Judd, Chief Executive Officer and President of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
32.2 |
|
Certification by Peter G. Williston, Senior Executive Vice President and Chief Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(1) Management contract or compensatory plan required to be filed as an exhibit.
* Incorporated by reference from the Registrant’s Form SB-2, as amended, Commission File No. 333-60347.
** Incorporated by reference from the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 1999.
*** Incorporated by reference from the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000.
**** Incorporated by reference from the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
***** Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed as of November 7, 2003.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated October 28, 2003, under Item 12. The report included a press release reporting Vail Banks’ results of operations and financial condition for the third quarter of 2003.
46
The Board of Directors and Shareholders of
Vail Banks, Inc.:
We have audited the accompanying consolidated balance sheets of Vail Banks, Inc. and subsidiaries (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 Vail Banks, Inc. and subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Footnote 5 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002, which changed its method of accounting for goodwill and other intangible assets.
|
/s/ DALBY, WENDLAND & CO., P.C. |
|
|
|
|
|
Dalby, Wendland & Co., P.C. |
|
|
Grand Junction, Colorado |
|
|
|
|
|
February 6, 2004 |
|
F-1
VAIL BANKS, INC.
December 31, 2003 and 2002
|
(in thousands, except share data) |
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
|
||
|
ASSETS |
|
|
|
|
|
||
|
Cash and due from banks |
|
$ |
21,628 |
|
$ |
24,940 |
|
|
Federal funds sold |
|
79,280 |
|
50,040 |
|
||
|
Cash and cash equivalents |
|
100,908 |
|
74,980 |
|
||
|
Interest-bearing deposits in banks |
|
2,000 |
|
— |
|
||
|
Investment securities, available for sale |
|
76,554 |
|
57,634 |
|
||
|
Investment securities, held to maturity (fair value of $397 and $731 at December 31, 2003 and 2002, respectively) |
|
370 |
|
684 |
|
||
|
Investments in bank stocks, at cost |
|
4,371 |
|
3,703 |
|
||
|
Loans held for sale |
|
2,515 |
|
9,879 |
|
||
|
Loans (includes related party loans of $11,239 and $4,733 at December 31, 2003 and 2002, respectively) |
|
311,774 |
|
331,003 |
|
||
|
Allowance for loan losses |
|
(3,503 |
) |
(3,747 |
) |
||
|
Net loans |
|
308,271 |
|
327,256 |
|
||
|
Premises and equipment, net |
|
38,147 |
|
39,005 |
|
||
|
Interest receivable |
|
2,134 |
|
1,914 |
|
||
|
Goodwill |
|
36,758 |
|
35,970 |
|
||
|
Other intangible assets, net |
|
199 |
|
816 |
|
||
|
Other assets |
|
3,383 |
|
2,422 |
|
||
|
|
|
$ |
575,610 |
|
$ |
554,263 |
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
||
|
Liabilities |
|
|
|
|
|
||
|
Deposits (includes related party deposits of $4,169 and $3,425 at December 31, 2003 and 2002, respectively) |
|
|
|
|
|
||
|
Non-interest bearing |
|
$ |
101,305 |
|
$ |
97,383 |
|
|
Interest bearing |
|
347,210 |
|
331,315 |
|
||
|
Total deposits |
|
448,515 |
|
428,698 |
|
||
|
Federal funds purchased and securities sold under agreements to repurchase |
|
907 |
|
— |
|
||
|
Short-term Federal Home Loan Bank advances |
|
10,809 |
|
9,490 |
|
||
|
Long-term Federal Home Loan Bank advances |
|
28,652 |
|
20,510 |
|
||
|
Guaranteed preferred beneficial interest in Company’s subordinated debt |
|
24,000 |
|
24,000 |
|
||
|
Interest payable and other liabilities |
|
4,165 |
|
4,080 |
|
||
|
Total liabilities |
|
517,048 |
|
486,778 |
|
||
|
Minority interest |
|
703 |
|
713 |
|
||
|
Commitments and contingencies (Notes 4, 9, 11, and 13) |
|
|
|
|
|
||
|
Shareholders’ equity |
|
|
|
|
|
||
|
Preferred stock – $1 par value; 2,250,000 shares authorized, no shares issued and outstanding at December 31, 2003 and 2002, respectively |
|
— |
|
— |
|
||
|
Common stock – $1 par value; 20,000,000 shares authorized, 5,283,264 and 5,734,303 shares issued and outstanding at December 31, 2003 and 2002, respectively |
|
5,283 |
|
5,734 |
|
||
|
Additional paid-in capital |
|
33,916 |
|
41,123 |
|
||
|
Retained earnings |
|
18,780 |
|
19,492 |
|
||
|
Accumulated other comprehensive (loss) income, net of tax (benefit) expense of $(71) and $243 at December 31, 2003 and 2002, respectively |
|
(120 |
) |
423 |
|
||
|
Total shareholders’ equity |
|
57,859 |
|
66,772 |
|
||
|
|
|
$ |
575,610 |
|
$ |
554,263 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-2
VAIL BANKS, INC.
Years Ended December 31, 2003, 2002 and 2001
|
(in thousands, except share data) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Interest and dividend income |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Loans, including fees |
|
$ |
26,098 |
|
$ |
30,153 |
|
$ |
39,620 |
|
|
Investment securities |
|
3,404 |
|
3,198 |
|
1,723 |
|
|||
|
Federal funds sold and other short-term investments |
|
690 |
|
578 |
|
622 |
|
|||
|
Total interest and dividend income |
|
30,192 |
|
33,929 |
|
41,965 |
|
|||
|
Interest expense |
|
|
|
|
|
|
|
|||
|
Deposits |
|
4,644 |
|
5,070 |
|
10,898 |
|
|||
|
Federal funds purchased and securities sold under agreements to repurchase |
|
1 |
|
— |
|
— |
|
|||
|
Short-term borrowings |
|
373 |
|
246 |
|
196 |
|
|||
|
Long-term borrowings |
|
1,229 |
|
758 |
|
12 |
|
|||
|
Guaranteed preferred beneficial interest in Company’s subordinated debt |
|
2,447 |
|
2,447 |
|
2,024 |
|
|||
|
Total interest expense |
|
8,694 |
|
8,521 |
|
13,130 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Net interest income |
|
21,498 |
|
25,408 |
|
28,835 |
|
|||
|
Provision for loan losses |
|
578 |
|
382 |
|
800 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Net interest income after provision for loan losses |
|
20,920 |
|
25,026 |
|
28,035 |
|
|||
|
Non-interest income |
|
|
|
|
|
|
|
|||
|
Deposit related |
|
3,080 |
|
3,495 |
|
3,968 |
|
|||
|
Mortgage broker fees |
|
4,936 |
|
4,943 |
|
4,075 |
|
|||
|
Other |
|
3,126 |
|
3,586 |
|
3,354 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Total non-interest income |
|
11,142 |
|
12,024 |
|
11,397 |
|
|||
|
Non-interest expense |
|
|
|
|
|
|
|
|||
|
Salaries and employee benefits |
|
17,593 |
|
16,776 |
|
15,388 |
|
|||
|
Occupancy |
|
3,737 |
|
3,153 |
|
3,025 |
|
|||
|
Furniture and equipment |
|
2,768 |
|
2,871 |
|
2,835 |
|
|||
|
Amortization of intangible assets |
|
617 |
|
74 |
|
1,661 |
|
|||
|
Other |
|
6,323 |
|
5,566 |
|
6,097 |
|
|||
|
Total non-interest expense |
|
31,038 |
|
28,440 |
|
29,006 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Income before income tax expense |
|
1,024 |
|
8,610 |
|
10,426 |
|
|||
|
Income tax expense |
|
310 |
|
2,997 |
|
4,323 |
|
|||
|
Net income |
|
$ |
714 |
|
$ |
5,613 |
|
$ |
6,103 |
|
|
|
|
|
|
|
|
|
|
|||
|
Net income available to common shareholders |
|
$ |
714 |
|
$ |
5,613 |
|
$ |
6,103 |
|
|
|
|
|
|
|
|
|
|
|||
|
Earnings per share – basic |
|
$ |
0.14 |
|
$ |
0.99 |
|
$ |
1.02 |
|
|
Earnings per share – diluted |
|
$ |
0.13 |
|
$ |
0.95 |
|
$ |
1.00 |
|
|
|
|
|
|
|
|
|
|
|||
|
Weighted average common shares |
|
|
|
|
|
|
|
|||
|
Basic |
|
5,220,221 |
|
5,651,737 |
|
5,965,374 |
|
|||
|
Diluted |
|
5,617,720 |
|
5,914,891 |
|
6,111,103 |
|
|||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
VAIL BANKS, INC.
Years Ended December 31, 2003, 2002 and 2001
|
(in thousands, except share data) |
|
Section A |
|
Common
Stock |
|
Additional |
|
Retained |
|
Accumulated |
|
Total |
|
||||||||||
|
|
|
|
|||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Balance at January 1, 2001 |
|
— |
|
$ |
— |
|
6,456,400 |
|
$ |
6,456 |
|
$ |
49,933 |
|
$ |
10,143 |
|
$ |
(102 |
) |
$ |
66,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Issuance of common stock in conjunction with exercise of stock options |
|
— |
|
— |
|
9,750 |
|
10 |
|
76 |
|
— |
|
— |
|
86 |
|
||||||
|
Repurchase of common stock |
|
— |
|
— |
|
(727,690 |
) |
(728 |
) |
(7,571 |
) |
— |
|
— |
|
(8,299 |
) |
||||||
|
Other |
|
— |
|
— |
|
(16 |
) |
— |
|
— |
|
— |
|
— |
|
— |
|
||||||
|
Issuance of restricted common stock |
|
— |
|
— |
|
15,708 |
|
16 |
|
(16 |
) |
— |
|
— |
|
— |
|
||||||
|
Recognition of stock comp. on restricted stock |
|
— |
|
— |
|
— |
|
— |
|
56 |
|
— |
|
— |
|
56 |
|
||||||
|
Recognition of stock comp. on non-employee stock options |
|
— |
|
— |
|
— |
|
— |
|
53 |
|
— |
|
— |
|
53 |
|
||||||
|
Declaration of dividends on common stock ($0.18 per share) |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(1,091 |
) |
— |
|
(1,091 |
) |
||||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net income |
|
— |
|
— |
|
— |
|
— |
|
— |
|
6,103 |
|
— |
|
6,103 |
|
||||||
|
Net change in unrealized losses on investment securities available for sale, net of taxes |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
118 |
|
118 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Total comprehensive income |
|
— |
|
— |
|
— |
|
— |
|
— |
|
6,103 |
|
118 |
|
6,221 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Balance at December 31, 2001 |
|
— |
|
— |
|
5,754,152 |
|
5,754 |
|
42,531 |
|
15,155 |
|
16 |
|
63,456 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Issuance of common stock in conjunction with exercise of stock options |
|
— |
|
— |
|
19,247 |
|
19 |
|
155 |
|
— |
|
— |
|
174 |
|
||||||
|
Repurchase of common stock |
|
— |
|
— |
|
(156,600 |
) |
(156 |
) |
(1,697 |
) |
— |
|
— |
|
(1,853 |
) |
||||||
|
Issuance of restricted common stock |
|
— |
|
— |
|
117,504 |
|
117 |
|
(117 |
) |
— |
|
— |
|
— |
|
||||||
|
Recognition of stock comp. on restricted stock |
|
— |
|
— |
|
— |
|
— |
|
189 |
|
— |
|
— |
|
189 |
|
||||||
|
Recognition of stock comp. on stock options |
|
— |
|
— |
|
— |
|
— |
|
62 |
|
— |
|
— |
|
62 |
|
||||||
|
Declaration of dividends on common stock ($0.22 per share) |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(1,276 |
) |
— |
|
(1,276 |
) |
||||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net income |
|
— |
|
— |
|
— |
|
— |
|
— |
|
5,613 |
|
— |
|
5,613 |
|
||||||
|
Net change in unrealized gains on investment securities available for sale, net of reclassification adjustment and taxes |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
407 |
|
407 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Total comprehensive income |
|
— |
|
— |
|
— |
|
— |
|
— |
|
5,613 |
|
407 |
|
6,020 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Balance at December 31, 2002 |
|
— |
|
— |
|
5,734,303 |
|
5,734 |
|
41,123 |
|
19,492 |
|
423 |
|
66,772 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Issuance of common stock in conjunction with exercise of stock options |
|
— |
|
— |
|
22,274 |
|
22 |
|
91 |
|
— |
|
— |
|
113 |
|
||||||
|
Repurchase of common stock |
|
— |
|
— |
|
(651,090 |
) |
(651 |
) |
(7,780 |
) |
— |
|
— |
|
(8,431 |
) |
||||||
|
Issuance of restricted common stock |
|
— |
|
— |
|
177,777 |
|
178 |
|
(178 |
) |
— |
|
— |
|
— |
|
||||||
|
Recognition of stock comp. on restricted stock |
|
— |
|
— |
|
— |
|
— |
|
465 |
|
— |
|
— |
|
465 |
|
||||||
|
Recognition of stock comp. on stock options |
|
— |
|
— |
|
— |
|
— |
|
195 |
|
— |
|
— |
|
195 |
|
||||||
|
Declaration of dividends on common stock ($0.26 per share) |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(1,426 |
) |
— |
|
(1,426 |
) |
||||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net income |
|
— |
|
— |
|
— |
|
— |
|
— |
|
714 |
|
— |
|
714 |
|
||||||
|
Net change in unrealized gains on investment securities available for sale, net of reclassification adjustment and taxes |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(543 |
) |
(543 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Total comprehensive income |
|
— |
|
— |
|
— |
|
— |
|
— |
|
714 |
|
(543 |
) |
171 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Balance at December 31, 2003 |
|
— |
|
$ |
— |
|
5,283,264 |
|
$ |
5,283 |
|
$ |
33,916 |
|
$ |
18,780 |
|
$ |
(120 |
) |
$ |
57,859 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
VAIL BANKS, INC.
Years Ended December 31, 2003, 2002 and 2001
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|||
|
Net income |
|
$ |
714 |
|
$ |
5,613 |
|
$ |
6,103 |
|
|
Adjustments to reconcile net
income to net cash provided by |
|
|
|
|
|
|
|
|||
|
Net amortization of premiums on investment securities |
|
579 |
|
398 |
|
24 |
|
|||
|
Gain on sale of investment securities |
|
(15 |
) |
(416 |
) |
— |
|
|||
|
Amortization of deferred loan fees |
|
(334 |
) |
— |
|
— |
|
|||
|
Provision for loan losses |
|
578 |
|
382 |
|
800 |
|
|||
|
Gain on sale of loans |
|
(95 |
) |
— |
|
— |
|
|||
|
Depreciation and amortization of premises and equipment |
|
2,409 |
|
2,318 |
|
2,289 |
|
|||
|
Net loss on sale/disposal/write-off of premises and equipment |
|
1,578 |
|
123 |
|
106 |
|
|||
|
Amortization of goodwill and other intangible assets |
|
617 |
|
74 |
|
1,661 |
|
|||
|
(Gain) loss on sale of foreclosed properties |
|
(467 |
) |
(88 |
) |
36 |
|
|||
|
Recognition of stock compensation on restricted common stock |
|
465 |
|
189 |
|
56 |
|
|||
|
Recognition of stock compensation on stock options |
|
195 |
|
62 |
|
53 |
|
|||
|
Deferred income tax (benefit) expense |
|
(465 |
) |
(205 |
) |
153 |
|
|||
|
Net changes in operating assets and liabilities, net of effect of purchase business combinations |
|
|
|
|
|
|
|
|||
|
Loans held for sale |
|
7,364 |
|
(2,929 |
) |
(6,318 |
) |
|||
|
Interest receivable |
|
(220 |
) |
657 |
|
854 |
|
|||
|
Other assets |
|
(955 |
) |
92 |
|
566 |
|
|||
|
Interest payable and other liabilities |
|
85 |
|
356 |
|
(8 |
) |
|||
|
Other, net |
|
(10 |
) |
12 |
|
4 |
|
|||
|
Net cash provided by operating activities |
|
12,023 |
|
6,638 |
|
6,379 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Cash flows from investing
activities, net of effect of |
|
|
|
|
|
|
|
|||
|
Net change in interest-bearing deposits in banks |
|
(2,000 |
) |
— |
|
— |
|
|||
|
Purchases of investment securities, available for sale |
|
(75,312 |
) |
(50,338 |
) |
(24,254 |
) |
|||
|
Purchases of bank stocks |
|
(668 |
) |
(1,076 |
) |
— |
|
|||
|
Proceeds from sales of investment securities, available for sale |
|
14,490 |
|
15,014 |
|
— |
|
|||
|
Proceeds from redemption of bank stocks |
|
— |
|
400 |
|
— |
|
|||
|
Proceeds from maturities of investment securities, held to maturity |
|
315 |
|
157 |
|
4,209 |
|
|||
|
Proceeds from maturities/calls/prepays of investment securities, available for sale |
|
40,371 |
|
16,067 |
|
8,823 |
|
|||
|
Net decrease in loans |
|
14,325 |
|
59,107 |
|
34,087 |
|
|||
|
Purchases of premises and equipment |
|
(3,150 |
) |
(2,332 |
) |
(4,465 |
) |
|||
|
Proceeds from sales of premises and equipment |
|
78 |
|
2,843 |
|
28 |
|
|||
|
Proceeds from sales of foreclosed properties |
|
5,015 |
|
681 |
|
317 |
|
|||
|
Net cash received in acquisitions |
|
— |
|
— |
|
(2 |
) |
|||
|
Net cash (used) provided by investing activities |
|
(6,536 |
) |
40,523 |
|
18,743 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Cash flows from financing
activities, net of effect of |
|
|
|
|
|
|
|
|||
|
Net increase (decrease) in deposits |
|
19,817 |
|
(13,652 |
) |
(39,652 |
) |
|||
|
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase |
|
907 |
|
— |
|
(8,410 |
) |
|||
|
Net increase in Federal Home Loan Bank advances |
|
9,461 |
|
8,900 |
|
21,100 |
|
|||
|
Repayment of line of credit |
|
— |
|
— |
|
(2,000 |
) |
|||
|
Proceeds from issuance of guaranteed preferred beneficial interest in Company’s subordinated debt |
|
— |
|
— |
|
24,000 |
|
|||
|
Proceeds from issuance of common stock |
|
113 |
|
174 |
|
86 |
|
|||
|
Repurchase of common stock |
|
(8,431 |
) |
(1,853 |
) |
(8,299 |
) |
|||
|
Payment of cash dividends on common stock |
|
(1,426 |
) |
(1,276 |
) |
(1,091 |
) |
|||
|
Net cash provided (used) by financing activities |
|
20,441 |
|
(7,707 |
) |
(14,266 |
) |
|||
|
Net increase in cash and cash equivalents |
|
25,928 |
|
39,454 |
|
10,856 |
|
|||
|
Cash and cash equivalents at beginning of year |
|
74,980 |
|
35,526 |
|
24,670 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Cash and cash equivalents at end of year |
|
$ |
100,908 |
|
$ |
74,980 |
|
$ |
35,526 |
|
F-5
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|||
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|||
|
Interest on deposits and borrowed funds |
|
$ |
8,679 |
|
$ |
8,603 |
|
$ |
12,872 |
|
|
Income taxes |
|
$ |
1,564 |
|
$ |
3,005 |
|
$ |
3,150 |
|
|
|
|
|
|
|
|
|
|
|||
|
Noncash investing and financing transactions: |
|
|
|
|
|
|
|
|||
|
Foreclosure of collateralized loans, net of reserve |
|
$ |
4,511 |
|
$ |
605 |
|
$ |
459 |
|
|
Unrealized loss (gain) on investments available for sale, net of taxes |
|
$ |
543 |
|
$ |
(407 |
) |
$ |
(118 |
) |
|
Reclassification of software from premises and equipment to other assets |
|
$ |
— |
|
$ |
— |
|
$ |
454 |
|
|
Reclassification from other assets to premises and equipment |
|
$ |
57 |
|
$ |
— |
|
$ |
— |
|
|
Issuance of restricted common stock |
|
$ |
178 |
|
$ |
117 |
|
$ |
16 |
|
|
|
|
|
|
|
|
|
|
|||
|
Goodwill recorded in connection with acquisitions/mergers: |
|
|
|
|
|
|
|
|||
|
Cash outflows for business acquisitions/mergers (net of cash acquired) |
|
$ |
— |
|
$ |
— |
|
$ |
2 |
|
|
Total consideration |
|
— |
|
— |
|
2 |
|
|||
|
Net liabilities acquired, at fair value |
|
788 |
|
— |
|
— |
|
|||
|
Goodwill recorded |
|
$ |
788 |
|
$ |
— |
|
$ |
2 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
WestStar Bank (WestStar) was formed in 1977 as a community bank to serve the local residents and businesses of Vail. In 1993, Vail Banks, Inc. (Vail Banks) was formed as a bank holding company for WestStar. WestStar offers a full range of financial services to individuals and businesses located primarily in the Western Slope and Front Range regions of Colorado. Colorado counties served by WestStar include Summit, Larimer, Grand, Eagle, Delta, Garfield, Pitkin, Mesa, Montrose, San Miguel and Routt, as well as the Denver Metropolitan area. Many of WestStar’s branches are located in resort areas that are somewhat dependent on seasonal tourism. This seasonality results in fluctuation in deposit and credit needs, with deposits tending to increase during ski season.
The accompanying consolidated financial statements include the accounts of Vail Banks and its wholly-owned subsidiaries, WestStar, Vail Banks Statutory Trust I, and Vail Banks Statutory Trust II. WestStar and Vail Banks own a 54.04% interest in Avon 56 Limited and WestStar owns a 100% interest in First Western Mortgage Services, Inc. (First Western) that are also included in the accompanying consolidated financial statements. All entities are collectively referred to as the Company. All significant intercompany balances and transactions have been eliminated in consolidation.
Concentrations of Credit Risk
Concentrations of credit risk arise when a number of counterparties have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Company’s loan portfolio consists primarily of commercial and real estate loans located in Colorado, making the value of the portfolio more susceptible to declines in real estate values and other changes in economic conditions in Colorado. The Company does not believe it has a significant exposure to any individual customer.
Use of Estimates
The preparation of consolidated 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 as of the date of the consolidated balance sheet and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant areas requiring management estimates include determination of the allowance for loan losses, determination of useful lives for depreciation of premises and equipment, valuation of foreclosed assets, recoverability of intangible assets and the ability to utilize net operating loss carryforwards.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash, balances due from banks, and federal funds sold which mature within ninety days. Cash equivalents include uninsured deposits in financial institutions approximating $15.8 million and $18.0 million at December 31, 2003 and 2002, respectively, other than amounts on deposit at the Federal Home Loan Bank (FHLB) of Topeka and the Federal Reserve Bank (the Federal Reserve). As of both December 31, 2003 and 2002, $200,000 of the cash and due from banks balance is required to be maintained at the Federal Reserve to meet reserve requirements. Accordingly, this cash is considered to be restricted.
Interest-bearing Deposits in Banks
Interest-bearing deposits in banks mature within one year and are carried at cost.
Federal Funds
WestStar is required to maintain legal cash reserves in a minimum amount, computed by applying prescribed percentages to its various types of deposits. When WestStar’s cash reserves are in excess of that required, it may lend the excess to other banks on an overnight basis, known as “federal funds sold”. Conversely, when cash reserves are less than required, WestStar may borrow funds on an overnight basis, known as “federal funds purchased”.
Investment Securities
Debt securities that the Company has the positive intent and ability to hold to maturity are classified as “held to maturity” and reported at cost, adjusted for amortization or accretion of premiums or discounts. Securities not classified as
F-7
held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available for sale securities are reported as a separate component of consolidated shareholders’ equity, and the annual change in such gains and losses are reported as other comprehensive income. Transfer of securities between categories is recorded at fair value on the date of transfer. For the years ended December 31, 2003, 2002 and 2001, the Company did not transfer securities between categories.
Realized gains and losses on the sale of available for sale securities are recorded on the trade date and are determined using the specific identification method. Discounts or premiums are accreted or amortized to interest income using the level-yield method to the earlier of call date or maturity of the related security.
The Company has investments in the stocks of the FHLB, Federal Reserve and Bankers’ Bank of the West. These investments are carried at cost and are classified as restricted, as the Company can only sell these stocks back to the respective issuers at par value or to other member banks. Dividends on these stocks are included in “Interest and dividend income—Investment securities” in the accompanying consolidated statements of income.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are classified as “held for sale” and are carried at the lower of cost or estimated fair value. Generally, the carrying amounts of mortgage loans held for sale approximate fair value due to the short period of time between origination of these loans and their sale (i.e. less than 90 days). As loans are pre-sold at a guaranteed interest rate, gains or losses are not realized from the sale of these loans.
Loans and Interest Income
Loans that the Company has the intent and ability to hold until maturity or pay-off are reported net of unearned interest and unamortized deferred fees and costs. Interest income on loans is accrued daily on the unpaid principal balance, if such income is deemed collectible. Generally, the Company places loans on nonaccrual status when payments are more than 90 days past due or when management believes it is probable that the Company will not collect its entire outstanding principal. When interest accrual is discontinued, all unpaid interest accrued to date is generally reversed unless the net realizable value of the underlying collateral is sufficient to cover principal and accrued interest. When such a reversal is made, uncollected interest accrued during prior years is charged to the allowance for loan losses (the Allowance). All other interest reversed on nonaccrual loans is charged against current year interest income. Interest income is subsequently recognized only to the extent cash payments are received, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to fully collect scheduled payments of principal or interest when due in accordance with the contractual terms of the loan agreements. Impaired loans are measured by using the present value of expected future cash flows discounted at the loan’s effective interest rate, except when it is determined that the sole source of repayment for the loan is operation or liquidation of the collateral. In such case, the current fair value of the collateral, reduced by estimated selling costs, is used in place of discounted cash flows. If the measurement of the impaired loan is less than the recorded investment in the loan, impairment is recognized by creating or adjusting an existing allocation of the Allowance.
Loan origination and commitment fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the level-yield method over the contractual life of the loan.
Provision and Allowance for Loan Losses
The Allowance represents the Company’s recognition of the risks of extending credit and its evaluation of the loan portfolio. The Allowance is maintained at a level considered adequate to provide for probable loan losses based on management’s assessment of various factors affecting the loan portfolio, including a review of problem loans, business conditions, historical loss experience, evaluation of the quality of the underlying collateral, and holding and disposal costs. The Allowance is increased by provisions charged to expense and reduced by loans charged off, net of recoveries.
The Company has established a formal process for determining an adequate Allowance. WestStar lending associates are responsible for ongoing reviews of the quality of the loan portfolio. During 2003, the Company established an internal loan review function that issues quarterly reports to the Audit Committee. State and federal regulatory agencies, as an integral part of their examination process, also review WestStar’s loans and its Allowance. A list containing problem loans is updated by management and reviewed by the Board of Directors (Board) monthly. The allowance calculation process has
F-8
two components. The first component represents the allowance for impaired loans computed in accordance with Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan (SFAS 114 Component). To determine the SFAS 114 Component, collateral dependent impaired loans are evaluated using internal analyses as well as third-party information, such as appraisals. If an impaired loan is unsecured, it is evaluated using a discounted cash flow of the payments expected over the life of the loan giving consideration to currently existing factors that would impact the amount or timing of the cash flows. The second component is the allowance calculated under SFAS No. 5, Accounting for Contingencies (SFAS 5 Component), and represents the estimated probable but undetected losses inherent within the portfolio due to uncertainties in economic conditions, delays in obtaining information about a borrower’s financial condition, delinquent loans that have not been determined to be impaired, trends in speculative construction real estate lending, results of internal and external loan reviews, and other factors. This component of the Allowance is calculated by assigning a certain risk weighting, within a predetermined range, to each identified risk factor.
Management believes that Vail Banks’ Allowance is adequate to cover probable losses based on all available evidence. Future additions to the Allowance will be subject to management’s continuing evaluation of the inherent risks in the portfolio. Additional provisions for loan losses may need to be recorded if the economy resumes a decline, asset quality deteriorates, or historical loss experience changes. Also, state or federal regulators, when reviewing Vail Banks’ loan portfolio in the future, may require Vail Banks to increase the Allowance, which could adversely affect Vail Banks’ earnings.
Premises and Equipment
Land and artwork are carried at cost. Buildings, leasehold improvements, and furniture, fixtures and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets, which are estimated at up to 50 years for buildings and three to seven years for furniture and equipment. Leasehold improvements are amortized over the shorter of their useful lives or lease terms.
The Company periodically reviews premises and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment exists when the estimated undiscounted cash flows for the property are less than its carrying value. If identified, an impairment loss is recognized through a charge to earnings based on the fair value of the property.
Intangible Assets
Intangible assets are comprised of goodwill and core deposit intangibles. Goodwill relates to the excess of cost paid in purchase transactions over the fair value of the net assets acquired. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), on January 1, 2002, the Company ceased amortization of goodwill. The core deposit intangible relates to a previously purchased branch and is being amortized on the straight-line method. See Footnote 5, “Goodwill and Other Intangible Assets” for further discussion on the adoption of SFAS 142.
Foreclosed Properties
Assets acquired through foreclosure, deed in lieu of foreclosure, or repossession are held for sale and are recorded at the lower of cost or fair value less estimated costs to sell. As of December 31, 2003 and 2002, foreclosed properties totaled $362,000 and $241,000, respectively, and are included in “Other Assets” in the accompanying consolidated balance sheets. Losses at the time of transfer from loans are charged to the Allowance. Subsequent adjustments to value and gains or losses on sales are included in non-interest expense in the accompanying consolidated statements of income. Rental income and costs of maintaining the properties are also included in the accompanying consolidated statements of income.
Mortgage Broker Fees
Origination fees are recorded in non-interest income upon funding of the loan. Broker fees are recorded in non-interest income upon purchase of the loan by an outside investor.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Vail Banks and its subsidiaries file consolidated income tax returns.
F-9
Disclosures of Fair Value of Financial Instruments
SFAS No. 107, Disclosure about Fair Value of Financial Instruments (SFAS 107) requires the Company to disclose estimated fair values of its financial instruments. Fair value estimates are made at a specific point in time, based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments owned at December 31, 2003 and 2002 without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments, including deferred tax assets and premises and equipment. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in these estimates.
Earnings Per Share
Basic earnings per share represents net income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share, except that the weighted average common shares outstanding is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. Common equivalent shares are not included where inclusion would be anti-dilutive. In addition, net income available to common shareholders is adjusted for any changes in net income that would have resulted from the assumed conversion of the potential common shares.
Stock Incentive Plan
The Company accounts for its stock incentive plan (the Plan) in accordance with SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123. This statement permits entities to expense over the vesting period the fair value of stock-based awards as measured on the date of grant. Alternatively, SFAS 123 allows entities to apply the provisions of Accounting Principles Board (APB) Opinion No. 25 while disclosing pro forma net income and pro forma earnings per share for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Company has elected to apply the accounting provisions of APB Opinion No. 25 to employee stock option grants and provide the pro forma disclosure provisions of SFAS 123. Accordingly, no stock-based compensation cost for employee stock option grants has been recognized in the consolidated financial statements (other than as described in Footnote 14), as options granted under the Plan had an exercise price equal to the market value of the underlying common stock on the date of grant. Any non-employee stock option grants are accounted for under SFAS 123.
The fair value of each employee stock option grant was estimated on the date of grant using the Black-Scholes option- pricing model. The following weighted-average assumptions were used:
|
|
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
Dividend yield |
|
2.0 |
% |
2.0 |
% |
1.8 |
% |
|
Expected life |
|
7 years |
|
6 years |
|
7 years |
|
|
Expected volatility |
|
27.5 |
% |
27.0 |
% |
27.0 |
% |
|
Risk-free interest rate |
|
3.6 |
% |
4.8 |
% |
5.2 |
% |
F-10
Had the Company determined compensation cost based on the fair value accounting provisions prescribed by SFAS 123 and using the assumptions listed above, the Company’s net income and earnings per share would have been adjusted to the pro forma amounts indicated below:
|
(in thousands, except share data) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Net income |
|
|
|
|
|
|
|
|||
|
As reported |
|
$ |
714 |
|
$ |
5,613 |
|
$ |
6,103 |
|
|
Deduct: Total stock-based employee compensation determined under the fair value method, net of tax |
|
(212 |
) |
(270 |
) |
(300 |
) |
|||
|
Pro forma |
|
502 |
|
5,343 |
|
5,803 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Earnings per share – basic |
|
|
|
|
|
|
|
|||
|
As reported |
|
$ |
0.14 |
|
$ |
0.99 |
|
$ |
1.02 |
|
|
Pro forma |
|
0.10 |
|
0.95 |
|
0.97 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Earnings per share – diluted |
|
|
|
|
|
|
|
|||
|
As reported |
|
0.13 |
|
0.95 |
|
1.00 |
|
|||
|
Pro forma |
|
0.09 |
|
0.88 |
|
0.94 |
|
|||
Recently Issued Accounting Standards
During June 2002, the Financial Accounting Standards Board (the FASB) issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement is effective for exit or disposal activities initiated after December 31, 2002. These activities may include sale or termination of a line of business, the closure of business activities in a particular location, the relocation of business activities from one location to another, changes in management structure, and a fundamental reorganization that affects the nature and focus of operations. The statement addresses financial accounting and reporting for costs associated with exit or disposal activities and requires companies to recognize liabilities associated with exit or disposal activities at the time that they are incurred rather than at the date of a commitment to the exit or disposal plan. The Company adopted this standard on January 1, 2003. Adoption of this standard did not have an effect on the Company’s consolidated financial condition or results of operations.
In January 2003, the FASB issued Financial Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements (ARB 51), addresses consolidation by business enterprises where ownership interests in an entity may vary over time or in many cases, of special-purpose entities (SPE’s). To be consolidated for financial reporting, these SPE’s must have certain characteristics. ARB 51 requires that an enterprise’s consolidated financial statements include only subsidiaries in which the enterprise has a controlling financial interest. The Company plans to adopt FIN 46 on January 1, 2004. As a result of adoption, the Company will be required to deconsolidate its two unrelated business trusts that had been formed in 2001 to issue trust preferred securities. The Company does not expect there to be a cumulative effect on retained earnings or a change in its capital ratios as a result of this deconsolidation.
During April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003, except for certain circumstances, and for hedging relationships designated after June 30, 2003. The Company does not utilize derivative instruments or engage in hedging activities. Accordingly, adoption of this standard did not have an effect on the Company’s consolidated financial condition or results of operations.
During May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability when previously it was classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first
F-11
interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance of the statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The Company adopted this statement on July 1, 2003. Adoption of this statement did not have an effect on the Company’s consolidated financial condition or results of operations.
During December 2003, the FASB revised SFAS No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88, and 106. This statement is effective for fiscal years ending after December 31, 2003 and revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans. This statement retains the disclosure requirements contained in the original SFAS 132 and requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans. The Company adopted this statement during December 2003. Adoption of this standard did not have an effect on the Company’s consolidated financial condition or results of operations.
Reclassifications
Certain reclassifications have been made to the previous consolidated financial statements to conform to the 2003 presentation.
2. INVESTMENT SECURITIES
Investment securities at December 31 consist of the following:
|
|
|
2003 |
|
||||||||||
|
(in thousands) |
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Securities available for sale |
|
|
|
|
|
|
|
|
|
||||
|
Government agencies |
|
$ |
20,869 |
|
$ |
47 |
|
$ |
(103 |
) |
$ |
20,813 |
|
|
State and municipal |
|
20,282 |
|
108 |
|
(113 |
) |
20,277 |
|
||||
|
Mortgage-backed securities |
|
31,080 |
|
177 |
|
(182 |
) |
31,075 |
|
||||
|
Agency preferred stock |
|
4,514 |
|
15 |
|
(140 |
) |
4,389 |
|
||||
|
Total securities available for sale |
|
$ |
76,745 |
|
$ |
347 |
|
$ |
(538 |
) |
$ |
76,554 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Securities held to maturity |
|
|
|
|
|
|
|
|
|
||||
|
Mortgage-backed securities |
|
$ |
370 |
|
$ |
27 |
|
$ |
— |
|
$ |
397 |
|
|
Total securities held to maturity |
|
$ |
370 |
|
$ |
27 |
|
$ |
— |
|
$ |
397 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Investments in bank stocks |
|
|
|
|
|
|
|
|
|
||||
|
Federal Home Loan Bank stock |
|
$ |
2,318 |
|
$ |
— |
|
$ |
— |
|
$ |
2,318 |
|
|
Federal Reserve Bank stock |
|
1,869 |
|
— |
|
— |
|
1,869 |
|
||||
|
Bankers’ Bank of the West stock |
|
184 |
|
— |
|
— |
|
184 |
|
||||
|
|
|
$ |
4,371 |
|
$ |
— |
|
$ |
— |
|
$ |
4,371 |
|
F-12
|
|
|
2002 |
|
||||||||||
|
(in thousands) |
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
||||
|
Securities available for sale |
|
|
|
|
|
|
|
|
|
||||
|
Government agencies |
|
$ |
13,299 |
|
$ |
71 |
|
$ |
(47 |
) |
$ |
13,323 |
|
|
State and municipal |
|
3,851 |
|
45 |
|
(16 |
) |
3,880 |
|
||||
|
Mortgage-backed securities |
|
35,318 |
|
634 |
|
(21 |
) |
35,931 |
|
||||
|
FHLMC preferred stock |
|
4,500 |
|
— |
|
— |
|
4,500 |
|
||||
|
Total securities available for sale |
|
$ |
56,968 |
|
$ |
750 |
|
$ |
(84 |
) |
$ |
57,634 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Securities held to maturity |
|
|
|
|
|
|
|
|
|
||||
|
Mortgage-backed securities |
|
$ |
684 |
|
$ |
47 |
|
$ |
— |
|
$ |
731 |
|
|
Total securities held to maturity |
|
$ |
684 |
|
$ |
47 |
|
$ |
— |
|
$ |
731 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Investments in bank stocks |
|
|
|
|
|
|
|
|
|
||||
|
Federal Home Loan Bank stock |
|
$ |
1,650 |
|
$ |
— |
|
$ |
— |
|
$ |
1,650 |
|
|
Federal Reserve Bank stock |
|
1,869 |
|
— |
|
— |
|
1,869 |
|
||||
|
Bankers’ Bank of the West stock |
|
184 |
|
— |
|
— |
|
184 |
|
||||
|
|
|
$ |
3,703 |
|
$ |
— |
|
$ |
— |
|
$ |
3,703 |
|
Expected maturities of investment securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The amortized cost and fair value of securities by contractual maturity at December 31, 2003 are as follows:
|
|
|
Available for Sale |
|
Held to Maturity |
|
||||||||
|
(in thousands) |
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
|
||||
|
Due within one year |
|
$ |
454 |
|
$ |
459 |
|
$ |
— |
|
$ |
— |
|
|
Due after one year through five years |
|
5,415 |
|
5,420 |
|
107 |
|
115 |
|
||||
|
Due after five years through ten years |
|
3,786 |
|
3,804 |
|
— |
|
— |
|
||||
|
Due after ten years |
|
67,090 |
|
66,871 |
|
263 |
|
282 |
|
||||
|
|
|
$ |
76,745 |
|
$ |
76,554 |
|
$ |
370 |
|
$ |
397 |
|
Management does not believe any individual unrealized loss as of December 31, 2003, represents an other than temporary impairment. WestStar has both the intent and ability to hold the securities contained in the table, above, for a time necessary to recover the amortized cost.
The following table presents the components of investment income for the periods presented:
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
Taxable interest income |
|
$ |
2,146 |
|
$ |
2,507 |
|
$ |
996 |
|
|
Nontaxable interest income |
|
1,058 |
|
500 |
|
579 |
|
|||
|
Dividends |
|
200 |
|
191 |
|
148 |
|
|||
|
|
|
$ |
3,404 |
|
$ |
3,198 |
|
$ |
1,723 |
|
During the year ended December 31, 2003, the Company sold certain securities that had been classified as available-for-sale. Proceeds from these sales amounted to $14.5 million, resulting in a gain of $15,000. During the year ended December 31, 2002, the Company sold certain securities that had been classified as available-for-sale. Proceeds from these sales amounted to $15.0 million, resulting in a gain of $416,000. Additionally during 2002, the Company redeemed $400,000 of FHLB stock at par. During the year ended December 31, 2001, there were no sales of securities.
F-13
Securities with a carrying value of $56.4 million and $36.9 million at December 31, 2003 and 2002, respectively, are pledged as collateral to secure public deposits and for other purposes as permitted or required by law. See Footnote 6 for further information. Securities with a carrying value of $907,000 and $0 were sold as of December 31, 2003 and 2002 to secure repurchase agreements. See Footnote 7 for further information.
As a member of the FHLB system, the Company is required to maintain an investment in stock of the FHLB equal to the greater of 1% of certain residential mortgages or 5% of FHLB advances. The Company has a blanket pledge with the FHLB and has pledged all of its FHLB stock and certain qualifying loans to secure outstanding advances from the FHLB. See Footnotes 3 and 9 for further information.
3. LOANS
Loans at December 31 consist of the following:
|
(in thousands) |
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
|
||
|
Commercial, industrial and land |
|
$ |
185,158 |
|
$ |
203,932 |
|
|
Real estate – construction |
|
63,844 |
|
55,275 |
|
||
|
Real estate – mortgage |
|
57,602 |
|
62,188 |
|
||
|
Consumer and other |
|
5,940 |
|
9,767 |
|
||
|
|
|
|
|
|
|
||
|
|
|
312,544 |
|
331,162 |
|
||
|
Less: Allowance for loan losses |
|
(3,503 |
) |
(3,747 |
) |
||
|
Net deferred loan fees |
|
(770 |
) |
(159 |
) |
||
|
Loans, net |
|
$ |
308,271 |
|
$ |
327,256 |
|
Loans totaling $98.8 million and $115.2 million at December 31, 2003 and 2002 were pledged to secure advances from the FHLB. See Footnote 9 for further information.
As of December 31, 2003 and 2002, $116,000 and $172,000, respectively, of deposit account overdrafts have been reclassified to loans. These amounts are included in the “Consumer and other” category in the table, above. See Footnote 6 for further information.
Transactions in the Allowance are summarized as follows:
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Allowance at beginning of year |
|
$ |
3,747 |
|
$ |
4,375 |
|
$ |
4,440 |
|
|
Loans charged off |
|
(1,101 |
) |
(1,640 |
) |
(996 |
) |
|||
|
Recoveries on loans previously charged off |
|
279 |
|
630 |
|
131 |
|
|||
|
Provision for loan losses |
|
578 |
|
382 |
|
800 |
|
|||
|
Allowance at end of year |
|
$ |
3,503 |
|
$ |
3,747 |
|
$ |
4,375 |
|
Loans having carrying values of $4.5 million and $605,000 were transferred to foreclosed properties during 2003 and 2002, respectively.
The principal balance of loans on which the accrual of interest has been discontinued was $1.7 million and $3.7 million at December 31, 2003 and 2002, respectively. Additional interest income that would have been recorded for nonaccrual loans had they been performing in accordance with their contractual requirements was $171,000 and $421,000 for the years ended December 31, 2003 and 2002, respectively. Actual interest income recorded for these loans was $186,000 and $180,000 for the years ended December 31, 2003 and 2002, respectively. As of December 31, 2003 and 2002, $164,000 and $6,000, respectively, of loans were past due 90 days and still accruing interest.
The majority of impaired loans requiring an allowance are measured using the fair value of the underlying collateral since these loans are considered collateral dependent. Any unsecured loans are measured using discounted cash flow
F-14
analyses of the payments expected over the life of the loan considering any internal or external factors that currently exist that would impact the amount or timing of cash flows.
The following is a summary of information pertaining to impaired loans at December 31:
|
(in thousands) |
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
|
||
|
Impaired loans without a valuation allowance |
|
$ |
— |
|
$ |
— |
|
|
Impaired loans with a valuation allowance |
|
2,862 |
|
5,972 |
|
||
|
Total impaired loans |
|
$ |
2,862 |
|
$ |
5,972 |
|
|
Valuation allowance related to impaired loans |
|
$ |
548 |
|
$ |
1,124 |
|
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Average investment in impaired loans |
|
$ |
2,856 |
|
$ |
6,147 |
|
$ |
3,411 |
|
|
Interest income recognized on impaired loans |
|
284 |
|
328 |
|
150 |
|
|||
4. PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of the following:
|
(in thousands) |
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
|
||
|
Land |
|
$ |
8,739 |
|
$ |
8,738 |
|
|
Buildings |
|
26,579 |
|
26,729 |
|
||
|
Leasehold improvements |
|
4,692 |
|
3,643 |
|
||
|
Furniture, fixtures and equipment |
|
9,588 |
|
10,635 |
|
||
|
|
|
|
|
|
|
||
|
|
|
49,598 |
|
49,745 |
|
||
|
Accumulated depreciation and amortization |
|
(11,451 |
) |
(10,740 |
) |
||
|
Premises and equipment, net |
|
$ |
38,147 |
|
$ |
39,005 |
|
Depreciation and amortization expense on premises and equipment was $2.4 million, $2.3 million and $2.3 million for the years ended December 31, 2003, 2002 and 2001, respectively, and is included in “Other Non-Interest Expense” in the accompanying consolidated statements of income.
During 2003, the Company scrutinized its premises and equipment listing and determined that certain premises and equipment were no longer required for the efficient operation of the Company. These premises and equipment were written off during the fourth quarter of 2003 resulting in a pre-tax charge to income of $1.6 million.
The Company leases certain facilities under noncancelable operating leases that expire through the year 2011. Several leases have renewal options that extend through 2028. The cost of such renewals is not included below. Future minimum rental commitments under the leases as of December 31, 2003 are as follows:
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
$ |
795 |
|
|
2005 |
|
498 |
|
|
|
2006 |
|
345 |
|
|
|
2007 |
|
189 |
|
|
|
2008 |
|
130 |
|
|
|
Thereafter |
|
224 |
|
|
|
|
|
$ |
2,181 |
|
F-15
Rental expense for facilities and equipment was $1.3 million, $1.1 million and $1.1 million for the years ended December 31, 2003, 2002 and 2001, and is included in “Other Non-Interest Expense” in the accompanying consolidated statements of income.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
During June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), which provides guidance on how to account for goodwill and intangible assets after an acquisition has been completed. Specifically, all new and pre-existing goodwill will no longer be amortized, but instead will be tested for impairment on an annual basis. Amortization of other intangible assets will continue. The Company adopted the provisions of SFAS 142 on January 1, 2002 and determined that the net unamortized goodwill of $36.0 million was not impaired as of that date. Additionally, the Company reassessed the useful life of the core deposit intangible asset related to a previously acquired branch. The Company determined that as of January 1, 2002, the core deposit intangible asset had a remaining useful life of twelve years. Accordingly, the $890,000 unamortized balance as of January 1, 2002 was to be amortized to expense on a straight-line basis over twelve years. This reduction in remaining life resulted in additional core deposit intangible amortization expense of $34,000 ($22,000 after tax) for the year ended December 31, 2002 over the comparable period during 2001. In addition to the transitional impairment test required as of January 1, 2002, SFAS 142 requires that an annual impairment test be performed. The Company performed this annual goodwill impairment test during the fourth quarter of 2003 and determined that the goodwill was not impaired as of that date.
The changes in the carrying amount of goodwill are as follows:
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Goodwill at beginning of year |
|
$ |
35,970 |
|
$ |
35,970 |
|
$ |
35,970 |
|
|
Goodwill acquired during year** |
|
788 |
|
— |
|
— |
|
|||
|
Goodwill at end of year |
|
$ |
36,758 |
|
$ |
35,970 |
|
$ |
35,970 |
|
**The additional goodwill recorded during 2003 was necessary to properly record deferred taxes related to a prior merger.
Goodwill assigned to each of the Company’s reportable segments (see Footnote 23) as of December 31 is as follows:
|
(in thousands) |
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
|
||
|
Banking |
|
$ |
33,867 |
|
$ |
33,079 |
|
|
Mortgage origination |
|
1,749 |
|
1,749 |
|
||
|
Other |
|
1,142 |
|
1,142 |
|
||
|
|
|
$ |
36,758 |
|
$ |
35,970 |
|
The changes in the carrying amount of other intangible assets are as follows:
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Net other intangible assets at beginning of year |
|
$ |
816 |
|
$ |
890 |
|
$ |
930 |
|
|
Amortization expense |
|
(617 |
) |
(74 |
) |
(40 |
) |
|||
|
Net other intangible assets at end of year |
|
$ |
199 |
|
$ |
816 |
|
$ |
890 |
|
The Company annually reviews its intangible assets for other-than-temporary impairment. If circumstances indicate that impairment may exist, recoverability of the asset is assessed based on expected undiscounted net cash flows. In addition to the impairment test performed on January 1, 2002 upon adoption of SFAS 142, the Company performed its annual impairment test of other intangible assets during the fourth quarter of 2003. Due to the attrition of acquired deposit accounts, the Company determined that $543,000 of the remaining net book value was no longer a valid asset and recorded this amount as additional amortization expense during 2003. The Company also determined that as of December 31, 2003, the core deposit intangible asset had a remaining useful life of five years.
Other intangible assets are assigned only to the Company’s banking segment.
F-16
The following table presents a summary of the components of intangible assets amortization expense for the years ended December 31, 2003, 2002 and 2001:
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Goodwill amortization |
|
$ |
— |
|
$ |
— |
|
$ |
1,621 |
|
|
Core deposit intangible amortization |
|
617 |
|
74 |
|
40 |
|
|||
|
Total intangible assets amortization expense |
|
$ |
617 |
|
$ |
74 |
|
$ |
1,661 |
|
The following table presents future estimated intangible amortization expense as of December 31, 2003:
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
$ |
40 |
|
|
2005 |
|
40 |
|
|
|
2006 |
|
40 |
|
|
|
2007 |
|
40 |
|
|
|
2008 |
|
39 |
|
|
|
|
|
$ |
199 |
|
The following table presents comparative net income and earnings per share information as if goodwill amortization expense had not been recorded for 2001:
|
(in thousands, except share data) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
NET INCOME |
|
|
|
|
|
|
|
|||
|
Reported net income |
|
$ |
714 |
|
$ |
5,613 |
|
$ |
6,103 |
|
|
Add back: Goodwill amortization |
|
— |
|
— |
|
1,621 |
|
|||
|
Adjusted net income |
|
$ |
714 |
|
$ |
5,613 |
|
$ |
7,724 |
|
|
|
|
|
|
|
|
|
|
|||
|
BASIC EARNINGS PER SHARE |
|
|
|
|
|
|
|
|||
|
Reported basic earnings per share |
|
$ |
0.14 |
|
$ |
0.99 |
|
$ |
1.02 |
|
|
Add back: Effect of goodwill amortization |
|
— |
|
— |
|
0.27 |
|
|||
|
Adjusted basic earnings per share |
|
$ |
0.14 |
|
$ |
0.99 |
|
$ |
1.29 |
|
|
|
|
|
|
|
|
|
|
|||
|
DILUTED EARNINGS PER SHARE |
|
|
|
|
|
|
|
|||
|
Reported diluted earnings per share |
|
$ |
0.13 |
|
$ |
0.95 |
|
$ |
1.00 |
|
|
Add back: Effect of goodwill amortization |
|
— |
|
— |
|
0.26 |
|
|||
|
Adjusted diluted earnings per share |
|
$ |
0.13 |
|
$ |
0.95 |
|
$ |
1.26 |
|
F-17
6. DEPOSITS
Deposits at December 31 consist of the following:
|
(in thousands) |
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
|
||
|
Non-interest bearing checking |
|
$ |
101,305 |
|
$ |
97,383 |
|
|
Interest bearing checking |
|
88,191 |
|
75,174 |
|
||
|
Money market |
|
103,969 |
|
106,494 |
|
||
|
Savings |
|
29,873 |
|
28,296 |
|
||
|
Certificates of deposit under $100,000 |
|
55,978 |
|
56,614 |
|
||
|
Certificates of deposit $100,000 and over |
|
69,199 |
|
64,737 |
|
||
|
|
|
$ |
448,515 |
|
$ |
428,698 |
|
As of December 31, 2003 and 2002, $116,000 and $172,000, respectively, of overdrafts have been reclassified to loans. See Footnote 3 for further information.
Public deposits are collateralized by investment securities with carrying values of $56.4 million and $36.9 million as of December 31, 2003 and 2002, respectively. See Footnote 2 for further information. Additionally, the Bank has a $24.0 million stand-by irrevocable letter of credit pledged as collateral for uninsured public fund deposits. See Footnote 9 for further information.
Scheduled maturities of time deposits at December 31, 2003 are as follows:
|
(in thousands) |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Certificates of deposit under $100,000 |
|
$ |
42,592 |
|
$ |
9,841 |
|
$ |
1,786 |
|
$ |
623 |
|
$ |
1,136 |
|
$ |
55,978 |
|
|
Certificates of deposit $100,000 and over |
|
50,094 |
|
16,484 |
|
1,066 |
|
143 |
|
1,412 |
|
69,199 |
|
||||||
|
|
|
$ |
92,686 |
|
$ |
26,325 |
|
$ |
2,852 |
|
$ |
766 |
|
$ |
2,548 |
|
$ |
125,177 |
|
7. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. At December 31, 2003 and 2002, the carrying amount of securities sold to secure repurchase agreements was $907,000 and $0. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities.
8. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has loans receivable from directors, executive officers and principal shareholders (holders of more than five percent of the outstanding shares of common stock) of the Company and their affiliates as follows:
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2003 |
|
$ |
4,733 |
|
|
New loans, including renewals** |
|
7,304 |
|
|
|
Payments, including renewals |
|
(798 |
) |
|
|
Balance at December 31, 2003 |
|
$ |
11,239 |
|
** Comprised of $6,354,000 of new loans and $950,000 relating to the repurchase of a loan participation.
F-18
Deposits from related parties held by WestStar at December 31, 2003 and 2002 amounted to $4.2 million and $3.4 million, respectively.
During 2002 and 2001, the Company paid $44,000 and $9,000, respectively, to a director for consulting services provided. No amounts were paid during 2003.
See Footnote 24 for further information regarding related party transactions.
9. BORROWINGS
WestStar is a member of the FHLB of Topeka and, as a regular part of its business, obtains advances from this FHLB. Advances bear interest at a fixed rate and are collateralized by FHLB stock owned by WestStar and certain qualifying loans receivable. See Footnote 3 for further information. As of December 31, 2003, the authorized borrowing line totaled $98.8 million of which $39.5 million was outstanding. Additionally, $24.0 million was a stand-by irrevocable letter of credit pledged as collateral for uninsured public fund deposits. See Footnote 6 for further information. Interest rates on outstanding FHLB borrowings at December 31, 2003 ranged from 1.55% to 5.45%. Interest payments on outstanding advances are due monthly. Principal repayments for certain advances are due at maturity, while other advances require annual principal repayments until fully repaid upon final maturity. Early repayment of advances will result in a prepayment penalty.
The contractual maturities of borrowings as of December 31, 2003 are as follows:
|
(in thousands) |
|
Borrowings |
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
$ |
9,690 |
|
3.60 |
% |
|
2005 |
|
6,465 |
|
3.76 |
% |
|
|
2006 |
|
6,365 |
|
4.23 |
% |
|
|
2007 |
|
990 |
|
3.43 |
% |
|
|
2008 |
|
662 |
|
3.45 |
% |
|
|
Thereafter |
|
15,289 |
|
4.18 |
% |
|
|
|
|
$ |
39,461 |
|
3.95 |
% |
WestStar has established an unsecured, overnight federal funds line with Bankers’ Bank of the West (BBW) that expires on August 31, 2004. As of December 31, 2003, the authorized borrowing line totaled $42.1 million with $0 outstanding.
WestStar has also established overnight federal funds lines with First Tennessee Bank, N.A. (First Tennessee) totaling $20.0 million. If drawn upon, $10.0 million will be a secured line and $10.0 million will be an unsecured line. These lines are subject to cancellation by First Tennessee at any time upon the occurrence of certain conditions. As of December 31, 2003, no amounts were outstanding under the lines.
During 2003, the Company established a federal funds line with Provident Bank totaling $5.0 million. As of December 31, 2003, no amounts were outstanding under this line.
As of December 31, 2000, $2.0 million was outstanding under an unsecured revolving line of credit with BBW. All outstanding principal and interest under the line of credit were fully repaid prior to the maturity of July 1, 2001.
F-19
10. INCOME TAXES
Income tax expense for the years ended December 31 consists of the following:
|
(in thousands) |
|
Current |
|
Deferred |
|
Total |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Year ended December 31, 2003 |
|
|
|
|
|
|
|
|||
|
Federal |
|
$ |
817 |
|
$ |
(519 |
) |
$ |
298 |
|
|
State |
|
68 |
|
(56 |
) |
12 |
|
|||
|
|
|
$ |
885 |
|
$ |
(575 |
) |
$ |
310 |
|
|
|
|
|
|
|
|
|
|
|||
|
Year ended December 31, 2002 |
|
|
|
|
|
|
|
|||
|
Federal |
|
$ |
2,878 |
|
$ |
(250 |
) |
$ |
2,628 |
|
|
State |
|
324 |
|
45 |
|
369 |
|
|||
|
|
|
$ |
3,202 |
|
$ |
(205 |
) |
$ |
2,997 |
|
|
|
|
|
|
|
|
|
|
|||
|
Year ended December 31, 2001 |
|
|
|
|
|
|
|
|||
|
Federal |
|
$ |
3,727 |
|
$ |
107 |
|
$ |
3,834 |
|
|
State |
|
443 |
|
46 |
|
489 |
|
|||
|
|
|
$ |
4,170 |
|
$ |
153 |
|
$ |
4,323 |
|
Income tax expense differs from the amounts computed by applying the statutory federal income tax rate to pretax earnings as a result of the following:
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Tax expense computed at the statutory federal tax rate |
|
$ |
348 |
|
$ |
2,927 |
|
$ |
3,545 |
|
|
Tax effect of: |
|
|
|
|
|
|
|
|||
|
State income taxes, net of federal income tax effects |
|
23 |
|
213 |
|
298 |
|
|||
|
Dividends subject to exclusion |
|
(88 |
) |
(70 |
) |
(52 |
) |
|||
|
Tax-exempt interest |
|
(258 |
) |
(56 |
) |
(82 |
) |
|||
|
Assets written off for tax purposes |
|
236 |
|
— |
|
— |
|
|||
|
Goodwill amortization |
|
— |
|
— |
|
559 |
|
|||
|
Other, net |
|
49 |
|
(17 |
) |
55 |
|
|||
|
|
|
$ |
310 |
|
$ |
2,997 |
|
$ |
4,323 |
|
F-20
Temporary differences between consolidated financial statement carrying amounts and tax bases of assets and liabilities resulting in significant components of deferred income taxes at December 31 are as follows:
|
(in thousands) |
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
|
||
|
Deferred tax assets |
|
|
|
|
|
||
|
Net operating loss carryforwards |
|
$ |
112 |
|
$ |
165 |
|
|
Unrealized losses on investment securities available for sale |
|
71 |
|
|
|
||
|
Allowance for loan losses |
|
1,299 |
|
989 |
|
||
|
Write-off of purchased goodwill with remaining tax basis |
|
786 |
|
602 |
|
||
|
Other |
|
584 |
|
407 |
|
||
|
Total deferred tax assets |
|
2,852 |
|
2,163 |
|
||
|
Deferred tax liabilities |
|
|
|
|
|
||
|
Basis of premises and equipment |
|
2,130 |
|
1,301 |
|
||
|
Unrealized gains on investment securities available for sale |
|
— |
|
243 |
|
||
|
Other |
|
154 |
|
151 |
|
||
|
Total deferred tax liabilities |
|
2,284 |
|
1,695 |
|
||
|
Net deferred tax asset |
|
$ |
568 |
|
$ |
468 |
|
Net deferred tax assets are included in “Other Assets” in the accompanying consolidated balance sheets. In assessing the realization of deferred tax assets, management considers the reversal of existing temporary differences and estimated future taxable income. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income in the period in which temporary differences become deductible. The Company believes that it is more likely than not that the deferred tax assets will be realized.
The Company has $3.7 million in net operating loss carryforwards for state income tax purposes, the components of which expire in the years 2006 through 2011. These net operating loss carryforwards are subject to separate return limitations.
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to credit related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
F-21
At December 31, the following financial instruments were outstanding whose contract amounts represent credit risk:
|
(in thousands) |
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
|
||
|
Financial instruments whose contractual amounts represent credit risk |
|
|
|
|
|
|
|
|
Commitments to extend credit** |
|
$ |
50,908 |
|
$ |
57,718 |
|
|
Letters of credit |
|
4,442 |
|
6,141 |
|
||
|
|
|
$ |
55,350 |
|
$ |
63,859 |
|
**Of the $50.9 million of commitments to extend credit at December 31, 2003, $50.5 million were at variable rates and $440,000 were at fixed rates. Of the $57.7 million of commitments to extend credit at December 31, 2002, $53.9 million were at variable rates and $3.8 million were at fixed rates.
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 payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the commitments do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment and income producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Financial letters of credit are primarily used to facilitate a trade transaction and are issued with the intent that they will be utilized by the beneficiary as the instrument of payment for goods shipped. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
12. GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY’S SUBORDINATED DEBT (TRUST PREFERRED)
During February 2001, Vail Banks formed Vail Banks Statutory Trust I (Trust I), a wholly owned subsidiary. On February 22, 2001, Trust I issued $16.5 million of 10.20% trust preferred securities (the Trust I Securities). Interest on the Trust I Securities is payable semi-annually. The Trust I Securities have a 30-year maturity and can be called beginning in February 2011. The 3% underwriting fee was capitalized and is included in “Other Assets” in the accompanying consolidated balance sheets. The fee is being amortized to expense over the 10-year call period. A portion of the proceeds from the Trust I Securities was used to pay the $2 million outstanding principal plus accrued interest on the line of credit with Bankers’ Bank of the West. The remainder of the proceeds was used for general corporate purposes including the repurchase of shares of common stock and for a capital contribution into WestStar. See Footnote 14 for further information.
During March 2001, Vail Banks formed Vail Banks Statutory Trust II (Trust II), a wholly owned subsidiary. On March 28, 2001, Trust II issued $7.5 million of 10.18% trust preferred securities (the Trust II Securities). Interest on the Trust II Securities is payable semi-annually. The Trust II Securities have a 30-year maturity and can be called beginning in March 2011. The 3% underwriting fee was capitalized and is included in “Other Assets” in the accompanying consolidated balance sheets. The fee is being amortized to expense over the 10-year call period. Proceeds from the Trust II Securities were used for general corporate purposes including the repurchase of shares of common stock. See Footnote 14 for further information.
13. LEGAL CONTINGENCIES
From time to time, the Company is party to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans and other issues relating to the business of the Company. Management of the Company does not believe that there is any pending or threatened proceeding against the Company, which would have a material effect on the Company’s consolidated financial statements.
F-22
14. SHAREHOLDERS’ EQUITY
Stock Repurchase Plan
At its meeting on January 19, 2004, the Company’s Board of Directors reauthorized the Company’s stock repurchase program that was originally approved in February 2001. Since inception of the program through December 31, 2003, the Company has repurchased 1,535,380 shares at an average price of $12.10 per share, or approximately $19 million. The total amount of repurchases under the program, both previously completed and allowable up to January 2005, aggregate approximately $29 million.
Dividends
Payment of dividends is at the discretion of the Board and is determined by taking into account the earnings, capital levels, cash requirements, and the financial condition of Vail Banks and WestStar, as well as applicable government regulations and other relevant factors. The principal source of Vail Banks’ income is dividends from WestStar. There are statutory and regulatory requirements applicable to the payment of dividends by WestStar to Vail Banks, as well as by Vail Banks to its shareholders. Due to the high volume of dividends relative to earnings paid in earlier years, beginning in 2004, any dividend payments from WestStar to Vail Banks will require prior regulatory approval. Management believes that approval will be granted as long as WestStar maintains its well-capitalized regulatory status.
Stock Incentive Plan
In January 1998, the Company adopted a Stock Incentive Plan (the Plan) pursuant to which the Compensation Committee (the Committee) of the Board may grant incentive stock options, nonqualified stock options, restricted stock awards and performance share awards to certain employees, directors and others who perform services for the Company.
The number of shares available for grant of awards under the Plan, if any, will be determined by the Company’s shareholders. On May 20, 2002, shareholders approved a proposal to increase the number of shares available under the Plan to 1,000,000, subject to an annual adjustment. If granted, outstanding options will be counted against the authorized pool of shares, regardless of their vested status. At December 31, 2003, there were 29,384 shares available for grant under the Plan.
The option exercise price for each stock option grant will not be less than the fair market value on the date the option is granted. The Committee may determine the restrictions and conditions under which options may be exercised. Options must be exercised within ten years of the date granted.
F-23
The following table summarizes the Company’s stock option activity and related information for the three years ended December 31, 2003:
|
|
|
Number of |
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at January 1, 2001 |
|
582,382 |
|
$ |
9.43 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
88,736 |
(a) |
10.61 |
|
|
|
Forfeited |
|
(27,688 |
) |
10.37 |
|
|
|
Exercised |
|
(9,750 |
) |
8.77 |
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2001 |
|
633,680 |
|
9.59 |
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
58,397 |
(a) |
11.27 |
|
|
|
Forfeited |
|
(32,577 |
) |
10.41 |
|
|
|
Exercised |
|
(19,247 |
) |
9.03 |
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2002 |
|
640,253 |
|
9.71 |
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
33,500 |
(a) |
12.22 |
|
|
|
Forfeited |
|
(59,945 |
) |
10.04 |
|
|
|
Exercised |
|
(22,274 |
) |
9.68 |
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2003 |
|
591,534 |
|
$ |
9.82 |
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2003 |
|
492,608 |
|
$ |
9.57 |
|
(a) Using the Black-Scholes option-pricing model, the weighted-average fair value of options granted at market value in 2003, 2002 and 2001 was estimated to be $3.35, $3.33 and $3.43, respectively. The weighted-average fair value of options granted below market value in 2002 was estimated to be $3.72. No options were granted below market value during 2003 or 2001. See Footnote 1 for a discussion of the pricing assumptions.
The following table summarizes information pertaining to stock options outstanding as of December 31, 2003:
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|||||||||
|
Range of |
|
Number |
|
Weighted |
|
Weighted |
|
Number |
|
Weighted Average |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
$8.00 – $8.99 |
|
|
213,398 |
|
4.2 |
|
$ |
8.54 |
|
213,398 |
|
$ |
8.54 |
|
|
9.00 – 9.99 |
|
|
151,512 |
|
6.2 |
|
9.48 |
|
135,321 |
|
9.48 |
|
||
|
10.00 – 10.99 |
|
|
90,112 |
|
6.3 |
|
10.38 |
|
70,554 |
|
10.42 |
|
||
|
11.00 – 11.99 |
|
|
63,512 |
|
7.9 |
|
11.42 |
|
26,835 |
|
11.45 |
|
||
|
12.00 – 12.99 |
|
|
73,000 |
|
6.5 |
|
12.24 |
|
46,500 |
|
12.25 |
|
||
|
|
|
|
591,534 |
|
5.8 |
|
$ |
9.82 |
|
492,608 |
|
$ |
9.57 |
|
F-24
During July 2000, the Company granted 80,000 stock options to an officer of the Company, who subsequently resigned in November 2000. Upon the officer’s resignation 70,400 unvested shares were not forfeited, but were instead allowed to continue vesting. The Company was previously recognizing compensation expense of $268,000 ratably over the vesting period of four years. In accordance with SFAS 123 and Financial Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, the Company recognized compensation expense related to these options of $53,000 during both 2002 and 2001, respectively. During 2003, the Company accelerated the vesting so that all options were fully vested at December 31, 2003. The Company recognized the remaining compensation expense related to these options of $152,000 during 2003.
During May 2002, the Company granted 19,988 stock options at a strike price below fair market value. Under APB Opinion No. 25, the Company is recognizing compensation of $20,000 (equal to the difference between the fair market value of the stock on the date of the grant and the strike price of the options) over the vesting period of four years. Compensation expense related to these options of $6,000 and $9,000 was recognized during 2003 and 2002, respectively.
On May 12, 2003, the Board approved the grant of 6,250 stock options to two individuals as an inducement to become officers of WestStar. The options were granted outside of the Plan and when exercised, these stock options will result in the employees receiving unregistered shares of stock. The following table summarizes the Company’s inducement stock option activity and related information for the year ended December 31, 2003:
|
|
|
Number of |
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Inducement options outstanding at January 1, 2003 |
|
— |
|
$ |
— |
|
|
Granted |
|
6,250 |
(a) |
12.28 |
|
|
|
Inducement options outstanding at December 31, 2003 |
|
6,250 |
|
$ |
12.28 |
|
|
Inducement options exercisable at December 31, 2003 |
|
— |
|
$ |
— |
|
(a) Using the Black-Scholes option-pricing model, the weighted-average fair value of options granted at market value in 2003 was estimated to be $4.31. See Footnote 1 for a discussion of the pricing assumptions.
F-25
The following table summarizes information pertaining to inducement stock options outstanding as of December 31, 2003:
|
|
|
Inducement Options Outstanding |
|
Inducement
Options |
|
||||||||
|
Range of |
|
Number |
|
Weighted |
|
Weighted |
|
Number |
|
Weighted |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
$12.00 – 12.99 |
|
6,250 |
|
9.4 |
|
$ |
12.28 |
|
— |
|
$ |
— |
|
|
|
|
6,250 |
|
9.4 |
|
$ |
12.28 |
|
— |
|
$ |
— |
|
During December 2003 an officer of the Company resigned. Upon the officer’s resignation the Company accelerated the vesting of 11,304 unvested stock options so that they were fully vested at December 31, 2003. In accordance with SFAS 123 and Financial Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, the Company recomputed total compensation related to the unvested options as of the resignation date when the officer transferred from employee to non-employee status and recognized compensation expense of $37,000 during 2003. The Company used the Black-Scholes option-pricing model to compute the compensation expense. The following weighted-average assumptions were used: (1) dividend yield of 2.12%, (2) expected life of 4.7 years, (3) expected volatility of 29.8%, and (4) risk-free interest rate of 3.3%.
The Plan also provides for the grant of restricted stock awards subject to restrictions, which the Committee may determine. The restrictions would typically require continued employment in order to vest in the restricted stock. Vesting may also be based upon attainment of certain performance measures.
In November 1999, the Company granted 28,762 restricted shares of common stock to officers of the Company. These shares were granted under the Plan. The Company is recognizing compensation expense of $302,000 ratably over the vesting period of 10 years. Compensation expense related to the vested shares was $30,000 in each of the three years ended December 31, 2003.
In January 2000, the Company granted 11,810 restricted shares of common stock to an officer of the Company. These shares were granted under the Plan. The Company is recognizing compensation expense of $112,000 ratably over the vesting period of 10 years. Compensation expense related to the vested shares was $11,000 in each of the three years ended December 31, 2003.
In January 2001, the Company granted 11,708 restricted shares of common stock to several officers of the Company. The Company is recognizing compensation expense of $120,000 ratably over the vesting period of 10 years. For the years ended December 31, 2003, 2002 and 2001, compensation expense related to the vested shares was $12,000, $12,000 and $11,000, respectively. Also during January 2001, the Company granted 4,000 restricted shares of common stock to an officer that vest over five years. The Company is recognizing compensation expense of $41,000 ratably over this vesting period, and for the years ended December 31, 2003, 2002 and 2001, compensation expense related to the vested shares was $8,000, $12,000 and $4,000, respectively.
In January 2002, the Company granted 117,504 restricted shares of common stock to several officers of the Company. The Company is recognizing compensation expense of $1.3 million ratably over the vesting period of 10 years. For the years ended December 31, 2003 and 2002, compensation expense related to the vested shares was $132,000 and $124,000, respectively.
On February 18, 2003, the Board granted 102,005 shares of restricted stock to several officers of the Company. The Company is recognizing compensation expense of $1.2 million ratably over the vesting period of 10 years. For the year ended December 31, 2003, compensation expense related to the vested shares was $107,000.
F-26
Also on February 18, 2003, the Board granted 10,000 shares of restricted stock to an officer of the Company. The Company was recognizing compensation expense of $120,000 ratably over the vesting period of 10 years and recognized compensation expense related to the vested shares of $10,000 through December 2003. During December 2003, the officer resigned and the vesting on all unvested shares was accelerated so that all shares were fully vested as of December 31, 2003. In accordance with SFAS 123 and Financial Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, the Company recomputed total compensation of $112,000 as of the resignation date when the officer transferred from employee to non-employee status and recognized additional compensation expense of $101,000. The Company used the Black-Scholes option-pricing model to compute the compensation expense. The following weighted-average assumptions were used: (1) dividend yield of 2.12%, (2) expected life of 3.0 years, (3) expected volatility of 29.8%, and (4) risk-free interest rate of 2.4%.
On April 25, 2003, the Board granted 18,272 shares of restricted stock to an officer of the Company. The Company is recognizing compensation expense of $226,000 related to this grant ratably over the vesting period of 10 years. For the year ended December 31, 2003, compensation expense related to the vested shares was $15,000.
On May 12, 2003, the Board granted 7,500 shares of restricted stock to an officer of the Company. The Company is recognizing compensation expense of $92,000 ratably over the vesting period of 10 years. For the year ended December 31, 2003, compensation expense related to the vested shares was $6,000.
During April and May of 2003, the Board granted 40,000 shares of restricted stock to two individuals as an inducement to become officers of WestStar. These shares are unregistered and granted outside of the Vail Banks, Inc. Stock Incentive Plan. The Company is recognizing compensation expense of $493,000 ratably over the vesting period of 10 years. For the year ended December 31, 2003, compensation expense related to the vested shares was $33,000.
Earnings Per Share
The following table presents the net income and weighted average common shares outstanding used to calculate earnings per share for the years ended December 31:
|
(in thousands, except share data) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Basic earnings per share computation |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Net income available to common shareholders |
|
$ |
714 |
|
$ |
5,613 |
|
$ |
6,103 |
|
|
Weighted average shares outstanding – basic |
|
5,220,221 |
|
5,651,737 |
|
5,965,374 |
|
|||
|
Basic earnings per share |
|
$ |
0.14 |
|
$ |
0.99 |
|
$ |
1.02 |
|
|
|
|
|
|
|
|
|
|
|||
|
Diluted earnings per share computation |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Net income available to common shareholders |
|
$ |
714 |
|
$ |
5,613 |
|
$ |
6,103 |
|
|
Weighted average shares outstanding – basic |
|
5,220,221 |
|
5,651,737 |
|
5,965,374 |
|
|||
|
Shares assumed issued: |
|
|
|
|
|
|
|
|||
|
Stock options |
|
147,265 |
|
120,628 |
|
101,225 |
|
|||
|
Restricted stock |
|
250,234 |
|
142,526 |
|
44,504 |
|
|||
|
Weighted average shares outstanding – diluted |
|
5,617,720 |
|
5,914,891 |
|
6,111,103 |
|
|||
|
Diluted earnings per share |
|
$ |
0.13 |
|
$ |
0.95 |
|
$ |
1.00 |
|
Options to purchase an average of 47,000 and 62,000 shares of common stock at average exercise prices of $12.25 and $12.19 per share were outstanding during 2002 and 2001, respectively, but were not included in the computation of diluted earnings per share because the exercise prices of these options was greater than the average market prices of the common stock during the year. There were no anti-dilutive options during 2003.
F-27
15. OTHER NON-INTEREST INCOME
The following table sets forth the components of Vail Banks’ other non-interest income for the years indicated:
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
Rental income |
|
$ |
907 |
|
$ |
993 |
|
$ |
1,127 |
|
|
Other fee income |
|
833 |
|
1,018 |
|
787 |
|
|||
|
Gain on sale of foreclosed properties |
|
540 |
|
138 |
|
— |
|
|||
|
ATM fees |
|
282 |
|
320 |
|
627 |
|
|||
|
Merchant discount |
|
49 |
|
474 |
|
486 |
|
|||
|
Gain on sale of investment securities |
|
15 |
|
416 |
|
— |
|
|||
|
Other |
|
500 |
|
227 |
|
327 |
|
|||
|
Total other non-interest income |
|
$ |
3,126 |
|
$ |
3,586 |
|
$ |
3,354 |
|
16. OTHER NON-INTEREST EXPENSE
The following table sets forth the components of Vail Banks’ other non-interest expense for the years indicated:
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Loss on sale, disposal or write-off of premises and equipment |
|
$ |
1,578 |
|
$ |
121 |
|
$ |
106 |
|
|
Professional fees |
|
774 |
|
1,079 |
|
945 |
|
|||
|
Banking service fees |
|
659 |
|
639 |
|
774 |
|
|||
|
Telephone and data communications |
|
633 |
|
613 |
|
640 |
|
|||
|
Marketing and promotions |
|
561 |
|
481 |
|
494 |
|
|||
|
Retail banking |
|
481 |
|
875 |
|
1,097 |
|
|||
|
Other |
|
1,637 |
|
1,758 |
|
2,041 |
|
|||
|
Total other non-interest expense |
|
$ |
6,323 |
|
$ |
5,566 |
|
$ |
6,097 |
|
17. 401(k) PLAN
In August 1996, the Company established a qualified 401(k) Plan (the 401(k) Plan) covering all full-time employees, as defined in the 401(k) Plan. Employees who were eligible could defer up to $12,000 of their compensation during 2003 ($14,000 for employees over 50 years old), subject to certain limitations imposed by the Internal Revenue Code. These deferral amounts will increase to $13,000 ($16,000 for employees over 50 years old) of compensation for 2004. The Company makes matching contributions equal to a discretionary percentage of the employees’ contributions; these matches were made in Vail Banks stock during 2003, 2002 and 2001. Matching contributions vest ratably over a five-year period. In addition, the Company may make additional profit sharing contributions. Employer contributions to the 401(k) Plan for the years ended December 31, 2003, 2002 and 2001 were $237,000, $198,000 and $216,000, respectively, and are included in “Non-Interest Expense—Salaries and Employee Benefits” in the accompanying consolidated statements of income.
18. REGULATORY MATTERS
The Company and WestStar are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and WestStar’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and WestStar must meet specific capital requirements 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. Undercapitalized
F-28
institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions, which become more extensive as an institution becomes more severely undercapitalized. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and WestStar to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).
As of December 31, 2003, WestStar was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum Total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions that have occurred since December 31, 2003 that management believes have changed WestStar’s status as well-capitalized.
The Company’s and WestStar’s actual capital amounts and ratios as of December 31, 2003 and 2002 are also presented in the table.
|
|
|
Actual |
|
Minimum
Capital |
|
Minimum to
be |
|
|||||||||
|
(in thousands) |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
As of December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total Capital to Risk-Weighted Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Vail Banks, Inc. |
|
$ |
49,115 |
|
13.72 |
% |
$ |
28,641 |
|
8 |
% |
N/A |
|
N/A |
|
|
|
WestStar Bank |
|
42,320 |
|
11.88 |
% |
28,494 |
|
8 |
% |
$ |
35,617 |
|
10 |
% |
||
|
Tier 1 Capital to Risk-Weighted Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Vail Banks, Inc. |
|
41,173 |
|
11.50 |
% |
14,320 |
|
4 |
% |
N/A |
|
N/A |
|
|||
|
WestStar Bank |
|
38,817 |
|
10.90 |
% |
14,247 |
|
4 |
% |
21,370 |
|
6 |
% |
|||
|
Tier 1 Capital to Adj. Average Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
(also known as leverage ratio) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Vail Banks, Inc. |
|
41,173 |
|
7.45 |
% |
22,116 |
|
4 |
% |
N/A |
|
N/A |
|
|||
|
WestStar Bank |
|
38,817 |
|
7.04 |
% |
22,058 |
|
4 |
% |
27,573 |
|
5 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
As of December 31, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total Capital to Risk-Weighted Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Vail Banks, Inc. |
|
$ |
57,858 |
|
15.61 |
% |
$ |
29,652 |
|
8 |
% |
N/A |
|
N/A |
|
|
|
WestStar Bank |
|
54,146 |
|
14.65 |
% |
29,567 |
|
8 |
% |
$ |
36,959 |
|
10 |
% |
||
|
Tier 1 Capital to Risk-Weighted Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Vail Banks, Inc. |
|
52,465 |
|
14.15 |
% |
14,826 |
|
4 |
% |
N/A |
|
N/A |
|
|||
|
WestStar Bank |
|
50,399 |
|
13.64 |
% |
14,784 |
|
4 |
% |
22,176 |
|
6 |
% |
|||
|
Tier 1 Capital to Adj. Average Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
(also known as leverage ratio) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Vail Banks, Inc. |
|
52,465 |
|
10.27 |
% |
20,442 |
|
4 |
% |
N/A |
|
N/A |
|
|||
|
WestStar Bank |
|
50,399 |
|
9.88 |
% |
20,398 |
|
4 |
% |
25,498 |
|
5 |
% |
|||
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based on quoted market prices. However, in most instances, there are no quoted market prices for the Company’s financial instruments, with the exception of the investment portfolio. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are highly subjective and judgmental in nature and are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may
F-29
not be realized in an immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
Cash and short-term instruments: The carrying amounts of cash and due from banks, interest-bearing deposits in banks, and federal funds sold approximate their fair values.
Investment securities: Fair values for securities, excluding FHLB, Federal Reserve and BBW stock are based on quoted market prices. The carrying values of FHLB, Federal Reserve and BBW stock approximate fair value based on the redemption provisions of the FHLB, Federal Reserve and BBW. If quoted bid prices are not available, fair value is estimated using quoted market prices for similar securities.
Loans held for sale: The carrying amounts of mortgage loans held for sale approximate fair value due to the short period of time between origination of these loans and their sale (i.e. less than 90 days).
Loans: The fair value of fixed rate loans is estimated by discounting the future cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
Deposits: The fair value of non-interest bearing and interest bearing demand deposits and savings accounts is determined to be the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities.
Short-term borrowings: The carrying amounts of federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings maturing within ninety days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Long-term borrowings and trust preferred securities: The fair values of the Company’s long-term borrowings and trust preferred securities are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
F-30
The carrying amounts and estimated fair values of financial instruments at December 31 are as follows:
|
|
|
2003 |
|
2002 |
|
||||||||
|
(in thousands) |
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Financial assets |
|
|
|
|
|
|
|
|
|
||||
|
Cash and due from banks |
|
$ |
21,628 |
|
$ |
21,628 |
|
$ |
24,940 |
|
$ |
24,940 |
|
|
Federal funds sold |
|
79,280 |
|
79,280 |
|
50,040 |
|
50,040 |
|
||||
|
Interest-bearing deposits in banks |
|
2,000 |
|
2,000 |
|
— |
|
— |
|
||||
|
Investment securities |
|
81,295 |
|
81,322 |
|
62,021 |
|
62,068 |
|
||||
|
Loans held for sale |
|
2,515 |
|
2,515 |
|
9,879 |
|
9,879 |
|
||||
|
Loans |
|
311,774 |
|
313,007 |
|
331,003 |
|
334,423 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
||||
|
Deposits, demand and savings |
|
323,338 |
|
323,338 |
|
307,347 |
|
307,347 |
|
||||
|
Deposits with stated maturities |
|
125,177 |
|
126,139 |
|
121,351 |
|
122,215 |
|
||||
|
Securities sold under agreements to repurchase |
|
907 |
|
907 |
|
— |
|
— |
|
||||
|
Short-term borrowings |
|
10,809 |
|
10,870 |
|
9,490 |
|
9,587 |
|
||||
|
Long-term borrowings |
|
28,652 |
|
29,036 |
|
20,510 |
|
21,452 |
|
||||
|
Trust preferred securities |
|
24,000 |
|
26,127 |
|
24,000 |
|
25,208 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
20. COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, however, such as unrealized gains and losses on available-for-sale investment securities, are reported as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income.
The components of other comprehensive income and related tax effects are as follows:
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Unrealized holding (losses) gains on available-for-sale investment securities |
|
$ |
(573 |
) |
$ |
580 |
|
$ |
186 |
|
|
Reclassification adjustment for (losses) gains included in net income |
|
(282 |
) |
61 |
|
— |
|
|||
|
Net unrealized (losses) gains |
|
(855 |
) |
641 |
|
186 |
|
|||
|
Tax effect |
|
312 |
|
(234 |
) |
(68 |
) |
|||
|
Net-of-tax amount |
|
$ |
(543 |
) |
$ |
407 |
|
$ |
118 |
|
F-31
21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data of the Company for the eight quarters ended December 31, 2003 are as follows:
|
|
|
2003 |
|
2002 |
|
|||||||||||||||||||||
|
(in thousands, except |
|
Mar-31 |
|
Jun-30 |
|
Sep-30 |
|
Dec-31 |
|
Mar-31 |
|
Jun-30 |
|
Sep-30 |
|
Dec-31 |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Total interest income |
|
$ |
7,750 |
|
$ |
8,078 |
|
$ |
7,359 |
|
$ |
7,005 |
|
$ |
8,698 |
|
$ |
8,657 |
|
$ |
8,583 |
|
$ |
7,991 |
|
|
|
Net interest income |
|
5,657 |
|
5,811 |
|
5,136 |
|
4,894 |
|
6,566 |
|
6,460 |
|
6,432 |
|
5,950 |
|
|||||||||
|
Provision for loan losses |
|
125 |
|
125 |
|
164 |
|
164 |
|
212 |
|
170 |
|
— |
|
— |
|
|||||||||
|
Net interest income after provision for loan losses |
|
5,532 |
|
5,686 |
|
4,972 |
|
4,730 |
|
6,354 |
|
6,290 |
|
6,432 |
|
5,950 |
|
|||||||||
|
Income (loss) before income taxes |
|
1,391 |
|
1,636 |
|
426 |
|
(2,429 |
) |
2,356 |
|
1,938 |
|
2,634 |
|
1,682 |
|
|||||||||
|
Net income (loss) |
|
975 |
|
1,137 |
|
363 |
|
(1,761 |
) |
1,520 |
|
1,309 |
|
1,688 |
|
1,096 |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Earnings (loss) per share – basic |
|
$ |
0.18 |
|
$ |
0.21 |
|
$ |
0.07 |
|
$ |
(0.35 |
) |
$ |
0.27 |
|
$ |
0.23 |
|
$ |
0.30 |
|
$ |
0.20 |
|
|
|
Earnings (loss) per share – diluted |
|
$ |
0.17 |
|
$ |
0.20 |
|
$ |
0.07 |
|
$ |
(0.35 |
) |
$ |
0.26 |
|
$ |
0.22 |
|
$ |
0.29 |
|
$ |
0.19 |
|
|
22. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining only to Vail Banks is as follows:
Condensed Balance Sheets
December 31,
|
(in thousands) |
|
2003 |
|
2002 |
|
||
|
ASSETS |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Cash and due from banks |
|
$ |
5,216 |
|
$ |
1,882 |
|
|
Investment in WestStar Bank |
|
73,906 |
|
85,902 |
|
||
|
Investments in Trust I and Trust II |
|
743 |
|
743 |
|
||
|
Balances due from Trust I and Trust II |
|
20 |
|
20 |
|
||
|
Other assets |
|
3,423 |
|
3,685 |
|
||
|
|
|
$ |
83,308 |
|
$ |
92,232 |
|
|
|
|
|
|
|
|
||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Balances due to Trust I and Trust II |
|
$ |
25,415 |
|
$ |
25,415 |
|
|
Other liabilities |
|
34 |
|
45 |
|
||
|
|
|
25,449 |
|
25,460 |
|
||
|
Shareholders’ equity |
|
57,859 |
|
66,772 |
|
||
|
|
|
$ |
83,308 |
|
$ |
92,232 |
|
F-32
Condensed Statements of Income
Years Ended December 31,
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Income |
|
|
|
|
|
|
|
|||
|
Equity in earnings of WestStar Bank |
|
$ |
(11,453 |
) |
$ |
4,183 |
|
$ |
8,381 |
|
|
Dividends from WestStar Bank |
|
15,000 |
|
4,000 |
|
— |
|
|||
|
Interest from Trust I and Trust II |
|
76 |
|
76 |
|
63 |
|
|||
|
Other |
|
4 |
|
3 |
|
7 |
|
|||
|
|
|
3,627 |
|
8,262 |
|
8,451 |
|
|||
|
Expenses |
|
|
|
|
|
|
|
|||
|
Interest to Trust I and Trust II |
|
2,523 |
|
2,523 |
|
2,112 |
|
|||
|
Salaries, benefits and other compensation |
|
1,500 |
|
1,065 |
|
882 |
|
|||
|
Other |
|
563 |
|
562 |
|
698 |
|
|||
|
|
|
4,586 |
|
4,150 |
|
3,692 |
|
|||
|
Income before income taxes |
|
(959 |
) |
4,112 |
|
4,759 |
|
|||
|
Income tax benefit |
|
1,673 |
|
1,501 |
|
1,344 |
|
|||
|
Net income |
|
$ |
714 |
|
$ |
5,613 |
|
$ |
6,103 |
|
F-33
Condensed Statements of Cash Flows
Years Ended December 31,
|
(in thousands) |
|
2003 |
|
2002 |
|
2001 |
|
|||
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|||
|
Net income |
|
$ |
714 |
|
$ |
5,613 |
|
$ |
6,103 |
|
|
Adjustments to reconcile net income to net cash used by operating activities |
|
|
|
|
|
|
|
|||
|
Equity in undistributed income of subsidiaries |
|
(3,547 |
) |
(8,183 |
) |
(8,381 |
) |
|||
|
Depreciation and amortization |
|
46 |
|
31 |
|
78 |
|
|||
|
Change in other assets and accrued liabilities net of effect of purchase business combinations |
|
954 |
|
(208 |
) |
(509 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Net cash used by operating activities |
|
(1,833 |
) |
(2,747 |
) |
(2,709 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|||
|
Advances to subsidiaries |
|
— |
|
— |
|
(8,144 |
) |
|||
|
Other |
|
(89 |
) |
— |
|
(91 |
) |
|||
|
Net cash used by investing activities |
|
(89 |
) |
— |
|
(8,235 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Cash flows from financing activities, net of effect of purchase business combinations |
|
|
|
|
|
|
|
|||
|
Repayment of proceeds from line of credit |
|
— |
|
— |
|
(2,000 |
) |
|||
|
Proceeds from issuance of notes payable to subsidiaries |
|
— |
|
— |
|
24,743 |
|
|||
|
Dividends received from WestStar Bank |
|
15,000 |
|
4,000 |
|
— |
|
|||
|
Proceeds from issuance of common stock |
|
113 |
|
174 |
|
86 |
|
|||
|
Repurchase of common stock |
|
(8,431 |
) |
(1,853 |
) |
(8,299 |
) |
|||
|
Payment of cash dividends on common stock |
|
(1,426 |
) |
(1,276 |
) |
(1,091 |
) |
|||
|
Net cash provided by financing activities |
|
5,256 |
|
1,045 |
|
13,439 |
|
|||
|
Net increase (decrease) in cash |
|
3,334 |
|
(1,702 |
) |
2,495 |
|
|||
|
Cash and due from banks at beginning of year |
|
1,882 |
|
3,584 |
|
1,089 |
|
|||
|
Cash and due from banks at end of year |
|
$ |
5,216 |
|
$ |
1,882 |
|
$ |
3,584 |
|
23. BUSINESS SEGMENTS
Segment information is presented in accordance with SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information (SFAS 131). This standard is based on a management approach, which requires segmentation based on the Company’s internal organization and internal monitoring of operations. During 2003 and 2002, the Company had two reportable segments, banking and mortgage origination. During 2001 the Company had one reportable segment, banking, however in accordance with SFAS 131, if an operating segment is identified as a reportable segment in the current period due to the quantitative thresholds, prior-period segment data presented for comparative purposes shall be restated to reflect the newly reportable segment as a separate segment even if that segment did not satisfy the criteria for reportability in the prior period. The banking segment provides a full range of commercial and consumer banking products to customers including deposit products, commercial loans, real estate loans, and other business financing arrangements. The banking segment’s principal source of income is the net spread between the interest earned on loans and investment securities and the interest cost associated with the deposits and borrowings used to finance such loans and investments. The mortgage origination segment originates mortgage loans and sells them at a guaranteed interest rate to investors in the secondary market. Its principal source of income is the origination and processing fees received upon funding of a loan by an outside investor. These two segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and accordingly, requires different technology and marketing strategies.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies contained in Footnote 1. Company management evaluates the performance of each segment based on profit or loss
F-34
from operations. Certain administrative costs, however, are borne by the banking segment and are not allocated to the mortgage origination segment. Accordingly, the information presented is not necessarily indicative of the segments’ financial condition and results of operations had each been operating as independent entities. The measurements used in reporting these segments, below, are the same as those reviewed monthly by executive management.
Parent company financial information is included in the “Other” category in the table below, and is deemed to represent an overhead function rather than an operating segment. Also included in this category are items related to Trust I and Trust II.
The Company does not have an external customer from whom it derives 10 percent or more of its revenues and operates in only one geographical area.
Information about reportable segments and reconciliation of such information to the consolidated financial statements as of and for the years ended December 31 is as follows:
|
|
|
Year Ended December 31, 2003 |
|
||||||||||
|
(in thousands) |
|
Banking |
|
Mortgage |
|
Other |
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Condensed income statement |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest and dividend income |
|
$ |
30,188 |
|
$ |
— |
|
$ |
4 |
|
$ |
30,192 |
|
|
Other income |
|
6,212 |
|
4,930 |
|
— |
|
11,142 |
|
||||
|
Total income |
|
36,400 |
|
4,930 |
|
4 |
|
41,334 |
|
||||
|
Interest expense |
|
6,247 |
|
— |
|
2,447 |
|
8,694 |
|
||||
|
Provision for loan losses |
|
578 |
|
— |
|
— |
|
578 |
|
||||
|
Depreciation and amortization |
|
2,948 |
|
31 |
|
47 |
|
3,026 |
|
||||
|
Other expense |
|
22,071 |
|
3,925 |
|
2,016 |
|
28,012 |
|
||||
|
Total expense |
|
31,844 |
|
3,956 |
|
4,510 |
|
40,310 |
|
||||
|
Income before income taxes |
|
4,556 |
|
974 |
|
(4,506 |
) |
1,024 |
|
||||
|
Income taxes |
|
1,623 |
|
360 |
|
(1,673 |
) |
310 |
|
||||
|
Net income |
|
$ |
2,933 |
|
$ |
614 |
|
$ |
(2,833 |
) |
$ |
714 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total assets |
|
$ |
566,257 |
|
$ |
6,372 |
|
$ |
2,981 |
|
$ |
575,610 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Average gross loans |
|
$ |
324,023 |
|
$ |
7,332 |
|
$ |
63 |
|
$ |
331,418 |
|
|
Average deposits |
|
$ |
456,810 |
|
$ |
— |
|
$ |
— |
|
$ |
456,810 |
|
F-35
|
|
|
Year Ended December 31, 2002 |
|
||||||||||
|
(in thousands) |
|
Banking |
|
Mortgage |
|
Other |
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Condensed income statement |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest and dividend income |
|
$ |
33,925 |
|
$ |
— |
|
$ |
4 |
|
$ |
33,929 |
|
|
Other income |
|
7,085 |
|
4,938 |
|
1 |
|
12,024 |
|
||||
|
Total income |
|
41,010 |
|
4,938 |
|
5 |
|
45,953 |
|
||||
|
Interest expense |
|
6,074 |
|
— |
|
2,447 |
|
8,521 |
|
||||
|
Provision for loan losses |
|
382 |
|
— |
|
— |
|
382 |
|
||||
|
Depreciation and amortization |
|
2,332 |
|
28 |
|
32 |
|
2,392 |
|
||||
|
Other expense |
|
20,583 |
|
3,868 |
|
1,597 |
|
26,048 |
|
||||
|
Total expense |
|
29,371 |
|
3,896 |
|
4,076 |
|
37,343 |
|
||||
|
Income before income taxes |
|
11,639 |
|
1,042 |
|
(4,071 |
) |
8,610 |
|
||||
|
Income taxes |
|
4,125 |
|
373 |
|
(1,501 |
) |
2,997 |
|
||||
|
Net income |
|
$ |
7,514 |
|
$ |
669 |
|
$ |
(2,570 |
) |
$ |
5,613 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total assets |
|
$ |
538,664 |
|
$ |
13,401 |
|
$ |
2,198 |
|
$ |
554,263 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Average gross loans |
|
$ |
356,629 |
|
$ |
7,060 |
|
$ |
74 |
|
$ |
363,763 |
|
|
Average deposits |
|
$ |
439,884 |
|
$ |
— |
|
$ |
— |
|
$ |
439,884 |
|
|
|
|
Year Ended December 31, 2001 |
|
||||||||||
|
(in thousands) |
|
Banking |
|
Mortgage |
|
Other |
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Condensed income statement |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest and dividend income |
|
$ |
41,961 |
|
$ |
— |
|
$ |
4 |
|
$ |
41,965 |
|
|
Other income |
|
7,320 |
|
4,075 |
|
2 |
|
11,397 |
|
||||
|
Total income |
|
49,281 |
|
4,075 |
|
6 |
|
53,362 |
|
||||
|
Interest expense |
|
11,059 |
|
21 |
|
2,050 |
|
13,130 |
|
||||
|
Provision for loan losses |
|
800 |
|
— |
|
— |
|
800 |
|
||||
|
Depreciation and amortization |
|
3,778 |
|
94 |
|
78 |
|
3,950 |
|
||||
|
Other expense |
|
20,367 |
|
3,189 |
|
1,500 |
|
25,056 |
|
||||
|
Total expense |
|
36,004 |
|
3,304 |
|
3,628 |
|
42,936 |
|
||||
|
Income before income taxes |
|
13,277 |
|
771 |
|
(3,622 |
) |
10,426 |
|
||||
|
Income taxes |
|
5,364 |
|
303 |
|
(1,344 |
) |
4,323 |
|
||||
|
Net income |
|
$ |
7,913 |
|
$ |
468 |
|
$ |
(2,278 |
) |
$ |
6,103 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total assets |
|
$ |
542,266 |
|
$ |
9,717 |
|
$ |
3,348 |
|
$ |
555,331 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Average gross loans |
|
$ |
410,539 |
|
$ |
5,212 |
|
$ |
74 |
|
$ |
415,825 |
|
|
Average deposits |
|
$ |
465,194 |
|
$ |
— |
|
$ |
— |
|
$ |
465,194 |
|
F-36
24. SUBSEQUENT EVENTS (UNAUDITED)
On January 19, 2004, the Board declared a regular quarterly dividend of $0.07 per share to shareholders of record on January 30, 2004. The dividend was paid on February 13, 2004.
On March 5, 2004, the Company sold its bank building in Vail, Colorado and is leasing back a portion of the space. The sale resulted in a gain of approximately $1.7 million, all of which was recognized at the time of sale. The lease, which is being accounted for as an operating lease, has a term of five years with three five-year renewal options and will require future minimum lease payments aggregating approximately $881,000. The proceeds of the sale included a mortgage note receivable of $7.9 million due in 2024, with an interest rate of 5.30%. Commissions related to the sale of $261,000 were paid to two related parties.
F-37
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.
|
|
VAIL BANKS, INC. |
|||
|
|
|
|||
|
|
|
|||
|
|
By: |
/s/ Gary S. Judd |
|
|
|
|
Gary S. Judd |
|||
|
|
President and
Chief Executive Officer (Principal Executive |
|||
|
|
March 26, 2004 |
|||
|
|
|
|||
|
|
|
|||
|
|
By: |
/s/ Peter G. Williston |
|
|
|
|
Peter G. Williston |
|||
|
|
Senior Executive
Vice President and Chief Financial Officer |
|||
|
|
March 26, 2004 |
|||
POWER OF ATTORNEY AND SIGNATURES
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears below constitutes and appoints Gary S. Judd or Peter. G. Williston and either of them (with full power in each to act alone), as true and lawful attorneys-in-fact, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the SEC, hereby ratifying and confirming all that said attorney-in-fact, or their substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in the capacities indicated on the 26th day of March 2004.
[Signatures on next page.]
F-38
|
Signature |
|
Title |
|
|
|
|
|
/s/ E. B. Chester, Jr. |
|
Chairman |
|
E. B. Chester, Jr. |
|
|
|
|
|
|
|
/s/ Lisa M. Dillon |
|
Vice Chairman |
|
Lisa M. Dillon |
|
|
|
|
|
|
|
/s/ Gary S. Judd |
|
Director |
|
Gary S. Judd |
|
|
|
|
|
|
|
/s/ Kay H. Chester |
|
Director |
|
Kay H. Chester |
|
|
|
|
|
|
|
/s/ Dennis R. Devor |
|
Director |
|
Dennis R. Devor |
|
|
|
|
|
|
|
/s/ James G. Flaum |
|
Director |
|
James G. Flaum |
|
|
|
|
|
|
|
/s/ George N. Gillett, Jr. |
|
Director |
|
George N. Gillett, Jr. |
|
|
|
|
|
|
|
/s/ Dan E. Godec |
|
Director |
|
Dan E. Godec |
|
|
|
|
|
|
|
/s/ S. David Gorsuch |
|
Director |
|
S. David Gorsuch |
|
|
|
|
|
|
|
/s/ James M. Griffin |
|
Director |
|
James M. Griffin |
|
|
|
|
|
|
|
/s/ Jack G. Haselbush |
|
Director |
|
Jack G. Haselbush |
|
|
|
|
|
|
|
/s/ Garner F. Hill II |
|
Director |
|
Garner F. Hill II |
|
|
|
|
|
|
|
/s/ Robert L. Knous, Jr. |
|
Director |
|
Robert L. Knous, Jr. |
|
|
|
|
|
|
|
/s/ Kent Myers |
|
Director |
|
Kent Myers |
|
|
|
|
|
|
|
/s/ Byron A. Rose |
|
Director |
|
Byron A. Rose |
|
|
|
|
|
|
|
/s/ Donald L. Vanderhoof |
|
Director |
|
Donald L. Vanderhoof |
|
|
F-39
|
No. |
|
Exhibit Index |
|
10.8 |
|
Agreement for the Sale of the Vail Bank Building, dated March 5, 2004 |
|
14 |
|
Conflict of Interest or Code of Ethics Policy |
|
21.1 |
|
Subsidiaries of the Registrant |
|
23.1 |
|
Consent of Dalby, Wendland & Co., P.C. dated March 26, 2004 |
|
31.1 |
|
Certification by Gary S. Judd, Chief Executive Officer and President of the Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.2 |
|
Certification by Peter G. Williston, Senior Executive Vice President and Chief Financial Officer of the Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32.1 |
|
Certification by Gary S. Judd, Chief Executive Officer and President of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
32.2 |
|
Certification by Peter G. Williston, Senior Executive Vice President and Chief Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
40