10-K 1 c83878e10vk.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ___________ COMMISSION FILE NUMBER: 001-15933 BLUE VALLEY BAN CORP (Exact name of registrant as specified in its charter) KANSAS 48-1070996 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11935 RILEY 66225-6128 OVERLAND PARK, KANSAS (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (913) 338-1000 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Guarantee with respect to the Trust Preferred American Stock Exchange Securities, $8.00 par value, of BVBC Capital Trust I
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by checkmark whether the registrant is an accelerated filer. Yes [ ] No [X] As of February 29, 2004 the registrant had 2,279,611 shares of Common Stock ($1.00 par value) outstanding, of which 1,191,526 shares were held by non-affiliates. The aggregate market value of the common shares of the registrant held by non-affiliates, computed based on the June 30, 2003 closing price of the stock, was approximately $33.4 million. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- 1. Part III - Proxy Statement for the 2004 Annual Meeting of Stockholders BLUE VALLEY BAN CORP FORM 10-K INDEX
Page No. PART I. Item I. Business 2 Item 2. Properties 14 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 15 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 16 Item 6. Selected Financial Data 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36 Item 8. Financial Statements and Supplementary Data 38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 38 Item 9A. Controls and Procedures 39 PART III. Item 10. Directors and Executive Officers of the Registrant 39 Item 11. Executive Compensation 39 Item 12. Security Ownership of Certain Beneficial Owners and Management 39 Item 13. Certain Relationships and Related Transactions 39 Item 14. Principal Accounting Fees and Services 40 PART IV. Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 41
1 PART I ITEM 1: BUSINESS THE COMPANY AND SUBSIDIARIES Blue Valley Ban Corp. ("Blue Valley", the "Company") is a bank holding company organized in 1989. In 2001, Blue Valley elected to become a financial holding company and such status was granted. The Company's wholly-owned subsidiary, Bank of Blue Valley (the "Bank") was also organized in 1989 to provide banking services to closely-held businesses and their owners, professionals and residents in Johnson County, Kansas, a high growth, demographically attractive area within the Kansas City, Missouri - Kansas Metropolitan Statistical Area (the "MSA"). The focus of Blue Valley has been to take advantage of the current and anticipated growth in our market area as well as to serve the needs of small and mid-sized commercial borrowers - customers that we believe currently are underserved as a result of banking consolidation in the industry generally and within our market specifically. In addition, Blue Valley originates residential mortgages nationwide through the Bank's InternetMortgage.com website. We have experienced significant internal growth since our inception. We currently have six banking center locations in Johnson County, Kansas, including our main office and a mortgage operations office in Overland Park, both of which include lobby banking centers, full-service offices in Olathe and Shawnee, Kansas, and supermarket banking facilities in Leawood and Shawnee, Kansas. We are nearing completion of a full service banking center located at 135th and Mission Road in Leawood, Kansas. This location is scheduled to open during the second quarter of 2004. Our lending activities focus on commercial lending and residential mortgage origination services, and to a lesser extent, consumer lending. We strive to identify, develop and maintain diversified lines of business which provide acceptable returns on a risk-adjusted basis. Our primary lines of business consist of commercial and industrial lending, commercial real estate lending, construction lending, indirect lending, leasing, and residential mortgage lending and origination services. We also seek to develop lines of business which diversify our revenue sources, increase our non-interest income and offer additional value-added services to our customers. We develop these new lines of business while monitoring related risk factors. The growth experienced in 2003 and 2002 in our residential mortgage origination services provides an example of the benefits that we have gained through diversification. This growth has largely been attained in a favorable low interest rate environment. Management recognizes that future increases in interest rates could have a detrimental impact on the revenues generated by this business and we seek to manage this business to enable us to minimize this detrimental impact where possible. In addition to fees generated in conjunction with our lending activities, we derive non-interest income by providing mortgage origination services, deposit and cash management services, investment brokerage services and trust services. In addition to the Bank, we have four wholly-owned subsidiaries: Blue Valley Building Corp., which owns the building and property that comprise our headquarters and mortgage operations facility in Overland Park, Kansas, the banking center at 135th and Mission Road in Leawood, Kansas, and one other property intended for future use; Blue Valley Insurance Services, Inc., an insurance agency created to offer insurance products to our customers; and BVBC Capital Trust I and BVBC Capital Trust II, which were created to offer the Company's trust preferred securities and to purchase our junior subordinated debentures. OUR MARKET AREA We operate primarily as a community bank, serving the banking needs of small and medium-sized companies and individuals in the Kansas City MSA generally, and in suburban Johnson County, in particular. Our trade area generally consists of Johnson County, Kansas. We believe that coupling our strategy of providing exceptional customer service and local decision making with attractive market demographics has led to a rate of growth which exceeds the national total asset and deposit growth rates of the banking industry as well as the growth experienced locally by many of our competitors. 2 The income levels and growth rate of Johnson County, Kansas compare favorably to national averages. Johnson County's population growth rate ranks in the top 2% of counties nationally, and its per capita income ranks in the top 1% of counties nationally. Johnson County is also a significant banking market in the State of Kansas and in the Kansas City MSA. According to available industry data, as of June 30, 2003, total deposits in Johnson County, including those of banks, thrifts and credit unions, were approximately $10.3 billion, which represented 22.90% of total deposits in the state of Kansas and 35.61% of total deposits in the Kansas City MSA. As our founders anticipated, the trade area surrounding our main banking facility in Overland Park has become one of the most highly developed retail areas in the Kansas City MSA. Our Olathe, Kansas branch is located approximately 10 miles west of our main office. We opened our Olathe branch in 1994 when we acquired the deposits of a branch of a failed savings and loan association. We made this acquisition because it was located in a contiguous market area and we believed that it represented a stable deposit base. The Shawnee, Kansas banking facilities are approximately 20 miles northwest of our headquarters location. We opened our Shawnee grocery branch for the convenience of our existing customers in Shawnee, and to expand our market presence in Shawnee. During the first quarter of 2001, construction of our freestanding banking facility in Shawnee, Kansas was completed and operations commenced. The Leawood, Kansas grocery branch is approximately 5 miles southeast of our headquarters location. We opened our Leawood grocery branch during October of 2002 to provide us a physical presence and expand our market penetration in Leawood. In 2002, we also acquired land for a 20,000 square foot branch and office building in Leawood, which we anticipate will open in the second quarter of 2004. During 2003 we acquired an office building approximately 1 mile northwest of our headquarters location. At this location, we consolidated our mortgage operations and opened a banking facility. LENDING ACTIVITIES Overview. Our principal loan categories include commercial, commercial real estate, construction, leasing and residential mortgages. We also offer a variety of consumer loans. Our primary source of interest income is interest earned on our loan portfolio. As of December 31, 2003, our loans represented approximately 67.77% of our total assets, our legal lending limit to any one borrower was $14.2 million, and our largest single borrower as of that date had outstanding loans of $12.8 million. We have been successful in expanding our loan portfolio because of the commitment of our staff and the economic growth in our area of operation. Our staff has significant experience in lending and has been successful in offering our products to both potential customers and existing customers. We believe that we have been successful in maintaining our customers because of our staff's attentiveness to their financial needs and the development of personal relationships with them. We strive to become a strategic business partner with our customers, not just a source of funds. We conduct our lending activities pursuant to the loan policies adopted by our board of directors. These policies currently require the approval of our loan committee of all commercial credits in excess of $600,000 and all real estate credits in excess of $1.0 million. Credits up to $600,000 on commercial loans and $1.0 million on real estate loans can be approved by the Bank's President. Our management information systems and loan review policies are designed to monitor lending sufficiently to ensure adherence to our loan policies. The following table shows the composition of our loan portfolio at December 31, 2003. 3 LOAN PORTFOLIO
AS OF DECEMBER 31, 2003 ----------------------- AMOUNT PERCENT (DOLLARS IN THOUSANDS) Commercial $ 109,818 25.86% Commercial real estate 87,438 20.59 Construction 123,445 29.08 Leases 22,175 5.22 Residential real estate 27,017 6.37 Consumer 29,701 6.99 Home equity 25,026 5.89 ---------- ------ Total loans and leases 424,620 100.00% Less allowance for loan losses 7,051 ---------- Loans receivable, net $ 417,569 ----------
Commercial loans. As of December 31, 2003, approximately $109.8 million, or 25.86%, of our loan portfolio represented commercial loans. The Bank has developed a strong reputation in the servicing of small business and commercial loans. We have expanded this portfolio through the addition of commercial lending staff, their business development efforts and our reputation. Commercial loans have historically been a significant portion of our loan portfolio and we expect to continue our emphasis on this loan category. The Bank's commercial lending activities historically have been directed to small and medium-sized companies in or near Johnson County, Kansas, with annual sales generally between $100,000 and $20 million. The Bank's commercial customers are primarily firms engaged in manufacturing, service, retail, construction, distribution and sales with significant operations in our market areas. The Bank's commercial loans are primarily secured by real estate, accounts receivable, inventory and equipment, and the Bank may seek to obtain personal guarantees for its commercial loans. As of December 31, 2003, approximately 10.59% of our commercial loans had outstanding balances in excess of $300,000, and these loans accounted for 65.79% of the total carrying value of our commercial loan portfolio. The Bank primarily underwrites its commercial loans on the basis of the borrowers' cash flow and ability to service the debt, as well as the value of any underlying collateral and the financial strength of any guarantors. Approximately $8.9 million, or 8.06%, of our commercial loans are Small Business Administration (SBA) loans, of which $6.6 million is government guaranteed. The SBA guarantees the repayment of a portion of the principal on these loans, plus accrued interest on the guaranteed portion of the loan. Under the federal Small Business Act, the SBA may guarantee up to 85% of qualified loans of $150,000 or less and up to 75% of qualified loans in excess of $150,000, up to a maximum guarantee of $1.0 million. We are an active SBA lender in our market area and have been approved to participate in the SBA Certified Lender Program. Commercial lending is subject to risks specific to the business of each borrower. In order to address these risks, we seek to understand the business of each borrower, place appropriate value on any personal guarantee or collateral pledged to secure the loan, and structure the loan amortization to maintain the value of any collateral during the term of the loan. Commercial real estate loans. The Bank also makes loans to provide permanent financing for retail and office buildings, multi-family properties and churches. As of December 31, 2003, approximately $87.4 million, or 20.59%, of our loan portfolio represented commercial real estate loans. Our commercial real estate loans are underwritten on the basis of the appraised value of the property, the cash flow of the underlying property, and the financial strength of any guarantors. Risks inherent in commercial real estate lending are related to the market value of the property taken as collateral, the underlying cash flows and documentation. Commercial real estate lending involves more risk than residential lending because loan balances may be greater and repayment is dependent on the borrower's operations. 4 We attempt to mitigate these risks by carefully assessing property values, investigating the source of cash flow servicing the loan on the property and adhering to our lending and underwriting policies and procedures. Construction loans. Our construction loans include loans to developers, home building contractors and other companies and consumers for the construction of single-family homes, land development, and commercial buildings, such as retail and office buildings and multi-family properties. As of December 31, 2003, approximately $123.4 million, or 29.08%, of our loan portfolio represented real estate construction loans. The builder and developer loan portfolio has been a consistent and profitable component of our loan portfolio over our fourteen-year history. We attribute this success to our expertise, availability and prompt service. The Bank's experience and reputation in this area have grown, thereby enabling it to focus on relationships with a smaller number of larger builders and increasing the total value of the Bank's real estate construction portfolio. Construction loans are made to qualified builders to build houses to be sold following construction, pre-sold houses and model houses. These loans are generally underwritten based upon several factors, including the experience and current financial condition of the borrowing entity, amount of the loan to appraised value, and general conditions of the housing market. Construction loans are also made to individuals for whom houses are being constructed by builders with whom the Bank has an existing relationship. Such loans are made on the basis of the individual's financial condition, the loan to value ratio, the reputation of the builder, and whether the individual will be pre-qualified for permanent financing. Risks related to construction lending include assessment of the market for the finished product, reasonableness of the construction budget, ability of the borrower to fund cost overruns, and the borrower's ability to liquidate and repay the loan at a point when the loan-to-value ratio is the greatest. We seek to manage these risks by, among other things, ensuring that the collateral value of the property throughout the construction process does not fall below acceptable levels, ensuring that funds disbursed are within parameters set by the original construction budget, and properly documenting each construction draw. Lease financing. Our lease portfolio includes capital leases that we have originated and leases that we have acquired from brokers or third parties. As of December 31, 2003, our lease portfolio totaled $22.2 million or 5.22%, of our total loan portfolio, consisting of $16.5 million principal amount of leases originated by us and $5.7 million principal amount of leases that we purchased. We provide lease financing for a variety of equipment and machinery, including office equipment, heavy equipment, telephone systems, tractor trailers and computers. Lease terms are generally from three to five years. Management believes this area is attractive because of its ability to provide a source of both interest and fee income. Our leases are generally underwritten based upon several factors, including the overall credit worthiness, experience and current financial condition of the lessee, the amount of the financing to collateral value, and general conditions of the market. The primary risks related to our lease portfolio are the value of the underlying collateral and specific risks related to the business of each borrower. To address these risks, we attempt to understand the business of each borrower, value the underlying collateral appropriately and structure the loan amortization to ensure that the value of the collateral exceeds the lease balance during the term of the lease. Residential real estate loans. Our residential real estate loan portfolio consists primarily of first and second mortgage loans on residential properties. As of December 31, 2003, $27.0 million, or 6.37%, of our loan portfolio represented residential mortgage loans. The terms of these loans typically include 2-5 year balloon payments based on a 15 to 30 year amortization, and accrue interest at a fixed or variable rate. By offering these products, we can offer credit to individuals who are self-employed or have significant income from partnerships or investments. These individuals are often unable to satisfy the underwriting criteria permitting the sale of their mortgages into the secondary market. Due to interest rate risk considerations, we generally sell our fixed rate residential mortgage loans in the secondary market. In addition, we also originate residential mortgage loans with the intention of selling these loans in the secondary market. During 2003, we originated approximately $1.5 billion of residential mortgage loans, and we sold approximately $1.6 billion in the secondary market. We originate conventional first mortgage loans through our internet website as well as through referrals from real estate brokers, builders, developers, prior customers and media advertising. We have offered customers the ability to apply for mortgage loans and to pre-qualify for mortgage loans over the Internet since 1999. In 2001, we expanded our internet mortgage application capacity with the acquisition of the internet domain name InternetMortgage.com and created a separate National Mortgage 5 division. The timing of this expansion allowed us to establish this division in a relatively low-rate environment, and reap the benefits of a significant increase in mortgage originations and refinancing experienced since 2001. The origination of a mortgage loan from the date of initial application through closing normally takes 15 to 60 days. We acquire forward commitments from investors on mortgage loans that we intend to sell into the secondary market to reduce market risk on mortgage loans in the process of origination and those held for sale. Our mortgage loan credit review process is consistent with the standards set by traditional secondary market sources. We review appraised value and debt service ratios, and we gather data during the underwriting process in accordance with various laws and regulations governing real estate lending. Loans originated by the Bank are sold with servicing released to increase current income and reduce the costs associated with retaining servicing rights. Commitments are obtained from the appropriate investor on a loan-by-loan basis on a 30, 45 or 60-day delivery commitment. Interest rates are committed to the borrower when a rate commitment is obtained from the investor. Loans are funded by the Bank and purchased by the investor within 30 days following closing pursuant to commitments obtained at the time of origination. We sell conventional conforming loans and all loans that are non-conforming as to credit quality to secondary market investors for cash on a non-recourse basis. Consequently, foreclosure losses on all sold loans are generally the responsibility of the investor and not that of the Bank. As with other loans to individuals, the risks related to residential mortgage loans include primarily the value of the underlying property and the financial strength and employment stability of the borrower. We attempt to manage these risks by performing a pre-funding underwriting that consists of the verification of employment and utilizes a detailed checklist of loan qualification requirements, including the source and amount of down payments, bank accounts, existing debt and overall credit. Consumer and other loans. As of December 31, 2003, our consumer and other loans totaled $29.7 million, or 6.99%, of our total loan portfolio. A substantial part of this amount consisted of installment loans to individuals in our market area. Installment lending offered directly by the Bank in our market area includes automobile loans, recreational vehicle loans, home improvement loans, unsecured lines of credit and other loans to professionals, people employed in education, industry and government, as well as retired individuals and others. A significant portion of our consumer loan portfolio consists of indirect automobile loans offered through automobile dealerships located primarily in our trade area. As of December 31, 2003, approximately $20.0 million, or 4.71%, of our loan portfolio represented indirect installment loans. Our loans made through this program generally represent loans to purchase new automobiles. There are currently 22 dealerships participating in this program. Since 1999, we have offered customers the ability to apply for consumer loans, personal lines of credit and overdraft protection lines of credit over the Internet through our electronic banking services. To date, consumer loan applications received over the Internet have not represented a material amount of our consumer loan portfolio. Our consumer and other loans are underwritten based on the borrower's income, current debt, past credit history, collateral, and the reputation of the originating dealership with respect to indirect automobile loans. Consumer loans are subject to the same risks as other loans to individuals, including the financial strength and employment stability of the borrower. In addition, some consumer loans are subject to the additional risk that the loan is not secured by collateral. For some of the loans that are secured, the underlying collateral may be rapidly depreciating and not provide an adequate source of repayment if we are required to repossess the collateral. We attempt to mitigate these risks by requiring a down payment and carefully verifying and documenting the borrower's credit quality, employment stability, monthly income, and with respect to indirect automobile loans, understanding and documenting the value of the collateral and the reputation of the originating dealership. INVESTMENT ACTIVITIES The objectives of our investment policy are to: - secure the safety of principal; - provide adequate liquidity; 6 - provide securities for use in pledging for public funds or repurchase agreements; and - maximize after-tax income. We invest primarily in direct obligations of the United States, obligations guaranteed as to principal and interest by the United States, obligations of agencies of the United States and bank-qualified obligations of state and local political subdivisions. In order to ensure the safety of principal, we typically do not invest in mortgage-backed securities, corporate debt, or other securities even though they are permitted by our investment policy. In addition, we enter into federal funds transactions with our principal correspondent banks, and depending on our liquidity position, act as a net seller or purchaser of these funds. The sale of federal funds is effectively short-term loans from us to other banks; while conversely, the purchase of federal funds is effectively short-term loans from other banks to us. DEPOSIT SERVICES The principal sources of funds for the Bank are core deposits from the local market areas surrounding the Bank's offices, including demand deposits, interest-bearing transaction accounts, money market accounts, savings deposits and time deposits of less than $100,000. Transaction accounts include interest-bearing and non-interest-bearing accounts, which provide the Bank with a source of fee income and cross-marketing opportunities as well as a low-cost source of funds. Since 2001, the Bank has realized a significant level of deposit growth from commercial checking accounts. While these accounts do not earn interest, many of them receive an earnings credit on their average balance to offset the cost of other services provided by the Bank. The Bank also offers two types of short-term investment accounts. The Bank's money market account is a daily access account that bears a higher rate than a personal interest-bearing checking account and allows for limited check-writing ability. A significant portion of our deposit growth during 2003 and 2002 has been attributable to our Money Management Account, or "short-term parking account." The Money Management Account provides a hybrid of the features available from a traditional money market account and a traditional time deposit. The account requires a minimum balance of $10,000 and allows for daily deposits but limits withdrawals to the first day and the 15th day of each month. This account typically pays a tiered rate of interest which is higher than a customer could receive on a traditional money market account but lower than the rates generally available on time deposits. We believe that the trade-off to depositors between higher interest rates but more limited access to withdrawals has proven to be an attractive product in our market areas and provides us with a more attractive source of funds than other alternatives such as Federal Home Loan Bank borrowings, as it provides us with the potential to cross-sell additional services to these account holders. Time and savings accounts also provide a relatively stable and low cost source of funding. The Bank's Funds Management policy also allows for acceptance of brokered deposits which can be utilized to support the growth of the Bank. As of December 31, 2003, the Bank had $35.8 million in brokered deposits, and the Bank does not anticipate brokered deposits becoming a significant percentage of its deposit base; however, we continue to evaluate their potential role in the Bank's overall funding and liquidity strategies. In pricing deposit rates, management considers profitability, the matching of term lengths with assets, the attractiveness to customers and rates offered by our competitors. INVESTMENT BROKERAGE SERVICES In 1999, the Bank began offering investment brokerage services through an unrelated broker-dealer. These services are currently offered at our Overland Park, Shawnee and Olathe locations. Two individuals responsible for providing these services are joint employees of the Bank and the registered broker-dealer. Investment brokerage services provide a source of fee income for the Bank. In 2003, the amount of our fee income generated from investment brokerage services was $270,000. TRUST SERVICES We began offering trust services in 1996. Until 1999, the Bank's trust services were offered exclusively through the employees of an unaffiliated trust company. The Bank hired a full-time officer in 1999 to develop the Bank's trust business. Trust services are marketed to both existing Bank customers and new customers. We believe that the ability to offer trust services as a part of our complement of financial services to new customers of the Bank 7 presents a significant cross-marketing opportunity. The services currently offered by the Bank's trust department include the administration of self-directed individual retirement accounts, qualified retirement plans, custodial and directed trust accounts. As of December 31, 2003, the Bank's trust department administered 195 accounts, with assets under management of approximately $90.4 million. Trust services provide the Bank with a source of fee income and additional deposits. In 2003, the amount of our fee income from trust services was $217,000. COMPETITION We encounter competition primarily in seeking deposits and in obtaining loan customers. The level of competition for deposits in our market area and nationally is high. Our principal competitors for deposits are other financial institutions within a few miles of our locations, including other banks, savings institutions and credit unions. Competition among these institutions is based primarily on interest rates offered, the quality of service provided, and the convenience of banking facilities. Additional competition for depositors' funds comes from U.S. government securities, private issuers of debt obligations and other providers of investment alternatives for depositors. We compete in our lending, investment brokerage and trust activities with other financial institutions, such as banks and thrift institutions, credit unions, automobile financing companies, mortgage companies, securities firms, investment companies and other finance companies. Many of our competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks and state regulations governing state-chartered banks. As a result, these non-bank competitors have some advantages over us in providing certain products and services. Many of the financial institutions with which we compete are larger and possess greater financial resources, name recognition and market presence. EMPLOYEES As of December 31, 2003, the Bank had approximately 261 full-time employees. Blue Valley, Blue Valley Building Corp., BVBC Capital Trust I, BVBC Capital Trust II and Blue Valley Investment Corp. did not have any employees. Blue Valley Insurances Services, Inc. had 2 full-time employees as of December 31, 2003. None of the employees of the Company's subsidiaries are subject to a collective bargaining agreement. We consider the Company's subsidiaries' relationship with their employees to be excellent. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For each of our directors and our executive officers, we have set forth below their ages as of December 31, 2003, and their principal positions. 8
Name Age Positions ---- --- --------- Directors Robert D. Regnier ................................. 55 President, Chief Executive Officer and Chairman of the Board of Directors of Blue Valley; President, Chief Executive Officer and Director of the Bank Donald H. Alexander................................ 65 Director of Blue Valley and the Bank Wayne A. Henry, Jr................................. 51 Director of Blue Valley C. Ted McCarter.................................... 67 Director of Blue Valley and Chairman of the Board of Directors of the Bank Thomas A. McDonnell................................ 58 Director of Blue Valley Additional Directors of the Bank Harvey S. Bodker................................... 68 Director of the Bank Suzanne E. Dotson.................................. 58 Director of the Bank Charles H. Hunter.................................. 61 Director of the Bank Executive Officers who are not Directors Mark A. Fortino.................................... 37 Senior Vice President and Chief Financial Officer of the Bank; Treasurer of Blue Valley Ralph J. Schramp................................... 54 Senior Vice President - Commercial Lending and Business Development for the Bank Sheila Stokes...................................... 42 Senior Vice President - Retail Division of the Bank
REGULATION AND SUPERVISION Blue Valley and its subsidiaries are extensively regulated under both federal and state laws. Laws and regulations to which Blue Valley and the Bank are subject govern, among other things, the scope of business, investments, reserve levels, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers and consolidations and the payment of dividends. These laws and regulations are intended primarily to protect depositors, not stockholders. Any change in applicable laws or regulations may have a material effect on Blue Valley's business and prospects, and legislative and policy changes may affect Blue Valley's operations. Blue Valley cannot predict the nature or the extent of the effects on its business and earnings that fiscal or monetary policies, economic controls or new federal or state legislation may have in the future. The following references to statutes and regulations affecting Blue Valley and the Bank are brief summaries only and do not purport to be complete and are qualified in their entirety by reference to the statutes and regulations. APPLICABLE LEGISLATION The enactment of legislation described below has significantly affected the banking industry generally and will have an on-going effect on Blue Valley and its subsidiaries. GRAMM-LEACH-BLILEY ACT. The Gramm-Leach-Bliley Act was signed into law on November 12, 1999. This major banking legislation expands the permissible activities of bank holding companies such as Blue Valley by permitting them to engage in activities, or affiliate with entities that engage in activities, that are "financial in nature." Activities that the Act expressly deems to be financial in nature include, among other things, securities and insurance underwriting and agency, investment management and merchant banking. The Federal Reserve and the Treasury Department, in cooperation with one another, determine what additional activities are "financial in nature." With certain exceptions, the Gramm-Leach-Bliley Act similarly expands the authorized activities of subsidiaries of 9 national banks. The provisions of the Gramm-Leach-Bliley Act authorizing the expanded powers became effective March 11, 2000. Bank holding companies that intend to engage in activities that are "financial in nature" must elect to become "financial holding companies." Financial holding company status is only available to a bank holding company if all of its affiliated depository institutions are "well capitalized" and "well managed," based on applicable banking regulations, and have a Community Reinvestment Act rating of at least "a satisfactory record of meeting community credit needs." Financial holding companies and banks may continue to engage in activities that are financial in nature only if they continue to satisfy the well capitalized and well managed requirements. Bank holding companies that do not elect to be financial holding companies or that do not qualify for financial holding company status may engage only in non-banking activities deemed "closely related to banking" prior to adoption of the Gramm-Leach-Bliley Act. In 2001, Blue Valley elected to become a financial holding company. The Act also calls for "functional regulation" of financial services businesses in which functionally regulated subsidiaries of bank holding companies will continue to be regulated by the regulator that ordinarily has supervised their activities. As a result, state insurance regulators will continue to oversee the activities of insurance companies and agencies, and the Securities and Exchange Commission will continue to regulate the activities of broker-dealers and investment advisers, even where the companies or agencies are affiliated with a bank holding company. Federal Reserve authority to examine and adopt rules regarding functionally regulated subsidiaries is limited. The Gramm-Leach-Bliley Act imposed an "affirmative and continuing" obligation on all financial service providers (not just banks and their affiliates) to safeguard consumer privacy and requires federal and state regulators, including the Federal Reserve and the FDIC, to establish standards to implement this privacy obligation. With certain exceptions, the Act prohibits banks from disclosing to non-affiliated parties any non-public personal information about customers unless the bank has provided the customer with certain information and the customer has had the opportunity to prohibit the bank from sharing the information with non-affiliates. The new privacy obligations became effective July 1, 2001. The Gramm-Leach-Bliley Act has been and may continue to be the subject of extensive rule making by federal banking regulators and others. ECONOMIC GROWTH AND REGULATORY PAPERWORK REDUCTION ACT OF 1996. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 became law on September 30, 1996. This Act streamlined the non-banking activities application process for well-capitalized and well-managed bank holding companies by permitting qualified bank holding companies to commence an approved non-banking activity without prior notice to the Federal Reserve, although written notice is required within 10 days after commencing the activity. Also, the Act reduced the prior notice period to 12 days in the event of any non-banking acquisition or share purchase, assuming the size of the acquisition does not exceed 10% of risk-weighted assets of the acquiring bank holding company and the consideration does not exceed 15% of a bank holding company's Tier 1 capital. BANK HOLDING COMPANY REGULATION Blue Valley is a registered bank holding company subject to periodic examination by the Federal Reserve and required to file periodic reports of its operations and such additional information as the Federal Reserve may require. INVESTMENTS AND ACTIVITIES. A bank holding company must obtain approval from the Federal Reserve before: - Acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after the acquisition, it would own or control more than 5% of the shares of the bank or bank holding company (unless it already owns or controls the majority of the shares); - Acquiring all or substantially all of the assets of another bank or bank holding company; or 10 - Merging or consolidating with another bank holding company. The Federal Reserve will not approve any acquisition, merger or consolidation that would have a substantially anticompetitive result unless the anticompetitive effects of the proposed transaction are clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The Federal Reserve also considers capital adequacy and other financial and managerial factors in reviewing acquisitions or mergers. With certain exceptions, a bank holding company is also prohibited from: - Acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company; and - Engaging, directly or indirectly, in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. Bank holding companies may, however, engage in businesses found by the Federal Reserve to be "financial in nature," as describe above. As a financial holding company, Blue Valley is authorized to engage in the expanded activities permitted under the Gramm-Leach-Bliley Act as long as it continues to qualify for financial holding company status. Finally, subject to certain exceptions, the Bank Holding Company Act and the Change in Bank Control Act, and the Federal Reserve's implementing regulations, require Federal Reserve approval prior to any acquisition of "control" of a bank holding company, such as Blue Valley. In general, a person or company is presumed to have acquired control if it acquires 10% of the outstanding shares of a bank or bank holding company and is conclusively determined to have acquired control if it acquires 25% or more of the outstanding shares of a bank or bank holding company. SOURCE OF STRENGTH. The Federal Reserve expects Blue Valley to act as a source of financial strength and support for the Bank and to take measures to preserve and protect the Bank in situations where additional investments in the Bank may not otherwise be warranted. The Federal Reserve may require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the Federal Reserve's determination that the activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or non-bank subsidiary if the agency determines that divestiture may aid the depository institution's financial condition. Blue Valley Building Corp., Blue Valley Insurance Services, Inc., BVBC Capital Trust I and BVBC Capital Trust II are Blue Valley's only direct subsidiaries that are not banks. CAPITAL REQUIREMENTS. The Federal Reserve uses capital adequacy guidelines in its examination and regulation of bank holding companies and banks. If the capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses. The Federal Reserve's capital guidelines establish a risk-based requirement expressed as a percentage of total risk-weighted assets and a leverage requirement expressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital (which consists principally of stockholders' equity). The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3%. The risk-based and leverage standards presently used by the Federal Reserve are minimum requirements, and higher capital levels may be required if warranted by the particular circumstances or risk profiles of individual banking organizations. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions, which is Tier 1 capital less all intangible assets, well above the minimum levels. DIVIDENDS. The Federal Reserve has issued a policy statement concerning the payment of cash dividends by bank holding companies. The policy statement provides that a bank holding company experiencing earnings 11 weaknesses should not pay cash dividends exceeding its net income or which could only be funded in ways that weakened the bank holding company's financial health, such as by borrowing. Also, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. BANK REGULATIONS The Bank operates under a Kansas state bank charter and is subject to regulation by the Kansas Banking Department and the Federal Reserve Bank. The Kansas Banking Department and the Federal Reserve Bank regulate or monitor all areas of the Bank's operations, including capital requirements, issuance of stock, declaration of dividends, interest rates, deposits, record keeping, establishment of branches, acquisitions, mergers, loans, investments, borrowing, security devices and procedures and employee responsibility and conduct. The Kansas Banking Department places limitations on activities of the Bank including the issuance of capital notes or debentures and the holding of real estate and personal property and requires the Bank to maintain a certain ratio of reserves against deposits. The Kansas Banking Department requires the Bank to file a report annually showing receipts and disbursements of the Bank, in addition to any periodic report requested. DEPOSIT INSURANCE. The FDIC, through its Bank Insurance Fund, insures the Bank's deposit accounts to a maximum of $100,000 for each insured depositor. The FDIC, through its Savings Association Insurance Fund, insures certain deposit accounts acquired by the Bank in 1994 from a branch of a failed savings institution. These deposit accounts are insured to a maximum of $100,000 for each insured depositor. The FDIC bases deposit insurance premiums on the perceived risk each bank presents to its deposit insurance fund. In addition, all Bank Insurance Fund-insured and Savings Association Insurance Fund-insured institutions currently pay an assessment based on insured deposits to service debt issued by the Financing Corporation, a federal agency established to finance the recapitalization of the former Federal Savings and Loan Insurance Corporation. The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management is not aware of any activity or condition that could result in termination of the deposit insurance of the Bank. CAPITAL REQUIREMENTS. The FDIC has established the following minimum capital standards for state-chartered, insured non-member banks, such as the Bank: (1) a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3%; and (2) a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. These capital requirements are minimum requirements, and higher capital levels may be required if warranted by the particular circumstances or risk profiles of individual institutions. The federal banking regulators also have broad power to take "prompt corrective action" to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends upon whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Under the prompt corrective action rules, an institution is: - "Well-capitalized" if the institution has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and the institution is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure; - "Adequately capitalized" if the institution has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater, and a leverage ratio of 4% or greater; - "Undercapitalized" if the institution has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4%, or a leverage ratio that is less than 4%; 12 - "Significantly undercapitalized" if the institution has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3%, or a leverage ratio that is less than 3%; and - "Critically undercapitalized" if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%. The federal banking regulators must take prompt corrective action with respect to capital deficient institutions. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: - Placing limits on asset growth and restrictions on activities, including the establishing of new branches; - Requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; - Restricting transactions with affiliates; - Restricting the interest rate the institution may pay on deposits; - Requiring that senior executive officers or directors be dismissed; - Requiring the institution to divest subsidiaries; - Prohibiting the payment of principal or interest on subordinated debt; and - Appointing a receiver for the institution. Companies controlling an undercapitalized institution are also required to guarantee the subsidiary institution's compliance with the capital restoration plan subject to an aggregate limitation of the lesser of 5% of the institution's assets at the time it received notice that it was undercapitalized or the amount of the capital deficiency when the institution first failed to meet the plan. The Federal Deposit Insurance Act generally requires the appointment of a conservator or receiver within 90 days after an institution becomes critically undercapitalized. As of December 31, 2003, the Bank had capital in excess of the requirements for a "well-capitalized" institution. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT. The Bank, having over $500 million in total assets, is subject to numerous reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Act (FDICIA 112). The primary purpose of FDICIA 112 is to provide a framework for early risk identification in financial management through independent audits, more stringent reporting requirements and an effective system of internal controls. INSIDER TRANSACTIONS. The Bank is subject to restrictions on extensions of credit to executive officers, directors, principal stockholders or any related interest of these persons. Extensions of credit must be made on substantially the same terms, including interest rates and collateral as the terms available for third parties and must not involve more than the normal risk of repayment or present other unfavorable features. The Bank is also subject to lending limits and restrictions on overdrafts to these persons. COMMUNITY REINVESTMENT ACT REQUIREMENTS. The Community Reinvestment Act (CRA) of 1977 requires that, in connection with examinations of financial institutions within their jurisdiction, the federal banking regulators must evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. In its most recent CRA examination dated June 10, 2002, the Bank received a rating of "Satisfactory." 13 STATE BANK ACTIVITIES. With limited exceptions, FDIC-insured state banks, like the Bank, may not make or retain equity investments of a rate or in an amount that are not permissible for national banks and also may not engage as a principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. REGULATIONS GOVERNING EXTENSIONS OF CREDIT. The Bank is subject to restrictions on extensions of credit to Blue Valley and on investments in Blue Valley's securities and using those securities as collateral for loans. These regulations and restrictions may limit Blue Valley's ability to obtain funds from the Bank for its cash needs, including funds for acquisitions and for payment of dividends, interest and operating expenses. Further, the Bank Holding Company Act and Federal Reserve regulations prohibit a bank holding company and its subsidiaries from engaging in various tie-in arrangements in connection with extensions of credit, leases or sales of property or furnishing of services. RESERVE REQUIREMENTS. The Federal Reserve requires all depository institutions to maintain reserves against their transaction accounts. Reserves of 3% must be maintained against net transaction accounts of $6.6 million to $45.4 million plus 10% must be maintained against that portion of net transaction accounts in excess $45.4 million (subject to adjustment by the Federal Reserve). The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements. OTHER REGULATIONS Interest and various other charges collected or contracted for by the Bank are subject to state usury laws and other federal laws concerning interest rates. The Bank's loan operations are also subject to federal laws applicable to credit transactions. The federal Truth in Lending Act governs disclosures of credit terms to consumer borrowers. The Home Mortgage Disclosure Act of 1975 requires financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves. The Equal Credit Opportunity Act prohibits discrimination on the basis of race, creed or other prohibited factors in extending credit. The Fair Credit Reporting Act of 1978 governs the use and provision of information to credit reporting agencies. The Fair Debt Collection Act governs the manner in which consumer debts may be collected by collection agencies. The various federal agencies charged with the responsibility of implementing these federal laws have adopted various rules and regulations. The deposit operations of the Bank are also subject to the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records, and the Electronic Funds Transfer Act, and Regulation E issued by the Federal Reserve to implement that Act, which govern automatic deposits to and withdrawals from the use of ATMs and other electronic banking services. ITEM 2: PROPERTIES The Company's principal office occupies 2.40 acres of ground on the corner of 119th and Riley streets in Overland Park, Kansas. The construction of the building was completed in 1994 and consists of 38,031 square feet. The building and land are subject to third-party mortgage indebtedness in the original principal amount of $2.5 million. As of December 31, 2003, the outstanding principal amount of this indebtedness was $1.3 million. In 2001, our Olathe, Kansas location was moved to a more suitable property occupying 0.41 acres of ground on the corner of Santa Fe and Ridgeview Streets. The building consists of 2,580 square feet on the main floor, plus basement storage. Our Shawnee, Kansas office currently occupies 425 square feet in a grocery store located at Highway K-7 and 55th Street. The lease for this space bears a primary term through December 2004. Our free-standing facility in Shawnee, Kansas is also located at Highway K-7 and 55th Street and was completed during the first quarter of 2001. The building consists of 4,000 square feet and occupies 0.85 acres of land. 14 In January 2003, we purchased a 55,000 square foot building located on the northwest corner of College Boulevard and Lowell in Overland Park, Kansas. This building occupies 3.10 acres of ground and is leased to the Bank. The Bank consolidated its mortgage operations and operates a small branch at this facility. Our current Leawood, Kansas banking center opened in 2002 and occupies 400 square feet in a grocery store located at 135th Street and Mission Road. The lease for this space bears a primary term through June, 2005. Additionally, in 2001 we purchased undeveloped land on the corner of 135th Street and Mission Road for the purposes of constructing a full-service banking center within a two-story 20,000 square foot office building. We are nearing the completion of the building and anticipate the banking center will open in the second quarter of 2004. In 1998, we purchased approximately 1.34 acres of undeveloped land on the corners of K-68 and US 69 Highway in Louisburg, Kansas, just south of Johnson County for potential future development as a full-service branch. ITEM 3: LEGAL PROCEEDINGS We are involved from time to time in routine litigation incidental to our business. We are not a party to any pending litigation that is likely to have a material adverse effect on our consolidated financial condition, results of operations or cash flows. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our stockholders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET FOR COMMON STOCK We are a reporting company under the Securities Exchange Act as a result of a trust preferred securities offering we completed during July 2000. Shares of our common stock have traded on the Over-The-Counter Bulletin Board since July 2002 under the symbol "BVBC." As of February 29, 2004, there were approximately 136 stockholders of record of our common stock. The following table sets forth the high and low prices of the Company's common stock based on close quotations provided by Yahoo.com. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
2003 2002 Fiscal Period High Low High Low First Quarter $ 25.84 $ 20.53 $ n.a. $ n.a. Second Quarter 27.83 22.42 n.a. n.a. Third Quarter 29.82 26.34 26.66 16.82 Fourth Quarter 30.07 24.85 22.51 20.03
DIVIDENDS During December 2003, our board of directors declared a cash dividend on our common stock. A $0.15 per share dividend was paid on January 30, 2004, to stockholders of record on December 31, 2003. During December 2002, our board of directors declared a cash dividend of $0.10 per share of common stock and the dividend was paid on January 15, 2003 to stockholders of record on December 31, 2002. Because our consolidated net income consists largely of the net income of the Bank, our ability to pay dividends on our common stock is subject to our receipt of dividends from the Bank. The ability of the Bank to pay dividends to us, and our ability to pay dividends to our stockholders, are regulated by federal banking laws. In addition, if we elect to defer interest payments on our outstanding junior subordinated debentures, we will be prohibited from paying dividends on our common stock during such deferral. Our board of directors intends to declare future dividends subject to limitations imposed by regulatory capital guidelines in addition to consideration of the Company's profitability and liquidity. 16 ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA The following table presents our consolidated financial data as of and for the five years ended December 31, 2003, and should be read in conjunction with the consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," each of which is included elsewhere in this Form 10-K. The selected statements of condition and statements of income data, insofar as they relate to the five years in the five-year period ended December 31, 2003, have been derived from our audited consolidated financial statements.
AS OF AND FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) SELECTED STATEMENT OF INCOME DATA Interest income: Loans, including fees .............................. $ 28,293 $ 26,857 $ 27,921 $ 26,733 $ 20,422 Federal funds sold and interest-bearing deposits ... 49 297 679 777 431 Securities ......................................... 2,070 3,405 4,541 3,607 2,755 ------------ ------------ ------------ ------------ ------------ Total interest income ........................... 30,412 30,559 33,141 31,117 23,608 ------------ ------------ ------------ ------------ ------------ Interest expense: Interest-bearing demand deposits ................... 165 388 815 872 644 Savings and money market deposit accounts .......... 2,204 2,711 4,846 5,726 3,156 Other time deposits ................................ 6,935 7,759 9,775 7,555 6,032 Funds borrowed ..................................... 4,245 3,368 2,958 2,543 1,372 ------------ ------------ ------------ ------------ ------------ Total interest expense .......................... 13,549 14,226 18,394 16,696 11,204 ------------ ------------ ------------ ------------ ------------ Net interest income ............................. 16,863 16,333 14,747 14,421 12,404 Provision for loan losses ............................. 1,350 2,920 2,400 1,950 2,144 ------------ ------------ ------------ ------------ ------------ Net interest income after provision for loan losses ........................................ 15,513 13,413 12,347 12,471 10,260 ------------ ------------ ------------ ------------ ------------ Non-interest income: Loans held for sale fee income ..................... 19,866 16,690 6,931 1,154 1,623 NSF charges & service fees ......................... 1,283 1,026 836 655 553 Other service charges .............................. 924 821 796 963 659 Realized gain on available-for-sale securities ..... - 193 500 - 3 Other income ....................................... 463 281 203 284 186 ------------ ------------ ------------ ------------ ------------ Total non-interest income ....................... 22,536 19,011 9,266 3,056 3,024 Non-interest expense: Salaries and employee benefits ..................... 19,670 16,437 10,063 5,856 4,578 Occupancy .......................................... 3,137 2,101 1,574 1,124 894 FDIC and other insurance ........................... 174 161 140 177 113 General & administrative ........................... 6,304 5,417 3,933 3,136 3,095 ------------ ------------ ------------ ------------ ------------ Total non-interest expense ...................... 29,285 24,116 15,710 10,293 8,680 ------------ ------------ ------------ ------------ ------------ Income before income taxes ......................... 8,764 8,308 5,903 5,234 4,604 Income tax provision ............................ 3,130 2,912 1,960 1,757 1,521 ------------ ------------ ------------ ------------ ------------ Net income ...................................... $ 5,634 $ 5,396 $ 3,943 $ 3,477 $ 3,083 ============ ============ ============ ============ ============ PER SHARE DATA Basic earnings ..................................... $ 2.51 $ 2.48 $ 1.82 $ 1.62 $ 1.45 Diluted earnings ................................... 2.43 2.40 1.77 1.59 1.42 Dividends .......................................... 0.15 0.10 - - - Book value basic (at end of period) ................ 17.64 15.47 13.11 11.12 8.83 Weighted average common shares outstanding: Basic .......................................... 2,244,930 2,178,803 2,165,030 2,141,523 2,131,372 Diluted ........................................ 2,320,840 2,252,929 2,222,166 2,191,305 2,166,008 Dividend payout ratio .............................. 5.98% 4.04% -% -% -%
17
AS OF AND FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) SELECTED FINANCIAL CONDITION DATA (AT END OF PERIOD): Total securities ...................................... $ 105,736 $ 61,364 $ 77,676 $ 78,503 $ 48,646 Total mortgage loans held for sale .................... 18,297 119,272 41,853 1,207 952 Total loans ........................................... 424,620 380,082 334,075 287,669 250,410 Total assets .......................................... 626,485 605,183 492,023 414,667 332,613 Total deposits ........................................ 470,495 423,787 394,245 338,221 268,145 Funds borrowed ........................................ 111,153 141,381 65,174 49,917 43,177 Total stockholders' equity ............................ 40,198 34,344 28,525 23,815 18,869 Trust assets under administration ..................... 90,389 44,245 41,571 35,268 19,436 SELECTED FINANCIAL RATIOS AND OTHER DATA: Performance Ratios: Net interest margin (1) ......................... 3.01% 3.35% 3.51% 4.35% 4.77% Non-interest income to average assets ........... 3.62 3.55 2.02 0.84 1.06 Non-interest expense to average assets .......... 4.71 4.51 3.43 2.84 3.04 Net overhead ratio (2) .......................... 1.08 0.95 1.41 2.00 1.98 Efficiency ratio (3) ............................ 74.33 68.23 65.42 58.89 56.26 Return on average assets (4) .................... 0.91 1.01 0.86 0.96 1.08 Return on average equity (5) .................... 14.85 17.34 15.26 16.84 17.43 Asset Quality Ratios: Non-performing loans to total loans ............. 0.72% 0.29% 0.92% 0.86% 0.21% Allowance for possible loan losses to: Total loans ................................... 1.66 1.82 1.58 1.54 1.52 Non-performing loans .......................... 230.79 618.29 171.96 179.47 710.80 Net charge-offs to average total loans .......... 0.30 0.36 0.51 0.49 0.32 Non-performing assets to total assets ........... 0.50 0.18 0.62 0.60 0.16 Balance Sheet Ratios: Loans to deposits ............................... 90.25% 89.69% 84.74% 85.05% 93.39% Average interest-earning assets to average interest-bearing liabilities .................. 114.61 115.64 114.50 113.30 116.11 Capital Ratios: Total equity to total assets .................... 6.42% 5.67% 5.80% 5.74% 5.67% Total capital to risk-weighted assets ratio ..... 12.41 10.13 10.69 11.95 8.07 Tier 1 capital to risk-weighted assets ratio .... 10.04 8.82 8.87 9.51 6.82 Tier 1 capital to average assets ratio .......... 8.31 7.74 7.17 7.47 5.80 Average equity to average assets ratio .......... 6.10 5.82 5.64 5.70 6.20
--------------------- (1) Net interest income, on a full tax-equivalent basis, divided by average interest-earning assets. (2) Non-interest expense less non-interest income divided by average total assets. (3) Non-interest expense divided by the sum of net interest income plus non-interest income. (4) Net income divided by average total assets. (5) Net income divided by average common equity. 18 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following presents management's discussion and analysis of our financial condition and results of operations as of the dates and for the periods indicated. You should read this discussion in conjunction with our "Selected Consolidated Financial Data," our consolidated financial statements and the accompanying notes, and the other financial data contained elsewhere in this report. This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of those safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, can generally be identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company is unable to predict the actual results of its future plans or strategies with certainty. Factors which could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, fluctuations in market rates of interest and loan and deposit pricing; a deterioration of general economic conditions or the demand for housing in the Company's market areas; a deterioration in the demand for mortgage financing; legislative or regulatory changes; adverse developments in the Company's loan or investment portfolio; any inability to obtain funding on favorable terms; the loss of key personnel; significant increases in competition; and the possible dilutive effect of potential acquisitions or expansions. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. CRITICAL ACCOUNTING POLICIES Please refer to Note 1 of our consolidated financial statements where we present a listing and discussion of our most significant accounting policies. After a review of these policies, we determined that accounting for the allowance for loan losses, income taxes, and stock-based compensation are deemed critical accounting policies because of the valuation techniques used, and the sensitivity of certain financial statement amounts to the methods, as well as the assumptions and estimates, underlying these policies. Accounting for these critical areas requires the most subjective and complex judgments that could be subject to revision as new information becomes available. As presented in Note 1 and Note 3 to the consolidated financial statements, the allowance for loan losses represents management's estimate of probable credit losses inherent in the loan portfolio as of the balance sheet date. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The adequacy of the allowance is analyzed monthly based on internal loan reviews and qualitative measurements of our loan portfolio. Management assesses the adequacy of the allowance for loan losses based upon a number of factors including, among others: - analytical reviews of loan loss experience in relationship to outstanding loans and commitments; - unfunded loan commitments; - problem and non-performing loans and other loans presenting credit concerns; - trends in loan growth, portfolio composition and quality; - appraisals of the value of collateral; and - management's judgment with respect to current economic conditions and their impact on the existing loan portfolio. The Bank computes its allowance by assigning specific reserves to impaired loans, plus a general reserve based on loss factors applied to the rest of the loan portfolio. The specific reserve on impaired loans is computed as the amount of the loan in excess of the present value of the estimated future cash flows discounted at the loan's effective interest rate, or based on the loan's observable market value or the fair value of the collateral if the loan is 19 collateral dependent. The general reserve loss factors are determined based on such items as management's evaluation of risk in the portfolio, local economic conditions, and historical loss experience. To further assist in confirming the results of the above-described allowance computation, during 1999, the Bank refined its risk grading system by developing associated reserve factors for each risk grade. The income tax amounts in Note 7 to the consolidated financial statements reflect the current period income tax expense for all periods presented, as well as future tax liabilities and benefits associated with differences in timing of expenses and income recognition for book and tax accounting purposes. Our current tax liability and expense amounts are determined using estimates and these estimates are subject to review and possible revision by taxing authorities. We discuss our accounting for stock-based compensation in greater detail in Note 1 to our consolidated financial statements. Included in Note 1 is the effect on our net income in the event we change our accounting of stock options to the guidance presented by Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" from our current policy, which follows Accounting Principles Board Opinion No. 25. OVERVIEW Net income for 2003 was $5.6 million, a $238,000, or 4.41% increase over the $5.4 million earned in 2002. The principal contributors to our increase in net income during 2003 were increases in net interest and non-interest income. Diluted earnings per share increased 1.25% to $2.43 for the year ended December 31, 2003 from $2.40 in the previous year. The Company's returns on average assets and average stockholders' equity for 2003 were 0.91% and 14.85%, compared to 1.01% and 17.34%, respectively, for 2002. Net interest income for 2003 was $16.9 million compared to $16.3 million earned during 2002. The increase of $530,000 or 3.24% was primarily the result of an increase in earning assets. Non-interest income increased 18.54% to $22.5 million in 2003 from $19.0 million in 2002. Non-interest income to average assets increased to 3.62% in 2003 from 3.55% in 2002. The expansion of the Company's mortgage capabilities coupled with continued declines in market interest rates resulted in a significant increase in the number of residential mortgage loans originated and sold in 2003 compared to 2002. This resulted in higher origination fees during 2003 than during 2002. However, increases in market rates, which occurred during the second half of 2003, resulted in lower loans held for sale fee income. Future market interest rate fluctuations and their resultant impact on loans held for sale fee income are difficult to project or quantify; however, it is likely that a future rise in interest rates would have a detrimental impact on mortgage loan refinancing and lower loans held for sale fee income. Total assets for the Company at December 31, 2003, were $626.5 million, an increase of $21.3 million, or 3.51%, from $605.2 million at December 31, 2002. Deposits and stockholders' equity at December 31, 2003 were $470.5 million and $40.2 million, compared with $423.8 million and $34.3 million at December 31, 2002, increases of $46.7 million, or 11.02%, and $5.9 million, or 17.04%, respectively. Loans at December 31, 2003 totaled $424.6 million, an increase of $44.5 million, or 11.71%, compared to December 31, 2002. The loan to deposit ratio at December 31, 2003 was 90.25% compared to 89.69% at December 31, 2002. The increase in the loan to deposit ratio was due to loan growth, which, on a relative basis, slightly outpaced deposit growth. Our funding philosophy for loans not held for sale has been to primarily increase deposits from retail and commercial deposit sources and secondarily use other borrowing sources as necessary to fund loans within the limits of the Bank's capital base. Our low level of non-performing assets reflects the Bank's conservative underwriting policies and aggressive management of impaired loans and has resulted in low levels of nonaccrual loans. Over the five years ended December 31, 2003, our non-performing loans to total loans ratio has averaged 0.69%. As of December 31, 2003, our ratio of non-performing loans to total loans was 0.72%, which was slightly above the historical average. Our non-performing credit relationships are regularly reviewed and closely monitored. Our philosophy has been to value non-performing loans at their estimated collectible value and to aggressively manage these situations. Generally, the Bank maintains its allowance for loan losses in excess of its non-performing loans. Over the five years ended December 31, 2003, our ratio of allowance for loan losses to non-performing loans has exceeded 20 170.00%. As of December 31, 2003, our ratio of allowance for loan losses to non-performing loans was 230.79%, compared to 618.29% at December 31, 2002. The net charge-off ratio has averaged 0.40% for the five years ended December 31, 2003. Our net charge-off ratio for the year ended December 31, 2003 was 0.30%, which was significantly below our historical average. The Bank continues to aggressively manage defaults in the loan portfolio in a softer economic environment. Management intends to vigorously pursue collection of all charged-off leases and loans. NET INTEREST INCOME A primary component of our net income is our net interest income. Net interest income is determined by the spread between the fully tax equivalent (FTE) yields we earn on our interest-earning assets and the rates we pay on our interest-bearing liabilities, as well as the relative amounts of such assets and liabilities. FTE net interest margin is determined by dividing FTE net interest income by average interest-earning assets. Years ended December 31, 2003 and 2002. FTE net interest income for 2003 increased to $17.2 million from $16.7 million in 2002, a $487,000, or 2.92%, increase. FTE interest income for 2003 was $30.7 million, a decrease of $190,000, or 0.62%, from $30.9 million in 2002, primarily as a result of continued asset repricing in the current low interest rate environment. The yield on average interest-earning assets fell to 5.38%, as compared to 6.21% in 2002, a decline of 83 basis points. Average interest earning assets increased $73.3 million, or 14.73%, during 2003. Due to the increase in earning asset volume, loan interest and fee income increased to $28.3 million in 2003 from $26.9 million in 2002, or 5.34%. Interest income on investment securities decreased by $1.4 million, or 36.77%, in 2003 compared to the prior year. The decline in market interest rates caused many of the securities in our portfolio to be called. Generally, the resultant return in principal was reinvested at lower yields; consequently, the overall impact on the portfolio has been a decline in the yield in 2003 compared to the prior year. The effect of the increase in earning assets was generally offset by the decrease in yield. Interest expense for 2003 was $13.5 million, down $677,000, or 4.76%, from $14.2 million in 2002. The decrease results from a decline in the yields paid on our interest bearing liabilities, primarily interest-bearing deposits. Although total average interest bearing liabilities increased $67.9 million or 15.76% during 2003 mostly due to the increases in money market and time deposits and FHLB borrowings, the yield on our total average interest bearing liabilities and deposits decreased to 2.72% and 2.50%, respectively, in 2003 compared to 3.31% and 3.08% in 2002, respectively, decreases of 59 and 58 basis points, respectively. Years ended December 31, 2002 and 2001. FTE net interest income for 2002 increased to $16.7 million from $15.1 million in 2001, a $1.6 million, or 10.27%, increase. FTE interest income for 2002 was $30.9 million, a decrease of $2.6 million, or 7.80%, from $33.5 million in 2001, primarily as a result of continued decreases in market interest rates during 2002. The yield on average interest-earning assets fell to 6.21%, as compared to 7.79% in 2001, a decline of 158 basis points. Average interest earning assets increased $67.4 million or 15.67% during 2002. Due to the decrease in yields, loan interest and fee income decreased slightly to $26.9 million in 2002 from $27.9 million in 2001, or 3.81%. Interest income on investment securities decreased by $1.2 million, or 23.77% in 2002 compared to the prior year. The decline in market interest rates caused many of the securities in our portfolio to be called. Some of the resultant return in principal has been reinvested; however, the overall impact on the portfolio has been a decline in the balance and yield in 2002 compared to the prior year. Interest expense for 2002 was $14.2 million, down $4.2 million, or 22.66%, from $18.4 million in 2001. The decrease results from a decline in the yields paid on our interest bearing liabilities, primarily interest-bearing deposits. The yield on our total average interest bearing liabilities and deposits decreased to 3.31% and 3.08%, respectively, in 2002 compared to 4.89% and 4.81% in 2001, respectively, decreases of 158 and 173 basis points, respectively. Total interest bearing liabilities increased $54.6 million or 14.52% during 2002. This increase was attributable mainly to the increases in savings, money market and time deposits and FHLB borrowings. 21 Average Balance Sheets. The following table sets forth for the periods and as of the dates indicated, information regarding our average balances of assets and liabilities as well as the dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities and the resultant yields or costs. Ratio, yield and rate information are based on average daily balances where available; otherwise, average monthly balances have been used. Nonaccrual loans are included in the calculation of average balances for loans for the periods indicated. AVERAGE BALANCES, YIELDS AND RATES
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 2003 2002 -------------------------------- --------------------------------- AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE ---------- ---------- ------- ---------- ---------- ------- (DOLLARS IN THOUSANDS) ASSETS Federal funds sold .................................. $ 5,500 $ 49 0.89% $ 18,171 $ 297 1.63% Investment securities - taxable ..................... 55,259 1,489 2.69 51,273 2,741 5.34 Investment securities - non-taxable (1) ............. 12,885 881 6.84 14,526 1,007 6.93 Mortgage loans held for sale ........................ 86,808 4,460 5.14 63,866 3,937 6.17 Loans, net of unearned discount and fees ............ 410,593 23,833 5.80 349,879 22,920 6.55 ---------- ---------- ---------- ---------- Total earning assets .......................... 571,045 30,712 5.38 497,715 30,902 6.21 ---------- ---------- ---------- ---------- Cash and due from banks - non-interest bearing ...... 30,453 22,910 Allowance for possible loan losses .................. (7,592) (5,547) Premises and equipment, net ......................... 16,388 9,380 Other assets ........................................ 12,129 10,546 ---------- ---------- Total assets .................................. $ 622,423 $ 535,004 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits-interest bearing: Interest-bearing demand accounts ................ $ 26,415 $ 165 0.63% $ 29,779 $ 388 1.30% Savings and money market deposits ............... 150,503 2,204 1.46 146,132 2,711 1.86 Time deposits ................................... 195,599 6,935 3.55 176,762 7,759 4.39 ---------- ---------- ---------- ---------- Total interest-bearing deposits ............... 372,517 9,304 2.50 352,673 10,858 3.08 ---------- ---------- ---------- ---------- Short-term borrowings ............................... 44,230 451 1.02 21,722 266 1.22 Long-term debt ...................................... 81,499 3,794 4.66 55,993 3,102 5.54 ---------- ---------- ---------- ---------- Total interest-bearing liabilities ............ 498,246 13,549 2.72 430,388 14,226 3.31 ---------- ---------- ---------- ---------- Non-interest bearing deposits ....................... 81,269 69,550 53,324 Other liabilities .................................. 4,959 3,952 Stockholders' equity .............................. 37,949 31,114 ---------- ---------- Total liabilities and stockholders' equity .... $ 622,423 $ 535,004 ========== ========== Net interest income/spread ........................ $ 17,163 2.66% $ 16,676 2.90% ========== ==== ========== ==== Net interest margin................................ 3.01% 3.35% ==== ==== YEAR ENDED DECEMBER 31, ------------------------------------------ 2001 ------------------------------------------ AVERAGE AVERAGE YIELD/ BALANCE INTEREST RATE ------------ ------------ ------- (DOLLARS IN THOUSANDS) ASSETS Federal funds sold .................................. $ 15,269 $ 679 4.45% Investment securities - taxable ..................... 59,010 3,811 6.46 Investment securities - non-taxable (1) ............. 15,782 1,105 7.00 Mortgage loans held for sale ........................ 29,505 1,752 5.94 Loans, net of unearned discount and fees ............ 310,727 26,169 8.42 ------------ ------------ Total earning assets .......................... 430,293 33,516 7.79 ------------ ------------ Cash and due from banks - non-interest bearing ...... 16,224 Allowance for possible loan losses .................. (4,809) Premises and equipment, net ......................... 7,435 Other assets ........................................ 9,133 ------------ Total assets .................................. $ 458,276 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits-interest bearing: Interest-bearing demand accounts ................ $ 31,441 $ 815 2.59% Savings and money market deposits ............... 131,492 4,846 3.69 Time deposits ................................... 158,078 9,775 6.18 ------------ ------------ Total interest-bearing deposits ............... 321,011 15,436 4.81 ------------ ------------ Short-term borrowings ............................... 21,862 667 3.05 Long-term debt ...................................... 32,937 2,291 6.96 ------------ ------------ Total interest-bearing liabilities ............ 375,810 18,394 4.89 ------------ ------------ Non-interest bearing deposits ....................... 53,324 Other liabilities .................................. 3,295 Stockholders' equity .............................. 25,847 ------------ Total liabilities and stockholders' equity .... $ 458,276 ============ Net interest income/spread ........................ $ 15,122 2.88% ============ ==== Net interest margin................................ 3.51% ====
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%. For the three years ended December 31, 2003, 2002 and 2001, the tax equivalency adjustment amounted to $300,000, $343,000, and 186,000, respectively 22 Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes. The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the increase or decrease related to changes in balances and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: - changes in volume, reflecting changes in volume multiplied by the current period rate; and - changes in rate, reflecting changes in rate multiplied by the prior period volume. CHANGES IN INTEREST INCOME AND EXPENSE VOLUME AND RATE VARIANCES
YEAR ENDED DECEMBER 31, 2003 COMPARED TO 2002 2002 COMPARED TO 2001 CHANGE CHANGE CHANGE CHANGE DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL RATE VOLUME CHANGE RATE VOLUME CHANGE ------------ ------------ ------------ ------------ ------------ ------------ Federal funds sold $ (135) $ (113) $ (248) $ (429) $ 47 $ (382) Investment securities - taxable (1,359) 107 (1,252) (657) (414) (1,071) Investment securities - non-taxable (1) (14) (112) (126) (11) (87) (98) Mortgage loans held for sale (656) 1,179 523 67 2,118 2,185 Loans, net of unearned discount (2,611) 3,524 913 (5,813) 2,565 (3,248) ------------ ------------ ------------ ------------ ------------ ------------ Total interest income (4,775) 4,585 (190) (6,843) 4,229 (2,614) ------------ ------------ ------------ ------------ ------------ ------------ Interest-bearing demand accounts (202) (21) (223) (405) (22) (427) Savings and money market deposits (571) 64 (507) (2,407) 272 (2,135) Time deposits (1,492) 668 (824) (2,836) 820 (2,016) Short-term borrowings (45) 230 185 (399) (2) (401) Long-term debt (495) 1,187 692 (466) 1,277 811 ------------ ------------ ------------ ------------ ------------ ------------ Total interest expense (2,805) 2,128 (677) (6,513) 2,345 (4,168) ------------ ------------ ------------ ------------ ------------ ------------ Net interest income $ (1,970) $ 2,457 $ 487 $ (330) $ 1,884 $ 1,554 ============ ============ ============ ============ ============ ============
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%. PROVISION FOR LOAN LOSSES We make provisions for loan losses in amounts management deems necessary to maintain the allowance for loan losses at an appropriate level. During the year ended December 31, 2003, we provided $1.4 million for loan losses, as compared to $2.9 million for the year ended December 31, 2002, a decrease of $1.6 million, or 53.77%. During 2003, our provision for loan losses decreased due to an overall improvement in credit quality, as indicated by the decline in total impaired loans to $10.2 million at December 31, 2003 from $11.7 million at December 31, 2002. The provision for 2002 had been increased due to risks associated with one commercial credit. The loan portfolio increased to $424.6 million in 2003 from $380.1 million in 2002, or 11.71%. The provision for loan losses increased to $2.9 million in 2002 from $2.4 million in 2001, or 21.67%, while the loan portfolio increased to $380.1 million in 2002 from $334.1 million in 2001, or 13.77%. The allowance for loan losses as a percentage of loans was 1.66% at December 31, 2003, as compared to 1.82% in 2002 and 1.58% in 2001. The decrease in this percentage from December 31, 2002 was primarily due to the increased provision for 2002 discussed in the previous paragraph. Therefore, with the exception of the increase in the 2002 allowance, the December 31, 2003 percentage is consistent with previous years as displayed in the 23 Summary of Loan Loss Experience and Related Information table on page 29. We increased the allowance for loan losses in 2003, 2002 and 2001 based upon an analysis of several factors, including the impairment and general reserve factor analysis referred to in our Critical Accounting Policies and changes in the loan mix. Total impaired loans decreased to $10.2 million with a related reserve of $1.5 million at December 31, 2003 compared to $11.7 million and $1.8 million, respectively, at December 31, 2002. General reserve factors, which are applied to categories of unimpaired loans, resulted in a decrease in the overall general reserve percentage to 1.34% at December 31, 2003 compared to 1.38% at December 31, 2002. The overall general reserve percentage at December 31, 2001 was 1.17%. The decrease in the general reserve factor in 2003 is attributable to changes in the loan portfolio mix, with larger relative amounts of loans in loan categories bearing lower general reserve factors. Due to the factors discussed above and the growth in our commercial real estate and construction loan portfolios, the overall result was a higher allowance for loan losses at December 31, 2003 compared with December 31, 2002. The allowance for loan losses represents our best estimate of probable losses that have been incurred as of the respective balance sheet dates. NON-INTEREST INCOME The following table describes the items of our non-interest income for the periods indicated: NON-INTEREST INCOME
YEAR ENDED DECEMBER 31 -------------------------------- 2003 2002 2001 ---------- ---------- ---------- (IN THOUSANDS) Loans held for sale fee income ........................ $ 19,866 $ 16,690 $ 6,931 NSF charges and service fees .......................... 1,283 1,026 836 Other service charges ................................. 924 821 796 Net realized gains on sales of investment securities .. - 193 500 Other income .......................................... 463 281 203 ---------- ---------- ---------- Total non-interest income ....................... $ 22,536 $ 19,011 $ 9,266 ========== ========== ==========
Non-interest income increased to $22.5 million, or 18.54%, during 2003, from $19.0 million during 2002. This increase is attributable to increases in loans held for sale fee income of $3.2 million and NSF charges and services fees of $257,000. We experienced growth in our loans held for sale income due to the expansion of our national and local mortgage capabilities concurrent with favorable conditions for residential mortgage origination and refinancing. Mortgage originations and refinancing continued to flourish due to the low interest rate environment which began in 2001 and persisted through 2003. The volume of closed residential mortgages grew to over $1.5 billion in 2003 from $1.3 billion and $640 million in 2002 and 2001, respectively. However, mortgage rates increased modestly during the second half of 2003, and the volume of mortgage refinancing activity declined dramatically. Other service charge income, which includes trust services income, investment brokerage income, merchant bankcard processing and debit card processing income, increased by $103,000 or 12.54% from 2002 to 2003. In 2002, we took advantage of opportunities to mitigate the risk of long-term rate volatility in our available-for-sale investment portfolio by selling some of our longer-term bonds. Due to the yield environment when we sold the securities, we realized $193,000 of net gains on the sales in 2002. Sustainability of the level of our loans held for sale fee income is primarily dependent upon the persistence of the low interest rate environment, and secondarily dependent on our ability to develop new products and alternative delivery channels. Future growth of other non-interest income categories is dependent upon new product development, and growth in our customer base. Non-interest income increased to $19.0 million, or 105.17%, during 2002, from $9.3 million during 2001. This increase is attributable to increases in loans held for sale fee income of $9.8 million and NSF charges and services fees of $190,000. We experienced significant growth in our loans held for sale income due to the expansion of our national and local mortgage capabilities concurrent with favorable conditions for residential mortgage origination and refinancing. Mortgage originations and refinancing continued to flourish due to the low interest rate environment which began in 2001 and persisted through 2002. Other service charge income, which includes trust 24 services income, investment brokerage income, merchant bankcard processing and debit card processing income, remained relatively unchanged from 2001. In 2002 and 2001, we took advantage of opportunities to mitigate the risk of long-term rate volatility in our available-for-sale investment portfolio by selling some of our longer-term bonds. Due to the yield environment when we sold the securities, we realized $193,000 and $500,000 of net gains on the sales in 2002 and 2001, respectively. NON-INTEREST EXPENSE The following table describes the items of our non-interest expense for the periods indicated. NON-INTEREST EXPENSE
YEAR ENDED DECEMBER 31 ------------------------------------ 2003 2002 2001 ---------- ---------- ---------- (IN THOUSANDS) Salaries and employee benefits .... $ 19,670 $ 16,437 $ 10,063 Occupancy ......................... 3,137 2,101 1,574 FDIC and other insurance expense .. 174 161 140 General and administrative ........ 6,304 5,417 3,933 ---------- ---------- ---------- Total non-interest expenses .. $ 29,285 $ 24,116 $ 15,710 ========== ========== ==========
Non-interest expense increased to $29.3 million, or 21.43%, during 2003, as compared to $24.1 million in the prior year. This increase is primarily attributable to increases in salaries and employee benefits and occupancy expenses, consistent with the Company's growth. Our salaries and employee benefits expense increased to $19.7 million in 2003, or 19.66%, from $16.4 million in 2002, mainly due to volume-related growth in incentive compensation related to mortgage origination activity as well as additional staff to facilitate our growth. We manage our staffing levels to accommodate the volume of our business. During 2003, FTEs fluctuated from approximately 257 to 313, and ended the year at approximately 263. The fluctuations in our staffing levels were primarily attributable to fluctuations in the volume of mortgage originations during the year. Occupancy expenses increased to $3.1 million, or 49.30% in 2003, from $2.1 million in 2002, primarily due to the addition of our 7900 College facility and higher telecommunication and depreciation expenses related to our growth and expansion. General and administrative expenses increased $887,000 to $6.3 million in 2003, compared to $5.4 million in 2002, principally due to increased marketing, postage/courier, and loan processing fees associated with the increased volume in the Company's mortgage origination departments. Future increases in non-interest expense are dependent upon continued growth of the Company, especially our mortgage origination business. Non-interest expense increased to $24.1 million, or 53.51%, during 2002, as compared to $15.7 million in the prior year. This increase was primarily attributable to increases in salaries and employee benefits and occupancy expenses, consistent with the Company's growth. Our salaries and employee benefits expense increased to $16.4 million in 2002, or 63.34%, from $10.1 million in 2001, as we hired additional staff to facilitate our growth. We had 262 full-time equivalent employees at December 31, 2002 compared to 217 at December 31, 2001. Many areas of the Company added employees to manage growth. Occupancy expenses increased to $2.1 million, or 33.48% in 2002, from $1.6 million in 2001, primarily due to increases in depreciation, rent, telephone expenses, and repairs and maintenance as the Company expanded its infrastructure to facilitate growth. General and administrative expenses increased $1.5 million to $5.4 million in 2002, compared to $3.9 million in 2001, principally due to increased marketing, postage/courier, and loan processing fees associated with the increased volume in the Company's mortgage origination departments. INCOME TAXES Our income tax expense during 2003 was $3.1 million, compared to $2.9 million during 2002, and $2.0 million during 2001. These increases reflect our higher earnings for the current and previous fiscal years. Our 25 consolidated effective income tax rates of 35.71%, 35.05% and 33.20% for the three respective years ended December 31, 2003 varies from the statutory rate principally due to the effects of state income taxes and interest income earned on our municipal securities portfolio which is generally tax-exempt for federal income tax purposes. FINANCIAL CONDITION Lending Activities. Our loan portfolio is a key source of income, and since our inception, has been a principal component of our revenue growth. Our loan portfolio reflects an emphasis on construction, commercial and commercial real estate, residential real estate, personal lending and leasing. We emphasize commercial lending to professionals, businesses and their owners. Commercial loans and loans secured by commercial real estate accounted for 46.45% of our total loans at December 31, 2003, 43.40% of our total loans at December 31, 2002, and 44.62% of our total loans at year end 2001. These loans increased at an 18.41% compound annual rate during the three-year period ended December 31, 2003. Loans were $424.6 million at December 31, 2003, an increase of $44.5 million, or 11.71%, compared to December 31, 2002. Loans at December 31, 2002 were $380.1 million, an increase of $46.0 million, or 13.77%, compared to December 31, 2001. Increases in deposits and Federal Home Loan Bank borrowings facilitated our loan growth during 2003. The loan to deposit ratio increased to 90.25%, compared to 89.69% at December 31, 2002, and 84.74% at December 31, 2001. We experienced increases in most loan categories during 2003. The growth of our commercial, commercial real estate and residential real estate portfolios is a result of the economic growth and development of our market area, coupled with the efforts and experience of our lending staff. The Company targets consumer lending lines of business in an effort to more broadly diversify our risk across multiple lines of business. Historically, a significant portion of the growth in our personal lending lines was attributable to growth in our indirect automobile loan portfolio. In 2003, additional sales officers cultivated additional dealer relationships as well as additional business from existing dealers and our indirect loan portfolio grew by $7.9 million or 64.67%. The growth in 2003 reversed a two-year decline which started in 2001 when we encountered significant competition from national finance companies offering below market rate financing incentives. We also encountered a considerable number of early pay-offs within other categories of our consumer loan portfolio due to customer refinancing, resulting in an overall net increase of $2.9 million in the consumer loan portfolio. The following table sets forth the composition of our loan portfolio by loan type as of the dates indicated. The amounts in the following table are shown net of discounts and other deductions.
AS OF DECEMBER 31, ----------------------------------------------------------------- 2003 2002 2001 -------------------- ------------------- ------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ---------- ------- --------- ------- --------- ------- (DOLLARS IN THOUSANDS) Commercial ................ $ 109,818 25.86% $ 93,658 24.64% $ 85,311 25.54% Commercial real estate .... 87,438 20.59 71,295 18.76 63,756 19.08 Construction .............. 123,445 29.08 127,071 33.43 93,656 28.03 Leases .................... 22,175 5.22 22,600 5.95 24,221 7.25 Residential real estate ... 27,017 6.37 21,581 5.68 24,460 7.32 Consumer .................. 29,701 6.99 26,750 7.04 29,895 8.96 Home equity ............... 25,026 5.89 17,127 4.50 12,776 3.82 ---------- ------ --------- ------ --------- ------ Total loans and leases ............... 424,620 100.00% 380,082 100.00% 334,075 100.00% ====== ====== ====== Less allowance for loan losses ............. 7,051 6,914 5,267 ---------- --------- --------- Loans receivable, net ..... $ 417,569 $ 373,168 $ 328,808 ========== ========= ========= AS OF DECEMBER 31, ------------------------------------------ 2000 1999 -------------------- ------------------- AMOUNT PERCENT AMOUNT PERCENT ---------- ------- --------- ------- (DOLLARS IN THOUSANDS) Commercial ................ $ 76,556 26.61% $ 64,552 25.78% Commercial real estate .... 42,267 14.69 26,617 10.63 Construction .............. 59,733 20.76 41,007 16.38 Leases .................... 25,302 8.81 30,416 12.14 Residential real estate ... 37,290 12.96 33,251 13.28 Consumer .................. 35,864 12.47 44,747 17.87 Home equity ............... 10,657 3.70 9,820 3.92 ---------- ------ --------- ------ Total loans and leases ............... 287,669 100.00% 250,410 100.00% ====== ====== Less allowance for loan losses ............. 4,440 3,817 ---------- --------- Loans receivable, net ..... $ 283,229 $ 246,593 ========== =========
Collateral and Concentration. At December 31, 2003, 2002 and 2001, substantially all of our loans were collateralized with real estate, inventory, accounts receivable and/or other assets or were guaranteed by the Small Business Administration. Loans to individuals and businesses in the construction industry totaled $123.4 million, or 29.08%, of total loans, as of December 31, 2003. The Bank does not have any other concentrations of loans to individuals or businesses involved in a single industry totaling 5% of total loans. The Bank's lending limit under 26 federal law to any one borrower was $14.2 million at December 31, 2003. The Bank's largest single borrower, net of participations, at December 31, 2003 had outstanding loans of $12.8 million. The following table presents the aggregate maturities of loans in each major category of our loan portfolio as of December 31, 2003, excluding the allowance for loan and valuation losses. Additionally, the table presents the dollar amount of all loans due more than one year after December 31, 2003 which have predetermined interest rates (fixed) or adjustable interest rates (variable). Actual maturities may differ from the contractual maturities shown below as a result of renewals and prepayments or the timing of loan sales. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
AS OF DECEMBER 31, 2003 --------------------------------------------------------------------------- MORE THAN ONE YEAR ----------------------- LESS THAN ONE TO OVER FIVE ONE YEAR FIVE YEARS YEARS TOTAL FIXED VARIABLE ---------- ---------- --------- ---------- ---------- ---------- (IN THOUSANDS) Commercial Real Estate ..... $ 13,506 $ 60,208 $ 13,724 $ 87,438 $ 32,281 $ 41,651 Commercial ................. 53,083 49,458 7,277 109,818 14,637 42,098 Construction ............... 97,179 23,347 2,917 123,445 4,330 21,934
NON-PERFORMING ASSETS Non-performing assets consist primarily of loans past due 90 days or more, nonaccrual loans and foreclosed real estate. The following table sets forth our non-performing assets as of the dates indicated:
AS OF DECEMBER 31, ------------------------------------------------------------------ 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Real estate loans: Past due 90 days or more ........................ $ 337 $ 54 $ - $ 206 $ - Nonaccrual ...................................... 1,991 582 824 499 - Installment loans: Past due 90 days or more ........................ 4 - 33 - - Nonaccrual ...................................... - - 13 37 87 Credit cards and related plans: Past due 90 days or more ........................ 39 23 - - - Nonaccrual ...................................... - - - - - Commercial and all other loans: Past due 90 days or more ........................ 117 - 76 24 50 Nonaccrual ...................................... 318 233 752 1,326 375 Lease financing receivables: Past due 90 days or more ........................ - 3 - - - Nonaccrual ...................................... 249 223 1,365 382 25 Debt securities and other assets (excluding other real estate owned and other repossessed assets): Past due 90 days or more ........................ - - - - - Nonaccrual ...................................... - - - - - ---------- ---------- ---------- ---------- ---------- Total non-performing loans ..................... 3,055 1,118 3,063 2,474 537 ---------- ---------- ---------- ---------- ---------- Foreclosed assets held for sale ....................... 416 614 49 334 186 ---------- ---------- ---------- ---------- ---------- Total non-performing assets .................... $ 3,471 $ 1,732 $ 3,112 $ 2,808 $ 723 ========== ========== ========== ========== ========== Total non-performing loans to total loans ............. 0.72% 0.29% 0.92% 0.86% 0.21% Total non-performing loans to total assets ............ 0.50 0.18 0.62 0.60 0.16 Allowance for loan losses to non-performing loans ..... 230.79 618.29 171.96 179.47 710.80 Non-performing assets to loans and foreclosed assets held for sale ................................. 0.82 0.46 0.93 0.97 0.29
27 NON-PERFORMING ASSETS Impaired Loans. A loan is considered impaired when it is probable that we will not receive all amounts due according to the contractual terms of the loan. This includes loans that are delinquent 90 days or more, nonaccrual loans, and certain other loans identified by management. Accrual of interest is discontinued, and interest accrued and unpaid is removed, at the time the loans are delinquent 90 days or when management believes that full collection of principal and interest under the original loan contract is unlikely to occur. Interest is recognized for nonaccrual loans only upon receipt, and only after all principal amounts are current according to the terms of the contract. Impaired loans totaled $10.2 million at December 31, 2003, $11.7 million at December 31, 2002, and $8.4 million at December 31, 2001, with related allowances for loan losses of $1.5 million, $1.8 million, and $1.5 million, respectively. Total interest income of $736,000, $699,000 and $923,000 was recognized on average impaired loans of $11.7 million, $9.6 million and $6.6 million for 2003, 2002 and 2001, respectively. Included in this total is cash basis interest income of $67,000, $46,000 and $202,000 recognized on nonaccrual impaired loans during 2003, 2002 and 2001, respectively. Allowance For Loan Losses. The allowance for loan losses is increased by provisions charged to expense and reduced by loans charged off, net of recoveries. The adequacy of the allowance is analyzed monthly based on internal loan reviews and quality measurements of our loan portfolio. The Bank computes its allowance by assigning specific reserves to impaired loans, and then applies a general reserve based on a loss factor applied to the rest of the loan portfolio. The loss factor is determined based on such items as management's evaluation of risk in the portfolio, local economic conditions, and historical loss experience. Specific allowances are accrued on specific loans evaluated for impairment for which the basis of each loan, including accrued interest, exceeds the discounted amount of expected future collections of interest and principal or, alternatively, the fair value of the loan collateral. The following table sets forth information regarding changes in our allowance for loan and valuation losses for the periods indicated. 28 SUMMARY OF LOAN LOSS EXPERIENCE AND RELATED INFORMATION
AS OF AND FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Balance at beginning of period ......................... $ 6,914 $ 5,267 $ 4,440 $ 3,817 $ 2,341 Loans charged-off: Commercial real estate ........................... 395 323 -- -- -- Residential real estate .......................... -- -- 5 -- -- Commercial ....................................... 802 323 1,015 343 567 Personal ......................................... 68 66 80 153 47 Home equity ...................................... 10 -- -- -- -- Construction ..................................... -- -- -- -- -- Leases ........................................... 279 870 836 1,034 158 -------- -------- -------- -------- -------- Total loans charged-off ..................... 1,554 1,582 1,936 1,530 772 Recoveries: Commercial real estate ........................... 10 1 -- -- -- Residential real estate .......................... -- -- 5 -- -- Commercial ....................................... 77 123 119 104 90 Personal ......................................... 35 23 41 46 2 Home equity ...................................... -- -- -- -- -- Construction ..................................... -- -- -- -- -- Leases ........................................... 219 162 198 53 12 -------- -------- -------- -------- -------- Total recoveries ....................................... 341 309 363 203 104 -------- -------- -------- -------- -------- Net loans charged-off .................................. 1,213 1,273 1,573 1,327 668 Provision for loan losses .............................. 1,350 2,920 2,400 1,950 2,144 -------- -------- -------- -------- -------- Balance at end of period ............................... $ 7,051 $ 6,914 $ 5,267 $ 4,440 $ 3,817 ======== ======== ======== ======== ======== Loans outstanding: ..................................... Average ..................................... $410,593 $349,879 $310,727 $268,227 $206,310 End of period ............................... 424,620 380,082 334,075 287,669 250,410 Ratio of allowance for loan losses to loans outstanding: Average ..................................... 1.72% 1.98% 1.70% 1.66% 1.85% End of period ............................... 1.66 1.82 1.58 1.54 1.52 Ratio of net charge-offs to: Average loans ............................... 0.30 0.36 0.51 0.49 0.32 End of period loans ......................... 0.29 0.33 0.47 0.46 0.27
The following table shows our allocation of the allowance for loan losses by specific category at the end of each of the periods shown. Management attempts to allocate specific portions of the allowance for loan losses based on specifically identifiable problem loans. However, the allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category. 29 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
As of December 31, ----------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------------------------------------------------------------------------------------- % of Total % of Total % of Total % of Total % of Total Amount Allowance Amount Allowance Amount Allowance Amount Allowance Amount Allowance ----------------------------------------------------------------------------------------- Commercial $2,899 41.12% $3,012 43.56% $1,181 22.42% $1,687 38.00% $1,206 31.60% Commercial real estate 1,161 16.47 1,008 14.58 888 16.86 485 10.92 268 7.02 Construction 1,581 22.42 1,405 20.32 1,070 20.32 672 15.14 454 11.89 Leases 690 9.78 813 11.76 1,440 27.34 526 11.84 559 14.65 Residential real estate 273 3.87 293 4.24 400 7.59 399 8.99 364 9.53 Consumer 288 4.09 256 3.70 210 3.99 547 12.32 843 22.09 Home equity 159 2.25 127 1.84 78 1.48 124 2.79 123 3.22 --------------- --------------- --------------- -------------- --------------- Total $7,051 100.00% $6,914 100.00% $5,267 100.00% $4,440 100.00% $3,817 100.00% =============== =============== =============== ============== ===============
Investment securities. The primary objectives of our investment portfolio are to secure the safety of principal, to provide adequate liquidity and to provide securities for use in pledging for public funds or repurchase agreements. Income is a secondary consideration. As a result, we generally do not invest in mortgage-backed securities and other higher yielding investments. Total investment securities increased by $44.4 million or 72.31% during 2003, as we reinvested significant liquidity generated by the reduction in our loans held for sale balance during the fourth quarter of the year. As of December 31, 2003, all of the securities in our investment portfolio were classified as available for sale in order to provide us with an additional source of liquidity when necessary, and as pledging requirements will permit. The following table presents the composition of our available for sale investment portfolio by major category at the dates indicated. INVESTMENT SECURITIES PORTFOLIO COMPOSITION
AT DECEMBER 31, ------------------------------ 2003 2002 2001 -------- -------- -------- (IN THOUSANDS) U.S. government agency securities..... $ 93,790 $ 47,579 $ 62,050 State and municipal obligations ...... 11,452 13,785 15,626 Equity and other ..................... 494 - - -------- -------- -------- Total ..................... $105,736 $ 61,364 $ 77,676 ======== ======== ========
The following table sets forth the maturities, carrying value or fair value (in the case of investment securities available for sale), and average yields for debt securities in our investment portfolio at December 31, 2003. Yields are presented on a tax equivalent basis. Expected maturities will differ from contractual maturities due to unscheduled repayments. Under our investment policy, not more than 10% of the Bank's capital may be invested in the tax-exempt general obligation bonds of any single issuer. 30 MATURITY OF INVESTMENTS IN DEBT SECURITIES AVAILABLE FOR SALE
MORE THAN TEN ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS YEARS ----------------- ----------------- ----------------- ----------------- CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD -------- ------- -------- ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) AVAILABLE FOR SALE U.S. government ....................... agency securities...................... $ - -% $ 93,790 2.49% $ - -% $ - -% State and municipal obligations....................... 922 4.63 7,253 4.76 3,276 4.83 - - Mortgage-backed securities........................ - - - - - - - - Other securities....................... - - - - - - - - -------- ------- -------- ------- -------- ------- -------- ------- Total available for sale.......... $ 922 4.63% $101,043 2.65% $ 3,276 4.83% $ - -% ======== ======= ======== ======= ======== ======= ======== =======
TOTAL INVESTMENT SECURITIES --------------------------- CARRYING FAIR AVERAGE VALUE VALUE YIELD -------- -------- ------- (DOLLARS IN THOUSANDS) AVAILABLE FOR SALE U.S. government ....................... agency securities...................... $ 93,790 $ 93,790 2.49% State and municipal obligations....................... 11,451 11,451 4.77 Mortgage-backed securities........................ - - - Other securities....................... - - - -------- -------- ------- Total available for sale.......... $105,241 $105,241 2.74% ======== ======== =======
Deposits. Deposits grew by $46.7 million, or 11.02%, for the year ended December 31, 2003, compared to 2002 year-end. The primary source of deposit growth in 2003 was in money management and time deposit balances, which increased by $29.2 million and $35.5 million, respectively. The increase in the money management balances during 2003 was primarily attributable to a change in the rate offered on our money management account to a tiered rate structure; whereby larger customer deposit balances earned a higher rate of interest. The increase in time deposit balances was primarily due to increases in brokered time deposit balances. During 2003, the brokered time deposit market offered attractive rates during a period when our liquidity requirements afforded us the opportunity to take advantage of this low-cost funding source. We have traditionally offered market-competitive rates on our time deposit products and believe they provide us with a more attractive source of funds than other alternatives such as Federal Home Loan Bank borrowings, due to our ability to cross-sell additional services to these account holders. Our strategy to grow our deposits includes opening additional branches in markets management deems underserved, offering new products, and obtaining brokered deposits as allowed by our board of directors. The following table sets forth the balances for each major category of our deposit accounts and the weighted-average interest rates paid for interest-bearing deposits for the periods indicated: DEPOSITS
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------------------------- 2003 2002 2001 ------------------------------- ------------------------------- ------------------------------- (DOLLARS IN THOUSANDS) PERCENT WEIGHTED PERCENT WEIGHTED PERCENT WEIGHTED OF AVERAGE OF AVERAGE OF AVERAGE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE -------- -------- -------- -------- -------- -------- -------- -------- -------- Demand .................... $ 74,717 15.88% --% $ 86,591 20.43% --% $ 74,229 18.83% --% Savings ................... 7,740 1.64 0.62 6,037 1.42 1.39 5,050 1.28 2.54 Interest-bearing demand ... 26,260 5.58 0.63 30,747 7.26 1.30 28,397 7.20 2.59 Money Market .............. 30,594 6.50 0.68 33,932 8.01 1.30 30,427 7.72 2.67 Money Management .......... 126,037 26.79 1.79 96,837 22.85 2.05 93,462 23.71 4.04 Time Deposits ............. 205,147 43.61 3.55 169,643 40.03 4.39 162,680 41.26 4.81 -------- ------ -------- ------ -------- ------ Total deposits.. $470,495 100.00% $423,787 100.00% $394,245 100.00% ======== ====== ======== ====== ======== ======
The following table sets forth the amount of our time deposits that are greater than $100,000 by time remaining until maturity as of December 31, 2003: 31 AMOUNTS AND MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
AS OF DECEMBER 31, 2003 --------------------------- WEIGHTED AVERAGE AMOUNT RATE PAID -------- ---------------- (DOLLARS IN THOUSANDS) Three months or less ..................... $ 32,215 1.83% Over three months through six months ..... 9,532 2.77 Over six months through twelve months .... 25,709 2.38 Over twelve months ....................... 39,213 4.20 -------- ---- Total ......................... $106,669 2.92% ======== ====
LIQUIDITY AND CAPITAL RESOURCES Liquidity. Liquidity is measured by a financial institution's ability to raise funds through deposits, borrowed funds, capital, or the sale of marketable assets, such as residential mortgage loans or a portfolio of SBA loans. Other sources of liquidity, including cash flow from the repayment of loans, are also considered in determining whether liquidity is satisfactory. Liquidity is also achieved through growth of core deposits and liquid assets, and accessibility to the money and capital markets. The funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans and operate the organization. Core deposits, defined as demand deposits, interest-bearing transaction accounts, savings deposits and time deposits less than $100,000 (excluding brokered deposits), were 76.20% of our total deposits at December 31, 2003, and 82.54% and 83.32% of total deposits at December 31, 2002 and 2001, respectively. Generally, the Company's funding strategy is to utilize Federal Home Loan Bank borrowings to fund originations of mortgage loans held for sale and fund balances generated by other lines of business with deposits. In addition, the Company uses other forms of short-term borrowings for cash management and liquidity management purposes on a limited basis. These forms of borrowings include federal funds purchased and revolving lines of credit. The Company's Asset-Liability Management Committee utilizes a variety of liquidity monitoring tools, including an asset/liability modeling service, to analyze and manage the Company's liquidity. The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks governed and regulated by the Federal Housing Finance Board. The Federal Home Loan Banks provide a central credit facility for member institutions. The Bank, as a member of the FHL Bank of Topeka, is required to acquire and hold shares of capital stock in the FHL Bank of Topeka in an amount at least equal to 1.00% of the aggregate principal amount of its unpaid residential mortgage loans or 5.00% of our total outstanding FHLB advances. The Bank is currently in compliance with this requirement, with a $6.6 million investment in stock of the FHL Bank of Topeka as of December 31, 2003. During 2003 and 2002, the Bank took advantage of some special advances from the FHLB to supplement its funding base. The Bank had $62.5 million and $52.5 million in outstanding long-term advances from the FHL Bank of Topeka at December 31, 2003 and 2002, respectively. Management has established internal guidelines and analytical tools to measure liquid assets, alternative sources of liquidity, as well as relevant ratios concerning asset levels and purchased funds. These indicators are reported to the board of directors monthly, and at December 31, 2003, the Bank was within the established guidelines. The following table sets forth a summary of our short-term borrowings during and as of the end of each period indicated. 32 SHORT-TERM BORROWINGS
AVERAGE WEIGHTED WEIGHTED AMOUNT AMOUNT MAXIMUM AVERAGE AVERAGE OUTSTANDING OUTSTANDING OUTSTANDING INTEREST RATE INTEREST RATE AT DURING THE AT ANY DURING THE AT PERIOD PERIOD END PERIOD (1) MONTH END PERIOD END ----------- ----------- ----------- ------------- ------------- (DOLLARS IN THOUSANDS) At or for the year ended December 31, 2003: Federal Home Loan Bank borrowings ... $ -- $15,118 $40,000 1.29% --% Federal Funds purchased ............. -- 3,674 11,000 1.22 -- Repurchase agreements ............... 22,648 23,264 25,661 0.60 0.50 ------- ------- ---- ---- Total ......................... $22,648 $42,056 0.90 0.50 ======= ======= At or for the year ended December 31, 2002: Federal Home Loan Bank borrowings ... $35,000 $ 2,236 $35,000 1.95% 1.28% Federal Funds purchased ............. 10,000 1,043 10,000 1.93 1.81 Repurchase agreements ............... 23,688 16,962 23,688 1.08 0.67 ------- ------- ---- ---- Total ......................... $68,688 $20,241 1.22 0.80 ======= ======= At or for the year ended December 31, 2001: Federal Home Loan Bank borrowings ... $ -- $ 2,985 $ 5,000 6.37% --% Federal Funds purchased ............. -- -- -- -- -- Note Payable-other .................. -- 231 1,000 6.00 -- Repurchase agreements ............... 17,173 17,246 20,862 2.37 1.07 ------- ------- ---- ---- Total ......................... $17,173 $20,462 2.43 1.07 ======= =======
----------- (1) Calculations are based on daily averages where available and monthly averages otherwise. Capital Resources. At December 31, 2003, our total stockholders' equity was $40.2 million, and our equity to asset ratio was 6.41%. At December 31, 2002, our total stockholders' equity was $34.3 million and our equity to asset ratio was 5.67%. During 2003, BVBC Capital Trust II (BVBC Trust II), a Delaware business trust formed by Blue Valley, completed the sale of $7.5 million of its trust preferred securities bearing interest at LIBOR + 3.25%. BVBC Trust II also issued common securities to Blue Valley and used the proceeds from the offering to purchase $7,732,000 in principal amount of junior subordinated debentures, bearing interest at LIBOR + 3.25%, due in 2033 issued by Blue Valley. The junior subordinated debentures are the sole assets of BVBC Trust II and are eliminated, along with the related income statement effects, in the consolidated financial statements. The proceeds were retained by Blue Valley for general corporate purposes, including additional investments from time to time in the subsidiaries of the Company in the form of additional capital to fund expansion. The trust preferred securities meet the criteria to be considered regulatory capital, subject to limitations defined in note (1) to the risk-based capital table on the following page. The Federal Reserve Board's risk-based guidelines establish a risk-adjusted ratio, relating capital to different categories of assets and off-balance sheet exposures, such as loan commitments and standby letters of credit. These guidelines place a strong emphasis on tangible stockholder's equity as the core element of the capital base, with appropriate recognition of other components of capital. At December 31, 2003, our Tier 1 capital ratio was 10.04%, while our total risk-based capital ratio was 12.41%, both of which exceed the capital minimums established in the risk-based capital requirements. 33 CONTRACTUAL OBLIGATIONS Our known contractual obligations outstanding as of December 31, 2003 are presented below.
PAYMENTS DUE BY PERIOD (IN THOUSANDS) LESS THAN 1 MORE THAN 5 TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS ------- ----------- --------- --------- ----------- Long-term Debt Obligations $87,706 $613 $1,347 $31,520 $54,226 Operating Lease Obligations 171 146 25 ------- ---- ------ ------- ------- Total $87,877 $759 $1,372 $31,520 $54,226 ======= ==== ====== ======= =======
Our risk-based capital ratios at December 31, 2003, 2002 and 2001 are presented below. RISK-BASED CAPITAL
DECEMBER 31, 2003 2002 2001 (DOLLARS IN THOUSANDS) Tier 1 capital Stockholders' equity ........................................................ $ 40,198 $ 34,344 $ 28,525 Intangible assets ........................................................... (1,128) (1,281) (1,433) Unrealized (appreciation) depreciation on available-for-sale securities ..... (570) (785) (831) Trust preferred securities (1) .............................................. 13,210 11,187 9,231 --------- --------- --------- Total Tier 1 capital ................................................ 51,710 43,465 35,492 --------- --------- --------- Tier 2 capital Qualifying allowance for loan losses ........................................ 6,448 6,171 5,002 Trust preferred securities(1) ............................................... 5,790 313 2,269 --------- --------- --------- Total Tier 2 capital ................................................ 12,238 6,484 7,271 --------- --------- --------- Total risk-based capital ............................................ $ 63,948 $ 49,949 $ 42,763 ========= ========= ========= Risk weighted assets ......................................................... $ 515,201 $ 492,922 $ 399,923 ========= ========= ========= Ratios at end of period Total capital to risk-weighted assets ratio ................................. 12.41% 10.13% 10.69% Tier 1 capital to average assets ratio (leverage ratio) ........................................................ 8.31% 7.74% 7.17% Tier 1 capital to risk-weighted assets ratio ................................................................... 10.04% 8.82% 8.87% Minimum guidelines Total capital to risk-weighted assets ratio ................................. 8.00% 8.00% 8.00% Tier 1 capital to average assets ratio (leverage ratio) ........................................................ 4.00% 4.00% 4.00% Tier 1 capital to risk-weighted assets ratio ................................................................... 4.00% 4.00% 4.00%
---------- (1) Federal Reserve guidelines for calculation of Tier 1 capital limits the amount of cumulative trust preferred securities which can be included in Tier 1 capital to 25% of total Tier 1 capital (Tier 1 capital before reduction of intangibles). At December 31, 2003, approximately $13.2 million of the trust preferred securities have been included as Tier 1 capital. The balance of the trust preferred securities have been included as Tier 2 capital. 34 INFLATION The consolidated financial statements and related data presented in this report have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as prices of goods and services. Additional discussion of the impact of interest rate changes is included in Item 7A: Qualitative and Quantitative Disclosure About Market Risk. In addition, we disclose the estimated fair value of our financial instruments in accordance with Statement of Financial Accounting Standards No. 107. See Note 15 to the consolidated financial statements included in this report. OFF-BALANCE SHEET ARRANGEMENTS The Company enters into off-balance sheet arrangements in the ordinary course of business. Our off-balance sheet arrangements generally are limited to commitments to extend credit, mortgage loans in the process of origination and forward commitments to sell those mortgage loans, letters of credit and lines of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. They generally have fixed expiration dates or other termination clauses. The commitments extend over varying periods of time with the majority being disbursed within a one-year period. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. At December 31, 2003, the Company had outstanding commitments to originate loans aggregating approximately $32,913,000. Mortgage loans in the process of origination represent amounts that the Company plans to fund within a normal period of 60 to 90 days and which are intended for sale to investors in the secondary market. Forward commitments to sell mortgage loans are obligations to deliver loans at a specified price on or before a specified future date. The Bank acquires such commitments to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. Total mortgage loans in the process of origination amounted to $47,965,000 and mortgage loans held for sale amounted to $18,297,000 at December 31, 2003 and combined had related forward commitments to sell mortgage loans amounted to approximately $66,2626,000 at December 31, 2003 respectively. Mortgage loans in the process of origination represent commitments to originate loans at fixed rates. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company had total outstanding letters of credit amounting to $20,228,000 at December 31, 2003. Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. 35 Management uses the same credit policies in granting lines of credit as it does for on-balance sheet instruments. At December 31, 2003 unused lines of credit borrowings aggregated approximately $131,995,000. FUTURE ACCOUNTING REQUIREMENTS The Financial Accounting Standards Board recently issued its Interpretation No. 46 (FIN 46 revised), Consolidation of Variable Interest Entities. This new Interpretation addresses consolidation by business enterprises of variable interest entities, which have one or more of the following characteristics: 1. The equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties, including the equity holders. 2. The equity investors lack one or more of the following essential characteristics of a controlling financial interest: a. The direct or indirect ability to make decisions about the entity's activities through voting rights or similar rights; b. The obligation to absorb the expected losses of the entity; or, c. The right to receive the expected residual returns of the entity. 3. The equity investors have voting rights that are not proportionate to their economic interests, and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The Company's initial application of the Interpretation will require deconsolidation of the Company's investment in BVBC Capital Trusts I and II, which we do not anticipate will have a material impact on the financial statements of the Company. The Company will apply FIN 46 (revised) in our first reporting period ending after March 15, 2004. ITEM 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK As a continuing part of our financial strategy, we attempt to manage the impact of fluctuations in market interest rates on our net interest income. This effort entails providing a reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield. Our funds management policy is established by our Bank Board of Directors and monitored by our Asset/Liability Management Committee. Our funds management policy sets standards within which we are expected to operate. These standards include guidelines for exposure to interest rate fluctuations, liquidity, loan limits as a percentage of funding sources, exposure to correspondent banks and brokers, and reliance on non-core deposits. Our funds management policy also establishes the reporting requirements to our Bank Board of Directors. Our investment policy complements our funds management policy by establishing criteria by which we may purchase securities. These criteria include approved types of securities, brokerage sources, terms of investment, quality standards, and diversification. We use an asset/liability modeling service to analyze the Company's current sensitivity to instantaneous and permanent changes in interest rates. The system simulates the Company's asset and liability base and projects future net interest income results under several interest rate assumptions. This allows management to view how changes in interest rates will affect the spread between the yield received on assets and the cost of deposits and borrowed funds. The asset/liability modeling service is also used to analyze the net economic value of equity at risk under instantaneous shifts in interest rates. The "net economic value of equity at risk" is defined as the market value of assets less the market value of liabilities plus/minus the market value of any off-balance sheet positions. By effectively looking at the present value of all future cash flows on or off the balance sheet, the net economic value of equity modeling takes a longer-term view of interest rate risk. 36 We strive to maintain a position that changes in interest rates will not affect net interest income or the economic value of equity by more than 5%, per 50 basis points. The following table sets forth the estimated percentage change in our net interest income over the next twelve-month period and our economic value of equity at risk at December 31, 2003 based on the indicated instantaneous and permanent changes in interest rates.
NET INTEREST NET ECONOMIC INCOME VALUE OF CHANGES IN INTEREST RATES (NEXT 12 MONTHS) EQUITY AT RISK ------------------------- ---------------- -------------- 300 basis point rise 33.49% 5.44% 200 basis point rise 22.83% 4.07% 100 basis point rise 12.25% 2.35% Base Rate Scenario - - 25 basis point decline (4.64%) (0.94%) 50 basis point decline (9.21%) (2.15%) 75 basis point decline (15.26%) (3.71%)
The above table indicates that, at December 31, 2003, in the event of a sudden and sustained increase in prevailing market rates, our net interest income would be expected to increase as our assets would be expected to reprice quicker than our liabilities, while a decrease in rates would indicate just the opposite. Generally, in the decreasing rate scenarios, not only would adjustable rate assets (loans) reprice to lower rates faster than our liabilities, but our liabilities - long-term Federal Home Loan Bank of Topeka (FHLB) advances and existing time deposits - would not decrease in rate as much as market rates. In addition, fixed rate loans might experience an increase in prepayments, further decreasing yields on earning assets and causing net interest income to decrease. Another consideration with a rising interest rate scenario is the impact on mortgage loan refinancing, which would likely decline, leading to lower loans held for sale fee income, though the impact is difficult to quantify or project. The above table also indicates that, at December 31, 2003, in the event of a sudden decrease in prevailing market rates, the economic value of our equity would decrease. Given our current asset/liability position, a 25, 50 or 75 basis point decline in interest rates will result in a lower economic value of our equity as the change in estimated loss on liabilities exceeds the change in estimated gain on assets in these interest rate scenarios. Currently, under a falling rate environment, the Company's estimated market value of loans could increase as a result of fixed rate loans, net of possible prepayments. The estimated market value of investment securities could also rise as our portfolio contains higher yielding securities. However, the estimated market value increase in fixed rate loans and investment securities is offset by time deposits unable to reprice to lower rates immediately and fixed-rate callable advances from FHLB. The likelihood of advances being called in a decreasing rate environment is diminished resulting in the advances existing until final maturity, which has the effect of lowering the economic value of equity. The following table summarizes the anticipated maturities or repricing of our interest-earning assets and interest-bearing liabilities as of December 31, 2003, based on the information and assumptions set forth below. 37 INTEREST-RATE SENSITIVITY ANALYSIS
Expected Maturity Date -------------------------------------------------------------------------------------- Fiscal Year Ending December 31, -------------------------------------------------------- 0-90 Days 91-365 Days 2004 2005 2006 2007 ----------- ----------- ----------- ----------- ----------- ----------- INTEREST-EARNING ASSETS: Fixed Rate Loans ................... $ 5,908 $ 11,292 $ 17,200 $ 22,254 $ 31,727 $ 15,168 Average Interest Rate .......... 5.92% 7.58% 7.01% 7.78% 6.90% 8.12% Variable Rate Loans ................ 311,171 5,394 316,565 -- -- -- Average Interest Rate .......... 4.73% 5.79% 4.75% -- -- -- Fixed Rate Investments ............. 200 722 922 49,628 33,615 15,646 Average Interest Rate .......... 4.66% 4.62% 4.63% 2.07% 2.92% 3.56% Variable Rate Investments .......... -- -- -- -- -- -- Average Interest Rate .......... -- -- -- -- -- -- Federal Funds Sold ................. 29,400 -- 29,400 -- -- -- Average Interest Rate .......... 0.90% -- 0.90% -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Total interest-earning assets $ 346,679 $ 17,408 $ 364,087 $ 71,882 $ 65,342 $ 30,814 =========== =========== =========== =========== =========== =========== INTEREST-BEARING LIABILITIES: Interest-bearing demand ............ $ 26,260 $ -- $ 26,260 $ -- $ -- $ -- Average Interest Rate .......... 0.38% -- 0.38% -- -- -- Savings and money market ........... 165,335 -- 165,335 -- -- -- Average Interest Rate .......... 1.58% -- 1.58% -- -- -- Time deposits ...................... 43,313 52,008 95,321 27,950 18,646 36,352 Average Interest Rate .......... 2.01% 2.56% 2.31% 3.49% 4.63% 4.69% Funds borrowed ..................... 23,599 461 24,060 653 694 20,736 Average Interest Rate .......... 0.46% 6.04% 0.57% 6.04% 6.05% 1.71% ----------- ----------- ----------- ----------- ----------- ----------- Total interest-bearing liabilities ................. $ 258,507 $ 52,469 $ 310,976 $ 28,603 $ 19,340 $ 57,088 =========== =========== =========== =========== =========== =========== CUMULATIVE: Rate sensitive assets (RSA) .... $ 346,679 $ 364,070 $ 364,087 $ 435,969 $ 501,311 $ 532,125 Rate sensitive liabilities (RSL) 258,507 310,976 310,976 339,579 358,919 416,007 GAP (GAP = RSA - RSL) .............. 88,172 53,094 53,110 96,390 142,392 116,118 RSA/RSL ............................ 134.11% 117.07% 117.08% 128.38% 139.67% 127.91% RSA/Total assets ................... 57.28 60.16 60.16 72.04 82.84 87.93 RSL/Total assets ................... 42.72 51.39 51.39 56.11 59.31 68.74 GAP/Total assets ................... 14.57 8.77 8.78 15.93 23.53 19.19 GAP/RSA ............................ 25.43 14.58 14.59 22.11 28.40 21.82
Expected Maturity Date ----------------------------------------- 2008 Thereafter Total ----------- ----------- ----------- INTEREST-EARNING ASSETS: Fixed Rate Loans ................... $ 27,875 $ 5,077 $ 119,302 Average Interest Rate .......... 6.40% 14.30% 7.43% Variable Rate Loans ................ -- -- 316,565 Average Interest Rate .......... -- -- 4.75% Fixed Rate Investments ............. 2,155 3,276 105,242 Average Interest Rate .......... 4.78% 4.83% 2.74% Variable Rate Investments .......... -- -- -- Average Interest Rate .......... -- -- -- Federal Funds Sold ................. -- -- 29,400 Average Interest Rate .......... -- -- 0.90% ----------- ----------- ----------- Total interest-earning assets $ 30,030 $ 8,353 $ 570,508 =========== =========== =========== INTEREST-BEARING LIABILITIES: Interest-bearing demand ............ $ -- $ -- $ 26,260 Average Interest Rate .......... -- -- 0.38% Savings and money market ........... -- -- 165,335 Average Interest Rate .......... -- -- 1.58% Time deposits ...................... 7,155 19,760 205,184 Average Interest Rate .......... 3.88% 4.21% 3.34% Funds borrowed ..................... 10,784 54,225 111,153 Average Interest Rate .......... 5.20% 5.41% 3.66% ----------- ----------- ----------- Total interest-bearing liabilities ................. $ 17,939 $ 73,985 $ 507,932 =========== =========== =========== CUMULATIVE: Rate sensitive assets (RSA) .... $ 562,155 $ 570,508 $ 570,508 Rate sensitive liabilities (RSL) 433,946 507,932 507,932 GAP (GAP = RSA - RSL) .............. 128,209 62,577 62,577 RSA/RSL ............................ 129.54% 112.32% RSA/Total assets ................... 92.89 94.27 RSL/Total assets ................... 71.70 83.93 GAP/Total assets ................... 21.19 10.34 GAP/RSA ............................ 22.81 10.97
Certain assumptions are contained in the above table which affect the presentation. Although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities lag behind changes in market interest rates. Disclosures about fair values of financial instruments, which reflect changes in market prices and rates, can be found in note 15 to the consolidated financial statements included in this report. ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS OF BLUE VALLEY BAN CORP See index to Blue Valley Ban Corp financial statements on page F-1. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No items are reportable. 38 ITEM 9A: CONTROLS AND PROCEDURES Management, including the Company's Chief Executive Officer and Treasurer, conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 31, 2003. Based upon the evaluation, management concluded that the Company's disclosure controls and procedures are effective to ensure that all material information requiring disclosure in this annual report was made known to them in a timely manner. The Company made no significant changes in internal controls over financial reporting or in other factors that could materially affect the Company's internal control over financial reporting. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the Company's directors and executive officers is included in the Company's Proxy Statement for the 2004 Annual Meeting of Stockholders and is hereby incorporated by reference. Information regarding the Bank's directors and executive officers is included in Part I of this Form 10-K under the caption "Directors and Executive Officers of the Registrant." The Company has adopted a code of conduct that applies to our senior financial officers. Information regarding our code of conduct can be obtained by contacting us directly at: Investor Relations 11935 Riley Overland Park, KS 66213 913.338.1000 Email: ir@bankbv.com ITEM 11: EXECUTIVE COMPENSATION This information is included in the Company's Proxy Statement for the 2004 Annual Meeting of Stockholders and is hereby incorporated by reference. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is included in the Company's Proxy Statement for the 2004 Annual Meeting of Stockholders and is hereby incorporated by reference. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Bank periodically makes loans to our executive officers and directors, the members of their immediate families and companies that they are affiliated with. As of December 31, 2003, the Bank had aggregate loans 39 outstanding to such persons of approximately $6.0 million, which represented 14.87% of our stockholders' equity of $40.2 million on that date. These loans: - were made in the ordinary course of business; - were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons; and - did not involve more than the normal risk of collectibility or present other unfavorable features. ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES This information is included in the Company's Proxy Statement for the 2004 Annual Meeting of Stockholders and is hereby incorporated by reference. 40 PART IV ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1 and 2. Financial Statements and any Financial Statement Schedules The financial statements and financial statement schedules listed in the accompanying index to consolidated financial statements and financial statement schedules are filed as part of this Form 10-K. (b) Reports on Form 8-K On October 10th, 2003, Blue Valley filed a report on Form 8-K covering the press release for the Company's third quarter 2003 earnings. On December 15th, 2003, Blue Valley filed a report on Form 8-K covering the press release for the Company's dividend declaration. (c) Exhibits 3.1 Amended and Restated Articles of Incorporation of Blue Valley Ban Corp.* 3.2 Bylaws, as amended, of Blue Valley Ban Corp.* 4.1 1998 Equity Incentive Plan.* 4.2 1994 Stock Option Plan.* 4.3 Form of Indenture of Blue Valley Ban Corp.** 4.4 Form of Junior Subordinated Debentures, due September 30, 2030.** 4.5 Certificate of Trust of BVBC Capital Trust I.* 4.6 Form of Amended and Restated Trust Agreement of BVBC Capital Trust I.** 4.7 Form of Cumulative Preferred Security Certificate for BVBC Capital Trust I.* 4.8 Form of Trust preferred securities Guarantee Agreement of Blue Valley Ban Corp relating to the Cumulative Trust preferred securities.* 4.9 Form of Agreement as to Expenses and Liabilities.* 4.10 Form of Indenture dated April 10, 2003, between Blue Valley Ban Corp and Wilmington Trust Company 4.11 Amended and Restated Declaration of Trust dated April 10, 2003 4.12 Guarantee Agreement dated April 10, 2003 4.13 Fee Agreement dated April 10, 2003 4.14 Specimen of Floating Rate Junior Subordinated Debt Security 10.1 Promissory Note of Blue Valley Building dated July 15, 1994.* 41 10.2 Mortgage, Assignment of Leases and Rents and Security Agreement between Blue Valley Building and Businessmen's Assurance Company of America, dated July 15, 1994.* 10.3 Assignment of Leases and Rents between Blue Valley Building and Businessmen's Assurance Company of America dated July 15, 1994.* 11.1 Statement regarding computation of per share earnings. Please see p. F-12. 21.1 Subsidiaries of Blue Valley Ban Corp. 23.3 Consent of BKD, LLP. 31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Treasurer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of the Chief Executive Officer and Treasurer pursuant to 18 U.S.C. Section 1350 * Filed with the Commission on April 10, 2000 as an Exhibit to Blue Valley's Registration Statement on Form S-1, Amendment No. 1, File No. 333-34328. Exhibit incorporated herein by reference. ** Filed with the Commission on June 29, 2000 as an Exhibit to Blue Valley's Registration Statement on Form S-1, Amendment No. 3, File No. 333-34328. Exhibit incorporated herein by reference. 42 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 18, 2004 By: /s/ Robert D. Regnier ------------------------------------------------ Robert D. Regnier, President, Chief Executive Officer and Director Date: March 18, 2004 By: /s/ Mark A. Fortino ------------------------------------------------ Mark A. Fortino, Treasurer and Principal Financial and Accounting Officer Date: March 18, 2004 By: /s/ Donald H. Alexander ------------------------------------------------ Donald H. Alexander, Director Date: March 18, 2004 By: /s/ Wayne A. Henry, Jr. ------------------------------------------------ Wayne A. Henry, Jr., Director Date: March 18, 2004 By: /s/ C. Ted McCarter ------------------------------------------------ C. Ted McCarter, Director Date: March 18, 2004 By: /s/ Thomas A. McDonnell ------------------------------------------------ Thomas A. McDonnell, Director 43 BLUE VALLEY BAN CORP DECEMBER 31, 2003, 2002 AND 2001 CONTENTS
Page ---- INDEPENDENT ACCOUNTANTS' REPORT................................ F-2 CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets............................................ F-3 Statements of Income...................................... F-5 Statements of Stockholders' Equity........................ F-6 Statements of Cash Flows.................................. F-7 Notes to Financial Statements............................. F-8
F-1 INDEPENDENT ACCOUNTANTS' REPORT Board of Directors and Stockholders Blue Valley Ban Corp Overland Park, Kansas We have audited the accompanying consolidated balance sheets of Blue Valley Ban Corp (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Blue Valley Ban Corp as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. /s/ BKD, LLP Kansas City, Missouri February 13, 2004 F-2 BLUE VALLEY BAN CORP CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2003 AND 2002 (dollars in thousands, except share data) ASSETS
2003 2002 ---- ---- Cash and due from banks $ 21,317 $ 27,755 Federal funds sold 29,400 - ----------- ----------- Cash and cash equivalents 50,717 27,755 Available-for-sale securities 105,736 61,364 Mortgage loans held for sale 18,297 119,272 Loans, net of allowance for loan losses of $7,051 and $6,914 in 2003 and 2002, respectively 417,569 373,168 Premises and equipment, net 18,250 10,277 Foreclosed assets held for sale, net 416 614 Interest receivable 1,923 2,014 Deferred income taxes 1,302 1,688 Prepaid expenses and other assets 3,593 2,541 Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities 7,554 5,209 Core deposit intangible asset, at amortized cost 1,128 1,281 ----------- ----------- Total Assets $ 626,485 $ 605,183 =========== ===========
See Notes to Consolidated Financial Statements F-3 BLUE VALLEY BAN CORP CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2003 AND 2002 (dollars in thousands, except share data) LIABILITIES AND STOCKHOLDERS' EQUITY
2003 2002 ---- ---- LIABILITIES Demand deposits $ 74,717 $ 86,591 Savings, NOW and money market deposits 190,631 167,553 Time deposits 205,147 169,643 ----------- ----------- Total Deposits 470,495 423,787 Federal funds purchased and other interest-bearing liabilities 23,447 36,830 Short-term debt - 35,000 Long-term debt 87,706 69,551 Interest payable and other liabilities 4,639 5,671 ----------- ----------- Total Liabilities 586,287 570,839 ----------- ----------- STOCKHOLDERS' EQUITY Capital stock Common stock, par value $1 per share; Authorized 15,000,000 shares; issued and outstanding 2003 - 2,279,161 shares; 2002 - 2,222,711 shares 2,279 2,223 Additional paid-in capital 7,404 6,284 Retained earnings 30,344 25,052 Unearned compensation (399) - Accumulated other comprehensive income Unrealized appreciation on available-for-sale securities, net of income taxes of $380 in 2003 and $523 in 2002 570 785 ----------- ----------- Total Stockholders' Equity 40,198 34,344 ----------- ----------- Total Liabilities and Stockholders' Equity $ 626,485 $ 605,183 =========== ===========
See Notes to Consolidated Financial Statements F-4 BLUE VALLEY BAN CORP CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (dollars in thousands, except per share data)
2003 2002 2001 ---- ---- ---- INTEREST INCOME Interest and fees on loans $ 28,293 $ 26,857 $ 27,921 Federal funds sold 49 297 679 Available-for-sale securities 2,070 3,405 4,422 Held-to-maturity securities - - 119 -------------- -------------- -------------- Total Interest Income 30,412 30,559 33,141 -------------- -------------- -------------- INTEREST EXPENSE Interest-bearing demand deposits 165 388 815 Savings and money market deposit accounts 2,204 2,711 4,846 Other time deposits 6,935 7,759 9,775 Federal funds purchased and other interest-bearing liabilities 195 223 462 Short-term debt 256 43 205 Long-term debt 3,794 3,102 2,291 -------------- -------------- -------------- Total Interest Expense 13,549 14,226 18,394 -------------- -------------- -------------- NET INTEREST INCOME 16,863 16,333 14,747 PROVISION FOR LOAN LOSSES 1,350 2,920 2,400 -------------- -------------- -------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,513 13,413 12,347 -------------- -------------- -------------- NONINTEREST INCOME Loans held for sale fee income 19,866 16,690 6,931 Service fees 2,207 1,847 1,632 Realized gains on sales of securities - 193 500 Other income 463 281 203 -------------- -------------- -------------- Total Noninterest Income 22,536 19,011 9,266 -------------- -------------- -------------- NONINTEREST EXPENSE Salaries and employee benefits 19,670 16,437 10,063 Net occupancy expense 3,137 2,101 1,574 Other operating expense 6,478 5,578 4,073 -------------- -------------- -------------- Total Noninterest Expense 29,285 24,116 15,710 -------------- -------------- -------------- INCOME BEFORE INCOME TAXES 8,764 8,308 PROVISION FOR INCOME TAXES 3,130 2,912 1,960 -------------- -------------- -------------- NET INCOME $ 5,634 $ 5,396 $ 3,943 ============== ============== ============== BASIC EARNINGS PER SHARE $ 2.51 $ 2.48 $ 1.82 ============== ============== ============== DILUTED EARNINGS PER SHARE $ 2.43 $ 2.40 $ 1.77 ============== ============== ============== DIVIDENDS PER SHARE $ 0.15 $ 0.10 $ - ============== ============== ==============
See Notes to Consolidated Financial Statements F-5 BLUE VALLEY BAN CORP CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (dollars in thousands, except share data)
Accumulated Additional Other Comprehensive Common Paid-In Retained Unearned Comprehensive Income Stock Capital Earnings Compensation Income Total ------------- ------ ---------- -------- ------------ -------------- ----- BALANCE, DECEMBER 31, 2000 $2,142 $ 5,277 $15,935 $ - $ 461 $23,815 Issuance of 33,456 shares of common stock 33 364 397 Net income $3,943 3,943 3,943 Change in unrealized appreciation on available-for-sale securities, net of income taxes of $246 370 370 370 ------ ------ ------- ------- --------- ------ ------- $4,313 ====== BALANCE, DECEMBER 31, 2001 $2,175 $ 5,641 $19,878 $ - $ 831 $28,525 ====== ======= ======= ========= ====== ======= Issuance of 47,535 shares of common stock 48 643 691 Dividends on common stock ($0.10 per share) (222) (222) Net income 5,396 5,396 5,396 Change in unrealized appreciation on available-for-sale securities, net of income taxes of $(30) (46) (46) (46) ------ ------ ------- ------- --------- ------ ------- $5,350 ====== BALANCE, DECEMBER 31, 2002 $2,223 $ 6,284 $25,052 $ - $ 785 $34,344 ====== ======= ======= ========= ====== ======= Issuance of 56,450 shares of common stock 56 1,120 (399) 777 Dividends on common stock ($0.15 per share) (342) (342) Net income 5,634 5,634 5,634 Change in unrealized appreciation on available-for-sale securities, net of income taxes of $(143) (215) (215) (215) ------ ------ ------- ------- --------- ------ ------- $5,419 ====== BALANCE, DECEMBER 31, 2003 $2,279 $ 7,404 $30,344 $ (399) $ 570 $40,198 ====== ======= ======= ========= ====== =======
December 31, December 31, December 31, 2003 2002 2001 ---- ---- ---- Reclassification Disclosure Unrealized appreciation (depreciation) on available-for-sale securities, net of income taxes of $(143), $47 and $446 for the periods ended December 31, 2003, 2002 and 2001, respectively $ (215) $ 70 $ 670 Less: reclassification adjustments for appreciation included in net income, net of income taxes of $0, $77 and $200 for the periods ended December 31, 2003, 2002 and 2001, respectively - (116) (300) --------- ------------ ------- Change in unrealized appreciation on available-for-sale securities, net of income taxes (credit) of $(143), $(30), and $246 for the periods ended December 31, 2003, 2002 and 2001, respectively $ (215) $ (46) $ 370 ========= ============ =======
See Notes to Consolidated Financial Statements F-6 BLUE VALLEY BAN CORP CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (dollars in thousands)
2003 2002 2001 ---------- ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,634 $ 5,396 $ 3,943 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation and amortization 1,579 1,114 848 Amortization of premiums and discounts on securities 38 42 24 Provision for loan losses 1,350 2,920 2,400 Deferred income taxes 529 (754) (212) Net gain on sales of available-for-sale securities - (193) (500) Net loss on sale of foreclosed assets 58 121 - Net (gain) loss on sale of premises and equipment (18) 35 (5) Originations of loans held for sale (1,544,916) (1,305,219) (641,332) Proceeds from the sale of loans held for sale 1,645,891 1,227,800 600,686 Changes in: Interest receivable 91 500 546 Prepaid expenses and other assets (1,353) (617) (87) Interest payable and other liabilities (1,374) 1,370 1,365 ---------- ---------- ---------- Net cash provided by (used in) operating activities 107,509 (76,485) (32,324) ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Net originations of loans (46,439) (58,127) (53,295) Proceeds from sales of loan participations - 9,135 4,946 Purchase of premises and equipment (9,099) (3,060) (1,445) Proceeds from sale of premises and equipment 18 12 11 Proceeds from the sale of foreclosed assets 828 1,026 655 Proceeds from maturities of held-to-maturity securities - - 2,000 Proceeds from sales of available-for-sale securities - 13,183 16,400 Proceeds from maturities of available-for-sale securities 80,168 65,198 33,875 Purchases of available-for-sale securities (124,936) (61,994) (50,357) Purchases of Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities (2,345) (2,625) (1,926) Proceeds from the sale of Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities - 893 - Net cash acquired in branch acquisition - - 1,604 ---------- ---------- ---------- Net cash used in investing activities (101,805) (36,359) (74,532) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand deposits, money market, NOW and savings accounts 11,204 22,579 31,279 Net increase in time deposits 35,504 6,963 22,162 Repayments of long-term debt (4,670) (162) (150) Proceeds from long-term debt 22,825 22,095 19,500 Net proceeds (payments) on short-term debt (35,000) 35,000 (5,000) Proceeds from sale of common stock 777 691 397 Net increase (decrease) in federal funds purchased and other interest-bearing liabilities (13,382) 19,274 907 ---------- ---------- ---------- Net cash provided by financing activities 17,258 106,440 69,095 ---------- ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,962 2,596 (10,761) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 27,755 25,159 35,920 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 50,717 $ 27,755 $ 25,159 ========== ========== ========== SUPPLEMENTAL CASH FLOWS INFORMATION Loans transferred to foreclosed assets held for sale $ 688 $ 1,712 $ 370 Restricted stock issued $ 399 $ - $ - Cash dividends declared on common stock $ 342 $ - $ - Interest paid $ 13,195 $ 14,638 $ 18,443 Income taxes paid (net of refunds) $ 4,771 $ 2,535 $ 2,693
See Notes to Consolidated Financial Statements F-7 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Company is a holding company for Bank of Blue Valley (the Bank), Blue Valley Building Corporation, Blue Valley Insurance Services, Inc., BVBC Capital Trust I and BVBC Capital Trust II through 100% ownership of each. The Bank is primarily engaged in providing a full range of banking and mortgage services to individual and corporate customers in southern Johnson County, Kansas. The Bank also originates mortgages nationwide on the internet through its National Mortgage division. The Bank is subject to competition from other financial institutions. The Bank also is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. The Blue Valley Building Corporation is primarily engaged in leasing real property at its facilities in Overland Park, Kansas and owning other properties intended for future use. BVBC Capital Trust I and II are Delaware business trusts created in 2000 and 2003, respectively, to offer trust preferred securities and to purchase the Company's prior subordinated debentures. The Trusts have terms of 35 years, but may dissolve earlier as provided in their trust agreements. OPERATING SEGMENT The Company provides community banking services through its subsidiary bank, including such products and services as loans; time deposits, checking and savings accounts; mortgage originations; trust services; and investment services. These activities are reported as a single operating segment. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets held for sale, management obtains independent appraisals for significant properties. F-8 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Management believes that the allowances for loan losses and the valuation of foreclosed assets held for sale are adequate. While management uses available information to recognize losses on loans and foreclosed assets held for sale, changes in economic conditions may necessitate revision of these estimates in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowances for loan losses and valuation of foreclosed assets held for sale. Such agencies may require the Company to recognize additional losses based on their judgments of information available to them at the time of their examination. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Blue Valley Ban Corp and its 100% owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. CASH EQUIVALENTS The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2003, cash equivalents consisted of federal funds sold. The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2003 was $750,000. INVESTMENT IN DEBT SECURITIES Available-for-sale securities, which include any security for which the Company has no immediate plan to sell, but which may be sold in the future, are carried at fair value. Realized gains and losses, based on amortized cost of the specific security, are included in other income. Unrealized gains and losses are recorded, net of related income tax effects, in stockholders' equity. Premiums and discounts are amortized and accreted, respectively, to interest income using a method which approximates the level-yield method over the period to maturity. Interest on investments in debt securities is included in income when earned. OTHER INVESTMENTS The Company, as a member of the Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) systems, is required to maintain an investment in capital stock of both the FHLB and FRB. No ready market exists for either stock, and the stocks have no quoted market value. Such stock is recorded at cost. F-9 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) MORTGAGE LOANS HELD FOR SALE Mortgage loans held for sale are carried at the lower of cost or fair value, determined using an aggregate basis. Write-downs to fair value are recognized as a charge to earnings at the time the decline in value occurs. Forward commitments to sell mortgage loans are acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. Amounts paid to investors to obtain forward commitments, if any, are deferred until such time as the related loans are sold. The fair values of the forward commitments are not recognized in the financial statements if their terms match those of the underlying mortgage. Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors. Gains and losses are determined by the difference between the selling price and the carrying amount of the loans sold, net of discounts collected or paid, commitment fees paid and considering a normal servicing rate. Fees received from borrowers to guarantee the funding of mortgage loans held for sale are recognized as income or expense when the loans are sold or when it becomes evident that the commitment will not be used. LOANS Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-offs are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. ALLOWANCE FOR LOAN LOSSES The allowance is management's estimate of probable losses which have occurred as of the balance sheet date based on management's evaluation of risk in the loan portfolio. The allowance for loan losses is increased by provisions charged to expense and reduced by loans charged off when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The adequacy of the allowance is evaluated on a monthly basis by management based on management's periodic review of the collectibility of the loans in consideration of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The Bank computes its allowance by assigning specific reserves to impaired loans, and then applies general reserve factors to the rest of the loan portfolio. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management when determining impairment include payment status, collateral value and probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as F-10 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of delay, the reason for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price or the fair value of the collateral if the loan is collateral dependent. PREMISES AND EQUIPMENT Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful lives of the assets. FORECLOSED ASSETS HELD FOR SALE Assets acquired by foreclosure or in settlement of debt and held for sale are valued at their estimated fair value as of the date of foreclosure, and a related valuation allowance is provided for estimated costs to sell the assets. Management evaluates the value of foreclosed assets held for sale periodically and increases the valuation allowance for any subsequent declines in fair value. Increases in the valuation allowance and gains/losses on sales of foreclosed assets are included in non-interest expenses, net. CORE DEPOSIT INTANGIBLE ASSETS Unamortized core deposit intangible assets aggregated $1,128,000 and $1,281,000 (originally $2,576,000) at December 31, 2003 and 2002, respectively, and have been amortized over a 15-year period using the straight-line method. Amortization expense related to core deposit intangible assets was $152,000 for each of the years 2003, 2002 and 2001. FEE INCOME Loan origination fees, net of direct origination costs, are recognized as income using the level-yield method over the term of the loans. RECLASSIFICATION Certain reclassifications have been made to the 2002 and 2001 financial statements to conform to the 2003 financial statement presentation. These reclassifications had no effect on net income. F-11 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES Deferred tax liabilities and assets are recognized for the tax effect of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized. EARNINGS PER SHARE Basic earnings per share is computed based on the weighted average number of shares outstanding during each year. Diluted earnings per share is computed using the weighted average common shares and all potential dilutive common shares outstanding during the year. The computation of per share earnings is as follows:
2003 2002 2001 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Net income $ 5,634 $ 5,396 $ 3,943 ---------- ---------- ---------- Average common shares outstanding 2,244,930 2,178,803 2,165,030 Average common share stock options outstanding 75,910 74,126 57,136 ---------- ---------- ---------- Average diluted common shares 2,320,840 2,252,929 2,222,166 ---------- ---------- ---------- Basic earnings per share $ 2.51 $ 2.48 $ 1.82 ========== ========== ========== Diluted earnings per share $ 2.43 $ 2.40 $ 1.77 ========== ========== ==========
F-12 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING FOR STOCK-BASED COMPENSATION The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for the plan and no compensation cost has been recognized. Had compensation cost for the Company's stock options issued under its Equity Incentive Plan been determined based on the fair value at the grant dates using the minimum value method under Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated as follows:
2003 2002 2001 ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income As reported $ 5,634 $ 5,396 $ 3,943 Pro forma $ 5,618 $ 5,344 $ 3,864 Basic earnings per share As reported $ 2.51 $ 2.48 $ 1.82 Pro forma $ 2.50 $ 2.45 $ 1.78 Diluted earnings per share As reported $ 2.43 $ 2.40 $ 1.77 Pro forma $ 2.42 $ 2.37 $ 1.74
The fair value of options granted is estimated on the date of the grant using the minimum value method with the following weighted-average assumptions:
2003 2002 2001 ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) Dividend per Share $ 0.15 $ 0.10 $ - Risk-Free Interest Rate 1.75% 1.75% 4.00% Expected Life of Options 2 years 2 years 2 years Weighted-average fair value of options granted during the year $ - $ 49 $ 108 ======== ======== ========
The expected life of options outstanding is based on the historical experience of the Company. During 2003, the Company issued no stock options. F-13 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 2: INVESTMENT IN DEBT SECURITIES The amortized cost and approximate fair value of available-for-sale securities are as follows:
December 31, 2003 -------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gains Losses Fair Value --------- --------- --------- --------- (dollars in thousands) U.S. Government agencies $ 93,408 $ 471 $ (89) $ 93,790 State and political subdivisions 10,878 573 - 11,451 Equity and other 500 - (5) 495 --------- --------- --------- --------- $ 104,786 $ 1,044 $ (94) $ 105,736 ========= ========= ========= =========
December 31, 2002 -------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gains Losses Fair Value --------- --------- ---------- ---------- (dollars in thousands) U.S. Government agencies $46,998 $ 581 $ - $47,579 State and political subdivisions 13,057 728 - 13,785 ------- ------- ------- ------- $60,055 $ 1,309 $ - $61,364 ======= ======= ======= =======
Maturities of available-for-sale debt instruments at December 31, 2003:
Amortized Approximate Cost Fair Value --------- ----------- (dollars in thousands) In one year or less $ 905 $ 922 After one through five years 100,321 101,043 After five through ten years 3,060 3,276 -------- -------- $104,286 $105,242 ======== ========
F-14 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 2: INVESTMENT IN DEBT SECURITIES (CONTINUED) The book value and approximate fair value of securities pledged as collateral to secure public deposits amounted to $45,159,000 at December 31, 2003 and $45,570,000 at December 31, 2002. The Company enters into sales of securities under agreements to repurchase. The amounts deposited under these agreements represent short-term borrowings and are reflected as a liability in the consolidated balance sheets. The securities underlying the agreements are book-entry securities. During the period, securities held in safekeeping were pledged to the depositors under a written custodial agreement that explicitly recognizes the depositors' interest in the securities. At December 31, 2003, or at any month end during the period, no material amount of agreements to repurchase securities sold was outstanding with any individual entity. Securities sold under agreements to repurchase averaged $23,264,000 and $16,962,000 during 2003 and 2002, and the maximum amounts outstanding at any month-end were $24,574,000 and $23,688,000, respectively. The carrying value of securities pledged to secure agreements to repurchase amounted to $28,178,000 and $28,357,000 at December 31, 2003 and 2002, respectively. Gross gains of $0, $193,000 and $514,000 were realized in 2003, 2002 and 2001, respectively, and gross losses of $0, $0 and $14,000 were realized in 2003, 2002 and 2001, respectively, from sales of available-for-sale securities. Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2003 was $23,897,000, or approximately 23% of the Company's investment in debt securities portfolio. These declines primarily result from fluctuations in market yields. Based on evaluation of available information and evidence, particularly recent volatility in market yields on debt securities, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period in which the other-than-temporary impairment is identified. At December 31, 2003, the Company owned no securities with gross unrealized losses outstanding longer than 12 months. F-15 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES Categories of loans at December 31, 2003 and 2002 include the following:
2003 2002 -------- -------- (dollars in thousands) Commercial $109,818 $ 93,658 Commercial real estate 87,438 71,295 Construction 123,445 127,071 Leases 22,175 22,600 Residential real estate 27,017 21,581 Personal 29,701 26,750 Home equity 25,026 17,127 -------- -------- Total loans 424,620 380,082 Less: Allowance for loan losses 7,051 6,914 -------- -------- Net loans $417,569 $373,168 ======== ========
Activity in the allowance for loan losses was as follows:
2003 2002 2001 ------- ------- ------- (dollars in thousands) Balance, beginning of year $ 6,914 $ 5,267 $ 4,440 Provision charged to expense 1,350 2,920 2,400 Losses charged off, net of recoveries of $341,000, $309,000 and $363,000 for 2003, 2002 and 2001, respectively (1,213) (1,273) (1,573) ------- ------- ------- Balance, end of year $ 7,051 $ 6,914 $ 5,267 ======= ======= =======
Impaired loans totaled $10,192,000 and $11,679,000 at December 31, 2003 and 2002, respectively, with related allowances for loan losses of $1,497,000 and $1,830,000, respectively. At December 31, 2003 and 2002, accruing loans delinquent 90 days or more totaled $497,000 and $89,000 respectively. Non-accrual loans were $2,558,000 and $1,038,000 at December 31, 2003 and 2002, respectively. Total interest income of $736,000, $699,000 and $923,000 was recognized on average impaired loans of $11,746,000, $9,585,000 and $6,630,000 for 2003, 2002 and 2001, respectively. Included in this total is cash-basis interest income of $67,000, $46,000 and $202,000 recognized on impaired loans on nonaccrual during 2003, 2002 and 2001, respectively. F-16 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 4: PREMISES AND EQUIPMENT Major classifications of these assets are as follows:
2003 2002 ------- ------- (dollars in thousands) Land $ 1,820 $ 1,777 Building and improvements 13,400 5,624 Furniture and equipment 5,115 4,200 Land improvements, net 1,876 1,876 ------- ------- 22,211 13,477 Less accumulated depreciation 3,961 3,200 ------- ------- Total premises and equipment $18,250 $10,277 ======= =======
NOTE 5: INTEREST-BEARING DEPOSITS Interest-bearing time deposits in denominations of $100,000 or more were $106,669,000 on December 31, 2003 and $65,700,000 on December 31, 2002. The Company acquires brokered deposits in the normal course of business. At December 31, 2003 and 2002, brokered deposits of $35,805,000 and $12,200,000, respectively, were included in the Company's time deposit balance. At December 31, 2003, the scheduled maturities of time deposits are as follows:
(dollars in thousands) 2004 $ 95,410 2005 27,821 2006 18,648 2007 36,350 2008 and thereafter 26,918 ----------- $ 205,147 ===========
F-17 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 6: OPERATING LEASES Blue Valley Building Corp. leases office space to others under noncancellable operating leases expiring in 2004. Minimum future rent receivable under noncancellable operating leases at December 31, 2003 was $143,000. The Company leases space from others under noncancellable operating leases expiring in various years through 2005. Consolidated rental and operating lease expenses were $154,000 in 2003, $236,000 in 2002 and $82,000 in 2001. Minimum rental commitments payable under noncancellable operating leases at December 31, 2003 are as follows:
(dollars in thousands) 2004 $ 146 2005 25 -------- Future minimum lease payable $ 171 ========
NOTE 7: INCOME TAXES The provision for income taxes consists of the following:
2003 2002 2001 ------- ------- ------ (dollars in thousands) Taxes currently payable $ 2,601 $ 3,666 $ 2,172 Deferred income taxes 529 (754) (212) ------- ------- ------- $ 3,130 $ 2,912 $ 1,960 ======= ======= =======
A reconciliation of income tax expense at the statutory rate to the Company's actual income tax expense is shown below:
2003 2002 2001 ------- ------- ------- (dollars in thousands) Computed at the statutory rate (34%) $ 2,980 $ 2,825 $ 2,007 Increase (decrease) resulting from: Tax-exempt interest (225) (235) (248) Stock options (30) (25) (59) State income taxes 232 293 194 Other 173 54 66 ------- ------- ------- Actual tax provision $ 3,130 $ 2,912 $ 1,960 ======= ======= =======
F-18 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 7: INCOME TAXES (CONTINUED) The tax effects of temporary differences related to deferred taxes shown on the December 31, 2003 and 2002 consolidated balance sheets are as follows:
2003 2002 ------- ------- (dollars in thousands) Deferred tax assets: Allowance for loan losses $ 2,135 $ 2,028 Accrued compensated absences 41 58 Mark to market - Mortgage loans held for sale 82 390 ------- ------- 2,258 2,476 ------- ------- Deferred tax liabilities: Accumulated depreciation (363) (184) Accumulated appreciation on available-for- sale securities (380) (523) Other (213) (81) ------- ------- (956) (788) ------- ------- Net deferred tax asset $ 1,302 $ 1,688 ======= =======
NOTE 8: SHORT-TERM DEBT Short-term debt at December 31, 2003 and 2002 consisted of the following components:
2003 2002 -------- ------- (dollars in thousands) Federal Home Loan Bank advance (A) $ - $35,000 -------- ------- Total short-term debt $ - $35,000 ======== =======
(A) Payable on demand; collateralized by various assets including mortgage-backed loans. F-19 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 9: LONG TERM DEBT Long-term debt at December 31, 2003 and 2002 consisted of the following components:
2003 2002 ------- ------- (dollars in thousands) Note payable - other (A) $ 1,281 $ 1,456 Note payable - bank (B) - 4,095 Note payable - bank (C) 4,925 - Federal Home Loan Bank advances (D) 62,500 52,500 Trust Preferred Securities - BVBC Capital Trust I (E) 11,500 11,500 Trust Preferred Securities - BVBC Capital Trust II (F) 7,500 - ------- ------- Total long-term debt $87,706 $69,551 ======= =======
(A) Due in August 2009; payable in monthly installments of $23,175 including interest at 7.5%; collateralized by land, building and assignment of future rents. (B) Borrowing under $10 million revolving line of credit; interest only at the fed funds rate + 1.68% due quarterly until 2003, when the outstanding principal balance is due; collateralized by common stock of the Company's subsidiary bank. (C) Due in December 2012, payable in quarterly installments of principal plus interest at the Federal Funds Rate plus 1.68%; collateralized by common stock of the Company's subsidiary bank. (D) Due in 2007, 2008, 2010, 2011 and 2013; collateralized by various assets including mortgage-backed loans. The interest rates on the advances range from 1.55% to 5.682%. (E) Due in 2030; interest only at 10.375% due quarterly; fully and unconditionally guaranteed by the Company on a subordinated basis to the extent that the funds are held by the Trust. (F) Due in 2033; interest only at LIBOR + 3.25% due quarterly; fully and unconditionally guaranteed by the Company on a subordinated basis to the extent that the funds are held by the Trust. Subordinated to the trust preferred securities (E) due in 2030. Aggregate annual maturities of long-term debt at December 31, 2003 are as follows:
(dollars in thousands) 2004 $ 613 2005 653 2006 694 2007 20,736 2008 10,784 Thereafter 54,226 ---------- $ 87,706 ==========
F-20 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 10: REGULATORY MATTERS The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below). Management believes, as of December 31, 2003, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2003, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Company and the Bank's actual capital amounts and ratios are also presented in the table.
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ------ ----------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- AS OF DECEMBER 31, 2003: (dollars in thousands) Total Capital (to Risk Weighted Assets) Consolidated $63,948 12.41% $41,216 8.00% N/A ======= ===== ======= ==== Bank Only $55,957 11.20% $39,973 8.00% $49,967 10.00% ======= ===== ======= ==== ======= ===== Tier 1 Capital (to Risk Weighted Assets) Consolidated $51,710 10.04% $20,608 4.00% N/A ======= ===== ======= ==== Bank Only $49,702 9.95% $19,987 4.00% $29,980 6.00% ======= ===== ======= ==== ======= ===== Tier 1 Capital (to Average Assets) Consolidated $51,710 8.31% $24,897 4.00% N/A ======= ===== ======= ==== Bank Only $49,702 8.15% $24,382 4.00% $30,478 5.00% ======= ===== ======= ==== ======= =====
F-21 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 10: REGULATORY MATTERS (CONTINUED)
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ------ ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- AS OF DECEMBER 31, 2002: (dollars in thousands) Total Capital (to Risk Weighted Assets) Consolidated $ 49,949 10.13% $ 39,434 8.00% N/A ======== ===== ======== ==== Bank Only $ 49,128 10.12% $ 38,840 8.00% $ 48,550 10.00% ======== ===== ======== ==== ======== ===== Tier 1 Capital (to Risk Weighted Assets) Consolidated $ 43,465 8.82% $ 19,717 4.00% N/A ======== ===== ======== ==== Bank Only $ 43,049 8.87% $ 19,420 4.00% $ 29,130 6.00% ======== ===== ======== ==== ======== ===== Tier 1 Capital (to Average Assets) Consolidated $ 43,465 7.74% $ 22,471 4.00% N/A ======== ===== ======== ==== Bank Only $ 43,049 7.79% $ 22,113 4.00% $ 27,642 5.00% ======== ===== ======== ==== ======== =====
The Bank is subject to certain restrictions on the amounts of dividends that it may declare without prior regulatory approval. At December 31, 2003, approximately $17,421,000 of retained earnings were available for dividend declaration without prior regulatory approval. NOTE 11: TRANSACTIONS WITH RELATED PARTIES At December 31, 2003 and 2002, the Company had loans outstanding to executive officers, directors and to companies in which the Bank's executive officers or directors were principal owners, in the amounts of $5,976,000 and $8,083,000, respectively. Related party transactions for 2003 and 2002 were as follows:
2003 2002 -------- ------ (dollars in thousands) Balance, beginning of year $ 8,083 $ 10,133 New loans 2,582 4,351 Repayments and reclassifications (4,689) (6,401) -------- -------- Balance, end of year $ 5,976 $ 8,083 ======== ========
In management's opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management's opinion, these loans did not involve more than the normal risk of collectibility or present other unfavorable features. F-22 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 12: PROFIT SHARING PLAN The Company's profit sharing plan covers substantially all employees. Contributions to the plan are determined annually by the Board of Directors, and participant interests are vested over a period from two to six years of service. Company contributions charged to expense for 2003, 2002 and 2001 were $320,000, $527,000 and $292,000, respectively. NOTE 13: EQUITY INCENTIVE COMPENSATION The Company has an Equity Incentive Plan (the "Plan") which allows the Company to issue equity incentive compensation awards to its employees and directors in the forms of stock options, restricted shares or deferred share units. Under the fixed option provisions of the Plan, the Company may grant options that vest two years from the date of grant to its employees for shares of common stock. At December 31, 2003, the Company had 247,759 shares available to be granted (options granted prior to 1998 were subject to an earlier plan with similar terms). The exercise price of each option is intended to equal the fair value of the Company's stock on the date of grant, and maximum terms are 10 years. During 2003, the Company granted no stock options, but did grant 13,275 shares of restricted common stock. Recipients of the restricted stock grant vest in the stock after three years from the date of the grant. The basis of the restricted shares granted, equal to the fair value of the Company's stock on the date of grant, will be amortized to compensation expense ratably over the three year vesting period. There were no forfeitures of restricted stock during 2003. A summary of the status of option shares under the plan at December 31, 2003, 2002 and 2001, and changes during the years then ended, is presented below:
2003 2002 2001 ------------------------- ------------------------- ------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding, beginning of year 235,575 $ 17.02 235,760 $ 14.77 224,716 $ 12.86 Granted - - 51,600 25.00 73,500 19.50 Exercised (41,675) 17.77 (45,035) 14.25 (32,456) 11.70 Forfeited (5,600) 22.30 (6,750) 17.94 (30,000) 15.37 ------- ------- ------- Outstanding, end of year 188,300 $ 16.70 235,575 $ 17.02 235,760 $ 14.77 ======= ======= ======= Options exercisable, end of year 164,350 $ 15.49 172,525 $ 15.26 171,760 $ 13.44 ======= ======= =======
The weighted-average remaining contractual life of option shares at December 31, 2003 was 6.67 years. Exercise prices ranged from $3.75 to $25.00. Information about options outstanding and exercisable as of December 31, 2003 is set forth in the following table. F-23 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 13: EQUITY INCENTIVE COMPENSATION (CONTINUED)
Options Outstanding Options Exercisable ------------------------------------------------ ------------------------ Weighted Weighted Number Average Weighted Number Average Range of Outstanding Remaining Average Exercisable Exercise Exercise Prices at 12/31/03 Contractual Life Exercise Price at 12/31/03 Price --------------- ----------- ----------- -------------- ----------- ----- $ 3.75 to $ 3.75 10,000 1 year $ 3.75 10,000 $ 3.75 5.10 to 5.10 3,000 2 years 5.10 3,000 5.10 6.25 to 6.25 7,000 3 years 6.25 7,000 6.25 7.50 to 7.50 9,000 4 years 7.50 9,000 7.50 11.25 to 11.25 16,400 5 years 11.25 16,400 11.25 14.38 to 14.38 19,700 6 years 14.38 19,700 14.38 16.50 to 16.50 33,350 7 years 16.50 33,350 16.50 19.50 to 19.50 51,500 8 years 19.50 51,500 19.50 25.00 to 25.00 38,350 9 years 25.00 14,400 25.00 ---------------------------------------------------------------------------------------------------------- 188,300 164,350 ==========================================================================================================
NOTE 14: OTHER INCOME/EXPENSE Other operating expenses consist of the following:
2003 2002 2001 ------ ------ ------ (dollars in thousands) Advertising $1,277 $ 920 $ 732 Data processing 556 530 441 Professional fees 810 628 379 Other expense 3,835 3,500 2,521 ------ ------ ------ Total $6,478 $5,578 $4,073 ====== ====== ======
Other income consists of the following:
2003 2002 2001 ---- ---- ---- (dollars in thousands) Rental income $154 $142 $140 Other income 309 139 63 ---- ---- ---- Total $463 $281 $203 ==== ==== ====
NOTE 15: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments: CASH AND CASH EQUIVALENTS For these short-term instruments, the carrying amount approximates fair value. F-24 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 15: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) AVAILABLE-FOR-SALE SECURITIES Fair values for available-for-sale securities, which also are the amounts recognized in the consolidated balance sheets, equal quoted market prices if available. If quoted market prices are not available, fair values are estimated based on quoted market prices of similar securities. MORTGAGE LOANS HELD FOR SALE For homogeneous categories of loans, such as mortgage loans held for sale, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. LOANS The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value. DEPOSITS The fair value of demand deposits, savings accounts, NOW accounts and certain money market deposits is the amount payable on demand at the reporting date (i.e., their carrying amount). The fair value of fixed maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE AND OTHER LIABILITIES For these short-term instruments, the carrying amount is a reasonable estimate of fair value. SHORT-TERM AND LONG-TERM DEBT Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. COMMITMENTS TO EXTEND CREDIT, LETTERS OF CREDIT AND LINES OF CREDIT The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit and lines of credit is based on fees currently charged for similar agreements or on F-25 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 15: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The following table presents estimated fair values of the Company's financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which method involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments, and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.
2003 2002 ------------------- ------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- (dollars in thousands) Financial assets: Cash and cash equivalents $ 50,717 $ 50,717 $ 27,755 $ 27,755 Available-for-sale securities 105,736 105,736 61,364 61,364 Mortgage loans held for sale 18,297 18,301 119,272 119,269 Interest receivable 1,923 1,923 2,014 2,014 Loans, net of allowance for loan losses 417,569 421,350 373,168 377,958 Financial liabilities: Deposits 470,495 471,704 423,787 426,827 Federal funds purchased and other interest- bearing liabilities 23,447 23,447 36,830 36,830 Short-term debt - - 35,000 35,000 Long-term debt 87,706 91,628 69,551 74,359 Interest payable 1,309 1,309 911 911 Unrecognized financial instruments (net of amortization): Commitments to extend credit - - - - Letters of credit - - - - Lines of credit - - - - Forward commitments - - - -
F-26 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 16: COMMITMENTS AND CREDIT RISKS The Company extends credit for commercial real estate mortgages, residential mortgages, working capital financing and consumer loans to businesses and residents principally in southern Johnson County. The Bank also purchases indirect leases from various leasing companies throughout Kansas and Missouri. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require a payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. At December 31, 2003 and 2002, the Company had outstanding commitments to originate loans aggregating approximately $32,913,000 and $24,836,000, respectively. The commitments extend over varying periods of time with the majority being disbursed within a one-year period. Loan commitments at fixed rates of interest amounted to $6,650,000 and $1,211,000 at December 31, 2003 and 2002, respectively, with the remainder at floating market rates. Mortgage loans in the process of origination represent amounts that the Company plans to fund within a normal period of 60 to 90 days and which are intended for sale to investors in the secondary market. Forward commitments to sell mortgage loans are obligations to deliver loans at a specified price on or before a specified future date. The Bank acquires such commitments to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. Total mortgage loans in the process of origination amounted to $47,965,000 and $126,471,000 and mortgage loans held for sale amounted to $18,297,000 and $119,272,000 at December 31, 2003 and 2002, respectively. Related forward commitments to sell mortgage loans amounted to approximately $66,2626,000 and $245,743,000 at December 31, 2003 and 2002, respectively. Mortgage loans in the process of origination represent commitments to originate loans at fixed rates. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company had total outstanding letters of credit amounting to $20,228,000 and $10,943,000 at December 31, 2003 and 2002, respectively. F-27 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 16: COMMITMENTS AND CREDIT RISKS (CONTINUED) Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance sheet instruments. At December 31, 2003 and 2002, unused lines of credit borrowings aggregated approximately $131,995,000 and $113,709,000, respectively. Additionally, the Company periodically has excess funds, which are loaned to other banks as federal funds sold. At December 31, 2003, federal funds sold totaling $29,400,000 and $0, respectively, were loaned to various banks, as approved by the Board of Directors, with the largest balance at any one bank being $25,400,000. NOTE 17: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table presents the unaudited results of operations for the past two years by quarter. See discussion on earnings per share in "Note 1: Nature of Operations and Summary of Significant Accounting Policies" in the Company's Consolidated Financial Statements.
2003 2002 ----------------------------------------- ----------------------------------------- FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Operations Net interest income after provision for loan losses $ 3,436 $ 4,402 $ 3,792 $ 3,883 $ 3,295 $ 3,552 $ 3,322 $ 3,244 Noninterest income 3,595 6,637 6,606 5,698 6,196 5,312 3,931 3,572 Noninterest expense 5,902 8,713 7,858 6,812 7,323 6,316 5,437 5,040 -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes 1,129 2,326 2,540 2,769 2,168 2,548 1,816 1,776 Income taxes 393 831 913 993 769 892 635 616 -------- -------- -------- -------- -------- -------- -------- -------- Net income $ 736 $ 1,495 $ 1,627 $ 1,776 $ 1,399 $ 1,656 $ 1,181 $ 1,160 ======== ======== ======== ======== ======== ======== ======== ======== Net Income per Share Data Basic $ 0.32 $ 0.66 $ 0.73 $ 0.80 $ 0.64 $ 0.76 $ 0.54 $ 0.53 ======== ======== ======== ======== ======== ======== ======== ======== Diluted $ 0.31 $ 0.64 $ 0.71 $ 0.77 $ 0.61 $ 0.74 $ 0.53 $ 0.52 ======== ======== ======== ======== ======== ======== ======== ======== Balance Sheet Total assets $626,485 $621,428 $628,110 $591,409 $605,183 $559,105 $534,767 $529,923 Total loans, net 417,569 406,127 406,954 396,531 373,168 351,943 341,386 331,035 Shareholders' equity 40,198 39,629 38,342 36,248 34,344 32,663 30,891 29,342
F-28 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 17: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED) The above unaudited financial information reflects all adjustments that are, in the opinion of management, necessary to present a fair statement of the results of operations for the interim periods presented. NOTE 18: NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board recently issued its Interpretation No. 46 (FIN 46 revised), Consolidation of Variable Interest Entities. This new Interpretation addresses consolidation by business enterprises of variable interest entities, which have one or more of the following characteristics: 1. The equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties, including the equity holders. 2. The equity investors lack one or more of the following essential characteristics of a controlling financial interest: a. The direct or indirect ability to make decisions about the entity's activities through voting rights or similar rights; b. The obligation to absorb the expected losses of the entity; or, c. The right to receive the expected residual returns of the entity. 3. The equity investors have voting rights that are not proportionate to their economic interests, and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The Company's initial application of the Interpretation will require deconsolidation of the Company's investment in BVBC Capital Trusts I and II, which we do not anticipate will have a material impact on the financial statements of the Company. The Company will apply FIN 46 (revised) in our first reporting period ending after March 15, 2004. F-29 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 19: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) CONDENSED BALANCE SHEETS DECEMBER 31, 2003 AND 2002
2003 2002 ---------- ---------- (In thousands) ASSETS Cash and cash equivalents $ 806 $ 330 Investments in subsidiaries: Bank of Blue Valley 51,400 45,114 Blue Valley Building Corp. 11,863 4,075 Blue Valley Insurance Services, Inc. 46 - BVBC Capital Trust I 356 356 BVBC Capital Trust II 232 - Other assets 2,279 1,844 ---------- ---------- Total Assets $ 66,982 $ 51,719 ========== ========== LIABILITIES Long-term debt $ 4,925 $ 4,095 Trust preferred securities 19,588 11,856 Other liabilities 2,270 1,424 ---------- ---------- Total Liabilities 26,783 17,375 ---------- ---------- STOCKHOLDERS' EQUITY Common stock 2,279 2,223 Additional paid-in capital 7,404 6,284 Retained earnings 30,344 25,052 Unearned compensation (399) - Unrealized appreciation on available-for-sale securities, net of income taxes of $380 and $523 at 2003 and 2002, respectively 570 785 ---------- ---------- Total Stockholders' Equity 40,198 34,344 ---------- ---------- Total Liabilities and Stockholders' Equity $ 66,982 $ 51,719 ========== ==========
F-30 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 19: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (CONTINUED) CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001 ---------- ---------- ---------- (In thousands) Income Dividends from subsidiaries $ 445 $ 137 $ 37 Other income 39 3 29 ---------- ---------- ---------- 484 140 66 Expenses 2,189 1,588 1,375 ---------- ---------- ---------- Loss before income taxes and equity in undistributed net income of subsidiaries (1,705) (1,448) (1,309) Credit for income taxes (716) (539) (446) ---------- ---------- ----------- Loss before equity in undistributed net income of subsidiaries (989) (909) (863) Equity in undistributed net income of subsidiaries 6,623 6,305 4,806 ---------- ---------- ---------- Net income $ 5,634 $ 5,396 $ 3,943 ========== ========== ==========
F-31 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 19: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001 ---------- ---------- ---------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,634 $ 5,396 $ 3,943 Items not requiring (providing) cash: Deferred income taxes 82 30 181 Equity in undistributed income of subsidiaries (6,623) (6,305) (4,806) Changes in: Other assets (517) (431) (80) Other liabilities 504 571 (50) ---------- ---------- ---------- Net cash used in operating activities (920) (739) (812) ---------- ---------- ---------- CASH FLOW FROM INVESTING ACTIVITIES Capital contributed to subsidiary (7,943) (2,018) (2,875) Net collections of loans - - 300 ---------- ---------- ---------- Net cash used in investing activities (7,943) (2,018) (2,575) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Repayments of long-term debt (4,495) - - Proceeds from long-term debt 13,057 2,095 2,000 Proceeds from sale of common stock 777 691 397 ---------- ---------- ---------- Net cash provided by financing activities 9,339 2,786 2,397 ---------- ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 476 29 (990) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 330 301 1,291 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 806 $ 330 $ 301 ========== ========== ==========
F-32