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, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
COMMISSION FILE NUMBER: 001-15933
BLUE VALLEY BAN CORP
(Exact name of registrant as specified in its charter)
KANSAS 48-1070996
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11935 RILEY
OVERLAND PARK, KANSAS 66225-6128
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (913) 338-1000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class 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 28, 2003 the registrant had 2,225,736 shares of Common
Stock ($1.00 par value) outstanding, of which 1,203,053 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 February 28, 2003
closing price of the stock, was approximately $29.5 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Part III - Proxy Statement for the 2003 Annual Meeting of Stockholders
BLUE VALLEY BAN CORP
FORM 10-K INDEX
Page No.
PART I.
Item I. Business 2
Item 2. Properties 15
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
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. Controls and Procedures 39
PART IV.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 40
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, their owners, professionals
and individuals 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. In
addition, in 1994, we acquired the deposits of a branch of a failed savings and
loan institution to augment our internal growth and expand into an additional
market which management believed was attractive. In 1994, we also completed the
construction of our current headquarters in Overland Park, Kansas. We currently
have five banking center locations in Johnson County, Kansas, including our main
office in Overland Park, full-service offices in Olathe and Shawnee, Kansas, and
supermarket banking facilities in Leawood and Shawnee, Kansas.
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 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; however, we 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 two wholly-owned subsidiaries, Blue
Valley Building Corp., which owns the building and property that comprise our
headquarters in Overland Park, Kansas and other properties intended for future
use, and BVBC Capital Trust I, which was created to offer the Company's trust
preferred securities and to purchase our junior subordinated debentures. The
Bank has one wholly-owned subsidiary, Blue Valley Investment Corp., which owns
and services a portion of a commercial lease portfolio that we purchased in
1999.
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 natural growth rate of the banking industry as well as the internal growth
experienced locally by our peers.
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The income levels and growth rate of Johnson County, Kansas compare
favorably to national averages. Johnson County's population growth rate ranks in
the top 2% of counties nationally, and its per capita income ranks in the top 1%
of counties nationally. Johnson County is also a significant banking market in
the State of Kansas and in the Kansas City MSA. According to available industry
data, as of June 30, 2002, total deposits in Johnson County, including those of
banks, thrifts and credit unions, were approximately $9.4 billion, which
represented 21.88% of total deposits in the state of Kansas and 34.28% 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. In 2001, the operations of
this branch were moved across the street into a more suitable location which the
Bank acquired. 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 expand our market presence 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 early in 2004.
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 income is interest earned on
our loan portfolio. As of December 31, 2002, our loans represented approximately
62.80% of our total assets. Our legal lending limit to any one borrower was
$12.5 million at December 31, 2002 and our largest single borrower as of that
date had outstanding loans of $9.0 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 potential customers and existing customers. We believe that we
have been successful in maintaining our customers because of our staff's
attentiveness to the financial needs of our customers 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 Company'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, 2002.
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LOAN PORTFOLIO
AS OF DECEMBER 31, 2002
----------------------------
AMOUNT PERCENT
(DOLLARS IN THOUSANDS)
Commercial...................................... $ 93,658 24.64%
Commercial real estate.......................... 71,295 18.76
Construction.................................... 127,071 33.43
Leases.......................................... 22,600 5.95
Residential real estate......................... 21,581 5.68
Personal........................................ 26,750 7.04
Home equity..................................... 17,127 4.50
------------- ------------
Total loans and leases.................... 380,082 100.00%
Less allowance for loan losses.................. 6,914
-------------
Loans receivable, net........................... $ 373,168
-------------
Commercial loans. As of December 31, 2002, approximately $93.7 million, or
24.64%, 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 the Kansas City MSA, focusing on 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 generally seeks to obtain personal guarantees for its commercial loans. As
of December 31, 2002, approximately 8.90% of our commercial loans had
outstanding balances in excess of $300,000, and these loans accounted for 61.13%
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 $6.5 million, or 6.90%, of our commercial loans are Small
Business Administration (SBA) loans, of which $4.6 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 buildings and
churches. As of December 31, 2002, approximately $71.3 million, or 18.76%, of
our loan portfolio represented commercial real estate mortgage loans. Our
commercial real estate mortgage 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 loan documentation policy.
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,
2002, approximately $127.1 million, or 33.43%, 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
thirteen-year history. We attribute this success to our expertise, availability
and prompt service. The Bank's experience and reputation in this area have
enabled it to focus on relationships with a smaller number of larger builders,
which has permitted it to increase the total value of its 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. Those 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, 2002, our lease portfolio totaled $22.6 million, or 5.95%, of our
total loan portfolio, consisting of $14.4 million principal amount of leases
originated by us and $8.2 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.
Of our lease portfolio at December 31, 2002, $244,000, or 1.08%,
represented the remaining balances of leases that Blue Valley Investment
acquired on February 1, 1999 for approximately $12.0 million from National
Refuelers Leasing ("NRL"), a tanker truck leasing company involved in bankruptcy
proceedings. These leases represent leases of tanker trucks used to transport
fuel. Many of these tanker trucks are used at airports and similar locations. Of
the total number of leases acquired by Blue Valley Investment, approximately
$8.7 million in principal amount represented leases that satisfied the Bank's
underwriting criteria for leases, and were purchased by the Bank from Blue
Valley Investment. The remaining NRL assets held by Blue Valley Investment
totaling $3.3 million represented leases that had defaults or delinquencies at
the time of purchase. However, as of December 31, 2002, the entire remaining
portfolio of $244,000 in leases was current.
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
amortization to maximize the value of the collateral during the term of the
lease.
Residential mortgage loans. Our residential mortgage loan portfolio
consists primarily of first and second mortgage loans on residential properties.
As of December 31, 2002, $21.6 million, or 5.68%, 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
5
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 2002, we
originated approximately $1.3 billion of residential mortgage loans, of which we
sold approximately $1.2 billion, or 94.07%, 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 Internet Mortgage division. The timing of this expansion allowed us to
establish this division in a relatively low-rate environment, and reap the
benefits of an eruption of 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 underwrite 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, 2002, our consumer and other
loans totaled $26.8 million, or 7.04%, 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, 2002, approximately $12.1
million, or 3.19%, of our loan portfolio represented indirect installment loans.
Our loans made through this program generally represent loans to purchase new
automobiles. There are currently 13 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.
6
INVESTMENT ACTIVITIES
The objectives of our investment policy are to:
- secure the safety of principal;
- provide adequate liquidity;
- provide securities for use in pledging for public funds or
repurchase agreements; and
- maximize after-tax income consistent with servicing the Bank's
customers' needs.
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 and other
higher-yielding instruments. We also may invest from time to time in corporate
debt or other securities as 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. In 2002 and 2001, the Bank 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 2002 and 2001 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 pays a 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. In 1999, the Bank changed its policy to allow for acceptance of
brokered deposits which can be utilized to support the growth of the Bank. As of
December 31, 2002, the Bank had $12.2 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. Three individuals responsible for providing
these services are joint employees of the Bank and the registered broker-dealer,
and an additional individual is employed by the broker-dealer under contract to
the Bank. Investment brokerage services provide a
7
source of fee income for the Bank. In 2002, the amount of our fee income
generated from investment brokerage services was $208,000.
TRUST SERVICES
We began offering trust services in 1996. Until 1999, the Bank's trust
services were offered exclusively through the employees of an unaffiliated trust
company. The Bank hired a full-time officer in 1999 to develop the Bank's trust
business. Trust services are marketed to both existing Bank customers and new
customers. We believe that the ability to offer trust services as a part of our
complement of financial services to new customers of the Bank presents a
significant cross-marketing opportunity. The services currently offered by the
Bank's trust department include the administration of self-directed individual
retirement accounts, qualified retirement plans, custodial and directed trust
accounts. As of December 31, 2002, the Bank's trust department administered 155
accounts, with assets under management of approximately $44.2 million. Trust
services provide the Bank with a source of fee income and additional deposits.
In 2002, the amount of our fee income from trust services was $203,000.
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 advantages
over us in providing certain 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, 2002, the Bank had approximately 263 full-time
employees. Blue Valley, Blue Valley Building Corp., BVBC Capital Trust I and
Blue Valley Investment Corp. do not have any full-time employees. None of the
employees of the Bank is subject to a collective bargaining agreement. We
consider the Bank's relationship with its employees to be excellent.
DIRECTORS AND EXECUTIVE OFFICERS
For each of our directors and our executive officers, we have set forth
below their ages as of December 31, 2002, and their principal positions.
8
Name Age Positions
- ---- --- ---------
Directors
Robert D. Regnier ................................. 54 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................................ 64 Director of Blue Valley and the Bank
Wayne A. Henry, Jr................................. 50 Director of Blue Valley
C. Ted McCarter.................................... 66 Director of Blue Valley and Chairman of the Board of
Directors of the Bank
Thomas A. McDonnell................................ 57 Director of Blue Valley
Additional Directors of the Bank
Harvey S. Bodker................................... 67 Director of the Bank
Suzanne E. Dotson.................................. 57 Director of the Bank
Charles H. Hunter.................................. 60 Director of the Bank
Executive Officers who are not Directors
Mark A. Fortino.................................... 36 Senior Vice President and Chief Financial Officer of
the Bank; Treasurer of Blue Valley
Ralph J. Schramp................................... 53 Senior Vice President - Commercial Lending and
Business Development for the Bank
Sheila Stokes...................................... 41 Senior Vice President - Retail Division of the Bank
Edward A. Herman................................... 58 Senior Vice President and Chief Lending Officer of the
Bank
John Markert....................................... 57 Senior Vice President - Internet Mortgage Division of
the Bank
Penny T. Hershman.................................. 58 Senior Vice President - Marketing & Signature
Financial Services of the Bank
COMMITTEES OF THE BOARD OF DIRECTORS
The Blue Valley board of directors has a standing Audit Committee, which
reports to the full board of directors in discharging its responsibilities
relating to our accounting, reporting and financial control practices. The Audit
Committee has general responsibility for oversight of financial controls, as
well as our accounting, regulatory and audit activities, and annually reviews
the qualifications of our independent auditors. The current members of the Audit
Committee are Messrs. Alexander, Bodker, Henry and Ms. Dotson.
The Blue Valley board of directors does not currently have a standing
Nominating Committee or Compensation Committee. The full Blue Valley board of
directors nominates persons to serve as directors of Blue Valley. The
compensation of the executive officers and employees of the Bank is determined
jointly by the full boards of directors of Blue Valley and 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
9
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 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
10
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.
RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994. The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 authorized
bank holding companies to expand, by acquiring existing banks, into all states,
even those which had theretofore restricted entry. The legislation also provides
that a holding company may convert the banks it owns in different states to
branches of a single bank, unless a state has elected to prohibit these
interstate transactions. Statewide branching is permitted under Kansas law,
however, out of state banks may establish branches in Kansas only through
mergers with banks already located in Kansas.
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
- 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.
11
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. and
BVBC Capital Trust I 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 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
12
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%;
- "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
13
- 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, 2002, the Bank had capital in excess of the
requirements for a "well-capitalized" institution.
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."
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 $41.3 million or
less plus 10% must be maintained against that portion of net transaction
accounts in excess of this amount (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
14
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 Bank'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, 2002, the outstanding
principal amount of this indebtedness was $1.5 million. This is the Company's
only real property subject to indebtedness.
In 2001, the Bank's 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.
The Bank's Shawnee, Kansas office currently occupies 425 square feet in a
grocery store located at Highway K-7 and 55th Street. The Bank's lease for this
space bears a primary term through December 2004. The Bank's 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.
In 2001, the Bank entered into two leases for approximately 7,345 square
feet of commercial office space located at 120th and Blue Valley Parkway for its
Internet Mortgage division and mortgage Secondary Marketing department. The
terms of the leases expire in July 2003.
In January 2003, Blue Valley Building Corp. 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 will be
leased to the Bank. The Bank intends to consolidate its mortgage operations and
operate a small branch at this facility.
In 1998, the Bank purchased approximately 1.34 acres of undeveloped land
on the corners of K68 and US 69 Highway in Louisburg, Kansas, just south of
Johnson County for potential future development as a full-service branch.
Additionally, in 2001 the Bank purchased undeveloped land on the corner of
135th Street and Mission Road in Leawood, Kansas for the purposes of
constructing a full-service branch and office building. The Bank intends to
construct a two-story building with approximately 20,000 square feet of space at
this location and anticipates this building will open early in 2004.
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 security-holders, 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 are traded on the Over-The-Counter Bulletin Board. As of
February 28, 2003, there were approximately 136 record holders of our common
stock. During 2002, the price of our common stock ranged between $19.50 and
$26.95.
DIVIDENDS
During December 2002, our board of directors declared the Company's first
cash dividend on our common stock. A $0.10 per share dividend was paid on
January 15, 2003, to shareholders 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, 2002, 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, 2002, have been derived from
our audited consolidated financial statements.
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SELECTED STATEMENT OF INCOME DATA
Interest income:
Loans, including fees ........................... $ 26,857 $ 27,921 $ 26,733 $ 20,422 $ 14,608
Federal funds sold and interest-bearing deposits 297 679 777 431 396
Securities ...................................... 3,405 4,541 3,607 2,755 2,814
---------- ---------- ---------- ---------- ----------
Total interest income ........................ 30,559 33,141 31,117 23,608 17,818
---------- ---------- ---------- ---------- ----------
Interest expense:
Interest-bearing demand deposits ................ 388 815 872 644 348
Savings and money market deposit accounts ....... 2,711 4,846 5,726 3,156 1,637
Other time deposits ............................. 7,759 9,775 7,555 6,032 6,247
Funds borrowed .................................. 3,368 2,958 2,543 1,372 973
---------- ---------- ---------- ---------- ----------
Total interest expense ....................... 14,226 18,394 16,696 11,204 9,205
---------- ---------- ---------- ---------- ----------
Net interest income .......................... 16,333 14,747 14,421 12,404 8,613
Provision for loan losses .......................... 2,920 2,400 1,950 2,144 1,061
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan
losses ..................................... 13,413 12,347 12,471 10,260 7,552
---------- ---------- ---------- ---------- ----------
Non-interest income:
Loans held for sale fee income .................. 16,690 6,931 1,154 1,623 1,329
NSF charges & service fees ...................... 1,026 836 655 553 598
Other service charges ........................... 821 796 963 659 157
Realized gain on available-for-sale securities .. 193 500 -- 3 112
Other income .................................... 281 203 284 186 450
---------- ---------- ---------- ---------- ----------
Total non-interest income .................... 19,011 9,266 3,056 3,024 2,646
Non-interest expense:
Salaries and employee benefits .................. 16,437 10,063 5,856 4,578 3,312
Occupancy ....................................... 2,101 1,574 1,124 894 748
FDIC and other insurance ...................... 161 140 177 113 121
General & administrative ........................ 5,417 3,933 3,136 3,095 1,815
---------- ---------- ---------- ---------- ----------
Total non-interest expense ................... 24,116 15,710 10,293 8,680 5,996
---------- ---------- ---------- ---------- ----------
Income before income taxes ...................... 8,308 5,903 5,234 4,604 4,202
Income tax provision ......................... 2,912 1,960 1,757 1,521 1,386
---------- ---------- ---------- ---------- ----------
Net income ................................... $ 5,396 $ 3,943 $ 3,477 $ 3,083 $ 2,816
========== ========== ========== ========== ==========
PER SHARE DATA
Basic earnings $ 2.48 $ 1.82 $ 1.62 $ 1.45 $ 1.36
Diluted earnings 2.40 1.77 1.59 1.42 1.35
Dividends 0.10 -- -- -- --
Book value basic (at end of period) 15.47 13.11 11.12 8.83 7.99
Weighted average common shares outstanding:
Basic ....................................... 2,178,803 2,165,030 2,141,523 2,131,372 2,065,400
Diluted ..................................... 2,252,929 2,222,166 2,191,305 2,166,008 2,084,088
17
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SELECTED FINANCIAL CONDITION DATA
(AT END OF PERIOD):
Total securities .................................... $ 61,364 $ 77,676 $ 78,503 $ 48,646 $ 53,427
Total mortgage loans held for sale................... 119,272 41,853 1,207 952 1,954
Total loans ......................................... 380,082 334,075 287,669 250,410 161,444
Total assets ........................................ 605,183 492,023 414,667 332,613 253,724
Total deposits ...................................... 423,787 394,245 338,221 268,145 209,824
Funds borrowed ...................................... 141,381 65,174 49,917 43,177 25,142
Total stockholders' equity .......................... 34,344 28,525 23,815 18,869 17,016
Trust assets under administration ................... 44,245 41,571 35,268 19,436 13,099
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Net interest margin (1) ....................... 3.35% 3.51% 4.35% 4.77% 4.30%
Non-interest income to average assets ......... 3.55 2.02 0.84 1.06 1.20
Non-interest expense to average assets ........ 4.51 3.43 2.84 3.04 2.72
Net overhead ratio (2) ........................ 0.95 1.41 2.00 1.98 1.52
Efficiency ratio (3) .......................... 68.23 65.42 58.89 56.26 53.26
Return on average assets (4) .................. 1.01 0.86 0.96 1.08 1.28
Return on average equity (5) .................. 17.34 15.26 16.84 17.43 18.98
Asset Quality Ratios:
Non-performing loans to total loans ........... 0.29% 0.92% 0.86% 0.21% 0.84%
Allowance for possible loan losses to:
Total loans ................................. 1.82 1.58 1.54 1.52 1.45
Non-performing loans ........................ 618.29 171.96 179.47 710.80 171.88
Net charge-offs to average total loans ........ 0.36 0.51 0.49 0.32 0.23
Non-performing assets to total assets ......... 0.18 0.63 0.68 0.22 0.55
Balance Sheet Ratios:
Loans to deposits ............................. 89.69% 84.74% 85.05% 93.39% 76.94%
Average interest-earning assets to average
interest-bearing liabilities ................ 115.64 114.50 113.30 116.11 116.57
Capital Ratios:
Total equity to total assets .................. 5.67% 5.80% 5.74% 5.67% 6.71%
Total capital to risk-weighted assets ratio ... 10.13 10.69 11.95 8.07 9.62
Tier 1 capital to risk-weighted assets ratio .. 8.82 8.87 9.51 6.82 8.37
Tier 1 capital to average assets ratio ........ 7.74 7.17 7.47 5.80 6.13
- ----------
(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
Our critical accounting policies are largely proscribed by accounting
principles generally accepted in the United States of America. 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 these
financial statement amounts to the methods, as well as the assumptions and
estimates underlying these balances. Accounting for these critical areas
requires the most subjective and complex judgments that could be subject to
revision as new information becomes available.
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 December 31, 2002.
This estimate is 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 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.
19
OVERVIEW
Net income for 2002 was $5.4 million, a $1.5 million, or 36.85% increase
over the $3.9 million earned in 2001. Diluted earnings per share increased
35.59% to $2.40 at December 31, 2002 from $1.77 at December 31, 2001. The
Company's returns on average assets and average stockholders' equity at year-end
2002 were 1.01% and 17.34%, compared to 0.86% and 15.26%, respectively, for
year-end 2001. The principal contributors to our increase in net income during
2002 were increases in net interest and non-interest income.
Net interest income for 2002 was $16.3 million compared to $14.7 million
earned during 2001. The increase of $1.6 million or 10.75% was primarily the
result of an increase in earning assets.
Non-interest income increased 105.16% to $19.0 million in 2002 from $9.3
million in 2001. Non-interest income to average assets increased to 3.55% in
2002 from 2.02% in 2001. The expansion of the Company's internet mortgage
capabilities coupled with continued declines in market interest rates resulted
in a significant increase in the number of residential mortgage loan
originations in 2002 compared to 2001. This resulted in significantly higher
origination fees during 2002 than during 2001.
Total assets for the Company at December 31, 2002, were $605.2 million, an
increase of $113.2 million, or 23.00%, from $492.0 million at December 31, 2001.
Deposits and stockholders' equity at December 31, 2002 were $423.8 million and
$34.3 million, compared with $394.2 million and $28.5 million at December 31,
2001, increases of $29.5 million, or 7.49%, and $5.8 million, or 20.40%,
respectively.
Loans at December 31, 2002 totaled $380.1 million, an increase of $46.0
million, or 13.77%, compared to December 31, 2001. The loan to deposit ratio at
December 31, 2002 was 89.69% compared to 84.74% at December 31, 2001. The
increase in the loan to deposit ratio was due to loan growth, which, on a
relative basis, outpaced deposit growth by 6.28%. 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, 2002, our non-performing loans to total loans ratio has averaged 0.71%. As
of December 31, 2002, our ratio of non-performing loans to total loans was
0.29%, which was below the historical average. Our non-performing credit
relationships are regularly reviewed and closely monitored and 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, 2002, our ratio of allowance for loan losses to
non-performing loans has exceeded 170.00%. As of December 31, 2002, our ratio of
allowance for loan losses to non-performing loans was 618.29%, compared to
171.96% at December 31, 2001.
The net charge-off ratio has averaged 0.38% for the five years ended
December 31, 2002. Our net charge-off ratio for the year ended December 31, 2002
was 0.36%, which was slightly 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
The 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 net interest
income by average interest-earning assets.
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.
20
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
has 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 is attributable mainly to the increases in savings, money
market and time deposits and FHLB borrowings.
Years ended December 31, 2001 and 2000. FTE net interest income for 2001
increased to $15.1 million from $14.8 million in 2000, a $333,000 or 2.25%,
increase.
FTE interest income for 2001 was $33.5 million, an increase of $2.0
million, or 6.45%, from $31.5 million in 2000, primarily as a result of a $90.1
million, or 26.47%, growth in average interest-earning assets. As a result of
sharp and continued decreases in market interest rates during 2001, the yield on
average interest-earning assets fell to 7.79%, as compared to 9.25% in 2000, a
decline of 146 basis points. In spite of the steep decrease in yields, loan
interest and fee income increased slightly to $27.9 million from $26.7 million
due to increases in volumes of loans outstanding, which was primarily funded
through growth in core deposits. Interest income on investment securities
increased by $942,000 and the annualized tax-equivalent yield on our investment
portfolio decreased 29 basis points in 2001 as compared to 2000.
Interest expense for 2001 was $18.4 million, up $1.7 million, or 10.17%,
from $16.7 million in 2000. We attribute the increase to a $64.5 million, or
25.17%, increase in our average interest-bearing deposits as well as a $10.96
million, or 25.01% increase in other interest-bearing liabilities. Interest
expense on other interest-bearing liabilities increased to $3.0 million in 2001,
up $415,000, or 16.32%, from $2.5 million in 2000. This increase is attributable
mainly to the increases in FHLB borrowings plus the full year's impact of our
junior subordinated debentures in connection with our trust preferred securities
offering. Overall, rates paid on average interest-bearing liabilities decreased
to 4.89% in 2001 from 5.56% in 2000, a decrease of 67 basis points.
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.
21
AVERAGE BALANCES, YIELDS AND RATES
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2002 2001
--------------------------- --------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- ------- ------
(DOLLARS IN THOUSANDS)
ASSETS
Federal funds sold................................ $ 18,171 $ 297 1.63% $ 15,269 $ 679 4.45%
Investment securities - taxable................... 51,273 2,741 5.34 59,010 3,812 6.46
Investment securities - non-taxable (1)........... 14,526 1,007 6.93 15,782 1,105 7.00
Mortgage loans held for sale...................... 63,866 3,937 6.17 29,505 1,752 5.94
Loans, net of unearned discount and fees.......... 349,879 22,920 6.55 310,727 26,168 8.42
-------- ------- -------- -------
Total earning assets......................... 497,715 30,902 6.21 430,293 33,516 7.79
-------- ------- -------- -------
Cash and due from banks - non-interest bearing.... 22,910 16,224
Allowance for possible loan losses................ (5,547) (4,809)
Premises and equipment, net....................... 9,380 7,435
Other assets...................................... 10,546 9,133
-------- --------
Total assets................................. $535,004 $458,276
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits-interest bearing:
Interest-bearing demand accounts............... $ 29,779 $ 388 1.30% $ 31,441 $ 815 2.59%
Savings and money market deposits.............. 146,132 2,711 1.86 131,492 4,846 3.69
Time deposits.................................. 176,762 7,759 4.39 158,078 9,775 6.18
-------- ------- -------- -------
Total interest-bearing deposits.............. 352,673 10,858 3.08 321,011 15,436 4.81
-------- ------- -------- -------
Short -term borrowings............................ 21,722 266 1.22 21,862 667 3.05
Long-term debt ................................... 55,993 3,102 5.54 32,937 2,291 6.96
-------- ------- -------- -------
Total interest-bearing liabilities .......... 430,388 14,226 3.31 375,810 18,394 4.89
-------- ------- -------- -------
Non-interest bearing deposits..................... 69,550 53,324
Other liabilities ................................ 3,952 3,295
Stockholders' equity.............................. 31,114 25,847
-------- --------
Total liabilities and stockholders' equity... $535,004 $458,276
======== ========
Net interest income/spread ....................... $16,676 2.90% $15,122 2.88%
======= ==== ======= ====
Net interest margin............................... 3.35% 3.51%
==== ====
2000
------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST RATE
-------- -------- -------
ASSETS
Federal funds sold................................ $ 12,412 $ 777 6.26%
Investment securities - taxable................... 42,539 2,894 6.80
Investment securities - non-taxable (1)........... 14,984 1,081 7.21
Mortgage loans held for sale...................... 2,072 165 7.96
Loans, net of unearned discount and fees.......... 268,227 26,568 9.91
-------- -------
Total earning assets......................... 340,234 31,485 9.25
-------- -------
Cash and due from banks - non-interest bearing.... 12,063
Allowance for possible loan losses................ (4,102)
Premises and equipment, net....................... 5,845
Other assets...................................... 8,246
--------
Total assets................................. $362,286
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits-interest bearing:
Interest-bearing demand accounts............... $ 24,920 $ 872 3.50%
Savings and money market deposits.............. 110,911 5,726 5.16
Time deposits.................................. 120,632 7,555 6.26
-------- -------
Total interest-bearing deposits.............. 256,463 14,153 5.52
-------- -------
Short -term borrowings............................ 26,680 1,395 5.23
17,156 1,148 6.69
Long-term debt ................................... -------- -------
Total interest-bearing liabilities .......... 300,299 16,696 5.56
-------- -------
Non-interest bearing deposits..................... 38,543
Other liabilities ................................ 2,791
Stockholders' equity.............................. 20,653
--------
Total liabilities and stockholders' equity... $362,286
========
Net interest income/spread ....................... $14,789 3.69%
======= ====
Net interest margin............................... 4.35%
====
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%.
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,
2002 COMPARED TO 2001 2001 COMPARED TO 2000
CHANGE CHANGE CHANGE CHANGE
DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL
RATE VOLUME CHANGE VOLUME RATE CHANGE
------- ------- ------- ------- ------- -------
Federal funds sold $ (429) $ 47 $ (382) $ (226) $ 128 $ (98)
Investment securities -
taxable (660) (412) (1,072) (144) 1,062 918
Investment securities -
non-taxable (1) 114 (84) 30 (28) 49 21
Mortgage loans held for
sale 68 2,118 2,186 (42) 1,629 1,587
Loans, net of unearned
discount (5,814) 2,566 (3,248) (3,824) 3,424 (400)
------- ------- ------- ------- ------- -------
Total interest income (6,721) 4,235 (2,486) (4,264) 6,292 2,028
------- ------- ------- ------- ------- -------
Interest-bearing demand
accounts (404) (22) (426) (223) 166 (57)
Savings and money market
deposits (2,407) 272 (2,135) (1,647) 767 (880)
Time deposits (2,839) 823 (2,016) (97) 2,317 2,220
Short-term borrowings (399) (2) (401) (581) (147) (728)
Long-term debt (470) 1,281 811 46 1,097 1,143
------- ------- ------- ------- ------- -------
Total interest expense (6,519) 2,352 (4,167) (2,502) 4,200 1,698
------- ------- ------- ------- ------- -------
Net interest income $ (202) $ 1,883 $ 1,681 $(1,762) $ 2,092 $ 330
======= ======= ======= ======= ======= =======
(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, 2002, we provided $2.9 million for loan losses, as
compared to $2.4 million for the year ended December 31, 2001, an increase of
$520,000, or 21.67%. During 2002, our allowance for loan losses increased as our
provision exceeded our net charge-offs. The loan portfolio increased to $380.1
million in 2002 from $334.1 million in 2001, or 13.77%. The provision for loan
losses increased to $2.4 million in 2001 from $2.0 million in 2000, or 23.08%,
while the loan portfolio increased to $334.1 million in 2001 from $287.7 million
in 2000, or 16.13%.
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, 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
23
of the collateral if the loan is collateral dependent. The general reserve loss
factors are determined based on such items as management's evaluation of risk in
the portfolio, local economic conditions, and historical loss experience. The
Bank has for many years used several different calculations to confirm the
results of the allowance calculation, including an historical loss ratio
calculation, a comparison to peer group ratios, as well as regulatory
calculation formulas. 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 allowance for loan losses as a percentage of loans increased to 1.82%
at December 31, 2002, as compared to 1.58% in 2001 and 1.54% in 2000. We
increased the allowance for loan losses in 2002, 2001 and 2000 based upon an
analysis of several factors, including the impairment analysis referred to
above, changes in the loan mix and the weakening of one commercial credit. Total
impaired loans increased to $11.7 million with a related reserve of $1.8 million
at December 31, 2002 compared to $8.4 million and $1.5 million, respectively, at
December 31, 2001. General reserve factors, which are applied to categories of
unimpaired loans, resulted in an increase in the overall general reserve
percentage to 1.38% at December 31, 2002 compared to 1.17% at December 31, 2001.
The overall general reserve percentage at December 31, 2000 was 1.09%. The
increase in the general reserve factor in 2002 is attributable to economic
factors and changes in the loan portfolio mix.
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, 2002 compared with December 31, 2001.
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
-------------------------------------
2002 2001 2000
-------- ------- -------
(IN THOUSANDS)
Loans held for sale fee income........................ $ 16,690 $ 6,931 $ 1,148
NSF charges and service fees.......................... 1,026 836 655
Other service charges................................. 821 796 963
Net realized gains on sales of investment securities.. 193 500 --
Other income ......................................... 281 203 284
-------- ------- -------
Total non-interest income....................... $ 19,011 $ 9,266 $ 3,056
======== ======= =======
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 internet and retail 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 services income, investment
brokerage income, merchant bankcard processing and debit card processing income,
remained relatively unchanged from 2001. 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 generated
$193,000 of net gains on the sales in 2002. Future growth of our non-interest
income is dependent upon continued low mortgage interest rates and growth in our
customer base.
Non-interest income increased to $9.3 million, or 203.21%, during 2001,
from $3.1 million during 2000. This increase is attributable to increases in
loans held for sale fee income of $5.8 million, NSF charges and services
24
fees of $181,000 and net realized gains on sales of investment securities of
$500,000. We experienced significant growth in our loans held for sale income
due to the expansion of our internet and retail mortgage capabilities concurrent
with the mortgage origination and refinancing boom. Mortgage originations and
refinancing flourished due to the steep decline in market interest rates during
2001. Other service charge income declined in 2001 primarily due to a $278,000
decrease in commercial mortgage and lease referral income and a $60,000 decrease
in investment brokerage income, offset by increases of $43,000 in trust services
income and $62,000 in bank services fee income. In 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 generated
$500,000 of net gains on the sales.
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
-------------------------------------------
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Salaries and employee benefits.............. $ 16,437 $ 10,063 $ 5,856
Occupancy................................... 2,101 1,574 1,124
FDIC and other insurance expense............ 161 140 177
General and administrative.................. 5,417 3,933 3,136
-------- -------- --------
Total non-interest expenses........... $ 24,116 $ 15,710 $ 10,293
======== ======== ========
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 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 $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 of $174,000, $154,000, $71,000 and
$64,000 in depreciation, rent, telephone expenses, and repairs and maintenance,
respectively, 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. Future increases in
non-interest expense are dependent upon continued growth of the Company,
especially our mortgage origination business.
Non-interest expense increased to $15.7 million, or 52.63%, during 2001,
as compared to $10.3 million in 2000. This increase is primarily attributable to
increases in salaries and employee benefits and occupancy expenses. Our salaries
and employee benefits expense increased to $10.1 million in 2001, or 71.84%,
from $5.9 million in 2000, as we hired additional staff to facilitate our
growth. We had 217 full-time equivalent employees at December 31, 2001 compared
to 129 at December 31, 2000. Many areas of the Company added employees to manage
growth. The addition of the Internet Mortgage division represented a significant
opportunity for the Company and necessitated the addition of 61 full-time
equivalent employees. Occupancy expenses increased to $1.6 million, or 40.04% in
2001, from $1.1 million in 2000, primarily due to increases of $143,000, $90,000
and $52,000 in depreciation, repairs and maintenance and rent expense,
respectively, as the Company expanded its infrastructure to facilitate growth.
General and administrative expenses increased $797,000 to $3.9 million in 2001,
compared to $3.1 million in 2000, principally due to increased marketing,
postage/courier, and loan processing fees associated with the increased volume
in the Company's mortgage origination departments.
25
INCOME TAXES
Our income tax expense during 2002 was $2.9 million, compared to $2.0
million during 2001, and $1.8 million during 2000. These increases reflect our
higher earnings for the current and previous fiscal years. Our consolidated
income tax rate 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 our main 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 43.40% of our
total loans at December 31, 2002, 44.62% of our total loans at December 31,
2001, and 41.30% of our total loans at year end 2000. These loans increased at a
21.85% compound annual rate during the three-year period ended December 31,
2002.
Loans were $380.1 million at December 31, 2002, an increase of $46.0
million, or 13.77%, compared to December 31, 2001. Loans at December 31, 2001
were $334.1 million, an increase of $46.4 million, or 16.13%, compared to
December 31, 2000. Increases in deposits, securities sold under agreement to
repurchase and Federal Home Loan Bank borrowings facilitated our loan growth
during 2002. During 2001, deposit growth facilitated the Company's loan growth.
The loan to deposit ratio increased to 89.69%, compared to 84.74% at December
31, 2001, which had declined slightly from 85.05% at December 31, 2000.
We experienced significant increases in our commercial, commercial real
estate, home equity and construction loan categories, and decreases in
residential real estate, personal loan and lease categories in 2002. The growth
of our commercial, commercial real estate and construction loan portfolios is a
result of the economic growth and development of our market area, coupled with
the efforts and experience of our construction and development lenders. The
Company targets personal 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. However, in 2002, our
indirect loan portfolio continued the decline which started in 2001, declining
by approximately $3.4 million, as we encountered significant competitive factors
from national finance companies offering below market rate financing incentives.
We have also encountered a considerable number of early pay-offs within the
indirect automobile loan portfolio due to customer refinancing.
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,
---------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------- ------------------ ----------------- ------------------ ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- -------- ------- ------- ------- -------- ------- ------ -------
(DOLLARS IN THOUSANDS)
Commercial.............. $ 93,658 24.64% $ 85,311 25.54% $ 76,556 26.61% $ 64,552 25.78% $ 52,310 32.41%
Commercial real estate.. 71,295 18.76 63,756 19.08 42,267 14.69 26,617 10.63 15,457 9.57
Construction............ 127,071 33.43 93,656 28.03 59,733 20.76 41,007 16.38 25,624 15.87
Leases.................. 22,600 5.95 24,221 7.25 25,302 8.81 30,416 12.14 13,765 8.53
Residential real estate. 21,581 5.68 24,460 7.32 37,290 12.96 33,251 13.28 28,367 17.57
Personal................ 26,750 7.04 29,895 8.96 35,864 12.47 44,747 17.87 19,751 12.23
Home equity............. 17,127 4.50 12,776 3.82 10,657 3.70 9,820 3.92 6,170 3.82
------- ------ -------- ------- ------- ------ -------- ------ ------- ------
Total loans and
leases............. 380,082 100.00% 334,075 100.00% 287,669 100.00% 250,410 100.00% 161,444 100.00%
====== ====== ====== ====== ======
Less allowance for loan
losses............... 6,914 5,267 4,440 3,817 2,341
------- -------- ------- -------- -------
Loans receivable, net... $373,168 $328,808 $283,229 $246,593 $159,103
======== ======== ======== ======== ========
26
Collateral and Concentration. At December 31, 2002, 2001 and 2000,
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 $127.1 million, or 33.43%, of total loans, as of December 31, 2002. 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 federal law to any one borrower was $12.5 million at
December 31, 2002. The Bank's largest single borrower, net of participations, at
December 31, 2002 had outstanding loans of $9.0 million.
The following table presents the aggregate maturities of loans in each
major category of our loan portfolio as of December 31, 2002, 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, 2002 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, 2002
---------------------------------------------------------------------------------
MORE THAN ONE YEAR
----------------------
LESS THAN ONE TO OVER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL FIXED VARIABLE
--------- ---------- --------- ------- -------- --------
(IN THOUSANDS)
Commercial Real Estate..... $ 5,300 $ 56,756 $ 9,239 $ 71,295 $ 23,451 $ 42,544
Commercial................. 45,431 41,933 6,294 93,658 10,044 38,183
Construction............... 87,605 38,908 1,080 127,593 2,982 37,006
27
NON-PERFORMING ASSETS
Non-performing assets consist primarily of loans past due 90 days or more,
nonaccrual loans and foreclosed real estate. The following table sets forth our
non-performing assets as of the dates indicated:
NON-PERFORMING ASSETS
AS OF DECEMBER 31,
---------------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Real estate loans:
Past due 90 days or more ..................... $ 54 $ -- $ 206 $ -- $ --
Nonaccrual ................................... 582 824 499 -- --
Installment loans:
Past due 90 days or more ..................... -- 33 -- -- 7
Nonaccrual ................................... -- 13 37 87 38
Credit cards and related plans:
Past due 90 days or more ..................... 23 -- -- -- --
Nonaccrual ................................... -- -- -- -- --
Commercial and all other loans:
Past due 90 days or more ..................... -- 76 24 50 319
Nonaccrual ................................... 233 752 1,326 375 650
Lease financing receivables:
Past due 90 days or more ..................... 3 -- -- -- 121
Nonaccrual ................................... 223 1,365 382 25 227
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 .................. 1,118 3,063 2,474 537 1,362
------ ------ ------ ------ ------
Foreclosed assets held for sale .................... 614 49 334 186 46
------ ------ ------ ------ ------
Total non-performing assets ................. $1,732 $3,112 $2,808 $723 $1,408
====== ====== ====== ====== ======
Total non-performing loans to total loans......... 0.29% 0.92% 0.86% 0.21% 0.84%
Total non-performing loans to total assets........ 0.18 0.62 0.60 0.16 0.54
Allowance for loan losses to non-performing loans 618.29 171.96 179.47 710.80 171.88
Non-performing assets to loans and foreclosed
assets
held for sale .............................. 0.46 0.93 0.97 0.29 0.87
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 $11.7 million at December 31, 2002, $8.4 million at
December 31, 2001, and $5.8 million at December 31, 2000, with related
allowances for loan losses of $1.8 million, $1.5 million, and $1.4 million,
respectively. The increase in impaired loans at December 31, 2002 is primarily
the result of the weakening of one commercial credit.
Total interest income of $699,000, $923,000 and $882,000 was recognized on
average impaired loans of $9.6 million, $6.6 million and $6.2 million for 2002,
2001 and 2000, respectively. Included in this total is cash basis interest
income of $46,000, $202,000 and $72,000 recognized on nonaccrual impaired loans
during 2002, 2001 and 2000, respectively.
28
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 allowance is management's best estimate of probable losses which
have been incurred as of the balance sheet date based on management's evaluation
of risk in the portfolio, local economic conditions and historical loss
experience. 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 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.
29
SUMMARY OF LOAN LOSS EXPERIENCE
AND RELATED INFORMATION
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period ....... $ 5,267 $ 4,440 $ 3,817 $ 2,341 $ 1,618
Loans charged-off:
Commercial real estate ............ 323 -- -- -- --
Residential real estate ........... -- 5 -- -- --
Commercial ........................ 323 1,015 343 567 310
Personal .......................... 66 80 153 47 49
Home equity ....................... -- -- -- -- --
Construction ...................... -- -- -- -- --
Leases ............................ 870 836 1,034 158 27
-------- -------- -------- -------- --------
Total loans charged-off ........ 1,582 1,936 1,530 772 386
Recoveries:
Commercial real estate ............ 1 -- -- -- --
Residential real estate ........... -- 5 -- -- --
Commercial ........................ 123 119 104 90 38
Personal .......................... 23 41 46 2 6
Home equity ....................... -- -- -- -- --
Construction ...................... -- -- -- -- --
Leases ............................ 162 198 53 12 4
-------- -------- -------- -------- --------
Total recoveries ..................... 309 363 203 104 48
-------- -------- -------- -------- --------
Net loans charged-off ................ 1,273 1,573 1,327 668 338
Provision for loan losses ............ 2,920 2,400 1,950 2,144 1,061
-------- -------- -------- -------- --------
Balance at end of period ............. $ 6,914 $ 5,267 $ 4,440 $ 3,817 $ 2,341
======== ======== ======== ======== ========
Loans outstanding:
Average ........................ $349,879 $310,727 $268,227 $206,310 $148,221
End of period................... 380,082 334,075 287,669 250,410 161,444
Ratio of allowance for loan losses
to loans outstanding:............
Average....................... 1.98% 1.70% 1.66% 1.85% 1.58%
End of period................. 1.82 1.58 1.54 1.52 1.45
Ratio of net charge-offs to:........
Average loans................. 0.36 0.51 0.49 0.32 0.23
End of period loans........... 0.33 0.47 0.46 0.27 0.21
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.
30
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
AS OF DECEMBER 31,
-------------------------------------------------------------------------------------
2002 2001 2000 1999
-------------------- -------------------- -------------------- -------------------
% OF % OF % OF % OF
TOTAL TOTAL TOTAL TOTAL
AMOUNT ALLOWANCE AMOUNT ALLOWANCE AMOUNT ALLOWANCE AMOUNT ALLOWANCE
------- --------- ------- --------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
Commercial real estate ............... $ 1,101 15.92% $ 888 16.86% $ 485 10.92% $ 268 7.02%
Residential real estate............... 293 4.24 400 7.59 399 8.99 364 9.53
Commercial ........................... 2,691 38.93 1,181 22.42 1,687 38.00 1,206 31.60
Personal ............................. 295 4.27 210 3.99 547 12.32 843 22.09
Home equity .......................... 88 1.27 78 1.48 124 2.79 123 3.22
Construction.......................... 1,632 23.61 1,070 20.32 672 15.14 454 11.89
Leases ............................... 813 11.76 1,440 27.34 526 11.84 559 14.65
------- ------- ------- ------- ------- ------- ------- -------
Total........................... $ 6,914 100.00% $ 5,267 100.00 $ 4,440 100.00% $ 3,817 100.00%
======= ======= ======= ======= ======= ======= ======= =======
AS OF DECEMBER 31,
-------------------
1998
-------------------
% OF
TOTAL
AMOUNT ALLOWANCE
------- ---------
(DOLLARS IN THOUSANDS)
Commercial real estate ............... $ 155 6.62%
Residential real estate............... 340 14.52
Commercial ........................... 1,013 43.27
Personal ............................. 215 9.19
Home equity .......................... 69 2.95
Construction.......................... 302 12.90
Leases ............................... 247 10.55
------- -------
Total........................... $ 2,341 100.00%
======= =======
31
Investment securities. The primary objectives of our investment portfolio
are to secure the adequacy 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.
Substantial declines in market rates prompted the issuers of many of the
securities in our portfolio to call those securities during 2002. As a result,
the investment portfolio decreased by $16.3 million, or 21.01%, during 2002 as
compared to 2001 year-end. Additionally, we took advantage of opportunities in
2002 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 generated $193,000 of net gains on
the sales. As of December 31, 2002, 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 investment portfolio
by major category at the dates indicated.
INVESTMENT SECURITIES PORTFOLIO COMPOSITION
AT DECEMBER 31,
---------------------------------
2002 2001 2000
------- ------- -------
(IN THOUSANDS)
U.S. government and agency securities.. $47,579 $62,050 $61,001
State and municipal obligations ....... 13,785 15,626 15,502
------- ------- -------
Total ........................... $61,364 $77,676 $76,503
======= ======= =======
Available for sale (fair value) ....... $61,364 $77,676 $76,503
Held to maturity (amortized cost) ..... -- -- 2,000
------- ------- -------
Total ........................... $61,364 $77,676 $78,503
======= ======= =======
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 our investment portfolio at December 31, 2002. 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.
MATURITY OF INVESTMENT SECURITIES PORTFOLIO
ONE YEAR OR ONE TO FIVE FIVE TO TEN MORE THAN TEN TOTAL INVESTMENT
LESS YEARS YEARS YEARS SECURITIES
----------------- ----------------- ----------------- ----------------- ---------------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING FAIR AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE VALUE YIELD
------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
U.S. government and
agency securities.. $ 1,023 6.90% $ 45,551 3.65% $ 1,005 5.78% $ -- --% $ 47,579 $47,579 3.76%
State and municipal
obligations........ 911 4.87 7,234 4.75 5,320 4.79 320 4.72 13,785 13,785 4.77
Mortgage-backed
securities......... -- -- -- -- -- -- -- -- -- -- --
Other securities...... -- -- -- -- -- -- -- -- -- -- --
------- ---- -------- ---- ------- ---- ------ ---- -------- ------- ----
Total available
for sale......... $ 1,934 5.94% $ 52,785 3.80% $ 6,325 4.95% $ 320 4.72% $ 61,364 $61,364 3.99%
======= ==== ======== ==== ======= ==== ====== ==== ======== ======= ====
Total investment
securities....... $ 1,934 5.94% $ 52,785 3.80% $ 6,325 4.95% $ 320 4.72% $ 61,364 $61,364 3.99%
======= ==== ======== ==== ======= ==== ====== ==== ======== ======= ====
Deposits. Deposits grew by $29.5 million, or 7.49%, for the year ended
December 31, 2002, compared to 2001 year-end. Approximately $11.1 million of our
deposit growth during fiscal year 2001 was attributable to growth in business
checking accounts and reflects the continued efforts of our business development
officers. These
32
commercial deposit accounts do not earn interest; however, many of them receive
an earnings credit on the balance to offset the cost of other services provided
by the Bank. Another source of deposit growth in 2002 was in time deposit
balances, which increased by over $7.0 million. 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,
----------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------ ------------------------------- ---------------------------------
(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.................. $ 86,591 20.43% --% $ 74,229 18.83% --% $ 44,354 13.11% --%
Savings................. 6,037 1.42 1.39 5,050 1.28 2.54 3,327 0.98 2.96
Interest-bearing demand. 30,747 7.26 1.30 28,397 7.20 2.59 32,427 9.59 3.50
Money Market............ 33,932 8.01 1.30 30,427 7.72 2.67 27,923 8.26 3.46
Money Management........ 96,837 22.85 2.05 93,462 23.71 4.04 90,787 26.84 5.99
Time Deposits........... 169,643 40.03 4.39 162,680 41.26 4.81 139,403 41.22 6.26
-------- ------ --------- ------ -------- ------
Total deposits.... $423,787 100.00% $ 394,245 100.00% $338,221 100.00%
======== ====== ========= ====== ======== ======
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, 2002:
AMOUNTS AND MATURITIES OF
TIME DEPOSITS OF $100,000 OR MORE
AS OF DECEMBER 31, 2002
-----------------------------
WEIGHTED AVERAGE
AMOUNT RATE PAID
--------- ----------------
(DOLLARS IN THOUSANDS)
Three months or less............................ $ 10,415 3.22%
Over three months through six months............ 7,719 3.17
Over six months through twelve months........... 13,719 3.62
Over twelve months.............................. 33,847 4.41
--------- ---
Total..................................... $ 65,700 3.91%
========= ====
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 57.80% of our total assets at December 31, 2002, and 66.76% and
69.16% of total assets at December 31, 2001 and 2000, respectively. The decrease
in this ratio as of December 31, 2002 was primarily the result of an increase in
33
mortgage loans held for sale as a percentage of total assets at year-end 2002.
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 FHLB of Topeka,
is required to acquire and hold shares of capital stock in the FHLB 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 $4.4
million investment in stock of the FHLB of Topeka as of December 31, 2002.
During 2002 and 2001, the Bank took advantage of some special advances from the
FHLB to supplement its funding base. The Bank had $52.5 million and $32.5
million in outstanding long-term advances from the FHLB of Topeka at December
31, 2002 and 2001, respectively. In addition, the Bank had $35.0 million in
outstanding short-term advances at December 31, 2002.
Management established internal guidelines to measure liquid assets 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,
2002, 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.
SHORT-TERM BORROWINGS
WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT AMOUNT MAXIMUM INTEREST INTEREST
OUTSTANDING OUTSTANDING OUTSTANDING RATE 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, 2002:
Federal Home Loan Bank borrowings. $ 35,000 $ 2,236 $ 35,000 1.95% 1.28%
Bank Stock Loan................... -- -- -- -- --
Federal Funds purchased........... 10,000 1,043 10,000 1.93 1.81
Note Payable - other.............. -- -- -- -- --
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% --%
Bank Stock Loan................... -- -- -- -- --
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
======== ========
At or for the year ended December 31, 2000:
Federal Home Loan Bank borrowings. $ 5,000 $ 7,408 $ 10,000 7.01% 7.17%
Bank Stock Loan................... -- 3,999 7,262 8.17 --
Federal Funds purchased........... -- 590 4,000 7.72 --
Repurchase agreements............. 15,299 13,245 16,650 3.09 3.34
-------- -------- ----- -----
Total.......................... $ 20,299 $ 25,242 5.15 6.05
======== ========
- -----------
(1) Calculations are based on daily averages where available and monthly
averages otherwise.
34
Capital Resources. At December 31, 2002, our total stockholders' equity
was $34.3 million, and our equity to asset ratio was 5.67%. At December 31,
2001, our total stockholders' equity was $28.5 million and our equity to asset
ratio was 5.80%.
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, 2002, our Tier 1 capital ratio was
8.82%, while our total risk-based capital ratio was 10.13%, both of which exceed
the capital minimums established in the risk-based capital requirements.
Our risk-based capital ratios at December 31, 2002, 2001 and 2000 are
presented below.
RISK-BASED CAPITAL
DECEMBER 31,
2002 2001 2000
(DOLLARS IN THOUSANDS)
Tier 1 capital
Stockholders' equity ................................ $ 34,344 $ 28,525 $ 23,815
Intangible assets ................................... (1,281) (1,433) (1,295)
Unrealized (appreciation) depreciation
on available-for-sale securities .................. (785) (831) (461)
Guaranteed preferred beneficial interest
in Company's subordinated debt (1) ................ 11,187 9,231 7,785
--------- --------- ---------
Total Tier 1 capital ............................ 43,465 35,492 29,844
--------- --------- ---------
Tier 2 capital
Qualifying allowance for loan losses ................ 6,171 5,002 3,929
Guaranteed preferred beneficial interest
in Company's subordinated debt (1) ................ 313 2,269 3,715
--------- --------- ---------
Total Tier 2 capital ............................ 6,484 7,271 7,644
--------- --------- ---------
Total risk-based capital ........................ $ 49,949 $ 42,763 $ 37,488
========= ========= =========
Risk weighted assets ................................ $ 492,922 $ 399,923 $ 313,841
========= ========= =========
Ratios at end of period
Total capital to risk-weighted assets
ratio................................................ 10.13% 10.69% 11.95%
Tier 1 capital to average assets ratio
(leverage ratio)................................... 7.74% 7.17% 7.47%
Tier 1 capital to risk-weighted assets
ratio.............................................. 8.82% 8.87% 9.51%
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, 2002, approximately $11.2
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.
35
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. We disclose the estimated
fair value of our financial instruments in accordance with Statement of
Financial Accounting Standards No. 107. See Note 16 to the consolidated
financial statements included in this report.
FUTURE ACCOUNTING REQUIREMENTS
The Financial Accounting Standards Board recently issued its
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. This new
Interpretation requires a guarantor to recognize a liability for the fair value
of the obligation undertaken in issuing a guarantee at its inception and
prescribes disclosures regarding guarantees. The Interpretation applies only to
guarantees issued or modified after December 31, 2002. Guarantees issued by the
Bank are principally in the form of letters of credit as discussed in Note 17 to
the consolidated financial statements. We do not anticipate thatinitial adoption
of the Interpretation will have a material impact on the Company's financial
statements. The Company's application of the Interpretation to guarantees issued
or modified after December 31, 2002, will, if material, result in recognition of
a liability for such guarantees, as well as recognition of fee revenue from them
over the period of time the guarantees are outstanding.
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.
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
36
percentage change in our net interest income over the next twelve-month period
and our economic value of equity at risk at December 31, 2002 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 22.10% 10.81%
200 basis point rise 14.09% 6.93%
100 basis point rise 6.34% 4.50%
Base Rate Scenario -- --
25 basis point decline (5.23%) (1.87%)
50 basis point decline (8.87%) (4.42%)
100 basis point decline (14.90%) (7.63%)
The above table indicates that, at December 31, 2002, 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, 2002, 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 100
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,
2002, 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 2003 2004 2005
----------- ----------- ----------- ----------- -----------
INTEREST-EARNING ASSETS:
Fixed Rate Loans ............ $ 7,326 $ 13,123 $ 20,449 $ 15,948 $ 22,235
Average Interest Rate .... 7.23% 7.95% 7.69% 9.59% 8.65%
Variable Rate Loans ......... 393,492 6,562 400,054 -- --
Average Interest Rate .... 4.94% 6.67% 4.96% -- --
Fixed Rate Investments ...... 276 1,658 1,934 14,143 26,264
Average Interest Rate .... 4.55% 6.04% 5.94% 2.45% 3.88%
Variable Rate Investments ... -- -- -- -- --
Average Interest Rate .... -- -- -- -- --
Federal Funds Sold .......... 141 -- 141 -- --
Average Interest Rate .... 1.15% -- 1.15% -- --
----------- ----------- ----------- ----------- -----------
Total interest-earning
assets ............... $ 401,235 $ 21,343 $ 422,578 $ 30,091 $ 48,499
=========== =========== =========== =========== ===========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand ..... $ 30,746 $ -- $ 30,746 $ -- $ --
Average Interest Rate .... 0.63% -- 0.63% -- --
Savings and money market .... 137,211 -- 137,211 -- --
Average Interest Rate .... 1.17% -- 1.17% -- --
Time deposits ............... 32,011 52,398 84,409 29,465 10,091
Average Interest Rate .... 3.51% 3.73% 3.65% 3.93% 5.18%
Funds borrowed .............. 71,873 4,227 76,100 188 203
Average Interest Rate .... 1.14% 3.07% 1.25% 7.50% 7.50%
----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities ........... $ 271,841 $ 56,625 $ 328,466 $ 29,653 $ 10,294
----------- =========== =========== =========== ===========
CUMULATIVE:
Rate sensitive assets
(RSA) .................... $ 401,235 $ 422,578 $ 422,578 $ 452,669 $ 501,168
Rate sensitive
liabilities (RSL) ........ 271,841 328,466 328,466 358,119 368,413
GAP (GAP = RSA - RSL) .... 129,394 94,112 94,112 94,550 132,755
RSA/RSL ..................... 147.60% 128.65% 128.65% 126.40% 136.03%
RSA/Total assets ............ 66.30 69.83 69.83 74.80 82.81
RSL/Total assets ............ 44.92 54.28 54.28 59.18 60.88
GAP/Total assets ............ 21.38 15.55 15.55 15.62 21.94
GAP/RSA ..................... 32.25 22.27 22.27 20.89 26.49
Expected Maturity Date
---------------------------------------------------------------
Fiscal Year Ending December 31,
-------------------------------
2006 2007 Thereafter Total
----------- ----------- ----------- -----------
INTEREST-EARNING ASSETS:
Fixed Rate Loans ............ $ 17,091 $ 14,573 $ 2,013 $ 92,309
Average Interest Rate .... 8.47% 8.17% 27.97% 8.91%
Variable Rate Loans ......... -- -- -- 400,054
Average Interest Rate .... -- -- -- 4.96%
Fixed Rate Investments ...... 9,486 2,892 6,645 61,364
Average Interest Rate .... 4.98% 5.83% 4.94% 3.99%
Variable Rate Investments ... -- -- -- --
Average Interest Rate .... -- -- -- --
Federal Funds Sold .......... -- -- -- 141
Average Interest Rate .... -- -- -- 1.15%
----------- ----------- ----------- -----------
Total interest-earning
assets ............... $ 26,577 $ 17,465 $ 8,658 $ 553,868
=========== =========== =========== ===========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand ..... $ -- $ -- $ -- $ 30,746
Average Interest Rate .... -- -- -- 0.63%
Savings and money market .... -- -- -- 137,211
Average Interest Rate .... -- -- -- 1.17%
Time deposits ............... 15,346 26,598 3,732 169,641
Average Interest Rate .... 4.97% 4.93% 5.07% 4.14%
Funds borrowed .............. 219 20,236 44,434 141,380
Average Interest Rate .... 7.50% 1.62% 6.24% 2.90%
----------- ----------- ----------- -----------
Total interest-bearing
liabilities ........... $ 15,565 $ 46,834 $ 48,166 $ 478,978
=========== =========== =========== ===========
CUMULATIVE:
Rate sensitive assets
(RSA) .................... $ 527,745 $ 545,210 $ 553,868 $ 553,868
Rate sensitive
liabilities (RSL) ........ 383,978 430,812 478,978 478,978
GAP (GAP = RSA - RSL) .... 143,767 114,398 74,890 74,890
RSA/RSL ..................... 137.44% 126.55% 115.64%
RSA/Total assets ............ 87.20 90.09 91.52
RSL/Total assets ............ 63.45 71.19 79.15
GAP/Total assets ............ 23.76 18.90 12.37
GAP/RSA ..................... 27.24 20.98 13.52
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 16 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
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors is included in the Company's
Proxy Statement for the 2003 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 "Bank Directors and
Executive Officers."
ITEM 11: EXECUTIVE COMPENSATION
This information is included in the Company's Proxy Statement for the 2003
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 2003
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, 2002, the Bank had aggregate loans outstanding to such
persons of approximately $8.1 million, which represented 23.53% of our
stockholders' equity of $34.3 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: 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 within the ninety-day period prior
to the date of filing this annual report. 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 or in other
factors that could significantly affect the internal controls subsequent to the
date management completed its evaluation.
39
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
Registrant did not file any reports on Form 8-K during the fourth quarter
of fiscal year 2002.
(c) Exhibits
The following exhibits were previously filed with the Commission on July
18, 2000 as an Exhibit to Blue Valley's Registration Statement on Form
S-1, Amendment No. 5, File No. 333-34328. The same is incorporated herein
by reference.
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.
10.1 Amended and Restated Promissory Note of Blue Valley Ban Corp, dated
December 30, 1999.
10.2 Promissory Note of Blue Valley Building dated July 15, 1994.
10.3 Mortgage, Assignment of Leases and Rents and Security Agreement
between Blue Valley Building and Businessmen's Assurance Company of
America, dated July 15, 1994.
10.4 Assignment of Leases and Rents between Blue Valley Building and
Businessmen's Assurance Company of America dated July 15, 1994.
10.5 Lease Agreement between Bank of Blue Valley and CMI, Inc., dated
January 18, 1999.
40
The following exhibits are filed as part of this annual report.
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.
99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350
99.2 Certification of the Treasurer pursuant to 18 U.S.C. Section 1350
41
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 26, 2003 By: /s/ Robert D. Regnier
---------------------
Robert D. Regnier, President,
Chief Executive Officer and
Director
Date: March 26, 2003 By: /s/ Mark A. Fortino
-------------------
Mark A. Fortino, Treasurer and
Principal Finance and
Accounting Officer
42
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert D. Regnier, certify that:
1. I have reviewed this annual report on Form 10-K of Blue Valley Ban Corp
(the "Company");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of the date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditor any material weaknesses in internal controls;
and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significant affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
March 26, 2003
/s/ Robert D. Regnier
---------------------
Robert D. Regnier,
President and Chief Executive Officer
43
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark A. Fortino, certify that:
1. I have reviewed this annual report on Form 10-K of Blue Valley Ban Corp
(the "Company");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of the date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditor any material weaknesses in internal controls;
and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significant affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
March 26, 2003
/s/ Mark A. Fortino
-------------------
Mark A. Fortino,
Treasurer
(Chief Financial Officer)
44
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 26, 2003 By: /s/ Robert D. Regnier
---------------------
Robert D. Regnier, President,
Chief Executive Officer and
Director
Date: March 26, 2003 By: /s/ Donald H. Alexander
-----------------------
Donald H. Alexander, Director
Date: March 26, 2003 By: /s/ Wayne A. Henry, Jr.
-----------------------
Wayne A. Henry, Jr., Director
Date: March 26, 2003 By: /s/ C. Ted McCarter
-------------------
C. Ted McCarter, Director
Date: March 26, 2003 By: /s/ Thomas A. McDonnell
-----------------------
Thomas A. McDonnell, Director
45
BLUE VALLEY BAN CORP
DECEMBER 31, 2002, 2001 AND 2000
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, 2002 and 2001, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2002
in conformity with accounting principles generally accepted in the United States
of America.
/s/ BKD, LLP
Kansas City, Missouri
February 14, 2003
F-2
BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(dollars in thousands, except share data)
ASSETS
2002 2001
-------- --------
Cash and due from banks $ 27,755 $ 20,159
Federal funds sold -- 5,000
-------- --------
Cash and cash equivalents 27,755 25,159
Available-for-sale securities 61,364 77,676
Mortgage loans held for sale 119,272 41,853
Loans 380,082 334,075
Less allowance for loan losses 6,914 5,267
-------- --------
Net loans 373,168 328,808
Premises and equipment 10,277 8,079
Foreclosed assets held for sale, net 614 49
Interest receivable 2,014 2,513
Deferred income taxes 1,688 904
Prepaid expenses and other assets 2,541 2,072
Federal Home Loan Bank stock, Federal Reserve
Bank stock, and other securities 5,209 3,477
Core deposit intangible asset, at amortized cost 1,281 1,433
-------- --------
Total Assets $605,183 $492,023
======== ========
See Notes to Consolidated Financial Statements
F-3
BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2002 2001
-------- --------
LIABILITIES
Demand deposits $ 86,591 $ 74,229
Savings, NOW and money market deposits 167,553 157,336
Time deposits 169,643 162,680
-------- --------
Total Deposits 423,787 394,245
Federal funds purchased and securities sold under
agreements to repurchase 33,688 17,173
Short-term debt 35,000 --
Long-term debt 58,051 36,118
Guaranteed preferred beneficial interest in Company's
subordinated debt 11,500 11,500
Balance due under U.S. Treasury note option 3,142 383
Accrued interest and other liabilities 5,671 4,079
-------- --------
Total Liabilities 570,839 463,498
-------- --------
STOCKHOLDERS' EQUITY
Capital stock
Common stock, par value $1 per share;
Authorized 15,000,000 shares; issued and outstanding
2002 - 2,222,711 shares; 2001 - 2,175,176 shares 2,223 2,175
Additional paid-in capital 6,284 5,641
Retained earnings 25,052 19,878
Accumulated other comprehensive income
Unrealized appreciation on available-for-sale securities,
net of income taxes of $523 in 2002 and $553 in 2001 785 831
-------- --------
Total Stockholders' Equity 34,344 28,525
-------- --------
Total Liabilities and Stockholders' Equity $605,183 $492,023
======== ========
See Notes to Consolidated Financial Statements
F-4
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(dollars in thousands, except per share data)
2002 2001 2000
------- ------- -------
INTEREST INCOME
Interest and fees on loans $26,857 $27,921 $26,733
Federal funds sold 297 679 777
Available-for-sale securities 3,405 4,422 3,566
Held-to-maturity securities -- 119 41
------- ------- -------
Total Interest Income 30,559 33,141 31,117
------- ------- -------
INTEREST EXPENSE
Interest-bearing demand deposits 388 815 872
Savings and money market deposit accounts 2,711 4,846 5,726
Other time deposits 7,759 9,775 7,555
Federal funds purchased and securities sold
under repurchase agreements 182 409 417
Long-term debt and advances 3,186 2,549 2,126
------- ------- -------
Total Interest Expense 14,226 18,394 16,696
------- ------- -------
NET INTEREST INCOME 16,333 14,747 14,421
PROVISION FOR LOAN LOSSES 2,920 2,400 1,950
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 13,413 12,347 12,471
------- ------- -------
NONINTEREST INCOME
Loans held for sale fee income 16,690 6,931 1,148
Service fees 1,847 1,632 1,624
Realized gains on sales of securities 193 500 --
Other income 281 203 284
------- ------- -------
Total Noninterest Income 19,011 9,266 3,056
------- ------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 16,437 10,063 5,856
Net occupancy expense 2,101 1,574 1,124
Other operating expense 5,578 4,073 3,313
------- ------- -------
Total Noninterest Expense 24,116 15,710 10,293
------- ------- -------
INCOME BEFORE INCOME TAXES 8,308 5,903 5,234
PROVISION FOR INCOME TAXES 2,912 1,960 1,757
------- ------- -------
NET INCOME $ 5,396 $ 3,943 $ 3,477
======= ======= =======
BASIC EARNINGS PER SHARE $ 2.48 $ 1.82 $ 1.62
======= ======= =======
DILUTED EARNINGS PER SHARE $ 2.40 $ 1.77 $ 1.59
======= ======= =======
DIVIDENDS PER SHARE $ 0.10 $ -- $ --
======= ======= =======
See Notes to Consolidated Financial Statements
F-5
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(dollars in thousands, except share data)
Accumulated
Additional Other
Comprehensive Common Paid-In Retained Comprehensive
Income Stock Capital Earnings Income Total
------- ------- -------- ------- -------- -------
BALANCE, DECEMBER 31, 1999 $ 2,138 $ 5,230 $12,458 $ (957) $18,869
Issuance of 4,000 shares of common stock 4 47 51
Net income $ 3,477 3,477 3,477
Change in unrealized appreciation on
available-for-sale securities, net of income
taxes of $945 1,418 1,418 1,418
------- ------- -------- ------- -------- -------
$ 4,895
=======
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
======= ======== ======= ======== =======
December 31, December 31, December 31,
2002 2001 2000
----- ----- ------
Reclassification Disclosure
Unrealized appreciation on available-for-sale securities, net of income taxes
of $47, $446 and $945 for the periods ended December 31, 2002, 2001 and
2000, respectively $ 70 $ 670 $1,418
Less: reclassification adjustments for appreciation included in net income,
net of income taxes of $77, $200 and $0 for the periods ended
December 31, 2002, 2001 and 2000, respectively (116) (300) --
----- ----- ------
Change in unrealized appreciation on available-for-sale
securities, net of income taxes (credit) of $(30), $246, and $945 for the
periods ended December 31, 2002, 2001 and 2000, respectively $ (46) $ 370 $1,418
===== ===== ======
See Notes to Consolidated Financial Statements
F-6
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(dollars in thousands)
2002 2001 2000
----------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,396 $ 3,943 $ 3,477
Adjustments to reconcile net income to
net cash flow from operating activities:
Depreciation and amortization 1,114 848 653
Amortization of premiums and discounts on securities 42 24 74
Provision for loan losses 2,920 2,400 1,950
Deferred income taxes (754) (212) (43)
Net gain on sales of available-for-sale securities (193) (500) --
Net loss on sale of foreclosed assets 121 -- --
Net (gain) loss on sale of premises and equipment 35 (5) --
Originations of loans held for sale (1,305,219) (641,332) (81,956)
Proceeds from the sale of loans held for sale 1,227,800 600,686 81,701
Changes in:
Accrued interest receivable 500 546 (1,019)
Prepaid expenses and other assets (617) (87) (291)
Accrued interest payable and other liabilities 1,370 1,365 292
----------- --------- --------
Net cash provided by (used in) operating activities (67,485) (32,324) 4,838
----------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net originations of loans (58,127) (53,295) (41,375)
Proceeds from sales of loan participations 9,135 4,946 1,617
Purchase of premises and equipment (3,060) (1,445) (1,514)
Proceeds from sale of premises and equipment 12 11 --
Proceeds from the sale of foreclosed assets 1,026 655 1,024
Purchases of held-to-maturity securities -- -- (2,000)
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 65,198 33,875 3,355
Purchases of available-for-sale securities (61,994) (50,357) (28,923)
Purchases of Federal Home Loan Bank stock, Federal Reserve Bank stock,
and other securities (2,625) (1,926) (516)
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 (36,359) (47,532) (68,332)
----------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, money market, NOW and savings accounts 22,579 31,279 35,470
Net increase in time deposits 6,963 22,162 34,606
Repayments of long-term debt (162) (150) (140)
Proceeds from long-term debt 22,095 19,500 5,000
Net proceeds from guaranteed preferred beneficial interest in Company's
subordinated debt 10,587
Net proceeds (payments) on short-term debt 35,000 (5,000) (12,450)
Proceeds from sale of common stock 691 397 51
Net increase in other borrowings 16,515 1,874 4,039
Net increase (decrease) in balance due under U.S. Treasury note option 2,759 (967) (1,209)
----------- --------- --------
Net cash provided by financing activities 106,440 69,095 75,954
----------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,596 (10,761) 12,460
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 25,159 35,920 23,460
----------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 27,755 $ 25,159 $ 35,290
=========== ========= ========
SUPPLEMENTAL CASH FLOWS INFORMATION
Loans transferred to foreclosed assets held for sale $ 1,712 $ 370 $ 1,172
Interest paid $ 14,638 $ 18,443 $ 16,077
Income taxes paid (net of refunds) $ 2,535 $ 2,693 $ 1,900
See Notes to Consolidated Financial Statements
F-7
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
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 and BVBC Capital Trust I 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 through its
Internet 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 facility in Overland Park, Kansas and owning other properties
intended for future use.
BVBC Capital Trust I is a Delaware business trust that was created in 2000
to offer trust preferred securities and to purchase the Company's prior
subordinated debentures. The Trust has a term of 35 years, but may dissolve
earlier as provided in its trust agreement.
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; trust services; and investment services. These activities are
reported as a single operating segment.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for loan losses and
the valuation of foreclosed assets held for sale, management obtains independent
appraisals for significant properties.
Management believes that the allowances for loan losses and the valuation
of foreclosed assets held for sale are adequate. While management uses available
information to recognize losses on loans and foreclosed assets held for sale,
changes in economic conditions may necessitate revision of these estimates in
future years. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowances for loan
losses and valuation of foreclosed assets held for sale. Such agencies may
require the
F-8
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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, Bank of Blue Valley, Blue Valley
Building Corporation and BVBC Capital Trust I. 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, 2002 and 2001, cash
equivalents consisted of federal funds sold.
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, 2002, 2001 AND 2000
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, 2002, 2001 AND 2000
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 $1,281,000 and
$1,433,000 (originally $2,576,000) at December 31, 2002 and 2001, 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 2002, 2001 and 2000.
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 2001 financial statements
to conform to the 2002 financial statement presentation. These reclassifications
had no effect on net income.
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.
F-11
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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:
2002 2001 2000
--------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Net income $ 5,396 $ 3,943 $ 3,477
--------- ---------- ----------
Average common shares outstanding 2,178,803 2,165,030 2,141,523
Average common share stock options outstanding 74,126 57,136 49,782
--------- ---------- ----------
Average diluted common shares 2,252,929 2,222,166 2,191,305
--------- ---------- ----------
Basic earnings per share $ 2.48 $ 1.82 $ 1.62
========= ========== ==========
Diluted earnings per share $ 2.40 $ 1.77 $ 1.59
========= ========== ==========
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 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:
2002 2001 2000
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income As reported $ 5,396 $ 3,943 $ 3,477
Pro forma $ 5,344 $ 3,864 $ 3,401
Basic earnings per share As reported $ 2.48 $ 1.82 $ 1.62
Pro forma $ 2.45 $ 1.78 $ 1.59
Diluted earnings per share As reported $ 2.40 $ 1.77 $ 1.59
Pro forma $ 2.37 $ 1.74 $ 1.55
F-12
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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:
2002 2001 2000
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Dividend per Share $ 0.10 $ -- $ --
Risk-Free Interest Rate 1.75% 4.00% 6.00%
Expected Life of Options 2 years 2 years 2 years
Weighted-average fair value of
options granted during the year $ 49 $ 108 $ 130
========= ========= =========
The expected life of options outstanding is based on the historical
experience of the Company.
F-13
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 2: INVESTMENT IN DEBT SECURITIES
The amortized cost and approximate fair value of available-for-sale
securities are as follows:
December 31, 2002
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------- ----- ------- -------
(dollars in thousands)
U.S. Treasury $ -- $ -- $ -- $ --
U.S. Government agencies 46,998 581 -- 47,579
State and political subdivisions 13,057 728 -- 13,785
------- ------ ------- -------
$60,055 $1,309 $ -- $61,364
======= ====== ======= =======
December 31, 2001
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------- ----- ------- -------
(dollars in thousands)
U.S. Treasury $ 2,000 $ 36 $ -- $ 2,036
U.S. Government agencies 59,024 1,119 (129) 60,014
State and political subdivisions 15,268 368 (10) 15,626
------- ------ ----- -------
$76,292 $1,523 $(139) $77,676
======= ====== ===== =======
Maturities of available-for-sale debt instruments at December 31, 2002:
Amortized Approximate
Cost Fair Value
---- ----------
(dollars in thousands)
In one year or less $ 1,897 $ 1,934
After one through five years 51,877 52,785
After five through ten years 5,982 6,325
After ten years 299 320
------- -------
$60,055 $61,364
======= =======
F-14
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
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 $45,570,000 at December 31,
2002 and $35,298,000 at December 31, 2001.
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, 2002, or at any month end during the period,
no material amount of agreements to repurchase securities sold was outstanding
with any individual dealer. Securities sold under agreements to repurchase
averaged $16,962,000 and $17,246,000 during 2002 and 2001, and the maximum
amounts outstanding at any month-end were $23,688,000 and $20,862,000,
respectively. The book value and approximate fair value of securities pledged to
secure agreements to repurchase amounted to $28,357,000 and $27,413,000 at
December 31, 2002 and 2001, respectively.
Gross gains of $193,000 and $514,000 were realized in 2002 and 2001,
respectively, and gross losses of $0 and $14,000 were realized in 2002 and 2001,
respectively, resulting from sales of available-for-sale securities.
F-15
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at December 31, 2002 and 2001 include the following:
2002 2001
-------- --------
(dollars in thousands)
Commercial $ 93,658 $ 85,311
Commercial real estate 71,295 63,756
Construction 127,071 93,656
Leases 22,600 24,221
Residential real estate 21,581 24,460
Personal 26,750 29,895
Home equity 17,127 12,776
-------- --------
Total loans 380,082 334,075
Less: Allowance for loan losses 6,914 5,267
-------- --------
Net loans $373,168 $328,808
======== ========
Activity in the allowance for loan losses was as follows:
2002 2001 2000
------- ------- -------
(dollars in thousands)
Balance, beginning of year $ 5,267 $ 4,440 $ 3,817
Provision charged to expense 2,920 2,400 1,950
Losses charged off, net of recoveries
of $309,000 $363,000 and $203,000
for 2002, 2001 and 2000, respectively (1,273) (1,573) (1,327)
------- ------- -------
Balance, end of year $ 6,914 $ 5,267 $ 4,440
======= ======= =======
Impaired loans totaled $11,679,000 and $8,431,000 at December 31, 2002 and
2001, respectively, with related allowances for loan losses of $1,830,000 and
$1,470,000, respectively.
Total interest income of $699,000 and $923,000 was recognized on average
impaired loans of $9,585,000 and $6,630,000 for 2002 and 2001, respectively.
Included in this total is cash-basis interest income of $46,000 and $202,000
recognized on impaired loans on nonaccrual during 2002 and 2001, respectively.
F-16
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 4: PREMISES AND EQUIPMENT
Major classifications of these assets are as follows:
2002 2001
------- -------
(dollars in thousands)
Land $ 1,777 $ 1,577
Building and improvements 5,624 5,370
Furniture and equipment 4,200 3,368
Land improvements, net 1,876 230
------- -------
13,477 10,545
Less accumulated depreciation 3,200 2,466
------- -------
Total premises and equipment $10,277 $ 8,079
======= =======
NOTE 5: INTEREST-BEARING DEPOSITS
Interest-bearing time deposits in denominations of $100,000 or more were
$65,700,000 on December 31, 2002 and $56,248,000 on December 31, 2001.
At December 31, 2002, the scheduled maturities of time deposits are as
follows:
(dollars in thousands)
2003 $ 84,410
2004 29,364
2005 10,090
2006 15,345
2007 and thereafter 30,434
--------
$169,643
========
F-17
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 6: OPERATING LEASES
Blue Valley Building Corp. leases office space to others under
noncancellable operating leases expiring in various years through 2004. Minimum
future rentals receivable under noncancellable operating leases at December 31,
2002 are as follows:
(dollars in thousands)
2003 $138
2004 143
----
Future minimum lease receivable $281
====
The Company leases space from others under noncancellable operating leases
expiring in various years through 2004. Consolidated rental and operating lease
expenses were $236,000 in 2002, $82,000 in 2001 and $30,000 in 2000. Minimum
rental commitments payable under noncancellable operating leases at December 31,
2002 are as follows:
(dollars in thousands)
2003 $ 91
2004 32
----
Future minimum lease payable $123
====
NOTE 7: INCOME TAXES
The provision for income taxes consists of the following:
2002 2001 2000
------- ------- -------
(dollars in thousands)
Taxes currently payable $ 3,666 $ 2,172 $ 1,800
Deferred income taxes (754) (212) (43)
------- ------- -------
$ 2,912 $ 1,960 $ 1,757
======= ======= =======
F-18
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 7: INCOME TAXES (CONTINUED)
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
2002 2001 2000
------- ------- -------
(dollars in thousands)
Computed at the statutory
rate (34%) $ 2,825 $ 2,007 $ 1,780
Increase (decrease) resulting from:
Tax-exempt interest (235) (248) (242)
Stock options (25) (59) (2)
State income taxes 293 194 128
Other 54 66 93
------- ------- -------
Actual tax provision $ 2,912 $ 1,960 $ 1,757
======= ======= =======
The tax effects of temporary differences related to deferred taxes shown
on the December 31, 2001 and 2000 consolidated balance sheets are as follows:
2002 2001
------- -------
(dollars in thousands)
Deferred tax assets:
Allowance for loan losses $ 2,028 $ 1,528
Accrued compensated absences 58 47
Mark to market - Mortgage loans held for sale 390 --
------- -------
2,476 1,575
------- -------
Deferred tax liabilities:
Accumulated depreciation (184) (52)
Accumulated appreciation on available-for-
sale securities (523) (553)
Other (81) (66)
------- -------
(788) (671)
------- -------
Net deferred tax asset $ 1,688 $ 904
======= =======
F-19
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 8: SHORT-TERM DEBT
Short-term debt at December 31, 2002 and 2001 consisted of the following
components:
2002 2001
------- ---------
(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 and securities. The variable interest
rate was 1.28% on December 31, 2002.
NOTE 9: LONG TERM DEBT
Long-term debt at December 31, 2002 and 2001 consisted of the following
components:
2002 2001
------- -------
(dollars in thousands)
Note payable - other (A) $ 1,456 $ 1,618
Note payable - bank (B) 4,095 2,000
Federal Home Loan Bank advances (C) 52,500 32,500
------- -------
Total long-term debt $58,051 $36,118
======= =======
(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 2007, 2008, 2010 and 2011; collateralized by various
assets including mortgage-backed loans and securities, and
U.S. Treasury and Agency securities. The interest rates on the
advances range from 1.55% to 5.682%.
F-20
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 9: LONG TERM DEBT (CONTINUED)
Aggregate annual maturities of long-term debt at December 31, 2002 are as
follows:
(dollars in thousands)
2003 $ 4,270
2004 188
2005 203
2006 219
2007 20,236
Thereafter 32,935
-------
$58,051
=======
NOTE 10: TRUST PREFERRED SECURITIES
On July 21, 2000, BVBC Capital Trust I (the "Trust"), a Delaware business
trust formed by the Company, completed the sale of $11,500,000 of 10.375% trust
preferred securities. The Trust is a 100% owned finance subsidiary of the
Company. The Trust also issued $355,672 of common securities to the Company and
used the total proceeds of $11,855,672 from the offering to purchase $11,855,672
in principal amount of 10.375% junior subordinated debentures of the Company due
September 30, 2030. Payments to the Company on the common securities are
subordinated to the trust preferred securities in the event of a default on the
junior subordinated debentures. The Company paid all underwriting discounts and
other operating expenses related to the offering and received net proceeds of
$10,578,000. The junior subordinated debentures are the sole assets of the Trust
and are eliminated, along with the related income statement effects, in the
Company's consolidated financial statements. Redemption of the trust preferred
securities is mandatory upon the maturity of the junior subordinated debentures
or earlier as provided in the indenture. The Company has the right to redeem the
junior subordinated debentures, in whole or in part, on or after September 30,
2005, at a redemption price specified in the indenture plus any accrued but
unpaid interest to the redemption date. The Company has fully and
unconditionally guaranteed the Trust's obligations under the trust preferred
securities on a subordinated basis to the extent that the funds are held by the
Trust. The trust preferred securities meet the criteria to be considered
regulatory capital.
F-21
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 11: REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2002, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 2002, 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, 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%
=========== ========= =========== ======= =========== =======
F-22
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 11: 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, 2001: (dollars in thousands)
Total Capital
(to Risk Weighted Assets)
Consolidated $ 42,763 10.69% $ 31,994 8.00% N/A
========== ========== ========== ==========
Bank Only $ 41,609 10.54% $ 31,586 8.00% $ 39,483 10.00%
========== ========== ========== ========== ======== ==========
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated $ 35,492 8.87% $ 15,997 4.00% N/A
========== ========== ========== ==========
Bank Only $ 36,669 9.29% $ 15,793 4.00% $ 23,690 6.00%
========== ========== ========== ========== ======== ==========
Tier 1 Capital
(to Average Assets)
Consolidated $ 35,492 7.17% $ 19,812 4.00% N/A
========== ========== ========== ==========
Bank Only $ 36,669 7.48% $ 19,612 4.00% $ 24,515 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, 2002,
approximately $10,288,000 of retained earnings were available for dividend
declaration without prior regulatory approval.
NOTE 12: TRANSACTIONS WITH RELATED PARTIES
At December 31, 2002 and 2001, 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 $8,083,000 and
$10,133,000, respectively. Related party transactions for 2002 and 2001 were as
follows:
2002 2001
-------- -------
(dollars in thousands)
Balance, beginning of year $ 10,133 $ 2,128
New loans 4,351 8,301
Repayments and reclassifications (6,401) (296)
-------- -------
Balance, end of year $ 8,083 $10,133
======== =======
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-23
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 13: 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.
Employer contributions charged to expense for 2002, 2001 and 2000 were $527,000,
$292,000 and $271,000, respectively.
NOTE 14: STOCK OPTIONS
The Company has a fixed option plan under which 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, 2002, the Company had 55,434 options 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.
A summary of the status of the plan at December 31, 2002, 2001 and 2000,
and changes during the years then ended, is presented below:
2002 2001 2000
---------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- -------- -------- -------- --------
Outstanding, beginning of year 235,760 $ 14.77 224,716 $ 12.86 157,216 $ 11.21
Granted 51,600 25.00 73,500 19.50 71,500 16.50
Exercised (45,035) 14.25 (32,456) 11.70 (4,000) 12.81
Forfeited (6,750) 17.94 (30,000) 15.37
-------- -------- --------
Outstanding, end of year 235,575 $ 17.02 235,760 14.77 $224,716 $ 12.86
======== ======== ========
Options exercisable, end of year 172,525 $ 15.26 171,760 $ 13.44 150,216 $ 11.57
======== ======== ========
The weighted-average remaining contractual life at December 31, 2002 was
7.80 years. Exercise prices ranged from $3.75 to $25.00.
F-24
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 15: OTHER INCOME/EXPENSE
Other operating expenses consist of the following:
2002 2001 2000
---- ---- ----
(dollars in thousands)
Advertising $ 920 $ 732 $ 514
Data processing 530 441 397
Professional fees 628 379 289
Other expense 3,500 2,521 2,113
------ ------ ------
Total $5,578 $4,073 $3,313
====== ====== ======
Other income consists of the following:
2002 2001 2000
---- ---- ----
(dollars in thousands)
Rental income $142 $140 $170
Other income 139 63 114
---- ---- ----
Total $281 $203 $284
==== ==== ====
F-25
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 16: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term instruments, the carrying amount approximates fair
value.
AVAILABLE-FOR-SALE SECURITIES
Fair values for available-for-sale securities, which also are the amounts
recognized in the consolidated balance sheets, equal quoted market prices if
available. If quoted market prices are not available, fair values are estimated
based on quoted market prices of similar securities.
MORTGAGE LOANS HELD FOR SALE
For homogeneous categories of loans, such as mortgage loans held for sale,
fair value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics.
LOANS
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. Loans with similar
characteristics were aggregated for purposes of the calculations. The carrying
amount of accrued interest approximates its fair value.
DEPOSITS
The fair value of demand deposits, savings accounts, NOW accounts and
certain money market deposits is the amount payable on demand at the reporting
date (i.e., their carrying amount). The fair value of fixed maturity time
deposits is estimated using a discounted cash flow calculation that applies the
rates currently offered for deposits of similar remaining maturities. The
carrying amount of accrued interest payable approximates its fair value.
BALANCE DUE UNDER U.S. TREASURY NOTE OPTION
The fair value of the balance due under U.S. Treasury note option is the
amount payable at the reporting date (i.e., their carrying amount).
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE AND OTHER LIABILITIES
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
F-26
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 16: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
NOTES PAYABLE AND LONG-TERM DEBT
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT, LETTERS OF CREDIT AND LINES OF CREDIT
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
For fixed rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair value
of letters of credit and lines of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate or otherwise settle the
obligations with the counterparties at the reporting date.
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.
F-27
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 16: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
2002 2001
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Financial assets: (dollars in thousands)
Cash and cash equivalents $ 27,755 $ 27,755 $ 25,159 $ 25,159
Available-for-sale securities 61,364 61,364 77,676 77,676
Mortgage loans held for sale 119,272 119,269 41,853 41,862
Interest receivable 2,014 2,014 2,513 2,513
Loans, net of allowance for loan losses 373,168 377,958 328,808 335,539
Financial liabilities:
Deposits 423,787 426,827 394,245 394,740
Balance due under U.S. Treasury note option 3,142 3,142 383 383
Securities sold under agreements to repurchase 33,688 33,688 17,173 17,173
Short-term debt 35,000 35,000 -- --
Long-term debt 58,051 60,957 36,118 36,094
Guaranteed preferred beneficial interest in
Company's subordinated debt 11,500 13,402 11,500 12,734
Interest payable 911 911 1,484 1,484
Unrecognized financial instruments
(net of amortization):
Commitments to extend credit -- -- -- --
Letters of credit -- -- -- --
Lines of credit -- -- -- --
Forward commitments -- -- -- --
NOTE 17: 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.
F-28
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 17: COMMITMENTS AND CREDIT RISKS (CONTINUED)
At December 31, 2002 and 2001, the Company had outstanding commitments to
originate loans aggregating approximately $24,836,000 and $46,467,000,
respectively. The commitments extended over varying periods of time with the
majority being disbursed within a one-year period. Loan commitments at fixed
rates of interest amounted to $1,211,000 and $1,110,000 at December 31, 2002 and
2001, 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
$126,471,000 and $84,280,000 and mortgage loans held for sale amounted to
$119,272,000 and $41,853,000 at December 31, 2002 and 2001, respectively.
Related forward commitments to sell mortgage loans amounted to approximately
$245,743,000 and $126,133,000 at December 31, 2002 and 2001, 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
$10,943,000 and $3,232,000 at December 31, 2002 and 2001, respectively.
Lines of credit are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may expire
without being drawn upon, the total unused lines do not necessarily represent
future cash requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management's credit evaluation of the counterparty. Collateral held
varies, but may include accounts receivable, inventory, property, plant and
equipment, commercial real estate and residential real estate. Management uses
the same credit policies in granting lines of credit as it does for on-balance
sheet instruments.
At December 31, 2002 and 2001, unused lines of credit borrowings
aggregated approximately $113,709,000 and $112,428,000, respectively.
F-29
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 17: COMMITMENTS AND CREDIT RISKS (CONTINUED)
Additionally, the Company periodically has excess funds, which are loaned
to other banks as federal funds sold. At December 31, 2002 and 2001, federal
funds sold totaling $0 and $5,000,000, respectively, were loaned to various
banks, as approved by the Board of Directors, with the largest balance at any
one bank being $5,000,000 at December 31, 2001.
NOTE 18: 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.
2002 2001
------------------------------------------ --------------------------------------------
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 $ 3,295 $ 3,552 $ 3,322 $ 3,244 $ 3,063 $ 3,184 $ 3,051 $ 3,144
Noninterest income 6,196 5,312 3,931 3,572 4,197 2,586 1,585 898
Noninterest expense 7,323 6,316 5,437 5,040 4,829 4,184 3,517 3,180
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes 2,168 2,548 1,816 1,776 2,431 1,586 1,119 767
Income taxes 769 892 635 616 805 544 356 255
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 1,399 $ 1,656 $ 1,181 $ 1,160 $ 1,626 $ 1,042 $ 763 $ 512
======== ======== ======== ======== ======== ======== ======== ========
Net Income per Share Data
Basic $ 0.64 $ 0.76 $ 0.54 $ 0.53 $ 0.75 $ 0.48 $ 0.35 $ 0.24
======== ======== ======== ======== ======== ======== ======== ========
Diluted $ 0.61 $ 0.74 $ 0.53 $ 0.52 $ 0.72 $ 0.47 $ 0.35 $ 0.23
======== ======== ======== ======== ======== ======== ======== ========
Balance Sheet
Total assets $605,183 $559,105 $534,767 $529,923 $492,023 $479,062 $451,065 $440,779
Total loans, net 373,168 351,943 341,386 331,035 328,808 315,480 309,906 294,306
Shareholders' equity 34,344 32,663 30,891 29,342 28,525 27,340 25,791 24,874
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 19: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Accounting principles generally accepted in the United States of America
require disclosure of certain significant estimates and current vulnerabilities
due to certain concentrations. Estimates related to the allowance for loan
losses are reflected in the footnote regarding loans. Current vulnerabilities
due to certain concentrations of credit risk are discussed in the footnote on
commitments and credit risk.
F-30
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 20: NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued its
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. This new
Interpretation requires a guarantor to recognize a liability for the fair value
of the obligation undertaken in issuing a guarantee at is inception and
prescribes disclosures regarding guarantees. The Interpretation applies only to
guarantees issued or modified after December 31, 2002. Guarantees issued by the
Bank are principally in the form of letters of credit as discussed in Note 17
to the consolidated financial statements. We do not anticipate that initial
adoption of the Interpretation will have a material impact on the Company's
financial statements. The Company's application of the Interpretation to
guarantees issued or modified after December 31, 2002, will, if material,
result in recognition of a liability for such guarantees, as well as
recognition of fee revenue from them over the period of time the guarantees are
outstanding.
F-31
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 21: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
------- -------
(In thousands)
ASSETS
Cash and cash equivalents $ 330 $ 301
Investments in subsidiaries:
Bank of Blue Valley 45,114 38,933
Blue Valley Building Corp. 4,075 1,978
BVBC Capital Trust I 356 356
Loans -- --
Other assets 1,844 1,444
------- -------
Total Assets $51,719 $43,012
======= =======
LIABILITIES
Long-term debt $ 4,095 $ 2,000
Guaranteed preferred beneficial interest in
Company's subordinated debt 11,856 11,856
Other liabilities 1,424 631
------- -------
Total Liabilities 17,375 14,487
------- -------
STOCKHOLDERS' EQUITY
Common stock 2,223 2,175
Additional paid-in capital 6,284 5,641
Undivided profits 25,052 19,878
Unrealized appreciation on available-for-sale securities,
net of income taxes of $523 and $553 at 2002
and 2001, respectively 785 831
------- -------
Total Stockholders' Equity 34,344 28,525
------- -------
Total Liabilities and Stockholders' Equity $51,719 $43,012
======= =======
F-32
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 21: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------- ------- -------
(In thousands)
Income
Dividends from subsidiaries $ 137 $ 37 $ 616
Other income 3 29 30
------- ------- -------
140 66 646
Expenses 1,588 1,375 918
------- ------- -------
Income (loss) before income taxes and equity in
undistributed net income of subsidiaries (1,448) (1,309) (272)
Credit for income taxes (539) (446) (297)
------- ------- -------
Income (loss) before equity in undistributed net income
of subsidiaries (909) (863) 25
Equity in undistributed net income of subsidiaries 6,305 4,806 3,452
------- ------- -------
Net income $ 5,396 $ 3,943 $ 3,477
======= ======= =======
F-33
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 21: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------- ------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,396 $ 3,943 $ 3,477
Items not requiring (providing) cash:
Deferred income taxes 539 181 (297)
Equity in undistributed income of subsidiaries (6,305) (4,806) (3,452)
Changes in:
Other assets (940) (80) (1)
Other liabilities 571 (50) 240
------- ------- --------
Net cash used in operating activities (739) (812) (33)
------- ------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Capital contributed to subsidiary (2,018) (2,875) (2,000)
Net collections of loans -- 300 --
------- ------- --------
Net cash used in investing activities (2,018) (2,575) (2,000)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt -- -- (7,450)
Proceeds from long-term debt 2,095 2,000 --
Net proceeds from guaranteed preferred beneficial
interest in Company's subordinated debt -- -- 10,587
Proceeds from sale of common stock 691 397 51
------- ------- --------
Net cash provided by financing activities 2,786 2,397 3,188
------- ------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 29 (990) 1,155
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 301 1,291 136
------- ------- --------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 330 $ 301 $ 1,291
======= ======= ========
F-34