UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
COMMISSION FILE NUMBER: 001-15933
BLUE VALLEY BAN CORP
(Exact name of registrant as specified in its charter)
KANSAS 48-1070996
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11935 RILEY
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:
<Table>
<Caption>
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Guarantee with respect to American Stock Exchange
the Trust Preferred
Securities, $8.00 par value,
of BVBC Capital Trust I
</Table>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer.
Yes [ ] No [X]
As of September 30, 2003 the registrant had 2,254,586 shares of Common
Stock ($1.00 par value) outstanding, of which 1,203,103 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 September 30, 2003
closing price of the stock, was approximately $36.1 million.
BLUE VALLEY BAN CORP
INDEX
<Table>
<Caption>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Independent Accountants' Report.....................................................................3
Consolidated Balance Sheets - September 30, 2003 (unaudited) and December 31, 2002..................4
Consolidated Statements of Income (unaudited) -
three months and nine months ended September 30, 2003 and 2002....................................6
Consolidated Statements of Stockholders' Equity (unaudited) -
nine months ended September 30, 2003 and 2002 ....................................................7
Consolidated Statements of Cash Flows (unaudited) -
nine months ended September 30, 2003 and 2002.....................................................8
Notes to Consolidated Financial Statements (unaudited) -
nine months ended September 30, 2003 and 2002.....................................................9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................................................12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................22
ITEM 4. CONTROLS AND PROCEDURES.......................................................................24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................................................25
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.....................................................25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...............................................................25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................25
ITEM 5. OTHER INFORMATION.............................................................................25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..............................................................25
</Table>
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Blue Valley Ban Corp
Overland Park, Kansas 66225
We have reviewed the accompanying consolidated balance sheet of Blue Valley Ban
Corp as of September 30, 2003, and the related consolidated statements of income
for the three-month and nine-month periods ended September 30, 2003 and 2002 and
the consolidated statements of stockholders' equity and cash flows for the
nine-month periods ended September 30, 2003 and 2002. These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2002 and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended (not presented
herein), and in our report dated February 14, 2003 we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 2002 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ BKD, LLP
Kansas City, Missouri
October 24, 2003
3
BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(dollars in thousands, except share data)
ASSETS
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(Unaudited)
Cash and due from banks $ 20,165 $ 27,755
Federal funds sold 36,000 --
---------- ----------
Cash and cash equivalents 56,165 27,755
Available-for-sale securities 63,958 61,364
Mortgage loans held for sale 62,135 119,272
Loans, net of allowance for loan losses of $7,597
and $6,914 in 2003 and 2002, respectively 406,127 373,168
Premises and equipment 17,459 10,277
Foreclosed assets held for sale, net 652 614
Interest receivable 1,794 2,014
Deferred income taxes 1,853 1,688
Prepaid expenses and other assets 2,660 2,541
Federal Home Loan Bank stock, Federal Reserve Bank stock
and other securities 7,459 5,209
Core deposit intangible asset, at amortized cost 1,166 1,281
---------- ----------
Total assets $ 621,42 $ 605,183
========== ==========
</Table>
See Accompanying Notes to Consolidated Financial Statements
and Independent Accountant's Report 4
BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(Unaudited)
LIABILITIES
Deposits
Demand $ 78,917 $ 86,591
Savings, NOW and money market 183,292 167,553
Time 202,761 169,643
---------- ----------
Total deposits 464,970 423,787
Federal funds purchased and other interest-bearing liabilities 21,966 36,830
Short-term debt -- 35,000
Long-term debt 68,851 58,051
Guaranteed preferred beneficial interest in Company's
subordinated debt 19,000 11,500
Accrued interest and other liabilities 7,012 5,671
---------- ----------
Total liabilities 581,799 570,839
---------- ----------
STOCKHOLDERS' EQUITY
Capital stock
Common stock, par value $1 per share;
authorized 15,000,000 shares; issued and outstanding
2003 - 2,254,586 shares; 2002 - 2,222,711 2,255 2,223
Additional paid-in capital 6,886 6,284
Retained earnings 29,949 25,052
Accumulated other comprehensive income
Unrealized appreciation on available-for-sale securities,
net of income taxes of $359 in 2003 and $523 in 2002 539 785
---------- ----------
Total stockholders' equity 39,629 34,344
---------- ----------
Total liabilities and stockholders' equity $ 621,428 $ 605,183
========== ==========
</Table>
See Accompanying Notes to Consolidated Financial Statements
and Independent Accountant's Report 5
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(dollars in thousands, except share data)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
INTEREST INCOME
Interest and fees on loans $ 7,640 $ 6,826 $ 21,972 $ 19,722
Federal funds sold 6 84 19 284
Available-for-sale securities 445 806 1,550 2,739
--------- --------- --------- ---------
Total interest income 8,091 7,716 23,541 22,745
--------- --------- --------- ---------
INTEREST EXPENSE
Interest-bearing demand deposits 41 110 131 304
Savings and money market deposit
accounts 591 661 1,561 2,195
Other time deposits 1,747 1,921 5,214 5,938
Federal funds purchased and other
interest-bearing liabilities 50 56 166 153
Short-term debt 96 -- 256 38
Long-term debt 1,014 756 2,786 2,269
--------- --------- --------- ---------
Total interest expense 3,539 3,504 10,114 10,897
--------- --------- --------- ---------
NET INTEREST INCOME 4,552 4,212 13,427 11,848
PROVISION FOR LOAN LOSSES 150 660 1,350 1,730
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,402 3,552 12,077 10,118
--------- --------- --------- ---------
NONINTEREST INCOME
Loans held for sale fee income 5,974 4,771 16,979 11,051
Service fees 557 460 1,631 1,350
Realized gain on sales of
investment securities -- -- -- 193
Other income 106 81 331 220
--------- --------- --------- ---------
Total noninterest income 6,637 5,312 18,941 12,814
--------- --------- --------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits 6,092 4,302 16,169 11,376
Net occupancy expense 833 563 2,296 1,494
Other operating expense 1,788 1,451 4,918 3,922
--------- --------- --------- ---------
Total noninterest expense 8,713 6,316 23,383 16,792
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 2,326 2,548 7,635 6,140
PROVISION FOR INCOME TAXES 831 892 2,738 2,143
--------- --------- --------- ---------
NET INCOME $ 1,495 $ 1,656 $ 4,897 $ 3,997
========= ========= ========= =========
BASIC EARNINGS PER SHARE $ 0.66 $ 0.76 $ 2.19 $ 1.84
========= ========= ========= =========
DILUTED EARNINGS PER SHARE $ 0.64 $ 0.74 $ 2.12 $ 1.79
========= ========= ========= =========
</Table>
See Accompanying Notes to Consolidated Financial Statements
and Independent Accountant's Report 6
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(dollars in thousands, except share data)
<Table>
<Caption>
ACCUMULATED
ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE
INCOME STOCK CAPITAL EARNINGS INCOME TOTAL
------------- ---------- ---------- ---------- ------------- ----------
BALANCE, DECEMBER 31, 2001 2,175 5,641 19,878 831 28,525
Issuance of 4,000 shares of
common stock -- 4 70 -- -- 74
Net income 3,997 -- -- 3,997 -- 3,997
Change in unrealized
appreciation on
available-for-sale
securities, net of
income taxes of $45 67 -- -- -- 67 67
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 2002 $ 4,064 $ 2,179 $ 5,711 $ 23,875 $ 898 $ 32,663
========== ========== ========== ========== ========== ==========
Issuance of 43,535 shares
of common stock -- 44 573 -- -- 617
Net income 1,399 -- -- 1,399 -- 1,399
Dividends on common stock
($0.10 per share) (222) (222)
Change in unrealized
appreciation on
available-for-sale
securities, net of
income tax credit of
$(15) (113) -- -- -- (113) (113)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2002 $ 1,286 $ 2,223 $ 6,284 $ 25,052 $ 785 $ 34,344
========== ========== ========== ========== ========== ==========
Issuance of 31,875 shares
of common stock -- 32 602 -- -- 634
Net income 4,897 -- -- 4,897 -- 4,897
Change in unrealized
appreciation on
available-for-sale
securities, net of
income tax credit of
$(164) (246) -- -- -- (246) (246)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 2003 $ 4,651 $ 2,255 $ 6,886 $ 29,949 $ 539 $ 39,629
========== ========== ========== ========== ========== ==========
</Table>
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2003 2002 2002
------------- ------------ -----------
RECLASSIFICATION DISCLOSURE
Unrealized appreciation (depreciation) on available-for-sale securities, net
of income taxes (credit) of $(164), $(75), and $122 for the periods ended
September 30, 2003, December 31, 2002 and September 30, 2002, respectively $ (246) $ (113) $ 183
Less: reclassification adjustments for appreciation included in
net income, net of income taxes of $0, $0, and $77 for the periods ended
September 30, 2003, December 31, 2002 and September 30, 2002, respectively -- -- (116)
--------- --------- ---------
Change in unrealized appreciation on available-for-sale securities,
net of income taxes (credit) of $(164), $(75), and $45 for the periods
ended September 30, 2003, December 31, 2002 and September 30, 2002, respectively $ (246) $ (113) $ 67
========= ========= =========
</Table>
See Accompanying Notes to Consolidated Financial Statements
and Independent Accountant's Report 7
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(dollars in thousands, except share data)
<Table>
<Caption>
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,897 $ 3,997
Adjustments to reconcile net income to net cash flow from
operating activities:
Depreciation and amortization 1,139 646
Amortization of premiums and discounts on securities 34 39
Provision for loan losses 1,350 1,730
Deferred income taxes -- (52)
Net gain on sales of available-for-sale securities -- (193)
Net loss on sale of foreclosed assets 39 54
Net loss (gain) on sale of premises and equipment (18) 10
Originations of loans held for sale (1,385,560) (865,818)
Proceeds from the sale of loans held for sale 1,442,697 832,163
Changes in
Accrued interest receivable 220 581
Prepaid expenses and other assets (348) (555)
Accrued interest payable and other liabilities 1,341 (228)
----------- -----------
Net cash provided by (used in) operating activities 65,791 (27,626)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net originations of loans (34,995) (28,636)
Proceeds from sales of loan participations -- 2,187
Purchase of premises and equipment (7,977) (2,355)
Proceeds from the sale of premises and equipment 18 12
Proceeds from the sale of foreclosed assets 610 937
Proceeds from sales of available-for-sale securities -- 13,183
Proceeds from maturities of available-for-sale securities 72,487 34,938
Purchases of available-for-sale securities (75,527) (28,999)
Proceeds from the sale of Federal Home Loan Bank stock, Federal
Reserve Bank stock, and other securities -- 893
Purchases of Federal Home Loan Bank stock, Federal Reserve Bank
stock, and other securities (2,250) (875)
----------- -----------
Net cash used in investing activities (47,634) (8,715)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, money market,
NOW and savings accounts 8,065 23,753
Net increase in time deposits 33,118 8,719
Repayments of long-term debt (4,525) (121)
Proceeds from long-term debt 15,325 21,995
Net proceeds from guaranteed preferred beneficial interest in
Company's subordinated debt 7,500 --
Net payments on short-term debt (35,000) --
Proceeds from sale of common stock 634 74
Net increase (decrease) in other borrowings (11,994) 6,222
Net increase (decrease) in balance due under U.S. Treasury note
option (2,870) 2,602
----------- -----------
Net cash provided by financing activities 10,253 63,244
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 28,410 26,903
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 27,755 25,159
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 56,165 $ 52,062
=========== ===========
</Table>
See Accompanying Notes to Consolidated Financial Statements
and Independent Accountant's Report 8
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the Company's consolidated financial position as of September 30, 2003,
and the consolidated results of its operations, stockholders' equity and
cash flows for the periods ended September 30, 2003 and 2002, and are of
a normal recurring nature.
Certain information and note disclosures normally included in the
company's annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
have been omitted. These consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes
thereto included in the Company's December 31, 2002 Form 10-K filed with
the Securities and Exchange Commission. Certain reclassifications to
prior year amounts have been made to conform to current year
presentation.
The results of operations for the period are not necessarily indicative
of the results to be expected for the full year.
The Company applies Accounting Principles Board No. 25 and related
Interpretations in accounting for its stock option plan and no
compensation cost has been recognized. Pro forma compensation costs for
the Company's plan are determined based on the fair value at the option
grant dates using the minimum value method under Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-based Compensation."
During the quarter and year-to-date periods ended September 30, 2003, the
Company issued no stock options; consequently, reported and pro forma net
income were identical.
The report of BKD, LLP commenting upon its review accompanies the
consolidated financial statements included in Item 1 of Part I.
NOTE 2: EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average number
of shares outstanding during each year. Diluted earnings per share is
computed using the weighted average common shares and all potential
dilutive common shares outstanding during the period.
The computation of per share earnings for the three and nine-month
periods ended September 30, 2003 and 2002 is as follows:
See Independent Accountants' Report 9
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
<Table>
<Caption>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------ ------------ ------------ -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(amounts in thousands, except (amounts in thousands, except
share and per share data) share and per share data)
Net income $ 1,495 $ 1,656 $ 4,897 $ 3,997
========== ========== ========== ==========
Average common shares outstanding 2,254,139 2,179,176 2,238,536 2,177,742
Average common share stock options
outstanding 79,381 64,569 74,467 80,486
---------- ---------- ---------- ----------
Average diluted common shares 2,333,520 2,243,745 2,313,003 2,258,228
========== ========== ========== ==========
Basic earnings per share $ 0.66 $ 0.76 $ 2.19 $ 1.84
========== ========== ========== ==========
Diluted earnings per share $ 0.64 $ 0.74 $ 2.12 $ 1.79
========== ========== ========== ==========
</Table>
NOTE 3: LONG-TERM DEBT
Long-term debt at September 30, 2003 and December 31, 2002, consisted of
the following components:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ ------------
(Unaudited)
(in thousands)
Note Payable - other(A) $ 1,326 $ 1,456
Note Payable - bank(B) -- 4,095
Note Payable - bank(C) 5,025 --
Federal Home Loan Bank advances(D) 62,500 52,500
--------- ---------
Total long-term debt $ 68,851 $ 58,051
========= =========
</Table>
(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 $8 million revolving line of credit; interest only at the
Fed Funds Rate + 1.68% due quarterly until December 2003, when the
outstanding principal balance is due; collateralized by common stock of the
Company's subsidiary bank.
See Independent Accountant's Report 10
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
(C) Due in December 2012, payable in quarterly installments of principal plus
interest at the Fed Funds Rate + 1.68%; collateralized by common stock of
the Company's subsidiary bank.
(D) Due in 2007, 2008, 2010, 2011 and 2013; collateralized by various assets
including mortgage-backed loans. The interest rates on the advances range
from 1.55% to 5.682%. Federal Home Loan Bank advance availability is
determined quarterly and at September 30, 2003, approximately $50,626,000
was available.
Aggregate annual maturities of long-term debt at September 30, 2003 are as
follows:
<Table>
<Caption>
(in thousands)
October 1 to December 31, 2003 $ 145
2004 613
2005 653
2006 694
2007 20,736
Thereafter 46,010
----------
$ 68,851
==========
</Table>
NOTE 4: TRUST PREFERRED SECURITIES
On April 10th, 2003, BVBC Capital Trust II ("the Trust"), a Delaware
business trust formed by the Company, completed the sale of $7,500,000 of
trust preferred securities. The Trust is a 100% owned finance subsidiary
of the Company. The Trust also issued $232,000 of common securities to
the Company and used the total proceeds of $7,732,000 from the offering
to purchase $7,732,000 in principal amount of variable rate (LIBOR plus
3.25%) junior subordinated debentures of the Company due April 24, 2033.
The offering was a private placement that the Company used to reduce
existing debt as well as fund additional growth. Securities issued by the
Trust are subordinate to the $11,500,000 issued by BVBC Capital Trust I
on July 21, 2000.
See Independent Accountant's Report 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. The
Company intends such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and is including this statement
for purposes of those safe harbor provisions. Forward-looking statements,
which are based on certain assumptions and describe future plans,
strategies and expectations of the Company, can generally be identified
by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. The Company is unable to
predict the actual results of its future plans or strategies with
certainty. Factors which could have a material adverse effect on the
operations and future prospects of the Company include, but are not
limited to, fluctuations in market rates of interest and loan and deposit
pricing; a deterioration of general economic conditions or the demand for
housing in the Company's market areas; a deterioration in the demand for
mortgage financing; legislative or regulatory changes; adverse
developments in the Company's loan or investment portfolio; any inability
to obtain funding on favorable terms; the loss of key personnel;
significant increases in competition; and the possible dilutive effect of
potential acquisitions or expansions. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue
reliance should not be placed on such statements.
GENERAL
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are largely proscribed by accounting
principles generally accepted in the United States of America. After a
review of our policies, we determined that accounting for the allowance
for loan losses, income taxes, and stock-based compensation are deemed
critical accounting policies because of the valuation techniques used,
and the sensitivity of these financial statement amounts to the methods,
as well as the assumptions and estimates underlying these balances.
Accounting for these critical areas requires the most subjective and
complex judgments that could be subject to revision as new information
becomes available. There have not been any material changes in our
critical accounting policies since December 31, 2002. Further description
of our critical accounting policies can be found in our Annual Report on
Form 10-K for the year ended December 31, 2002.
RESULTS OF OPERATIONS
Three months ended September 30, 2003 and 2002. Net income for the
quarter ended September 30, 2003, was $1.5 million, compared to net
income of $1.7 million for the quarter ended September 30, 2002,
representing a decrease of $161,000, or 9.73%. Diluted earnings per share
decreased 13.52% to $0.64 during the third quarter of 2003 from $0.74 in
the same period of 2002. The Company's annualized return on average
assets and average stockholders' equity for the three-month period ended
September 30, 2003 were 0.89% and 15.31%, compared to 1.22% and 20.76%,
respectively, for the same period in 2002, decreases of 27.05% and
26.26%, respectively.
During the third quarter of 2003, as compared to the same period in 2002,
the Company experienced a $1.3 million increase in noninterest income,
mostly loans held for sale income, a
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
$510,000 decrease in the provision for loan losses and a $340,000
increase in net interest income. However, net income for the period
declined as these factors did not fully offset a $2.4 million increase in
non-interest expense, which resulted primarily from compensation expenses
related to the mortgage areas. An unforeseen surge of mortgage
refinancing activity during the period outpaced the ability of the
Company to process the loans. Had we been able to anticipate the volume
of loans, we are confident that income for the quarter would have been
greater.
Nine months ended September 30, 2003 and 2002. Net income for the nine
months ended September 30, 2003 was $4.9 million, compared to net income
of $4.0 million for the nine-month period ended September 30, 2002,
representing an increase of $900,000, or 22.51%. Diluted earnings per
share increased 18.43% to $2.12 during the nine months ended September
30, 2003 from $1.79 in the same period of 2002. The Company's annualized
return on average assets and average stockholders' equity for the
nine-month period ended September 30, 2003 were mostly unchanged at 1.05%
and 17.61%, compared to 1.02% and 17.62%, respectively, for the same
period in 2002.
The principal contributing factors to our increase in net income from the
nine months ended September 30, 2002 to the current year were a $6.1
million increase in non-interest income, mostly loans held for sale fee
income, an increase in net interest income of $1.6 million and a $380,000
decrease in the provision for loan losses, partially offset by a $6.6
million increase in non-interest expense. The low interest rate
environment resulted in continued strong demand for residential mortgage
loan originations as well as a decline in funding rates. The Company has
continued to capitalize on the mortgage resources put into place during
2001 and 2002.
The increase in Loans Held for Sale Fee Income experienced during the
three and nine month periods ending September 30, 2003 over the same
periods in the prior year was primarily due to an historically low
interest rate environment, which has caused a surge in mortgage refinance
activity. However, near the end of the third quarter of 2003, mortgage
interest rates increased, resulting in a reduction of refinance activity.
Higher mortgage rates could reduce the noninterest income contribution
from our National and Local mortgage divisions in future periods.
NET INTEREST INCOME
Fully tax equivalent (FTE) net interest income for the three-month period
ended September 30, 2003 was $4.6 million, an increase of $330,000 or
7.67%, from $4.3 million for the three-month period ended September 30,
2002.
FTE interest income for the current year third quarter was $8.2 million,
an increase of $365,000, or 4.67%, from $7.8 million in the prior year
third quarter. This increase was primarily a result of an overall
increase in average earning assets. Average earning asset volume
increased from the third quarter of 2002 to the current period by $131.2
million, or 26.22%. Partially offsetting the increase in average earning
assets was a decline in yield on interest-earning assets. The yield on
average earning assets declined 106 basis points to 5.13% in the third
quarter of 2003, compared to 6.19% in the prior year third quarter. The
106 basis point decrease in yield resulted primarily from decreases in
market interest rates during 2002 and 2003 and the impact of the low
interest rates on new and repriced assets during 2002 and 2003.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Interest expense for the current year third quarter was $3.5 million, a
slight increase of $35,000, or 0.99%, from $3.5 million in the prior year
second quarter. The increase is attributable to an increase in average
interest-bearing liability volume of $101.2 million or 23.39% from the
third quarter of 2002 compared to the third quarter of 2003. Average
interest-bearing deposits increased by $29.2 million, or 8.20% from the
prior year and other interest-bearing liabilities increased by $72.0
million or 93.5% from the prior year, mainly in the form of FHLB
borrowings, guaranteed preferred beneficial interest in Company's
subordinated debt, Federal Funds purchased, securities sold under
agreements to repurchase and notes payable. Partially offsetting the
increase in volume was a decline in the rates paid on average
interest-bearing liabilities during the third quarter of 2003. The
primary cause for this decline was the overall decline in market interest
rates and the impact of the low interest rates on new and repriced
liabilities during 2002 and 2003. The rate paid on total average
interest-bearing liabilities decreased to 2.63% during the quarter ended
September 30, 2003 compared to 3.21% during the quarter ended September
30, 2002, a decrease of 58 basis points.
FTE net interest income for the nine-month period ended September 30,
2003 was $13.7 million, an increase of $1.5 million or 12.78%, from $12.1
million for the nine-month period ended September 30, 2002.
FTE interest income for the nine months ended September 30, 2003 was
$23.8 million, an increase of $765,000, or 3.32%, from $23.0 million for
the nine months ended September 30, 2002. This increase was primarily a
result of an overall increase in average earning assets. Average earning
asset volume increased from September 30, 2002 to the current period by
$94.8 million, or 19.42%. Partially offsetting the increase in average
earning assets was a decline in yield on interest-earning assets. The
yield on average earning assets declined 85 basis points to 5.46% for the
first nine months of 2003, compared to 6.31% for the first nine months of
2002. The 85 basis point decrease in yield resulted primarily from
decreases in market interest rates during 2002 and 2003 and the impact of
the low interest rates on new and repriced assets during 2002 and 2003.
Interest expense for the nine-month period ended September 30, 2003 was
$10.1 million, a decrease of $783,000, or 7.19%, from $10.9 million in
the same period of the prior year. The decrease is attributable to a
decrease in the rates paid on average interest-bearing liabilities during
the first nine months of 2003. The primary cause for this decline was the
overall decline in market interest rates and the impact of low interest
rates on new and repriced liabilities during 2002 and 2003. The rate paid
on total average interest-bearing liabilities decreased to 2.73% during
the nine-month period ended September 30, 2003 compared to 3.42% during
the same period in 2002, a decrease of 69 basis points. Average
interest-bearing deposits increased by $10.3 million, or 2.90% from the
prior year and other interest-bearing liabilities increased by $59.3
million or 83.09% from the prior year, mainly in the form of FHLB
borrowings, guaranteed preferred beneficial interest in Company's
subordinated debt, Federal Funds purchased, securities sold under
agreements to repurchase and notes payable. The increase in
interest-bearing liability volume partially offset the decrease in rate.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Average Balance Sheets. The following table sets forth, for the periods
and as of the dates indicated, information regarding our average balances
of assets and liabilities as well as the dollar amounts of FTE interest
income from interest-earning assets and interest expense on
interest-bearing liabilities and the resultant yields or costs. Ratio,
yield and rate information are based on average daily balances where
available; otherwise, average monthly balances have been used. Nonaccrual
loans are included in the calculation of average balances for loans for
the periods indicated.
AVERAGE BALANCES, YIELDS AND RATES
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------
2003 2002
----------------------------------------- ----------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- ----------- ----------- ----------- ----------- -----------
ASSETS
Federal funds sold ...................... $ 2,696 $ 19 0.94% $ 23,231 $ 284 1.63%
Investment securities - taxable ......... 51,262 1,102 2.87 52,968 2,231 5.63
Investment securities - non-taxable (1) . 13,246 680 6.86 14,772 770 6.97
Mortgage loans held for sale ............ 107,101 3,765 4.70 52,987 2,585 6.52
Loans, net of unearned discount
and fees .............................. 408,194 18,206 5.96 343,785 17,137 6.66
----------- ----------- ----------- -----------
Total earning assets .................. 582,499 23,772 5.46 487,743 23,007 6.31
----------- =========== ----------- ===========
Cash and due from banks - non-interest
bearing ............................... 19,050 23,737
Allowance for possible loan losses ...... (7,732) (5,334)
Premises and equipment, net ............. 15,920 9,146
Other assets ............................ 11,599 10,790
----------- -----------
Total assets .......................... $ 621,336 $ 526,082
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits-interest bearing:
Interest-bearing demand accounts ........ $ 26,847 $ 131 0.65% $ 29,572 $ 304 1.37%
Savings and money market deposits ....... 145,288 1,561 1.44 146,325 2,195 2.01
Time deposits ........................... 192,695 5,214 3.62 178,638 5,938 4.44
----------- ----------- ----------- -----------
Total interest-bearing deposits ....... 364,830 6,906 2.53 354,535 8,437 3.18
----------- ----------- ----------- -----------
Short-term borrowings ................... 51,207 422 1.10 19,916 191 1.28
Long-term debt .......................... 79,472 2,786 4.69 51,457 2,269 5.90
----------- ----------- ----------- -----------
Total interest-bearing
liabilities ......................... 495,509 10,114 2.73 425,908 10,897 3.42
----------- ----------- ----------- -----------
Non-interest bearing deposits ........... 83,642 66,171
Other liabilities ....................... 5,013 3,671
Stockholders' equity .................... 37,172 30,332
----------- -----------
Total liabilities and
stockholders' equity ............... $ 621,336 $ 526,082
=========== ===========
Net interest income/spread .............. $ 13,658 2.73% $ 12,110 2.89%
=========== =========== =========== ===========
Net interest margin ..................... 3.13% 3.32%
</Table>
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Analysis of Changes in Net Interest Income Due to Changes in Interest
Rates and Volumes. The following table presents the dollar amount of
changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It
distinguishes between the increase or decrease related to changes in
balances and changes in interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to:
o changes in volume, reflecting changes in volume multiplied by the
prior period rate; and
o changes in rate, reflecting changes in rate multiplied by the prior
period volume.
CHANGES IN INTEREST INCOME AND
EXPENSE VOLUME AND RATE VARIANCES
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
2003 COMPARED TO 2002
---------------------------------------
CHANGE CHANGE
DUE TO DUE TO TOTAL
RATE VOLUME CHANGE
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Federal funds sold .......................... $ (120) $ (145) $ (265)
Investment securities - taxable ............. (1,092) (36) (1,128)
Investment securities - non-taxable (1) ..... (13) (77) (90)
Mortgage loans held for sale ................ (1,104) 2,284 1,180
Loans, net of unearned discount ............. (1,422) 2,491 1,069
--------- --------- ---------
Total interest income ............ (3,751) 4,516 765
--------- --------- ---------
Interest-bearing demand accounts ............ (160) (13) (173)
Savings and money market deposits ........... (623) (11) (634)
Time deposits ............................... (1,104) 380 (724)
Short-term borrowings ....................... (27) 258 231
Long-term debt .............................. (465) 982 517
--------- --------- ---------
Total interest expense ........... (2,379) 1,596 (783)
--------- --------- ---------
Net interest income ......................... $ (1,372) $ 2,920 $ 1,548
========= ========= =========
</Table>
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PROVISION FOR LOAN LOSSES
The provision for loan losses for the third quarter of 2003 was $150,000,
compared to $660,000 for the same period of 2002. For the nine months
ended September 30, 2003 and 2002, the provision was $1.4 million and
$1.7 million, respectively. The decrease in the provision for loans
losses recorded in the three- and nine-month periods ended September 30,
2003 compared to the same periods in the prior year was the result of
improvements in the overall credit exposure in the loan portfolio. The
Company's credit administration function performs monthly analyses on the
loan portfolio to assess and report on risk levels, delinquencies, an
internal ranking system and overall credit exposure. Management and the
Board of Directors reviews the allowance for loan losses monthly,
considering such factors as current and projected economic conditions,
loan growth, the composition of the loan portfolio, loan trends and
classifications, and other factors. We make provisions for loan losses in
amounts that management deems necessary to maintain the allowance for
loan losses at an appropriate level.
NON-INTEREST INCOME
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(IN THOUSANDS)
Loans held for sale fee income ................ $ 5,974 $ 4,771 $ 16,979 $ 11,051
NSF charges and service fees .................. 333 253 943 752
Other service charges ......................... 224 207 688 598
Realized gain on sales of investment securities -- -- -- 193
Other income .................................. 106 81 331 220
--------- --------- --------- ---------
Total non-interest income ............ $ 6,637 $ 5,312 $ 18,941 $ 12,814
========= ========= ========= =========
</Table>
Non-interest income increased $1.3 million or 24.94%, to $6.6 million
during the three-month period ended September 30, 2003, from $5.3 million
during the three-month period ended September 30, 2002. Non-interest
income for the nine-months ended September 30, 2003 was $18.9 million, an
increase of $6.1 million, or 47.81%, from $12.8 million for the
nine-months ended September 30, 2002. These increases are attributable
primarily to increases in loans held for sale fee income, though
significant increases were also realized in overdraft charges and service
fees. Loans held for sale fee income increased $1.2 million, or 25.21%,
and $5.9 million, or 53.64%, for the three-month and nine-month periods
ended September 30, 2003, respectively. During 2002 and 2003, we
experienced significant growth in our loans held for sale income due to
the expansion of our National and Local mortgage divisions concurrent
with a relatively low interest rate environment. The increase in Loans
Held for Sale Fee Income experienced during the three and nine month
periods ending September 30, 2003 over the same periods in the prior year
was primarily due to a combination of these factors. However, near the
end of the third quarter of 2003, mortgage interest rates increased,
resulting in a reduction of refinance activity. Higher interest rates
could reduce the noninterest income contribution from our National and
Local mortgage divisions in future periods.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NON-INTEREST EXPENSE
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(IN THOUSANDS)
Salaries and employee benefits .... $ 6,092 $ 4,302 $ 16,169 $ 11,376
Occupancy ......................... 833 563 2,296 1,494
FDIC and other insurance expense .. 59 25 178 171
General and administrative ........ 1,729 1,426 4,740 3,751
--------- --------- --------- ---------
Total non-interest expense $ 8,713 $ 6,316 $ 23,383 $ 16,792
========= ========= ========= =========
</Table>
Non-interest expense increased to $8.7 million, or 37.95%, during the
three-month period ended September 30, 2003 and to $23.4 million, or
39.25%, during the nine-month period ended September 30, 2003, from $6.3
million and $16.8 million in the prior year periods, respectively. These
increases are attributable primarily to an increase in salaries and
employee benefits expense which increased $1.8 million, or 41.60%, during
the third quarter of 2003 and $4.8 million, or 42.13%, during the
nine-month period ended September 30, 2003, compared to the prior year
periods. Salaries and employee benefits expense increased due to
increased volume-based incentive compensation in our mortgage production
departments as well as additional staff hired to facilitate our growth.
We had 288 full-time equivalent employees at September 30, 2003 compared
to 249 at September 30, 2002. Many areas of the Company added employees
to manage growth and expansion.
FINANCIAL CONDITION
Total assets for the Company at September 30, 2003, were $621.4 million,
an increase of $16.2 million, or 2.68%, compared to $605.2 million at
December 31, 2002. Deposits and stockholders' equity at September 30,
2003, were $465.0 million and $39.6 million, respectively, compared with
$423.8 million and $34.3 million, respectively, at December 31, 2002,
increases of $41.2 million, or 9.71%, and $5.3 million, or 15.38%,
respectively.
Loans at September 30, 2003 totaled $413.7 million, reflecting an
increase of $33.6 million, or 8.85%, compared to December 31, 2002. The
loan to deposit ratio at September 30, 2003 was 88.98% compared to 89.69%
at December 31, 2002.
Mortgage loans held for sale at September 30, 2003 totaled $62.1 million,
a decrease of $57.1 million, or 47.91% compared to December 31, 2002. The
Company's principal funding source for mortgage loans held for sale is
deposits and advances from the Federal Home Loan Bank. Advance
availability with the Federal Home Loan Bank is determined quarterly and
at September 30, 2003, approximately $50,626,000 was available.
Non-performing assets consist primarily of loans past due 90 days or more
and nonaccrual loans and foreclosed real estate. The following table sets
forth our non-performing assets as of the dates indicated:
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NON-PERFORMING ASSETS
<Table>
<Caption>
AS OF
-------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2003 2002 2002
-------------------------- ------------
(Dollars in thousands)
REAL ESTATE LOANS:
Past due 90 days or more $ 1,538 $ -- $ 54
Nonaccrual -- 410 582
INSTALLMENT LOANS:
Past due 90 days or more 1 -- --
Nonaccrual -- -- --
CREDIT CARDS AND RELATED PLANS:
Past due 90 days or more 4 1 23
Nonaccrual -- -- --
COMMERCIAL (TIME AND DEMAND) AND ALL OTHER LOANS:
Past due 90 days or more 788 1,576 --
Nonaccrual 1,440 425 233
LEASE FINANCING RECEIVABLES:
Past due 90 days or more 27 -- 3
Nonaccrual 141 310 223
DEBT SECURITIES AND OTHER ASSETS (EXCLUDE OTHER REAL
ESTATE OWNED AND OTHER REPOSSESSED ASSETS):
Past due 90 days or more -- -- --
Nonaccrual -- -- --
---------- ---------- ----------
Total non-performing loans 3,939 2,722 1,118
FORECLOSED ASSETS HELD FOR SALE 652 644 614
---------- ---------- ----------
Total non-performing assets $ 4,591 $ 3,366 $ 1,732
========== ========== ==========
Total nonperforming loans to total loans 0.95% 0.76% 0.29%
Total nonperforming loans to total assets 0.63% 0.49% 0.18%
Allowance for loan losses to nonperforming loans 192.87% 212.92% 618.29%
Nonperforming assets to loans and foreclosed assets
held for sale 1.11% 0.94% 0.46%
</Table>
As of September 30, 2003, non-performing loans equaled 0.95% of total
loans, representing an increase in non-performing loans from December 31,
2002. This increase was primarily due to several commercial credit
relationships which became past due over 90 days during the first half of
2003. The Company had already reserved for the estimated potential loss
from these credit relationships when they were identified as impaired. In
spite of the increase in total non-performing loans at September 30, 2003
compared to 2002, the overall credit exposure in the Company's loan
portfolio improved; consequently, the Company recorded a lower provision
for loan losses in the three- and nine-month periods ending September 30,
2003 as compared to 2002. The level of loans charged-off decreased during
the first nine months of 2003, as evidenced by the decrease in our ratio
of net charge-offs to average loans, to 0.21% for the period compared to
0.36% for the period ending December 31, 2002. We closely monitor
non-performing credit relationships and our philosophy has been to value
non-performing loans at their estimated collectible value and to
aggressively manage these situations. Generally, the Company maintains
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
its allowance for loan losses in excess of its non-performing loans. As
of September 30, 2003, our ratio of allowance for loan losses to
non-performing loans was 192.87%.
The following table sets forth information regarding changes in our
allowance for loan losses for the periods indicated.
SUMMARY OF LOAN LOSS EXPERIENCE
AND RELATED INFORMATION
<Table>
<Caption>
AS OF AND FOR THE
--------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
-------------------------- DECEMBER 31,
2003 2002 2002
---------- ---------- ------------
(Dollars in thousands)
BALANCE AT BEGINNING OF PERIOD $ 6,914 $ 5,267 $ 5,267
LOANS CHARGED-OFF
Commercial real estate 392 181 323
Residential real estate -- 142 --
Commercial 260 328 323
Personal 64 45 66
Home Equity 10 -- --
Construction 3 -- --
Leases 202 783 870
---------- ---------- ----------
Total loans charged-off 931 1,479 1,582
---------- ---------- ----------
RECOVERIES:
Commercial real estate 5 1 1
Residential real estate 2 -- --
Commercial 72 105 123
Personal 32 20 23
Home Equity -- -- --
Construction 3 -- --
Leases 150 151 162
---------- ---------- ----------
Total recoveries 264 277 309
---------- ---------- ----------
NET LOANS CHARGED-OFF 667 1,202 1,273
PROVISION FOR LOAN LOSSES 1,350 1,730 2,920
---------- ---------- ----------
BALANCE AT END OF PERIOD $ 7,597 $ 5,795 $ 6,914
========== ========== ==========
LOANS OUTSTANDING:
Average $ 408,194 $ 343,785 $ 349,879
End of period 413,724 357,738 380,082
RATIO OF ALLOWANCE FOR LOAN LOSSES TO
LOANS OUTSTANDING:
Average 1.86% 1.68% 1.98%
End of period 1.84% 1.62% 1.82%
RATIO OF ANNUALIZED NET CHARGE-OFFS TO
LOANS OUTSTANDING:
Average 0.21% 0.47% 0.36%
End of period 0.22% 0.44% 0.33%
</Table>
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The allowance for loan losses as a percent of total loans increased
slightly to 1.84% as of September 30, 2003, compared to 1.82% at December
31, 2002.
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 57.93% and 57.80% of our total assets at September 30,
2003, and December 31, 2002, respectively. Management has 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 September 30, 2003,
the Company was within the established guidelines.
At September 30, 2003, our total stockholders' equity was $39.6 million
and our equity to asset ratio was 6.37%. At September 30, 2003, our Tier
1 capital ratio was 9.77% compared to 8.82% at December 31, 2002, while
our total risk-based capital ratio was 12.17% compared to 10.13% at
December 31, 2002. As of September 30, 2003, we had capital in excess of
the requirements for a "well-capitalized" institution.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a continued 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 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 the 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 Bank of Blue
Valley's current sensitivity to instantaneous and permanent changes in
interest rates. The system simulates the Bank's asset and liability base
and projects future net interest income results under several interest
rate assumptions. This allows management to view how changes in interest
rates will affect the spread between the yield received on assets and the
cost of deposits and borrowed funds.
The asset/liability modeling service is also used to analyze the net
economic value of equity at risk under instantaneous shifts in interest
rates. The "net economic value of equity at risk" is defined as the
market value of assets less the market value of liabilities plus/minus
the market value of any off-balance sheet positions. By effectively
looking at the present value of all future cash flows on or off the
balance sheet, the net economic value of equity modeling takes a
longer-term view of interest rate risk.
We strive to maintain a position such that current changes in interest
rates will not affect net interest income or the economic value of equity
by more than 5% per 50 basis points. The following table sets forth the
estimated percentage change in the Bank of Blue Valley's net interest
income over the next twelve month period and net economic value of equity
at risk at September 30, 2003 based on the indicated instantaneous and
permanent changes in interest rates.
<Table>
<Caption>
NET INTEREST NET ECONOMIC
INCOME VALUE OF
CHANGES IN INTEREST RATES (NEXT 12 MONTHS) EQUITY AT RISK
- ------------------------- ---------------- ---------------
300 basis point rise 40.46% 6.83%
200 basis point rise 27.05% 4.96%
100 basis point rise 14.73% 2.99%
Base Rate Scenario -- --
25 basis point decline (3.90)% (1.17)%
50 basis point decline (7.63)% (2.33)%
100 basis point decline (12.45)% (3.22)%
</Table>
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The above table indicates that, at September 30, 2003, in the event of a
sudden and sustained increase in prevailing market rates, our net
interest income would be expected to increase as our assets would be
expected to reprice quicker than our liabilities, while a decrease in
rates would indicate just the opposite. Generally, in the decreasing rate
scenarios, not only would adjustable rate assets (loans) reprice to lower
rates faster than our liabilities, but our liabilities - long-term
Federal Home Loan Bank of Topeka (FHLB) advances and existing time
deposits - would not decrease in rate as much as market rates. In
addition, fixed rate loans might experience an increase in prepayments,
further decreasing yields on earning assets and causing net interest
income to decrease. Another consideration with a rising interest rate
scenario is the impact on mortgage loan refinancing, which would likely
decline, leading to lower loans held for sale fee income, though the
impact is difficult to quantify or project.
The table also indicates that, at September 30, 2003, in the event of a
sudden decrease in prevailing market rates, the current net 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.
23
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Item 307 of Regulation S-K promulgated under the
Securities Act of 1933, as amended, and within 90 days of the date of
this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief
Financial Officer of the Company (the "Certifying Officers") have
conducted evaluations of the Company's disclosure controls and
procedures. As defined under Sections 13a-14(c) and 15d-14(c) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
term "disclosure controls and procedures" means controls and other
procedures of an issuer that are designed to ensure that information
required to be disclosed by the issuer in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and
forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to
be disclosed by an issuer in the reports that it files or submits under
the Exchange Act is accumulated and communicated to the issuer's
management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure. The Certifying Officers have reviewed the Company's
disclosure controls and procedures and have concluded that those
disclosure controls and procedures are effective as of the date of this
Quarterly Report on Form 10-Q. In compliance with Section 302 of the
Sarbanes-Oxley Act of 2002, (18 U.S.C. 1350), each of the Certifying
Officers executed an Officer's Certification included in this Quarterly
Report on 10-Q.
As of the date of this Quarterly Report on Form 10-Q, there have not been
any significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
24
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(E) EXHIBITS
11. Computation of Earnings Per Share. Please see p. 9.
15. Letter regarding Unaudited Interim Financial Information
31.1 Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350
31.2 Certification of the Treasurer pursuant to 18 U.S.C.
Section 1350
32.1 Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350
32.2 Certification of the Treasurer pursuant to 18 U.S.C.
Section 1350
(F) REPORTS ON FORM 8-K
On July 14, 2003, Blue Valley filed a report on Form 8-K covering
the press release for the Company's second quarter 2003 earnings.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLUE VALLEY BAN CORP
Date: November 12, 2003 By: /s/ Robert D. Regnier
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Robert D. Regnier, President and
Chief Executive Officer
Date: November 12, 2003 By: /s/ Mark A. Fortino
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Mark A. Fortino, Treasurer
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