<PAGE> 1
FILED PURSUANT TO RULE 424(b)3
REGISTRATION NOS. 333-40028 AND 333-40028-01
1,000,000 TRUST PREFERRED SECURITIES
FRONT RANGE CAPITAL TRUST I
11% CUMULATIVE TRUST PREFERRED SECURITIES
FULLY, IRREVOCABLY AND UNCONDITIONALLY GUARANTEED
ON A SUBORDINATED BASIS BY
FRONT RANGE CAPITAL CORPORATION
The trust preferred securities represent undivided beneficial interests in
the assets of Front Range Capital Trust I. The trust will invest the proceeds of
this offering of trust preferred securities in the 11% junior subordinated
debentures of Front Range Capital Corporation.
You are entitled to receive quarterly cumulative cash distributions on the
trust preferred securities at an annual rate of 11%. Payment of distributions
may be deferred at any time for up to 20 consecutive quarters. The trust
preferred securities are effectively subordinated to all senior and subordinated
indebtedness of Front Range Capital Corporation and its subsidiaries. The
debentures mature and the trust preferred securities must be redeemed on
December 28, 2030.
There is no current public market for the trust preferred securities.
However, the trust preferred securities have been approved for listing on the
American Stock Exchange under the trading symbol "FNG.Pr."
INVESTING IN THE TRUST PREFERRED SECURITIES INVOLVES RISKS WHICH ARE
DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 6.
THE TRUST PREFERRED SECURITIES AND THE DEBENTURES ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OBLIGATIONS OF ANY BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
<TABLE>
<CAPTION>
PER TRUST
PREFERRED SECURITY TOTAL
------------------ ----------
<S> <C> <C>
Public offering price..................................... $8.00 $8,000,000
Proceeds to the trust..................................... $8.00 $8,000,000
Underwriting fees to be paid by Front Range Capital
Corporation............................................. $0.40 $ 400,000
Proceeds to Front Range Capital Corporation............... $7.60 $7,600,000
</TABLE>
The underwriters have entered into a firm commitment underwriting agreement
with Front Range Capital Corporation and Front Range Capital Trust I, which
means that all of the trust preferred securities will be purchased by the
underwriters, if any are. The underwriters may purchase an additional 150,000
trust preferred securities as an over-allotment option.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HOWE BARNES INVESTMENTS, INC.
December 21, 2000
<PAGE> 2
[INSERT MAP OF BANKING CENTER LOCATIONS]
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 1
Summary Consolidated Financial Data......................... 4
Recent Developments......................................... 5
Risk Factors................................................ 6
Forward-Looking Information................................. 11
Use of Proceeds............................................. 11
Accounting Treatment........................................ 12
Capitalization.............................................. 13
Selected Consolidated Financial Data........................ 14
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Business.................................................... 31
Management.................................................. 34
Interests of Management and Others in Certain
Transactions.............................................. 38
Beneficial Ownership of Common Stock by Management and
Principal Stockholders.................................... 39
Supervision and Regulation.................................. 40
Description of the Trust.................................... 46
Description of the Trust Preferred Securities............... 47
Description of the Debentures............................... 58
Book-Entry Issuance......................................... 65
Description of the Guarantee................................ 66
Relationship Among the Trust Preferred Securities, the
Debentures and the Guarantee.............................. 69
Federal Income Tax Consequences............................. 70
ERISA Considerations........................................ 73
Underwriting................................................ 74
Legal Matters............................................... 75
Experts..................................................... 75
Where You Can Find Information.............................. 76
Index to Financial Statements............................... F-1
</TABLE>
i
<PAGE> 4
SUMMARY
FRONT RANGE CAPITAL CORPORATION
We are a bank holding company headquartered in Louisville, Colorado.
Through our subsidiary, Heritage Bank, we conduct business through 11
full-service banking branches located throughout the greater Denver-Boulder
metropolitan area. This gives us a substantial presence in the communities along
one of Colorado's primary business corridors.
Capitalizing on the economic and population growth in the Denver-Boulder
market and recent industry consolidation, we have opened a number of new banking
branches, including six new locations over the past two years. As a result, our
assets have increased to $200.3 million at September 30, 2000, from $5.6 million
at the end of 1990. At September 30, 2000, we had $167.4 million in deposits and
$8.9 million in stockholders' equity.
In addition to significant growth, our operating performance has been
characterized by improving earnings, sound asset quality and a strong net
interest margin. Despite the costs associated with our growth, net income
increased by 165.0% from $514,000 in 1998 to $1.4 million in 1999. For the nine
months ended September 30, 2000, our net income equaled $1.1 million. At the
same time, we have maintained sound asset quality as represented by our 0.07%
ratio of nonperforming assets to total assets at September 30, 2000. Our net
interest margin for the nine months ended September 30, 2000 remained strong at
5.83%.
We operate under a community banking philosophy, seeking to develop broad
relationships with our customers, mainly local residents and small to medium
sized businesses, based on responsive, individualized service.
Our executive offices are located at 1020 Century Drive, Suite 202,
Louisville, Colorado 80027. Our telephone number is (303) 926-0300.
FRONT RANGE CAPITAL TRUST I
The trust is a newly formed financing subsidiary of Front Range Capital
Corporation. Upon issuance of the trust preferred securities offered by this
prospectus, the purchasers in this offering will own all of the issued and
outstanding trust preferred securities of the trust. In exchange for our capital
contribution to the trust, we will own all of the common securities of the
trust. The trust is authorized only to issue the trust preferred securities and
common securities and hold the junior subordinated debentures.
The trust's address is 1020 Century Drive, Suite 202, Louisville, Colorado
80027. Its telephone number is (303) 926-0300.
<PAGE> 5
THE OFFERING
Trust preferred securities
issuer................... Front Range Capital Trust I
Securities that are being
offered.................. The trust is offering 1,000,000 trust preferred
securities, which represent undivided beneficial
interests in the assets of the trust. Those assets
will consist solely of the debentures and interest
paid on the debentures. The trust will sell the
trust preferred securities to the public for cash.
The trust will use that cash to buy the debentures
from us.
Offering price............. $8 per trust preferred security.
Payment of distributions to
you...................... If you purchase the trust preferred securities, you
are entitled to receive cumulative cash
distributions at an 11% annual rate. Distributions
will accumulate from the date the trust issues the
trust preferred securities and will be paid
quarterly, beginning on March 31, 2001.
We and the trust have
the option to defer
payments................. The trust will rely solely on payments made by us
on the debentures to pay distributions on the trust
preferred securities. So long as no event of
default under the indenture has occurred and is
continuing, we may, at one or more times, defer
interest payments on the debentures for up to 20
consecutive quarters, but not beyond December 28,
2030. If we defer interest payments on the
debentures:
- the trust will also defer distributions on the
trust preferred securities;
- distributions you are entitled to will
accumulate; and
- these accumulated distributions will accumulate
additional distributions at an annual rate of 11%
compounded quarterly.
At the end of any deferral period, we will pay to
the trust all accrued and unpaid amounts on the
debentures. The trust will then pay all accumulated
and unpaid distributions to you.
Maturity of the
debentures............... The debentures will mature and the trust preferred
securities must be redeemed on December 28, 2030.
We have the option, however, to shorten the
maturity date to a date not earlier than December
28, 2005.
Redemption of the trust
preferred securities
before December 28, 2030
is possible.............. The trust must redeem the trust preferred
securities when the debentures are paid at maturity
or upon any earlier redemption of the debentures.
We may redeem all or part of the debentures on or
after December 28, 2005. In addition, we may
redeem, at any time, all of the debentures if:
- the interest we pay on the debentures is no
longer deductible by us for federal income tax
purpose or the trust becomes subject to federal
income tax or other governmental charges;
- there is a change in existing law or regulations
that requires the trust to register as an
investment company; or
- there is a change in the capital adequacy
guidelines of the Federal Reserve that prevents
or inhibits our ability to count a portion of the
trust preferred securities as Tier 1 capital.
2
<PAGE> 6
If the trust preferred securities are redeemed by
the trust, you will receive the liquidation amount
of $8 per trust preferred security plus any
accumulated and unpaid distributions up to the date
of redemption.
How the securities
will rank in right
of payment.............. Our obligations under the trust preferred
securities, debentures and guarantee are unsecured
and will rank as follows with regard to right of
payment:
- The trust will pay distributions on the trust
preferred securities and the common securities on
an equal basis. However, if we default with
respect to the debentures, then no distributions
on the common securities will be paid until all
accumulated and unpaid distributions on the trust
preferred securities have been paid;
- our obligations under the debentures and the
guarantee will rank junior in priority to our
existing and future senior and other subordinated
indebtedness; and
- because we are a holding company, the debentures
and the guarantee will effectively be
subordinated to all depositors' claims as well as
existing and future liabilities of our
subsidiaries.
We may distribute the
debentures directly to
you...................... We may, at any time, dissolve the trust and
distribute the debentures to you in exchange for
your trust preferred securities.
Our guarantee of payment... We guarantee that the trust will use its assets to
pay the distributions on the trust preferred
securities. However, the guarantee does not apply
when the trust does not have sufficient funds to
make the payments. In this event, your remedy is to
initiate a legal proceeding directly against us for
enforcement of payments under the debentures.
Use of proceeds............ The trust will use all of the proceeds from the
sale of the trust preferred securities to purchase
the debentures. We plan to use the net proceeds
from the sale of the debentures for capital
investment in the bank, including to support its
growth and to finance possible new branch openings,
debt repayment and for general corporate purposes.
3
<PAGE> 7
FRONT RANGE CAPITAL CORPORATION
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS ENDED AS OF AND FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net interest income....................... $ 7,100 $ 5,721 $ 7,912 $ 5,669 $ 4,431
Provision for loan losses................. 265 292 402 421 318
Noninterest income........................ 1,115 859 1,197 871 477
Noninterest expense....................... 6,416 4,977 6,772 5,450 3,520
Net income................................ 1,125 882 1,362 514 665
COMMON SHARE DATA:
Earnings per common share (basic)......... $ 0.85 $ 0.66 $ 1.03 $ 0.42 $ 0.06
Book value per common share............... 6.70 5.39 5.62 5.18 3.90
BALANCE SHEET DATA (AT PERIOD END):
Total assets.............................. $200,268 $157,937 $172,690 $131,745 $ 90,739
Loans, net of unearned income............. 154,257 115,374 130,708 91,793 59,284
Allowance for loan losses................. 1,652 1,306 1,411 1,097 754
Deposits.................................. 167,384 137,545 141,926 114,933 84,138
Borrowed funds............................ 22,197 11,546 21,827 8,937 1,122
Stockholders' equity...................... 8,897 7,156 7,462 6,861 4,636
PERFORMANCE RATIOS(1):
Return on average assets(1)............... 0.80% 0.82% 0.92% 0.49% 0.87%
Return on average stockholders'
equity(1).............................. 18.54 17.39 20.06 9.27 15.80
Net interest margin(1).................... 5.83 6.10 6.12 6.10 6.59
Loan to deposit ratio..................... 91.17 82.93 91.10 78.91 69.56
ASSET QUALITY RATIOS(2):
Nonperforming loans to total loans(3)..... 0.02 0.18 0.05 0.93 0.96
Net loan charge-offs to average total
loans.................................. 0.02 0.08 0.08 0.11 0.46
Allowance for loan losses to total
loans.................................. 1.07 1.13 1.08 1.20 1.27
CAPITAL RATIOS (AT PERIOD END)(4):
Leverage ratio............................ 4.69% 4.90% 4.87% 7.06% 5.49%
Tier 1 risk-based capital ratio........... 5.18 5.98 5.47 8.22 6.29
Total risk-based capital ratio............ 6.12 7.02 6.43 9.28 7.36
EARNINGS TO FIXED CHARGES(5):
Including interest on deposits............ 1.28x 1.38x 1.38x 1.18x 1.38x
Excluding interest on deposits............ 2.23x 3.16x 3.24x 3.80x 10.30x
</TABLE>
---------------
(1) The ratios for the nine months ended September 30, 2000 and 1999 have been
annualized and are not necessarily indicative of the results for the entire
year.
(2) At period end, except for net loan charge-offs to average total loans, which
is for periods ended on such dates.
(3) Nonperforming loans consist of nonaccrual loans, loans past due 90 days or
more and restructured loans.
(4) The leverage and risk-based capital ratios are defined by federal
regulations. See "Supervision and Regulation."
(5) For purposes of computing the ratio of earnings to fixed charges, earnings
represent earnings before income taxes, extraordinary items and fixed
charges. Fixed charges represent interest expense.
4
<PAGE> 8
RECENT DEVELOPMENTS
As a part of our application for listing the trust preferred securities on
the American Stock Exchange, on October 19, 2000, we refinanced $1.3 million of
our indebtedness by issuing 1,317 shares of our 2000 series B cumulative
preferred stock in exchange for existing senior outstanding promissory notes.
This preferred stock pays a dividend, when declared by our board of directors,
paid quarterly, in an amount equal to the prime rate published in the Wall
Street Journal on the dividend payment date. The shares of series B preferred
stock are redeemable solely at our option. We currently intend to redeem all of
the issued and outstanding shares of series B preferred stock at various times
over the next three years.
5
<PAGE> 9
RISK FACTORS
An investment in the trust preferred securities involves a number of risks.
You should carefully read and consider the following factors in evaluating us,
our business and the trust, in addition to the other information in this
prospectus, before you purchase the trust preferred securities offered by this
prospectus.
Because the trust will rely on the payments it receives on the debentures
to fund all payments on the trust preferred securities, and because the trust
may distribute the debentures in exchange for the trust preferred securities,
you are making an investment decision that relates to the debentures as well as
the trust preferred securities. You should carefully review the information in
this prospectus about the trust preferred securities, the debentures and the
guarantee.
RISKS RELATED TO AN INVESTMENT IN THESE
TRUST PREFERRED SECURITIES
YOU WILL NOT RECEIVE PAYMENTS ON THE TRUST PREFERRED SECURITIES IF OUR EARNINGS
ARE NOT SUFFICIENT TO MAKE TIMELY PAYMENTS ON THE DEBENTURES.
The trust will depend solely on our payments on the debentures to pay
amounts due you on the trust preferred securities. If we default on our
obligation to pay the principal or interest on the debentures, the trust will
not have sufficient funds to pay distributions or the liquidation amount on the
trust preferred securities. In that case, you will not be able to rely on the
guarantee for payment of these amounts because the guarantee only applies if the
trust has sufficient funds to make distributions on or to pay the liquidation
amount of the trust preferred securities. Instead, you or the property trustee
will have to initiate a direct action against us to enforce the property
trustee's rights under the indenture relating to the debentures.
IF OUR BANK SUBSIDIARY IS UNABLE TO PAY DIVIDENDS TO US, WE MAY BE UNABLE TO
MAKE PAYMENTS ON THE DEBENTURES.
We are a holding company and substantially all of our assets are held by
our subsidiary bank. Our ability to make payments on the debentures when due
will depend primarily on available cash resources at the holding company and
dividends from the bank. Dividend payments from the bank are subject to
regulatory limitations, generally based on capital levels and current and
retained earnings, imposed by the various regulatory agencies with authority
over the bank. The ability of the bank to pay dividends is also subject to its
profitability, financial condition and capital expenditures and other cash flow
requirements. We cannot assure you that the bank will be able to pay dividends
in the future.
IN THE FUTURE OUR REGULATORS MAY IMPOSE RESTRICTIONS ON OUR ABILITY TO PAY
INTEREST ON THE DEBENTURES.
We may also be precluded from making interest payments on the debentures by
our regulators in order to address any perceived deficiencies in liquidity or
regulatory capital levels at the holding company level. Such regulatory action
would require us to obtain consent from our regulators prior to paying dividends
on our capital stock or interest on the debentures. In the event our regulators
withheld their consent to our payment of interest on the debentures, we would
exercise our right to defer interest payments on the debentures, and the trust
would not have funds available to make distributions on the trust preferred
securities during such period. The commencement of a deferral period would
likely cause the market price of the trust preferred securities to decline. We
cannot assure you that our regulators will not attempt to preclude us from
making interest payments on the debentures.
IF OUR EARNINGS ARE INSUFFICIENT TO PAY ALL OF OUR CREDITORS, THE HOLDERS OF OUR
SENIOR INDEBTEDNESS WILL BE PAID BEFORE WE MAKE PAYMENTS TO THE TRUST AND BEFORE
THE TRUST CAN MAKE PAYMENTS TO YOU.
Our obligations under the debentures and the guarantee are unsecured and
will rank junior in priority of payment to our existing and future senior and
subordinated indebtedness. At September 30, 2000, we had approximately $22.2
million of senior and subordinated indebtedness, excluding deposits, but
including
6
<PAGE> 10
federal funds purchased, short-term borrowed funds and long-term debt. Included
as senior and subordinated indebtedness, as of September 30, 2000, is $1.3
million held in promissory notes by a number of our common stockholders. On
October 19, 2000, such promissory notes were refinanced with our series B
preferred stock. This stock is redeemable solely at our option and normally
would be subordinate to the debentures, but we intend to redeem such stock at
various times over the next three years, decreasing the amount of our capital.
Since we intend to redeem this stock, you should continue to count it as senior
and subordinated indebtedness that ranks higher in priority than the trust
preferred securities and the debentures.
We expect to incur additional indebtedness from time to time in the future.
The issuance of the debentures and the trust preferred securities does not limit
our ability to incur additional indebtedness. Because we are a holding company,
the creditors and depositors of the bank, totaling $167.4 million at September
30, 2000, will also have priority over you in any distribution of assets in
liquidation, reorganization or otherwise. Accordingly, the debentures and the
guarantee will be effectively subordinated to all existing and future
liabilities of the bank, and you should look only to our assets for payments on
the trust preferred securities and the debentures.
IF WE ELECT TO DEFER PAYMENTS ON THE DEBENTURES, YOU WILL NOT RECEIVE TIMELY
DISTRIBUTIONS ON THE TRUST PREFERRED SECURITIES.
We may, at one or more times, defer interest payments on the debentures for
up to 20 consecutive quarters. If we defer interest payments on the debentures,
the trust will defer distributions on the trust preferred securities during any
deferral period. Your distributions will continue to accrue and the interest in
the unpaid distributions will compound quarterly.
IF WE ELECT TO DEFER INTEREST PAYMENTS, YOU WILL HAVE TO INCLUDE INTEREST IN
YOUR TAXABLE INCOME BEFORE YOU RECEIVE THE DISTRIBUTION.
Although you will not receive cash distributions during a deferral period,
you will be required to recognize as income for federal income tax purposes the
interest income that accrues on your proportionate share of the debentures held
by the trust in the tax year in which that interest accrues. As a result, you
must include this income in your gross income for federal income tax purposes
before you receive the distribution. You will also not receive the cash related
to any accrued and unpaid interest from the trust if you dispose of the trust
preferred securities before the end of any deferral period.
THE PRICE OF THE TRUST PREFERRED SECURITIES MAY NOT REFLECT UNPAID INTEREST AND
YOU MAY SUFFER ADVERSE TAX CONSEQUENCES OR A LOSS IF YOU SELL THEM WHILE
INTEREST REMAINS UNPAID.
If we exercise our right to defer interest payments on the debentures, the
price at which you could sell the trust preferred securities may decline because
the price may not reflect the value of any accrued but unpaid interest.
Accordingly, if you dispose of the trust preferred securities during an interest
deferral period, you may not receive the same return on investment as someone
who continues to hold the trust preferred securities.
During a deferral period, your tax basis in the trust preferred securities
will increase by the amount of accrued but unpaid distributions. If you sell the
trust preferred securities during a deferral period, your increased tax basis
will decrease the amount of any capital gain or increase the amount of any
capital loss you might have otherwise recognized on the sale. Except in certain
limited circumstances, a capital loss may not be used to offset ordinary income.
Accordingly, as a result of the deferral of distributions, you may have
additional ordinary income, a related tax liability and a capital loss that can
only be used to offset a capital gain.
7
<PAGE> 11
SINCE WE MAY REDEEM THE DEBENTURES AT ANY TIME ON OR AFTER DECEMBER 28, 2005 OR
WITHIN 90 DAYS FOLLOWING THE OCCURRENCE OF SPECIFIED TAX OR REGULATORY EVENTS,
YOU MAY BE REQUIRED TO REINVEST YOUR MONEY IN OTHER INVESTMENTS AT A LOWER RATE
OF RETURN.
Subject to Federal Reserve approval, if then required, we may redeem the
debentures before their stated maturity under limited circumstances, including:
- redemption in whole or in part, at any time on or after December 28,
2005; or
- redemption in whole, but not in part, within 90 days after certain
occurrences at any time during the life of the trust. These occurrences
include specified adverse tax, investment company or bank regulatory
developments.
You should assume that we will exercise our redemption option if we are
able to obtain capital at a lower cost than we must pay on the debentures or if
it is otherwise in our interest to redeem the debentures. If the debentures are
redeemed, the trust must redeem trust preferred securities having an aggregate
liquidation amount equal to the aggregate principal amount of debentures
redeemed, and if you reinvest your principal in another investment you may not
be able to earn a return that is as high as you were earning on the trust
preferred securities prior to the redemption.
WE CAN DISTRIBUTE THE DEBENTURES TO YOU IN EXCHANGE FOR THE TRUST PREFERRED
SECURITIES, WHICH MAY ADVERSELY AFFECT THE LIQUIDITY AND THE MARKET VALUE OF
YOUR INVESTMENT AND RESULT IN A TAXABLE EVENT.
We may dissolve the trust at any time. After satisfying its liabilities to
its creditors, the trust may distribute the debentures to you in exchange for
the trust preferred securities. We will not dissolve the trust without the prior
approval of the Federal Reserve, if then required. There is no public market for
the debentures and we cannot predict the market prices for the debentures that
may be distributed. Accordingly, the debentures that you receive upon a
distribution, or the trust preferred securities you hold pending such a
distribution, may trade at a lower price than you paid to purchase the trust
preferred securities.
Under current federal income tax law and interpretations, a distribution of
the debentures should not be a taxable event to holders of the trust preferred
securities. See "Federal Income Tax Consequences."
THE LIMITED COVENANTS WE MADE IN THE INDENTURE AND THE TRUST AGREEMENT WILL NOT
PROTECT YOUR INVESTMENT.
The indenture governing the debentures and the trust agreement governing
the trust preferred securities do not require us to maintain any financial
ratios or specified levels of net worth, revenues, income, cash flow or
liquidity. As a result, these governing documents will not protect your
investment in the event we experience significant adverse changes in our
financial condition or results of operations. In addition, neither the indenture
nor the trust agreement limits our ability or the ability of our subsidiaries to
incur additional indebtedness. You should not consider the covenants contained
in these governing documents as a significant factor in evaluating whether we
will be able to comply with our obligations under the debentures or the
guarantee.
AN ACTIVE TRADING MARKET FOR THE TRUST PREFERRED SECURITIES OR THE DEBENTURES IS
UNLIKELY TO DEVELOP, WHICH COULD IMPAIR THE MARKET VALUE OF THE TRUST PREFERRED
SECURITIES.
There is currently no public market for the trust preferred securities.
Although the trust preferred securities have been approved for listing on the
American Stock Exchange under the symbol "FNG.Pr," an active or liquid trading
market for the trust preferred securities is unlikely to develop. If an active
trading market does not develop, the market price and liquidity of the trust
preferred securities will be adversely affected. Even if an active public market
does develop, there is no guarantee that the market price for the trust
preferred securities will equal or exceed the price you pay for the trust
preferred securities.
8
<PAGE> 12
RISKS RELATED TO AN INVESTMENT IN
FRONT RANGE CAPITAL CORPORATION
AN INABILITY TO OBTAIN ADDITIONAL FINANCING COULD LIMIT OUR GROWTH AND
PROFITABILITY AND IMPACT OUR ABILITY TO MAKE PAYMENTS ON THE DEBENTURES.
To support and continue our growth, or to repay our outstanding
indebtedness, we may need to obtain additional debt and equity financing. In the
past, our financing limitations have caused us to sell loans when our deposits
decreased for a short period of time and kept us from securing brokered deposits
or other possible sources of funds. Our access to capital markets and the costs
of raising capital, may be affected by changes in interest rates, general
economic conditions, the perception in the capital markets of our business, our
results of operations, leverage, financial condition and business prospects and
regulatory borrowing restrictions which may apply to us and to the bank. We
believe that the proceeds from the sale of the debentures will sustain our
growth for the next few years, but we cannot assure you that this will be the
case or that additional funds will not be needed.
OUR EXPANSION HAS ADDED COSTS AND CAUSED MISMATCHES BETWEEN ASSETS AND DEPOSITS
WHICH MAY CONTINUE TO ADVERSELY AFFECT OUR EARNINGS AND HINDER OUR ABILITY TO
MAKE PAYMENTS ON THE DEBENTURES.
We have pursued an aggressive internal growth strategy centered on
establishing new branches in new and existing markets. This strategy has raised
our overhead costs and, in the second quarter of 2000, caused our asset growth
to exceed our deposit growth. We cannot assure you that this, and other
potential problems related to growth, will not recur. As we continue to grow, we
cannot assure you that we will successfully:
- generate an increasing volume of loans and deposits at acceptable risk
levels and on acceptable terms;
- control and absorb costs and increasing efficiency;
- obtain additional debt and equity financing when needed;
- attract and retaining qualified management and staff;
- provide adequate technology and support systems; and
- maintain adequate internal audit, loan review and compliance functions.
An inability to successfully manage growth could adversely impact our
operations and financial condition and increase the risk of nonpayment on the
debentures and the trust preferred securities.
IF OUR ALLOWANCE FOR LOAN LOSSES IS NOT ADEQUATE TO COVER ACTUAL LOSSES OUR
EARNINGS COULD DECREASE AND OUR ABILITY TO MAKE PAYMENTS ON THE DEBENTURES WOULD
BE NEGATIVELY IMPACTED.
We believe that our allowance for loan losses is maintained at a level
adequate to absorb any inherent losses in our loan portfolio. However, our
actual loan losses could increase significantly due to changes in economic and
other conditions that are generally beyond our control. Management's estimates
used in determining the allowance are based on our historical loan loss
experience, the amount of nonperforming loans and related collateral, volume,
growth and composition of the loan portfolio, current economic conditions that
may affect the borrower's ability to pay and the value of collateral, the
evaluation of our loan portfolio through our internal loan review process and
other relevant factors. These estimates are inherently subjective and their
accuracy depends on the outcome of future events. Ultimate losses may differ
from current estimates. As a result, such losses could exceed our current
allowance estimates. We can provide no assurance that our allowance is
sufficient to cover actual loan losses should such losses be realized.
In addition, federal and state regulators, as an integral part of their
respective supervisory functions, periodically review our allowance for loan
losses. Such regulatory agencies may require us to increase our provision for
loan losses or to recognize further loan charge-offs, based upon judgments
different from those of management. Any increase in our allowance required by
these regulatory agencies could have a negative effect on our earnings,
financial condition and results of operations.
9
<PAGE> 13
OUR EXECUTIVE OFFICERS AND DIRECTORS, WHOSE INTERESTS MAY DIFFER FROM YOURS, CAN
SIGNIFICANTLY INFLUENCE ALL OUR STOCKHOLDER VOTES, WHICH CAN IMPACT CORPORATE
POLICIES THAT MAY AFFECT THE DEBENTURES AND THE TRUST PREFERRED SECURITIES.
Our executive officers and directors beneficially own approximately 48.4%
of our issued and outstanding common stock. Accordingly, these executive
officers and directors are able to influence, to a significant extent, the
outcome of all matters required to be submitted to our stockholders for
approval, including decisions relating to the election of our directors, the
determination of our corporate and management policies and other significant
transactions, including matters related to our capital position, the trust, the
debentures and the trust preferred securities.
A SUBSTANTIAL PORTION OF OUR LOANS ARE SECURED BY REAL ESTATE LOANS, WHICH MEANS
OUR RISK MAY NOT BE DIVERSIFIED AND FACTORS AFFECTING THE REAL ESTATE MARKET CAN
SIGNIFICANTLY IMPAIR OUR EARNINGS WITHOUT A GENERAL ECONOMIC DOWNTURN THAT WOULD
EFFECT OTHER COMPANIES.
At September 30, 2000, real estate loans comprised approximately 78% of our
total loan portfolio. This concentration in real estate as collateral for our
loans could have an adverse impact on our results of operations because our risk
of nonpayment or other default may not be well spread across diversified
borrowing groups. Moreover, a downturn in the Denver-Boulder economy could
impair the value of real estate, which in turn could impair the value of
collateral, cause us to experience significant loan losses and increase the risk
of nonpayment of loans potentially leading to operating losses and impaired
liquidity.
WE CANNOT ASSURE YOU THAT OUR EXECUTIVE OFFICERS AND KEY EMPLOYEES WILL REMAIN
EMPLOYED WITH US, WHICH COULD IMPAIR OUR RELATIONSHIP WITH OUR CUSTOMERS.
Since we do not have employment agreements with any of our key personnel,
we cannot guarantee that they will continue to be employed with us in the
future. The loss of their services can negatively impact our business because
their skills, years of experience and relationships in the communities we serve
is one of our business strengths.
AS A BANK HOLDING COMPANY OPERATING IN COLORADO, PARTICULARLY IN THE
DENVER-BOULDER MARKET, EACH OF THE FOLLOWING RISKS AND ECONOMIC CONDITIONS COULD
ADVERSELY AFFECT OUR EARNINGS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
- CHANGES IN INTEREST RATES. Our net interest income, which is the
difference between interest income we earn and interest expense we pay on
interest-bearing liabilities, may be significantly impacted by changes in
interest rates. Mismatches between the repricing or maturity characteristics of
our assets and liabilities due to changes in interest rates and other conditions
can impact our net interest margin and results of operations.
- COMPETITIVE MARKET. Due to recently enacted federal legislation that
eased restrictions previously imposed on financial service providers, financial
institutions and certain nonfinancial entities may provide similar products and
services to those that we offer and can directly compete with us. Some of our
competitors have greater financial strength, marketing capability and name
recognition than we do, and operate on a statewide or nationwide basis.
- BUSINESS CONCENTRATION IN COLORADO. Substantially all of our business is
located in Colorado, and, as a result, our financial condition, results of
operations and cash flows may be affected by changes in local economic
conditions that could result in an increase in nonpayment of loans and a
decrease in collateral value.
10
<PAGE> 14
FORWARD-LOOKING INFORMATION
Statements and financial discussion and analysis contained in this
prospectus that are not historical facts are forward-looking statements.
Forward-looking statements describe our future plans, strategies and
expectations, are based on assumptions and involve a number of risks and
uncertainties, many of which are beyond our control. In addition to each of the
factors listed in the "Risk Factors" section of this prospectus, the important
factors that could cause actual results to differ materially from the
forward-looking statements include, without limitation:
- changes in interest rates and market prices, which could reduce our net
interest margins, asset valuations and expense expectations;
- changes in the levels of loan prepayments and the resulting effects on
the value of our loan portfolio;
- changes in local economic and business conditions which could adversely
affect our customers, including the ability of our borrowers to repay
their loans according to their terms or a change in the value of the
related collateral;
- increased competition for deposits and loans adversely affecting rates
and terms;
- increased credit risk in our assets and increased operating risk caused
by a material change in commercial, consumer and/or real estate loans as
a percentage of the total loan portfolio;
- the failure of assumptions underlying the establishment of and provisions
made to the allowance for loan losses;
- changes in the availability of funds resulting in increased costs or
reduced liquidity;
- increased asset levels and changes in the composition of assets and the
resulting impact on our capital levels and regulatory capital ratios;
- our ability to acquire, operate and maintain cost effective and efficient
operations without unexpectedly incurring expenses related to necessary
technological improvements;
- the loss of key personnel and the potential inability to hire qualified
personnel at reasonable compensation levels;
- the bank's inability to pay sufficient dividends to us;
- our ability to obtain appropriate additional debt or equity financing if
necessary for our growth or operations; and
- changes in statutes and government regulations or their interpretations
applicable to bank holding companies and our present and future banking
and other subsidiaries, including changes in tax requirements and tax
rates.
We undertake no obligation to publicly update or otherwise revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
events discussed in any forward-looking statements in this prospectus might not
occur.
USE OF PROCEEDS
The trust will invest all the proceeds from the sale of the trust preferred
securities in the debentures. We will use the net proceeds we receive from the
sale of the debentures which will be approximately $7.2 million, after deducting
the underwriting commission and an estimated $400,000 in expenses or $8.3
million, if the underwriters' purchase option is exercised in full, for the
following purposes:
- repayment of a revolving line of credit with a balance at September 30,
2000 of $2.4 million and a maximum draw amount of $3.0 million, bearing
interest at the prime rate and maturing on January 5, 2001. This line of
credit will remain available to us until its maturity.
11
<PAGE> 15
- repayment of a promissory note in the principal amount of $100,000,
bearing interest at prime and maturing on December 31, 2000.
- the remaining amount, approximately $4.7 million, will be invested in the
bank in order to finance opening of new branches, to improve technology
and services, to support the bank's continued growth and to increase the
bank's capital to attain or maintain certain levels of capitalization set
forth in applicable federal banking regulations. Approximately all of the
net proceeds that are invested in the bank will constitute Tier 1 capital
of the bank as defined under applicable regulatory definitions.
ACCOUNTING TREATMENT
The trust will be treated, for financial reporting purposes, as our
subsidiary and, accordingly, the accounts of the trust will be included in our
consolidated financial statements. The trust preferred securities will be
presented as a separate line item in our consolidated balance sheet under the
caption "Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Subordinated Debentures," and appropriate
disclosures about the trust preferred securities, the guarantee and the
debentures will be included in the notes to consolidated financial statements.
For financial reporting purposes, we will record distributions payable on the
trust preferred securities as interest expense in our Consolidated Statements of
Income.
Our future reports filed under the Securities Exchange Act of 1934 will
include a footnote to the consolidated financial statements stating that:
- the trust is wholly owned;
- the sole assets of the trust are the debentures and specifying the
debentures' principal amount, interest rate and maturity date; and
- our obligations described in this prospectus, in the aggregate,
constitute a full, irrevocable and unconditional guarantee on a
subordinated basis by us of the obligations of the trust under the trust
preferred securities.
The trust is not currently subject to the information reporting
requirements of the Exchange Act. Although the trust will become subject to such
requirements upon the effectiveness of the registration statement, of which this
prospectus is a part, it is not expected that the trust will be required to file
separate reports under the Exchange Act because:
- we will be a reporting company under the Exchange Act;
- the trust is our wholly-owned subsidiary and does not have any
independent operations other than issuing the trust preferred and common
securities and purchasing our debentures;
- we have fully and unconditionally guaranteed all of the trust's
obligations with respect to the trust preferred securities through the
guarantee, the indenture, the trust agreement and the debentures; and
- you may proceed directly against us to enforce our guarantee.
We have not included separate financial statement of the trust in this
prospectus. We do not consider separate financial statements to be material to
holders of trust preferred securities because we will own all of the trust's
voting securities, the trust has no independent operations and we guarantee the
payments on the trust preferred securities to the extent described in this
prospectus.
12
<PAGE> 16
CAPITALIZATION
The following table sets forth our indebtedness and capitalization at
September 30, 2000 on a historical basis and as adjusted to give effect to the
issuance of the trust preferred securities in this offering, the issuance of our
series B preferred stock in exchange for certain promissory notes and the use of
estimated net proceeds. This data should be read in conjunction with the
"Selected Consolidated Financial Data" and the consolidated financial statements
and notes thereto, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-----------------------
ACTUAL AS ADJUSTED
-------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Federal funds purchased..................................... $ 4,000 $ 4,000
Other borrowed funds
Advances from the Federal Home Loan Bank.................. 14,405 14,405
Notes payable(1).......................................... 3,792 25
------- -------
Total other borrowed funds........................ 18,197 14,430
======= =======
Company obligated mandatory redeemable preferred securities
of subsidiary trust holding solely subordinated
debentures(2)............................................. -- 8,000
======= =======
Stockholders' equity:
Preferred stock, $.001 par value, 100,000,000 shares
authorized, 10,500 shares issued and outstanding(1).... -- --
Common stock, no par value, 200,000,000 shares authorized,
1,327,444 shares issued and outstanding................ 1 1
Capital Surplus(1)........................................ 4,616 5,933
Retained earnings......................................... 4,662 4,662
Unrealized (loss) gain on securities available for sale,
net of taxes........................................... (382) (382)
------- -------
Total stockholders' equity........................ 8,897 10,214
======= =======
Consolidated regulatory capital ratios:
Leverage ratio(3)......................................... 4.69% 6.90%
Tier 1 capital(3)......................................... 5.18 7.90
Total risk-based capital.................................. 6.12 11.40
</TABLE>
---------------
(1) As adjusted numbers includes the conversion of $1.3 million of indebtedness
to $1.3 million liquidation preference amount of series B preferred stock on
October 19, 2000 as set forth under "Recent Developments" in this
prospectus. As adjusted, there will be 11,817 shares of preferred stock,
$.001 par value, issued and outstanding.
(2) Front Range Capital Trust I, our wholly owned subsidiary, will hold, as its
sole asset, $8 million in principal amount of subordinated debentures
related to the trust preferred securities.
(3) The trust preferred securities have been structured to qualify as Tier 1
capital. However, Federal Reserve guidelines limit the aggregate amount of
trust preferred securities which can be included in Tier 1 capital to 25% of
our total Tier 1 capital. As adjusted for this offering, our Tier 1 capital
as of September 30, 2000 would have been $13.9 million, of which $3.5
million would have been attributable to the trust preferred securities. Any
future increases in other elements of our Tier 1 capital, including retained
earnings, would allow us to include greater portions of the trust preferred
securities in Tier 1 capital.
13
<PAGE> 17
FRONT RANGE CAPITAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for, and as of the end
of, each of the years in the three year period ended December 31, 1999 are
derived from our consolidated financial statements. The consolidated financial
statements as of December 31, 1999 and 1998 and for each of the years in the two
year period ended December 31, 1999, and the report thereon of Fortner, Bayens,
Levkulich and Co., P.C., are included elsewhere in this prospectus. The
consolidated financial data as of and for each of the nine months ended
September 30, 2000 and 1999 are derived from unaudited consolidated financial
statements included elsewhere in this prospectus, and, in the opinion of
management, contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly our financial position and results of operations as
of such dates and for such periods. The results of operations for past periods
and the nine months ended September 30, 2000 are not necessarily indicative of
the results of operations that may be expected for the year ended December 31,
2000 or for any future periods.
<TABLE>
<CAPTION>
AS OF AND FOR THE NINE AS OF AND FOR THE YEAR ENDED
MONTHS ENDED SEPTEMBER 30, DECEMBER 31,
--------------------------- ------------------------------------
2000 1999 1999 1998 1997
------------ ------------ ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income................ $ 12,640 $ 9,292 $ 13,000 $ 9,452 $ 7,246
Interest expense............... 5,540 3,571 5,088 3,783 2,815
---------- ---------- ---------- ---------- ----------
Net interest income......... 7,100 5,721 7,912 5,669 4,431
Provision for loan losses...... 265 292 402 421 318
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan
losses.................... 6,835 5,429 7,510 5,248 4,113
Noninterest income............. 1,115 859 1,197 871 477
Noninterest expense............ 6,416 4,977 6,772 5,450 3,520
---------- ---------- ---------- ---------- ----------
Income before income
taxes..................... 1,534 1,311 1,935 669 1,070
Income tax expense............. 409 429 573 155 405
---------- ---------- ---------- ---------- ----------
Net income.................. $ 1,125 $ 882 $ 1,362 $ 514 $ 665
========== ========== ========== ========== ==========
COMMON SHARE DATA:
Earnings per common share
(basic)..................... $ 0.85 $ 0.66 $ 1.03 $ 0.42 $ 0.06
Earnings per common share
(diluted)................... 0.84 0.66 1.02 0.42 0.06
Book value per common share.... 6.70 5.39 5.62 5.18 3.90
Tangible book value per common
share....................... 6.60 5.29 5.52 5.07 3.84
Cash dividends per common
share....................... 0.00 0.00 0.00 0.00 0.00
Weighted average common shares
outstanding (basic)......... 1,327,744 1,326,623 1,326,906 1,225,391 1,178,619
Weighted average common shares
outstanding (diluted)....... 1,338,244 1,337,123 1,337,406 1,235,891 1,189,119
End of period common shares
outstanding................. 1,327,744 1,327,744 1,327,744 1,325,744 1,186,477
</TABLE>
14
<PAGE> 18
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS ENDED AS OF AND FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- -----------------------------
2000 1999 1999 1998 1997
--------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Total assets........................... $ 200,268 $157,937 $172,690 $131,745 $90,739
Loans, net of unearned income.......... 154,257 115,374 130,708 91,793 59,284
Allowance for loan losses.............. 1,652 1,306 1,411 1,097 754
Deposits............................... 167,384 137,545 141,926 114,933 84,138
Borrowed funds......................... 22,197 11,546 21,827 8,937 1,122
Stockholders' equity................... 8,897 7,156 7,462 6,861 4,636
PERFORMANCE RATIOS:(1)
Return on average assets............... 0.80% 0.82% 0.92% 0.49% 0.87%
Return on average stockholders'
equity(1)........................... 18.54 17.39 20.06 9.27 15.80
Net interest margin(1)................. 5.83 6.10 6.12 6.10 6.59
Operating efficiency ratio(2).......... 78.05 75.58 74.34 83.33 71.72
Loan to deposit ratio.................. 91.17 82.93 91.10 78.91 69.56
ASSET QUALITY RATIOS(3):
Nonperforming assets to total
assets(4)........................... 0.07% 0.20% 0.10% 0.83% 0.65%
Nonperforming loans to total
loans(5)............................ 0.02 0.18 0.05 0.93 0.96
Net loan charge-offs to average total
loans............................... 0.02 0.08 0.08 0.11 0.46
Allowance for loan losses to total
loans............................... 1.07 1.13 1.08 1.20 1.27
Allowance for loan losses to
nonperforming loans................. 6,608.00 640.20 2,391.53 128.76 132.51
CAPITAL RATIOS (AT PERIOD END)(6):
Leverage ratio......................... 4.69% 4.90% 4.87% 7.06% 5.49%
Tier 1 risk-based capital ratio........ 5.18 5.98 5.47 8.22 6.29
Total risk-based capital ratio......... 6.12 7.02 6.43 9.28 7.36
EARNINGS TO FIXED CHARGES(7):
Including interest on deposits......... 1.28x 1.38x 1.38x 1.18x 1.38x
Excluding interest on deposits......... 2.23x 3.16x 3.24x 3.80x 10.30x
</TABLE>
---------------
(1) The ratios for the nine months ended September 30, 2000 and 1999 have been
annualized and are not necessarily indicative of the results for the entire
year.
(2) Calculated by dividing total noninterest expenses, excluding intangible
asset amortization, by net interest income plus noninterest income.
(3) At period end, except for net loan charge-offs to average total loans, which
is for periods ended on such dates.
(4) Nonperforming assets consist of nonaccrual loans, loans past due 90 days or
more, restructured loans and other real estate owned.
(5) Nonperforming loans consist of nonaccrual loans, loans past due 90 days or
more and restructured loans.
(6) The leverage and risk-based capital ratios are defined in "Supervision and
Regulation."
(7) For purposes of computing the ratio of earnings to fixed charges, earnings
represent earnings before income taxes, extraordinary items and fixed
charges. Fixed charges represent interest expense.
15
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of our balance sheets and statements of
income. This section should be read in conjunction with our financial statements
and accompanying notes and other detailed information appearing elsewhere in
this prospectus.
RESULTS OF OPERATIONS
Overview
In the first nine months of 2000, our net income was $1.1 million, an
increase of $243,000 or 27.6% over the first nine months of 1999. For the year
ended December 31, 1999, we recorded net income of $1.4 million versus net
income of $514,000 for the year ended December 31, 1998. Our earnings
performance reflects positive growth trends in both total assets and loans and
the income generated as a result of this growth offset our increased noninterest
expenses, including additional staffing costs.
We experienced significant asset growth in all comparison periods with
total assets equalling $200.3 million at September 30, 2000. During the first
nine months of 2000, our total assets increased $27.6 million or 16.0% over
total assets at December 31, 1999. During 1999 and 1998, our total assets
increased by 31.1% and 45.2%, respectively. As a result of increased loan
demand, loans were $154.3 million, an increase of $23.5 million or 18.0% in the
first nine months of 2000. We experienced loan increases of $38.9 million or
42.4% during 1999 and $32.5 million or 54.8% during 1998. Although deposits
increased by 17.9% to $167.4 million at September 30, 2000 and 23.5% during 1999
to $141.9 million, additional borrowed funds were necessary to support loan
growth. Total borrowed funds at September 30, 2000 increased to $22.2 million or
1.7% from total borrowed funds at December 31, 1999. At December 31, 1999, total
borrowed funds, including federal funds purchased, were $21.8 million, an
increase of $12.9 million or 144.2% over total borrowed funds outstanding at
December 31, 1998.
Our return on average stockholders' equity was 18.54% for the first nine
months of 2000 compared with 17.39% for the first nine months of 1999. Our
return on average total assets for the first nine months of 2000 was 0.80%
compared with 0.82% for the first nine months of 1999. Our return on average
stockholders' equity was 20.06% for 1999 compared with 9.27% for 1998 and our
return on average total assets for 1999 was 0.92% compared with 0.49% for 1998.
Net Interest Income
Our primary source of revenue is net interest income, which is the
difference between interest income and interest expense. Significant factors
affecting net interest income include the amount of interest-earning assets and
interest-bearing liabilities, the types of interest-earning assets and
interest-bearing liabilities and their sensitivity to changes in interest rates.
Net interest margin, which is net interest income expressed as a percentage of
average earning assets, was 5.83% (annualized) for the nine months ended
September 30, 2000, 6.12% for the year ended December 31, 1999 and 6.10% for the
year ended December 31, 1998.
Interest Income
Our interest income was $12.6 million during the first nine months of 2000,
a $3.3 million or 35.5% increase compared with total interest income for the
first nine months of 1999. Interest income in 1999 was $13.0 million, a 36.8%
increase compared with interest income of $9.5 million in 1998. While our
principal sources of interest income are loans and investment securities, most
of these increases resulted from growth in loans.
Interest Expense
Total interest expense was $5.5 million for the first nine months of 2000
compared with $3.6 million for the first nine months of 1999, an increase of
52.8%. The increase is attributable largely to increases in
16
<PAGE> 20
borrowed funds and certificates of deposit, and to increased interest rates on
borrowed funds and interest-bearing demand accounts. Total interest expense was
$5.1 million in 1999, an increase of $1.3 million or 34.2% compared with $3.8
million in 1998. The increase in interest expense in 1999 from 1998 was
primarily due to increases in interest-bearing liabilities.
The following table presents for the periods indicated the total dollar
amount of average balances, interest income from average interest-earning assets
and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. All average
balances are daily average balances. Nonaccrual loans are included in the table
as loans carrying a zero yield.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------------------------------------------- ------------------------------
2000 1999 1999
------------------------------ ------------------------------ ------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED YIELD OR AVERAGE EARNED YIELD OR AVERAGE EARNED YIELD OR
BALANCE OR PAID RATE(3) BALANCE OR PAID RATE(3) BALANCE OR PAID RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold.......... $ 197 $ 2 1.65% $ 568 $ 8 1.81% $ 470 $ 9 1.91%
Investment securities
Taxable................... 16,951 818 6.40 15,614 724 6.09 15,484 962 6.21
Tax exempt(1)............. 9,117 477 6.98 8,969 454 6.75 8,846 607 6.86
Loans(2).................... 141,057 11,486 10.86 104,437 8,260 10.56 109,015 11,628 10.67
Allowance for loan losses.... (1,506) -- (1,201) -- (1,234) --
-------- ------- -------- ------ -------- -------
Total interest-earning
assets............... 165,816 12,783 10.28% 128,387 9,446 9.81% 132,581 13,206 9.96%
Noninterest-earning assets... 20,629 14,346 15,666
-------- -------- --------
Total assets.......... $186,445 $142,733 148,247
======== ======== ========
Interest-bearing liabilities:
Interest-bearing deposits
Demand,
interest-bearing........ $ 66,948 $ 2,115 4.21% $ 50,577 $1,260 3.32% $ 53,137 $ 1,895 3.57%
Savings................... 9,140 169 2.46 8,303 150 2.41 8,569 209 2.44
Certificates of deposit... 46,616 2,012 5.75 39,189 1,553 5.28 39,902 2,120 5.31
-------- ------- -------- ------ -------- -------
Total interest-bearing
deposits............. 122,704 4,296 4.67 98,069 2,963 4.03 101,608 4,224 4.16
Federal funds purchased...... 5,666 264 6.21 3,469 136 5.24 3,827 207 5.41
Other short-term funds
borrowed.................... 7,519 314 5.57 -- -- -- --
Long-term debt............... 11,918 666 7.45 10,297 472 6.11 10,777 657 6.10
-------- ------- -------- ------ -------- -------
Total interest-bearing
liabilities.......... 147,807 5,540 5.00% 111,835 3,571 4.26% 116,212 5,088 4.38%
Noninterest-bearing
liabilities................. 30,549 24,136 25,247
-------- -------- --------
Total liabilities..... 178,356 135,971 141,459
Stockholders' equity......... 8,089 6,762 6,788
-------- -------- --------
Total liabilities and
stockholders'
equity............... $186,445 $142,733 $148,247
======== ======== ========
Net interest income.......... $ 7,243 $5,875 $ 8,118
======= ====== =======
Net interest margin.......... 5.83% 6.10% 6.12%
Net interest spread.......... 5.28 5.55 5.58
Ratio of average
interest-earning assets to
average interest-bearing
liabilities................. 112.18% 114.80% 114.09%
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998
------------------------------
INTEREST AVERAGE
AVERAGE EARNED YIELD OR
BALANCE OR PAID RATE
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold.......... $ 3,020 $ 122 4.04%
Investment securities
Taxable................... 14,906 951 6.38
Tax exempt(1)............. 4,759 322 6.77
Loans(2).................... 72,943 8,166 11.20
Allowance for loan losses.... (888) --
-------- ------
Total interest-earning
assets............... 94,740 9,561 10.09%
Noninterest-earning assets... 11,186
--------
Total assets.......... 105,926
========
Interest-bearing liabilities:
Interest-bearing deposits
Demand,
interest-bearing........ $ 39,377 $1,480 3.76%
Savings................... 6,755 187 2.77
Certificates of deposit... 32,441 1,877 5.79
-------- ------
Total interest-bearing
deposits............. 78,573 3,544 4.51
Federal funds purchased...... 636 37 5.82
Other short-term funds
borrowed.................... -- --
Long-term debt............... 2,500 202 8.08
-------- ------
Total interest-bearing
liabilities.......... 81,709 3,783 4.63%
Noninterest-bearing
liabilities................. 18,672
--------
Total liabilities..... 100,381
Stockholders' equity......... 5,545
--------
Total liabilities and
stockholders'
equity............... $105,926
========
Net interest income.......... $5,778
======
Net interest margin.......... 6.10%
Net interest spread.......... 5.46
Ratio of average
interest-earning assets to
average interest-bearing
liabilities................. 115.95%
</TABLE>
---------------
(1) Yields are calculated using tax-equivalent rates.
(2) Loans are net of unearned discount. Nonaccrual loans are included in average
loans outstanding.
(3) Annualized.
17
<PAGE> 21
The following table presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase
(decrease) related to outstanding balances and the volatility of interest rates
for the periods indicated. For purposes of this table, changes attributable to
both rate and volume which cannot be segregated have been allocated to volume.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
----------------------- ----------------------- -----------------------
2000 VS. 1999 1999 VS. 1998 1998 VS. 1997
----------------------- ----------------------- -----------------------
CHANGE DUE TO CHANGE DUE TO CHANGE DUE TO
-------------- -------------- --------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ----- ------ ------ ----- ------ ------ ----- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold................... $ (5) $ (1) $ (6) $(103) $ (10) $ (113) $ 33 $ (3) $ 30
Investment securities
Taxable............................ 62 32 94 37 (26) 11 504 (13) 491
Tax exempt......................... 7 16 23 277 8 285 179 (1) 178
Loans................................ 2,896 330 3,226 4,038 (576) 3,462 1,805 (178) 1,627
------ ----- ------ ------ ----- ------ ------ ----- ------
Total increase (decrease) in
interest income.............. 2,960 377 3,337 4,249 (604) 3,645 2,521 (195) 2,326
------ ----- ------ ------ ----- ------ ------ ----- ------
Interest-bearing liabilities:
Interest-bearing deposits
Demand, interest-bearing........... 408 447 855 517 (102) 415 646 (94) 552
Savings............................ 15 4 19 50 (28) 22 33 (15) 18
Certificates of deposit............ 294 165 459 432 (189) 243 225 48 273
Federal funds purchased.............. 86 42 128 186 (16) 170 15 1 16
Other short-term borrowed funds...... 314 -- 314 -- -- -- -- -- --
Long-term debt....................... 74 120 194 669 (214) 455 158 (49) 109
------ ----- ------ ------ ----- ------ ------ ----- ------
Total increase (decrease) in
interest expense............. 1,191 778 1,969 1,854 (549) 1,305 1,077 (109) 968
------ ----- ------ ------ ----- ------ ------ ----- ------
Increase (decrease) in net interest
income............................... $1,769 $(401) $1,368 $2,395 $ (55) $2,340 $1,444 $ (86) $1,358
====== ===== ====== ====== ===== ====== ====== ===== ======
</TABLE>
Average loans outstanding during the first nine months of 2000 were $141.1
million compared with $104.4 million outstanding for the first nine months of
1999, a 35.1% increase. During 1999, the average balance of loans outstanding
was $109.0 million, 49.5% greater than the average balance of loans for 1998.
Average loans were 73.5% of average total assets in 1999 compared with 68.9% in
1998. The greater volume of loans outstanding during 1999 resulted in an
increase of $3.5 million in interest income in 1999 over 1998, despite the
average yield on loans in 1999 decreasing to 10.67% from 11.20% in 1998.
The average amount of nonaccrual loans also affects the average yield
earned on all outstanding loans. The average amount of nonaccrual loans for the
first nine months of 2000 and for the years ended December 31, 1999 and 1998
were minimal, and, therefore, did not have a significant effect on the average
loan yield.
Provision for Loan Losses
Our provision for loan losses is established through charges to income in
the form of the provision in order to bring the total allowance for loan losses
to a level deemed appropriate by our management based on the factors discussed
under "-- Financial Condition -- Allowance for Loan Losses." During the first
nine months of 2000, we made a provision for loan losses of $265,000, which was
$27,000 less than the provision made for the first nine months of 1999. We had
net charge-offs of $24,000 for the first nine months of 2000, compared with
$84,000 for the same period in 1999. Although total loans increased during 1999
and the first nine months of 2000, the overall improvement in the quality of our
loan portfolio enabled us to decrease our provision, which management believes
was appropriate given the current economic conditions in our market area.
18
<PAGE> 22
Because of overall improvement in the quality of our loan portfolio, we
made a provision for loan losses of $402,000 during the year ended December 31,
1999, which was $19,000 less than the $421,000 provision made during the year
ended December 31, 1998. Net charge-offs totaled $88,000 for the year ended
December 31, 1999 compared with $78,000 for the year ended December 31, 1998.
Noninterest Income
The following table sets forth our noninterest income for the periods
indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- ---------------
2000 1999 1999 1998
------- ----- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Service charges on deposit accounts............... $ 610 $529 $ 732 $ 570
Gain (loss) on sale of investment securities...... -- 7 7 8
Loan origination fees............................. 194 161 228 60
Other............................................. 311 162 230 233
------ ---- ------ ------
Total noninterest income................ $1,115 $859 $1,197 $ 871
====== ==== ====== ======
</TABLE>
Noninterest income generated for the nine months ended September 30, 2000
increased $256,000 or 29.8% to $1.1 million compared with $859,000 for the same
period in 1999. Noninterest income for the year ended December 31, 1999
increased $326,000 or 37.4% to $1.2 million compared with $871,000 in 1998. The
increase in both periods was primarily due to an increase in service charges on
deposit accounts and loan origination fees both resulting from increased volume
of activity.
Noninterest Expense
The following table sets forth our noninterest expense for the periods
indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ---------------
2000 1999 1999 1998
------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and benefits............................. $3,528 $2,690 $3,663 $2,647
Occupancy......................................... 645 388 519 500
Furniture and equipment........................... 449 368 497 366
Data processing................................... 433 278 389 288
Supplies and printing............................. 208 170 230 179
Marketing and promotions.......................... 227 153 208 202
Other............................................. 926 930 1,266 1,268
------ ------ ------ ------
Total noninterest expense............... $6,416 $4,977 $6,772 $5,450
====== ====== ====== ======
</TABLE>
Salary and benefits expense increased by $838,000 or 31.2% during the first
nine months of 2000 compared with the first six months of 1999. This increase
reflects pay range adjustments and additional staff needed for two new branches.
Salary and benefits expense increased by $1.0 million or 38.4% for the year
ended December 31, 1999 compared with the year ended December 31, 1998. This
increase resulted from normal salary increases, a 33.0% increase in the cost of
benefits and the addition of approximately 17 full-time equivalent employees.
During the first nine months of 2000, operating expenses other than
salaries and benefits increased $601,000 or 26.3%. These increased costs were
related primarily to greater depreciation expenses, occupancy expenses, data
processing expenses, supplies expenses and marketing expenses. For the year
ended December 31, 1999, operating expenses other than salaries and benefits
increased $306,000 or 10.9% compared with the year ended December 31, 1998.
19
<PAGE> 23
Provision for Income Taxes
Total income tax expense was approximately $409,000 for the first nine
months of 2000 compared with $429,000 for the first nine months of 1999, and
$573,000 and $155,000 for the years ended December 31, 1999 and 1998,
respectively. Our effective income tax rates for the first nine months of 2000
and 1999 and the years ended December 31, 1999 and 1998 were 26.7%, 32.7%, 29.6%
and 23.2%, respectively.
Return on Average Assets and Stockholders' Equity
The following table sets forth certain ratios for the nine months ended
September 30, 2000 and 1999 and the years ended December 31, 1999 and 1998
(using average balance sheet data):
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ -------------
2000 1999 1999 1998
------ ------ ----- -----
<S> <C> <C> <C> <C>
Return on average assets............................ 0.80% 0.82% 0.92% 0.49%
Return on average stockholders' equity.............. 18.54 17.39 20.06 9.27
Stockholders' equity to average assets.............. 4.78 5.01 5.03 6.48
</TABLE>
Return on average assets decreased slightly to 0.80% for the first nine
months of 2000 compared with the 0.82% return recorded for the first nine months
of 1999. Return on average assets increased 43 basis points to 0.92% in 1999
compared with the 0.49% recorded in 1998.
Return on average stockholders' equity increased to 18.54% in the first
nine months of 2000 compared with the 17.39% recorded for the first nine months
of 1999. Return on average stockholders' equity for the year ended December 31,
1999 was 20.06%, up 116.4% from 9.27% in 1998.
FINANCIAL CONDITION
Loan Portfolio
Loans were $154.3 million at September 30, 2000, an increase of $23.5
million or 18.0% since December 31, 1999. Loan growth occurred primarily in
residential real estate loans. Loans at December 31, 1999 were $130.7 million,
an increase of $38.9 million or 42.4% compared with loans at December 31, 1998.
Loan growth during this period occurred primarily in commercial and residential
real estate loans.
The following table summarizes our loan portfolio by type of loan at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
SEPTEMBER 30, 2000 1999 1998
------------------ ------------------ -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real
estate -- construction.... $ 39,691 25.6% $ 29,684 22.6% $22,853 24.8%
Real estate -- commercial... 39,279 25.3 36,203 27.6 20,068 21.8
Real
estate -- residential..... 42,548 27.4 35,804 27.3 23,137 25.1
Commercial.................. 27,309 17.6 24,110 18.3 20,975 22.6
Consumer.................... 6,239 4.1 5,525 4.2 5,217 5.7
-------- ----- -------- ----- ------- -----
Total loans............... $155,066 100.0% $131,326 100.0% $92,250 100.0%
===== ===== =====
Less unearned income...... (809) (618) (457)
-------- -------- -------
Loans..................... $154,257 $130,708 $91,793
======== ======== =======
</TABLE>
We concentrate our lending activities in five principal areas: commercial,
real estate-construction, real estate-commercial, real estate-residential and
consumer loans. The interest rates charged for the loans we make vary with the
perceived degree of credit and interest rate risk, the size and maturity of the
loans and the borrower's relationship with us.
20
<PAGE> 24
Our underwriting standards are determined by our board of directors in our
loan policy. The board reviews the loan policy at least annually to ensure that
standard banking practices are utilized. All underwriting decisions examine the
purpose for the loan; the character and credit history of the borrower; the
sources of repayment of the loan, emphasizing historical and projected cash
flows and the collateral for the loan. We do not employ a specific formula for
our underwriting standards, but rather evaluate the merits of each loan request
individually based on the above criteria.
The majority of our loans are direct loans made to individuals and small to
medium-sized businesses. We rely on local promotional activities and personal
contact by officers, directors and employees to compete with other financial
institutions. We make loans to borrowers whose applications include a sound
purpose, a viable repayment source and a plan of repayment established at
inception and are generally backed by a secondary source of repayment.
Upon approval of a loan, we utilize an automated loan system that
standardizes the loan product for all commercial and consumer loans, and assists
in ensuring that we remain in compliance with all applicable state and federal
laws and regulations.
Commercial loans are generally secured and are structured as credit lines,
term loans, or occasionally as time notes. Credit lines and time notes are
usually secured by general business assets and mature in one year or less. Term
loans are usually secured by equipment and/or real property and mature in one to
seven years. The primary emphasis in underwriting commercial loans is on cash
flow and collateral values while personal guarantees are of secondary
importance. Although recent losses have been minimal, these loans have a
relatively higher risk profile in that they are generally for large amounts and
repayment depends largely upon the business success of the borrower. Our loan
policy limits equipment and commercial real property loans to 80% of the lesser
of cost or market value of the collateral, subject to compensating factors. The
amounts and terms of loans secured by accounts receivable and inventory are
determined according to a formula which values the collateral based on currency
and/or degree of completion.
Consumer loans may be secured or unsecured, but the largest growth in our
consumer loan portfolio is in loans secured by automobiles, boats and
recreational vehicles. Most consumer loans mature in four years, although our
loan policy permits consumer loans that mature in five years and home
improvement loans secured by second mortgages on real property that mature in
ten years. Most of these loans are made by individual loan officers within their
assigned lending limits. Historically, net charge-offs for our consumer loans
have generally been quite modest and there are no discernible negative trends.
Residential real estate loans are generally made in accordance with the
standards required by the secondary market. The loans mature in up to 30 years,
and may have either fixed or adjustable interest rates. We generally sell those
residential mortgages that mature in 15 or more years. Residential real estate
loans which we intend to retain in our portfolio generally have adjustable rates
and/or maturities of five years or less.
The loan portfolio in general is subject to the risk of an economic
downturn, although a downturn would likely have a more adverse effect on the
commercial portfolio than on any of the other portfolios. In addition, rising
interest rates have a stronger negative effect on the commercial portfolio than
on the other portfolios because commercial loans frequently have variable
interest rates and as the cost of credit increases, the risk of default also
increases. Loans secured by real estate are subject to a greater risk of a
decline in real estate values than are unsecured loans and loans secured by
personal property. Consumer loans are subject to the risks of consumer
bankruptcies and other personal circumstances.
Our loan policy permits the sale of loans by participation for purposes of
asset/liability and liquidity management, diversification of risk and prevention
of overlines. In the second quarter of 2000, we sold $5.0 million in loans to
increase liquidity. The sale was brought on by our asset growth exceeding our
deposit growth in the quarter. We have the right to repurchase the loans at any
time and may do so following this offering. The loan policy also allows us to
purchase loans by participation for purposes of asset/liability management and
diversification of risk. Such loans must be of high quality and meet our own
underwriting
21
<PAGE> 25
criteria. We analyze the suitability of all institutions with which we
participate in loans, whether by sale or purchase.
The following tables present the maturities and sensitivity to changes in
interest rates of loans at September 30, 2000 and December 31, 1999. Variable
rate loans comprised 15.2% of our loan portfolio at September 30, 2000 and 13.9%
at December 31, 1999.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-------------------------------------------------------------
OVER ONE YEAR
THROUGH FIVE YEARS OVER FIVE YEARS
------------------ ------------------
ONE YEAR FIXED FLOATING FIXED FLOATING
OR LESS RATE RATE RATE RATE TOTAL
-------- ------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate -- construction......... $31,183 $ 2,239 $ 2,608 $ 3,556 $ 105 $ 39,691
Real estate -- commercial........... 3,535 9,455 6,209 16,887 3,193 39,279
Real estate -- residential.......... 15,901 10,308 3,406 11,815 1,118 42,548
Commercial.......................... 14,645 5,463 5,323 292 1,586 27,309
Consumer............................ 1,460 4,239 -- 540 -- 6,239
------- ------- ------- ------- ------ --------
Total loans(1)............ $66,724 $31,704 $17,546 $33,090 $6,002 $155,066
======= ======= ======= ======= ====== ========
</TABLE>
---------------
(1) Total loans excludes $809,000 of unearned loan income. Net of unearned loan
income, loans equaled $154.3 million.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------------
OVER ONE YEAR
THROUGH FIVE YEARS OVER FIVE YEARS
------------------ ------------------
ONE YEAR FIXED FLOATING FIXED FLOATING
OR LESS RATE RATE RATE RATE TOTAL
-------- ------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate -- construction......... $26,263 $ 764 $ 1,539 $ 1,038 $ 80 $ 29,684
Real estate -- commercial........... 4,209 6,825 5,570 17,883 1,716 36,203
Real estate -- residential.......... 12,723 6,278 2,881 12,788 1,134 35,804
Commercial.......................... 14,836 3,929 4,371 55 919 24,110
Consumer............................ 2,187 2,848 -- 490 -- 5,525
------- ------- ------- ------- ------ --------
Total loans(1)............ $60,218 $20,644 $14,361 $32,254 $3,849 $131,326
======= ======= ======= ======= ====== ========
</TABLE>
---------------
(1) Total loans excludes $618,000 of unearned loan income. Net of unearned loan
income, loans equaled $130.7 million.
Nonperforming Assets
Nonperforming loans, defined as nonaccrual loans, accruing loans 90 days or
more past due and restructured loans, totaled $25,000 at September 30, 2000, a
57.6% decrease from nonperforming loans at December 31, 1999. Nonperforming
loans decreased $793,000 or 93.1% from December 31, 1998 to December 31, 1999.
The significant difference in total nonperforming loans between 1998 and 1999
was primarily due to three nonperforming loans recorded in 1998 which were
repaid or otherwise resolved in 1999.
We generally place a loan on nonaccrual status and cease accruing interest
when, in management's opinion, there is an indication the borrower may be unable
to make payments when they become due. Although interest income is not accrued
on loans reclassified to nonaccrual status, interest income may be recognized on
a cash basis if management expects collection in full of principal and interest.
When a loan is placed on nonaccrual status, any previously accrued but unpaid
interest is reversed. Loans for which the accrual of interest has been
discontinued amounted to $14,000 at September 30, 2000, and $35,000 and $393,000
at December 31, 1999 and 1998, respectively. Of the amount of nonaccrual loans
at December 31, 1998, $390,000 was related to three borrowers and was repaid or
otherwise resolved in 1999.
22
<PAGE> 26
Nonperforming assets include nonperforming loans and other real estate
owned -- OREO. Delinquent real estate loans are not reclassified as OREO until
we take title to the property, either through foreclosure or upon receipt of a
deed in lieu of foreclosure. In such situations, the secured loan is
reclassified on the balance sheet as OREO at the lesser of the fair value of the
underlying collateral less estimated selling costs, or the recorded amount of
the loan.
Management considers both the adequacy of the collateral and the other
resources of the borrower in determining the steps to be taken to collect
nonaccrual and charged-off loans. Alternatives for collection that are
considered include foreclosure, collecting on guarantees, restructuring the loan
or filing suit.
The following table sets forth the amount of our nonperforming assets as of
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------
2000 1999 1998
------------- ----- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans........................................ $ 14 $ 35 $ 393
Other loans 90 days or more past due.................... 11 24 459
Other real estate....................................... 121 118 243
----- ----- ------
Total nonperforming assets.................... $ 146 $ 177 $1,095
===== ===== ======
Nonperforming and other loans 90 days or more past due
to total loans........................................ 0.02% 0.05% 0.93%
Nonperforming assets to total loans plus other real
estate................................................ 0.09 0.14 1.19
Nonperforming assets to total assets.................... 0.07 0.10 0.83
</TABLE>
At September 30, 2000, the OREO balance of $121,000 was attributable to one
commercial property.
Allowance for Loan Losses
The allowance for loan losses is established through charges to earnings in
the form of a provision for loan losses. Management of the bank has established
an allowance for loan losses which it believes is adequate for estimated losses
inherent in our loan portfolio. Based on an evaluation of the loan portfolio,
management presents a review of the allowance for loan losses to the bank's
board of directors, indicating any change in the allowance since the last review
and any recommendations as to adjustments in the allowance. In making its
evaluation, management considers factors such as our historical loan loss
experience, the amount of nonperforming loans and related collateral, volume,
growth and composition of the loan portfolio, current economic conditions that
may affect the borrower's ability to pay and the value of collateral, the
evaluation of our loan portfolio through our internal loan review process and
other relevant factors. Charge-offs occur when management deems that loans are
uncollectible in whole or in part.
During the first nine months of 2000, we increased our allowance for loan
losses by $265,000 less net charge-offs of $24,000, for a balance at September
30, 2000 of $1.7 million. The total allowance for loan losses was $1.4 million
at December 31, 1999, an increase of $314,000 from December 31, 1998. Management
believes the increase in the allowance for loan losses is necessary to the
overall growth in the loan portfolio.
We follow a loan review program whereby we grade each loan and assign to it
a risk grade. We subsequently regrade such loan if necessary when new
information becomes available. Our grading procedure is based on six
classifications, ranging from Grade 1, representing no significant risk, up to
Grade 6, representing an anticipated 100% loss. Grading guidelines can be
influenced by many factors, including the quality of the collateral and
evaluation of key financial information of the borrower.
We maintain a classified loan list which includes Grade 3 through Grade 6
loans. Loans graded as Grade 4 "substandard" loans are characterized by the
borrower's likely inability to meet present payment terms, increased operating
losses or reduced cash flows. Grade 5 "Doubtful" loans are similar to
substandard loans and have deficient collateral. Grade 6 "Loss" loans are loans
in the process of being charged-off. Grade 3 loans are designated as "specially
mentioned". While "specially mentioned" loans do not have all the
characteristics of a substandard or doubtful loan, they include sufficient
weakness to warrant special
23
<PAGE> 27
attention. Classified loans require more frequent monitoring than non-classified
loans. Based on the above factors, specific allowances are provided for
classified loans. For example, Grade 3 loans are allocated a 3% allowance, Grade
4 loans are allocated a 15% allowance, Grade 5 loans are allocated a 50%
allowance and Grade 6 loans are allocated a 100% allowance.
The following table summarizes, for the periods indicated, the activity in
the allowance for loan losses and other related data:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
NINE MONTHS ENDED -------------------
SEPTEMBER 30, 2000 1999 1998
------------------ --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average loans outstanding...................... $ 141,057 $ 109,015 $72,943
========== ========= =======
Loans outstanding at end of period............. $ 154,257 $ 130,708 $91,793
========== ========= =======
Allowance for loan losses at beginning of
period....................................... $ 1,411 $ 1,097 $ 754
Charge-offs:
Real estate -- construction.................. -- -- --
Real estate -- commercial.................... -- -- --
Real estate -- residential................... -- 24 29
Commercial................................... 12 33 32
Consumer..................................... 20 35 24
---------- --------- -------
Total charge-offs.................... 32 92 85
Recoveries:
Real estate -- construction.................. -- -- --
Real estate -- commercial.................... -- -- --
Real estate -- residential................... -- -- --
Commercial................................... -- 1 1
Consumer..................................... 8 3 6
---------- --------- -------
Total recoveries..................... 8 4 7
Net (recoveries) charge-offs................... 24 88 78
Provision for loan losses...................... 265 402 421
---------- --------- -------
Allowance for loan losses at end of period..... $ 1,652 $ 1,411 $ 1,097
========== ========= =======
Ratio of net charge-offs (recoveries) to
average loans................................ 0.02% 0.08% 0.11%
Ratio of allowance to end of period loans...... 1.07 1.08 1.20
Ratio of allowance to end of period
nonperforming loans.......................... 6,608.00 2,391.53 128.76
</TABLE>
24
<PAGE> 28
The following table summarizes, for the periods indicated, the allocation
of the allowance for loan losses among various categories of loans and certain
other information at September 30, 2000 and December 31, 1999 and 1998. The
allocation is made for analytical purposes and is not necessarily indicative of
the categories in which future losses may occur. The total allowance is
available to absorb losses from any segment of loans.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
SEPTEMBER 30, 2000 1999 1998
---------------------- ---------------------- ----------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF LOANS OF LOANS OF LOANS
AMOUNT OF TO TOTAL AMOUNT OF TO TOTAL AMOUNT OF TO TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance of allowance for loan
losses applicable to:
Real
estate -- construction... $ 223 25.6% $ 298 22.6% $ 201 24.8%
Real estate -- commercial... 443 25.3 275 27.6 246 21.8
Real
estate -- residential.... 360 27.4 364 27.3 243 25.1
Commercial.................. 529 17.6 407 18.3 369 22.6
Consumer.................... 97 4.1 67 4.2 38 5.7
------ ----- ------ ----- ------ -----
Total allowance for
loan losses....... $1,652 100.0% $1,411 100.0% $1,097 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
Management believes that the allowance for loan losses at September 30,
2000 is adequate to cover losses inherent in the loan portfolio at such date. No
assurance can be given, however, that adverse economic conditions or other
circumstances will not result in increased losses in the portfolio.
Investment Portfolio
Our investment policy is designed to ensure liquidity for cash flow
requirements, to help manage interest rate risk, to ensure collateral is
available for public deposits, to manage asset quality diversification and to
maximize yield. Investments are managed centrally to maximize compliance and
effectiveness of overall investing activities. Ongoing review of the performance
of the investment portfolio, market values, market conditions, current economic
conditions, profitability, capital ratios, liquidity needs and other matters
related to investing activities is performed by the Executive Committee and
Asset Liability Committee and reviewed by our board of directors.
The following table summarizes the amortized cost and the distributions of
our securities held as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available for sale securities
U.S. Treasury securities.............. $ 499 1.9% $ 1,099 4.7% $ 2,804 12.1%
U.S. government agency securities..... 7,530 29.1 6,679 28.7 6,515 28.2
Mortgage-backed securities............ 6,291 24.4 4,928 21.2 3,371 14.6
State and municipal securities........ 9,846 38.1 9,012 38.7 8,856 38.4
Corporate securities.................. 1,167 4.5 1,172 5.0 1,178 5.1
Equity securities..................... 341 1.3 226 1.0 183 0.8
Other investments..................... $ 181 0.7 $ 181 0.7 $ 181 0.8
------- ----- ------- ----- ------- -----
Total available for sale...... $25,855 100.0% $23,297 100.0% $23,088 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
25
<PAGE> 29
As of September 30, 2000, the entire investment portfolio is designated
"available for sale." As of September 30, 2000, the amortized cost of our total
investment portfolio was $25.9 million, an increase of 11.0% from December 31,
1999. The amortized cost of the total investment portfolio was $23.3 million at
December 31, 1999, an increase of $1.2 million from December 31, 1998.
The following table summarizes the contractual maturity of investment
securities and their weighted average yields at September 30, 2000:
<TABLE>
<CAPTION>
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE WITHIN FIVE WITHIN TEN
YEAR YEARS YEARS AFTER TEN YEARS TOTAL
-------------- -------------- -------------- --------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities... $ 499 5.27% $ -- --% $ -- --% $ -- --% $ 499 5.27%
U.S. government agency
securities............... -- -- 6,790 6.10 740 6.24 -- -- 7,530 6.12
Mortgage-backed
securities............... -- -- 309 6.57 345 5.51 5,637 6.54 6,291 6.48
State and municipal
securities............... 415 6.27 458 6.71 1,636 6.30 7,337 6.83 9,846 7.09
Corporate securities....... -- -- 624 5.14 543 6.10 -- -- 1,167 5.58
Equity securities and other
investments(1)........... -- -- -- -- -- -- 522 6.00 522 6.00
------ ------ ------ ------- -------
Total available
for sale
securities...... $ 914 5.72% $8,181 6.08% $3,264 6.17% $13,496 6.94% $25,855 6.53%
====== ====== ====== ======= =======
</TABLE>
---------------
(1) Equity securities and other investments do not have stated maturities.
Interest on investment securities increased during the first nine months of
2000 as existing lower-yielding investments were repriced at current higher
rates. The tax equivalent average yield for the first nine months of 2000 was
6.75% compared with 6.33% for the first nine months of 1999. Interest on
investment securities increased by $199,000 or 17.1% in 1999 compared with 1998.
Because the average balance of securities increased by $4.7 million in 1999 over
1998, and the average rate declined slightly to 6.45% from 6.47%, we enjoyed
higher interest income in 1999.
We have adopted Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities. At the date of
purchase, we are required to classify debt and equity securities into one of
three categories: held to maturity, trading or available for sale. At each
reporting date, the appropriateness of the classification is reassessed.
Investments in debt securities are classified as held to maturity and measured
at amortized cost in the financial statements only if management has the
positive intent and ability to hold those securities to maturity. Securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading and measured at fair value in the financial
statements with unrealized gains and losses included in earnings. Investments
not classified as either held to maturity or trading are classified as available
for sale and measured at fair value in the financial statement with unrealized
gains and losses reported, net of tax, in a separate component of stockholders'
equity until realized.
Deposits
Our primary source of funds has historically been customer deposits. Total
deposits increased to $167.4 million at September 30, 2000 from $141.9 million
at December 31, 1999 and $114.9 million at December 31, 1998. These increases
were primarily a result of the opening of two branches in February 2000, one
branch in 1999, three branches in 1998 and one branch in 1997.
Noninterest-bearing deposits of $35.1 million at September 30, 2000
represented an increase of $8.6 million or 33.3% from $26.6 million at December
31, 1999. Noninterest-bearing deposits at December 31, 1999 increased to $26.6
million, an increase of $4.1 million or 18.3% from $22.4 million at December 31,
1998. Interest-bearing deposits at September 30, 2000 were $132.3 million, an
increase of
26
<PAGE> 30
$16.9 million or 14.7% from $115.4 million at December 31, 1999.
Interest-bearing deposits at December 31, 1999, represented an increase of $22.9
million or 24.8% from $92.5 million at December 31, 1998.
The following table sets forth the distribution of our deposits by type as
of the date indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------------------
2000 1999 1998
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand, noninterest-bearing
deposits........................... $ 35,122 21.0% $ 26,566 18.7% $ 22,419 19.4%
Demand, interest-bearing deposits.... 70,639 42.2 62,962 44.4 48,120 41.9
Savings.............................. 8,894 5.3 9,398 6.6 7,759 6.8
Time, $100,000 and over.............. 23,576 14.1 19,352 13.6 13,110 11.4
Other time........................... 29,153 17.4 23,648 16.7 23,525 20.5
-------- ----- -------- ----- -------- -----
Total deposits............. $167,384 100.0% $141,926 100.0% $114,933 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
The following table presents the daily average balances for each major
category of deposits and the weighted average interest rate paid on
interest-bearing deposits for each of the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED --------------------------------------
SEPTEMBER 30, 2000 1999 1998
------------------ ------------------ -----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand, interest-bearing deposits..... $ 66,948 4.21% $ 53,137 3.57% $39,377 3.76%
Savings............................... 9,140 2.46 8,569 2.44 6,755 2.77
Time, $100,000 and over............... 21,682 5.95 15,883 5.32 11,444 5.81
Other Time............................ 24,934 5.58 24,019 5.30 20,997 5.77
-------- -------- -------
Total interest-bearing
deposits.................. 122,704 4.67 101,608 4.16 78,573 4.51
Noninterest-bearing deposits.......... 29,014 23,733 17,320
-------- -------- -------
Total deposits.............. $151,718 3.78% $125,341 3.37% $95,893 3.70%
======== ======== =======
</TABLE>
The following table presents the amounts and maturity of certificates of
deposit that had balances of $100,000 or more at September 30, 2000:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Remaining maturity
Less than three months.................................. $ 5,723
Three months up to six months........................... 5,491
Six months up to twelve months.......................... 9,073
Twelve months and over.................................. 3,289
-------
Total........................................... $23,576
=======
</TABLE>
Federal Funds Purchased and Other Borrowed Funds
Federal funds purchased averaged $5.7 million during the first nine months
of 2000 compared with $3.5 million during the first nine months of 1999. This
62.9% increase was necessary to meet increased loan demand. Federal funds
purchased averaged $3.8 million in 1999, a 501.7% increase over 1998. The
average rate paid on federal funds decreased to 5.41% in 1999 compared with
5.82% in 1998. Total interest paid on federal funds purchased increased by
$170,000 or 459.5% in 1999 compared with 1998 as the result of the increase in
federal funds purchased and the decrease in average rates. Leveraging the
balance sheet through the use of borrowed funds during the past several years
has had a significantly favorable effect on our net interest income as a result
of the positive spread between the yield on earning assets and cost of borrowed
funds.
27
<PAGE> 31
During the nine months ended September 30, 2000, we began to utilize
short-term advances from the Federal Home Loan Bank as an additional source of
funds. At September 30, 2000, we had $6.0 million of these advances outstanding.
Long-term debt includes fixed rate Federal Home Loan Bank advances, a note
payable to an unaffiliated bank and unsecured loans from stockholders. Other
borrowed funds averaged $19.4 million during the first nine months of 2000
compared with $10.3 million during the first nine months of 1999. This 88.3%
increase was necessary to meet loan demand and to provide the bank with
additional capital. Long-term debt averaged $10.8 million in 1999, a 332.0%
increase over long-term debt in 1998, and the average rate paid decreased to
6.10% in 1999 compared with 8.08% in 1998. Based on these factors, interest
expense on long-term debt increased by $455,000 or 225.2% in 1999 compared with
1998.
The following table sets forth certain information regarding total borrowed
funds at or for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE PERIOD ENDED
--------------------------------
DECEMBER 31,
SEPTEMBER 30, ----------------
2000 1999 1998
------------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average balance outstanding............................... $25,103 $14,604 $3,136
Maximum amount outstanding at any month-end during the
period.................................................. 27,697 21,827 8,937
Balance outstanding at end of period...................... 22,197 21,827 8,937
Weighted average interest rate during the period.......... 6.61% 5.92% 7.62%
</TABLE>
Liquidity
Our liquidity policy provides management with guidelines to ensure that
funds are available as needed to support asset growth or to reduce assets to
meet deposit withdrawals and other payment obligations, to maintain reserve
requirements and otherwise to operate on an ongoing basis. Due to the potential
for unexpected fluctuation in deposits and loans, active management of our
liquidity is critical. In order to respond to these circumstances, sources of
both on and off-balance sheet funding are in place.
Traditionally, we have relied on such sources as cash on hand and loan and
investment maturities to fund liquidity needs. Within the past two years, we
have chosen to expand our sources to include lines of credit and advances with
the Federal Home Loan Bank and other correspondent banks.
To enhance our ability to manage liquidity, and in accordance with SFAS No.
115, Accounting for Certain Investment and Debt and Equity Securities, all
investments are accounted for as available for sale. At September 30, 2000,
these securities plus cash and due from banks totaled $32.5 million, which was
16.2% of total assets.
Generally, investment securities which mature within one year can be
converted to cash for liquidity needs at amounts which approximate their book
value. Securities with maturities greater than one year are more sensitive to
changes in interest rates and, therefore, their liquidation value would tend to
be more volatile relative to their book value.
Capital Resources
Stockholders' equity increased to $8.9 million at September 30, 2000 from
$7.5 million at December 31, 1999, an increase of $1.4 million or 19.2%. This
increase was primarily the result of net income for the period. During the year
ended December 31, 1999, stockholders' equity increased by $600,000 or 8.7% from
$6.9 million at December 31, 1998. This increase was due to net income of $1.4
million, offset by an unrealized loss on available for sale securities of
$786,000.
Stockholder's equity increased to $10.2 million on October 19, 2000, when
we refinanced $1.3 million of our outstanding indebtedness held by certain of
our common stockholders by issuing, in exchange for the promissory notes, 1,317
shares of our series B preferred stock.
28
<PAGE> 32
The following table provides a comparison of the leverage and risk weighted
capital ratios of us and the bank as of September 30, 2000 and December 31, 1999
to the minimum and well-capitalized regulatory standards:
<TABLE>
<CAPTION>
TO BE WELL
MINIMUM CAPITALIZED ACTUAL RATIO
REQUIRED FOR UNDER PROMPT AT
CAPITAL ADEQUACY CORRECTIVE ACTION SEPTEMBER 30, ACTUAL RATIO AT
PURPOSES PROVISIONS 2000 DECEMBER 31, 1999
---------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Front Range Capital
Corporation
Leverage ratio............. 4.00%(1) N/A 4.69% 4.87%
Tier 1 risk-based capital
ratio................... 4.00 N/A 5.18 5.47
Risk-based capital ratio... 8.00 N/A 6.12 6.43
Heritage Bank
Leverage ratio............. 4.00%(1) 5.00% 6.62% 6.91%
Tier 1 risk-based capital
ratio................... 4.00 6.00 7.38 7.77
Risk-based capital ratio... 8.00 10.00 8.32 8.73
</TABLE>
---------------
(1) The Federal Reserve may require us and/or the bank to maintain a leverage
ratio of up to 100 basis points above the required minimum.
Interest Rate Sensitivity
Our asset liability management policy provides management with the
necessary guidelines for managing the volume and mix of our assets and other
funding sources and we have established a system for monitoring our net interest
rate sensitivity position.
Interest rate is managed by ALCO, the bank's Asset Liability Committee,
which is comprised of our senior officers, in accordance with policies approved
by our board of directors. The ALCO formulates strategies based on appropriate
levels of interest rate risk. In determining the appropriate level of interest
rate risk, the ALCO considers the impact on earnings, capital levels and general
economic conditions.
Interest rate risk management involves the maintenance of an appropriate
balance between interest sensitive assets and interest sensitive liabilities to
reduce interest rate risk exposure while also providing liquidity to satisfy the
cash flow requirements of operations and to meet customers' fluctuating demands
for funds, either in terms of loan requests or deposit withdrawals.
Interest-earning assets and interest-bearing liabilities are those which
have yields or rates which are subject to change within a future time period due
to maturity of the instrument or changes in the rate environment. "GAP" refers
to the difference between interest-earning assets and interest-bearing
liabilities repricing within given time frames. As a result, major fluctuations
in net interest income and net earnings could occur due to imbalances between
the amounts of interest-earning assets and interest-bearing liabilities, as well
as different repricing characteristics. GAP management seeks to protect earnings
by maintaining an appropriate balance between interest-earning assets and
interest-bearing liabilities in order to minimize fluctuations in the net
interest margin and net earnings in periods of volatile interest rates.
We use a net interest income simulation model to estimate near-term risk
due to changes in interest rates. The model, which is updated quarterly,
incorporates substantially all of our assets and liabilities together with
forecasted changes in the balance sheet and assumptions that reflect the current
interest rate environment. Balance sheet changes are based on expected
prepayments of loans and securities. ALCO uses the model to simulate the effect
of immediate and sustained parallel shifts in the yield curve of 100 and 200
basis points. The results from the simulation are reviewed by ALCO quarterly and
are used to guide ALCO's asset liability strategy. ALCO guidelines approved by
our board of directors generally limit the estimated change in net interest
margin over the succeeding 12 months. In the event the change exceeds 25 basis
points of the forecasted net interest margin given a 200 basis points change in
interest rates, the board will increase its scrutiny and may change its strategy
if necessary. At September 30, 2000, the estimated effect of an immediate 200
basis point increase in rate was a decrease in forecasted net interest margin
for 12 months of
29
<PAGE> 33
19 basis points, which would result in a decrease in net interest income of
$398,000. The estimated effect of an immediate 200 basis point decrease in rate
was an increase in forecasted net interest margin for 12 months of 8 basis
points, which would result in an increase in net interest income of $158,000.
The following table summarizes our interest rate sensitivity analysis at
September 30, 2000:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
---------------------------------------------------------
OVER THREE OVER ONE
THREE MONTHS YEAR
MONTHS THROUGH THROUGH OVER
OR LESS ONE YEAR FIVE YEARS FIVE YEARS TOTAL
------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold.............. $ -- $ -- $ -- $ -- $ --
Investment securities........... 415 499 8,181 16,760 25,855
Loans........................... 77,120 12,247 29,275 36,424 155,066
------- -------- -------- ------- --------
Total interest-earning
assets................ 77,535 12,746 37,456 53,184 180,921
Interest-bearing liabilities:
Deposits
Demand, interest-bearing..... 28,255 28,256 14,128 -- 70,639
Savings...................... 3,558 3,557 1,779 -- 8,894
Certificates of deposit...... 13,741 29,687 9,301 -- 52,729
Federal funds purchased......... 4,000 -- -- -- 4,000
Other short-term borrowings..... 6,000 -- -- -- 6,000
Long-term debt.................. 3,932 253 3,489 4,523 12,197
------- -------- -------- ------- --------
Total interest-bearing
liabilities........... $59,486 $ 61,753 $ 28,697 $ 4,523 $154,459
------- -------- -------- ------- --------
Period gap........................ $18,049 $(49,007) $ 8,759 $48,661 $ 26,462
Cumulative period gap............. $18,049 $(30,958) $(22,199) $26,462
Cumulative period gap to total
assets.......................... 9.01% (15.46)% 11.08% 13.21%
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, 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. Also, 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 may lag behind and over the
life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table.
Availability of Dividends
Our principal cash requirement at the holding company level is the
repayment of debt. We depend upon the payment of cash dividends by the bank to
service debt.
We, as the sole stockholder of the bank, are entitled to dividends declared
by the bank's board of directors, out of funds legally available to pay
dividends, and subject to the restrictions imposed by banking regulations.
Generally, a Colorado-chartered banking corporation which is a member of the
Federal Reserve may make quarterly distributions provided they do not exceed the
lesser of the bank's retained earnings or the bank's net income for the last
three fiscal years, including the current year, less the amount of any
distributions made by the bank to its stockholders during that three-year
period. The regulators may order a bank to refrain from making a proposed
distribution when, in the regulators' opinions, the payment of the distribution
would be an unsafe or unsound practice. As of September 30, 2000, the bank had
$3.4 million available for dividends.
We expect that the cash dividends paid by the bank to us will be sufficient
to meet our cash requirements, although there is no assurance that dividends
will be paid at any time in any amount.
30
<PAGE> 34
BUSINESS
GENERAL
We are a bank holding company headquartered in Louisville, Colorado, which
is located southeast of Boulder along the Denver-Boulder business corridor. We
derive substantially all of our income from, and our principal asset is, all of
the common stock of our wholly owned subsidiary, Heritage Bank. We currently
have no plans to conduct any other business unrelated to our ownership of the
bank. We have 11 full-service branches in the Denver-Boulder metropolitan area.
We operate under a community banking philosophy. We develop broad customer
relationships based on responsive, individualized service provided by our
experienced officers and staff. We offer our customers, including local
residents and small to medium-sized businesses, a variety of traditional loan
and deposit products from our attractive, convenient locations.
HISTORY OF THE COMPANY
In March of 1985, we acquired the bank, then operating under the name
Lafayette First Industrial Bank. After the acquisition, we converted Lafayette
First into a state-chartered commercial bank named Bank VII. In 1990, Robert L.
and Claudia A. Beauprez acquired a significant ownership interest in us and
thereupon instituted significant changes in order to enable us to more
effectively serve the needs of local small to medium-sized business and
individual customers. To reflect these changes, the name of the bank was changed
in 1991 to Lafayette State Bank. Since 1990, the bank has enjoyed steady growth
in deposits and in commercial and consumer loans.
The bank began its geographic expansion in 1995, with the establishment of
branches in Boulder and Louisville. We have since opened branches in Erie in
1997; Broomfield, Denver and Louisville (Main Street) in 1998; Longmont in 1999;
and downtown Boulder, Lafayette (95th Street) and Niwot in 2000. This geographic
expansion gives us a significant presence throughout the diverse and growing
economic and population base in the Denver-Boulder metropolitan area. On June 1,
1998, the bank again changed its name to Heritage Bank to better reflect its
expanding geographic presence.
BUSINESS STRATEGIES
The Denver-Boulder metropolitan area enjoys strong economic growth, an
expanding population and an array of diverse industries. Our objective is to
serve the individual and business needs of our market while achieving an
acceptable rate of return for our stockholders. To achieve this objective, we
have focused on the following strategies:
Emphasizing community banking relationships and a strong customer service
culture. We enjoy an excellent reputation in our market area for our strong
service culture. Starting with our Chairman of the Board and President, Robert
L. Beauprez, who has lived and worked in our market area all of his life, and
his wife, Claudia A. Beauprez, who has lived in Colorado since 1964, our
officers and staff are dedicated to providing responsive, individualized service
to our business and individual customers. We encourage our board members, branch
presidents, branch managers and officers to become actively involved in civic
and public service affairs in their communities. As a result of this community
interaction, we are better able to understand the specific needs of local
customers and provide the responsiveness to local concerns expected of a
community bank.
Our management team is talented, deep and stable. We have experienced very
little management turnover, which promotes a continuity of service to our
customers. Several of our branch presidents formerly ran other banking
organizations and have chosen to join us and be a part of our service-oriented
team. We believe our banking offices are conveniently located in our market
areas. Most of our locations are designed to make the customer feel "at home"
and resemble a family home atmosphere more than a corporate office. All of our
locations, such as our branches in the "LODO" section of downtown Denver and in
downtown Boulder, are designed to fit in aesthetically with their surroundings.
This combination of service-oriented
31
<PAGE> 35
management and staff and attractive, accessible locations enables us to provide
outstanding service to our customers.
Expanding market share and increasing efficiency through internal
growth. We have grown significantly through our branching activities. We believe
that our current locations provide us with the necessary platform to expand our
services within our existing market area and that we have the infrastructure and
systems in place to accommodate substantial additional market penetration. We
believe that as we continue to expand our business from our current locations,
we can absorb many of the overhead costs incurred in the creation of our branch
network. As a result, our efficiency ratio should decrease and our net earnings
should increase. We will continue to look for appropriate opportunities to grow
by opening additional branches within our existing markets or in new markets
offering growth potential.
Enhancing use of technology to provide competitive products and
services. We provide a wide range of the usual and customary commercial and
consumer banking products and services in all of the communities we serve. Our
use of advanced technology also allows us to offer our customers the ability to
bank through their personal computer from their home or business. These services
allow customers the flexibility of monitoring their loan and account activity
and conducting banking transactions 24 hours a day. Telephone access enables
customers to receive real-time account balances, deposit status, checks paid,
withdrawals made, loan status, loan payments due and other specifics related to
services we provide. In addition, our customers can access their accounts at our
ATM locations and at ATM locations worldwide through agreements with other banks
and ATM networks.
Maintaining strong asset quality. As a result of our strong credit
underwriting and loan administration, we have maintained excellent asset quality
despite the rapid expansion of our loan portfolio. Our total assets have grown
from $5.6 million at December 31, 1990 to $200.3 million at September 30, 2000.
Over this same period, loans increased from $3.7 million to $154.3 million and
total deposits have risen from $4.9 million to $167.4 million. Over the past two
calendar years, total assets have grown from $90.7 million at December 31, 1997
to $172.7 million at December 31, 1999, total loans have increased from $59.3
million to $130.7 million and total deposits have risen from $84.1 million to
$141.9 million. Despite this growth, our ratio of nonperforming assets to total
assets at September 30, 2000 was 0.07%. We intend to continue to maintain our
sound asset quality and adhere to the policies and practices that contribute to
this result.
COMPETITION
The banking business is highly competitive, and our profitability depends
principally upon our ability to compete in the markets in which our branch
operations are located. Consolidation in the financial services industry has
reduced the number of independent banks. We compete with other commercial banks,
savings banks, savings and loan associations, credit unions, finance companies,
mutual funds, insurance companies, asset-based non-bank lenders and certain
other nonfinancial institutions, including retail stores which may maintain
their own credit programs and certain governmental organizations which may offer
more favorable financing than we offer. Some of our competitors enjoy
significant financial resources, are well-recognized and have more offices than
we do, and in some cases, are not subject to the same regulations and
restrictions that we are subject to.
Nevertheless, we have been able to effectively compete by emphasizing
customer service, technology and responsive decision-making by establishing
long-term customer relationships and building customer loyalty as well as by
providing products and services designed to meet the specific needs of our
customers. We believe our competitive strengths, including our reputation for
developing and continuing banking relationships, responsiveness to customer
needs, individualized customer service and maintenance of skilled and
resourceful personnel, will enable us to continue to successfully compete in the
communities we serve.
Although we consider our principal competition to be those banks and other
financial institutions with offices in our current market area, under the
Gramm-Leach-Bliley Act, effective March 11, 2000, securities firms and insurance
companies that elect to become financial holding companies may acquire banks and
other financial institutions. These financial holding companies will be able to
offer banking, insurance and securities brokerage products to their customers.
The Gramm-Leach-Bliley Act may significantly change the competitive
32
<PAGE> 36
environment in which we operate. In addition, other federal legislation has had
the effect of easing membership limits on credit unions and increasing the
ability of credit unions to compete with us for deposits and loans in the
communities we serve.
FACILITIES AND PROPERTIES
We conduct business at 11 full-service branch locations, including branches
in Boulder, Longmont, Lafayette, Louisville, Broomfield, Denver, Erie and Niwot,
Colorado. We own five of the facilities that house our branches and lease the
remaining facilities under various terms.
The following table sets forth certain information regarding our
facilities:
<TABLE>
<CAPTION>
OWNED/LEASED AND IN OPERATION
LOCATION ADDRESS LEASE TERMS(1) SINCE
-------- ------- ---------------- ------------
<S> <C> <C> <C>
Boulder -- Pearl Street 2775 Pearl Street, Boulder, Leased: 5 year term ending February 1995
Colorado 80302 September 30, 2004
Boulder -- West End 1900 Ninth Street, Boulder, Leased: 5 year term ending July February 2000
Colorado 80302 31, 2004
Broomfield 5720 W. 120th Avenue, Broomfield, Owned January 1998
Colorado 80020
Denver -- LODO 1543 Wazee Street, Denver, Owned October 1998
Colorado 80202
Erie 785 Cheesman, Erie, Owned June 1997
Colorado 80516
Lafayette 811 S. Public Road, Lafayette, Owned April 1987
Colorado 80026
Lafayette -- 95th Street 2695 North Park Drive, Suite 101, Leased: 5 year term ending February 2000
Lafayette, January 14, 2005
Colorado 80026
Longmont 2333 N. Main Street, Suite E, Leased: 62 month term ending March 1999
Longmont, Colorado 80501 March 21, 2004
Louisville 1020 Century Drive, Suite 202, Owned July 1995
Louisville,
Colorado 80027
Louisville -- Main 801 Main Street, Suite 130, Leased: 5 year term ending March August 1998
Street Louisville, Colorado 80027 31, 2003
Niwot 6800 N. 79th Street, Niwot, Leased: 5 year term ending July 2000
Colorado 80503 February 28, 2005
</TABLE>
---------------
(1) The lease terms do not include renewal option periods which may be
available.
EMPLOYEES
As of September 30, 2000, we employed 102 persons on a full-time or
equivalent basis. We are not a party to any collective bargaining agreement and
we have good relations with our employees. We provide customary insurance
benefits to our employees. None of our officers is employed pursuant to an
employment contract.
LEGAL PROCEEDINGS
We are periodically party to or otherwise involved in legal proceedings
arising in the normal course of our business, such as claims to enforce liens,
claims involving the making and servicing of real property loans, and other
issues incident to our business. Management does not believe that there is any
pending or threatened proceeding against us which, if determined adversely,
would have a material effect on our business, results of operations or financial
condition.
33
<PAGE> 37
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to our
executive officers and directors and the executive officers and directors of the
bank:
<TABLE>
<CAPTION>
POSITION WITH FRONT RANGE
NAME AGE CAPITAL CORPORATION POSITION WITH HERITAGE BANK
---- --- ------------------------- ---------------------------
<S> <C> <C> <C>
Robert L. Beauprez.... 52 Chairman of the Board; President Chairman of the Board; Chief
Executive Officer and President
Claudia A. Beauprez... 50 Director; Secretary and Treasurer Director; Secretary
Alice M. Bier......... 47 Chief Financial Officer Chief Operating Officer
Victor Fruehauf....... 65 Director Director
Larry W. Gibson....... 60 Director Director; Senior Vice President
William G. Hofgard.... 68 Director Director
Donald E. Imel........ 69 Director Director
W. Bruce Joss......... 51 Director Director
Robert W. Lathrop..... 61 Director Director
William A. Mitchell, 41 Vice President Executive Vice President
Jr. ................
</TABLE>
The eight directors that serve on our board of directors also comprise the
board of directors of the bank. Each of our executive officers and each
executive officer of the bank serves at the discretion of the respective board
of directors. All directors hold office until the next annual meeting of
stockholders or until their successors are elected and qualified or until their
death, resignation or removal. Officers are appointed by the board of directors
and hold office until their successors are duly elected or qualified or until
their death, resignation or removal.
Robert and Claudia Beauprez are husband and wife. There are no family
relationships among any other of our directors and executive officers or those
of the bank.
Robert L. Beauprez has been the President and a director of the company
since 1990. He was elected Chairman of the Board in July 1993. He has served as
Chief Executive Officer of the bank since 1995. Prior to that, he was an
operating partner in his family's dairy farming operations in Lafayette,
Colorado. He also served as a director of Bank One-Louisville Center, formerly
Affiliated Bank of Louisville, for 13 years prior to 1990.
Mr. Beauprez presently serves as Chairman for the Colorado Republican Party
and previously served as chairman of his county party and congressional
district. He currently serves on the Boulder Community Hospital Foundation
Finance Committee and the Boulder Community Hospital Association Board. He has
also served as Chairman of the Board of the Independent Bankers of Colorado and
as vice chairman of the Independent Bankers of America Policy Development
Committee. Mr. Beauprez' other community activities include work with the St.
Louis Church Finance Committee, Long's Peak Council Boy Scouts of America,
Student Venture, Boulder County Advisory Council, St. Louis School Board and
several other community organizations.
Claudia A. Beauprez has been Secretary, Treasurer and a director of the
company since 1991 and a director of the bank since 1990. She is a part-time
employee of the bank, serving as an administrative assistant. Mrs. Beauprez also
is a licensed real estate agent and was active in the family dairy farming
business in Lafayette, Colorado prior to joining the company.
Alice M. Bier became Chief Financial Officer of the company in 2000, Chief
Operating Officer of the bank in 1997 and vice president and cashier of the bank
in 1996. Prior to her tenure at the bank, she served for several years as an
employee and officer in several operations and lending capacities at The Bank of
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<PAGE> 38
Louisville, including director from 1984 to 1996, President from 1995 to 1996,
Executive Vice President and Cashier from early in 1994 to August 1995, and Vice
President and cashier for ten years prior to 1994. She also served as Corporate
Secretary of Financial Holdings, Inc., the holding company for The Bank of
Louisville from 1984 to 1995. Ms. Bier has worked in the banking industry since
1971. Ms. Bier has been an active member in several community organizations,
including Coal Creek Rotary, Louisville Chamber of Commerce, Louisville Downtown
Business Association, Leadership Louisville Program, Lafayette Chamber of
Commerce and the Louisville Labor Day Parade Committee. She is also a board
member of the Independent Bankers' Network.
Victor Fruehauf has been a director of the company since 1995 and a
director of the bank since 1994. He is the Chief Executive Officer and a
director of Fruehauf Plant and Garden Center, a privately-owned company in
Boulder, Colorado that sells plants, flowers, giftware, outdoor furniture,
nursery stock and other related products. Mr. Fruehauf also is the general
partner of a family limited partnership that develops, owns and operates a small
shopping mall in Boulder, Colorado. Prior to his experience with Fruehauf Plant
and Garden Center, Mr. Fruehauf served in various personnel and labor relations
capacities with Dow Chemical Company. He previously served for seven years on
the board of directors of Colorado National Bank - Boulder. Four of those years,
he served as Chairman of the Board.
Larry W. Gibson has been a director of the company and the bank since 1992.
He served as vice president of the bank from 1990 to 1997 and currently serves
as Senior Vice President. Mr. Gibson has served in lending officer positions at
various financial institutions for more than 30 years.
William G. Hofgard has been a director of the company since 1995 and a
director of the bank since 1994. For over forty years, he has been Chairman of
the Board of Hofgard & Company, Inc., a privately owned employee benefits
consulting and insurance brokerage firm in Boulder, Colorado. He also served as
President of Hofgard & Company, Inc. for over 25 years until 1997. Mr. Hofgard
is a chartered life underwriter and a chartered financial consultant.
Donald E. Imel was a founder of Lafayette First Industrial Bank, the
predecessor to the bank. He has served as a director of both the company and the
bank, or its predecessors, since 1987, serving as Chairman of the Board of the
company from 1987 to 1993. Mr. Imel was a principal in a family-owned business
for 37 years. He also manages various commercial and residential real estate
investments in local communities.
W. Bruce Joss has been a director of the company and the bank since 1991.
He is a stockholder in the Louisville law firm of Rautenstraus and Joss, P.C.,
specializing in commercial law. He has maintained a private practice since 1974
and has previously served as Louisville City Attorney and Prosecutor. Mr. Joss
previously served as a director of Bank One-Louisville Center. Mr. Joss' law
firm currently serves as legal counsel for the company and the bank.
Robert W. Lathrop was elected to the board of directors of the company and
the bank in 1993. Mr. Lathrop was the owner, President and Chief Executive
Officer of Rental Center of Louisville, Inc., from 1986 until 1998. He served on
the Louisville city council for eight years and the Louisville planning
commission for two years. Mr. Lathrop served as a director of Affiliated First
National Bank in Louisville from 1989 to 1990.
William A. Mitchell, Jr. became Vice President of the company in 2000 and
Executive Vice President of the bank in 1998. He manages the bank's loan and
investment functions as well as the branch presidents and branch managers. Prior
to joining the bank, Mr. Mitchell served as President and a director of First
Community Industrial Bank, a Washington Mutual company in Denver, managing a
$275 million banking organization with 11 branch locations in three states. In
addition, he supervised a $200 million home equity company based in California
for Washington Mutual. Prior to that, he worked for six years as a branch
manager for Chrysler First Financial Services in Aurora, Colorado, where he
managed a $50 million branch consumer finance institution. Mr. Mitchell has
served as director of the Colorado State Banking Board and currently serves as a
director of Independent Bankers of Colorado. He also serves as a director of the
Boulder Adopt a School program and of Colorado Microcredit, Inc., a part of the
Colorado Alliance for Micro-Enterprise Initiative, both nonprofit organizations.
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<PAGE> 39
OPERATION OF OUR BOARD OF DIRECTORS
Our board of directors has established a compensation committee. In
addition, our board of directors and the board of the bank have established
audit committees. The purpose of the audit committees is to review the general
scope of the audit conducted by our independent auditors and matters relating to
our internal control systems. In performing this function, the audit committees
review reports from our independent auditors and meet separately with
representatives of senior management. Both our and the bank's audit committees
are comprised of Messrs. Joss, Lathrop and Hofgard, each of whom is an outside
director. The compensation committee has the limited role of making
recommendations to the board of directors with respect to the compensation of
our executive officers, particularly our president. The compensation committee
is comprised of Messrs. Fruehauf, Lathrop and Imel, each of whom is an outside
director.
INDEMNIFICATION, INSURANCE AND LIMITATION OF LIABILITY
Under our articles of incorporation and bylaws, we have provided for
indemnification, to the maximum extent permitted by law, of any person who is or
was a director, officer, agent, fiduciary or employee of the company or the bank
against any claim, liability or expense arising against him or her because he or
she is or was a director, officer, agent fiduciary or employee or was serving
another entity as a director, officer, partner, trustee, employee or fiduciary
at the bank's or the company's request. We also maintain director and officer
insurance on behalf of any individual who is or was a director, officer,
employee, fiduciary or agent against any claims or liability asserted against
him or her arising out of his or her capacity or status as such.
We have also provided for the limitation of personal liability of any
director for breach of fiduciary duty unless the director
(1) breaches his duty of loyalty;
(2) engages in intentional misconduct or knowing violation of law;
(3) votes for a distribution in violation of Colorado law if the director
did not perform his or her duties in compliance with Colorado law or
(4) engages in any transaction from which the director directly or
indirectly derives an improper personal benefit.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
company or the trust pursuant to the foregoing provisions, or otherwise, the
company and the trust have been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the company or the trust of expenses incurred or paid by a director,
officer, or controlling person of the company or the trust in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, each
of the company and the trust will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
EMPLOYMENT AGREEMENTS
We have not entered into any employment agreements with any executive
officers or directors of the company or the bank.
DIRECTOR COMPENSATION
Our directors receive no compensation for their services. However,
directors of the bank, who are not also officers, receive $600 per month for
their service on the board and attendance at board meetings. No additional
compensation is paid for serving on a committee. Directors of the bank, who are
also officers, receive no additional compensation for their role as directors.
Mr. Imel receives additional compensation for inspecting and verifying the value
of collateral that secures loans.
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<PAGE> 40
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation we paid to or accrued on behalf of our President and our other
executive officers of the bank who earned more than $100,000 in salary and
bonuses for the fiscal year 1999:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ALL OTHER COMPENSATION
--------------------------- ---- -------- ------- ----------------------
<S> <C> <C> <C> <C>
Robert L. Beauprez.................... 1999 $125,000 $31,250 $21,745(1)
President of the company; Chief
Executive Officer and President of
the bank
William A. Mitchell, Jr. ............. 1999 $ 87,500 $17,500 $ 142(2)
Vice President of the Company;
Executive Vice President of the bank
</TABLE>
---------------
(1) Consists of contributions by us of $4,398 to our 401(k) plan, $17,087 to our
Executive Retirement Plan and $260 reportable as income for income tax
purposes paid pursuant to our Split Dollar Life Insurance Plan.
(2) Consists of $142 reportable as income for income tax purposes paid pursuant
to our Split Dollar Life Insurance Plan.
STOCK OPTION PLANS
We have no stock option plans for any of our officers, directors or other
employees at this time, although management may consider submitting such a plan
to a vote of our stockholders in the future.
BENEFIT PLAN
In 1995 we established a contributory pension benefit plan pursuant to
Section 401(k) of the Internal Revenue Code covering all eligible employees. A
participating employee may contribute up to 20% of total compensation in a given
year and may make rollover contributions from other qualified plans. We match
our employees' contributions up to 3% of such employee's total compensation. The
benefit plan includes a "safe harbor" which allows us to make a voluntary
contribution of up to 3% of our eligible employees' compensation, even if the
employee does not also make a contribution. Benefits are payable upon retirement
and participants are subject to vesting requirements. The benefit plan files
Form 5500-C with the Internal Revenue Service. The bank contributed $46,000 and
$34,000 into the plan in 1999 and 1998, respectively.
RETIREMENT PLANS
The bank has established an Executive Retirement Plan and an Indexed Salary
Continuation Plan for certain employees who are selected to participate by a
committee whose sole function is to select those officers to be given the
opportunity to become participants under either or both of the plans.
Executive Retirement Plan. The bank maintains an Executive Retirement Plan
for certain executive officers. Pursuant to the retirement plan, Robert L.
Beauprez will receive $4,750 per month for a period of 180 months upon
retirement, unless Mr. Beauprez' benefits have not fully vested, in which case a
certain percentage of the benefits will be nonforfeitable in accordance with Mr.
Beauprez' years of service. Mr. Beauprez' benefits will be fully vested after
ten years of service. There are currently five participants in the retirement
plan including Mr. Beauprez. The benefits payable to the five participants will
aggregate $16,362 per month. The benefits payable to any given participant will
be paid for a period of 180 months following such participant's retirement.
Indexed Salary Continuation Plan. The bank established an Indexed Salary
Continuation Plan in 1998. The index plan provides supplemental retirement
benefits to certain of the bank's executive officers, including Messrs.
Beauprez, Mitchell and Gibson and Ms. Bier. Pursuant to the terms of the index
plan and a related Split Dollar Plan, the bank purchased life insurance policies
for the benefit of each participant and excess
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<PAGE> 41
earnings from such policies are paid to the respective participant over the ten
year period following such person's retirement from the bank.
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
The bank leases the Pearl Street branch in Boulder from Fruehauf
Investments, Ltd., in which Victor Fruehauf, a director of the company and the
bank, is a principal. The lease is for a ten-year term beginning on October 1,
1994, with one five-year extension option. The monthly rent for the year 2000 is
$9,843, subject to annual increases.
We employ the law firm of Rautenstraus and Joss, P.C. from time to time. W.
Bruce Joss, a director of the company and the bank, is a principal of
Rautenstraus and Joss, P.C. In 1999, we paid a total of $38,502 in fees to
Rautenstraus and Joss, P.C.
Further, some of our directors, executive officers and stockholders who own
10% or more of our common stock and their associates, which include
corporations, partnerships and other organizations in which they are officers or
partners or in which they or their immediate families have at least a 5%
interest, are our customers. During 1999 and the nine months ended September 30,
2000, we made loans in the aggregate amount of $1.3 million, in the ordinary
course of business to many of our directors, executive officers and principal
stockholders and their associates, all of which were on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with persons unaffiliated with us and did not
involve more than the normal risk of collectability or present other unfavorable
features. Loans to our directors, executive officers and principal stockholders
are subject to limitations contained in the Federal Reserve Act, the principal
effect of which is to require that extensions of credit by us to executive
officers, directors and principal stockholders satisfy the foregoing standards.
We expect to have such transactions or transactions on a similar basis with our
directors, executive officers and principal stockholders and their associates in
the future.
In addition, we have executed promissory notes payable to several of our
officers and directors or their immediate family members. These promissory notes
bear interest at the prime rate, are payable quarterly and mature as follows:
<TABLE>
<CAPTION>
HOLDER PRINCIPAL MATURITY DATE
------ --------- -------------
<S> <C> <C>
Robert W. Lathrop and
Carol D. Lathrop.......................................... $100,000 December 31, 2000
Carol Ann Imel, the wife of
Donald E. Imel............................................ $100,000 December 31, 2000
Carol Ann Imel, the wife of
Donald E. Imel............................................ $ 85,000 December 31, 2001
Joe C. Beauprez and Marie Beauprez,
the parents of Robert L. Beauprez......................... $132,000 December 31, 2000
</TABLE>
Each of these promissory notes was refinanced and exchanged for shares of
our series B preferred stock, issued on October 19, 2000 and described elsewhere
in this prospectus. Each holder of a promissory note so exchanged received an
aggregate liquidation preference amount of series B preferred stock equal to the
principal amount on his or her respective promissory note. The series B
preferred stock is redeemable at our option at any time.
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<PAGE> 42
BENEFICIAL OWNERSHIP OF COMMON STOCK BY
MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of September 30, 2000, by (1) each of our
directors and executive officers, (2) each stockholder whom we know to own
beneficially 5% or more of the common stock and (3) all of our directors and
executive officers as a group. Unless otherwise indicated, based on information
furnished by such stockholders, management believes that each person has sole
voting and dispositive power over their shares and the address of each
stockholder is the same as our address. There are no arrangements which upon
operation at a subsequent date would result in a change of control of the
company or the bank.
<TABLE>
<CAPTION>
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
NAME OWNED(1) OWNED(1)
---- ------------ ------------
<S> <C> <C>
Robert L. Beauprez.......................................... 438,171(2) 32.7%
Claudia A. Beauprez......................................... 296,194(3) 22.1%
Alice M. Bier............................................... 1,500 *
Victor Fruehauf............................................. 20,000 1.5%
Larry W. Gibson............................................. 25,760 1.9%
William G. Hofgard.......................................... 26,667(4) 2.0%
Donald Imel................................................. 109,960(5) 8.2%
W. Bruce Joss............................................... 6,000(6) *
Robert W. Lathrop........................................... 6,000(7) *
William A. Mitchell, Jr. ................................... 5,000(8) *
Directors and executive officers as a group (11 persons).... 642,823 48.1%
</TABLE>
---------------
* Indicates ownership which does not exceed 1.0%.
(1) The percentage beneficially owned was calculated based on 1,327,744 shares
of common stock issued and outstanding. However, with respect to each
stockholder who holds shares of preferred stock and the directors and
executive officers as a group, this percentage assumes the conversion by
such stockholder or group of all shares of preferred stock which are
convertible on a one-to-one basis into shares of common stock within 60
days. There are currently 5,500 shares of 1987 series A preferred stock and
5,000 shares of 1988 series A preferred stock that are convertible into
common stock outstanding.
(2) Includes 288,013 shares of common stock and 4,416 shares of preferred stock
convertible into shares of common stock on a one-to-one basis held of record
jointly by Robert L. Beauprez and his wife, Claudia A. Beauprez. This total
does not include 3,765 shares owned solely by Claudia A. Beauprez, to which
Mr. Beauprez disclaims any beneficial ownership.
(3) Includes 288,013 shares of common stock and 4,416 shares of preferred stock
convertible into shares of common stock on a one-to-one basis held jointly
by Robert L. and Claudia A. Beauprez. Does not include 145,742 shares owned
solely by Mr. Beauprez to which Mrs. Beauprez disclaims any beneficial
ownership.
(4) Includes 16,667 shares held of record by Resources Trust Co. for the benefit
of William G. Hofgard.
(5) Includes 6,500 shares held of record by the Imel Family LLC, of which Mr.
Imel is a principal and 4,417 shares of preferred stock, which are
convertible into shares of common stock on a one-for-one basis.
(6) Consists of 5,500 shares held of record jointly by Mr. Joss and his wife and
500 shares held of record by Mr. Joss' wife.
(7) Includes 3,000 shares held of record by Smith Barney Shearson as IRA
Custodian for the benefit of Robert W. Lathrop. Also includes 1,000 shares
held of record by Edward Jones as Custodian for the benefit of Mr. Lathrop's
wife, Carol D. Lathrop.
(8) These shares are held of record jointly by Mr. Mitchell and his wife, Leigh
Ann Mitchell.
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<PAGE> 43
SUPERVISION AND REGULATION
The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the deposit
insurance funds of the FDIC and the banking system as a whole, and not for the
protection of the bank holding company stockholders or creditors. The banking
agencies have broad enforcement power over bank holding companies and banks
including the power to impose substantial fines and other penalties for
violations of laws and regulations.
The following description summarizes some of the laws to which we and the
bank are subject. We believe that we are in compliance in all material respects
with these laws and regulations.
FRONT RANGE CAPITAL CORPORATION
We are a bank holding company registered under the Bank Holding Company Act
of 1956 and are therefore subject to supervision, regulation and examination by
the Federal Reserve.
Restrictions on Dividends. It is the policy of the Federal Reserve that
bank holding companies pay cash dividends on common stock only out of income
available over the past year and only if prospective earnings retention is
consistent with the organization's expected future needs and financial
condition. The policy provides that bank holding companies should not maintain a
level of cash dividends that undermines the bank holding company's ability to
serve as a source of strength to its banking subsidiaries.
Source of Strength. Under Federal Reserve policy, a bank holding company is
expected to act as a source of financial strength to each of its banking
subsidiaries and commit resources to their support. Such support may be required
at times when, absent this Federal Reserve policy, a holding company may not be
inclined to provide it.
Bankruptcy. In the event of a bank holding company's bankruptcy under
Chapter 11 of the U.S. Bankruptcy Code, the bankruptcy trustee will be deemed to
have assumed and is required to cure immediately any deficit under any
commitment by the debtor holding company to any of the federal banking agencies
to maintain the capital of an insured depository institution, and any claim for
breach of such obligation will generally have priority over most other unsecured
claims.
Holding Company Activities and Financial Modernization. With certain
limited exceptions, bank holding companies are prohibited from acquiring direct
or indirect ownership or control of any voting shares of any company which is
not a bank or from engaging in any activities other than those of banking,
managing or controlling banks and certain other subsidiaries, or furnishing
services to or performing services for its subsidiaries.
An exception to these prohibitions allows the acquisition of companies
whose activities are closely related to banking or managing or controlling
banks. Some of the activities that have been determined by regulation to be
closely related to banking are making or servicing loans, performing certain
data processing services, acting as an investment or financial advisor to
certain investment trusts and investment companies, and providing securities
brokerage services. Other activities approved by the Federal Reserve include
consumer financial counseling, tax planning and tax preparation, futures and
options advisory services, check guaranty services, collection agency and credit
bureau services, and personal property appraisals.
However, the recently enacted Gramm-Leach-Bliley Act eliminated the
barriers to affiliations among banks, securities firms, insurance companies and
other financial service providers. The Gramm-Leach-Bliley Act permits bank
holding companies to become financial holding companies and join with securities
firms and insurance companies and engage in other activities that are financial
in nature. No regulatory approval will be required for a financial holding
company to acquire a company, other than a bank or savings association, engaged
in activities that are financial in nature or incidental to activities that are
financial in nature, as determined by the Federal Reserve.
Under the Gramm-Leach-Bliley Act, a bank holding company may become a
financial holding company if each of its subsidiary banks is well-capitalized,
well managed, and has at least a satisfactory rating under the Community
Reinvestment Act of 1977. The Gramm-Leach-Bliley Act defines "financial in
nature" to
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<PAGE> 44
include securities underwriting, dealing and market making; sponsoring mutual
funds and investment companies; insurance underwriting and agency; and merchant
banking activities. Subsidiary banks of a financial holding company must remain
well-capitalized and well managed in order to continue to engage in activities
that are financial in nature without regulatory actions or restrictions, which
could include divestiture of the financial in nature subsidiary or subsidiaries.
In addition, a financial holding company may not acquire a company that is
engaged in activities that are financial in nature unless each of its subsidiary
banks has a CRA rating of satisfactory or better.
Safe and Sound Banking Practices. Bank holding companies are not permitted
to engage in unsafe and unsound banking practices. Federal Reserve Regulations,
for example, generally require a holding company to give the Federal Reserve
prior notice of any redemption or repurchase of its own equity securities, if
the consideration to be paid, together with the consideration paid for any
repurchases or redemptions in the preceding year, is equal to 10% or more of its
consolidated net worth. The Federal Reserve may oppose the transaction if it
believes that the transaction would constitute an unsafe or unsound practice or
would violate any law or regulation. Depending upon the circumstances, the
Federal Reserve could take the position that paying a dividend would constitute
an unsafe or unsound banking practice.
The Federal Reserve has broad authority to prohibit activities of bank
holding companies and their nonbanking subsidiaries which represent unsafe and
unsound banking practices or which constitute violations of laws or regulations,
and can assess civil money penalties for certain activities conducted on a
knowing and reckless basis, if those activities caused a substantial loss to a
depository institution. The penalties can be as high as $1.0 million for each
day the activity continues.
Anti-Tying Restrictions. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other nonbanking services offered by a holding company or its
affiliates.
Capital Adequacy Requirements. The Federal Reserve has adopted a system
using risk-based capital guidelines to evaluate the capital adequacy of bank
holding companies. These regulations establish minimum capital standards in
relation to assets and off-balance sheet exposures as adjusted for credit risk.
The capital adequacy standards include consideration of interest rate risk in
the overall determination of the capital ratio, thus institutions with greater
interest rate risk must maintain greater capital. Under the guidelines, specific
categories of assets are assigned different risk weights, based generally on
their perceived credit risk. These risk weights are multiplied by corresponding
asset balances to determine a "risk-weighted" asset base.
The guidelines require a minimum total risk-based capital ratio of 8.0%, of
which at least 4.0% is required to consist of Tier 1 capital elements. Tier 1
capital generally consists of common equity, minority interests in equity
accounts of consolidated subsidiaries and certain perpetual preferred stock,
including the trust preferred securities up to certain limits, less intangibles,
but does not include unrecognized gains and losses on securities. Tier 2
capital, also known as supplementary capital, includes the allowance for loan
losses provided that the allowance does not exceed 1.25% of weighted risk
assets; certain perpetual preferred stock and subordinated non-convertible debt
and some intermediate perpetual preferred stock. Total capital is the sum of
Tier 1 and Tier 2 capital. As of September 30, 2000, our ratio of Tier 1 capital
to total risk-weighted assets was 5.18% and our ratio of total capital to total
risk-weighted assets was 6.12%.
In addition to the risk-based capital guidelines, the Federal Reserve uses
a leverage ratio as an additional tool to evaluate the capital adequacy of bank
holding companies. The leverage ratio is a company's Tier 1 capital divided by
its average total consolidated assets. Certain highly-rated bank holding
companies that are not experiencing substantial growth may maintain a minimum
leverage ratio of 3.0%, but other bank holding companies are required to
maintain a leverage ratio of at least 4.0%. As of September 30, 2000, our
leverage ratio was 4.69%.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria. The federal bank regulatory agencies may set capital
requirements for a particular banking organization that are higher than the
minimum ratios when circumstances warrant. Federal Reserve guidelines also
provide that banking organizations experiencing
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<PAGE> 45
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets.
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators
are required to take "prompt corrective action" to resolve problems associated
with insured depository institutions whose capital declines below certain
levels. In the event an institution becomes "undercapitalized," it must submit a
capital restoration plan. The capital restoration plan will not be accepted by
the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital restoration
plan up to a certain specified amount. Any guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank
is limited to the lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized or
fails to submit a capital restoration plan. For example, a bank holding company
controlling such an institution can be required to obtain prior Federal Reserve
approval of proposed dividends, or might be required to consent to a
consolidation or to divest the troubled institution or other affiliates.
Acquisitions by Bank Holding Companies. Every bank holding company must
obtain the prior approval of the Federal Reserve before it may acquire all or
substantially all of the assets of any bank, or ownership or control of any
voting shares of any bank, if after such acquisition it would own or control,
directly or indirectly, more than 5% of the voting shares of such bank. In
addition, a bank holding company is generally prohibited from engaging in, or
acquiring, direct or indirect control of the voting shares of any company
engaged in non-banking activities other than activities so closely related to
banking as to be a proper incident thereto. In approving bank acquisitions by
bank holding companies, the Federal Reserve is required to consider the
financial and managerial resources and future prospects of the bank holding
company and the banks concerned, the convenience and needs of the communities to
be served and various competitive factors.
Control Acquisitions. The Change in Bank Control Act prohibits a person or
group of persons from acquiring "control" of a bank holding company unless the
Federal Reserve has been notified and has not objected to the transaction. Under
a rebuttable presumption established by the Federal Reserve, the acquisition of
10% or more of a class of voting stock of a bank holding company with a class of
securities registered under the Exchange Act, would, under the circumstances set
forth in the presumption, constitute acquisition of control.
In addition, any entity is required to obtain the approval of the Federal
Reserve before acquiring 25% or more of our outstanding common stock, or
otherwise obtaining control or a "controlling influence" over us. If the
acquirer is a bank holding company, Federal Reserve approval is required before
the bank holding company can acquire 5% or more of our outstanding common stock.
HERITAGE BANK
The bank is a Colorado-chartered banking corporation. Its deposits are
insured by the FDIC. The bank is a member of the Federal Reserve and the FDIC
and accordingly is subject to supervision and regulation by the Federal Reserve,
the FDIC and the Colorado Division of Banking, the CDB. These regulations
subject the bank to special restrictions, requirements, potential enforcement
actions and periodic examination by the Federal Reserve and the CDB.
In addition to federal regulation, the bank must also register and file
periodic information with the CDB about the financial condition, operations,
management and intercompany relationships of us and our subsidiaries. The CDB
may also require any additional information necessary to assess whether we are
in compliance with the provisions of Colorado law, regulations, rules and
orders. The CDB may also conduct examinations of us and our subsidiaries.
Equivalence to National Bank Powers. In general, a Colorado-chartered bank
has the same rights and privileges that are or may be granted to national banks
domiciled in Colorado. Federal law and regulations
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<PAGE> 46
have limited the extent to which Colorado law and regulations may allow
state-chartered banks to engage in a broader range of activities than national
banks. Federal law provides that no state bank or subsidiary of a state bank may
engage as principal in any activity not permitted for national banks, unless the
institution complies with applicable capital requirements and the FDIC
determines that the activity poses no significant risk to the insurance fund. In
general, statutory restrictions on the activities of banks are aimed at
protecting the safety and soundness of depository institutions.
Financial Modernization. A national bank may establish a financial
subsidiary and engage in activities that are financial in nature, other than
insurance underwriting, insurance company portfolio investment, real estate
development, real estate investment, annuity issuance and merchant banking
activities. To do so, a bank must be well-capitalized, well-managed and have a
CRA rating of satisfactory or better. National banks with financial subsidiaries
must remain well-capitalized and well-managed in order to continue to engage in
activities that are financial in nature without regulatory actions or
restrictions which could include divestiture of the financial in nature
subsidiary or subsidiaries. In addition, a bank may not acquire a company that
is engaged in activities that are financial in nature unless the bank has a CRA
rating of satisfactory or better.
Although the powers of state-chartered banks are not specifically addressed
in the Gramm-Leach-Bliley Act, a Colorado chartered bank will have the same
powers as national banks through the parity provisions contained in Colorado's
banking laws.
Branching. Colorado law provides that a Colorado-chartered bank can
establish a branch anywhere in Colorado provided that the branch is approved in
advance by the CDB. The branch must also be approved by the Federal Reserve,
which will consider a number of factors, including financial history, capital
adequacy, earnings prospects, character of management, needs of the community
and consistency with corporate powers.
Restrictions on Transactions with Affiliates and Insiders. Certain
provisions of the Federal Reserve Act limit transactions between the bank and
its nonbanking affiliates, including us and any of our nonbanking subsidiaries,
and also require certain levels of collateral for loans to affiliated parties.
Advances to third parties which are collateralized by our securities or
obligations or the securities or obligations of any of our nonbanking
subsidiaries are also limited.
The Federal Reserve Act also generally requires that certain transactions
between the bank and its affiliates be on terms substantially the same, or at
least as favorable to the bank, as those prevailing at the time for comparable
transactions with or involving other nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal
stockholders and their related interests, collectively referred to as
"insiders", contained in the Federal Reserve Act and Regulation O apply to all
insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on all
loans to insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the Federal Reserve may
determine that a lesser amount is appropriate. Insiders are subject to
enforcement actions for knowingly accepting loans in violation of applicable
restrictions.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets. Most,
if not all, of our revenues are derived from dividends paid to us by the bank
and we anticipate that such dividends will continue to be our principal source
of operating funds, including funds used to pay dividends on the trust preferred
securities. Certain statutory and regulatory requirements apply to the bank's
payment of dividends. Capital adequacy requirements serve to limit the amount of
dividends that may be paid by the bank. Under federal law, the bank cannot pay a
dividend if, after paying the dividend, the bank will be undercapitalized. The
Federal Reserve may declare a dividend payment to be unsafe and unsound even
though the bank would continue to meet its capital requirements after the
dividend. Approval by the Federal Reserve and CDB is required if the total of
all dividends declared by a state bank exceeds the total of its net profits for
the year combined with its retained net profits of the preceding two years.
Because we are a legal entity separate and distinct from our subsidiaries,
our right to participate in the distribution of assets of any subsidiary upon
the subsidiary's liquidation or reorganization will be subject to
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the prior claims of the subsidiary's creditors. In the event of a liquidation or
other resolution of an insured depository institution, the claims of depositors
and other general or subordinated creditors are entitled to a priority of
payment over the claims of holders of any obligation of the institution to its
stockholders, including any depository institution holding company or any of its
stockholders or creditors.
Examinations. The Federal Reserve periodically examines and evaluates the
bank. Based on this evaluation, the Federal Reserve may revalue the assets of
the institution and require that it establish specific reserves to compensate
for the difference between the Federal Reserve-determined value and the book
value of such assets. The CDB also conducts examinations of state banks but may
accept the results of a federal examination in lieu of conducting an independent
examination.
Capital Adequacy Requirements. A state-chartered bank is subject to the
same capital adequacy requirements as a bank holding company is subject to,
including the requirement of a total risk-based capital ratio of 8.0%, 4.0% of
which is required to consist of Tier 1 capital elements. To be categorized as
"well-capitalized" under prompt corrective action regulations, Tier 1 capital to
risk-based assets must be 6%; total capital to risk-based assets must be 10%;
and the leverage ratio must be 3%. However, in the event a bank does not meet or
maintain capital adequacy requirements, it may be subject to "prompt corrective
action" measures as set forth below.
Corrective Measures for Capital Deficiencies. The federal banking
regulators are required to take "prompt corrective action" with respect to
capital-deficient institutions. Federal regulations define, for each capital
category, the levels at which institutions are "well-capitalized,"
"adequately-capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." In addition to requiring undercapitalized
institutions to submit a capital restoration plan, agency regulations contain
broad restrictions on certain activities of undercapitalized institutions
including asset growth, acquisitions, branch establishment and expansion into
new lines of business. With certain exceptions, an insured depository
institution is prohibited from making capital distributions, including
dividends, and is prohibited from paying management fees to control persons if
the institution would be undercapitalized after any such distribution or
payment.
As an institution's capital decreases, the Federal Reserve's enforcement
powers become more severe. A significantly undercapitalized institution is
subject to mandated capital raising activities, restrictions on interest rates
paid and transactions with affiliates, removal of management and other
restrictions. The Federal Reserve has only very limited discretion in dealing
with a critically undercapitalized institution and is virtually required to
appoint a receiver or conservator.
Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.
The bank currently is classified as "adequately capitalized" for purposes
of the Federal Reserve's prompt corrective action regulations. At September 30,
2000, the bank's Tier 1 capital to risk-based assets ratio was 7.38%, total
capital to risk-based assets ratio was 8.32% and its leverage ratio was 6.62%.
Deposit Insurance Assessments. The bank must pay assessments to the FDIC
for federal deposit insurance protection. The FDIC has adopted a risk-based
assessment system as required by federal law. Under this system, FDIC-insured
depository institutions pay insurance premiums at rates based on their risk
classification. Institutions assigned to higher risk classifications pay
assessments at higher rates than institutions that pose a lower risk. An
institution's risk classification is assigned based on its capital levels and
the level of supervisory concern the institution poses to the regulators. In
addition, the FDIC can impose special assessments in certain instances. The
current range of assessments is between 0% for healthy banks and 0.27% of
deposits for the riskiest banks.
The FDIC established a process for raising or lowering all rates for
insured institutions semi-annually if conditions warrant a change. Under this
system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, but only within a range of
five cents per $100 above or below the premium schedule adopted. Changes in the
rate schedule outside the five cent range above
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or below the current schedule can be made by the FDIC only after a full
rulemaking with opportunity for public comment.
Federal law aimed at recapitalizing the Savings Association Insurance Fund,
SAIF, and assuring the payment of the Financing Corporation's, FICO, bond
obligations, require insured banks to pay a portion of the interest due on bonds
that were issued by FICO to help shore up the ailing Federal Savings and Loan
Insurance Corporation in 1987. Payers are assessed pro rata for the FICO bond
obligations. For the second quarter of 2000, the FICO rates were .0202% of
deposits.
Enforcement Powers. The FDIC and the other federal banking agencies have
broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations and
supervisory agreements could subject us or our banking subsidiaries, as well as
officers, directors and other institution-affiliated parties of these
organizations, to administrative sanctions and potentially substantial civil
money penalties. The appropriate federal banking agency, including the FDIC in
certain circumstances, may appoint the FDIC as conservator or receiver for a
banking institution if any one or more of a number of circumstances exist,
including, without limitation, the fact that the banking institution is
undercapitalized and has no reasonable prospect of becoming adequately
capitalized; fails to become adequately capitalized when required to do so;
fails to submit a timely and acceptable capital restoration plan; or materially
fails to implement an accepted capital restoration plan. The Federal Reserve and
the CDB also have broad enforcement powers over the bank, including the power to
impose orders, remove officers and directors, impose fines and appoint
supervisors and conservators.
Community Reinvestment Act. The CRA and the corresponding regulations are
intended to encourage banks to help meet the credit needs of their service area,
including low and moderate income neighborhoods, consistent with the safe and
sound operations of the banks. These regulations also provide for regulatory
assessment of a bank's record in meeting the needs of its service area when
considering applications to establish branches, merger applications and
applications to acquire the assets and assume the liabilities of another bank.
Federal banking agencies are required to make public a rating of a bank's
performance under the CRA. In the case of a bank holding company, the CRA
performance record of the banks involved in the transaction are reviewed in
connection with the filing of an application to acquire ownership or control of
shares or assets of a bank or to merge with any other bank holding company. An
unsatisfactory record can substantially delay or block the transaction.
Consumer Laws and Regulations. In addition to the laws and regulations
discussed herein, the bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
These laws and regulations include the Truth in Lending Act, the Truth in
Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability
Act, the Equal Credit Opportunity Act, and the Fair Housing Act. These laws and
regulations mandate certain disclosure requirements and regulate the manner in
which financial institutions must deal with customers when taking deposits or
making loans to such customers. The bank must comply with the applicable
provisions of these consumer protection laws and regulations as part of its
ongoing customer relations.
INSTABILITY AND REGULATORY STRUCTURE
Various legislation, such as the Gramm-Leach-Bliley Act, which expanded the
powers of financial institutions, and proposals to overhaul the bank regulatory
system and limit the investments that a depository institution may make with
insured funds, is from time to time introduced in Congress. Such legislation may
change banking statutes and the environment in which we and the bank operate in
substantial and unpredictable ways. We cannot predict the ultimate effect that
the Gramm-Leach-Bliley Act will have or that potential legislation, if enacted,
or implementing regulations, would have upon ours or the bank's financial
condition or results of operations.
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EXPANDING ENFORCEMENT AUTHORITY
One of the major additional burdens imposed on the banking industry by
federal law is the increased ability of banking regulators to monitor the
activities of banks and their holding companies. In addition, the Federal
Reserve and FDIC are possessed of extensive authority to police unsafe or
unsound practices and violations of applicable laws and regulations by
depository institutions and their holding companies. For example, the FDIC may
terminate the deposit insurance of any institution which it determines has
engaged in an unsafe or unsound practice. The agencies can also assess civil
money penalties, issue cease and desist or removal orders, seek injunctions, and
publicly disclose such actions. Laws have expanded the authority of regulatory
agencies in recent years, and the agencies have not yet fully tested the limits
of their powers.
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policy of
the Federal Reserve, have a significant effect on the operating results of bank
holding companies and their subsidiaries. Among the means available to the
Federal Reserve to affect the money supply are open market operations in U.S.
government securities, changes in the discount rate on member bank borrowings,
and changes in reserve requirements against member bank deposits. These means
are used in varying combinations to influence overall growth and distribution of
bank loans, investments and deposits, and their use may affect interest rates
charged on loans or paid for deposits.
Federal Reserve monetary policies have materially affected the operating
results of commercial banks in the past and are expected to continue to do so in
the future. In view of the changing conditions in the national economy and in
the money markets, as well as the effect of actions by monetary and fiscal
authorities, including future monetary policies, the impact of such policies on
our and our subsidiaries' business and earnings cannot be predicted.
DESCRIPTION OF THE TRUST
The trust is a statutory business trust formed under the Delaware Business
Trust Act, a trust agreement executed by us and the trustees of the trust, and a
certificate of trust filed with the Delaware Secretary of State. The trust
agreement will be amended and restated in the form filed as an exhibit to the
registration statement of which this prospectus is a part. The trust agreement
will be qualified as an indenture under the Trust Indenture Act of 1939.
The holders of the trust preferred securities will own all of the issued
and outstanding trust preferred securities. We will acquire common securities in
an amount equal to at least 3% of the total capital of the trust and will own,
directly or indirectly, all of the issued and outstanding common securities. The
trust preferred securities together with the common securities are called the
trust securities. The trust exists for the purposes of:
- issuing the trust preferred securities to the public for cash;
- issuing its common securities to us in exchange for our capitalization of
the trust;
- investing the proceeds from the sale of the trust securities in an
equivalent amount of debentures; and
- engaging in other activities that are incidental to those listed above.
The rights of the holders of the trust securities are as set forth in the
trust agreement, the Delaware Business Trust Act and the Trust Indenture Act.
The trust agreement does not permit the trust to borrow money or make any
investment other than in the debentures. Other than with respect to the trust
securities, we have agreed to pay for all debts and obligations and all costs
and expenses of the trust and the offering of the trust preferred securities,
including the fees and expenses of the trustees and any income taxes, duties and
other governmental charges, and all costs and expenses related to these charges,
to which the trust may become subject, except for United States withholding
taxes that are properly withheld.
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The number of trustees of the trust will initially be five. Three of the
trustees will be administrative trustees, who are our employees or officers or
who are otherwise affiliated with us. The initial administrative trustees will
be Robert L. Beauprez, William A. Mitchell, Jr. and Alice M. Bier. A
biographical description of each may be found in "Management." The fourth
trustee will be Wilmington Trust Company, a Delaware banking corporation
unaffiliated with us, with its principal place of business in the State of
Delaware. Wilmington Trust Company will serve as Delaware trustee for purposes
of complying with the Delaware Business Trust Act and property trustee under the
trust agreement, debenture trustee under the indenture and guarantee trustee
under the guarantee agreement, all for purposes of complying with the Trust
Indenture Act. The trust has a term of approximately 31 years but may terminate
earlier as provided in the trust agreement.
The property trustee will hold the debentures for the benefit of the
holders of the trust securities and will have the power to exercise all rights,
powers and privileges as the holder of the debentures. In addition, the property
trustee will maintain exclusive control of a segregated noninterest-bearing
account to hold all payments made on the debentures for the benefit of the
holders of the trust securities. The property trustee will make payments of
distributions and payments on liquidation, redemption and otherwise to the
holders of the trust securities out of funds from the property account. The
guarantee trustee will hold the guarantee for the benefit of the holders of the
trust preferred securities. The administrative trustees will be authorized to
exercise all rights powers and privileges on behalf of the trust as provided by
the trust agreement.
DESCRIPTION OF THE TRUST PREFERRED SECURITIES
The trust preferred securities will be issued under the terms of the trust
agreement, which will include those stated in the trust agreement and those made
part of the trust agreement by the Trust Indenture Act. The following is a
summary of the material terms and provisions of the trust preferred securities
and the trust agreement.
GENERAL
The trust agreement authorizes the administrative trustees, on behalf of
the trust, to issue the trust securities. We will own all of the common
securities issued by the trust. The trust preferred securities will represent
preferred undivided beneficial interests in the assets of the trust, and the
holders of the trust preferred securities will be entitled to a preference upon
an event of default with respect to distributions and amounts payable on
redemption or liquidation over the common securities. The trust is not permitted
to issue any securities other than the trust securities or incur any other
indebtedness.
The trust preferred securities will rank equally, and payments on the trust
preferred securities will be made proportionally, with the common securities,
except as described under "Subordination of common securities" below.
The property trustee will hold legal title to the debentures in trust for
the benefit of the holders of the trust securities. We guarantee the payment of
distributions out of money held by the trust, and payments upon redemption of
the trust preferred securities or liquidation of the trust, to the extent the
trust has funds available for distribution. The guarantee agreement does not
cover the payment of any distribution or the liquidation amount when the trust
does not have sufficient funds available to make these payments.
DISTRIBUTIONS
Source of Distributions. The funds of the trust available for distribution
to holders of the trust preferred securities will be limited to payments made
under the debentures, which the trust will purchase with the proceeds from the
sale of the trust securities. Distributions will be paid through the property
trustee, who will hold the amounts received from our interest payments on the
debentures in the property account for the benefit of the holders of the trust
preferred securities. If we do not make interest payments on the debentures, the
property trustee will not have funds available to pay distributions on the trust
preferred securities.
Payment of Distributions. Distributions on the trust preferred securities
will be payable at the annual rate of 11% of the $8 stated liquidation amount,
payable quarterly on March 31, June 30, September 30, and
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December 31 of each year, to the holders of the trust preferred securities on
the relevant record dates. The record date will be the business day immediately
preceding the relevant distribution date. The first distribution date for the
trust preferred securities will be March 31, 2001.
Distributions will accumulate from the date of issuance, and the amount
payable for any period will be computed on the basis of a 360-day year of twelve
30-day months. If the distribution date is not a business day, then payment of
the distributions will be made on the next day that is a business day, without
any additional interest or other payment in respect of the delay. However, if
the next business day is in the next calendar year, payment of the distribution
will be made on the immediately preceding business day.
Extension Period. As long as no event of default under the indenture has
occurred and is continuing, we have the right to defer the payment of interest
on the debentures at any time for a period not exceeding 20 consecutive
quarters. However, no extension period may extend beyond December 28, 2030 or
end on a date other than an interest payment date, which dates are the same as
the distribution dates. If we defer the payment of interest, quarterly
distributions on the trust preferred securities will also be deferred during any
such extension period. Any deferred distributions under the trust preferred
securities will accumulate additional amounts at the annual rate of 11%,
compounded quarterly from the relevant distribution date. The term
"distributions" as used in this prospectus includes those accumulated amounts.
During an extension period, we may not:
- declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of our capital
stock, other than the reclassification of any class of our capital stock
into another class of capital stock, or allow any of our subsidiaries to
do the same with respect to their capital stock, other than the payment
of dividends or distributions to us;
- make any payment of principal, interest or premium on or repay,
repurchase or redeem any debt securities that rank equally with or junior
in interest to the debentures or allow any of our subsidiaries to do the
same;
- make any guarantee payments with respect to any other guarantee by us of
any other debt securities of any of our subsidiaries if the guarantee
ranks equally with or junior to the debentures other than payments under
the guarantee; or
- redeem, purchase or acquire less than all of the debentures or any of the
trust preferred securities.
After the termination of any extension period and the payment of all amounts
then due, we may elect to begin a new extension period. We do not currently
intend to exercise our right to defer distributions on the trust preferred
securities by extending the interest payment period on the debentures.
REDEMPTION OR EXCHANGE
The trust will redeem your trust preferred securities upon repayment of the
debentures at maturity or their earlier redemption. The trust will redeem your
trust preferred securities upon the same terms as which we redeem the
debentures.
Subject to the prior approval of the Federal Reserve, if required, we may
redeem the debentures prior to maturity:
- in whole at any time, or in part from time to time, on or after December
28, 2005; or
- in whole, but not in part, at any time within 90 days following the
occurrence of a Tax Event, an Investment Company Event or a Capital
Treatment Event, each as defined below.
Mandatory Redemption. Upon our repayment or redemption, in whole or in
part, of any debentures, whether on December 28, 2030 or earlier, the property
trustee will apply the proceeds to redeem the same amount of the trust
securities, upon not less than 30 days nor more than 60 days notice, at the
redemption price. The redemption price will equal 100% of the aggregate
liquidation amount of the trust securities plus
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accumulated but unpaid distributions and additional interest. Additional
interest is additional amounts needed to offset taxes, duties and other
governmental charges incurred by the trust. If less than all of the debentures
to be repaid or redeemed on a date of redemption, then the proceeds from the
repayment or redemption will be allocated to redemption of the trust preferred
securities and the common securities proportionally.
Distribution of Debentures. Upon prior approval of the Federal Reserve, if
required, we will have the right at any time to dissolve, wind-up or terminate
the trust and, after satisfaction of the liabilities of creditors of the trust
including amounts due and owing the trustees of the trust, cause the debentures
to be distributed directly to the holders of trust securities to liquidate the
trust. See "Liquidation distribution upon termination."
After the liquidation date set for any distribution of debentures in
exchange for trust preferred securities:
- those trust preferred securities will no longer be deemed to be
outstanding; and
- any certificates representing trust preferred securities will be deemed
to represent debentures with a principal amount equal to the liquidation
amount of those trust preferred securities, and bearing accrued and
unpaid interest in an amount equal to the accumulated and unpaid
distributions on the trust preferred securities until the certificates
are presented to the administrative trustees or their agent for transfer
or reissuance.
There can be no assurance as to the market prices for the trust preferred
securities or the debentures that may be distributed if a dissolution and
liquidation of the trust were to occur. The trust preferred securities that an
investor may purchase, or the debentures that an investor may receive on
dissolution and liquidation of the trust, may trade at a discount to the price
that the investor paid to purchase the trust preferred securities.
Redemption Upon a Tax Event, Investment Company Event or Capital Treatment
Event. If a Tax Event, an Investment Company Event or a Capital Treatment Event
occurs, we have the right to redeem the debentures in whole and thereby cause a
mandatory redemption of the trust securities in whole at the redemption price.
If one of these events occurs and we do not elect to redeem the debentures, or
to dissolve the trust and cause the debentures to be distributed to holders of
the trust securities, then the trust preferred securities will remain
outstanding and additional interest may be payable on the debentures.
"Tax Event" means the receipt by the trust and us of an opinion of counsel
experienced in such matters stating that there is more than an insubstantial
risk that:
- interest payable by us on the debentures is not, or within 90 days of the
date of the opinion will not be, deductible by us, in whole or in part,
for federal income tax purposes;
- the trust is, or will be within 90 days after the date of the opinion,
subject to federal income tax with respect to income received or accrued
on the debentures; or
- the trust is, or will be within 90 days after the date of opinion,
subject to more than an immaterial amount of other taxes, duties,
assessments or other governmental charges, as a result of any amendment
to any tax laws or regulations.
"Investment Company Event" means the receipt by the trust and us of an
opinion of counsel experienced in such matters to the effect that the trust is
or will be considered an "investment company" that is required to be registered
under the Investment Company Act, as a result of the occurrence of a change in
law or regulation or a change in interpretation or application of law or
regulation.
"Capital Treatment Event" means the receipt by the trust and us of an
opinion of counsel experienced in such matters to the effect that there is more
than an insubstantial risk of impairment of our ability to treat the trust
preferred securities as Tier 1 capital for purposes of the current capital
adequacy guidelines of the Federal Reserve, as a result of any amendment to any
law or regulation.
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For all of the events described above, we or the trust must request and
receive an opinion of counsel with regard to the event within a reasonable
period of time after we became aware of the possible occurrence of an event of
this kind.
REDEMPTION PROCEDURES
Trust preferred securities will be redeemed at the redemption price with
the applicable proceeds from our contemporaneous redemption of the debentures.
Redemptions of the trust preferred securities will be made and the redemption
price will be payable on each date of redemption only to the extent that the
trust has funds available for the payment of the redemption price.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the date of redemption to each holder of trust securities to be
redeemed at its registered address. Unless we default in payment of the
redemption price on the debentures, interest will cease to accrue on those
debentures called for redemption on and after the redemption date.
If the trust gives notice of redemption of its trust securities, then the
property trustee, to the extent it actually has received and holds such funds,
will irrevocably deposit with the depositary for the trust securities funds
sufficient to pay the aggregate redemption price and will give the depositary
for the trust securities irrevocable instructions and authority to pay the
redemption price to the holders upon surrender of their certificates evidencing
the trust securities. If the trust preferred securities are no longer in
book-entry form, the property trustee will deposit with the designated paying
agent for such trust preferred securities funds sufficient to pay the aggregate
redemption price and will give the paying agent irrevocable instructions and
authority to pay the redemption price to the holders upon surrender of their
certificates evidencing the trust preferred securities. Nevertheless,
distributions payable on or prior to the date of redemption for any trust
securities called for redemption will be payable to the holders of the trust
securities on the relevant record dates for the related distribution dates.
If notice of redemption has been given and we have deposited funds as
required, then on the date of the deposit all rights of the holders of the trust
securities called for redemption will cease, except the right to receive the
redemption price, no interest on the redemption price will accrue after the date
of redemption. The trust securities also will cease to be outstanding on the
date of the deposit.
If payment of the redemption price for trust securities called for
redemption is improperly withheld or refused and not paid by the trust, or by us
under the guarantee, distributions on the trust securities will continue to
accumulate at the applicable rate from the date of redemption originally
established by the trust for the trust securities to the date the redemption
price is actually paid. In this case, the actual payment date will be considered
the date fixed for redemption for purposes of calculating the redemption price.
See "Description of the Guarantee."
Payment of the redemption price on the trust preferred securities and any
distribution of debentures to holders of trust preferred securities will be made
to the applicable recordholders as they appear on the register for the trust
preferred securities on the relevant record date. The record date will be the
business day immediately preceding the date of redemption or liquidation date,
as applicable.
If fewer than all of the trust securities are to be redeemed, then the
aggregate liquidation amount of the trust securities to be redeemed will be
allocated proportionately between the common securities and the trust preferred
securities based upon the relative liquidation amounts. The particular trust
preferred securities to be redeemed will be selected by the property trustee
from the outstanding trust preferred securities not previously called for
redemption by a method the property trustee deems fair and appropriate. This
redemption may provide for the redemption of portions equal to $8 or a multiple
of $8 of the liquidation amount of the trust preferred securities. The property
trustee will promptly notify the registrar for the trust preferred securities in
writing of the trust preferred securities selected for redemption and, in the
case of any trust preferred securities selected for partial redemption, the
liquidation amount to be redeemed. For purposes of the trust agreement, unless
the context otherwise requires, all provisions relating to the redemption of
trust
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preferred securities will relate to the portion of the aggregate liquidation
amount of trust preferred securities which has been or is to be redeemed.
We may, at any time, purchase outstanding trust preferred securities if
allowable by applicable law, and if we are not exercising our right to defer
interest payments on the debentures.
SUBORDINATION OF COMMON SECURITIES
Payment of distributions on, and the redemption price of, the trust
preferred securities and common securities will be made based on the liquidation
amount of these securities. However, if an event of default under the indenture
has occurred and is continuing, no distributions on or redemption of the common
securities will be made unless:
- payment in full in cash of all accumulated and unpaid distributions,
including additional interest, if any is required, on all of the
outstanding trust preferred securities for all distribution periods
terminating on or before that time will have been made or provided for;
or
- in the case of payment of the redemption price, payment of the full
amount of the redemption price on all of the outstanding trust preferred
securities then called for redemption, will have been made or provided
for; and
all funds available to the property trustee will first be applied to the payment
in full in cash of all distributions on, or the redemption price of, the trust
preferred securities then due and payable.
In the case of the occurrence and continuance of any event of default under
the trust agreement resulting from an event of default under the indenture, we,
as holder of the common securities, will be deemed to have waived any right to
act with respect to that event of default under the trust agreement until the
effect of the event of default has been cured, waived or otherwise eliminated.
Until the event of default under the trust agreement has been so cured, waived
or otherwise eliminated, the property trustee will act solely on behalf of the
holders of the trust preferred securities and not on our behalf, and only the
holders of the trust preferred securities will have the right to direct the
property trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
We will have the right at any time to dissolve, wind-up or terminate the
trust and cause the debentures to be distributed to the holders of the trust
preferred securities subject to our receiving approval of the Federal Reserve,
if required.
In addition, the trust will automatically dissolve upon expiration of its
term and will dissolve earlier on the first to occur of:
- our bankruptcy, dissolution or liquidation;
- the distribution of a like amount of the debentures to the holders of the
trust securities, if we have given written direction to the property
trustee to terminate the trust;
- redemption of all of the trust preferred securities as described under
"Redemption or exchange -- Mandatory Redemption;" or
- the entry of a court order for the dissolution of the trust.
With the exception of a redemption as described under "Redemption or
Exchange -- Mandatory Redemption," if an early dissolution occurs, the trust
will be liquidated by the administrative trustees as expeditiously as they
determine to be possible. After satisfaction of liabilities to creditors of the
trust as provided by applicable law, the trustees will distribute to the holders
of trust securities debentures:
- in an aggregate stated principal amount equal to the aggregate stated
liquidation amount of the trust securities;
- with an interest rate identical to the distribution rate on the trust
securities; and
- with accrued and unpaid interest equal to accumulated and unpaid
distributions on the trust securities.
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However, if the property trustee determines that the distribution is not
practical, then the holders will be entitled to receive a proportionate amount
of the liquidation distribution. The liquidation distribution will be the amount
equal to the aggregate of the liquidation amount plus accumulated and unpaid
distributions to the date of payment. If the liquidation distribution can be
paid only in part because the trust has insufficient assets available to pay in
full the aggregate liquidation distribution, then the amounts payable directly
by the trust on the trust securities will be paid to us, as the holder of the
common securities, and the holders of the trust preferred securities on a
proportional basis based on liquidation amounts.
Under current United States federal income tax law and interpretations and
assuming that the trust is treated as a grantor trust, as is expected, a
distribution of the debentures should not be a taxable event to holders of the
trust preferred securities. Should there be a change in law, a change in legal
interpretation, a Tax Event or another circumstance, however, the distribution
could be a taxable event to holders of the trust preferred securities. See
"Federal Income Tax Consequences -- Receipt of debentures or cash upon
liquidation of the trust."
If we do not elect to redeem the debentures prior to maturity or to
liquidate the trust and distribute the debentures to holders of the trust
preferred securities, the trust preferred securities will remain outstanding
until the repayment of the debentures. If we elect to dissolve the trust and
thus cause the debentures to be distributed to holders of the trust preferred
securities in liquidation of the trust, we will continue to have the right to
shorten the maturity of the debentures. See "Description of the
Debentures -- General."
LIQUIDATION VALUE
The amount of the liquidation distribution payable on the trust preferred
securities in the event of any liquidation of the trust is $8 per trust
preferred security plus accumulated and unpaid distributions to the date of
payment, which may be in the form of a distribution of debentures having a
liquidation value and accrued interest of an equal amount. See "Liquidation
distribution upon termination."
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an event of default under the
trust agreement with respect to the trust preferred securities:
- the occurrence of an event of default under the indenture;
- a default by the trust in the payment of any distribution when it becomes
due and payable, and continuation of the default for a period of 30 days;
- a default by the trust in the payment of any redemption price of any of
the trust securities when it becomes due and payable;
- a default in the performance, or breach, in any material respect, of any
covenant or warranty of the trust in the trust agreement, other than
those defaults covered in the previous two points, and continuation of
the default or breach for a period of 60 days after there has been given,
by registered or certified mail, to the trustee(s) by the holders of at
least 25% in aggregate liquidation amount of the outstanding trust
preferred securities, a written notice specifying the default or breach
and requiring it to be remedied and stating that the notice is a "Notice
of Default" under the trust agreement; or
- the occurrence of events of bankruptcy or insolvency with respect to the
property trustee and our failure to appoint a successor property trustee
within 60 days following our receipt of written notice of or an
administrative trustee's actual knowledge of such events of bankruptcy or
insolvency.
Within five business days after the property trustee has actual knowledge
of the occurrence of any event of default, the property trustee will transmit
notice of the event of default to the holders of the trust preferred securities,
the administrative trustees and to us, unless the event of default has been
cured or waived. We and the administrative trustees are required to file
annually with the property trustee a certificate as to whether or
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not we are each in compliance with all the conditions and covenants applicable
to us and the administrative trustees, respectively, under the trust agreement.
If an event of default under the indenture has occurred and is continuing,
the trust preferred securities will have preference over the common securities
upon termination of the trust. The existence of an event of default under the
trust agreement does not entitle the holders of trust preferred securities to
accelerate the maturity of the trust preferred securities, unless the event of
default is caused by the occurrence of an event of default under the indenture
and both the indenture trustee and holders of at least 25% in principal amount
of the debentures fail to accelerate the maturity of the debentures.
REMOVAL OF THE TRUSTEES
Unless an event of default under the indenture has occurred and is
continuing, we may remove any trustee at any time. If an event of default under
the indenture has occurred and is continuing, only the holders of a majority in
liquidation amount of the outstanding trust preferred securities may remove the
property trustee or the Delaware trustee. The holders of the trust preferred
securities have no right to vote to appoint, remove or replace the
administrative trustees. These rights are vested exclusively with us as the
holder of the common securities. No resignation or removal of a trustee and no
appointment of a successor trustee will be effective until the successor trustee
accepts the appointment in accordance with the trust agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an event of default under the indenture has occurred and is
continuing, for the purpose of meeting legal requirements, we will have the
power to appoint at any time, and upon written request of the property trustee,
we will appoint, one or more persons or entities to act as a co-trustee, jointly
with the property trustee, of all or any part of the trust property, or as
separate trustee of any trust property. In either case these trustees will have
the powers that may be provided in the instrument of appointment, and will have
vested in them any property, title, right or power deemed necessary or
desirable, subject to the trust agreement. If an event of default under the
indenture has occurred and is continuing, the property trustee alone will have
power to make the appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Generally, a successor trustee may be any person meeting all of the
qualifications and eligibility standards to act as a trustee, including a
successor resulting from a merger or consolidation.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below. The trust may, at our request, with the consent of the
administrative trustees and without the consent of the holders of the trust
preferred securities, the property trustee or the Delaware trustee, undertake a
transaction listed above if the following conditions are met:
- the successor entity either (a) expressly assumes all of the obligations
of the trust with respect to the trust preferred securities, or (b)
substitutes for the trust preferred securities other securities having
substantially the same terms as the trust preferred securities so long as
the successor securities rank the same in priority as the trust preferred
securities with respect to distributions and payments upon liquidation,
redemption and otherwise;
- we expressly appoint a trustee of the successor entity possessing
substantially the same powers and duties as the property trustee in its
capacity as the holder of the debentures;
- the successor securities are listed or will be listed upon notification
of issuance, on any national securities exchange or other organization on
which the trust preferred securities are then listed, if any;
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- the merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not adversely affect the rights, preferences and
privileges of the holders of the trust preferred securities, including
any successor securities, in any material respect;
- the successor entity has a purpose substantially identical to that of the
trust;
- prior to the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, we have received an opinion from
independent counsel to the effect that (a) any transaction of this kind
does not adversely affect the rights, preferences and privileges of the
holders of the trust preferred securities, including any successor
securities, in any material respect, and (b) following the transaction,
neither the trust nor the successor entity will be required to register
as an "investment company;" and
- we own all of the common securities of the successor entity and guarantee
the obligations of the successor entity under the successor securities at
least to the extent provided by the guarantee.
Moreover, the trust may not, except with the consent of every record holder
of the trust preferred securities, enter into any transaction of this kind or
permit any other person to consolidate, amalgamate, merge with or into, or
replace the trust if the transaction would cause the trust or the successor
entity to be classified as other than a grantor trust for federal income tax
purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided below and under "Description of the
Guarantee -- Amendments and assignment" and as otherwise required by the Trust
Indenture Act and the trust agreement, the holders of the trust preferred
securities will have no voting rights.
The trust agreement may be amended from time to time by us and the
trustees, without the consent of the holders of the trust preferred securities,
in the following circumstances:
- with respect to acceptance of appointment by a successor trustee;
- to cure any ambiguity, correct or supplement any provisions in the trust
agreement that may be inconsistent with any other provision, or to make
any other provisions with respect to matters or questions arising under
the trust agreement, as long as the amendment is not inconsistent with
the other provisions of the trust agreement and does not have a material
adverse effect on the interests of any holder of trust securities; or
- to modify, eliminate or add to any provisions of the trust agreement if
necessary to ensure that the trust will be classified for federal income
tax purposes as a grantor trust at all times that any trust securities
are outstanding or to ensure that the trust will not be required to
register as an "investment company."
The trust agreement may be amended by us and the trustees with:
- the consent of the holders of a majority of the aggregate liquidation
amount of the outstanding trust securities; and
- receipt by the trustees of an opinion of counsel to the effect that the
amendment or the exercise of any power granted to the trustees in
accordance with the amendment will not affect the trust's status as a
grantor trust for federal income tax purposes or the trust's exemption
from status as an "investment company."
Without the consent of each holder of trust securities, the trust agreement
may not be amended to:
- change the amount or timing of any distribution on the trust securities
or otherwise adversely affect the amount of any distribution required to
be made on the trust securities as of a specified date, or
- restrict the right of a holder of trust securities to institute suit for
the enforcement of the payment on or after that date.
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As long as the property trustee holds any debentures, the trustees will
not:
- direct the time, method and place of conducting any proceeding for any
remedy available to the indenture trustee, or executing any trust or
power conferred on the property trustee with respect to the debentures;
- waive any past default that is waivable under the indenture;
- exercise any right to rescind or annul a declaration that the principal
of all the debentures will be due and payable; or
- consent to any amendment, modification or termination of the indenture or
the debentures, where the consent is required, without obtaining the
prior approval of the holders of a majority in aggregate liquidation
amount of all outstanding trust securities. However, where a consent
under the indenture requires the consent of each holder of the affected
debentures, no consent will be given by the property trustee without the
prior consent of each holder of the trust securities.
The trustees may not revoke any action previously authorized or approved by
a vote of the holders of the trust securities except by subsequent vote of the
holders of the trust securities. The property trustee will notify each holder of
record of trust securities of any notice of default it receives with respect to
the debentures. In addition to obtaining the foregoing approvals of the holders
of the trust securities, prior to taking any of the foregoing actions the
trustees must obtain an opinion of counsel experienced in these matters to the
effect that the trust will not be classified as an association taxable as a
corporation for federal income tax purposes on account of the action.
Any required approval of holders of trust securities may be given at a
meeting of holders of the trust securities convened for such purpose or pursuant
to written consent. The property trustee will cause a notice of any meeting at
which holders of the trust securities are entitled to vote, or of any matter
upon which action by written consent of the holders is to be taken, to be given
to each holder of record of trust securities.
No vote or consent of the holders of trust preferred securities will be
required for the trust to redeem and cancel its trust preferred securities in
accordance with the trust agreement.
Notwithstanding the fact that holders of trust preferred securities are
entitled to vote or consent under any of the circumstances described above, any
of the trust preferred securities that are owned by us, the trustees or any
affiliate of us or any trustee, will, for purposes of the vote or consent, be
treated as if they were not outstanding.
GLOBAL TRUST PREFERRED SECURITIES
The trust preferred securities will be represented by one or more global
trust preferred securities registered in the name of The Depository Trust
Company, New York, New York or its nominee. A global trust preferred security is
a security representing interests of more than one beneficial holder. Beneficial
interests in the global trust preferred securities will be shown on, and
transfers will be effected only through, records maintained by participants.
Participants are brokers, dealers, or others with accounts with DTC. Except as
described below, trust preferred securities in definitive form will not be
issued in exchange for the global trust preferred securities. See "Book-Entry
Issuance."
No global trust preferred security may be exchanged for trust preferred
securities registered in the names of persons other than DTC or its nominee
unless:
- DTC notifies the indenture trustee that it is unwilling or unable to
continue as a depositary for the global trust preferred security and we
are unable to locate a qualified successor depositary;
- we execute and deliver to the indenture trustee a written order stating
that we elect to terminate the book-entry system through DTC; or
- there shall have occurred and be continuing an event of default under the
indenture.
Any global trust preferred security that is exchangeable for definitive
certificates shall be registered in the names as DTC shall direct. It is
expected that the instructions will be based upon directions received by
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DTC with respect to ownership of beneficial interests in the global trust
preferred security. If trust preferred securities are issued in definitive form,
the trust preferred securities will be in denominations of $1,000 and integral
multiples of $1,000 and may be transferred or exchanged at the offices described
below.
Unless it is exchanged in whole or in part for the individual trust
preferred securities, a global trust preferred security may not be transferred
except as a whole by DTC to a nominee of DTC, by a nominee of DTC to DTC or
another nominee of DTC or by DTC or any nominee to a successor depositary or any
nominee of the successor.
Payments on global trust preferred securities will be made to DTC, as the
depositary for the global trust preferred securities. If the trust preferred
securities are issued in definitive form, distributions will be payable, the
transfer of the trust preferred securities will be registrable, and trust
preferred securities will be exchangeable, for trust preferred securities of
other denominations of a like aggregate liquidation amount, at the corporate
office of the property trustee, or at the offices of any paying agent or
transfer agent appointed by the administrative trustees. However, payment of any
distribution may be made at the option of the administrative trustees by check
mailed to the address of record of the persons entitled to the distribution or
by wire transfer.
Upon the issuance of one or more global trust preferred securities, and the
deposit of the global trust preferred security with or on behalf of DTC or its
nominee, DTC or its nominee will credit, on its book-entry registration and
transfer system, the respective aggregate liquidation amounts of the individual
trust preferred securities represented by the global trust preferred security to
the accounts of persons that have accounts with DTC. These accounts shall be
designated by the dealers, underwriters or agents with respect to the trust
preferred securities. Ownership of beneficial interests in a global trust
preferred security will be limited to persons or entities with an account with
DTC or who may hold interest through any person or entity with an account that
may hold interests through participants. With respect to interests of any person
or entity with an account with DTC, ownership of beneficial interests in a
global trust preferred security will be shown on, and the transfer of that
ownership will be effected only through, records maintained by the applicable
depositary or its nominee. With respect to persons or entities who hold an
interest in a global trust preferred security through a participant, the
interest and any transfer of the interest will be shown on the participant's
records. The laws of some states require that certain purchasers of securities
take physical delivery of these securities in definitive form. These laws may
impair the ability to transfer beneficial interests in a global trust preferred
security.
So long as DTC or another depositary, or its nominee, is the registered
owner of the global trust preferred security, it will be considered the sole
owner or holder of the trust preferred securities represented by the global
trust preferred security for all purposes under the trust agreement. Except as
described in this prospectus, owners of beneficial interests in a global trust
preferred security will not be entitled to have any of the individual trust
preferred securities represented by the global trust preferred security
registered in their names, will not receive or be entitled to receive physical
delivery of any of the trust preferred securities in definitive form, will not
receive notices from the trust, the trustees or us with respect to the trust
preferred securities and will not be considered the owners or holders of the
trust preferred securities under the trust agreement.
None of us, the property trustee, any paying agent or the securities
registrar for the trust preferred securities will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests of the global trust preferred security
representing the trust preferred securities or for maintaining, supervising or
reviewing any records relating to the beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any payment of the
liquidation amount or distributions in respect of a global trust preferred
security, immediately will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interest in the aggregate
liquidation amount of the global trust preferred security as shown on the
records of DTC or its nominee. We also expect that payments by participants to
owners of beneficial interests in the global trust preferred security held
through the participants will be governed by standing instructions and customary
practices, as is now the case with
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securities held for the accounts of customers in bearer form or registered in
"street name." The payments will be the responsibility of the participants. See
"Book-Entry Issuance."
PAYMENT AND PAYING AGENCY
Payments on the trust preferred securities will be made to DTC, which will
credit the relevant accounts of participants on the applicable distribution
dates, or, if any of the trust preferred securities are not held by DTC, the
payments will be made by check mailed to the address of the holder as listed on
the register of holders of the trust preferred securities. The paying agent for
the trust preferred securities will initially be the property trustee and any
co-paying agent chosen by the property trustee and acceptable to us and the
administrative trustees. The paying agent for the trust preferred securities may
resign as paying agent upon 30 days written notice to the administrative
trustees, the property trustee and us. If the property trustee no longer is the
paying agent for the trust preferred securities, the administrative trustees
will appoint a successor to act as paying agent. The successor must be a bank or
trust company acceptable to us and the property trustee.
REGISTRAR AND TRANSFER AGENT
The property trustee will act as the registrar and the transfer agent for
the trust preferred securities. Registration of transfers of trust preferred
securities will be effected without charge by or on behalf of the trust, but
upon payment of any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. The trust and its registrar and
transfer agent will not be required to register or cause to be registered the
transfer of trust preferred securities after they have been called for
redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The property trustee, until the occurrence and continuance of an event of
default under the trust agreement, undertakes to perform only the duties set
forth in the trust agreement. After an event of default under the trust
agreement, the property trustee must exercise the same degree of care and skill
as a prudent person exercises or uses in the conduct of its own affairs. The
property trustee is under no other obligation to exercise any of the powers
vested in it at the request of any holder of trust preferred securities unless
it is offered reasonable indemnity against costs, expenses and liabilities. If
no event of default under the trust agreement has occurred and is continuing and
the property trustee is required to decide between alternative causes of action,
construe ambiguous provisions in the trust agreement or is unsure of the
application of any provision of the trust agreement, and the matter is not one
on which holders of trust preferred securities are entitled to vote upon, then
the property trustee will take the action directed in writing by us. If the
property trustee is not so directed, then it will take the action it deems
advisable and in the best interests of the holders of the trust securities and
will have no liability except for its own bad faith, negligence or willful
misconduct.
MISCELLANEOUS
The administrative trustees are authorized and directed to conduct the
affairs of and to operate the trust in such a way that:
- the trust will not be deemed to be an "investment company" required to be
registered under the Investment Company Act;
- the trust will not be classified as an association taxable as a
corporation for federal income tax purposes; and
- the debentures will be treated as our indebtedness for federal income tax
purposes.
In this regard, we and the administrative trustees are authorized to take
any action not inconsistent with applicable law, the certificate of trust or the
trust agreement, that we and the administrative trustees determine to be
necessary or desirable for these purposes.
Holders of the trust preferred securities have no preemptive or similar
rights to subscribe for additional trust preferred securities. The trust
agreement and the trust preferred securities will be governed by Delaware law.
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DESCRIPTION OF THE DEBENTURES
Concurrently with the issuance of the trust preferred securities, the trust
will invest the proceeds from the sale of the trust securities in the debentures
issued by us. The debentures will be issued as unsecured debt under the
indenture between us and Wilmington Trust, as debenture trustee. The indenture
will be qualified under the Trust Indenture Act.
We urge prospective investors to read the form of the indenture, which is
filed as an exhibit to the Registration Statement of which this prospectus forms
a part.
GENERAL
The debentures will be limited in aggregate principal amount to $8,250,000,
this amount being the sum of the aggregate stated liquidation amounts of the
trust securities. If the underwriters exercise in full their option to purchase
additional trust preferred securities, this amount will be $9,485,000. The
debentures will bear interest at the annual rate of 11% of the principal amount.
The interest will be payable quarterly on March 31, June 30, September 30 and
December 31 of each year, beginning March 31, 2001, to the person in whose name
each debenture is registered at the close of business on the business day
immediately preceding the day interest is due. We anticipate that, until the
liquidation of the trust, if any, the debentures will be held in the name of the
property trustee in trust for the benefit of the holders of the trust
securities.
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months. Accrued interest that is not paid on
the applicable interest payment date will bear additional interest on the amount
due at the annual rate of 11%, compounded quarterly. The term "interest,"
includes quarterly interest payments, interest on quarterly interest payments
not paid on the applicable interest payment date and additional interest, as
applicable.
The debentures will mature on December 28, 2030, the stated maturity date.
We may shorten this date once at any time to any date not earlier than December
28, 2005, subject to the prior approval of the Federal Reserve, if required.
We will give notice to the indenture trustee and the holders of the
debentures no more than 180 days and no less than 90 days prior to the
effectiveness of any change in the stated maturity date. We will not have the
right to redeem the debentures from the trust until after December 28, 2005,
except if a Tax Event, an Investment Company Event or a Capital Treatment Event
has occurred.
The debentures will be unsecured and will rank junior to all of our senior
and subordinate indebtedness. Because we are a holding company, our right to
participate in any distribution of assets of any of our subsidiaries, upon any
subsidiary's liquidation or reorganization or otherwise, is subject to the prior
claim of creditors of the subsidiary. The debentures will, therefore, be
effectively subordinated to all existing and future liabilities of our
subsidiaries, and holders of debentures should look only to our assets for
payment. The indenture does not limit our ability to incur or issue secured or
unsecured senior and junior debt.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
As long as no event of default under the indenture has occurred and is
continuing, we have the right under the indenture to defer the payment of
interest on the debentures at any time for a period not exceeding 20 consecutive
quarters. However, no extension period may extend beyond the stated maturity of
the debentures or end on a date other than a date interest is normally due. At
the end of an extension period, we must pay all interest then accrued and
unpaid, together with interest thereon at the annual rate of 11% compounded
quarterly. During an extension period, interest will continue to accrue and
holders of debentures, or the holders of trust preferred securities if they are
then outstanding, will be required to accrue and recognize as income for federal
income tax purposes the accrued but unpaid interest amounts in the year in which
such amounts accrued.
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During an extension period, we may not:
- declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of our capital
stock, other than the reclassification of any class of our capital stock
into another class of capital stock, or allow any of our subsidiaries to
do the same with respect to their capital stock, other than the payment
of dividends or distributions to us;
- make, or allow any of our subsidiaries to make, any payment of principal,
interest or premium on or repay, repurchase or redeem any debt securities
that rank equally with or junior in interest to the debentures;
- make any guarantee payments with respect to any other guarantee by us of
any other debt securities of any of our subsidiaries if the guarantee
ranks equally with or junior to the debentures other than payments under
the guarantee; or
- redeem, purchase or acquire less than all of the debentures or any of the
trust preferred securities.
Prior to the termination of any extension period, so long as no event of
default under the indenture is continuing, we may further defer the payment of
interest subject to the above stated requirements. Upon the termination of any
extension period and the payment of all amounts then due, we may elect to begin
a new extension period at any time.
We must give the property trustee, the administrative trustees and the
indenture trustee notice of our election of an extension period at least two
business days prior to the earlier of:
- the next date on which distributions on the trust securities would have
been payable except for the election to begin an extension period; or
- the date we are required to give notice of the record date, or the date
the distributions are payable, to the American Stock Exchange, or other
applicable self-regulatory organization, or to holders of the trust
preferred securities, but in any event at least one business day prior to
the record date.
No other circumstances limit the number of times that we may elect to begin
an extension period.
ADDITIONAL SUMS TO BE PAID AS A RESULT OF ADDITIONAL TAXES
If the trust is required to pay any additional taxes, duties or other
governmental charges as a result of the occurrence of a Tax Event, we will pay
as additional amounts on the debentures any amounts which may be required so
that the net amounts received and retained by the trust after paying any
additional taxes, duties or other governmental charges will not be less than the
amounts the trust would have received had the additional taxes, duties or other
governmental charges not been imposed.
REDEMPTION OR EXCHANGE
Subject to prior approval of the Federal Reserve, if required, we may
redeem the debentures prior to maturity:
- in whole at any time, or in part from time to time, on or after December
28, 2005; or
- in whole, but not in part, at any time within 90 days following the
occurrence of a Tax Event, an Investment Company Event or a Capital
Treatment Event;
In each case we will pay a redemption price equal to the accrued and unpaid
interest on the debentures so redeemed to the date fixed for redemption, plus
100% of the principal amount of the debentures.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of debentures to be redeemed
at its registered address. Redemption of less than all outstanding debentures
shall be effected proportionately, by lot or in any other manner deemed to be
fair by the indenture trustee. Unless we default in payment of the redemption
price for the debentures, on and
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after the redemption date interest shall cease to accrue on the debentures or
portions thereof called for redemption.
The debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of the Trust Preferred
Securities -- Liquidation distribution upon termination," under certain
circumstances and with the Federal Reserve's approval, the debentures may be
distributed to the holders of the trust preferred securities in liquidation of
the trust after satisfaction of liabilities to creditors of the trust. If this
occurs, we will use our best efforts to list the debentures on the American
Stock Exchange or other stock exchange or national quotation service, on which
the trust preferred securities are then listed, if any. There can be no
assurance as to the market price of any debentures that may be distributed to
the holders of trust preferred securities.
RESTRICTIONS ON PAYMENTS
Upon the occurrence of any of the following events, we will not make the
payments set forth below:
- an event of default is continuing under the indenture;
- we are in default with respect to our obligations under the guarantee; or
- we have given notice of our election to extend an interest payment period
regarding the debentures and the notice has not been rescinded or the
extension period is continuing.
If any of the above events have occurred, we will not:
- declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of our
capital stock other than the reclassification of any class of our capital
stock into another class of capital stock, or allow any of our
subsidiaries to do the same with respect to their capital stock, other
than the payment of dividends or distributions to us;
- make any payment of principal, interest or premium on, or repay or
repurchase or redeem any of our debt securities that rank equally with or
junior to the debentures or allow any of our subsidiaries to do the same;
- make any guarantee payments with respect to any guarantee by us of the
debt securities of any of our subsidiaries if the guarantee ranks equally
with or junior to the debentures other than payments under the guarantee;
or
- redeem, purchase or acquire less than all of the debentures or any of the
trust preferred securities.
SUBORDINATION
Under the indenture, the debentures are subordinated and junior in right of
payment to all of our senior and subordinated debt. Upon any payment or
distribution of assets to our creditors upon any liquidation, dissolution,
winding up, reorganization, assignment for the benefit of creditors, marshaling
of assets or any bankruptcy, insolvency, debt restructuring or similar
proceedings in connection with any of our insolvency or bankruptcy proceedings,
the holders of senior and subordinated debt will first be entitled to receive
payment in full of principal, premium and interest before the holders of
debentures will be entitled to receive or retain any payment on the debentures.
In the event of the acceleration of the maturity of any debentures, the
holders of all of our senior and subordinated debt outstanding at the time of
the acceleration will also be entitled to first receive payment in full of all
amounts due, including any amounts due upon acceleration, before the holders of
the debentures will be entitled to receive or retain any payment in respect of
the principal of or interest on the debentures.
No payments of principal or interest in respect of the debentures may be
made if there has occurred and is continuing a default in any payment with
respect to any of our senior or subordinated debt or an event of
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default with respect to any of our senior or subordinated debt resulting in the
acceleration of the maturity of the debentures, or if any judicial proceeding is
pending with respect to any default.
The term "debt" means, with respect to any entity, whether recourse is to
all or a portion of the assets of an entity and whether or not contingent:
- every obligation of the entity for money borrowed;
- every obligation of the entity evidenced by bonds, debentures, notes or
other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses;
- every reimbursement obligation of the entity with respect to letters of
credit, bankers' acceptances or similar facilities issued for the account
of the entity;
- every obligation of the entity issued or assumed as the deferred purchase
price of property or services, excluding trade accounts payable or
accrued liabilities arising in the ordinary course of business;
- every capital lease obligation of the entity; and
- every obligation of the type referred to in the first five points of
another person and all dividends of another person the payment of which,
in either case, the entity has guaranteed or is responsible or liable,
directly or indirectly, as obligor or otherwise.
The term "senior debt" means, with respect to us, the principal of and
premium and interest, including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to us whether or not a
claim for post-petition interest is allowed in the proceeding, on debt, whether
incurred on or prior to the date of the indenture or incurred after the date.
Senior debt also includes all indebtedness, whether incurred on or prior to the
date of the indenture or thereafter incurred, for claims in respect of
derivative products such as interest and foreign exchange rate contracts,
commodity contracts and similar arrangements. However, senior debt does not
include:
- any debt where it is provided in the instrument creating the debt that
the obligations are not superior in right of payment to the debentures or
to other debt which is equal with, or subordinated to, the debentures;
- any of our debt that when incurred and without respect to any election
under the federal bankruptcy laws was without recourse to us;
- any debt of ours to any of our subsidiaries;
- any debt to any of our employees;
- any debt that by its terms is subordinated to trade accounts payable or
accrued liabilities arising in the ordinary course of business to the
extent provided in the indenture; and
- debt which constitutes subordinated debt.
The term "subordinated debt" means, with respect to us, the principal of,
premium and interest, including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to us whether or not the
claim for post-petition interest is allowed in the proceeding, on debt.
Subordinated debt includes debt incurred on or prior to the date of the
indenture or thereafter incurred, which is by its terms expressly provided to be
junior and subordinate to other debt of ours, other than the debentures.
However, subordinated debt does not include:
- any of our debt which when incurred and without respect to any election
under the federal bankruptcy laws, was without recourse to us;
- any debt of ours to any of our subsidiaries;
- any debt to any of our employees;
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- any debt which by its terms is subordinated to trade accounts payable or
accrued liabilities arising in the ordinary course of business to the
extent provided in the indenture;
- debt which constitutes senior debt; and
- any debt of ours under debt securities or guarantees of debt securities
initially issued to any trust, or a trustee of a trust, partnership or
other entity affiliated with us that is, directly or indirectly, a
financing vehicle of ours in connection with the issuance by that entity
of preferred securities or other securities which are intended to qualify
for "Tier 1" capital treatment.
We expect from time to time to incur additional indebtedness, and there is
no limitation on the amount we may incur. At September 30, 2000, we had
consolidated senior debt and subordinated debt of approximately $22.2 million,
excluding deposits.
PAYMENT AND PAYING AGENTS
Generally, payment of principal and interest on the debentures will be made
at the office of the indenture trustee in Wilmington, Delaware. However, we have
the option to make payment of any interest by (i) check mailed to the address of
the person entitled to payment at the address listed in the register of holders
of the debentures, or (ii) wire transfer to an account maintained by the person
entitled thereto as specified in the register of holders of the debentures,
provided that proper transfer instructions have been received by the regular
record date. Payment of any interest on debentures will be made to the person in
whose name the debenture is registered at the close of business on the regular
record date for the interest payment, except in the case of defaulted interest.
We may at any time designate additional paying agents for the debentures or
rescind the designation of any paying agent for the debentures. However, we will
at all times be required to maintain a paying agent in Wilmington, Delaware, and
each place of payment for the debentures.
Any moneys deposited with the debenture trustee or any paying agent for the
debentures, or then held by us in trust, for the payment of the principal of or
interest on the debentures and remaining unclaimed for two years after the
principal or interest has become due and payable, will be repaid to us on
December 28 of each year. If we hold any of this money in trust, then it will be
discharged from the trust to us and the holder of the debenture will thereafter
look, as a general unsecured creditor, only to us for payment.
REGISTRAR AND TRANSFER AGENT
The debenture trustee will act as the registrar and the transfer agent for
the debentures. Debentures may be presented for registration of transfer, with
the form of transfer endorsed on the debentures, or a satisfactory written
instrument of transfer, duly executed, at the office of the registrar. Provided
that we maintain a transfer agent in Wilmington, Delaware, we may rescind the
designation of any transfer agent or approve a change in the location through
which any transfer agent acts. We may at any time designate additional transfer
agents with respect to the debentures.
In the event of any redemption, neither we nor the debenture trustee will
be required to (i) issue, register the transfer of or exchange debentures during
a period beginning at the opening of business 15 days before the day of
selection for redemption of debentures and ending at the close of business on
the day of mailing of the relevant notice of redemption, or (ii) transfer or
exchange any debentures so selected for redemption, except, in the case of any
debentures being redeemed in part, any portion not to be redeemed.
MODIFICATION OF INDENTURE
We and the debenture trustee may, from time to time without the consent of
the holders of the debentures, amend, waive or supplement the indenture for
purposes which do not materially adversely affect the rights of the holders of
the debentures. Other changes may be made by us and the debenture trustee with
the consent of the holders of a majority in principal amount of the outstanding
debentures. However, without
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the consent of the holder of each outstanding debenture affected by the proposed
modification, no modification may:
- extend the fixed maturity of the debentures;
- reduce the principal amount or the rate or extend the time of payment of
interest; or
- reduce the percentage of principal amount of debentures required to amend
the indenture.
As long as any of the trust preferred securities remain outstanding, no
modification may be made that requires the consent of the holders of the
debentures, no termination of the indenture may occur, and no waiver of any
event of default under the indenture may be effective, without the prior consent
of the holders of a majority of the aggregate liquidation amount of the trust
preferred securities.
DEBENTURE EVENTS OF DEFAULT
The indenture provides that any one or more of the following described
events with respect to the debentures that has occurred and is continuing
constitutes an event of default under the indenture:
- failure for 30 days to pay any interest on the debentures when due,
subject to deferral of any due date in the case of an extension period;
- failure to pay any principal on the debentures when due whether at
maturity, upon redemption by declaration or otherwise;
- failure to observe or perform in any material respect other covenants
contained in the indenture for 90 days after written notice to us from
the indenture trustee or the holders of at least 25% in aggregate
outstanding principal amount of the debentures; or
- our bankruptcy, insolvency or reorganization or dissolution of the trust.
The holders of a majority of the aggregate outstanding principal amount of
the debentures have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the debenture trustee. The debenture
trustee, or the holders of at least 25% in aggregate outstanding principal
amount of the debentures, may declare the principal due and payable immediately
upon an event of default under the indenture. The holders of a majority of the
outstanding principal amount of the debentures may annul the declaration and
waive the default if the default has been cured and a sum sufficient to pay all
matured installments of interest and principal due otherwise than by
acceleration, has been deposited with the indenture trustee. The holders may not
annul the declaration and waive a default if the default is the non-payment of
the principal of the debentures which has become due solely by the acceleration.
Should the holders of the debentures fail to annul the declaration and waive the
default, the holders of at least 25% in aggregate liquidation amount of the
trust preferred securities will have this right.
If an event of default under the indenture has occurred and is continuing,
the debenture trustee will have the right to declare the principal of and the
interest on the debentures, and any other amounts payable under the indenture,
to be due and payable and to enforce its other rights as a creditor with respect
to the debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE TRUST PREFERRED SECURITIES
If an event of default under the indenture has occurred and is continuing
and the event is attributable to our failure to pay interest on or principal of
the debentures on the payment date on which the payment is due and payable, then
a holder of trust preferred securities may initiate a direct action against us.
In connection with a direct action, we will have a right to counter the amount
of the direct action to the extent of any payment made by us to the holder of
trust preferred securities with respect to the direct action. We may not amend
the indenture to remove the foregoing right to bring a direct action without the
prior written consent of all of the holders of the trust preferred securities.
If the right to bring a direct action is removed, the trust may become subject
to the reporting obligations under the Exchange Act.
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The holders of the trust preferred securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the debentures unless there has been an event of
default under the trust agreement.
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
We may not consolidate with or merge into any other entity or convey or
transfer our properties and assets substantially as an entirety to any entity,
and no entity may be consolidated with or merged into us or sell, convey,
transfer or otherwise dispose of its properties and assets substantially as an
entirety to us, unless:
- if we consolidate with or merge into another person or convey or transfer
our properties and assets substantially as an entirety to any person, the
successor person is organized under the laws of the United States or any
State or the District of Columbia, and the successor person expressly
assumes by supplemental indenture our obligations on the debentures, or
substitutes securities having substantially similar terms;
- immediately after giving effect, no event of default under the indenture,
and no event which, after notice or lapse of time, or both, would become
an event of default under the indenture, has occurred and is continuing;
and
- other conditions as prescribed in the indenture are met.
SATISFACTION AND DISCHARGE
The indenture will cease to be of further effect and we will be deemed to
have satisfied and discharged the indenture when all debentures not previously
delivered to the debenture trustee for cancellation:
- have become due and payable, or
- will become due and payable at their stated maturity within one year or
are to be called for redemption within one year, and we deposit or cause
to be deposited with the indenture trustee funds, in trust, for the
purpose and in an amount sufficient to pay and discharge the entire
indebtedness on the debentures not previously delivered to the indenture
trustee for cancellation, for the principal and interest due to the date
of the deposit or to the stated maturity or redemption date, as the case
may be.
We may still be required to provide officers' certificates, opinions of
counsel and pay fees and expenses due after these events occur.
GOVERNING LAW
The indenture and the debentures will be governed by and construed in
accordance with the laws of the State of Colorado.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The debenture trustee is subject to all the duties and responsibilities
specified with respect to a debenture trustee under the Trust Indenture Act. The
debenture trustee is under no other obligation to exercise any of the powers
vested in it by the indenture at the request of any holder of debentures, unless
offered reasonable indemnity by the holder against the costs, expenses and
liabilities which might be incurred. The debenture trustee is not required to
expend or risk its own funds or otherwise incur personal financial liability in
the performance of its duties if the indenture trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
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MISCELLANEOUS
In the indenture, we have agreed for so long as trust preferred securities
remain outstanding:
- to maintain directly or indirectly 100% ownership of the common
securities of the trust except that certain successors that are permitted
pursuant to the indenture may succeed to our ownership of the common
securities;
- not to voluntarily terminate, wind up or liquidate the trust without
prior approval of the Federal Reserve, if required;
- to use our reasonable efforts to cause the trust (a) to remain a business
trust, except in connection with a distribution of debentures, the
redemption of all of the trust securities of the trust or mergers,
consolidations or amalgamations, each as permitted by the trust
agreement; and (b) to otherwise continue not to be treated as an
association taxable as a corporation or partnership for federal income
tax purposes; and
- to use our reasonable efforts to cause each holder of trust securities to
be treated as owning an individual beneficial interest in the debentures.
BOOK-ENTRY ISSUANCE
GENERAL
DTC will act as securities depositary for the trust preferred securities
and may act as securities depositary for all of the debentures in the event of
the distribution of the debentures to the holders of trust preferred securities.
Except as described, the trust preferred securities will be issued only as
registered securities in the name of DTC's nominee, Cede & Co. One or more
global trust preferred securities will be issued for the trust preferred
securities and will be deposited with DTC or held by a custodian for DTC.
DTC is a limited purpose trust company organized under New York banking
law, a "banking organization" within the meaning of the New York banking law, a
member of the Federal Reserve, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code, and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC holds securities that its
participants deposit with DTC. DTC also facilitates the settlement among
participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. DTC is owned by a number of its direct participants and by the
New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Access to the DTC system is
also available to indirect participants, such as securities brokers and dealers,
banks and trust companies that clear through or maintain custodial relationships
with direct participants, either directly or indirectly. The rules applicable to
DTC and its participants are on file with the SEC.
Purchases of trust preferred securities within the DTC system must be made
by or through direct participants, which will receive a credit for the trust
preferred securities on DTC's records. The beneficial ownership interest of each
actual purchaser of each trust preferred security is in turn to be recorded on
the direct and indirect participant's records. Beneficial owners will not
receive written confirmation from DTC of their purchases, but beneficial owners
are expected to receive written confirmations providing details of the
transactions, as well as periodic statements of their holdings, from the direct
or indirect participants through which the beneficial owners purchased trust
preferred securities. Transfers of ownership interests in the trust preferred
securities are to be accomplished by entries made on the books of participants
acting on behalf of beneficial owners. Beneficial owners will not receive
certificates representing their ownership interest in trust preferred
securities, except if use of the book-entry system for the trust preferred
securities is discontinued.
DTC will have no knowledge of the actual beneficial owners of the trust
preferred securities; DTC's records reflect only the identity of the direct
participants to whose accounts the trust preferred securities are
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credited, which may or may not be the beneficial owners. The participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that we believe to be accurate, but we and the
trust assume no responsibility for the accuracy thereof. Neither we nor the
trust have any responsibility for the performance by DTC or its participants of
their respective obligations as described in this prospectus or under the rules
and procedures governing their respective operations.
NOTICES AND VOTING
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct and
indirect participants to beneficial owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Redemption notices will be sent to Cede & Co. as the registered holder of
the trust preferred securities. If fewer than all of the trust preferred
securities are being redeemed, the amount to be redeemed will be determined in
accordance with the trust agreement.
Although voting with respect to the trust preferred securities is limited
to the holders of record of the trust preferred securities, in those instances
in which a vote is required, neither DTC nor Cede & Co. will itself consent or
vote with respect to trust preferred securities. Under its usual procedures, DTC
would mail an omnibus proxy to the property trustee as soon as possible after
the record date. The omnibus proxy assigns Cede & Co.'s consenting or voting
rights to those direct participants to whose accounts the trust preferred
securities are credited on the record date.
DISTRIBUTION FUNDS
The property trustee will make distribution payments on the trust preferred
securities to DTC. DTC's practice is to credit direct participants' accounts on
the relevant payment date in accordance with their respective holdings shown on
DTC's records unless DTC has reason to believe that it will not receive payments
on the payment date. Payments by participants to beneficial owners will be
governed by standing instructions and customary practices and will be the
responsibility of the participant and not of DTC, the property trustee, the
trust or us, subject to any statutory or regulatory requirements as may be in
effect from time to time. Payment of distributions to DTC is the responsibility
of the property trustee, disbursement of the payments to direct participants is
the responsibility of DTC, and disbursements of the payments to the beneficial
owners is the responsibility of direct and indirect participants.
SUCCESSOR DEPOSITORIES AND TERMINATION OF BOOK-ENTRY SYSTEM
DTC may discontinue providing its services with respect to any of the trust
preferred securities at any time by giving reasonable notice to the property
trustee and to us. If no successor securities depositary is obtained, definitive
trust preferred securities representing the trust preferred securities are
required to be printed and delivered. We also have the option to discontinue use
of the system of book-entry transfers through DTC or any successor depositary.
After an event of default under the indenture, the holders of a majority in
liquidation amount of trust preferred securities may determine to discontinue
the system of book-entry transfers through DTC. In these events, definitive
certificates for the trust preferred securities will be printed and delivered.
DESCRIPTION OF THE GUARANTEE
The guarantee agreement will be executed and delivered by us concurrently
with the issuance of the trust preferred securities for the benefit of the
holders of the trust preferred securities. The guarantee agreement will be
qualified as an indenture under the Trust Indenture Act. Wilmington Trust, the
guarantee trustee, will act as trustee for purposes of complying with the
provisions of the Trust Indenture Act, and will also hold the
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guarantee for the benefit of the holders of the trust preferred securities.
Prospective investors are urged to read the form of the trust preferred
securities guarantee agreement, which has been filed as an exhibit to the
Registration Statement of which this prospectus forms a part.
GENERAL
We agree to pay in full on a subordinated basis, to the extent described in
the guarantee agreement, the guarantee payments to the holders of the trust
preferred securities, as and when due, regardless of any defense or counterclaim
that the trust may have or assert other than the defense of payment.
The following payments with respect to the trust preferred securities are
called the guarantee payments and, to the extent not paid or made by the trust
and to the extent that the trust has funds available for those distributions,
will be subject to the guarantee:
- any accumulated and unpaid distributions required to be paid on the trust
preferred securities;
- the redemption price for any trust preferred securities called for
redemption; and
- upon a voluntary or involuntary dissolution, winding up or liquidation of
the trust, other than in connection with the distribution of debentures
to the holders of trust preferred securities or a redemption of all of
the trust preferred securities, the lesser of:
(a) the amount of the liquidation distribution; or
(b) the amount of assets of the trust remaining available for
distribution to holders of trust preferred securities in liquidation of
the trust.
We may satisfy our obligations to make a guarantee payment by making a
direct payment of the required amounts to the holders of the trust preferred
securities or by causing the trust to pay the amounts to the holders.
The guarantee agreement is a guarantee, on a subordinated basis, of the
guarantee payments, but the guarantee only applies to the extent the trust has
funds available for those distributions. If we do not make interest payments on
the debentures purchased by the trust, the trust will not have funds available
to make the distributions and will not pay distributions on the trust preferred
securities.
STATUS OF THE GUARANTEE
The guarantee constitutes our unsecured obligation that ranks junior in
right of payment to all of our senior and subordinated debt in the same manner
as the debentures. We expect to incur additional indebtedness in the future,
although we have no specific plans in this regard presently, and neither the
indenture nor the trust agreement limits the amounts of the obligations that we
may incur.
The guarantee constitutes a guarantee of payment and not of collection. If
we fail to make guarantee payments when required, holders of trust preferred
securities may institute a legal proceeding directly against us to enforce their
rights under the guarantee without first instituting a legal proceeding against
any other person or entity.
The guarantee will not be discharged except by payment of the guarantee
payments in full to the extent not paid by the trust or upon distribution of the
debentures to the holders of the trust preferred securities. Because we are a
holding company, our right to participate in any distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization or otherwise is
subject to the prior claims of creditors of that subsidiary, except to the
extent we may be recognized as a creditor of that subsidiary. Our obligations
under the guarantee, therefore, will be effectively subordinated to all existing
and future liabilities of our subsidiaries, and claimants should look only to
our assets for payments under the guarantee.
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AMENDMENTS AND ASSIGNMENT
Except for any changes that do not materially adversely affect the rights
of holders of the trust preferred securities, in which case no vote will be
required, the guarantee may be amended only with the prior approval of the
holders of a majority of the aggregate liquidation amount of the outstanding
trust preferred securities. However, any amendments to the guarantee that affect
the rights of the trust preferred guarantee trustee must be approved by the
guarantee trustee.
EVENTS OF DEFAULT; REMEDIES
An event of default under the guarantee agreement will occur upon our
failure to make any required guarantee payments or to perform any other
obligations under the guarantee. The holders of a majority in aggregate
liquidation amount of the trust preferred securities have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the guarantee trustee in respect of the guarantee and may direct the exercise
of any power conferred upon the guarantee trustee under the guarantee agreement.
Any holder of trust preferred securities may initiate a legal proceeding
directly against us to enforce its rights under the guarantee without first
instituting a legal proceeding against the trust, the guarantee trustee or any
other person or entity.
We are required to provide annually to the guarantee trustee a certificate
as to whether or not we are in compliance with all of the conditions and
covenants applicable to us under the guarantee agreement.
TERMINATION OF THE GUARANTEE
The guarantee will terminate and be of no further force and effect upon:
- full payment of the redemption price of the trust preferred securities;
- full payment of the amounts payable upon liquidation of the trust; or
- distribution of the debentures to the holders of the trust preferred
securities.
If at any time any holder of the trust preferred securities must restore
payment of any sums paid under the trust preferred securities or the guarantee,
the guarantee will continue to be effective or will be reinstated with respect
to such amounts.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The guarantee trustee, other than during the occurrence and continuance of
our default in performance of the guarantee, undertakes to perform only those
duties as are specifically set forth in the guarantee agreement. When an event
of default has occurred and is continuing, the guarantee trustee must exercise
the same degree of care and skill as a prudent person would exercise or use in
the conduct of his or her own affairs. Subject to those provisions, the
guarantee trustee is under no obligation to exercise any of the powers vested in
it by the guarantee at the request of any holder of any trust preferred
securities unless it is offered reasonable indemnity against the costs, expenses
and liabilities that might be incurred thereby.
EXPENSE AGREEMENT
We and the trust will enter into an Agreement as to Expenses and
Liabilities whereby we agree to irrevocably and unconditionally guarantee to
each person or entity to whom the trust becomes indebted or liable, the full
payment of any costs, expenses or liabilities of the trust, other than
obligations of the trust to pay to the holders of the trust preferred securities
or other similar interests in the trust of the amounts due to those holders.
Third party creditors of the trust may proceed directly against us under the
expense agreement, regardless of whether they had notice of the expense
agreement.
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GOVERNING LAW
The guarantee agreement will be governed by the laws of the State of
Colorado.
RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES,
THE DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
We and the trust believe that, taken together, our obligations under the
indenture, the trust agreement, the expense agreement and the guarantee
agreement provide, in the aggregate, a full, irrevocable and unconditional
guarantee, on a subordinated basis, of payment of distributions and other
amounts due on the trust preferred securities. No single document standing alone
or operating in conjunction with fewer than all of the other documents
constitutes a guarantee. It is only the combined operation of these documents
that has the effect of providing a full, irrevocable and unconditional guarantee
of the obligations of the trust under the trust preferred securities.
If and to the extent that we do not make payments on the debentures, the
trust will not pay distributions or other amounts due on the trust preferred
securities. The guarantee does not cover payment of distributions when the trust
does not have sufficient funds to pay the distributions. In this event, the
remedy of a holder of trust preferred securities is to institute a legal
proceeding directly against us for enforcement of payment on the debentures to
the trust. Then, the trust will have funds available to make payments on the
trust preferred securities. Our obligations under the guarantee are subordinate
and junior in right of payment to all of our other indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
debentures, these payments will be sufficient to cover distributions and other
payments due on the trust preferred securities, primarily because:
- the aggregate principal amount of the debentures will be equal to the sum
of the aggregate stated liquidation amount of the trust securities;
- the interest rate and interest and other payment dates on the debentures
will match the distribution rate and distribution and other payment dates
for the trust preferred securities;
- we will pay for any and all costs, expenses and liabilities of the trust,
except the obligations of the trust to pay to holders of the trust
preferred securities the amounts due to the holders pursuant to the terms
of the trust preferred securities; and
- the trust will not engage in any activity that is not consistent with the
limited purposes of the trust.
ENFORCEMENT RIGHTS OF HOLDERS OF TRUST PREFERRED SECURITIES
A holder of any trust preferred security may institute a legal proceeding
directly against us to enforce its rights under the guarantee without first
instituting a legal proceeding against the guarantee trustee, the trust or any
other person.
A default or event of default under any of our senior or subordinated debt
would not constitute a default or event of default under the trust agreement.
However, payment defaults under, or acceleration of, our senior or subordinated
debt, will not allow us to make payments on the debentures until such other debt
obligations have been paid in full or any payment default has been cured or
waived. Failure to make required payments on the debentures would constitute an
event of default under the trust agreement.
69
<PAGE> 73
LIMITED PURPOSE OF THE TRUST
The trust preferred securities evidence preferred undivided beneficial
interests in the assets of the trust. The trust exists for the exclusive
purposes of issuing the trust securities, investing the proceeds in the
debentures and engaging in only those other activities necessary, advisable or
incidental to those purposes. A principal difference between the rights of a
holder of a trust preferred security and the rights of a holder of a debenture
is that a holder of a debenture is entitled to receive from us the principal
amount of and interest accrued on debentures held, while a holder of trust
preferred securities is entitled to receive distributions from the trust if and
to the extent the trust has funds available for the payment of the
distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or liquidation of
the trust involving the liquidation of the debentures, the holders of the trust
preferred securities will be entitled to receive, out of assets held by the
trust, the liquidation distribution in cash. See "Description of the Trust
Preferred Securities -- Liquidation distribution upon termination."
Upon our voluntary or involuntary liquidation or bankruptcy, the property
trustee, as holder of the debentures, would be a subordinated creditor of ours.
Therefore, the property trustee would be subordinated in right of payment to all
of our senior and subordinated debt, but is entitled to receive payment in full
of principal and interest before any of our stockholders receive payments or
distributions. Since we are the guarantor under the guarantee and have agreed to
pay for all costs, expenses and liabilities of the trust other than the
obligations of the trust to pay to holders of the trust preferred securities the
amounts due to the holders pursuant to the terms of the trust preferred
securities, the positions of a holder of the trust preferred securities and a
holder of the debentures relative to our other creditors and to our stockholders
in the event of liquidation or bankruptcy are expected to be substantially the
same.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary of the material federal income tax considerations
that may be relevant to the purchasers of trust preferred securities represents
the opinion of Rothgerber Johnson & Lyons LLP, counsel to us and the trust
insofar as it relates to matters of law and legal conclusions. The conclusions
expressed herein are based upon current provisions of the Internal Revenue Code
of 1986, regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change at any time, with possible
retroactive effect. Subsequent changes may cause tax consequences to vary
substantially from the consequences described below. Furthermore, the
authorities on which the following summary is based are subject to various
interpretations, and it is therefore possible that the federal income tax
treatment of the purchase, ownership and disposition of trust preferred
securities may differ from the treatment described below. In rendering its
opinion, Rothgerber Johnson & Lyons LLP has not sought a ruling from the
Internal Revenue Service as to any tax consequences, and its opinion is not
binding on the Internal Revenue Service.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting purchasers of trust preferred securities.
Moreover, the discussion generally focuses on holders of trust preferred
securities who are individual citizens or residents of the United States and who
acquire trust preferred securities on their original issue at their offering
price and hold trust preferred securities as capital assets. The discussion has
only limited application to dealers in securities, corporations, estates, trusts
or nonresident aliens and does not address all the tax consequences that may be
relevant to holders who may be subject to special tax treatment. The following
summary also does not address the tax consequences to persons that have a
functional currency other than the U.S. dollar or the tax consequences to
stockholders, partners or beneficiaries of a holder of trust preferred
securities. Further, it does not include any description of any alternative
minimum tax consequences or the tax laws of any state or local government or of
any foreign government that may be applicable to the trust preferred securities.
Accordingly, each prospective investor should consult, and should rely
exclusively on, the investor's own tax advisors in analyzing the
70
<PAGE> 74
federal, state, local and foreign tax consequences of the purchase, ownership or
disposition of trust preferred securities.
CLASSIFICATION OF THE DEBENTURES
In accordance with the opinion of Rothgerber Johnson & Lyons LLP, that the
debentures will be classified for federal income tax purposes as our
indebtedness under current federal tax law, we intend to treat the debentures as
indebtedness for federal income tax purposes and, that by acceptance of a trust
preferred security, each holder covenants to treat the debentures as
indebtedness and the trust preferred securities as evidence of an indirect
beneficial ownership interest in the debentures. No assurance can be given,
however, that this position will not be challenged by the Internal Revenue
Service or, if challenged, that it will not be successful. The remainder of this
discussion assumes that the debentures will be classified for federal income tax
purposes as our indebtedness.
CLASSIFICATION OF THE TRUST
With respect to the trust preferred securities, Rothgerber Johnson & Lyons
LLP has rendered its opinion generally to the effect that, assuming full
compliance with the terms of the trust agreement and indenture, the trust will
be classified for federal income tax purposes as a grantor trust and not as an
association taxable as a corporation. Accordingly, for federal income tax
purposes, each holder of trust preferred securities generally will be treated as
owning an undivided beneficial interest in the debentures, and each holder will
be required to include in its gross income any interest with respect to the
debentures at the time such interest is accrued or is received, in accordance
with the holder's method of accounting. If the debentures were determined to be
subject to the original issue discount -- OID -- rules, each holder would
instead be required to include in its gross income any OID accrued with respect
to its allocable share of the debentures whether or not cash were actually
distributed to the holder.
INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT
United States taxpayers, including cash basis taxpayers that hold debt
instruments issued with OID must generally include such OID in income as it
accrues on a constant yield method even if there is not a corresponding receipt
of cash attributable to such income. Debt instruments such as the debentures
will generally be treated as issued with OID if the stated interest on the
instrument does not constitute "qualified stated interest." Qualified stated
interest is generally any one of a series of stated interest payments on an
instrument that are unconditionally payable at least annually at a single fixed
rate. In determining whether stated interest on an instrument is unconditionally
payable and thus constitutes qualified stated interest, remote contingencies as
to the timely payment of stated interest are ignored. In the case of the
debentures, we have concluded that the likelihood of exercising our option to
defer payments of interest is remote.
Rothgerber Johnson & Lyons LLP has rendered its opinion that if we actually
exercise our option to defer the payment of interest, the debentures would be
treated as issued with OID at the time of issuance or at the time of such
exercise, as the case may be, and all stated interest would thereafter be
treated as OID as long as the debentures remained outstanding. In such event,
all of a United States person's taxable interest income in respect of the
debentures would constitute OID that would have to be included in income on a
constant yield method before the receipt of the cash attributable to such
income, regardless of such person's method of tax accounting, and actual
distributions of stated interest would not be reported as taxable income.
Consequently, a holder of trust preferred securities would be required to
include such OID in gross income even though we would not make any actual cash
payments during an extension period.
Rothgerber Johnson & Lyons LLP's opinion also states that because income on
the trust preferred securities will constitute interest, corporate holders of
trust preferred securities will not be entitled to a dividends-received
deduction with respect to any income recognized with respect to the trust
preferred securities.
MARKET DISCOUNT AND ACQUISITION PREMIUM
Holders of trust preferred securities other than holders who purchased the
trust preferred securities upon original issuance may be considered to have
acquired their undivided interests in the debentures with "market
71
<PAGE> 75
discount" or "acquisition premium" as these phrases are defined for federal
income tax purposes. Such holders are advised to consult their tax advisors as
to the income tax consequences of the acquisition, ownership and disposition of
the trust preferred securities.
RECEIPT OF DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
Under the circumstances described under "Description of the Trust Preferred
Securities -- Redemption or exchange" and "Liquidation distribution upon
termination," the debentures may be distributed to holders of trust preferred
securities upon a liquidation of the trust. According to the opinion rendered by
Rothgerber Johnson & Lyons LLP, a distribution of the debentures to holders of
the trust preferred securities upon liquidation of the trust would be treated as
a nontaxable event to the holder and would result in the holder having an
aggregate tax basis in the debentures received in the liquidation equal to the
holder's aggregate tax basis in the trust preferred securities immediately
before the distribution. A holder's holding period in debentures received in
liquidation of the trust would include the period for which the holder held the
trust preferred securities.
If, however, a Tax Event occurs which results in the trust being treated as
an association taxable as a corporation, the distribution would likely
constitute a taxable event to holders of the trust preferred securities. Under
certain circumstances, the debentures may be redeemed for cash and the proceeds
of the redemption distributed to holders in redemption of their trust preferred
securities. Rothgerber Johnson & Lyons LLP has rendered its opinion that
redemption of the debentures for cash, to the extent that such redemption
constitutes a complete redemption, constitutes a taxable disposition of the
redeemed trust preferred securities, and a holder for federal income tax
purposes, should recognize gain or loss as if the holder sold the trust
preferred securities for cash.
DISPOSITION OF TRUST PREFERRED SECURITIES
Rothgerber Johnson & Lyons LLP has given its opinion that a holder that
sells trust preferred securities will recognize gain or loss equal to the
difference between the amount realized on the sale of the trust preferred
securities and the holder's adjusted tax basis in the trust preferred
securities. A holder's adjusted tax basis in the trust preferred securities
generally will be its initial purchase price increased by OID previously
includable in the holder's gross income to the date of disposition and decreased
by payments received on the trust preferred securities to the date of
disposition. A gain or loss of this kind will generally be a capital gain or
loss and will be a long-term capital gain or loss if the trust preferred
securities have been held for more than one year at the time of sale.
The trust preferred securities may trade at a price that does not
accurately reflect the value of accrued but unpaid interest with respect to the
underlying debentures. According to the opinion of Rothgerber Johnson & Lyons
LLP, a holder that disposes of its trust preferred securities between record
dates for payments of distributions thereon will be required to include accrued
but unpaid interest on the debentures through the date of disposition in income
as ordinary income, and to add the amount to its adjusted tax basis in its
proportionate share of the underlying debentures deemed disposed of. To the
extent the selling price is less than the holder's adjusted tax basis a holder
will recognize a capital loss. The adjusted basis would include, in the form of
OID, all accrued but unpaid interest. Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for federal income
tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The amount of qualified stated interest, or, if applicable, OID, accrued on
the trust preferred securities held of record by individual citizens or
residents of the United States, or certain trusts, estates and partnerships,
will be reported to the Internal Revenue Service on Forms 1099-INT, or, where
applicable, forms 1099-OID, which forms should be mailed to the holders by
January 31 following each calendar year. Payments made on, and proceeds from the
sale of, the trust preferred securities may be subject to a "backup" withholding
tax unless the holder complies with certain identification and other
requirements. Any amounts withheld under the backup withholding rules will be
allowed as a credit against the holder's federal income tax liability, provided
the required information is provided to the Internal Revenue Service.
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<PAGE> 76
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON THE PARTICULAR
SITUATION OF A HOLDER OF TRUST PREFERRED SECURITIES. HOLDERS OF TRUST PREFERRED
SECURITIES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE TRUST
PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN
AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX
LAWS.
ERISA CONSIDERATIONS
Employee benefit plans that are subject to the Employee Retirement Income
Security Act of 1974, or Section 4975 of the Internal Revenue Code, generally
may purchase trust preferred securities, subject to the investing fiduciary's
determination that the investment in trust preferred securities satisfies
ERISA's fiduciary standards and other requirements applicable to investments by
the plan.
In any case, with respect to certain plans, we and/or any of our affiliates
may be considered a "party in interest," within the meaning of ERISA, or a
"disqualified person" within the meaning of Section 4975 of the Internal Revenue
Code. These plans generally include plans maintained or sponsored by, or
contributed to by, any such persons with respect to which we or any of our
affiliates are a fiduciary or plans for which we or any of our affiliates
provide services. The acquisition and ownership of trust preferred securities by
a plan, or by an individual retirement arrangement or other plans described in
Section 4975(e)(1) of the Internal Revenue Code, with respect to which we or any
of our affiliates are considered a party in interest or a disqualified person
may constitute or result in a prohibited transaction under ERISA or Section 4975
of the Internal Revenue Code, unless the trust preferred securities are acquired
pursuant to and in accordance with an applicable exemption.
As a result, plans to which we or any of our affiliates is a party in
interest or a disqualified person should not acquire trust preferred securities
unless the trust preferred securities are acquired pursuant to an applicable
exemption. Any other plans or other entities whose assets include plan assets
subject to ERISA or Section 4975 of the Internal Revenue Code proposing to
acquire trust preferred securities should consult with their own counsel.
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<PAGE> 77
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement among us,
the trust and the underwriters listed in the table below for whom Howe Barnes
Investments, Inc. is acting as representative, the underwriters have severally
agreed to purchase from the trust an aggregate of 1,000,000 trust preferred
securities in the amounts set forth opposite their respective names.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF TRUST PREFERRED SECURITIES
------------ ------------------------------------
<S> <C>
Howe Barnes Investments, Inc. .............................. 680,000
D.A. Davidson & Company..................................... 40,000
Fahnestock & Co., Inc. ..................................... 40,000
Friedman, Billings, Ramsey & Co., Inc. ..................... 40,000
Pacific Crest Securities.................................... 40,000
Ryan, Beck & Co., Inc. ..................................... 40,000
Wayne Hummer Investments LLC................................ 30,000
Frederick & Company, Inc. .................................. 30,000
Kirkpatrick, Pettis, Smith, Polian Inc. .................... 30,000
David A. Noyes & Company.................................... 30,000
---------
Total............................................. 1,000,000
=========
</TABLE>
The underwriting agreement requires the underwriters to accept and pay for
all of the trust preferred securities, if any are taken. In addition, the
underwriting agreement sets forth customary conditions that we and the trust
must satisfy before the underwriters are obligated to purchase the trust
preferred securities. These conditions include the accuracy of specific
representations and warranties and the receipt of opinions of counsel and
reports from accountants as to our status and the status of the trust and the
trust preferred securities.
The trust has granted to the underwriters an option, exercisable within 30
days after the date of this prospectus, to purchase up to an additional 150,000
trust preferred securities at the same price per trust preferred security to be
paid by the underwriters for the other trust preferred securities offered by
this prospectus. If the underwriters purchase any of the additional trust
preferred securities under this option, each underwriter will be committed to
purchase the additional trust preferred securities in approximately the same
proportion as set forth in the table above. The underwriters may exercise the
option only for the purpose of covering over-allotments, if any, in connection
with the distribution of the trust preferred securities offered by this
prospectus.
The table below shows the price and proceeds on a per trust preferred
security and aggregate basis assuming no sales are directed by us:
<TABLE>
<CAPTION>
PER TRUST
PREFERRED
SECURITY TOTAL
--------- ----------
<S> <C> <C>
Public offering price....................................... $ 8.00 $8,000,000
Proceeds to the trust....................................... $ 8.00 $8,000,000
Underwriting fees to be paid by Front Range Capital
Corporation............................................... $ 0.40 $ 400,000
Proceeds to Front Range Capital Corporation................. $ 7.60 $7,600,000
</TABLE>
The proceeds we will receive as shown in the table above do not reflect
estimated expenses of $400,000 payable by us.
All of the proceeds to the trust will be used to purchase the debentures
from us. We have agreed to pay the underwriters 5.00% of the public offering
price per trust preferred security for an aggregate of $400,000, for arranging
the sale of the trust preferred securities -- unless we direct the sale, in
which case we will pay the underwriters 3.50% of the public offering price for
such sales -- and the subsequent investment in the debentures.
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<PAGE> 78
The underwriters propose to offer the trust preferred securities in part
directly to the public at the initial public offering price set forth above, and
in part to securities dealers at this price less a concession not in excess of
$0.16 per trust preferred security. The underwriters may allow, and the dealers
may reallow, a concession not in excess of $0.08 per trust preferred security to
brokers and dealers. After the trust preferred securities are released for sale
to the public, the offering price and other selling terms may from time to time
be varied by the underwriters.
We and the trust have agreed to indemnify the underwriters against several
liabilities, including liabilities under the Securities Act. Generally, the
indemnification provisions in the underwriting agreement provide for full
indemnification of the underwriters in actions related to the disclosure in this
prospectus unless such disclosure was provided by the underwriters specifically
for use in this prospectus.
In connection with the offering, the underwriters may purchase and sell the
trust preferred securities in the open market. These transactions may include
stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. Stabilizing transactions consist of
bids or purchases for the purpose of preventing or retarding a decline in the
market price of the trust preferred securities; and syndicate short positions
involve the sale by the underwriters of a greater number of securities than they
are required to purchase from us in the offering. The underwriters also may
impose a penalty bid, whereby selling concessions allowed to syndicate members
or other broker-dealers in respect of the securities sold in the offering for
their own account may be reclaimed by the syndicate if the trust preferred
securities are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the trust preferred securities, which may be higher than the
price that might otherwise prevail in the open market. These activities, if
commenced, may be discontinued at any time. These transactions may be effected
in the over-the-counter market or otherwise.
In connection with the offer and sale of the trust preferred securities,
the underwriters will comply with Rule 2810 under the NASD Conduct Rules. The
underwriters have advised us and the trust that they will not confirm any sales
of trust preferred securities to any discretionary accounts.
LEGAL MATTERS
Certain legal matters, including matters relating to federal income tax
considerations, for us and the trust will be passed upon by Rothgerber Johnson &
Lyons LLP, counsel to us and the trust. Certain legal matters will be passed
upon for the underwriters by Chapman and Cutler, Chicago, Illinois. Certain
matters of Delaware law relating to the validity of the trust preferred
securities will be passed upon on behalf of us and the trust by Morris, James,
Hitchens & Williams LLP, special Delaware counsel to the trust and us.
EXPERTS
The consolidated financial statements of the company as of September 30,
2000 and for each of the two years in the period ended December 31, 1999, are
included in this prospectus. The consolidated financial statements of the
Company ended December 31, 1999 and for each of the two years in the period
ended December 31, 1999 have been audited by Fortner, Bayens, Levkulich and Co.,
P.C., independent auditors, as stated in their report appearing herein, and are
included in reliance upon such report given upon their authority as experts in
accounting and auditing.
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<PAGE> 79
WHERE YOU CAN FIND INFORMATION
This prospectus is a part of a Registration Statement on Form SB-2 filed by
us and the trust with the Securities and Exchange Commission under the
Securities Act, with respect to the trust preferred securities, the debentures
and the guarantee. This prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. For further information
with respect to us and the securities offered by this prospectus, reference is
made to the Registration Statement, including the exhibits to the Registration
Statement. Statements contained in this prospectus concerning the provisions of
such documents are necessarily summaries of such documents and each such
statement is qualified in its entirety by reference to the copy of the
applicable document filed with the SEC.
As a result of this offering, we will be required to file periodic reports,
proxy statements and other information with the SEC. Our filings will be
available to the public over the Internet at the SEC's web site. The address of
that site is http://www.sec.gov. You may also inspect and copy these materials
at the public reference facilities of the SEC at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, as well as at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and 75 Park Place, Room 1400, New York, New York 10007.
Copies of such material can be obtained at prescribed rates from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information.
You should not rely on any information not contained in this prospectus. We
have not, and our underwriters have not, authorized any person to provide you
with any information different from or inconsistent with that contained in this
prospectus. We are not, and our underwriters are not, making an offer to sell
these securities in any jurisdictions where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus is
accurate as of the date on the front cover of this prospectus only.
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FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report on the Consolidated Financial
Statements................................................ F-2
Consolidated Balance Sheets as of September 30, 2000
(Unaudited) and December 31, 1999......................... F-3
Consolidated Statements of Income for the Nine Months Ended
September 30, 2000 and 1999 (Unaudited) and the Years
Ended December 31, 1999 and 1998.......................... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1999 and 1998 and the Nine Months
Ended September 30, 2000 (Unaudited)...................... F-5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 (Unaudited) and the
Years Ended December 31, 1999 and 1998.................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 81
INDEPENDENT AUDITORS' REPORT
Board of Directors
Front Range Capital Corporation and Subsidiary
Louisville, Colorado
We have audited the accompanying consolidated balance sheet of Front Range
Capital Corporation and Subsidiary as of December 31, 1999 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the two years in the period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Front Range
Capital Corporation and Subsidiary at December 31, 1999 and the consolidated
results of their operations and consolidated cash flows for each of the two
years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
FORTNER, BAYENS, LEVKULICH & CO.,
P.C.
Denver, Colorado
February 15, 2000
F-2
<PAGE> 82
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 7,177 $ 7,782
Interest-bearing deposits in banks.......................... 108 99
-------- --------
Cash and cash equivalents................................. 7,285 7,881
Securities available for sale............................... 25,245 22,193
Federal Home Loan Bank stock, at cost....................... 1,258 724
Loans, net of unearned income............................... 154,257 130,708
Less allowance for loan losses.............................. (1,652) (1,411)
-------- --------
Net loans................................................. 152,605 129,297
Premises and equipment, net................................. 8,003 7,092
Accrued interest receivable................................. 1,170 871
Income taxes receivable..................................... 99 --
Deferred income taxes....................................... 817 1,001
Other assets................................................ 3,786 3,631
-------- --------
$200,268 $172,690
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing.................................... $ 35,122 $ 26,566
Interest-bearing....................................... 132,262 115,360
-------- --------
Total deposits.................................... 167,384 141,926
Federal funds purchased................................... 4,000 9,200
Other short-term funds borrowed........................... 6,000 --
Income taxes payable...................................... -- 135
Long-term debt............................................ 12,197 12,627
Accrued interest payable.................................. 553 396
Other liabilities......................................... 1,237 944
-------- --------
Total liabilities................................. 191,371 165,228
Commitments and contingencies (notes H, J and K)
Stockholders' equity
Preferred stock, authorized 100,000,000 shares of $.001
par value; issued 10,500 shares........................ -- --
Common stock, authorized 200,000,000 shares of $.001 par
value; 1,327,744 shares issued and outstanding......... 1 1
Capital surplus........................................... 4,616 4,616
Retained earnings......................................... 4,662 3,537
Accumulated other comprehensive loss...................... (382) (692)
-------- --------
8,897 7,462
-------- --------
$200,268 $172,690
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 83
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ----------------
2000 1999 1999 1998
-------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans............................. $11,486 $8,260 $11,628 $8,166
Interest on investment securities
Taxable............................................. 818 724 962 951
Exempt from federal income tax...................... 334 300 401 213
Other interest income.................................. 2 8 9 122
------- ------ ------- ------
Total interest income.......................... 12,640 9,292 13,000 9,452
Interest expense
Interest on deposits................................... 4,295 2,963 4,224 3,544
Federal funds purchased................................ 264 136 207 37
Other short-term funds borrowed........................ 153 -- -- --
Long-term debt......................................... 828 472 657 202
------- ------ ------- ------
Total interest expense......................... 5,540 3,571 5,088 3,783
------- ------ ------- ------
Net interest income...................................... 7,100 5,721 7,912 5,669
Provision for loan losses................................ 265 292 402 421
------- ------ ------- ------
Net interest income after provision for loan losses...... 6,835 5,429 7,510 5,248
Noninterest income
Service charges on deposit accounts.................... 610 529 732 570
Gain (loss) on sale of investment securities........... -- 7 7 8
Loan origination fees.................................. 194 161 228 60
Other.................................................. 311 162 230 233
------- ------ ------- ------
Total noninterest income....................... 1,115 859 1,197 871
Noninterest expense
Salaries and benefits.................................. 3,528 2,690 3,663 2,647
Occupancy expense...................................... 645 388 519 500
Furniture and equipment................................ 449 368 497 366
Data processing........................................ 433 278 389 288
Other.................................................. 1,361 1,253 1,704 1,649
------- ------ ------- ------
Total noninterest expense...................... 6,416 4,977 6,772 5,450
------- ------ ------- ------
Income before income taxes............................... 1,534 1,311 1,935 669
Income tax expense....................................... 409 429 573 155
------- ------ ------- ------
NET INCOME............................................... $ 1,125 $ 882 $ 1,362 $ 514
======= ====== ======= ======
EARNINGS PER SHARE
Basic.................................................. $ 0.85 $ 0.66 $ 1.03 $ 0.42
======= ====== ======= ======
Diluted................................................ $ 0.84 $ 0.66 $ 1.02 $ 0.42
======= ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 84
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
AND NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
PREFERRED COMMON CAPITAL RETAINED COMMON
STOCK STOCK SURPLUS EARNINGS INCOME (LOSS) TOTAL
--------- ------ ------- -------- ------------- ------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998........ $ -- $1 $2,927 $1,661 $ 47 $4,636
Sale of common stock.............. -- -- 1,665 -- -- 1,665
Comprehensive income
Net income...................... -- -- -- 514 -- 514
Change in net unrealized gain
(loss) on securities
available for sale, net of
taxes........................ -- -- -- -- 47 47
------
Total comprehensive
income................ 561
--- -- ------ ------ ----- ------
BALANCE AT DECEMBER 31, 1998...... -- 1 4,592 2,175 94 6,862
Sale of common stock.............. -- -- 24 -- -- 24
Comprehensive income
Net income...................... -- -- -- 1,362 -- 1,362
Change in net unrealized gain
(loss) on securities
available for sale, net of
taxes........................ -- -- -- -- (786) (786)
------
Total comprehensive
income................ 576
--- -- ------ ------ ----- ------
BALANCE AT DECEMBER 31, 1999...... -- 1 4,616 3,537 (692) 7,462
Comprehensive income
Net income (unaudited).......... -- -- -- 1,125 -- 1,125
Change in net unrealized gain
(loss) on securities
available for sale, net of
taxes (unaudited)............ -- -- -- -- 310 310
--- -- ------ ------ ----- ------
Total comprehensive
income (unaudited).... 1,435
--- -- ------ ------ ----- ------
BALANCE AT SEPTEMBER 30, 2000
(UNAUDITED)..................... $ -- $1 $4,616 $4,662 $(382) $8,897
==== == ====== ====== ===== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 85
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- -------------------
2000 1999 1999 1998
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 1,125 $ 882 $ 1,362 $ 514
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 522 424 564 426
Net amortization of securities............................ 25 43 36 26
Stock dividends received.................................. -- (69) (97) (21)
Provision for loan losses................................. 265 292 402 421
Deferred income taxes..................................... (24) 231 (130) (170)
(Gain) loss on sales of securities, net................... -- (7) (7) (8)
Loss on sale of foreclosed assets......................... -- -- -- 45
Changes in deferrals and accruals:
Accrued interest receivable............................. (299) (198) (127) (191)
Other assets............................................ (158) (1,487) (1,621) (1,025)
Income taxes payable.................................... (234) (140) 134 (132)
Accrued interest payable................................ 157 29 121 51
Other liabilities....................................... 293 647 207 166
(Gain) loss on disposal of equipment.................... 6 -- -- 17
-------- -------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES....................................... 1,676 647 844 119
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in federal funds sold.......................... -- (580) -- --
Proceeds from the sale of securities available for sale..... 600 3,200 3,200 7,725
Proceeds from the maturities of securities available for
sale...................................................... 959 1,085 3,034 5,004
Purchase of securities available for sale................... (4,652) (6,743) (6,752) (23,769)
Increase in loans........................................... (23,574) (23,783) (39,120) (32,804)
Purchase of premises and equipment, net..................... (1,435) (2,235) (2,684) (1,057)
Proceeds from sale of foreclosed assets..................... -- 243 243 --
-------- -------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES.............. (28,102) (28,813) (42,079) (44,901)
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash (used) provided by
Deposits.................................................. 25,458 22,612 26,992 30,795
Federal funds purchased................................... (5,200) -- 9,200 --
Short-term borrowings..................................... 6,000 -- -- --
Proceeds from long-term borrowings.......................... 750 2,768 4,335 9,450
Payments on long-term borrowings............................ (1,180) (159) (645) (1,550)
Sale of common stock........................................ -- 24 24 1,665
-------- -------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......... 25,828 25,245 39,906 40,360
-------- -------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS.......... (596) (2,921) (1,329) (4,422)
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD... 7,881 9,210 9,210 13,632
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS -- END OF PERIOD......... $ 7,285 $ 6,289 $ 7,881 $ 9,210
======== ======== ======== ========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest................................................ $ 5,383 $ 3,542 $ 4,968 $ 3,732
Income taxes............................................ 627 355 600 456
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 86
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 IS
UNAUDITED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Front Range Capital Corporation (the Company) was incorporated for the
purposes of owning shares of and acting as parent holding company for Heritage
Bank (the Bank). The Bank provides a full range of banking and mortgage services
to individual and corporate customers principally in Boulder County and the
Denver metropolitan area. A majority of the Bank's loans are related to real
estate and commercial activities. Borrowers' abilities to honor their loans are
dependent upon the continued economic viability of the area. The Bank is subject
to competition from other financial institutions for loans and deposit accounts.
The Bank is also subject to regulation by certain governmental agencies and
undergoes periodic examinations by those regulatory agencies.
Principles of Consolidation
The consolidated financial statements include Front Range Capital
Corporation ("the Company") and its wholly-owned subsidiary, Heritage Bank ("the
Bank"). All significant intercompany balances and transactions have been
eliminated in consolidation.
Basis of Financial Statement Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan losses.
In connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties and
assesses estimated future cash flows from borrowers' operations and the
liquidation of loan collateral.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans and
foreclosed assets, changes in economic conditions may necessitate revisions in
future years. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses and valuation of foreclosed real estate. Such agencies may require the
Company to recognize additional losses based on their judgments about
information available to them at the time of their examination.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and balances due from banks and federal funds sold, all
of which mature within ninety days.
Investment Securities
Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held to maturity" and recorded at amortized cost.
Securities not classified as held to maturity or trading, including equity
securities with readily determinable fair values, are classified as "available
for sale" and recorded at fair value, with unrealized gains and losses excluded
from earnings and reported in other comprehensive income. The Company has
designated all securities as available for sale.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in fair value of
held-to-maturity and available-for-sale securities below their
F-7
<PAGE> 87
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 IS
UNAUDITED)
cost that are deemed to be other than temporary are reflected in earnings as
realized losses. Gains and losses on the sale of securities are recorded on the
trade date and are determined using the specific identification method.
Loans
Loans are reported net of unearned income. Interest income is accrued on
the unpaid principal balances as earned. Loan and commitment fees are deferred
and recognized over the life of the loan and/or commitment period as yield
adjustments.
The Company grants real estate, commercial and consumer loans to customers.
A substantial portion of the loan portfolio is represented by real estate and
commercial loans throughout the Boulder and Louisville, Colorado areas. The
ability of the Company's borrowers to honor their contracts is dependent upon
the real estate and general economic conditions in this area.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported at their
outstanding unpaid principal balances adjusted for charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans. Interest
income is accrued on the unpaid principal balance. Loan origination fees, net of
certain direct origination costs, are deferred and recognized as an adjustment
of the related loan yield using the interest method.
The accrual of interest on loans is discontinued at the time the loan is 90
days delinquent unless the credit is well-secured and in process of collection.
In all cases, loans are placed on nonaccrual or charged-off at an earlier date
if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged-off is reversed against interest income. The interest on
these loans is accounted for on the cash-basis method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light 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 any 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.
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 in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons 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 for commercial loans by either
the present value of expected future cash flows discounted
F-8
<PAGE> 88
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 IS
UNAUDITED)
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.
Large groups of smaller balance homogenous loans are collectively evaluated
for impairment. Accordingly, the Company does not separately identify individual
consumer and residential loans for impairment disclosures.
Premises and Equipment
Company premises and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed generally on the straight-line method
over the assets useful lives. Land is carried at cost.
Foreclosed Assets
Foreclosed assets, which are included in other assets, are assets acquired
through, or in lieu of, loan foreclosure and are held for sale. These assets are
initially recorded at the lower of cost basis or fair value at the date of
foreclosure. Subsequent to foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from operations and changes in the
valuation allowance are included in net expenses from foreclosed assets.
Goodwill
Goodwill is amortized on a straight-line basis over twenty-five years.
Other assets include goodwill of $136,000 at December 31, 1999.
Income Taxes
Deferred income tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net deferred tax
asset or liability is determined based on the tax effects of the temporary
differences between the book and tax bases of the various balance sheet assets
and liabilities and gives current recognition to changes in tax rates and laws.
Preferred Stock
Preferred stock consists of 5,000 shares of 1987 Series A 8% non-cumulative
convertible preferred stock of the Company ("1987 Preferred Stock") outstanding,
and 5,500 shares of 1988 Series A 8% non-cumulative convertible non-voting
preferred stock of the Company ("1988 Preferred Stock") outstanding. The Company
has no other classes of capital stock. Each share of the 1987 Preferred Stock
and each share of the 1988 Preferred Stock is convertible into one share of
common stock.
Comprehensive Income
The Company has adopted SFAS 130, Reporting Comprehensive
Income. Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain changes
in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS 130 had no effect on
the Company's net income or shareholders' equity.
The Company discloses comprehensive income in the Statement of
Stockholders' Equity.
F-9
<PAGE> 89
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 IS
UNAUDITED)
Earnings per Share
The Company computes earnings per share in accordance with Financial
Accounting Standard No. 128, Earnings per Share. Basic earnings per share is
based on the weighted average number of common shares outstanding during each
period. Diluted earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period plus
dilutive securities. Common shares used in the determination of basic and
diluted earnings per share follow:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
--------------------- ---------------------
2000 1999 1999 1998
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Basic
Weighted average common shares
outstanding......................... 1,327,744 1,326,623 1,326,906 1,225,391
Effect of dilutive securities Convertible
preferred stock........................ 10,500 10,500 10,500 10,500
--------- --------- --------- ---------
Diluted.................................. 1,338,244 1,337,123 1,337,406 1,235,891
========= ========= ========= =========
</TABLE>
Recently Issued Accounting Standards
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", establishes accounting and reporting standards for derivative
instruments and requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. This statement is effective for periods beginning June 15, 2000.
Management believes the implementation of this pronouncement will not have a
material effect on the Company's financial statements.
Interim Financial Information (Unaudited)
The unaudited interim financial statements have been prepared in conformity
with generally accepted accounting principles and include all adjustments which
are, in the opinion of management, normal and recurring in nature and necessary
to a fair presentation of the interim periods presented. Results of operations
for the nine months ended September 30, 2000 are not necessarily indicative of
the results to be expected for the full year.
NOTE B -- CASH AND DUE FROM BANKS
The Bank is required by the Federal Reserve Bank to maintain an average
reserve balance. "Cash and due from banks" in the consolidated balance sheet at
December 31, 1999 includes amounts so restricted of approximately $1,049,000.
F-10
<PAGE> 90
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 IS
UNAUDITED)
NOTE C -- INVESTMENT SECURITIES
At December 31, 1999, the Company had securities with the following
amortized cost and estimated fair market values (in thousands):
<TABLE>
<CAPTION>
GROSS ESTIMATED
AMORTIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Securities available for sale
U.S. Treasury securities.................. $ 1,099 $-- $ (5) $ 1,094
U.S. government agency securities......... 6,679 11 (125) 6,565
Mortgage-backed securities................ 4,928 -- (251) 4,677
State and municipal securities............ 9,012 1 (664) 8,349
Corporate securities...................... 1,172 -- (41) 1,131
Equity securities......................... 226 -- -- 226
Other investments......................... 181 -- (30) 151
------- --- ------- -------
$23,297 $12 $(1,116) $22,193
======= === ======= =======
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1999 by contractual maturity are shown below (in thousands).
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations without call or prepayment
penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 1,016 $ 1,017
Due after one year through five years....................... 7,257 7,150
Due after five years through ten years...................... 2,938 2,805
Due after ten years......................................... 7,158 6,544
------- -------
18,369 17,516
Mortgage-backed securities.................................. 4,928 4,677
------- -------
$23,297 $22,193
======= =======
</TABLE>
Securities with carrying amount of approximately $9,447,000 at December 31,
1999 were pledged as collateral for public deposits and for other purposes as
required or permitted by law.
Available for sale securities were sold in 1999 for a gross gain $7,690.
Gross realized losses amounted to $1,144.
F-11
<PAGE> 91
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 IS
UNAUDITED)
NOTE D -- LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The components of the loan portfolio are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
Real estate -- construction................................ $ 39,691 $ 29,684
Real estate -- commercial.................................. 39,279 36,203
Real estate -- residential................................. 42,548 35,804
Commercial................................................. 27,309 24,110
Consumer................................................... 6,239 5,525
-------- --------
155,066 131,326
Less unearned income....................................... (809) (618)
-------- --------
$154,257 $130,708
-------- --------
</TABLE>
Transactions in the allowance for loan losses are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
NINE MONTHS ENDED ---------------
SEPTEMBER 30, 2000 1999 1998
--------------------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Balance at beginning of year....................... $1,411 $1,097 $ 754
Provision for loan losses.......................... 265 402 421
Loans charged off.................................. (32) (92) (85)
Recoveries......................................... 8 4 7
------ ------ ------
Balance at end of period........................... $1,652 $1,411 $1,097
====== ====== ======
</TABLE>
The following is a summary of information pertaining to impaired loans (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1999 1998
----- -----
<S> <C> <C>
Total impaired loans........................................ $ 35 $393
Valuation allowance related to impaired loans............... 5 66
Average investment in impaired loans........................ 251 314
</TABLE>
Interest income on impaired loans was not significant.
NOTE E -- PREMISES AND EQUIPMENT
At December 31, 1999, premises and equipment, less accumulated depreciation
and amortization, consisted of the following (in thousands):
<TABLE>
<S> <C>
Land........................................................ $1,008
Buildings................................................... 3,577
Furniture and equipment..................................... 1,876
Construction in progress.................................... 2,191
------
8,652
Less accumulated depreciation and amortization.............. (1,560)
------
$7,092
======
</TABLE>
F-12
<PAGE> 92
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 IS
UNAUDITED)
NOTE F -- TIME DEPOSITS
At December 31, 1999 the aggregate amount of time deposits of $100,000 or
more was $19,352,000. Interest expense on these deposits was $845,000 for the
year ended December 31, 1999.
At December 31, 1999, the scheduled maturities of time deposits (in
thousands) are as follows:
<TABLE>
<S> <C>
2000....................................................... $39,033
2001....................................................... 3,947
2002....................................................... --
2003....................................................... 20
-------
$43,000
=======
</TABLE>
NOTE G -- LONG-TERM DEBT
Long-term debt (debt with original maturities of more than one year) at
December 31, 1999 consisted of the following (in thousands):
<TABLE>
<S> <C>
FRONT RANGE CAPITAL CORPORATION
Note payable to bank...................................... $ 1,960
Loans from shareholders (unsecured)....................... 1,442
-------
3,402
HERITAGE BANK
Federal Home Loan Bank fixed-rate advances................ 9,225
-------
$12,627
=======
</TABLE>
The note payable to bank is a secured note due October 5, 2000 and is
collateralized by the common stock of Heritage Bank. The available line of
credit on this note is $3,000,000 and the interest rate is adjustable to prime,
which was 8.5% at December 31, 1999. The loans to shareholders are all unsecured
notes payable with interest adjustable to prime and various maturity dates.
The Federal Home Loan Bank fixed-rate advances are secured by investment
securities and loans. At December 31, 1999 the interest rates ranged from 5.27%
to 7.42%.
Maturities of long-term debt outstanding at December 31, 1999 were as
follows (in thousands):
<TABLE>
<CAPTION>
PARENT
CONSOLIDATED COMPANY
------------ -------
<S> <C> <C>
2000........................................................ $ 3,722 $2,392
2001........................................................ 1,039 710
2002........................................................ 1,329 --
2003........................................................ 1,829 300
2004........................................................ 329 --
Thereafter.................................................. 4,379 --
------- ------
Total............................................. $12,627 $3,402
======= ======
</TABLE>
NOTE H -- COMMITMENTS
The Company conducts its operations in facilities leased under operating
leases which expire at various dates through the year 2005.
F-13
<PAGE> 93
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 IS
UNAUDITED)
The total future minimum rental commitments at December 31, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000...................................................... $ 370
2001...................................................... 385
2002...................................................... 377
2003...................................................... 377
2004...................................................... 284
Thereafter................................................ 19
------
$1,812
======
</TABLE>
Rental expense was $224,000 and $155,000 in 1999 and 1998, respectively,
and includes certain contingent rental amounts such as increases in property
taxes.
NOTE I -- INCOME TAXES
Following is an analysis of income taxes included in the statements of
income as of December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Current
Federal................................................... $ 633 $ 310
State..................................................... 70 15
----- -----
703 325
Deferred
Federal................................................... (113) (147)
State..................................................... (17) (23)
----- -----
(130) (170)
----- -----
$ 573 $ 155
===== =====
</TABLE>
The reasons for the differences between the statutory federal income tax
rate and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------
1999 1998
---- -----
<S> <C> <C>
Statutory federal tax rate.................................. 34.0% 34.0%
Increase (decrease) resulting from
State taxes, net of federal tax benefit................... 2.4 1.5
Tax exempt income......................................... (7.0) (10.5)
Other, net................................................ .2 (1.5)
---- -----
Effective tax rates......................................... 29.6% 23.5%
==== =====
</TABLE>
A deferred tax asset or liability is recognized for the tax consequences of
temporary differences in the recognition of revenue and expense for financial
reporting and tax purposes.
F-14
<PAGE> 94
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 IS
UNAUDITED)
Listed below are the components of the net deferred income taxes at
December 31, 1999 (in thousands):
<TABLE>
<S> <C>
Deferred tax assets
Allowance for loan losses................................. $ 447
Net unrealized loss on securities available-for-sale...... 412
Nonqualified employee retirement plan..................... 159
Depreciation.............................................. 19
------
Total deferred tax assets......................... 1,037
Deferred tax liabilities
Federal Home Loan Bank stock dividends.................... (36)
------
Total deferred tax liabilities.................... (36)
------
Net deferred tax asset...................................... $1,001
======
</TABLE>
NOTE J -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and stand-by
letters of credit.
Those instruments involve, to a varying degree, elements of credit risk in
excess of the amount recognized in the statement of financial position. The
contract amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments.
The following financial instruments were outstanding whose contract amounts
represent credit risk (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Commitments to extend credit.............................. $40,997 $29,545
Stand-by letters of credit................................ 3,266 1,829
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation. Collateral held varies, but may include accounts
receivable, inventory, property, plant and equipment and income-producing
commercial properties.
Stand-by letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
NOTE K -- LEGAL CONTINGENCIES
Various legal claims also arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect on
the Company's consolidated financial statements.
F-15
<PAGE> 95
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 IS
UNAUDITED)
NOTE L -- REGULATORY MATTERS
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Company's and Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and Bank must meet specific capital
guidelines that involve quantitative measures of the bank's 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).
As of December 31, 1999, the most recent notification from the Federal
Reserve Bank categorized the Bank as adequately capitalized under the regulatory
framework for prompt corrective action. Accordingly, the Bank is not permitted
to accept brokered or high rate deposits, as defined, without prior regulatory
approval. Whereas the Bank has not relied on these funding sources in the past,
this restriction is not anticipated to have an impact on the Bank's operations.
At December 31, 1999, the Company's consolidated capital amounts and ratios
were less than those required for capital adequacy purposes. The Company is
considering various strategies for bringing the capital amounts and ratios into
compliance with regulatory guidelines, including, but not limited to, the
issuance of trust preferred securities.
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. Capital ratios as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- -------- ------ -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted
assets
Consolidated................... $ 9,398 6.4% $11,764 $ 8.0% N/A N/A
Bank........................... 12,756 8.7% 11,684 $ 8.0% $14,605 $ 10.0%
Tier 1 capital to risk weighted
assets
Consolidated................... 7,987 5.4% 5,882 $ 4.0% N/A N/A
Bank........................... 11,345 7.8% 5,842 $ 4.0% 8,763 $ 6.0%
Tier 1 capital to average assets
Consolidated................... 7,987 4.9% 6,559 $ 4.0% N/A N/A
Bank........................... 11,345 6.9% 6,564 $ 4.0% 8,205 $ 5.0%
</TABLE>
NOTE M -- EMPLOYEE BENEFIT PLAN
The Company has established a defined contribution pension plan covering
substantially all employees. The plan allows employees to make salary deferrals
and allows the Company to make discretionary matching
F-16
<PAGE> 96
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 IS
UNAUDITED)
and profit sharing contributions. Salaries and employee benefits expense
includes $46,000 and $34,000 for this plan in 1999 and 1998, respectively.
The Company also has deferred compensation agreements with key employees.
Vesting is based upon age and years of service. Life insurance contracts have
been purchased which may be used to fund these agreements. The cash surrender
value of the life insurance contracts totals $3,106,000 at December 31, 1999 and
is included in other assets. The 1999 and 1998 expenses related to the life
insurance policies were $105,000 and $102,000, respectively.
NOTE N -- RELATED PARTY TRANSACTIONS
In the ordinary course of business, certain directors and executive
officers of the Company and the Bank were borrowers of the Bank. All loans were
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable loans with other persons and did
not involve more than the normal risk of collectibility. At December 31, 1999,
these loans receivable aggregated $1,037,000.
NOTE O -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments. The Company
operates as a going concern and except for its investment portfolio, no active
market exists for its financial instruments. Much of the information used to
determine fair value is highly subjective and judgmental in nature and,
therefore, the results may not be precise. The subjective factors include, among
other things, estimates of cash flows, risk characteristics, credit quality and
interest rates, all of which are subject to change. Since the fair value is
estimated as of the balance sheet date, the amounts which will actually be
realized or paid upon settlement or maturity of the various financial
instruments could be significantly different.
Cash and Cash Equivalents
For these short-term instruments, the carrying amount approximates fair
value.
Investments
For securities held as investments, fair value equals quoted market price,
if available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities. The carrying amount of
accrued interest receivable approximates its fair value.
Loans
The fair value of fixed rate 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. For
variable rate loans, the carrying amount is a reasonable estimate of fair value.
For loans where collection of principal is in doubt, an allowance for losses has
been estimated. 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
F-17
<PAGE> 97
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 IS
UNAUDITED)
offered for deposits of similar remaining maturities. The carrying amount of
accrued interest payable approximates its fair value.
Commitments to Extend Credit, Standby 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 credit worthiness of the counterparts. 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 them or otherwise settle the
obligations with the counterparts at the reporting date. There is no material
difference between the notional amount and the estimated fair value of loan
commitments and letters of credit. In addition, fees collected from these
arrangements are considered to be immaterial.
The following table presents estimated fair values of the Company's
financial instruments as of December 31, 1999:
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Financial assets
Cash and due from banks................................... $ 7,782 $ 7,782
Interest bearing deposits................................. 99 99
Securities available for sale............................. 22,193 22,193
Federal Home Loan Bank stock.............................. 724 724
Loans, less allowance for loan losses..................... 129,297 127,926
Accrued interest receivable............................... 871 871
Financial liabilities
Deposits.................................................. 141,926 141,904
Federal funds purchased................................... 9,200 9,200
Long-term debt............................................ 12,627 12,627
Accrued interest payable.................................. 396 396
</TABLE>
F-18
<PAGE> 98
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 IS
UNAUDITED)
NOTE P -- PARENT COMPANY FINANCIAL INFORMATION
Following are summarized balance sheets and income statements of the
Company on a parent company only basis at the periods indicated:
FRONT RANGE CAPITAL CORPORATION
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash........................................................ $ 5 $ 58
Investment in subsidiary bank............................... 12,522 10,684
Due from subsidiary......................................... -- 16
Goodwill, net of amortization............................... 132 136
Other assets................................................ 84 --
------- -------
$12,743 $10,894
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accrued interest payable.................................. $ 54 $ 30
Notes payable............................................. 3,792 3,402
------- -------
Total liabilities...................................... 3,846 3,432
Stockholders' equity
Preferred stock........................................... -- --
Common stock.............................................. 1 1
Capital surplus........................................... 4,616 4,616
Retained earnings......................................... 4,662 3,537
Accumulated other comprehensive income (loss)............. (382) (692)
------- -------
8,897 7,462
------- -------
$12,743 $10,894
======= =======
</TABLE>
F-19
<PAGE> 99
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 IS
UNAUDITED)
FRONT RANGE CAPITAL CORPORATION
STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- --------------
2000 1999 1999 1998
------- ------- ------ -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue
Dividends from bank....................................... $ -- $ -- $ -- $ 38
------ ------ ------ -----
Total revenue..................................... -- -- -- 38
Expenses
Professional fees......................................... 33 1 10 4
Other..................................................... 8 6 8 7
Interest.................................................. 252 139 201 149
------ ------ ------ -----
Total operating expenses.......................... 293 146 219 160
Net operating income (loss)................................. (293) (146) (219) (122)
Income tax benefit (expense)................................ 125 -- 80 58
------ ------ ------ -----
Income (loss) before equity in undistributed income of
subsidiary............................................. (168) (146) (139) (64)
Equity in undistributed net income of subsidiary............ 1,293 1,028 1,501 578
------ ------ ------ -----
NET INCOME................................................ $1,125 $ 882 $1,362 $ 514
====== ====== ====== =====
</TABLE>
F-20
<PAGE> 100
FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 IS
UNAUDITED)
FRONT RANGE CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ----------------
2000 1999 1999 1998
------- -------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $1,125 $ 882 $1,362 $ 514
Adjustments to reconcile net income to net cash provided
by operating activities
Equity in undistributed earnings of subsidiaries....... (1,293) (1,028) (1,501) (578)
Amortization of goodwill............................... 4 4 6 5
Changes in deferrals and accruals
Accrued interest payable............................... 24 21 30 (10)
Amount due from subsidiaries........................... 16 131 115 (57)
Other.................................................. (841) 25 -- --
------ ------- ------ -------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES................................... (208) 35 12 (126)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiary bank............................ (235) (820) (1,300) (2,513)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings....................... 390 755 1,315 2,515
Payments on long-term borrowing.......................... -- -- -- (1,550)
Sale of common stock..................................... -- 24 24 1,665
------ ------- ------ -------
NET CASH PROVIDED BY FINANCING ACTIVITIES...... 390 779 1,339 2,630
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... (53) (6) 51 (9)
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD......... 58 7 7 16
------ ------- ------ -------
CASH AND CASH EQUIVALENTS -- END OF PERIOD............... $ 5 $ 1 $ 58 $ 7
====== ======= ====== =======
</TABLE>
NOTE Q -- SUBSEQUENT EVENTS (UNAUDITED)
On June 23, 2000, Front Range Capital Trust I was formed by filing a
Certificate of Trust with the Secretary of State of the State of Delaware. The
Company intends for the Trust to become its wholly-owned subsidiary upon the
Company's purchase of all the Trust's common securities. Through September 30,
2000, the Trust had not issued any securities, and had no assets, liabilities or
operations.
On October 19, 2000, certain loans from stockholders totaling $1,317,000
were converted to 1,317 shares of the Company's 2000 series B Preferred Stock
(2000 Preferred Stock). The 2000 Preferred Stock has a par value of $0.001 per
share and a purchase price of $1,000 per share.
Owners of 2000 Preferred Stock are entitled to receive annually, cumulative
cash dividends in an amount equal to the prime rate, published in the Wall
Street Journal, multiplied by the purchase price paid. Dividends accumulate from
October 19, 2000 and will be paid quarterly beginning December 31, 2000.
Dividends are payable at the discretion of the Board of Directors.
The 2000 Preferred Stock is redeemable solely at the Company's option. The
redemption price is $1,000 per share plus any accumulated and unpaid dividends
as of the date of the redemption.
F-21
<PAGE> 101
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1,000,000 TRUST PREFERRED SECURITIES
FRONT RANGE CAPITAL TRUST I
11% CUMULATIVE TRUST PREFERRED SECURITIES
FULLY, IRREVOCABLY AND UNCONDITIONALLY GUARANTEED
ON A SUBORDINATED BASIS BY
FRONT RANGE CAPITAL CORPORATION
------------------------
PROSPECTUS
------------------------
HOWE BARNES INVESTMENTS, INC.
DECEMBER 21, 2000
UNTIL JANUARY 15, 2001, ALL DEALERS THAT EFFECT TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO
THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
--------------------------------------------------------------------------------
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