<PAGE> 1
Filed Pursuant Rule 424(a)
File No. 333-24781
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the Registration Statement
becomes effective. This Prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED APRIL 21, 1997
700,000 CAPITAL SECURITIES
VBC CAPITAL I
% CUMULATIVE CAPITAL SECURITIES
(LIQUIDATION AMOUNT $25 PER CAPITAL SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
VECTRA BANKING CORPORATION
[VECTRA BANK LOGO]
The % Cumulative Capital Securities (the "Capital Securities") offered
hereby represent undivided beneficial interests in the assets of VBC Capital I,
a statutory business trust formed under the laws of the State of Delaware ("VBC
Capital"). Vectra Banking Corporation, a Colorado corporation (the "Company"),
will be the owner of all of the beneficial interests represented by common
securities of VBC Capital (the "Common Securities" and, collectively with the
Capital Securities, the "Trust Securities"). VBC Capital exists for the sole
purpose of issuing the Trust Securities and investing the proceeds thereof in
% Junior Subordinated Debentures (the "Junior Subordinated Debentures") to
be issued by the Company. The Junior Subordinated Debentures will mature on
, 2027, which date may be shortened (such date, as it may be
shortened, the "Stated Maturity") to a date not earlier than , 2002
if certain conditions are met (including the Company having received prior
approval of the Board of Governors of the Federal Reserve System (the "Federal
Reserve") to do so if then required under applicable capital guidelines or
policies of the Federal Reserve). The Capital Securities will have a preference
under certain circumstances with respect to cash distributions and amounts
payable on liquidation, redemption or otherwise over the Common Securities,
which will be held by the Company. See "Description of the Capital Securities --
Subordination of Common Securities of VBC Capital Held by the Company."
(Continued on next page)
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THESE SECURITIES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, BY
ANY OTHER GOVERNMENTAL AGENCY, OR OTHERWISE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
============================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC COMMISSION(1) VBC CAPITAL(2)(3)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Capital Security............................ $25.00 (2) $25.00
- ------------------------------------------------------------------------------------------------------------
Total........................................... $17,500,000 (2) $17,500,000
============================================================================================================
</TABLE>
(1) The Company and VBC Capital have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) In view of the fact that all of the proceeds of the sale of the Capital
Securities will be used to purchase the Junior Subordinated Debentures, the
Company has agreed to pay the Underwriters as compensation for arranging the
investment therein of such proceeds $ per Capital Security, or
$ in the aggregate. See "Underwriting."
(3) Before deducting offering expenses payable by the Company estimated at
$200,000.
---------------------
The Capital Securities are being offered by the Underwriters named herein
subject to prior sale and when, as and if delivered to and accepted by the
Underwriters. It is expected that the Capital Securities will be ready for
delivery in book-entry form only through the facilities of The Depository Trust
Company in New York, New York, on or about , 1997, against payment
therefor in immediately available funds.
DAIN BOSWORTH HOWE BARNES INVESTMENTS, INC.
Incorporated
The date of this Prospectus is , 1997
<PAGE> 2
Holders of the Capital Securities will be entitled to receive preferential
cumulative cash distributions accruing from the date of original issuance and
payable quarterly in arrears on the 15th day of April, July, October and January
of each year (subject to possible deferral as described below), commencing July
15, 1997, at the annual rate of % of the Liquidation Amount of $25 per Capital
Security ("Distributions"). The amount of each Distribution due with respect to
the Capital Securities will include amounts accrued through the date the
distribution payment is due. The Company will have the right to defer payments
of interest on the Junior Subordinated Debentures at any time or from time to
time for a period not exceeding 20 consecutive quarters with respect to each
deferral period (each, an "Extension Period"), provided that no Extension Period
may extend beyond the Stated Maturity of the Junior Subordinated Debentures.
Upon the termination of any such Extension Period and the payment of all amounts
then due, the Company may elect to begin a new Extension Period subject to the
requirements set forth herein. If interest payments on the Junior Subordinated
Debentures are so deferred, Distributions on the Capital Securities will also be
deferred and the Company will not be permitted, subject to certain exceptions
described herein, to declare or pay any cash distributions with respect to its
capital stock or to make any payment with respect to its debt securities that
rank pari passu with or junior to the Junior Subordinated Debentures. During an
Extension Period, interest on the Junior Subordinated Debentures will continue
to accrue (and the amount of Distributions to which holders of the Capital
Securities are entitled will accumulate) at the rate of % per annum,
compounded quarterly, and holders of the Capital Securities will be required to
accrue income and will be required to pay United States federal income tax on
that income. See "Description of Junior Subordinated Debentures -- Option to
Extend Interest Payment Period" and "Certain Federal Income Tax
Consequences -- Interest Income and Original Issue Discount."
The Company has, through the Guarantee, Trust Agreement, Junior
Subordinated Debentures, Indenture and the Expense Agreement (each as defined
herein), taken together, fully, irrevocably and unconditionally guaranteed, on a
subordinated basis, all of VBC Capital's obligations under the Capital
Securities. See "Relationship Among the Capital Securities, the Junior
Subordinated Debentures and the Guarantee -- Full and Unconditional Guarantee."
Under the Guarantee, the Company guarantees the payment of Distributions by VBC
Capital and payments on liquidation of or redemption of the Capital Securities
(subordinate to the right to payment of Senior and Subordinated Debt of the
Company) to the extent of funds held by VBC Capital. The Guarantee does not
cover payment of Distributions when VBC Capital does not have sufficient funds
to pay such Distributions. See "Description of Guarantee." If the Company does
not make required payments on the Junior Subordinated Debentures held by VBC
Capital, VBC Capital will have insufficient funds to pay Distributions on the
Capital Securities. In such event, a holder of the Capital Securities may
institute a legal proceeding directly against the Company to enforce payment of
such Distributions to such holder. See "Description of Junior Subordinated
Debentures -- Enforcement of Certain Rights by Holders of the Capital
Securities." The obligations of the Company under the Guarantee and the Junior
Subordinated Debentures are subordinate and junior in right of payment to all
Senior and Subordinated Debt (as defined in "Description of Junior Subordinated
Debentures -- Subordination") of the Company.
The Capital Securities are subject to mandatory redemption, in whole or in
part, upon repayment of the underlying Junior Subordinated Debentures at
maturity or to the extent of their earlier redemption in an amount equal to the
amount of Junior Subordinated Debentures maturing or being redeemed. The
redemption price will equal the aggregate liquidation preference of the Capital
Securities plus any accumulated and unpaid Distributions thereon to the date of
redemption. The Junior Subordinated Debentures are redeemable prior to maturity
at the option of the Company, subject to any required prior approval of the
Federal Reserve, (i) on or after , 2002, in whole at any time or in
part from time to time, or (ii) at any time, in whole (but not in part), upon
the occurrence and continuation of a Tax Event, an Investment Company Event or a
Capital Treatment Event (each as defined herein), in each case at a redemption
price equal to the accrued and unpaid interest on the Junior Subordinated
Debentures to the date fixed for redemption, plus 100% of the principal amount
thereof. See "Description of the Capital Securities -- Redemption."
(Continued on next page)
2
<PAGE> 3
The Company will have the right at any time to terminate VBC Capital and
cause the Junior Subordinated Debentures to be distributed to the holders of the
Trust Securities in liquidation of VBC Capital, subject to the Company having
received prior approval of the Federal Reserve if required. See "Description of
the Capital Securities -- Redemption." The Junior Subordinated Debentures are
unsecured and subordinated to all Senior and Subordinated Debt, which
essentially consists of all debt of the Company. As of December 31, 1996, the
Company had approximately $4.1 million aggregate principal amount of Senior and
Subordinated Debt outstanding. The terms of the Junior Subordinated Debentures
place no limitation on the amount of Senior and Subordinated Debt that the
Company can issue. See "Description of Junior Subordinated
Debentures -- Subordination."
In the event of the termination of VBC Capital, after satisfaction of
liabilities to creditors of VBC Capital as required by applicable law, the
holders of Capital Securities will be entitled to receive a liquidation amount
of $25 per Capital Security ("Liquidation Amount"), plus accumulated and unpaid
Distributions thereon through the date of distribution, which may be in the form
of a distribution of a Like Amount (as defined herein) of Junior Subordinated
Debentures, including accumulated and unpaid interest thereon equal to the
accumulated and unpaid Distributions on the Capital Securities through the date
of distribution. See "Description of the Capital Securities -- Liquidation
Distribution Upon Termination."
The Company intends to include the Capital Securities for quotation on the
Nasdaq National Market. Although each of the Underwriters has indicated an
intention to make a market in the Capital Securities, the Underwriters are not
obligated to do so, and any market making may be discontinued at any time at the
sole discretion of such Underwriters. There can be no assurance that a market
will develop for the Capital Securities. See "Risk Factors -- Absence of
Existing Public Market" and "Underwriting."
The Capital Securities will be represented by one or more global
certificates registered in the name of The Depository Trust Company (the
"Depositary") or its nominee. Beneficial interests in the Capital Securities
will be shown on, and transfers thereof will be effected only through, records
maintained by participants in the Depositary. Except as described herein, the
Capital Securities in certificate form will not be issued in exchange for global
certificates. See "Book-Entry Issuance."
AS USED HEREIN, (I) THE "INDENTURE" MEANS THE SUBORDINATED INDENTURE DATED
AS OF , 1997, AS AMENDED AND SUPPLEMENTED FROM TIME TO TIME, BETWEEN
THE COMPANY AND WILMINGTON TRUST COMPANY AS TRUSTEE (THE "INDENTURE TRUSTEE"),
UNDER WHICH THE JUNIOR SUBORDINATED DEBENTURES WILL BE ISSUED, AND (II) THE
"PROPERTY TRUSTEE" AND "DELAWARE TRUSTEE" UNDER THE TRUST AGREEMENT EXECUTED BY
THE COMPANY, AS DEPOSITOR, WILMINGTON TRUST COMPANY, AS TRUSTEE, AND THE
ADMINISTRATIVE TRUSTEES NAMED THEREIN, TO BE AMENDED AND RESTATED PURSUANT TO AN
AMENDED AND RESTATED TRUST AGREEMENT EXECUTED BY SUCH PARTIES (AS AMENDED AND
RESTATED, THE "TRUST AGREEMENT") MEANS WILMINGTON TRUST COMPANY.
---------------------
INFORMATION INCLUDED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS
INCLUDES "FORWARD LOOKING STATEMENTS," WHICH CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE,"
"ESTIMATE," OR "CONTINUE," OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON
OR COMPARABLE TERMINOLOGY. THE STATEMENTS IN "RISK FACTORS" BEGINNING ON PAGE 11
OF THE PROSPECTUS AND OTHER STATEMENTS AND DISCLAIMERS IN THE PROSPECTUS
CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING
CERTAIN RISKS AND UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN
SUCH FORWARD-LOOKING STATEMENTS.
3
<PAGE> 4
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-2 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the offering of the
securities offered hereby. This Prospectus does not contain all of the
information set forth in such Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Reports, proxy statements and other information filed by the Company
can be inspected and copies of such material can be obtained at prescribed rates
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Room 1024, Judiciary Plaza, Washington, D.C. 20549, and at the following
Regional Offices of the Commission: Chicago Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and New York
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048. The
Commission also maintains a Web site (http://www.sec.gov) at which reports,
proxy and information statements and other information regarding the Company may
be accessed. In addition, such reports, proxy statements and other information
can also be inspected at the offices of The Nasdaq Stock Market, 1735 K Street,
N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following document filed by the Company with the Commission is
incorporated by reference in this Prospectus: the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of this offering shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained herein or in a document incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed to constitute a part of this
Prospectus, except as so modified or superseded.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the oral or written request of any such
person, a copy of all documents which are incorporated by reference in this
Prospectus, other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to Ray L. Nash, Chief Financial Officer, Vectra
Banking Corporation, 1650 South Colorado Boulevard, Suite 320, Denver, Colorado
80222, telephone number (303) 782-7440.
---------------------
The Company furnishes its securityholders with an Annual Report containing
Consolidated Financial Statements audited by its independent certified public
accountants.
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY EFFECT TRANSACTIONS
WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CAPITAL SECURITIES ON THE
NASDAQ NATIONAL MARKET OR OTHERWISE, AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
4
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial information appearing elsewhere in this
Prospectus or in the documents incorporated into this Prospectus by reference.
Unless the context clearly suggests otherwise, references to the Company include
the Company and its subsidiaries.
THE COMPANY
Vectra Banking Corporation (the "Company") is the second largest
independent Colorado-based bank holding company, with a total of 12 banking
locations serving the Denver/Boulder metropolitan area. Through its bank
subsidiary, Vectra Bank (the "Bank"), the Company provides a broad range of
banking products and services primarily to consumers and small to medium sized
businesses. The Company was founded in 1988 by two senior banking executives
who, together with a small group of investors, provided $9.8 million in initial
capital to the Company. The Company's initial objective was to acquire several
strategically located community banks and transform them into a banking system
that would provide a broad package of products and services to its customers and
growth potential to its shareholders. In 1989, the Company acquired its initial
eight locations having total assets of $156 million. Since that time, the
Company has grown significantly through a combination of internal growth and
acquisitions. At December 31, 1996, the Company had total assets of
approximately $562 million.
In November 1995, the Company completed a merger of First Denver
Corporation ("FDC"), a bank holding company whose primary operating subsidiary
was First National Bank of Denver, into the Company. This acquisition added
approximately $44 million in deposits and $17 million in loans. In June 1996,
the Company acquired Bank Land Company, a bank holding company whose primary
operating subsidiary was Southwest State Bank ("Southwest"). This acquisition
added approximately $96 million in deposits and $74 million in loans. The
addition of the FDC and Southwest banking locations has allowed the Company to
serve a broader base of households and businesses within its market and to
achieve growth in assets and revenue without a proportionate growth in expenses.
The Company intends to continue to pursue its growth strategy through a
combination of internal growth and acquisitions, with the goal of maintaining
and expanding a well-capitalized, customer-focused financial institution.
Management believes that the Company has the executive management team,
distribution network and operational systems support to achieve this goal.
Management also believes that increased consolidation and regulatory burdens are
likely to lead owners of community banks to explore the possibility of a
combination with a broader-based bank holding company such as the Company.
The Company's operating strategy is to continue to build a growing,
profitable community banking network. The principal elements of this strategy
are (i) focus on the financial service needs of consumers and small to medium
sized businesses by combining the elements of service traditionally found in
community banks with product lines typically found in large banks, (ii)
emphasize high quality customer service in all aspects of operations, (iii)
maintain high asset quality and (iv) achieve efficiencies through centralized
administrative and support functions.
The Company's principal executive office is located at 1650 South Colorado
Boulevard, Suite 320, Denver, Colorado 80222, and its telephone number is (303)
782-7440.
VBC CAPITAL
VBC Capital is a statutory business trust formed under Delaware law
pursuant to (i) the Trust Agreement and (ii) the filing of a certificate of
trust with the Delaware Secretary of State on April 4, 1997. VBC Capital's
business and affairs are conducted by the Property Trustee, the Delaware Trustee
and three individual Administrative Trustees who are officers of the Company.
VBC Capital exists for the exclusive purposes of (i) issuing and selling the
Trust Securities, (ii) using the proceeds from the sale of the Trust Securities
to acquire the Junior Subordinated Debentures issued by the Company, and (iii)
engaging in only
5
<PAGE> 6
those other activities necessary, advisable or incidental thereto (such as
registering the transfer of the Trust Securities). Accordingly, the Junior
Subordinated Debentures will be the sole assets of VBC Capital, and payments by
the Company under the Junior Subordinated Debentures and the Expense Agreement
will be the sole revenues of VBC Capital. The Company will acquire Common
Securities in an aggregate liquidation amount equal to 3% of the total
Liquidation Amount of the Capital Securities sold hereunder. All of the Common
Securities will be owned by the Company. The Common Securities will rank pari
passu, and payments will be made thereon pro rata, with the Capital Securities,
except that upon the occurrence and during the continuance of an event of
default under the Trust Agreement resulting from an event of default under the
Indenture, the rights of the Company as holder of the Common Securities to
payment in respect of Distributions and payments upon liquidation, redemption or
otherwise will be subordinated to the rights of the holders of the Capital
Securities. See "Description of the Capital Securities -- Subordination of
Common Securities of VBC Capital Held by the Company." VBC Capital has a term of
31 years, but may terminate earlier as provided in the Trust Agreement.
VBC Capital's principal executive offices are located at 1650 South
Colorado Boulevard, Suite 320, Denver, Colorado 80222, and its telephone number
is (303) 782-7440.
THE OFFERING
Capital Securities
issuer..................... VBC Capital
Securities offered......... 700,000 Capital Securities. The Capital Securities
represent undivided beneficial interests in VBC
Capital's assets, which will consist solely of the
Junior Subordinated Debentures and payments
thereunder.
Distributions.............. The Distributions payable on each Capital Security
will be fixed at a rate per annum of % of the
Liquidation Amount of $25 per Capital Security,
will be cumulative, will accrue from the date of
issuance of the Capital Securities, and will be
payable quarterly in arrears on the 15th day of
April, July, October and January of each year,
commencing on July 15, 1997 (subject to possible
deferral as described below). The amount of each
distribution due with respect to the Capital
Securities will include amounts accrued through the
date the distribution payment is due. See
"Description of the Capital
Securities -- Distributions."
Extension Periods.......... So long as no Debenture Event of Default (as
defined herein) has occurred and is continuing, the
Company will have the right, at any time, to defer
payments of interest on the Junior Subordinated
Debentures by extending the interest payment period
thereon for a period not exceeding 20 consecutive
quarters with respect to each deferral period (each
an "Extension Period"), provided that no Extension
Period may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. If interest
payments are so deferred, Distributions on the
Capital Securities will also be deferred and the
Company will not be permitted, subject to certain
exceptions described herein, to declare or pay any
cash distributions with respect to the Company's
capital stock or debt securities that rank pari
passu with or junior to the Junior Subordinated
Debentures. During an Extension Period,
Distributions will continue to accrue with income
thereon compounded quarterly. Because interest
would continue to accrue and compound on the Junior
Subordinated Debentures, to the extent permitted by
applicable law, holders of the Capital Securities
would be required to accrue income for United
States federal income tax purposes. See
"Description of Junior Subordinated
Debentures -- Option to Extend Interest Payment
Period" and "Certain Federal Income Tax
Consequences -- Interest Income and Original Issue
Discount."
6
<PAGE> 7
Maturity................... The Junior Subordinated Debentures will mature on
, 2027, which date may be shortened
(such date, as it may be shortened, the "Stated
Maturity") to a date not earlier than ,
2002 if certain conditions are met (including the
Company having received prior approval of the
Federal Reserve to do so if then required under
applicable capital guidelines or policies of the
Federal Reserve).
Redemption................. The Capital Securities are subject to mandatory
redemption upon repayment of the Junior
Subordinated Debentures at maturity or their
earlier redemption in an amount equal to the amount
of Junior Subordinated Debentures maturing or being
redeemed at a redemption price equal to the
aggregate Liquidation Amount of the Capital
Securities, plus accumulated and unpaid
Distributions thereon to the date of redemption.
Subject to Federal Reserve approval, if then
required under applicable capital guidelines or
policies of the Federal Reserve, the Junior
Subordinated Debentures are redeemable prior to
maturity at the option of the Company (i) on or
after , 2002, in whole at any time or
in part from time to time, or (ii) at any time, in
whole (but not in part), upon the occurrence and
during the continuance of a Tax Event, an
Investment Company Event or a Capital Treatment
Event, in each case at a redemption price equal to
100% of the principal amount of the Junior
Subordinated Debentures so redeemed, together with
any accrued but unpaid interest to the date fixed
for redemption. See "Description of the Capital
Securities -- Redemption" and "Description of
Junior Subordinated Debentures -- Redemption."
Distribution of Junior
Subordinated
Debentures............... The Company has the right at any time to terminate
VBC Capital and cause the Junior Subordinated
Debentures to be distributed to holders of Capital
Securities in liquidation of VBC Capital, subject
to the Company having received prior approval of
the Federal Reserve to do so if then required under
applicable capital guidelines or policies of the
Federal Reserve. See "Description of the Capital
Securities -- Distribution of Junior Subordinated
Debentures."
Guarantee.................. Taken together, the Company's obligations under
various documents described herein, including the
Guarantee, provide a full guarantee on a
subordinated basis of payments by VBC Capital of
Distributions and other amounts due on the Capital
Securities. Under the Guarantee, the Company
guarantees the payment of Distributions by VBC
Capital and payments on liquidation of or
redemption of the Capital Securities (subordinate
to the right to payment of Senior and Subordinated
Debt of the Company, as defined herein) to the
extent of funds held by VBC Capital. If VBC Capital
has insufficient funds to pay Distributions on the
Capital Securities (i.e., if the Company has failed
to make required payments under the Junior
Subordinated Debentures), a holder of the Capital
Securities would have the right to institute a
legal proceeding directly against the Company to
enforce payment of such Distributions to such
holder. See "Description of Junior Subordinated
Debentures -- Enforcement of Certain Rights of
Holders of the Capital Securities," "Description of
Junior Subordinated Debentures -- Debenture Events
of Default" and "Description of Guarantee."
7
<PAGE> 8
Ranking.................... The Capital Securities will rank pari passu, and
payments thereon will be made pro rata, with the
Common Securities of VBC Capital held by the
Company, except as described under "Description of
the Capital Securities -- Subordination of Common
Securities of VBC Capital Held by the Company." The
obligations of the Company under the Guarantee, the
Junior Subordinated Debentures and other documents
described herein are unsecured and rank subordinate
and junior in right of payment to all current and
future Senior and Subordinated Debt, the amount of
which is unlimited. At December 31, 1996, the
aggregate outstanding Senior and Subordinated Debt
of the Company was approximately $4.1 million. In
addition, because the Company is a holding company,
all obligations of the Company relating to the
securities described herein will be effectively
subordinated to all existing and future liabilities
of the Company's subsidiaries, including the Bank.
The Company may cause additional capital securities
to be issued by trusts similar to VBC Capital in
the future, and there is no limit on the amount of
such securities that may be issued. In this event,
the Company's obligations under the junior
subordinated debentures to be issued to such other
trusts and the Company's guarantees of the payments
by such trusts will rank pari passu with the
Company's obligations under the Junior Subordinated
Debentures and the Guarantee, respectively.
Voting Rights.............. The holders of the Capital Securities will
generally have limited voting rights relating only
to the modification of the Capital Securities, the
dissolution, winding-up or termination of VBC
Capital and certain other matters described herein.
See "Description of the Capital Securities --
Voting Rights; Amendment of Trust Agreement."
Proposed Nasdaq National
Market Symbol............ VTRAO
Use of Proceeds............ The proceeds to VBC Capital from the sale of the
Capital Securities offered hereby will be invested
by VBC Capital in the Junior Subordinated
Debentures of the Company. The Company intends to
use the net proceeds from the issuance of the
Junior Subordinated Debentures for redemption of
its outstanding $.95 Series A Cumulative Preferred
Stock (approximately $8.3 million) and for general
corporate purposes, which may include without
limitation possible future acquisitions, funding
investments in, or extensions of credit to, the
Company's subsidiaries and repayment of existing
obligations. The Company expects the Capital
Securities to qualify as Tier 1 capital under the
capital guidelines of the Federal Reserve subject
to regulatory limitations. See "Use of Proceeds."
8
<PAGE> 9
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data concerning
the Company. The selected financial data for each of the five years ended
December 31, 1996, is derived from the Consolidated Financial Statements of the
Company and related notes thereto, and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In November 1995, the Company completed a merger of FDC into the
Company, which was accounted for as a pooling of interests. Accordingly, the
Consolidated Financial Statements reflect the Company and FDC combined for all
years presented. In June 1996, the Company acquired Southwest, which was
accounted for using purchase accounting. Accordingly, Southwest's balances and
results of operations have been included in the Consolidated Financial
Statements only from the date of acquisition forward. See Note 2 of Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Interest income................................... $ 37,957 $ 34,253 $ 28,543 $ 18,700 $ 17,385
Interest expense.................................. 15,230 16,330 11,172 5,912 6,044
Net interest income............................... 22,727 17,923 17,371 12,788 11,341
Provision for loan losses......................... 916 795 794 283 363
Other income...................................... 4,492 3,820 3,507 4,001 3,988
Other expenses.................................... 17,918 15,871 15,052 14,752 13,421
Net earnings...................................... 5,445 3,303 2,675 2,410 1,518
Net earnings available to common shareholders..... 4,271 2,538 2,096 2,404 1,498
BALANCE SHEET:
Total assets...................................... $561,811 $417,806 $462,314 $293,700 $262,625
Net loans......................................... 315,667 204,171 179,766 140,750 125,316
Securities available for sale and held to
maturity........................................ 181,258 171,198 235,086 112,277 93,182
Nonperforming assets(1)........................... 3,550 2,369 2,477 3,077 5,323
Deposits.......................................... 439,351 307,085 268,184 250,111 205,097
Shareholders' equity.............................. 45,435 30,185 23,593 17,353 15,048
PER SHARE:
Earnings per common share and common equivalent
share(2)........................................ $ 1.31 $ 0.79 $ 0.69 $ 0.95 $ 0.63
Earnings per common share assuming full
dilution(2)..................................... 1.26 0.78 0.69 0.95 0.63
Book value per pro forma fully converted common
share(3)........................................ 9.28 6.93 4.86 5.91 4.69
Tangible book value per pro forma fully converted
common share(3)................................. 7.30 6.84 4.86 5.91 4.69
KEY RATIOS:
Net interest margin............................... 5.20% 4.42% 4.66% 5.30% 5.71%
Net interest spread............................... 4.29 3.57 3.95 4.68 5.04
Return on average assets.......................... 1.13 0.75 0.66 0.88 0.65
Return on average common equity................... 15.74 13.41 12.65 15.37 11.61
Shareholders' equity to total assets.............. 8.09 7.22 5.10 5.91 5.73
Nonperforming assets to total assets.............. 0.63 0.57 0.54 1.05 2.03
Nonperforming loans to total loans................ 0.79 0.67 0.62 1.34 2.52
Allowance for loan losses to total loans.......... 1.32 1.21 1.10 1.62 1.63
Allowance for loan losses to nonperforming
loans........................................... 166.92 181.31 176.75 121.42 64.68
Ratio of earnings to fixed charges(4):
Excluding interest on deposits.................. 2.36x 1.54x 1.74x 2.20x 1.95x
Including interest on deposits.................. 1.49 1.28 1.41 1.28 1.24
</TABLE>
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(1) Includes loans 90 days or more delinquent and still accruing interest,
nonaccrual loans, restructured loans and real estate and other assets
acquired by foreclosure.
(2) See Note 17 of Notes to Consolidated Financial Statements.
(3) Assumes the conversion of $10,971,000 of $100 Series A Convertible Preferred
Stock into 827,992 shares of common stock.
(4) 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, including the interest
component of rental expense, and preferred stock dividends. Fixed charges
attributable to the preferred stock dividends are assumed to equal the
amount of pre-tax earnings that would be necessary to pay such dividends.
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[VECTRA BANK LOGO]
BANKING LOCATIONS
[MAP OF BANKING LOCATIONS]
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RISK FACTORS
Prospective investors should consider, among other things, the following
factors in connection with a decision to purchase the Capital Securities.
RANKING OF THE COMPANY'S OBLIGATIONS UNDER THE JUNIOR SUBORDINATED DEBENTURES
AND THE GUARANTEE
The ability of VBC Capital to pay amounts due to holders of the Capital
Securities is solely dependent upon the Company making payments on the Junior
Subordinated Debentures as and when required. All obligations of the Company
under the Guarantee, the Junior Subordinated Debentures and other documents
described herein are unsecured and rank subordinate and junior in right of
payment to all current and future Senior and Subordinated Debt, the amount of
which is unlimited. At December 31, 1996, the aggregate outstanding Senior and
Subordinated Debt of the Company was approximately $4.1 million. None of the
Indenture, the Guarantee or the Trust Agreement places any limitation on the
amount of secured or unsecured debt, including Senior and Subordinated Debt,
that may be incurred by the Company or its subsidiaries. Further, there is no
limitation on the Company's ability to issue additional junior subordinated
debentures in connection with any future offerings of capital securities, and
any such additional debentures would rank pari passu with the Junior
Subordinated Debentures.
In addition, because the Company is a holding company, all obligations of
the Company relating to the securities described herein will be effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries, including the Bank. As a holding company, the right of the Company
to participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise (and thus the ability of
holders of the Capital Securities to benefit indirectly from such distribution)
is subject to the prior claims of creditors of that subsidiary, except to the
extent that the Company may itself be recognized as a creditor of that
subsidiary. Accordingly, holders of the Capital Securities should look only to
the assets of the Company, and not of its subsidiaries, for principal and
interest payments on the Junior Subordinated Debentures. See "Description of
Junior Subordinated Debentures -- Subordination" and "Description of
Guarantee -- Status of the Guarantee."
DEPENDENCE ON DIVIDENDS FROM SUBSIDIARY BANK
As a holding company, with the substantial majority of its assets
represented by its equity interest in the Bank, the Company's ability to pay
interest on the Junior Subordinated Debentures to VBC Capital (and consequently
VBC Capital's ability to pay Distributions on the Capital Securities and the
Company's ability to pay its obligations on the Guarantee) depends primarily
upon the cash dividends the Company receives from the Bank. Dividend payments
from the Bank are subject to regulatory limitations, generally based on current
and retained earnings, imposed by the various regulatory agencies with authority
over the Bank. Payment of dividends is also subject to regulatory restrictions
if such dividends would impair the capital of the Bank. Payment of Bank
dividends is also subject to its profitability, financial condition and capital
expenditures and other cash flow requirements. No assurance can be given that
the Bank will be able to pay dividends at past levels, or at all, in the future.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES OF A DEFERRAL OF
INTEREST PAYMENTS
So long as no Debenture Event of Default (as defined herein) has occurred
and is continuing, the Company has the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarters with respect to
each Extension Period, provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated Debentures. As a consequence of any
such deferral, quarterly Distributions on the Capital Securities by VBC Capital
will be deferred (and the amount of Distributions to which holders of the
Capital Securities are entitled will accumulate additional amounts thereon at
the rate of % per annum, compounded quarterly, from the relevant payment date
for such Distributions, to the extent permitted by applicable law) during any
such Extension Period. During any such Extension Period, the Company will be
prohibited from making certain payments or distributions with respect to the
Company's capital stock
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(including dividends on or redemptions of common or preferred stock) and from
making certain payments with respect to any debt securities of the Company that
rank pari passu with or junior in interest to the Junior Subordinated
Debentures; however, the Company will not be restricted from (a) paying
dividends or distributions in common stock of the Company, (b) redeeming rights
or taking certain other actions under a stockholders' rights plan, if any, (c)
making payments under the Guarantee or (d) making purchases of common stock
related to the issuance of common stock or rights under any of the Company's
benefit plans for its directors, officers or employees. Further, during an
Extension Period, the Company would have the ability to continue to make
payments on Senior and Subordinated Debt. Prior to the termination of any
Extension Period, the Company may further extend such Extension Period provided
that such extension does not cause such Extension Period to exceed 20
consecutive quarters or to extend beyond the Stated Maturity. Upon the
termination of any Extension Period and the payment of all interest then accrued
and unpaid (together with interest thereon at the annual rate of %, compounded
quarterly, to the extent permitted by applicable law), the Company may elect to
begin a new Extension Period subject to the above requirements. There is no
limitation on the number of times that the Company may elect to begin an
Extension Period. See "Description of the Capital Securities -- Distributions"
and "Description of Junior Subordinated Debentures -- Option to Extend Interest
Payment Period."
The Company believes the likelihood of it exercising its option to defer
payments of interest is remote since, among other things, exercising the option
would prevent the Company from declaring dividends or distributions on its
capital stock. Consequently, the Junior Subordinated Debentures will be treated
as issued without "original issue discount" for United States federal income tax
purposes. As a result, holders of Capital Securities will include interest in
taxable income under their own methods of accounting (i.e., cash or accrual). If
the Company exercises its right to defer payments of interest or if the Internal
Revenue Service successfully took the position that the exercise of such right
was not remote at the time of issuance of the Junior Subordinated Debentures,
original issue discount would arise, and the holders of Capital Securities would
be required to include their pro rata share of original issue discount in gross
income as it accrues for United States federal income tax purposes in advance of
the receipt of cash. See "Certain Federal Income Tax Consequences -- Potential
Extension of Interest Payment Period and Original Issue Discount." The Company
has no current intention of exercising its right to defer payments of interest
by extending the interest payment period on the Junior Subordinated Debentures.
However, should the Company elect to exercise its right to defer payments of
interest in the future, the market price of the Capital Securities is likely to
be adversely affected. A holder that disposes of such holder's Capital
Securities during an Extension Period, therefore, might not receive the same
return on such holder's investment as a holder that continues to hold the
Capital Securities.
TAX EVENT REDEMPTION, INVESTMENT COMPANY ACT REDEMPTION OR CAPITAL TREATMENT
EVENT REDEMPTION
Upon the occurrence and during the continuation of a Tax Event, an
Investment Company Event or a Capital Treatment Event (whether occurring before
or after , 2002), the Company has the right to redeem the Junior
Subordinated Debentures in whole (but not in part) at 100% of the principal
amount together with accrued but unpaid interest to the date fixed for
redemption within 90 days following the occurrence of such Tax Event, Investment
Company Event or Capital Treatment Event and therefore cause a mandatory
redemption of the Trust Securities. The exercise of such right is subject to the
Company having received prior approval of the Federal Reserve to do so if then
required under applicable guidelines or policies of the Federal Reserve. See
"Description of the Capital Securities -- Redemption."
A "Tax Event" means the receipt by the Company and VBC Capital of an
opinion of counsel experienced in such matters to the effect that, as a result
of any amendment to, or change (including any announced prospective change) in,
the laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such pronouncement or decision is announced on or after the original issuance of
the Capital Securities, there is more than an insubstantial risk that (i) VBC
Capital is, or will be within 90 days of the date of such opinion, subject to
United States federal income tax with respect to income received or accrued on
the Junior
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Subordinated Debentures, (ii) interest payable by the Company on the Junior
Subordinated Debentures is not, or within 90 days of such opinion, will not be,
deductible by the Company, in whole or in part, for United States federal income
tax purposes, or (iii) VBC Capital is, or will be within 90 days of the date of
the opinion, subject to more than a de minimis amount of other taxes, duties or
other governmental charges. See "-- Possible Tax Law Changes Affecting the
Capital Securities" below for a discussion of certain legislative proposals
that, if adopted, could give rise to a Tax Event, which may permit the Company
to cause a redemption of the Junior Subordinated Debentures (and therefore the
Capital Securities) prior to , 2002.
An "Investment Company Event" means the receipt by the Company and VBC
Capital of an opinion of counsel experienced in such matters to the effect that,
as a result of any change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, VBC Capital is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act, which change becomes effective on or after the original issuance of
the Capital Securities.
A "Capital Treatment Event" means the reasonable determination by the
Company that, as a result of any amendment to, or change (including any proposed
change) in, the laws (or any regulations thereunder) of the United States or any
political subdivision thereof or therein, or as a result of any official or
administrative pronouncement or action or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such proposed change, pronouncement or decision is announced on or after the
date of issuance of the Capital Securities under the Trust Agreement, there is
more than an insubstantial risk of impairment of the Company's ability to treat
the Capital Securities (or any substantial portion thereof) as "Tier 1 Capital"
(or the then equivalent thereof) for purposes of the capital adequacy guidelines
of the Federal Reserve, as then in effect and applicable to the Company.
POSSIBLE TAX LAW CHANGES AFFECTING THE CAPITAL SECURITIES
On February 6, 1997, the Clinton Administration submitted Revenue Proposals
(the "Proposals") to the 105th Congress. If enacted, the Proposals would
generally deny deductions for interest on an instrument issued by a publicly
traded corporation (a) that has a maximum weighted average maturity of more than
40 years or (b) has a maximum term of more than 15 years and that is not shown
as indebtedness on the separate balance sheet of the issuer or, where the
instrument is issued to a related party (other than a corporation), where the
holder or some other related party issues a related instrument that is not shown
as indebtedness on the issuer's consolidated balance sheet. For purposes of
determining the weighted average maturity or the term of an instrument, any
right to extend would be treated as exercised. The above-described provisions of
the Proposals are proposed to be effective generally for instruments issued on
or after the date of first Congressional committee action on the Proposals. If
either provision were to apply to the Junior Subordinated Debentures, the
Company would not be able to deduct interest on the Junior Subordinated
Debentures. If the proposed legislation is ultimately enacted and if the
effective date provision contained in the Proposals is followed, such
legislation would not apply to the Junior Subordinated Debentures. There can be
no assurance, however, that current or future legislative proposals or final
legislation will not adversely affect the ability of the Company to deduct
interest on the Junior Subordinated Debentures or otherwise affect the tax
treatment of the transaction described herein. Such a change could give rise to
a Tax Event, which may permit the Company, upon approval of the Federal Reserve
if then required under applicable capital guidelines or policies of the Federal
Reserve, to cause a redemption of the Capital Securities prior to ,
2002. See "Description of the Capital Securities -- Redemption -- Tax Event
Redemption" and "Description of the Junior Subordinated
Debentures -- Redemption." See also "Certain Federal Income Tax
Consequences -- Possible Tax Law Changes."
POSSIBLE DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF CAPITAL
SECURITIES
The Company will have the right at any time to terminate VBC Capital and
cause the Junior Subordinated Debentures to be distributed to the holders of the
Capital Securities in liquidation of VBC Capital, subject to the receipt of any
required prior approval of the Federal Reserve. Because holders of the
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Capital Securities may receive Junior Subordinated Debentures in liquidation of
VBC Capital and because Distributions are otherwise limited to payments on the
Junior Subordinated Debentures, prospective purchasers of the Capital Securities
are also making an investment decision with regard to the Junior Subordinated
Debentures and should carefully review all the information regarding the Junior
Subordinated Debentures contained herein. See "Description of the Capital
Securities -- Liquidation Distribution Upon Termination" and "Description of the
Junior Subordinated Debentures."
LIMITATIONS ON DIRECT ACTIONS AGAINST THE COMPANY AND ON RIGHTS UNDER THE
GUARANTEE
Under the Guarantee, the Company guarantees the payment of Distributions by
VBC Capital and payments on liquidation of or redemption of the Capital
Securities (subordinate to the right to payment of Senior and Subordinated Debt
of the Company) to the extent of funds held by VBC Capital. If VBC Capital has
insufficient funds to pay Distributions on the Capital Securities (i.e., if the
Company has failed to make required payments under the Junior Subordinated
Debentures), a holder of the Capital Securities would have the right to
institute a legal proceeding directly against the Company for enforcement of
payment to such holder of the principal of or interest on such Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Capital Securities of such holder (a "Direct Action").
Except as described herein, holders of the Capital Securities will not be able
to exercise directly any other remedy available to the holders of the Junior
Subordinated Debentures or assert directly any other rights in respect of the
Junior Subordinated Debentures.
Under the Guarantee, Wilmington Trust Company will act as indenture trustee
(the "Guarantee Trustee"). The holders of not less than a majority in aggregate
Liquidation Amount of the Capital 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 or to direct the exercise of any
trust power conferred upon the Guarantee Trustee under the Guarantee Agreement.
Any holder of the Capital Securities may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against VBC Capital, the Guarantee Trustee or any
other person or entity. The Trust Agreement provides that each holder of the
Capital Securities by acceptance thereof agrees to the provisions of the
Guarantee Agreement and the Indenture. See "Description of Junior Subordinated
Debentures -- Enforcement of Certain Rights of Holders of Capital Securities"
and "-- Debenture Events of Default" and "Description of Guarantee."
LIMITED COVENANTS
The covenants in the Indenture are limited, and there are no covenants
relating to the Company in the Trust Agreement. As a result, neither the
Indenture nor the Trust Agreement protects holders of Junior Subordinated
Debentures, or Capital Securities, respectively, in the event of a material
adverse change in the Company's financial condition or results of operations or
limits the ability of the Company or any subsidiary to incur additional
indebtedness. Therefore, the provisions of these governing instruments should
not be considered a significant factor in evaluating whether the Company will be
able to comply with its obligations under the Junior Subordinated Debentures or
the Guarantee.
LIMITED VOTING RIGHTS
Holders of the Capital Securities will generally have limited voting rights
relating only to the modification of the Capital Securities and certain other
matters described herein. In the event that (i) there is a Debenture Event of
Default (as defined herein) with respect to the Junior Subordinated Debentures
(see "Description of the Junior Subordinated Debentures -- Events of Default"),
(ii) the Property Trustee fails to pay any Distribution on the Capital
Securities for 30 days (subject to deferral of Distributions as provided under
"Description of the Capital Securities -- Extension Periods"), (iii) the
Property Trustee fails to pay the redemption price on the Capital Securities
when due upon redemption, (iv) the Property Trustee fails to observe a covenant
in the Trust Agreement for the Capital Securities for 60 days after receiving a
Notice of Default, or (v) the Property Trustee is declared bankrupt or insolvent
and not replaced by the Company within 60 days, the holders of a majority of the
outstanding Capital Securities will be able to remove the
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Property Trustee and the Indenture Trustee (but not the Administrative Trustees
who may only be removed by the Company as holder of the Common Securities). See
"Description of the Capital Securities -- Voting Rights; Amendment of the Trust
Agreement" and "-- Removal of Trustees."
ABSENCE OF EXISTING PUBLIC MARKET; MARKET PRICES
There is no existing market for the Capital Securities. An application is
pending for listing of the Capital Securities on the Nasdaq National Market
System. There can be no assurance that an active and liquid trading market for
the Capital Securities will develop or that a listing of the Capital Securities
will be available on Nasdaq. Although each Underwriter has informed VBC Capital
and the Company that such Underwriter intends to make a market in the Capital
Securities offered hereby, the Underwriters are not obligated to do so and any
such market making activity may be terminated at any time without notice to the
holders of the Capital Securities. Future trading prices of the Capital
Securities will depend on many factors including, among other things, prevailing
interest rates, the operating results and financial condition of the Company,
and the market for similar securities. There can be no assurance as to the
market prices for the Capital Securities or the Junior Subordinated Debentures
that may be distributed in exchange for the Capital Securities if the Company
exercises its right to terminate VBC Capital. Accordingly, the Capital
Securities that an investor may purchase, or the Junior Subordinated Debentures
that a holder of the Capital Securities may receive in liquidation of VBC
Capital, may decline in value from the price that the investor paid to purchase
the Capital Securities offered hereby.
GROWTH AND ACQUISITION STRATEGIES
The Company has pursued and intends to continue to pursue an internal
growth strategy, the success of which will depend primarily on generating an
increasing level of loans and deposits at acceptable risk levels and terms
without proportionate increases in noninterest expenses. There can be no
assurance that the Company will be successful in implementing its internal
growth strategy. In addition, the Company has grown and may seek to grow by
acquiring other financial institutions. Any acquisitions will be subject to
regulatory approval, and there can be no assurance that the Company will obtain
such approvals. Although the Company does not have any signed contracts, letters
of intent or agreements in principle, the Company routinely solicits and reviews
acquisition opportunities and, at any given time, may have bids outstanding or
may be involved in discussions with the owners of financial institutions or
other parties relative to a particular financial institution. The Company may
not be successful in identifying further acquisition candidates, integrating
acquired institutions or preventing deposit erosion at acquired institutions.
Competition for acquisitions in the Company's market area is highly competitive,
and the Company may not be able to acquire other institutions on attractive
terms. Furthermore, the success of the growth strategy of the Company will
depend on maintaining sufficient regulatory capital levels and on continued
favorable economic conditions in the Denver/Boulder area.
MARKET VALUE OF INVESTMENTS; INTEREST RATE CEILINGS
Substantially all of the Company's securities investment portfolio has been
designated as available for sale pursuant to Statement of Financial Accounting
Standards No. 115 ("SFAS 115") relating to accounting for investments. SFAS 115
requires that unrealized gains and losses in the estimated value of the
available for sale portfolio (net of tax) be "marked to market" and reflected as
a separate item in shareholders' equity. At December 31, 1996, the Company
maintained approximately 32.2% of its assets in securities available for sale.
Shareholders' equity will continue to reflect the unrealized gains and losses
(net of tax) of these investments. There can be no assurance that the market
value of the Company's investment portfolio will not decline, causing a
corresponding decline in shareholders' equity.
Management believes that several factors will affect the market values of
the Company's investment portfolio. These include, but are not limited to,
changes in interest rates or expectations of changes, the degree of volatility
in the securities markets, inflation rates or expectations of inflation and the
slope of the interest rate yield curve. (The yield curve refers to the
differences between longer-term and shorter-term interest rates. A positively
sloped yield curve means shorter-term rates are lower than longer-term rates.)
Also, the passage
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of time will affect the market values of the securities, in that the closer they
are to maturing, the closer the market price should be to par value. In addition
to the foregoing, there are other factors that impact specific categories of the
portfolio differently.
In addition, substantially all of the variable rate securities in the
investment portfolio of the Company are subject to interest rate ceilings. The
market values of these securities would likely decline, causing a corresponding
decline in shareholders' equity, if the coupon rates increased to the ceiling
levels or higher. This could also negatively impact net interest income
depending on corresponding changes in the cost of deposits and other
liabilities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
ALLOWANCE FOR LOAN LOSSES
Inability of borrowers to repay loans can erode earnings and capital of
banks. Like all banks, the Company maintains an allowance for loan losses to
provide for loan defaults and nonperformance. The allowance is based on prior
experience with loan losses, as well as an evaluation of the risks in the
current portfolio, and is maintained at a level considered adequate by
management to absorb anticipated losses. The amount of future losses is
susceptible to changes in economic, operating and other conditions, including
changes in interest rates, that may be beyond management's control, and such
losses may exceed current estimates. At December 31, 1996, the Company had
nonperforming loans of $2.5 million and an allowance for loan losses of $4.2
million or 1.32% of total loans and 167% of nonperforming loans. There can be no
assurance that the Company's allowance for loan losses will be adequate to cover
actual losses. Future provisions for loan losses could materially and adversely
affect results of operations of the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
ECONOMIC CONDITIONS AND IMPACT OF INTEREST RATES
Results of operations for financial institutions, including the Company,
may be materially and adversely affected by changes in prevailing economic
conditions, including declines in real estate values, rapid changes in interest
rates and the monetary and fiscal policies of the federal government. The
profitability of the Company is in part a function of the spread between the
interest rates earned on assets and the interest rates paid on deposits and
other interest-bearing liabilities, including advances from the Federal Home
Loan Bank ("FHLB"). A decrease in interest rate spreads would have a negative
effect on the net interest income and profitability of the Company, and there
can be no assurance that this spread will not decrease. Although economic
conditions in the market area of the Company have been generally stronger than
those in many other regions of the country, there can be no assurance that such
conditions will continue to prevail. Moreover, substantially all of the loans of
the Company are to individuals and businesses in the Denver/Boulder area, and
any decline in the economy of this market area could have an adverse impact on
the Company. There can be no assurance that positive trends or developments
discussed herein will continue or that negative trends or developments will not
have a material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
COMPETITIVE BANKING ENVIRONMENT
The banking business in Colorado is highly competitive. The Company
competes for loans and deposits with other local, regional and national
commercial banks, savings banks, savings and loan associations, finance
companies, money market funds, brokerage houses, credit unions and nonfinancial
institutions, many of which have substantially greater financial resources than
the Company. Interstate banking is permitted in Colorado. Currently, branch
banking in Colorado is allowed on a limited basis. After a phase-in period
ending July 1, 1997, full state-wide branch banking will be permitted. As a
result, management believes that the Company may experience greater competition
in its market area.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the continued services of Gary S. Judd,
its President and Chief Executive Officer, Ray L. Nash, its Chief Financial
Officer, and other key management personnel. The
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Company does not have employment agreements with such persons, nor does it have
key person insurance on any of their lives. The loss of the services of these
persons could adversely affect the Company. See "Management."
GOVERNMENT REGULATION AND RECENT LEGISLATION
The Company and the Bank are subject to extensive federal and state
legislation, regulation and supervision which is intended primarily to protect
depositors and the Bank Insurance Fund, rather than investors. Recently enacted,
proposed and future legislation and regulations designed to strengthen the
banking industry have had and may continue to have a significant impact on the
banking industry. Although some of the legislative and regulatory changes may
benefit the Company and the Bank, others may increase their costs of doing
business or otherwise adversely affect them and create competitive advantages
for non-bank competitors.
USE OF PROCEEDS
All of the proceeds from the sale of Capital Securities will be invested by
VBC Capital in the Junior Subordinated Debentures. The net proceeds to the
Company from the sale of the Junior Subordinated Debentures of the Company are
estimated to be $16.4 million (net of estimated underwriting commission and
other estimated offering expenses). The Company intends to use the net proceeds
for redemption of the Company's outstanding $.95 Series A Cumulative Preferred
Stock (approximately $8.3 million) and for general corporate purposes, which may
include without limitation possible future acquisitions, funding investments in,
or extensions of credit to, the Company's subsidiaries, and repayment of
existing obligations. Although the Company does not have any signed contracts,
letters of intent or agreements in principle, the Company routinely solicits and
reviews acquisition opportunities and, at any given time, may have bids
outstanding or may be involved in discussions with the owners of financial
institutions or other parties relative to a particular financial institution.
Pending their application, the net proceeds may be invested in short-term
investment grade financial instruments.
The Company is required by the Federal Reserve to maintain certain levels
of capital for bank regulatory purposes. On October 21, 1996, the Federal
Reserve announced that certain qualifying amounts of securities having the
characteristics of the Capital Securities could be included as Tier 1 capital
for bank holding companies subject to certain limitations. See "Capitalization."
Such Tier 1 capital treatment, together with the Company's ability to deduct,
for federal income tax purposes, interest payable on the Junior Subordinated
Debentures, will provide the Company with a cost-effective means of obtaining
capital for bank regulatory purposes.
ACCOUNTING TREATMENT
For financial reporting purposes, VBC Capital will be treated as a
subsidiary of the Company and, accordingly, the accounts of VBC Capital will be
included in the Consolidated Financial Statements of the Company. The Capital
Securities will be presented as a separate line item in the consolidated balance
sheets of the Company under the caption "Company Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures," and appropriate disclosures about the Capital
Securities, the Guarantee and the Junior Subordinated Debentures will be
included in the Notes to Consolidated Financial Statements. For financial
reporting purposes, the Company will record Distributions payable on the Capital
Securities as interest expense in the consolidated statements of operations.
Future reports of the Company filed under the Exchange Act will include a
footnote to the financial statements stating that (i) VBC Capital is
wholly-owned, (ii) the sole assets of VBC Capital are the Junior Subordinated
Debentures (specifying the principal amount, interest rate and maturity date of
such Junior Subordinated Debentures), and (iii) the obligations of the Company
described herein, in the aggregate, constitute a full and unconditional
guarantee on a subordinated basis by the Company of the obligations of VBC
Capital under the Capital Securities. VBC Capital will not provide separate
reports under the Exchange Act.
17
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization (including deposits) of
the Company at December 31, 1996 and as adjusted to give effect to the issuance
of the Capital Securities by VBC Capital in this offering and the use of
proceeds therefrom.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deposits.................................................... $439,351 $439,351
======== ========
Borrowings:
Advances from the Federal Home Loan Bank and federal funds
purchased.............................................. $ 59,700 $ 59,700
Securities and loans sold under agreements to
repurchase............................................. 10,733 10,733
Notes payable............................................. 4,050 4,050
-------- --------
Total borrowings.................................. $ 74,483 $ 74,483
======== ========
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely Junior
Subordinated Debentures(1)................................ $ -- $ 17,500
======== ========
Shareholders' equity:
Preferred stock, $.10 par value:
$.95 Series A Cumulative Preferred Stock; 805,000
shares issued and outstanding......................... $ 8,050 $ --
$100 Series A Convertible Preferred Stock; 109,709
shares issued and outstanding......................... 10,971 10,971
Common Stock, $.01 par value; 7,000,000 shares
authorized; 3,202,412 shares issued and outstanding... 32 32
Capital in excess of par value............................ 25,716 25,716
Retained earnings......................................... 4,441 4,200
Unrealized loss on securities available for sale, net of
income tax effect of $2,246............................ (3,775) (3,775)
-------- --------
Total shareholders' equity........................ $ 45,435 $ 37,114
======== ========
Consolidated regulatory capital ratios:
Total capital to risk-weighted assets..................... 11.6% 13.9%
Tier 1 capital to risk-weighted assets(2)................. 10.5 11.2
Tier 1 capital to tangible assets(2)...................... 7.0 7.5
</TABLE>
- ---------------
(1) The subsidiary trust is VBC Capital, a wholly-owned subsidiary of the
Company that will hold approximately $18.0 million principal amount of
Junior Subordinated Debentures issued by the Company to VBC Capital as its
sole asset. The Capital Securities are issued by VBC Capital. See
"Description of Junior Subordinated Debentures." The Company owns all of the
Common Securities of VBC Capital.
(2) The Capital Securities have been structured to qualify as Tier 1 capital.
However, the Capital Securities cannot be used to constitute, together with
outstanding cumulative preferred stock of the Company, more than 25% of the
Company's total Tier 1 capital. As adjusted for this offering, the Company's
Tier 1 capital as of December 31, 1996 would have been $43.9 million of
which $11.0 million would have been attributable to the Capital Securities.
Any future increases in other elements of the Company's Tier 1 capital,
including retained earnings, will allow the Company to include greater
portions of the Capital Securities offered hereby in Tier 1 capital.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT AND RISK FACTORS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes included elsewhere herein.
The Company's future operating results may be affected by various trends and
factors which are beyond the Company's control. These include, among other
factors, the competitive banking environment in which the Company operates,
dependence on key personnel, changes in allowances for loan losses, risks
relating to the Company's growth strategy, changes in general economic
conditions and interest rates, rapid or unexpected changes in technologies and
other uncertain business conditions that affect the Company's business.
Accordingly, past results and trends may not be reliable indicators of future
results or trends.
With the exception of historical information, the matters discussed below
include forward-looking statements that involve risks and uncertainties. The
Company wishes to caution readers that a number of important factors discussed
herein, and in other reports filed with the Securities and Exchange Commission,
could affect the Company's actual results and cause actual results to differ
materially from those in the forward-looking statements.
OVERVIEW
The Company's net income is derived primarily from net interest income. Net
interest income is the difference between interest income, principally from
loans and investment securities, and interest expense, principally on customer
deposits and borrowings. Changes in net interest income result from changes in
volume, net interest spread and net interest margin. Volume refers to the
average dollar levels of interest-earning assets and interest-bearing
liabilities. Net interest spread refers to the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities. Net interest margin refers to net interest income divided by
average interest-earning assets and is influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities.
One of the Company's strategies has been to leverage its capital to
maximize earnings capacity. In executing this strategy, the Company has borrowed
from the FHLB. These borrowings, which generally adjust monthly, have been used
to fund loan growth and to fund the purchase of additional adjustable rate
securities.
The Company's objectives are to increase loans as a percent of total assets
and to fund growth in its asset base with growth in deposits and equity to the
extent possible. However, the Company plans to maintain an appropriate level of
wholesale funding, including borrowings from the FHLB, as a means of enhancing
overall earnings and return on equity. In pursuing these objectives, the Company
expects overall yields on assets to increase -- since loans produce higher
yields than investments -- and further expects to minimize potential volatility
in the performance and market value of its investment portfolio as investments
become a smaller percent of total assets. The combination of internal growth and
the pooling of interests merger with FDC in 1995 and the acquisition of
Southwest in 1996 have allowed the Company to achieve progress towards these
objectives. The ratio of loans to total assets increased to 56.9% at the end of
1996 compared to 49.5% at the end of 1995 and 39.3% at the end of 1994.
Borrowings from the FHLB and other federal funds purchased decreased to 10.6% of
assets at the end of 1996 from 16.8% at the end of 1995 and 35.1% at the end of
1994. Net interest margin increased to 5.20% in 1996 compared to 4.42% in 1995
and 4.66% in 1994. See Note 7 of Notes to Consolidated Financial Statements.
19
<PAGE> 20
NET INTEREST INCOME
The following tables set forth information for the periods indicated with
regard to average balances of assets and liabilities, as well as the total
dollar amounts of interest income from interest-earning assets and interest
expense on interest-bearing liabilities, resultant yields or costs, net interest
income, net interest spread, net interest margin and the ratio of average
interest-earning assets to average interest-bearing liabilities for the Company.
These schedules have been adjusted to a fully taxable equivalent basis for 1996.
There were no adjustments for 1995 and 1994 related to tax-exempt interest as
such interest was not significant prior to 1996. In November 1995, FDC merged
with the Company in a pooling of interests. Accordingly, all financial
statements included herein reflect the Company and FDC as combined for all
periods presented. In June 1996, the Company acquired Southwest in a transaction
accounted for using purchase accounting. Accordingly, balances and results of
operations of Southwest have been included in the Company's financial statements
only from the date of acquisition forward.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1995
--------------------------------- -------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED YIELD AVERAGE EARNED YIELD
BALANCE OR PAID OR COST BALANCE OR PAID OR COST
-------- -------- --------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold.......... $ 231 $ 12 5.25% $ 1,846 $ 113 6.12%
Investments................. 180,829 11,188 6.19 211,153 13,579 6.43
Investment in stock of the
Federal Home Loan Bank.... 4,554 294 6.46 7,003 428 6.11
Loans(1).................... 255,761 26,531 10.37 187,637 20,133 10.73
Allowance for loan losses... (3,313) -- -- (2,282) -- --
-------- ------- -------- -------
Total interest-earning
assets.............. 438,062 38,025 8.68 405,357 34,253 8.45
Noninterest-earning assets
Cash and due from banks... 21,229 15,549
Other..................... 23,801 19,283
-------- --------
Total assets.......... $483,092 $440,189
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
NOW and money market
accounts................ $ 78,227 $ 1,972 2.52% $ 65,715 $ 1,721 2.62%
Savings................... 117,270 4,930 4.20 87,072 3,846 4.42
Certificates of deposit:
Under $100,000.......... 56,243 3,089 5.49 41,445 2,305 5.56
$100,000 and over....... 20,461 1,132 5.53 11,345 638 5.62
-------- ------- -------- -------
Total interest-bearing
deposits............ 272,201 11,123 4.09 205,577 8,510 4.14
Advances from the Federal
Home Loan Bank and federal
funds purchased........... 64,743 3,547 5.48 123,083 7,483 6.08
Securities and loans sold
under agreements to
repurchase................ 7,565 352 4.65 4,899 240 4.90
Notes payable............... 2,573 208 8.08 1,076 97 9.01
-------- ------- -------- -------
Total interest-bearing
liabilities......... 347,082 15,230 4.39 334,635 16,330 4.88
Noninterest-bearing demand
accounts.................. 95,555 76,072
-------- --------
Total deposits and
interest-bearing
liabilities......... 442,637 410,707
Other noninterest-bearing
liabilities............... 2,672 2,499
-------- --------
Total liabilities..... 445,309 413,206
Shareholders' equity........ 37,783 26,983
-------- --------
Total liabilities and
shareholders'
equity.............. $483,092 $440,189
======== ========
Net interest income......... $22,795 $17,923
======= =======
Net interest spread......... 4.29% 3.57%
===== =====
Net interest margin......... 5.20% 4.42%
===== =====
Ratio of average
interest-earning assets to
average interest-bearing
liabilities................. 126% 121%
======== ========
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994
--------------------------------
INTEREST AVERAGE
AVERAGE EARNED YIELD
BALANCE OR PAID OR COST
-------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Federal funds sold.......... $ 2,424 $ 98 4.05%
Investments................. 205,060 12,004 5.85
Investment in stock of the
Federal Home Loan Bank.... 6,765 398 5.88
Loans(1).................... 160,944 16,043 9.97
Allowance for loan losses... (2,145) -- --
-------- -------
Total interest-earning
assets.............. 373,048 28,543 7.65
Noninterest-earning assets
Cash and due from banks... 16,268
Other..................... 16,885
--------
Total assets.......... $406,201
========
LIABILITIES AND SHAREHOLDERS'
Deposits:
NOW and money market
accounts................ $ 70,884 $ 1,553 2.19%
Savings................... 83,521 2,979 3.57
Certificates of deposit:
Under $100,000.......... 19,996 695 3.48
$100,000 and over....... 7,669 289 3.77
-------- -------
Total interest-bearing
deposits............ 182,070 5,516 3.03
Advances from the Federal
Home Loan Bank and federal
funds purchased........... 114,989 5,420 4.71
Securities and loans sold
under agreements to
repurchase................ 3,333 116 3.48
Notes payable............... 1,357 120 8.84
-------- -------
Total interest-bearing
liabilities......... 301,749 11,172 3.70
Noninterest-bearing demand
accounts.................. 77,733
--------
Total deposits and
interest-bearing
liabilities......... 379,482
Other noninterest-bearing
liabilities............... 2,099
--------
Total liabilities..... 381,581
Shareholders' equity........ 24,620
--------
Total liabilities and
shareholders'
equity.............. $406,201
========
Net interest income......... $17,371
=======
Net interest spread......... 3.95%
===
Net interest margin......... 4.66%
===
Ratio of average
interest-earning assets to
average interest-bearing
liabilities................. 124%
========
</TABLE>
- ---------------
(1) Loans are net of unearned discount. Nonaccruals are included in average
loans outstanding. Loan fees are included in interest income as follows:
1996 -- $1,269,000; 1995 -- $1,225,000; 1994 -- $1,156,000.
20
<PAGE> 21
The following table illustrates, for the periods indicated, the changes in
the Company's net interest income due to changes in volume and changes in
interest rates. Changes in net interest income due to both volume and rate have
been included in the changes due to rate.
<TABLE>
<CAPTION>
1996 COMPARED TO 1995: 1995 COMPARED TO 1994:
INCREASE (DECREASE) IN INCREASE (DECREASE) IN
NET INTEREST INCOME NET INTEREST INCOME
DUE TO CHANGE IN DUE TO CHANGE IN
----------------------------- -----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold........... $ (99) $ (2) $ (101) $ (23) $ 38 $ 15
Investments.................. (1,950) (441) (2,391) 357 1,218 1,575
Investment in stock of the
Federal Home Loan Bank.... (150) 16 (134) 14 16 30
Loans........................ 7,310 (912) 6,398 2,661 1,429 4,090
------- ------- ------- ------- ------- -------
Total
interest-earning
assets............. 5,112 (1,340) 3,772 3,009 2,701 5,710
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
NOW and money market
accounts.................. (328) 77 (251) 113 (281) (168)
Savings...................... (1,334) 250 (1,084) (127) (740) (867)
Certificates of deposit:
Under $100,000............ (823) 39 (784) (746) (864) (1,610)
$100,000 and over......... (513) 19 (494) (139) (210) (349)
Advances from the Federal
Home Loan Bank and federal
funds purchased........... 3,547 389 3,936 (382) (1,681) (2,063)
Securities and loans sold
under agreements to
repurchase................ (131) 19 (112) (55) (69) (124)
Notes payable................ (135) 24 (111) 25 (2) 23
------- ------- ------- ------- ------- -------
Total
interest-bearing
liabilities........ 283 817 1,100 (1,311) (3,847) (5,158)
------- ------- ------- ------- ------- -------
Net increase
(decrease) in net
interest
income............. $ 5,395 $ (523) $ 4,872 $ 1,698 $(1,146) $ 552
======= ======= ======= ======= ======= =======
</TABLE>
ASSET/LIABILITY MANAGEMENT
The Company's liquidity management objective is to ensure its ability to
satisfy cash flow requirements of depositors, borrowers and the Company's
operations. The Company has two basic sources of liquidity. The first is its
retail deposit base served by its banking offices. The Company has successfully
increased core deposits through its retail network by implementing deposit
programs and promotions directed at existing and potential customers and via the
acquisition of other banks. Average deposits increased by $86.1 million or 30.6%
in 1996 compared to 1995. Approximately $51.4 million of the increase relates to
the time weighted average of deposits acquired with the acquisition of Southwest
with the remaining $34.7 million representing internally generated growth.
The second source of liquidity is from borrowings, primarily from the FHLB.
This source is used regularly in the Company's cash management function both to
fund a portion of the investment portfolio and to manage the day-to-day
fluctuations in liquidity resulting from needs of depositors and borrowers. At
December 31, 1996, the Company had available approximately $88 million of unused
borrowing capacity, principally from the FHLB. The borrowing line from the FHLB
is collateralized by investments and loans. Sources of borrowing other than the
FHLB include unsecured federal funds purchase lines from three banks.
21
<PAGE> 22
Regular use of the FHLB as a liquidity management tool has enabled the Company
to hold federal funds sold to a low level without impairing its ability to
manage liquidity adequately. The Company anticipates that it will continue to
rely primarily upon customer deposits, FHLB borrowings, loan repayments, loan
sales and retained earnings to provide liquidity and will use funds so provided
primarily to make loans and to purchase investment securities.
The mismatch between maturities and interest rate sensitivities of assets
and liabilities results in interest rate risk. Rising and falling interest rate
environments can have various impacts on net interest income, depending on the
difference between the repricing of interest-earning assets and interest-bearing
liabilities, unscheduled repayments of loans and investments, early withdrawals
of deposits and other factors. The factor of most potential significance to
overall interest rate risk is basis risk which is the degree to which yields on
assets and costs of liabilities may adjust differently over time and in relation
to other interest rate changes.
The Company has focused on maintaining balance between interest rate
sensitive assets and liabilities and repricing frequencies. An important element
of this focus has been to emphasize variable rate loans and investments funded
by deposits and FHLB borrowings which also mature or reprice over short time
periods.
22
<PAGE> 23
The following table sets forth the estimated maturity or repricing, and the
resulting interest rate gap, of the Company's interest-earning assets and
interest-bearing liabilities at December 31, 1996. All amounts in the table are
based on contractual repricing schedules except for fixed rate mortgage-related
securities for which maturities are estimated based upon recent prepayment
experience and assumed future prepayment rates. Actual prepayment and withdrawal
experience may vary significantly from the assumptions reflected in the table.
<TABLE>
<CAPTION>
ESTIMATED MATURITY OR REPRICING AT DECEMBER 31, 1996
--------------------------------------------------------------------
THREE MONTHS
LESS THAN TO LESS THAN ONE TO OVER
THREE MONTHS ONE YEAR FIVE YEARS FIVE YEARS TOTAL
------------ ------------ ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed-rate commercial loans.... $ 7,050 $ 10,500 $ 30,525 $ 10,082 $ 58,157
Fixed-rate consumer loans...... 3,042 13,906 42,817 19,413 79,178
Variable-rate commercial
loans....................... 159,879 -- -- -- 159,879
Variable-rate consumer loans... 21,067 381 1,243 -- 22,691
Investment securities.......... 125,266 29,734 35,418 471 190,889
Federal funds sold............. -- -- -- -- --
-------- -------- -------- -------- --------
Total interest-earning
assets............... 316,304 54,521 110,003 29,966 510,794
Interest-bearing liabilities:
NOW and MMA.................... 88,466 -- -- -- 88,466
Savings........................ 128,890 -- -- -- 128,890
Certificates of deposit under
$100,000.................... 8,491 39,388 16,993 -- 64,872
Certificates of deposit
$100,000 and over........... 6,319 25,497 2,594 -- 34,410
Advances from the Federal Home
Loan Bank and federal funds
purchased................... 59,700 -- -- -- 59,700
Other interest-bearing
liabilities................. 10,733 -- -- 4,050 14,783
-------- -------- -------- -------- --------
Total interest-bearing
liabilities.......... 302,599 64,885 19,587 4,050 391,121
-------- -------- -------- -------- --------
Interest rate gap................ $ 13,705 $(10,364) $ 90,416 $ 25,916 $119,673
======== ======== ======== ======== ========
Cumulative interest rate gap at
December 31, 1996.............. $ 13,705 $ 3,341 $ 93,757 $119,673
======== ======== ======== ========
Cumulative interest rate gap to
total assets................... 2.4% 0.6% 16.7% 21.3%
======== ======== ======== ========
</TABLE>
23
<PAGE> 24
The following table presents at December 31, 1996, loans by maturity in
each major category of the Company's portfolio. Actual maturities may differ
from the contractual maturities shown below as a result of renewals and
prepayments. Loan renewals are evaluated in the same manner as new credit
applications.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
LESS THAN ONE TO OVER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial................................... $37,599 $ 31,841 $12,228 $ 81,668
Real estate -- mortgage...................... 32,881 76,675 65,872 175,428
Real estate -- construction.................. 21,110 1,677 470 23,257
Installment and revolving lines of credit.... 1,263 34,415 1,383 37,061
Loans held for sale.......................... 2,864 -- -- 2,864
------- -------- ------- --------
Total face amount of loans......... $95,717 $144,608 $79,953 320,278
======= ======== =======
Deferred loans fees, discounts and costs,
net........................................ (373)
--------
Total loans................................ $319,905
========
</TABLE>
Of the $224.6 million of loans that mature after one year, a total of
$102.8 million are fixed rate loans and $121.8 million are variable rate loans.
In addition to reviewing its gap position, the Company uses an interest
rate risk model to evaluate the potential impact that changes in interest rates
might have on earnings and the estimated market value of the Company's equity.
The Company has adopted profitability, liquidity and market valuation parameters
and objectives against which modeled results are measured. If projections, which
are updated at least quarterly, indicate unacceptable risk to achievement of
established parameters, management reviews the reasons and develops plans to
mitigate or minimize such risks.
At December 31, 1996, the Company had approximately $187.0 million of
assets (substantially all of its floating rate loans and $4.4 million of its
investments) and $74.5 million of liabilities (advances from FHLB and securities
and loans sold under agreements to repurchase) on which interest rates have
adjusted, generally within 30 days, in the direction of and by the approximate
magnitude of changes in the federal funds rate. Such assets and liabilities are
indexed to or closely tied to the prime rate or other short-term indices.
Management expects these assets and liabilities to continue to adjust in
reaction to future changes in the federal funds rate except that it is possible,
as has sometimes happened in previous cycles of changing interest rates, that
the prime rate may not change by the magnitude of all changes in the federal
funds rate. If the prime rate were to rise by a lesser degree than increases in
the federal funds rate or decline by more than the degree of declines in the
federal funds rate, the Company's net interest income would likely be negatively
impacted, at least temporarily.
Competitive pressures are significant in determining the rates paid on
interest-bearing deposits. In 1995 compared to 1994, the average cost of all
deposits increased by a larger percentage than the increase in average yield on
interest-earning assets. This was not the case, however, in 1996 when the
average cost of all deposits remained unchanged at 3.02% compared to 1995 while
the average yield on interest-earning assets increased 0.23%. The levels, mix
and cost of deposits are significant factors impacting overall net interest
income.
Net interest income is also impacted significantly by the levels and
maturities of fixed rate securities and loans and the levels of
noninterest-bearing deposits, other noninterest-bearing liabilities and
shareholders' equity. The Company's combined average of noninterest-bearing
deposits, other noninterest-bearing liabilities and shareholders' equity in 1996
totaled $136.0 million, up from $105.6 million in 1995 and totaled $170.7
million at December 31, 1996. At December 31, 1996, fixed rate loans and
investments totaled approximately $192 million. As these loans and investments
mature, they can either be replaced with variable rate loans or securities or
with then current market rate fixed rate loans or securities or the proceeds can
be used to reduce borrowings from the FHLB.
24
<PAGE> 25
INVESTING ACTIVITIES
During 1996, the Company focused attention on selected restructuring of its
investment portfolio with the objective of reducing the potential volatility to
market value changes and basis risk that might be caused by changes in interest
rates. Securities sold included fixed and variable rate collateralized mortgage
obligations ("CMOs") and certain other mortgage backed securities ("MBS").
Securities purchased were generally fixed rate obligations of U.S. government
agencies with maturities of three years or less, most of which are callable.
Certain variable rate CMOs and MBS were also purchased during 1996.
The Company's strategy of leveraging its capital to maximize earnings
capacity has been accomplished with borrowings from the FHLB. These borrowings,
which generally adjust monthly, are used as a wholesale funding source for the
purchase of additional adjustable rate securities, which also generally adjust
monthly, semiannually or annually. Average FHLB advances in 1996 of $64.7
million were down 47.4% from the $123 million average balance in 1995. In 1995,
the level of these activities was reduced compared to 1994 consistent with the
Company's objective of replacing investments with higher yielding loans and
replacing borrowings with customer deposits. Although the 1995 average FHLB
borrowings were up $8 million from the 1994 average, the balance at December 31,
1995 was reduced to $70 million from $162 million one year earlier. The
profitability of these activities increased during 1996 compared to 1995.
Evidence of such increase is the 0.24% decline in the average yield on
investments in 1996 from 1995 versus a larger 0.49% decrease in the average cost
of all interest-bearing liabilities. The significant flattening of the interest
rate yield curve during 1995 reduced the profitability of these investing
activities compared to 1994. The 1995 yield on investments increased only 0.58%
over 1994 while the cost of interest-bearing liabilities increased by 1.18%.
The following table summarizes certain information about the Company's
investment portfolio:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------------------------------- -----------------------
EXCESS OF
UNREALIZED INTEREST RATE UNREALIZED
INDEX TO WHICH MARKET CAPS OVER ESTIMATED MARKET
COUPON ON AMORTIZED VALUE CURRENT AVERAGE AMORTIZED VALUE
DESCRIPTION SECURITY IS TIED COST ADJUSTMENTS COUPONS LIVES COST ADJUSTMENTS
----------- ---------------- --------- ----------- ------------- ---------- --------- -----------
(DOLLARS IN MILLIONS) (IN YEARS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
CMO-Floating rate........ COFI $ 37.6 $(1.7) 3.5% 14.3 $ 44.3 $(1.1)
CMO-Floating rate........ 10 yr CMT 75.5 (3.6) 3.9 14.8 76.5 (3.5)
CMO-Floating rate........ 7 yr CMT 9.6 (0.1) 4.3 5.4 8.9 (0.1)
CMO-Floating rate........ 1 mo LIBOR 1.4 0.0 2.3 2.8 4.7 (0.1)
CMO-Fixed rate........... N.A. 7.4 (0.3) N.A. 2.3 13.1 (0.3)
MBS-Adjustable rate...... 6 mo LIBOR 4.9 0.1 3.3 5.0 -- --
MBS-Adjustable rate...... 1 yr CMT 3.9 0.0 2.6 3.7 2.4 0.1
FHLB Dual Indexed Notes.. (1) 5.8 (0.4) N.M. 6.5 5.8 (0.7)
FHLB Inverse Floating
Note.................... 3 mo LIBOR 5.0 (0.1) N.M. 1.8 5.0 (0.3)
U.S. Treasuries.......... N.A. 5.0 0.0 N.A. 1.5 5.0 0.0
SBA Guaranteed........... Prime 3.0 0.0 N.A. 2.0 4.3 0.1
Govt. Sponsored
Agencies................ N.A. 23.9 0.1 N.A. 3.0
Municipal Securities..... N.A. 2.5 0.0 N.A. 4.2
Other.................... 1.5 0.0 N.A. N.A. 6.2 0.1
------ ----- ------ -----
Total portfolio.......... $187.0 $(6.0) $176.2 $(5.8)
====== ===== ====== =====
<CAPTION>
DECEMBER 31, 1995
--------------------------
EXCESS OF
INTEREST RATE
CAPS OVER ESTIMATED
CURRENT AVERAGE
DESCRIPTION COUPONS LIVES
----------- ------------- ----------
(IN YEARS)
<S> <C> <C>
CMO-Floating rate........ 3.2% 10.6
CMO-Floating rate........ 4.3 13.5
CMO-Floating rate........ 4.8 5.7
CMO-Floating rate........ 3.0 2.8
CMO-Fixed rate........... N.A. 1.7
MBS-Adjustable rate...... -- --
MBS-Adjustable rate...... 4.0 5.0
FHLB Dual Indexed Notes.. N.M. 7.5
FHLB Inverse Floating
Note.................... N.M. 2.8
U.S. Treasuries.......... N.A. 1.5
SBA Guaranteed........... N.A. 3.4
Govt. Sponsored
Agencies................
Municipal Securities.....
Other.................... N.A. N.A.
Total portfolio..........
</TABLE>
The adjustable rate portion of the Company's investment portfolio at
December 31, 1996 is distributed as follows:
<TABLE>
<CAPTION>
BY INDEX BY ADJUSTMENT FREQUENCY LEGEND OF TERMS
-------- ----------------------- ---------------
<S> <C> <C> <C> <C>
10 yr CMT.......... 51% Monthly............ 83% CMO -- Collateralized Mortgage Obligation
COFI............... 26 Quarterly.......... 6 COFI -- FHLB 11th District cost-of-funds index
7 yr CMT........... 7 Semi-annually...... 9 CMT -- Index of constant maturing U.S. Treasury
Dual Index......... 4 Annually........... 2 securities
1 mo LIBOR......... 1 --- MBS -- Mortgage Backed Securities
3 mo LIBOR......... 3 Total.............. 100% LIBOR -- London Interbank Offered Rate Index
Prime.............. 2 === N.M. -- Not meaningful
1 yr CMT........... 3 N.A. -- Not applicable
Other.............. 3
---
Total.............. 100%
===
</TABLE>
- ---------------
(1) The coupon on these securities is set at the 10 year CMT less the six month
LIBOR plus 4.75%.
25
<PAGE> 26
Movements in COFI historically lag behind movements in other indices. For
example, the 10 year CMT and the 6 month LIBOR were at or near cyclical lows in
October of 1993 and reached cyclical highs in November or December of 1994. In
contrast, COFI reached its cyclical low in March of 1994 and its cyclical high
in June of 1995. As a result of the lagging character of COFI, the CMOs indexed
to it produced lower yields when interest rates were rising in 1994 than did
other floating rate securities. It is likely that COFI will continue to lag
other indices and that during times of falling interest rates it may provide
superior yields to other floating rate CMOs. Despite its lagging nature,
movements in COFI correspond reasonably well with changes in the Company's cost
of deposits. The market value of the COFI indexed CMOs is impacted by both their
yield relative to other securities and to their expected average lives. To
reduce the potential market value and yield volatility in its portfolio, the
Company sold approximately $15 million of COFI indexed CMOs in 1995 and another
$6 million in 1996.
Yields on the Company's CMOs indexed to the seven and 10 year CMT indices
fluctuate directly as such indices fluctuate. The averages for the 10 year CMT
index were 6.44%, 6.57% and 7.08% in 1996, 1995 and 1994, respectively. The
relative contribution of these securities to net interest income will generally
depend on the slope of the yield curve and their yields relative to the cost of
funds. Throughout 1995 there was relatively little change in the federal funds
rates but the seven and 10 year CMT indices declined significantly. This
resulted in a very flat or inverted yield curve compared to historical norms and
resulted in decreases in the contributions to net interest income from these two
classes of CMOs compared to 1994. During 1996, these two indices increased from
their levels at the end of 1995 as the yield curve regained some steepness. More
information on the impact on net interest income of a flat yield curve is
included in "Results of Operations" below. As a result of their lower yields
relative to other securities and their longer expected average lives, the market
values of the CMOs indexed to the seven and 10 year CMT at December 31, 1996
remained at levels similar to those at December 31, 1995. Historically, periods
of flat or inverted yield curves have not persisted for prolonged periods. If
the yield curve were to steepen, management believes that net interest income
would be positively impacted and that the market values of these CMOs might
increase.
All of the Company's CMOs are collateralized by fixed rate mortgages and
mortgage backed securities. The average lives of the CMOs fluctuate based on the
prepayment rates of the underlying mortgages. The significant increase in
interest rates in 1994 substantially reduced mortgage prepayment rates which
resulted in significant extensions in the expected average lives of most of the
CMOs.
Most of the current holdings of CMOs were purchased during 1993 and through
the first several months of 1994. The average yields earned on the major classes
of CMOs from then through December 31, 1996, were approximately 6.2% for those
indexed to the 10 year CMT, 6.4% for those indexed to the seven year CMT,
approximately 5.7% for those indexed to COFI and approximately 5.5% for fixed
rate CMOs. Yields on Treasury securities fluctuated during that time frame but,
for comparison purposes, using the average Treasury yields from June 30, 1993,
through April 30, 1994, when the majority of the CMOs were purchased,
investments in two, five or 10 year Treasury securities, if purchased at the
average yields available during such period, would have yielded approximately
4.3%, 5.25% or 5.9% respectively. Treasury security yields at December 31, 1996,
with two, five and 10 year maturities were 5.86%, 6.20% and 6.42% respectively.
The Company's investment portfolio includes $10.75 million face value of
notes issued by the FHLB which were purchased in 1993. The Company purchased
these notes because at the time of purchase they offered excellent yields, and
being United States agency securities, they provided the Company with needed
qualifying collateral to pledge for public deposits. With the increases in
interest rates that started in 1994, the market value of these securities
declined significantly as did their yields. The liquidity of these instruments
also decreased. Management concluded that the proceeds from the sale, at a loss,
of these securities could not have been reinvested in any other acceptable
investment which would have recouped the loss and provided the return to be
realized from continuing to hold these securities.
Of these notes, $5.75 million represent floating rate dual-indexed notes.
The coupon on these notes resets every six months to a rate equal to the 10 year
CMT less the six month LIBOR plus 4.75%. The coupon rate was 7.50% when issued,
4.94% at December 31, 1995 and 5.38% at December 31, 1996. A U. S. Treasury
security of approximately the same maturity was priced to yield approximately
6.3% at December 31, 1996.
26
<PAGE> 27
The coupon rate on these bonds decreases when the yield curve flattens or
becomes inverted and increases when the yield curve steepens. At December 31,
1996, the yield curve was flatter than average with the difference between the
10 year CMT and the six month LIBOR being only 0.70% compared to a 1.18% average
difference for the last 10 years. If the yield curve returned to its normal
shape of the last 10 years, these bonds would have approximately a 5.93% coupon.
These bonds perform best in both yield and market value when interest rates are
low and the yield curve is steep.
The other $5 million investment in FHLB notes was purchased in September
1993 and matures in September 1998. These notes yielded 5.375% during their
first year which ended in September 1994. Thereafter, the coupon resets
quarterly. For the second and third years, the coupon rate was set at 9% minus
the three month LIBOR. In years four (which started in September 1996) and five
the coupon rate is set at 11% minus the three month LIBOR. These notes may be
called by FHLB at any quarterly interest payment date. As a result of the
increase in interest rates in 1994, the coupon rate and market value of these
bonds declined significantly. At December 31, 1994, the coupon rate was 2.64%.
It increased to 3.31% at December 31, 1995, and was at 5.41% at December 31,
1996. With the increase in the coupon on this security and the proximity of its
maturity, its market value increased to 98.9% of par value at December 31, 1996,
compared to 94.5% one year earlier.
As indicated in the table above summarizing the investment portfolio of the
Company, substantially all of the Company's variable rate investments are
subject to interest rate caps. To the extent interest rates on securities
increased to or above the level of the caps, net interest income would likely be
negatively impacted depending on corresponding changes in the cost of deposits
and other liabilities.
Basis risk in the structure of the Company's assets and liabilities reduced
net interest margins during 1995 as a result of the significant flattening of
the yield curve. The Company's focus in 1995 and 1996 was to purchase
investments with shorter lives and, if variable rate, to purchase securities
indexed to shorter-term indices with less potential average life extension and
to sell certain investments that would reduce basis risk and market valuation
risk. A moderately steeper yield curve combined with the impacts of the
portfolio changes resulted in improved profitability of the investing activities
in 1996. Management believes its focus on holding a large proportion of its
portfolio in variable rate securities and on maintaining a balanced gap position
is in the Company's best long-term interest.
Substantially all of the Company's investment portfolio is held in the
available-for-sale classification. As a result, the Company reflects a
mark-to-market adjustment on its entire portfolio (net of taxes) in
shareholders' equity. Because of the series of interest rate increases in 1994,
the bond market suffered its most volatile year in decades. This contributed to
a substantial decline in the market values of the Company's investments during
1994. Market values improved since then and the unrealized losses on securities
available for sale decreased from 5.8% of the portfolio or a $7.7 million
adjustment against equity at December 31, 1994, to 3.1% of the portfolio or a
$3.8 million adjustment against equity at December 31, 1996. Management believes
that the Company's capital and liquidity are more than adequate to allow it to
continue to hold its investment portfolio. It also expects that the passage of
time and further restructuring of the portfolio will reduce its exposure to
market value and basis risk.
27
<PAGE> 28
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
earnings and expense data and changes in such data.
<TABLE>
<CAPTION>
YEAR ENDED CHANGE: YEAR ENDED CHANGE: YEAR ENDED
DECEMBER 31, BETTER DECEMBER 31, BETTER DECEMBER 31,
1996 (WORSE) 1995 (WORSE) 1994
------------ ------- ------------ -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income........................... $ 37,957 $ 3,704 $ 34,253 $ 5,710 $ 28,543
Interest expense.......................... (15,230) 1,100 (16,330) (5,158) (11,172)
-------- ------- -------- ------- --------
Net interest income....................... 22,727 4,804 17,923 552 17,371
Provision for loan losses................. (916) (121) (795) (1) (794)
-------- ------- -------- ------- --------
Net interest income after provision for
loan losses............................. 21,811 4,683 17,128 551 16,577
Other income.............................. 4,493 673 3,820 313 3,507
Other expenses............................ (17,918) (2,047) (15,871) (819) (15,052)
-------- ------- -------- ------- --------
Earnings before income taxes and
cumulative effect of changes in
accounting.............................. 8,386 3,309 5,077 45 5,032
Income tax expense........................ (2,941) (1,167) (1,774) (954) (820)
-------- ------- -------- ------- --------
Earnings before cumulative effect of
changes in accounting................... 5,445 2,142 3,303 (909) 4,212
Cumulative effect of change in accounting
for goodwill............................ -- -- -- 1,537 (1,537)
-------- ------- -------- ------- --------
Net earnings.............................. $ 5,445 $ 2,142 $ 3,303 $ 628 $ 2,675
======== ======= ======== ======= ========
</TABLE>
1996 COMPARED TO 1995
On June 18, 1996, the Company completed the Southwest acquisition, which
was accounted for using purchase accounting. As a result, the Company's results
of operations and average balances included the Southwest balances only from the
date of acquisition through December 31, 1996.
Interest Income. Interest income increased $3.7 million to $38.0 million in
1996 from $34.3 million in 1995. This increase resulted primarily from an
increase of $32.7 million in average interest-earning assets to $438.1 million
in 1996 from $405.4 million in 1995. A shift in the mix of assets toward larger
loan balances as a percent of total interest-earning assets also contributed to
the increase. Average loans increased $68.1 million to $255.8 million in 1996
from $187.6 million in 1995 while average investments decreased $32.8 million to
$185.4 million in 1996 from $218.2 million in 1995. Approximately $39 million of
the increase in average loans was a result of the Southwest acquisition. These
asset mix changes are consistent with management's desire to continue the
expansion of the loan portfolio while allowing investments to decline as a
percent of total assets. Lower average yields on both loans and investments
partially offset the increases resulting from higher balances. The yields on
investments and loans in 1996 decreased by 0.24% and 0.36%, respectively,
compared to 1995. The Denver/Boulder marketplace in which the Company operates
has continued to offer good opportunities for expansion of the Company's
customer base and loan portfolio.
Interest Expense. Interest expense decreased $1.1 million to $15.2 million
in 1996 from $16.3 million in 1995. This decrease was the combined effect of a
decrease in the average cost of interest-bearing liabilities to 4.39% in 1996
from 4.88% in 1995, and a $12.4 million increase in average interest-bearing
liabilities to $347.1 million in 1996 from $334.6 million in 1995. Changes in
the relative mix of average interest-bearing liabilities included a $58.3
million decrease in average advances from the FHLB and an increase in average
interest-bearing deposits of $66.6 million. Approximately $51 million of the
average increase in total deposits resulted from the Southwest acquisition. The
cost of the Company's borrowings from the FHLB generally moves in direct
relationship to movements in the federal funds rate. The 0.60% decrease in the
1996 average from 1995 compares to a 0.50% average decrease in federal funds
rates in 1996 from 1995. Expansion of the
28
<PAGE> 29
depositor base provides added customer cross selling opportunities. The Company
expects to continue to supplement its deposit funding with borrowings to fund
loan demand and to finance its investment portfolio.
Net Interest Income. Net interest income increased $4.8 million in 1996
compared to 1995. Net interest margin increased to 5.20% in 1996 from 4.42% in
1995. The increase in net interest income resulted from the increase in
interest-earning assets and in the net interest margin. The principal reason for
the increase in net interest margin was that loans continued to increase in
total and as a percent of total assets. The average yield on loans is
significantly higher than the yield on investments. The acquisition of Southwest
contributed to the improvements in both total net interest income and in the
increase in the net interest margin. Prior to its acquisition, Southwest's net
interest margin exceeded 6%.
Some steepening of the interest rate yield curve in 1996 compared to 1995
has also contributed to the improvement in margins and total net interest
income. The yield curve refers to the difference between interest yields on
longer-term and shorter-term instruments. A flattening of the curve occurs when
the difference between such yields declines as it did from 1995 to 1996. At
December 31, 1995, the yield curve was very flat by historical norms with the
difference between the 10 year CMT index and the targeted overnight federal
funds rate being only 0.08% compared to 1.17% at December 31, 1996, to 2.32% at
December 31, 1994, and to approximately 1.50% over the last 10 years. A
flattening of the yield curve would likely contribute to lower net interest
income while a steepening of the yield curve would likely increase net interest
income. If the Company can continue to increase deposits at a cost less than
FHLB borrowings and/or increase loan balances, which have a higher yield than
investments, net interest income would likely increase.
Provision for Loan Losses. The $121,000 increase in 1996 over the 1995
provision reflects the general growth in the loan portfolio and management's
commitment to maintain an adequate allowance for loan losses.
Other Income. Other income increased $673,000 to $4.5 million in 1996 from
$3.8 million in 1995, principally as a result of a $616,000 increase in service
fees on deposit accounts, a $437,000 increase in gain on sales of loans
partially offset by a $328,000 increase in the net losses on sales of
securities, including a $154,000 loss on the transfer of $2 million of
securities to trading from available for sale. The Company's purchase of MacWest
Mortgage Company on June 30, 1995, which substantially increased mortgage
lending capacity, contributed to an increase in gain on sales of mortgage loans
by $369,000 to $897,000 in 1996 compared to $528,000 in 1995. A $67,000 increase
in gain on sales of SBA guaranteed loans to $544,000 in 1996 from $477,000 in
1995 accounted for substantially all the remaining increase in gain on sales of
loans. Both the mortgage and the SBA lending functions are important to the
Company and to the customers it serves, and management expects to continue its
emphasis on expanding these operations.
Other Expenses. Other expenses increased $2.0 million to $17.9 million in
1996 from $15.9 million in 1995. This increase consisted of increases of $1.8
million in salaries and employee benefits, $306,000 in occupancy, $202,000 in
amortization of intangible assets and $300,000 in other expenses partially
offset by decreases of $326,000 in professional fees and $317,000 in FDIC and
state bank assessments. The increase in salaries and employee benefits was
primarily due to the purchase of Southwest together with a full year's expense
for certain positions added to support the increased mortgage lending
activities, asset growth, pay increases and increased benefits expenses. The
decrease in professional fees was related to the First Denver acquisition and to
legal expenses it incurred prior to the merger in November 1995 related to
litigation which was decided in its favor. No such expenses were incurred in
1996. During 1995, the Company completed the amortization of intangible assets
acquired in connection with acquisitions it made in 1989. In 1996, the Company
began amortizing the intangible asset related to the Southwest acquisition. The
amortization is being recorded on a straight-line basis over 25 years with the
annual charge totaling approximately $320,000.
Income Tax Expense. Income tax expense for 1996 of $2.9 million is
approximately $187,000 less than the amount expected based on the combined
federal and state tax rate of 37.3%. This difference is primarily due to
reversal of a valuation allowance against deferred tax assets and interest
income from certain loans and life insurance policies that is not subject to
income taxes.
29
<PAGE> 30
Asset and Liability Growth. Total assets at December 31, 1996, of $562
million were 34% or $144 million higher than at December 31, 1995. This was
primarily a result of the purchase of Southwest and of the internally generated
increase in loans of approximately $40 million. The increase in loans not only
reflects the strong local economy but also the Company's success in adding to
its customer base. At December 31, 1996, deposits had increased 43% to $439
million from $307 million one year earlier. A $4.3 million increase in retained
earnings plus the issuance of $11 million of new convertible preferred stock in
connection with the Southwest acquisition resulted in a $15.2 million increase
in total shareholders' equity to $45.4 million at December 31, 1996 from $30.2
million one year earlier.
1995 COMPARED TO 1994
Interest Income. Interest income increased $5.7 million to $34.3 million in
1995 from $28.5 million in 1994. This increase resulted primarily from an
increase of $32.3 million in average interest-earning assets to $405.4 million
in 1995 from $373 million in 1994 combined with an overall increase in asset
yields resulting from interest rate increases. A shift in the mix of assets
toward larger loan balances as a percent of total interest-earning assets also
contributed to the increase. Average loans increased $26.2 million to $187.6
million in 1995 from $160.9 million in 1994 while average investments increased
$6.3 million to $218.2 million in 1995 from $211.8 million in 1994. In addition
to the volume changes, higher average interest rates in 1995 compared to 1994
also contributed to the increase in interest income.
Most of the Company's investments were in floating rate securities tied to
a variety of indices. The yield on investments in 1995 increased only 0.58%
compared to 1994 versus a 0.76% increase in loan yields. This is because,
despite increases in short-term interest rates resulting from increases in the
federal funds rate, some of the longer-term interest indices declined. The
Company's investments included approximately $85 million of floating rate
mortgage backed securities indexed to the seven and 10 year CMT indices. The
rally in the bond market during most of 1995 resulted in declines in Treasury
yields and in these two indices from 1994 levels. The average of the 10 year CMT
index declined to 6.57% in 1995 from 7.08% in the same period of 1994. The seven
year CMT index declined by a similar amount. This resulted in a decline in the
average yield on these securities by .5% which partially offset increases in the
yields of other investments resulting in the aforementioned 0.58% overall yield
increase.
Interest Expense. Interest expense increased $5.2 million to $16.3 million
in 1995 from $11.2 million in 1994. This increase was the combined effect of an
increase in the average cost of such liabilities to 4.88% in 1995 from 3.70% in
1994, and a $32.9 million increase in average interest-bearing liabilities to
$334.6 million in 1995 from $301.7 million in 1994. Changes in the relative mix
of average interest-bearing liabilities included an $8.1 million increase in
average advances from the FHLB and an increase in average interest-bearing
deposits of $23.5 million. The cost of the Company's borrowings from the FHLB
generally moves in direct relationship to movements in the federal funds rate.
The series of increases in the federal funds rate during 1994 through early 1995
resulted in an average national federal funds rate of 5.85% in 1995 compared to
4.24% in 1994. This 1.61% increase in the federal funds rate was the primary
reason for the 1.37% increase in the cost of FHLB borrowings between years.
During 1995, the Company focused on replacing FHLB borrowings with deposits
which have a lower average cost. At December 31, 1995, FHLB borrowings decreased
to $70.3 million from $162.2 million one year earlier. Expansion of the
depositor base not only adds deposits but also provides added customer cross
selling opportunities.
Net Interest Income. Net interest income increased $551,000 in 1995
compared to 1994. Net interest margin decreased to 4.42% in 1995 from 4.66% in
1994. The increase in net interest income resulted from the increase in
interest-earning assets largely offset by the decline in the net interest
margin. The principal reason for the decline in net interest margin was that the
cost of interest-bearing liabilities increased more than did the yield on
average interest-earning assets. Competition for deposits and higher general
interest rates drove up the cost of interest-bearing deposits in 1995. The
flattening of the interest rate yield curve in 1995 compared to 1994
significantly reduced net interest income from investing activities. The yield
curve refers to the difference between interest yields on longer-term and
shorter-term instruments. A flattening of the curve occurs when the difference
between such rates declines as it did from 1994 to 1995. At December 31, 1995,
the yield curve was very flat by historical norms with the difference between
the 10 year CMT index and the
30
<PAGE> 31
targeted federal funds rate being only 0.08% compared to 2.32% at December 31,
1994 and approximately 1.50% over the last 10 years.
Provision for Loan Losses. The 1995 provision for loan losses is intended
to reflect general growth in the loan portfolio and management's commitment to
maintain an adequate allowance for loan losses. There was no change from 1994 in
this provision.
Other Income. Other income increased $313,000 to $3.8 million in 1995 from
$3.5 million in 1994, principally as a result of a $422,000 increase in gain on
sales of loans. The Company's purchase of MacWest Mortgage Company on June 30,
1995, which substantially increased mortgage lending capacity, resulted in an
increase in gain on sales of mortgage loans by $336,000 to $528,000 in 1995
compared to $192,000 in 1994. A $101,000 increase in gain on sales of SBA loans
to $477,000 in 1995 from $376,000 in 1994 accounted for substantially all the
remaining increase in gain on sales of loans.
Other Expenses. Other expenses increased $819,000 to $15.9 million in 1995
from $15.1 million in 1994. This increase consisted of increases of $675,000 in
salaries and employee benefits, $353,000 in marketing and promotion, $178,000 in
professional fees and $282,000 of other net increases partially offset by
decreases of $319,000 in amortization of intangible assets and $282,000 in FDIC
premiums. The increase in salaries and employee benefits was primarily due to
certain positions added to support the increased mortgage lending activities,
asset growth, pay increases and increased benefits expenses. The increases in
marketing and promotion related largely to promotions aimed at increasing
deposit balances and also to promotions of loan products. Professional fees in
1995 include approximately $260,000 in legal expenses which FDC incurred related
to litigation which was decided in its favor prior to the acquisition. During
1994, the Company completed the amortization of intangible assets acquired in
connection with acquisitions in 1989. The 1995 amortization relates to
intangible assets arising from the acquisition of MacWest Mortgage Company.
Income Tax Expense. Income tax expense for 1995 of $1.8 million was
approximately $121,000 less than the amount expected based on the combined
federal and state tax rate of 37.3%. This difference is primarily due to the
reversal of a valuation allowance against deferred tax assets and to interest
income from certain loans and life insurance policies that is not subject to
income taxes partially offset by the accrual of income taxes from the surrender
and cancellation of certain life insurance policies. Compared to 1994, income
tax expense increased $950,000. The increase attributable to increased pre tax
earnings is only approximately $23,000. The majority of the increase is a result
of the reversal in 1994 of $1 million of valuation allowances held against
deferred tax assets.
Asset and Liability Growth. Total assets at December 31, 1995, of $418
million were 9.6% or $44.5 million lower than at December 31, 1994. This was
primarily a result of a $67.6 million reduction in investments partially offset
by a $24.9 million increase in loans. The increase in loans not only reflects
the strong local economy but also the Company's success in adding to its
customer base. At December 31, 1995, deposits increased 14.5% to $307 million
from $268 million one year earlier. These changes allowed the Company to reduce
borrowings from the FHLB to $70 million at December 31, 1995, from $162 million
one year earlier. A $2.5 million increase in retained earnings plus a $4 million
improvement in the unrealized loss on securities available for sale resulted in
a $6.6 million increase in total shareholders' equity to $30.2 million at
December 31, 1995 from $23.6 million one year earlier.
31
<PAGE> 32
ALLOWANCE FOR LOAN LOSSES
The Company maintains its allowance for loan losses at a level considered
by management to be adequate to cover the risk of loss in the loan portfolio at
a particular point in time. Management's judgment as to whether additional
amounts should be added to the allowance in excess of the amount of loan losses
takes into consideration a number of factors, including losses experienced, the
status of problem loans and overall portfolio quality, regular examinations of
loan portfolios conducted by the Company's staff and by state and federal
supervisory authorities, and economic conditions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for losses:
Beginning balance....................................... $2,493 $1,999 $ 2,324
Acquired through acquisition............................ 1,346 -- --
Provisions for loan losses.............................. 916 795 794
Recoveries.............................................. 142 259 173
Charge-offs............................................. (659) (560) (1,292)
------ ------ -------
Ending balance.......................................... $4,238 $2,493 $ 1,999
====== ====== =======
</TABLE>
Charge-offs during 1996 totaled $659,000 or .26% of average loans compared
to $560,000 or 0.30% of average loans in 1995 and $1.3 million or 0.80% of
average loans in 1994. Included in the 1994 charge-offs were two individual
loans totaling $669,000 or 52% of total charge-offs.
EFFECTS OF INFLATION AND CHANGING PRICES
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than inflation. Although interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services, increases in inflation generally have resulted in increased
interest rates. Over short periods of time interest rates may not move in the
same direction or magnitude as inflation.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Financial Accounting Standards (SFAS) No. 114,
Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting
by Creditors for Impairment of a Loan -- Income Recognition and Disclosures
(collectively referred to as "SFAS 114") effective January 1, 1995. SFAS 114
requires that certain impaired loans be measured based on the present value of
expected cash flows discounted at the loan's original effective interest rate.
The adoption of this pronouncement did not have a material impact on the
Company. See Notes 1 and 6 of Notes to Consolidated Financial Statements.
In March 1995, the Financial Accounting Standards Board adopted SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. This Statement established accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. This Statement requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company adopted this Statement on January 1, 1996, with no
material impact on its financial condition, results of operations or liquidity.
See Note 1 of Notes to Consolidated Financial Statements.
In October 1995, the Financial Accounting Standards Board adopted SFAS No.
123, Accounting for Stock-Based Compensation. This Statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans. This Statement defines a fair value based method of
accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of
32
<PAGE> 33
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement No. 123 requires that an
employer's financial statements include certain disclosures about stock-based
employee compensation arrangements regardless of the method used to account for
them. The Company adopted this Statement in 1996 and has elected to continue to
follow the provisions of APB Opinion No. 25 in accounting for stock-based
compensation. The required new disclosures are included in Note 11 of Notes to
Consolidated Financial Statements.
In June 1996, the Financial Accounting Standards Board adopted SFAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. This Statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. This Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. It requires that servicing assets and other retained
interests in the transferred assets be measured by allocating the previous
carrying amount between the assets sold, if any, and retained interests, if any,
based on their relative fair values at the date of the transfer. The Statement
will be effective for certain transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. The Statement
will be effective for repurchase agreements, dollar-rolls, securities lending,
or similar transactions as of January 1, 1998. Management has not completed a
final determination of the expected impact of adopting this Statement but does
not believe its implementation will have a material impact on the Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
President, Chief Executive Officer and
Gary S. Judd....................... 56 Director
W. James Tozer, Jr................. 56 Director
Richard B. Tucker.................. 67 Director
Robert D. Greene................... 56 Director
James L. Rumsey.................... 64 Director
Robert A. Silverberg............... 62 Executive Vice President and Director
Mary Gittings Cronin............... 58 Director
Gary A. Mosko...................... 52 Executive Vice President and Director
Robert C. Barton................... 45 Mortgage Group President
J. Patrick McDuff.................. 48 Regional President of the Bank -- North Region
Michael Y. Meganck................. 45 Senior Credit Policy Officer
Ray L. Nash........................ 45 Chief Financial Officer
Joseph J. Wolf..................... 41 Regional President of the Bank -- South Region
</TABLE>
There are no family relationships among any of the executive officers and
directors of the Company.
Gary S. Judd has been President, Chief Executive Officer and a Director of
the Company since he and James Tozer founded it in March 1988. Mr. Judd has been
President of the Bank since July 1992. Mr. Judd's previous experience includes
over 16 years of employment with Citicorp and Citibank, N.A. in a broad range of
senior managerial positions both internationally and in the United States.
W. James Tozer, Jr. was a Director from March 1988 through August 1989, and
has been a Director since April 1991. For the last five years, Mr. Tozer has
been managing director of Vectra Management Group, an organization unrelated to
the Company which is involved in real estate development and management of
private investments. From April 1993 to December 1994, Mr. Tozer was President,
Chief Executive Officer and a Director of Lincolnshire Management, Inc., a New
York based investment firm. From July 1990 through March 1993 he served as an
advisor to financial institutions and managed private investments. Mr. Tozer's
previous financial service industry experience includes 20 years of senior
management positions at Marine Midland Bank, Prudential Securities, Inc. and
Citicorp/Citibank. Mr. Tozer serves as trustee of the Citizens Budget Commission
and the School for Field Studies. Mr. Tozer was also a director of Cobra
Industries, Inc. from April 1993 through October 1995. Cobra Industries filed
for reorganization under federal bankruptcy laws in October 1995 and is being
liquidated.
Richard B. Tucker has been a Director since August 1989. Mr. Tucker has
been Chairman of Custom Envelope Corporation, Denver, Colorado since 1980. From
1950 through 1977, Mr. Tucker was employed by PakWell Corp., ending his tenure
as President. Mr. Tucker is a board member of several civic organizations,
including Allied Jewish Federation, National Jewish Hospital, Shalom Park, Ocean
Journey Aquarium, and the Rose Community Foundation.
Robert D. Greene has been a Director since October 1989. Mr. Greene is a
business consultant. Mr. Greene retired from Safeway Foods in June 1993, ending
his 37-year tenure with that company as Senior Vice President and Division
Manager.
James L. Rumsey has been a Director since October 1989. Mr. Rumsey has been
an independent financial and management consultant since May 1990. From November
1985 through April 1990 Mr. Rumsey was President and Chief Executive Officer of
Scott Capital Corporation, Denver, Colorado, a private holding company. Prior
thereto, Mr. Rumsey held senior management positions with Spectrum Oil and Gas
Company, Outdoor Sports Industries, Inc. and Rio Grande Industries, Inc. Mr.
Rumsey is a general partner of
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<PAGE> 35
Cheeseman Realty Associates, Ltd. and Evans Investment Associates, Ltd., two
privately held real estate partnerships.
Robert A. Silverberg has been Executive Vice President and a Director of
the Company since November 1995. From 1981 until joining the Company he was
Chairman of the Board of First Denver Corporation and First National Bank of
Denver. He is also a director of Vanguard Cellular Systems, Inc., a corporation
with a class of equity securities registered under the Securities Exchange Act
of 1934.
Mary Gittings Cronin has been a Director since November 1995. She has been
the Executive Director of The Piton Foundation, Denver, Colorado since 1977.
Gary A. Mosko has been Executive Vice President and a Director since June
1996. From 1974 until joining the Company he was a director and an executive
officer of Southwest State Bank, most recently, since 1983 as president and
chairman of the board of directors. He served as president and chairman of the
board of directors of Bank Land Co., the majority shareholder of Southwest State
Bank, from 1991 until he joined the Company.
Robert C. Barton has served as Mortgage Group President, Regional President
or Consumer Business Sector Head of the Bank since June 1989. From 1974 through
May 1989, Mr. Barton was employed by Citicorp in various positions, ending his
tenure as Senior Vice President for Citicorp Mortgage in the western United
States.
J. Patrick McDuff has been President of Vectra Bank of Boulder or Regional
President of the Bank since July 1987. Mr. McDuff serves as a director of Black
Hawk Gaming & Development Company, Inc., a Nasdaq National Market listed
company.
Michael Y. Meganck has been Senior Credit Policy Officer since May 1989. He
was self employed as a business consultant from 1986 until joining the Company.
Mr. Meganck worked with Crocker National Bank and Wells Fargo in various
capacities from 1978 to 1986.
Ray L. Nash has been Chief Financial Officer since July 1989. From March
1984 through June 1989, Mr. Nash was employed by WestAmerica Mortgage Company as
Vice President and Controller.
Joseph J. Wolf has served as Regional President of the Bank since December
1993. Mr. Wolf served as President of Vectra Bank of Denver from December 1991
until it was merged into the Bank in November 1993. From November 1981 through
January 1990, he was employed by United Banks, Denver, Colorado, ending his
employment as Vice President and Manager of Commercial Lending.
DESCRIPTION OF THE CAPITAL SECURITIES
The Capital Securities and the Common Securities will be issued pursuant to
the terms of the Trust Agreement. The Trust Agreement will be qualified as an
indenture under the Trust Indenture Act. Initially, Wilmington Trust Company
will be the Delaware Trustee and the Property Trustee and will act as trustee
for the purpose of complying with the Trust Indenture Act. The terms of the
Capital Securities will include those stated in the Trust Agreement and those
made part of the Trust Agreement by the Trust Indenture Act. This summary of
certain terms and provisions of the Capital Securities and the Trust Agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Trust Agreement, including
the definitions therein of certain terms, and the Trust Indenture Act. Wherever
particular defined terms of the Trust Agreement (as amended or supplemented from
time to time) are referred to herein, such defined terms are incorporated
herein. The form of the Trust Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
GENERAL
Pursuant to the terms of the Trust Agreement, the Administrative Trustees
on behalf of VBC Capital will issue the Capital Securities and the Common
Securities (collectively, the "Trust Securities"). The Capital Securities will
represent preferred undivided beneficial interests in the assets of VBC Capital
and the holders
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<PAGE> 36
thereof will be entitled to a preference in certain circumstances with respect
to Distributions and amounts payable on redemption or liquidation over the
Common Securities of VBC Capital (which will be held by the Company), as well as
other benefits as described in the Trust Agreement.
The Capital Securities will rank pari passu, and payments will be made
thereon pro rata, with the Common Securities of VBC Capital except as described
under "Subordination of Common Securities of VBC Capital Held by the Company"
below.
Legal title to the Junior Subordinated Debentures will be held by the
Property Trustee in trust for the benefit of the holders of the Trust
Securities. The Guarantee executed by the Company for the benefit of the holders
of the Capital Securities (the "Guarantee") will be a guarantee on a
subordinated basis and will not guarantee payment of Distributions or amounts
payable on redemption of the Capital Securities or on liquidation of the Capital
Securities if VBC Capital does not have funds on hand available to make such
payments. See "Description of Guarantee."
DISTRIBUTIONS
Payment of Distributions. Distributions on the Capital Securities will be
payable at the annual rate of % of the stated Liquidation Amount of $25,
payable quarterly in arrears on the 15th day of April, July, October and January
in each year, commencing July 15, 1997 to the holders of the Capital Securities
on the relevant record dates (each date on which Distributions are payable in
accordance with the foregoing, a "Distribution Date"). The amount of each
Distribution due with respect to the Capital Securities will include amounts
accrued through the date the Distribution is due. Distributions on the Capital
Securities will be payable to the holders thereof as they appear on the register
of VBC Capital on the relevant record date which, for so long as the Capital
Securities remain in book-entry form, will be one Business Day (as defined
below) prior to the relevant Distribution Date and, in the event the Capital
Securities are not in book-entry form, will be the 1st day of the month in which
the relevant Distribution Date occurs. Distributions will accumulate from the
date of original issuance. The first Distribution Date for the Capital
Securities will be July 15, 1997.
The amount of Distributions payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. In the event that any date on
which Distributions are payable on the Capital Securities is not a Business Day,
payment of the Distribution payable on such date will be made on the next
Business Day (and without any interest or other payment in respect to any such
delay) except that, if such Business Day is in the next succeeding calendar
year, payment of such Distribution shall be made on the immediately preceding
Business Day, in each case with the same force and effect as if made on the date
such payment was originally payable. As used in this Prospectus, a "Business
Day" means any day other than a Saturday or a Sunday, or a day on which banking
institutions in the State of Colorado are authorized or required by law or
executive order to remain closed or a day on which the corporate trust office of
the Property Trustee or the Indenture Trustee is closed for business.
The funds of VBC Capital available for distribution to holders of its
Capital Securities will be limited to payments by the Company under the Junior
Subordinated Debentures in which VBC Capital will invest the proceeds from the
issuance and sale of its Capital Securities. See "Description of Junior
Subordinated Debentures." If the Company does not make interest payments on the
Junior Subordinated Debentures, the Property Trustee will not have funds
available to pay Distributions on the Capital Securities. The payment of
Distributions (if and to the extent VBC Capital has funds legally available for
the payment of such Distributions and cash sufficient to make such payments) is
guaranteed by the Company. See "Description of Guarantee."
Extension Period. So long as no Debenture Event of Default has occurred and
is continuing, the Company has the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarters with respect to
each such period (each, an "Extension Period"), provided that no Extension
Period may extend beyond the Stated Maturity of the Junior Subordinated
Debentures. As a consequence of any such election, quarterly Distributions on
the Capital Securities will be deferred by VBC Capital during any such Extension
Period. Distributions to which holders of Capital Securities are entitled will
accumulate additional amounts thereon at
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<PAGE> 37
the rate per annum of % thereof, compounded quarterly from the relevant
Distribution Date, to the extent permitted under applicable law. The term
"Distributions" as used herein shall include any such additional accumulated
amounts. During any such Extension Period, the Company may not (i) declare or
pay any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock (which
includes common and preferred stock) or (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank pari passu with or junior in interest to the
Junior Subordinated Debentures or make any guarantee payments with respect to
any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu with or junior in interest to the
Junior Subordinated Debentures (other than (a) dividends or distributions in
common stock of the Company, (b) any declaration of a dividend in connection
with the implementation of a stockholders' rights plan, or the issuance of stock
under any such plan in the future, or the redemption or repurchase of any such
rights pursuant thereto, (c) payments under the Guarantee and (d) purchases of
common stock for issuance under any of the Company's benefit plans for its
directors, officers or employees). Prior to the termination of any such
Extension Period, the Company may further extend such Extension Period, provided
that such extension does not cause such Extension Period to exceed 20
consecutive quarters or extend beyond the Stated Maturity. Upon the termination
of any such Extension Period and the payment of all amounts then due, and
subject to the foregoing limitations, the Company may elect to begin a new
Extension Period. Subject to the foregoing, there is no limitation on the number
of times that the Company may elect to begin an Extension Period.
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures.
REDEMPTION
Mandatory Redemption of Capital Securities. Upon the repayment or
redemption at any time, in whole or in part, of any Junior Subordinated
Debentures, the proceeds from such repayment or redemption shall be applied by
the Property Trustee to redeem a Like Amount (as defined below) of the Trust
Securities, upon not less than 30 nor more than 60 days' notice of a date of
redemption (the "Redemption Date"), at the Redemption Price (as defined below).
See "Description of Junior Subordinated Debentures -- Redemption." If less than
all of the Junior Subordinated Debentures are to be repaid or redeemed on a
Redemption Date, then the proceeds from such repayment or redemption shall be
allocated to the redemption of the Trust Securities pro rata.
Optional Redemption of Junior Subordinated Debentures. The Company will
have the right to redeem the Junior Subordinated Debentures (i) on or after
, 2002, in whole at any time or in part from time to time at a
redemption price equal to the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption, plus 100%
of the principal amount thereof, or (ii) at any time, in whole (but not in
part), upon the occurrence of a Tax Event, an Investment Company Event or a
Capital Treatment Event at a redemption price equal to the accrued and unpaid
interest on the Junior Subordinated Debentures so redeemed to the date fixed for
redemption, plus 100% of the principal amount thereof, in each case subject to
receipt of prior approval by the Federal Reserve if then required under
applicable capital guidelines or policies of the Federal Reserve. See
"Description of Junior Subordinated Debentures -- Redemption."
Tax Event Redemption, Investment Company Event Redemption, Capital
Treatment Event Redemption or Distribution of Junior Subordinated Debentures. If
a Tax Event, an Investment Company Event or a Capital Treatment Event shall
occur and be continuing, the Company has the right to redeem the Junior
Subordinated Debentures in whole (but not in part) and thereby cause a mandatory
redemption of the Trust Securities in whole (but not in part) at the Redemption
Price (as defined below) within 90 days following the occurrence of such Tax
Event, Investment Company Event or Capital Treatment Event, in each case subject
to receipt of prior approval by the Federal Reserve if then required under
applicable capital guidelines or policies of the Federal Reserve. In the event a
Tax Event, an Investment Company Event or a Capital Treatment Event has occurred
and is continuing and the Company does not elect to redeem the Junior
Subordinated Debentures and thereby cause a mandatory redemption of the Trust
Securities or to liquidate
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<PAGE> 38
VBC Capital and cause the Junior Subordinated Debentures to be distributed to
holders of the Trust Securities in liquidation of VBC Capital as described
below, such Trust Securities will remain outstanding and Additional Sums (as
defined below) may be payable on the Junior Subordinated Debentures.
Definitions.
"Additional Sums" means the additional amounts as may be necessary to be
paid by the Company with respect to the Junior Subordinated Debentures in order
that the amount of Distributions then due and payable by VBC Capital on the
outstanding Trust Securities of VBC Capital shall not be reduced as a result of
any additional taxes, duties and other governmental charges to which VBC Capital
has become subject.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount (as defined below) equal to that
portion of the principal amount of Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Capital Securities based upon the relative
Liquidation Amounts of such classes and the proceeds of which will be used to
pay the Redemption Price of such Trust Securities, and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of Trust Securities in
connection with a dissolution or liquidation of VBC Capital, Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of the
Trust Securities of the holder to whom such Junior Subordinated Debentures are
distributed.
"Liquidation Amount" means the stated amount of $25 per Trust Security.
"Redemption Price" means, with respect to any Trust Security, the
Liquidation Amount of such Trust Security, plus accumulated and unpaid
Distributions to the Redemption Date, allocated on a pro rata basis (based on
Liquidation Amounts) among the Trust Securities.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
Subject to the Company having received prior approval of the Federal
Reserve if so required under applicable capital guidelines or policies of the
Federal Reserve, the Company will have the right at any time to liquidate VBC
Capital and, after satisfaction of the liabilities of creditors of VBC Capital
as provided by applicable law, cause the Junior Subordinated Debentures to be
distributed to the holders of Trust Securities in liquidation of VBC Capital.
After the liquidation date fixed for any distribution of Junior Subordinated
Debentures for Capital Securities (i) such Capital Securities will no longer be
deemed to be outstanding, (ii) the Depositary or its nominee, as the record
holder of the Capital Securities, will receive a registered global certificate
or certificates representing the Junior Subordinated Debentures to be delivered
upon such distribution and (iii) any certificates representing Capital
Securities not held by the Depositary or its nominee will be deemed to represent
the Junior Subordinated Debentures having a principal amount equal to the
Liquidation Amount of such Capital Securities, and bearing accrued and unpaid
interest in an amount equal to the accrued and unpaid Distributions on the
Capital Securities until such 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 Capital
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for the Capital Securities if a dissolution and liquidation of VBC
Capital were to occur. Accordingly, the Capital Securities that an investor may
purchase, or the Junior Subordinated Debentures that the investor may receive on
dissolution and liquidation of VBC Capital, may trade at a discount to the price
that the investor paid to purchase the Capital Securities offered hereby.
REDEMPTION PROCEDURES
Capital Securities redeemed on each Redemption Date will be redeemed at the
Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Junior Subordinated Debentures. Redemptions of the Capital
Securities will be made and the Redemption Price will be payable on each
Redemption Date only to the extent that VBC Capital has funds on hand available
for the payment of such
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<PAGE> 39
Redemption Price. See "-- Subordination of Common Securities of VBC Capital Held
by the Company" and "-- Guarantee."
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 Trust Securities at such
holder's registered address. Unless VBC Capital defaults in payment of the
applicable Redemption Price, on and after the Redemption Date, Distributions
will cease to accrue on such Capital Securities called for redemption.
If VBC Capital gives a notice of redemption in respect of the Capital
Securities, then, by 12:00 noon, Denver time, on the Redemption Date, the
Property Trustee will pay the Redemption Price to the Depositary, as the record
holder of the Capital Securities, and the Depositary thereafter will credit the
Redemption Price to the Participants for whom it holds the Capital Securities.
See "Book-Entry Issuance." If such Capital Securities are no longer in
book-entry form, the Property Trustee, to the extent funds are available, will
deposit with the paying agent for such Capital Securities funds sufficient to
pay the aggregate Redemption Price and will give such paying agent irrevocable
instructions and authority to pay the Redemption Price to the holders thereof
upon surrender of their certificates evidencing such Capital Securities.
Notwithstanding the foregoing, Distributions payable on or prior to the
Redemption Date will be payable to the holders of such Capital Securities on the
relevant record dates for the related Distribution Dates. If notice of
redemption shall have been given and funds deposited as required, then upon the
date of such deposit, all rights of the holders of the Capital Securities will
cease, except the right of the holders of the Capital Securities to receive the
applicable Redemption Price, but without interest on such Redemption Price, and
such Capital Securities will cease to be outstanding. In the event that any date
fixed for redemption of such Capital Securities is not a Business Day, then
payment of the Redemption Price payable on such date will be made on the next
succeeding Business Day (and without any interest or other payment in respect of
any such delay), except that, if such Business Day falls in the next calendar
year, such payment will be made on the immediately preceding Business Day. In
the event that payment of the Redemption Price in respect of Capital Securities
called for redemption is improperly withheld or refused and not paid either by
VBC Capital or by the Company pursuant to the Guarantee, Distributions on such
Capital Securities will continue to accrue at the then applicable rate, from the
Redemption Date originally established by VBC Capital for such Capital
Securities to the date such Redemption Price is actually paid, in which case the
actual payment date will be the date fixed for redemption for purposes of
calculating the Redemption Price. See "Description of Guarantee."
Subject to applicable law (including, without limitation, United States
federal securities law), the Company may at any time and from time to time
purchase outstanding Capital Securities by tender, in the open market or by
private agreement.
Payment of the Redemption Price on the Capital Securities and any
distribution of Junior Subordinated Debentures to holders of Capital Securities
will be made to the applicable record holders thereof as they appear on the
register of such Capital Securities on the relevant record date, which date will
be one Business Day prior to the relevant Redemption Date or Liquidation Date,
as applicable; provided, however, that in the event that any Capital Securities
are not in book-entry form, the relevant record date for such Capital Securities
will be a date at least 15 days prior to the Redemption Date or Liquidation
Date, as applicable. In the case of a liquidation, the record date will be no
more than 45 days before the Liquidation Date.
If less than all of the Trust Securities issued by VBC Capital are to be
redeemed on a Redemption Date, then the aggregate Redemption Price for such
Trust Securities to be redeemed will be allocated pro rata to the Capital
Securities and Common Securities based upon the relative Liquidation Amounts of
such classes. The particular Capital Securities to be redeemed will be selected
by the Property Trustee from the outstanding Capital Securities not previously
called for redemption, by such method as the Property Trustee shall deem fair
and appropriate and which may provide for the selection for redemption of
portions (equal to $25 or an integral multiple thereof) of the Liquidation
Amount of Capital Securities. The Property Trustee shall promptly notify the
Trust Securities registrar in writing of the Capital Securities selected for
redemption and, in the case of any Capital Securities selected for partial
redemption, the Liquidation Amount thereof to be redeemed. For all purposes of
the Trust Agreement, unless the context otherwise requires, all provisions
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<PAGE> 40
relating to the redemption of Capital Securities will relate to the portion of
the aggregate Liquidation Amount of Capital Securities which has been or is to
be redeemed.
SUBORDINATION OF COMMON SECURITIES OF VBC CAPITAL HELD BY THE COMPANY
Payment of Distributions on, and the Redemption Price of, the Capital
Securities and Common Securities, as applicable, shall be made pro rata based on
the Liquidation Amounts of the Capital Securities and Common Securities;
provided, however, that if on any Distribution Date or Redemption Date a
Debenture Event of Default shall have occurred and be continuing, no payment of
any Distribution on, or applicable Redemption Price of, any of the Common
Securities, and no other payment on account of the redemption, liquidation or
other acquisition of the Common Securities, shall be made unless payment in full
in cash of all accumulated and unpaid Distributions on all of the outstanding
Capital Securities for all Distribution periods terminating on or prior thereto,
or in the case of payment of the applicable Redemption Price the full amount of
such Redemption Price on all of the outstanding Capital Securities then called
for redemption, shall have been made or provided for, and all funds available to
the Property Trustee shall first be applied to the payment in full in cash of
all Distributions on, or Redemption Price of, the Capital Securities then due
and payable.
In the case of any Event of Default under the Trust Agreement resulting
from a Debenture Event of Default, the Company as holder of the Common
Securities will be deemed to have waived any right to act with respect to any
such Event of Default until the effects of all such Events of Default have been
cured, waived or otherwise eliminated. Until any such Events of Default have
been so cured, waived or otherwise eliminated, the Property Trustee shall act
solely on behalf of the holders of the Capital Securities and not on behalf of
the Company as holder of the Common Securities, and only the holders of the
Capital Securities will have the right to direct the Property Trustee to act on
their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
The Company will have the right at any time to terminate VBC Capital and
cause the Junior Subordinated Debentures to be distributed to the holders of the
Capital Securities. Such right is subject to the Company having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. See "Distribution of Junior
Subordinated Debentures" above.
In addition, pursuant to the Trust Agreement, VBC Capital shall
automatically terminate upon expiration of its term and shall earlier terminate
on the first to occur of: (i) certain events of bankruptcy, dissolution or
liquidation of the Company; (ii) delivery by the Company of written direction to
the Property Trustee to terminate VBC Capital (which direction is optional and
wholly within the discretion of the Company); (iii) redemption of all of the
Capital Securities as described under "Description of the Capital Securities --
Redemption -- Mandatory Redemption;" and (iv) the entry of an order for the
dissolution of VBC Capital by a court of competent jurisdiction.
If an early termination occurs as described in clause (i), (ii) or (iv)
above or upon the expiration of the term of VBC Capital, VBC Capital shall be
liquidated by the Trustees as expeditiously as the Trustees determine to be
possible by distributing, after satisfaction of liabilities to creditors of VBC
Capital as provided by applicable law, to the holders of such Trust Securities a
Like Amount of the Junior Subordinated Debentures, unless such distribution is
determined by the Property Trustee not to be practical, in which event such
holders will be entitled to receive out of the assets of VBC Capital available
for distribution to holders, after satisfaction of liabilities to creditors of
VBC Capital as provided by applicable law, an amount equal to, in the case of
holders of Capital Securities, the aggregate of the Liquidation Amount of $25
per Trust Security plus accrued and unpaid Distributions thereon to the date of
payment (such amount being the "Liquidation Distribution"). If such Liquidation
Distribution can be paid only in part because VBC Capital has insufficient
assets available to pay in full the aggregate Liquidation Distribution, then the
amounts payable directly by VBC Capital on the Capital Securities will be paid
on a pro rata basis. The holder(s) of the Common Securities will be entitled to
receive distributions upon any such liquidation pro rata with the holders of the
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Capital Securities, except that if a Debenture Event of Default has occurred and
is continuing, the Capital Securities will have a priority over the Common
Securities.
Under current United States federal income tax law and interpretations and
assuming, as expected, VBC Capital is treated as a grantor trust, a distribution
of the Junior Subordinated Debentures should not be a taxable event to holders
of the Capital Securities. Should there be a change in law, a change in legal
interpretation, a Tax Event or other circumstances, however, the distribution
could be a taxable event to holders of the Capital Securities. See "Certain
Federal Income Tax Consequences." If the Company elects neither to redeem the
Junior Subordinated Debentures prior to maturity nor to liquidate VBC Capital
and distribute the Junior Subordinated Debentures to holders of the Capital
Securities, the Capital Securities will remain outstanding until the repayment
of the Junior Subordinated Debentures.
If the Company elects to liquidate VBC Capital and thereby causes the
Junior Subordinated Debentures to be distributed to holders of the Capital
Securities in liquidation of VBC Capital, the Company will continue to have the
right to shorten the maturity of such Junior Subordinated Debentures, subject to
certain conditions. See "Description of Junior Subordinated
Debentures -- General."
EVENTS OF DEFAULT; NOTICE
Any one of the following events that has occurred and is continuing
constitutes an "Event of Default" under the Trust Agreement (an "Event of
Default") with respect to the Capital Securities and Common Securities (whatever
the reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default under the Indenture (see
"Description of Junior Subordinated Debentures -- Debenture Events of Default");
or
(ii) default by the Trust in the payment of any Distribution when it
becomes due and payable, and continuation of such default for a period of 30
days; or
(iii) default by the Trust in the payment of any Redemption Price of any
Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of any
covenant or warranty of the Property Trustee in the Trust Agreement (other than
a default or breach in the performance of a covenant or warranty which is
addressed in clause (ii) or (iii) above), and continuation of such default or
breach, for a period of 60 days after there has been given, by registered or
certified mail, to the Property Trustee by the holders of at least 25% in
aggregate Liquidation Amount of the outstanding Capital Securities, a written
notice specifying such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by the Company to appoint a
successor Property Trustee within 60 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of such Event of Default to the holders of the Capital Securities, the
Administrative Trustees and the Company, unless such Event of Default shall have
been cured or waived. The Company and the Administrative Trustees are required
to file annually with the Property Trustee a certificate as to whether they are
in compliance with all the conditions and covenants applicable to them under the
Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the Capital
Securities will have a preference over the Common Securities upon termination of
VBC Capital as described above. See "-- Liquidation Distribution Upon
Termination." Upon a Debenture Event of Default, unless the principal of all the
Junior Subordinated Debentures has already become due and payable, either the
Property Trustee or the holders of not less than 25% in aggregate principal
amount of the Junior Subordinated Debentures then outstanding may declare all of
the Junior Subordinated Debentures to be due and payable immediately by
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giving notice in writing to the Company (and to the Property Trustee, if notice
is given by holders of the Junior Subordinated Debentures). If the Property
Trustee or the holders of the Junior Subordinated Debentures fail to declare the
principal of all of the Junior Subordinated Debentures due and payable upon a
Debenture Event of Default, the holders of at least 25% in Liquidation Amount of
the Capital Securities then outstanding will have the right to declare the
Junior Subordinated Debentures immediately due and payable. In either event,
payment of principal and interest on the Junior Subordinated Debentures will
remain subordinated to the extent provided in the Indenture. In addition,
holders of the Capital Securities have the right in certain circumstances to
bring a Direct Action (as defined below). See "Description of Junior
Subordinated Debentures -- Enforcement of Certain Rights by Holders of Capital
Securities."
REMOVAL OF TRUSTEES
Unless a Debenture Event of Default shall have occurred and be continuing,
any Trustee may be removed at any time by the holder of the Common Securities.
If a Debenture Event of Default has occurred and is continuing, the Property
Trustee and the Delaware Trustee may be removed at such time by the holders of a
majority in Liquidation Amount of the outstanding Capital Securities. In no
event will the holders of the Capital Securities have the right to vote to
appoint, remove or replace the Administrative Trustees, which voting rights are
vested exclusively in the Company 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 acceptance of appointment by the successor trustee
in accordance with the provisions of the Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default shall have occurred and be continuing, at any
time or times, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of Trust Property may at
the time be located, the Company, as the holder of the Common Securities, and
the Administrative Trustees will have power to appoint one or more persons
either to act as a co-trustee, jointly with the Property Trustee, of all or any
part of such Trust Property, or to act as separate trustee of any such property,
in either case with such powers as may be provided in the instrument of
appointment, and to vest in such person or persons in such capacity any
property, title, right or power deemed necessary or desirable, subject to the
provisions of the Trust Agreement. In case a Debenture Event of Default has
occurred and is continuing, the Property Trustee alone will have power to make
such appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Any Person (as defined in the Trust Agreement) into which the Property
Trustee, the Delaware Trustee or any Administrative Trustee that is not a
natural person may be merged or converted or with which it may be consolidated,
or any Person resulting from any merger, conversion or consolidation to which
such Trustee will be a party, or any person succeeding to all or substantially
all the corporate trust business of such Trustee, shall be the successor of such
Trustee under the Trust Agreement, provided such corporation shall be otherwise
qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF VBC CAPITAL
VBC Capital 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. VBC Capital may, at the request of the Company, with the
consent of the Administrative Trustees and without the consent of the holders of
the Capital Securities, merge with or into, consolidate, amalgamate, or be
replaced by or convey, transfer or lease its properties and assets substantially
as an entirety to a trust organized as such under the laws of any State;
provided, that (i) such successor entity either (a) expressly assumes all of the
obligations of VBC Capital with respect to the Capital Securities or (b)
substitutes for the Capital Securities other securities having substantially the
same terms as the Capital Securities (the "Successor Securities") so long as the
Successor Securities rank the same as the Capital Securities rank in priority
with respect to distributions and payments upon liquidation, redemption and
otherwise, (ii) the Company expressly appoints a trustee of such successor
entity possessing the same powers
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and duties as the Property Trustee as the holder of the Junior Subordinated
Debentures, (iii) any such transaction does not adversely affect the rights,
preferences and privileges of the holders of the Capital Securities (including
any Successor Securities) in any material respect, (iv) such successor entity
has a purpose identical to that of VBC Capital, (v) the Successor Securities
will be listed or traded on any national securities exchange or other
organization on which the Capital Securities may then be listed, (vi) prior to
such a transaction, the Company has received an opinion from independent counsel
to VBC Capital experienced in such matters to the effect that (a) such
transaction does not adversely affect the rights, preferences and privileges of
the holders of the Capital Securities (including any Successor Securities) in
any material respect, and (b) following any such transaction, neither VBC
Capital nor such successor entity will be required to register as an investment
company under the Investment Company Act and (vii) the Company or any permitted
successor or designee owns all of the common securities of such successor entity
and guarantees the obligations of such successor entity under the Successor
Securities at least to the extent provided by the Guarantee. Notwithstanding the
foregoing, VBC Capital shall not, except with the consent of holders of 100% in
Liquidation Amount of the Capital Securities, enter into any such transaction,
or permit any other entity to consolidate, amalgamate, merge with or into, or
replace it if such transaction, would cause VBC Capital or the successor entity
to be classified as other than a grantor trust for United States federal income
tax purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "Description of Guarantee -- Amendments
and Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Capital Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the Company, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Trust Securities, (i) 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, which shall not be inconsistent
with the other provisions of the Trust Agreement, or (ii) to modify, eliminate
or add to any provisions of the Trust Agreement to such extent as will be
necessary to ensure that VBC Capital will be classified for United States
federal income tax purposes as a grantor trust at all times that any Trust
Securities are outstanding or to ensure that VBC Capital will not be required to
register as an "investment company" under the Investment Company Act; provided,
however, that in the case of clause (i), such action shall not adversely affect
in any material respect the interests of any holder of Trust Securities, and any
amendments of the Trust Agreement shall become effective when notice thereof is
given to the holders of the Trust Securities. The Trust Agreement may be amended
by the Trustees and the Company (i) with the consent of holders representing not
less than a majority of the aggregate Liquidation Amount of the outstanding
Trust Securities, and (ii) upon receipt by the Trustees of an opinion of counsel
to the effect that such amendment or the exercise of any power granted to the
Trustees in accordance with such amendment will not affect VBC Capital's status
as a grantor trust for United States federal income tax purposes or VBC
Capital's exemption from status as an "investment company" under the Investment
Company Act, provided that without the consent of each holder of Trust
Securities, the Trust Agreement may not be amended to (i) 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 in respect of the Trust
Securities as of a specified date or (ii) restrict the right of a holder of
Trust Securities to institute suit for the enforcement of any such payment on or
after such date.
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Trustees shall not (i) 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 Junior Subordinated Debentures, (ii) waive any past default that is waivable
under the Indenture, (iii) exercise any right to rescind or annul a declaration
that the principal of all the Junior Subordinated Debentures shall be due and
payable or (iv) consent to any amendment, modification or termination of the
Indenture or the Junior Subordinated Debentures, where such consent shall be
required, without, in each case, obtaining the prior approval of the holders of
a majority in aggregate Liquidation Amount of all outstanding Capital
Securities;
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provided, however, that where a consent under the Indenture would require the
consent of each holder of Junior Subordinated Debentures affected thereby, no
such consent may be given by the Property Trustee without the prior consent of
each holder of the Capital Securities. The Trustees shall not revoke any action
previously authorized or approved by a vote of the holders of the Capital
Securities except by subsequent vote of the holders of the Capital Securities.
The Property Trustee will notify each holder of the Capital Securities of any
notice of default with respect to the Junior Subordinated Debentures. In
addition to obtaining the foregoing approvals of such holders of the Capital
Securities, prior to taking any of the foregoing actions, the Trustees shall
obtain an opinion of counsel experienced in such matters to the effect that VBC
Capital will not be classified as an association taxable as a corporation for
United States federal income tax purposes on account of such action.
Any required approval of holders of the Capital Securities may be given at
a meeting of holders of Capital 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 Capital Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be given
to each holder of record of the Capital Securities in the manner set forth in
the Trust Agreement.
No vote or consent of the holders of the Capital Securities will be
required for VBC Capital to redeem and cancel the Capital Securities in
accordance with the Trust Agreement.
Notwithstanding that holders of the Capital Securities are entitled to vote
or consent under any of the circumstances described above, any of the Capital
Securities that are owned by the Company, the Trustees or any affiliate of the
Company or any Trustees, shall, for purposes of such vote or consent, be treated
as if they were not outstanding.
GLOBAL CAPITAL SECURITIES
The Capital Securities will be represented by one or more global
certificates registered in the name of the Depositary or its nominee ("Global
Capital Security"). Beneficial interests in the Capital Securities will be shown
on, and transfers thereof will be effected only through, records maintained by
participants in the Depositary. Except as described below, Capital Securities in
certificated form will not be issued in exchange for the global certificates.
See "Book-Entry Issuance."
A global security will be exchangeable for Capital Securities registered in
the names of persons other than the Depositary or its nominee only if (i) the
Depositary notifies the Company that it is unwilling or unable to continue as a
depositary for such global security and no successor depositary shall have been
appointed, or if at any time the Depositary ceases to be a clearing agency
registered under the Securities Exchange Act of 1934, as amended, at a time when
the Depositary is required to be so registered to act as such depositary, (ii)
the Company in its sole discretion determines that such global security shall be
so exchangeable, or (iii) there shall have occurred and be continuing an Event
of Default under the Indenture. Any global security that is exchangeable
pursuant to the preceding sentence shall be exchangeable for definitive
certificates registered in such names as the Depositary directs. It is expected
that such instructions will be based upon directions received by the Depositary
with respect to ownership of beneficial interests in such global security. In
the event that Capital Securities are issued in definitive form, they will be in
denominations of $25 and integral multiples thereof and may be transferred or
exchanged at the offices described below.
Unless and until it is exchanged in whole or in part for the individual
Capital Securities represented thereby, such Global Capital Security may not be
transferred except as a whole by the Depositary to a nominee of such Depositary
or by a nominee of such Depositary to such Depositary or another nominee of such
Depositary or by the Depositary or any nominee to a successor Depositary or any
nominee of such successor.
Payments on Capital Securities represented by a global security will be
made to the Depositary, as the depositary for the Capital Securities. In the
event the Capital Securities are issued in definitive form, Distributions will
be payable, the transfer of the Capital Securities will be registrable, and
Capital Securities will be exchangeable for Capital Securities of other
denominations of a like aggregate Liquidation Amount, at
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the corporate office of the Property Trustee, or at the offices of any paying
agent or transfer agent appointed by the Administrative Trustees, provided that
payment of any Distribution may be made at the option of the Administrative
Trustees by check mailed to the address of the persons entitled thereto or by
wire transfer. In addition, if the Capital Securities are issued in certificated
form, the record dates for payment of Distributions will be the 1st day of the
month in which the relevant Distribution Date occurs. For a description of the
terms of the depositary arrangements relating to payments, transfers, voting
rights, redemptions and other notices and other matters, see "Book-Entry
Issuance."
Upon the issuance of a Global Capital Security, and the deposit of such
Global Capital Security with or on behalf of the Depositary, the Depositary or
its nominee will credit, on its book-entry registration and transfer system, the
respective aggregate Liquidation Amounts of the individual Capital Securities
represented by such Global Capital Security to persons that have accounts with
such Depositary ("Participants"). Such accounts shall be designated by the
dealers, underwriters or agents with respect to such Capital Securities.
Ownership of beneficial interests in a Global Capital Security will be limited
to Participants or persons that may hold interests through Participants.
Ownership of beneficial interests in such Global Capital Security will be shown
on, and the transfer of that ownership will be effected only through, records
maintained by the Depositary or its nominee (with respect to interests of
Participants) and the records of Participants (with respect to interests of
persons who hold through Participants). The laws of some states require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Capital Security.
So long as the Depositary for a Global Capital Security, or its nominee, is
the registered owner of such Global Capital Security, such Depositary or such
nominee, as the case may be, will be considered the sole owner or holder of the
Capital Securities represented by such Global Capital Security for all purposes
under the Trust Agreement governing such Capital Securities. Except as provided
below, owners of beneficial interests in a Global Capital Security will not be
entitled to have any of the individual Capital Securities represented by such
Global Capital Security registered in their names, will not receive or be
entitled to receive physical delivery of any such Capital Securities in
definitive form and will not be considered the owners or holders thereof under
the Trust Agreement.
None of the Company, the Property Trustee, any Paying Agent, or the
Securities Registrar (defined below) for such Capital 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 Capital
Security representing such Capital Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
The Company expects that the Depositary for Capital Securities or its
nominee, upon receipt of any payment of the Liquidation Amount or Distributions
in respect of a permanent Global Capital Security, immediately will credit
Participants' accounts with payments in amounts proportionate to their
respective beneficial interest in the aggregate Liquidation Amount of such
Global Capital Security as shown on the records of such Depositary or its
nominee. The Company also expects that payments by Participants to owners of
beneficial interests in such Global Capital Security held through such
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in "street name." Such payments will be the responsibility of
such Participants.
If the Depositary for the Capital Securities is at any time unwilling,
unable or ineligible to continue as depositary and a successor depositary is not
appointed by the Company within 90 days, VBC Capital will issue individual
Capital Securities in exchange for the Global Capital Security. In addition, VBC
Capital may at any time and in its sole discretion, subject to any limitations
described herein relating to such Capital Securities, determine not to have any
Capital Securities represented by one or more Global Capital Securities and, in
such event, will issue individual Capital Securities in exchange for the Global
Capital Security or Securities representing the Capital Securities. Further, if
VBC Capital so specifies with respect to the Capital Securities, an owner of a
beneficial interest in a Global Capital Security representing Capital Securities
may, on terms acceptable to the Company, the Property Trustee and the Depositary
for such Global Capital
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Security, receive individual Capital Securities in exchange for such beneficial
interests, subject to any limitations described herein. In any such instance, an
owner of a beneficial interest in a Global Capital Security will be entitled to
physical delivery of individual Capital Securities represented by such Global
Capital Security equal in Liquidation Amount to such beneficial interest and to
have such Capital Securities registered in its name. Individual Capital
Securities so issued will be issued in denominations, unless otherwise specified
by VBC Capital, of $25 and integral multiples thereof.
PAYMENT AND PAYING AGENCY
Payments in respect of the Capital Securities will be made to the
Depositary, which will credit the relevant accounts at the Depositary on the
applicable Distribution Dates or, if any of the Capital Securities are not held
by the Depositary, such payments will be made by check mailed to the address of
the holder entitled thereto as such address will appear on the Register. The
paying agent (the "Paying Agent") will initially be the Property Trustee and any
co-paying agent chosen by the Property Trustee and acceptable to the
Administrative Trustees and the Company. The Paying Agent will be permitted to
resign as Paying Agent upon 30 days' written notice to the Property Trustee and
the Company. In the event that the Property Trustee shall no longer be the
Paying Agent, the Administrative Trustees will appoint a successor (which shall
be a bank or trust company acceptable to the Administrative Trustees and the
Company) to act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the
Capital Securities. Registration of transfers of the Capital Securities will be
effected without charge by or on behalf of VBC Capital, but upon payment of any
tax or other governmental charges that may be imposed in connection with any
transfer or exchange. VBC Capital will not be required to register or cause to
be registered the transfer of the Capital Securities after such Capital
Securities have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, 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 this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of
Capital Securities unless it is offered reasonable indemnity against the costs,
expenses and liabilities that might be incurred thereby. If no Event of Default
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 the Capital Securities
are entitled under the Trust Agreement to vote, then the Property Trustee shall
take such action as is directed by the Company and if not so directed, shall
take such action as 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 VBC Capital in such a way that VBC Capital will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a corporation
for United States federal income tax purposes and so that the Junior
Subordinated Debentures will be treated as indebtedness of the Company for
United States federal income tax purposes. In this regard, the Company and the
Administrative Trustees are authorized to take any action, not inconsistent with
applicable law, the certificate of trust of VBC Capital or the Trust Agreement,
that the Company and the Administrative Trustees determine in their discretion
to be necessary or desirable for such purposes, as long as such action does not
materially adversely affect the interests of the holders of the related Capital
Securities. Holders of the Capital Securities have no preemptive or similar
rights.
VBC Capital may not borrow money or issue debt or mortgage or pledge any of
its assets.
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DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures will be issued under the Subordinated
Indenture, dated as of , 1997 (the "Indenture"), between the Company
and Wilmington Trust Company, as trustee (the "Indenture Trustee"). The
following summary of the terms and provisions of the Junior Subordinated
Debentures and the Indenture does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the Indenture, which has been
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part, and to the Trust Indenture Act. The Indenture is qualified under the
Trust Indenture Act. Whenever particular defined terms of the Indenture are
referred to herein, such defined terms are incorporated herein or therein by
reference.
Concurrently with the issuance of the Capital Securities, VBC Capital will
invest the proceeds thereof, together with the consideration paid by the Company
for the Common Securities, in Junior Subordinated Debentures issued by the
Company. The Junior Subordinated Debentures will be issued as unsecured debt
under the Indenture.
GENERAL
The Junior Subordinated Debentures will bear interest at the annual rate of
% of the principal amount thereof, payable quarterly in arrears on the 15th
day of April, July, October and January of each year (each, an "Interest Payment
Date"), commencing July 15, 1997, to the person in whose name each Junior
Subordinated Debenture is registered, subject to certain exceptions, at the
close of business on the Business Day next preceding such Interest Payment Date.
Notwithstanding the above, in the event that either the (i) Junior Subordinated
Debentures are held by the Property Trustee and the Capital Securities are no
longer in book-entry only form or (ii) the Junior Subordinated Debentures are
not represented by a Global Subordinated Debenture (as defined herein), the
record date for such payment shall be the 1st day of the month in which such
payment is made. The amount of each interest payment due with respect to the
Junior Subordinated Debentures will include amounts accrued through the Interest
Payment Date. It is anticipated that, until the liquidation, if any, of VBC
Capital, each Junior Subordinated Debenture will be held in the name of the
Property Trustee in trust for the benefit of the holders of the Capital
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. In the event that any date
on which interest is payable on the Junior Subordinated Debentures is not a
Business Day, then payment of the interest payable on such date will be made on
the next Business Day (and without any interest or other payment in respect of
any such delay), except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on the date such
payment was originally payable. Accrued interest that is not paid on the
applicable Interest Payment Date will bear additional interest on the amount
thereof (to the extent permitted by law) at the rate per annum of %
thereof, compounded quarterly. The term "interest" as used herein shall include
quarterly interest payments, interest on quarterly interest payments not paid on
the applicable Interest Payment Date and Additional Sums (as defined below), as
applicable.
The Junior Subordinated Debentures will mature on , 2027 (such
date, as it may be shortened as hereinafter described, the "Stated Maturity").
Such date may be shortened once at any time by the Company to any date not
earlier than , 2002, subject to the Company having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. In the event that the Company
elects to shorten the Stated Maturity of the Junior Subordinated Debentures, it
will give notice to the registered holders of the Junior Subordinated
Debentures, the Property Trustee and the Trust of such shortening no less than
90 days prior to the effectiveness thereof. The Property Trustee must give
notice to the holders of the Trust Securities of the shortening of the Stated
Maturity at least 30 but not more than 60 days before such date.
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The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior and Subordinated Debt of
the Company. Because the Company is a holding company, the right of the Company
to participate in any distribution of assets of any subsidiaries, including the
Bank, upon any such subsidiaries' liquidation or reorganization or otherwise
(and thus the ability of holders of the Capital Securities to benefit indirectly
from such distribution), is subject to the prior claims of creditors of that
subsidiary, except to the extent that the Company may itself be recognized as a
creditor of that subsidiary. Accordingly, the Junior Subordinated Debentures
will be effectively subordinated to all existing and future liabilities of the
Company's subsidiaries, and holders of Junior Subordinated Debentures should
look only to the assets of the Company for payments on the Junior Subordinated
Debentures. The Indenture does not limit the incurrence or issuance of other
secured or unsecured debt of the Company, including Senior and Subordinated
Debt, whether under the Indenture or any existing or other indenture that the
Company may enter into in the future or otherwise. See "Subordination" below.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as no Debenture Event of Default has occurred and is continuing,
the Company has the right under the Indenture at any time during the term of the
Junior Subordinated Debentures to defer the payment of interest at any time or
from time to time for a period not exceeding 20 consecutive quarters (each such
period an "Extension Period"), provided that no Extension Period may extend
beyond the Stated Maturity. At the end of such Extension Period, the Company
must pay all interest then accrued and unpaid (together with interest thereon at
the annual rate of %, compounded quarterly, to the extent permitted by
applicable law). During an Extension Period, interest will continue to accrue
and holders of Junior Subordinated Debentures will be required to accrue
interest income for United States federal income tax purposes. See "Certain
Federal Income Tax Consequences -- Potential Extension of Interest Payment
Period and Original Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company (including other Junior
Subordinated Debentures) that rank pari passu with or junior in interest to the
Junior Subordinated Debentures or make any guarantee payments with respect to
any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu with or junior in interest to the
Junior Subordinated Debentures (other than (a) dividends or distributions in
common stock of the Company, (b) any declaration of a dividend in connection
with the implementation of a stockholders' rights plan, or the issuance of stock
under any such plan in the future, or the redemption or repurchase of any such
rights pursuant thereto, (c) payments under the Guarantee, and (d) purchases of
common stock related to rights under any of the Company's benefit plans for its
directors, officers or employees). Prior to the termination of any such
Extension Period, the Company may further extend such Extension Period, provided
that such extension does not cause such Extension Period to exceed 20
consecutive quarters or extend beyond the Stated Maturity. Upon the termination
of any such Extension Period and the payment of all amounts then due on any
Interest Payment Date, the Company may elect to begin a new Extension Period
subject to the above requirements. No interest shall be due and payable during
an Extension Period, except at the end thereof. The Company must give the
Property Trustee, the Administrative Trustees and the Indenture Trustee notice
of its election of any Extension Period at least one Business Day prior to the
earlier of (i) the date the Distributions on the Capital Securities would have
been payable except for the election to begin or extend such Extension Period or
(ii) the date the Administrative Trustees are required to give notice to the
holders of the Capital Securities of the record date or the date such
Distributions are payable, but in any event not less than one Business Day prior
to such record date. The Indenture Trustee shall give notice of the Company's
election to begin or extend a new Extension Period the holders of the Capital
Securities. There is no limitation on the number of times that the Company may
elect to begin an Extension Period.
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ADDITIONAL SUMS
If VBC Capital is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Company will pay as
additional amounts on the Junior Subordinated Debentures such amounts
("Additional Sums") as shall be required so that the Distributions payable by
VBC Capital shall not be reduced as a result of any such additional taxes,
duties or other governmental charges.
REDEMPTION
Subject to the Company having received prior approval of the Federal
Reserve, if then required under applicable capital guidelines or policies of the
Federal Reserve, the Junior Subordinated Debentures are redeemable prior to
maturity at the option of the Company (i) on or after , 2002, in
whole at any time or in part from time to time, or (ii) at any time in whole
(but not in part), upon the occurrence and during the continuance of a Tax
Event, an Investment Company Event or a Capital Treatment Event, in each case at
a redemption price equal to the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption, plus 100%
of the principal amount thereof.
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 Junior Subordinated
Debentures to be redeemed at such holder's registered address. Unless the
Company defaults in payment of the Redemption Price, on and after the Redemption
Date interest ceases to accrue on such Junior Subordinated Debentures or
portions thereof called for redemption.
The Junior Subordinated Debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of the Capital Securities -- Liquidation
Distribution Upon Termination," under certain circumstances involving the
termination of VBC Capital, the Junior Subordinated Debentures may be
distributed to the holders of the Capital Securities and Common Securities in
liquidation of VBC Capital after satisfaction of liabilities to creditors of VBC
Capital as provided by applicable law. If distributed to holders of the Capital
Securities in liquidation, the Junior Subordinated Debentures will initially be
issued in the form of one or more global securities and the Depositary, or any
successor depositary for the Capital Securities, will act as depositary for the
Junior Subordinated Debentures. It is anticipated that the depositary
arrangements for the Junior Subordinated Debentures would be substantially
identical to those in effect for the Capital Securities. If the Junior
Subordinated Debentures are distributed to the holders of Capital Securities
upon the liquidation of VBC Capital, there can be no assurance as to the market
price of any Junior Subordinated Debentures that may be distributed to the
holders of Capital Securities.
RESTRICTIONS ON CERTAIN PAYMENTS
If at any time (i) there shall have occurred any event of which the Company
has actual knowledge that (a) with the giving of notice or the lapse of time, or
both, would constitute a Debenture Event of Default and (b) in respect of which
the Company shall not have taken reasonable steps to cure, or (ii) the Company
shall have given notice of its election of an Extension Period as provided in
the Indenture with respect to the Junior Subordinated Debentures and shall not
have rescinded such notice, or such Extension Period, or any extension thereof,
shall be continuing, or (iii) while the Junior Subordinated Debentures are held
by VBC Capital, the Company shall be in default with respect to its payment of
any obligation under the Guarantee, then the Company will not (1) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or (2)
make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company (including other Junior
Subordinated Debt) that rank pari passu with or junior in interest to the Junior
Subordinated Debentures or make any guarantee payments with respect to any
guarantee by the Company of the debt securities of any subsidiary of the Company
if such guarantee ranks pari passu or junior in interest to the Junior
Subordinated Debentures (other than (a) dividends or distributions in common
stock, (b) any declaration of a dividend in connection with the implementation
of a stockholders' rights plan, or the issuance
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of stock under any such plan in the future or the redemption or repurchase of
any such rights pursuant thereto, (c) payments under the Guarantee and (d)
purchases of common stock related to rights under any of the Company's benefit
plans for its directors, officers or employees).
SUBORDINATION
In the Indenture, the Company has agreed that any Junior Subordinated
Debentures will be subordinate and junior in right of payment to all Senior and
Subordinated Debt to the extent provided in the Indenture. Upon any payment or
distribution of assets to 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 insolvency or bankruptcy proceeding of the Company, the
holders of Senior and Subordinated Debt will first be entitled to receive
payment in full of principal of (and premium, if any) and interest, if any, on
such Senior and Subordinated Debt before the holders of Junior Subordinated
Debentures will be entitled to receive or retain any payment in respect of the
principal of or interest, if any, on the Junior Subordinated Debentures.
In the event of the acceleration of the maturity of any Junior Subordinated
Debentures, the holders of all Senior and Subordinated Debt outstanding at the
time of such acceleration will first be entitled to receive payment in full of
all amounts due thereon (including any amounts due upon acceleration) before the
holders of Junior Subordinated Debentures will be entitled to receive or retain
any payment in respect of the principal of or interest, if any, on the Junior
Subordinated Debentures; provided, however, that holders of Subordinated Debt
shall not be entitled to receive payment of any such amounts to the extent that
such Subordinated Debt is by its terms subordinated to trade creditors.
No payments on account of principal or interest, if any, in respect of the
Junior Subordinated Debentures may be made if there shall have occurred and be
continuing a default in any payment with respect to Senior and Subordinated Debt
or an event of default with respect to any Senior and Subordinated Debt
resulting in the acceleration of the maturity thereof, or if any judicial
proceeding shall be pending with respect to any such default.
"Debt" means with respect to any person, whether recourse is to all or a
portion of the assets of such person and whether or not contingent: (i) every
obligation of such person for money borrowed; (ii) every obligation of such
person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such person; (iv) every obligation of such person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of such person; and (vi) every
obligation of the type referred to in clauses (i) through (v) of another person
and all dividends of another person the payment of which, in either case, such
person has guaranteed or is responsible or liable, directly or indirectly, as
obligor or otherwise.
"Senior and Subordinated Debt" means the principal of (and premium, if any)
and interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not such claim for post-petition interest is allowed in such proceeding), on
Debt, whether incurred on or prior to the date of the Indenture or thereafter
incurred, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are not
superior in right of payment to the Junior Subordinated Debentures or to other
Debt which is pari passu with, or subordinated to, the Junior Subordinated
Debentures; provided, however, that Senior and Subordinated Debt shall not be
deemed to include (i) any Debt of the Company which when incurred and without
respect to any election under section 1111(b) of the United States Bankruptcy
Code of 1978, as amended, was without recourse to the Company, (ii) any Debt of
the Company to any of its subsidiaries, (iii) any Debt to any employee of the
Company, (iv) 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 that payments made to the holders of such Debt by the holders of the
Junior Subordinated Debentures as a result of the
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subordination provisions of the Indenture would be greater than they otherwise
would have been as a result of any obligation of such holders to pay amounts
over to the obligees on such trade accounts payable or accrued liabilities
arising in the ordinary course of business as a result of subordination
provisions to which such Debt is subject, (v) the Guarantee, and (vi) any other
debt securities issued pursuant to the Indenture.
The Indenture places no limitation on the amount of additional Senior and
Subordinated Debt that may be incurred by the Company. The Company expects from
time to time to incur additional indebtedness constituting Senior and
Subordinated Debt.
DENOMINATIONS, REGISTRATION AND TRANSFER
The Junior Subordinated Debentures will be represented by global
certificates registered in the name of the Depositary or its nominee ("Global
Subordinated Debenture"). Beneficial interests in the Junior Subordinated
Debentures will be shown on, and transfers thereof will be effected only
through, records maintained by the Depositary. Except as described below, Junior
Subordinated Debentures in certificated form will not be issued in exchange for
the global certificates. See "Book-Entry Issuance."
Unless and until a Global Subordinated Debenture is exchanged in whole or
in part for the individual Junior Subordinated Debentures represented thereby,
it may not be transferred except as a whole by the Depositary for such Global
Subordinated Debenture to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary or by the
Depositary or any nominee to a successor Depositary or any nominee of such
successor.
A global security shall be exchangeable for Junior Subordinated Debentures
registered in the names of persons other than the Depositary or its nominee only
if (i) the Depositary notifies the Company that it is unwilling or unable to
continue as a depositary for such global security and no successor depositary
shall have been appointed, or if at any time the Depositary ceases to be a
clearing agency registered under the Securities Exchange Act of 1934, as
amended, at a time when the Depositary is required to be so registered to act as
such depositary, (ii) the Company in its sole discretion determines that such
global security shall be so exchangeable or (iii) there shall have occurred and
be continuing an Event of Default under the Indenture with respect to such
global security. Any global security that is exchangeable pursuant to the
preceding sentence shall be exchangeable for definitive certificates registered
in such names as the Depositary shall direct. It is expected that such
instructions will be based upon directions received by the Depositary from its
Participants with respect to ownership of beneficial interests in such global
security. In the event that Junior Subordinated Debentures are issued in
definitive form, such Junior Subordinated Debentures will be in denominations of
$25 and integral multiples thereof and may be transferred or exchanged at the
offices described below.
Payments on Junior Subordinated Debentures represented by a global security
will be made to the Depositary, as the depositary for the Junior Subordinated
Debentures. In the event Junior Subordinated Debentures are issued in definitive
form, principal and interest will be payable, the transfer of the Junior
Subordinated Debentures will be registrable, and Junior Subordinated Debentures
will be exchangeable for Junior Subordinated Debentures of other denominations
of a like aggregate principal amount, at the corporate office of the Indenture
Trustee, or at the offices of any paying agent or transfer agent appointed by
the Company, provided that payment of interest may be made at the option of the
Company by check mailed to the address of the persons entitled thereto or by
wire transfer. In addition, if the Junior Subordinated Debentures are issued in
certificated form, the record dates for payment of interest will be the 1st day
of the month in which such payment is to be made. For a description of the
Depositary and the terms of the depositary arrangements relating to payments,
transfers, voting rights, redemptions and other notices and other matters, see
"Book-Entry Issuance."
The Company will appoint the Indenture Trustee as securities registrar
under the Indenture (the "Securities Registrar"). Junior Subordinated Debentures
may be presented for exchange as provided above, and may be presented for
registration of transfer (with the form of transfer endorsed thereon, or a
satisfactory written instrument of transfer, duly executed), at the office of
the Securities Registrar. The Company may at any time rescind the designation of
any such registrar or approve a change in the location through which any
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such registrar acts, provided that the Company maintains a registrar in the
place of payment. The Company may at any time designate additional registrars
with respect to the Junior Subordinated Debentures.
In the event of any redemption, neither the Company nor the Indenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of Junior
Subordinated 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
Junior Subordinated Debentures so selected for redemption, except, in the case
of any Junior Subordinated Debentures being redeemed in part, any portion
thereof not to be redeemed.
GLOBAL SUBORDINATED DEBENTURE
Upon the issuance of the Global Subordinated Debenture, and the deposit of
such Global Subordinated Debenture with or on behalf of the Depositary, the
Depositary for such Global Subordinated Debenture or its nominee will credit, on
its book-entry registration and transfer system, the respective principal
amounts of the individual Junior Subordinated Debentures represented by such
Global Subordinated Debenture to Participants. Ownership of beneficial interests
in a Global Subordinated Debenture will be limited to Participants or persons
that may hold interests through Participants. Ownership of beneficial interests
in such Global Subordinated Debenture 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 interests of Participants) and the
records of Participants (with respect to interests of persons who hold through
Participants). The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Subordinated Debenture.
So long as the Depositary for a Global Subordinated Debenture, or its
nominee, is the registered owner of such Global Subordinated Debenture, such
Depositary or such nominee, as the case may be, will be considered the sole
owner or holder of the Junior Subordinated Debentures represented by such Global
Subordinated Debenture for all purposes under the Indenture governing such
Junior Subordinated Debentures. Except as provided below, owners of beneficial
interests in a Global Subordinated Debenture will not be entitled to have any of
the individual Junior Subordinated Debentures represented by such Global
Subordinated Debenture registered in their names, will not receive or be
entitled to receive physical delivery of any such Junior Subordinated Debentures
in definitive form and will not be considered the owners or holders thereof
under the Indenture.
Payments of principal of and interest on individual Junior Subordinated
Debentures represented by a Global Subordinated Debenture registered in the name
of the Depositary or its nominee will be made to the Depositary or its nominee,
as the case may be, as the registered owner of the Global Subordinated Debenture
representing such Junior Subordinated Debentures. None of the Company, the
Indenture Trustee, any Paying Agent, or the Securities Registrar for such Junior
Subordinated Debentures 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 Subordinated Debenture representing such Junior
Subordinated Debentures or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
The Company expects that the Depositary or its nominee, upon receipt of any
payment of principal or interest in respect of the Global Subordinated Debenture
representing the Junior Subordinated Debentures, immediately will credit
Participants' accounts with payments in amounts proportionate to their
respective beneficial interest in the principal amount of the Global
Subordinated Debenture as shown on the records of such Depositary or its
nominee. The Company also expects that payments by Participants to owners of
beneficial interests in such Global Subordinated Debenture held through such
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in "street name." Such payments will be the responsibility of
such Participants.
If the Depositary is at any time unwilling, unable or ineligible to
continue as depositary and a successor depositary is not appointed by the
Company within 90 days, the Company will issue individual Junior
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Subordinated Debentures in exchange for the Global Subordinated Debenture. In
addition, the Company may at any time and in its sole discretion, determine not
to have the Junior Subordinated Debentures represented by one or more Global
Subordinated Debentures and, in such event, will issue individual Junior
Subordinated Debentures in exchange for the Global Subordinated Debenture.
Further, if the Company so specifies with respect to the Junior Subordinated
Debentures, an owner of a beneficial interest in a Global Subordinated Debenture
representing the Junior Subordinated Debentures may, on terms acceptable to the
Company, the Indenture Trustee and the Depositary for such Global Subordinated
Debenture, receive individual Junior Subordinated Debentures in exchange for
such beneficial interests. In any such instance, an owner of a beneficial
interest in a Global Subordinated Debenture will be entitled to physical
delivery of individual Junior Subordinated Debentures equal in principal amount
to such beneficial interest and to have such Junior Subordinated Debentures
registered in its name. Individual Junior Subordinated Debentures so issued will
be issued in denominations, unless otherwise specified by the Company, of $25
and integral multiples thereof.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the Junior Subordinated
Debentures will be made at the office of the Indenture Trustee, except that at
the option of the Company payment of any interest may be made (i) except in the
case of a Global Subordinated Debenture, by check mailed to the address of the
person entitled thereto as such address shall appear in the securities register
or (ii) by transfer to an account maintained by the person entitled thereto as
specified in the securities register, provided that proper transfer instructions
have been received by the regular record date. Payment of any interest on Junior
Subordinated Debentures will be made to the person in whose name such Junior
Subordinated Debenture is registered at the close of business on the regular
record date for such interest. The Company may at any time designate additional
Paying Agents or rescind the designation of any Paying Agent; however, the
Company will at all times be required to maintain a Paying Agent in each place
of payment for the Junior Subordinated Debentures.
Any moneys deposited with the Indenture Trustee or any Paying Agent, or
then held by the Company in trust, for the payment of the principal of or
interest on the Junior Subordinated Debentures and remaining unclaimed for two
years after such principal or interest has become due and payable shall, at the
request of the Company, be repaid to the Company and the holder of such Junior
Subordinated Debenture shall thereafter look, as a general unsecured creditor,
only to the Company for payment thereof.
MODIFICATION OF INDENTURE
From time to time the Company and the Indenture Trustee may, without the
consent of the holders of the Junior Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies (provided that any such action
does not materially adversely affect the interests of the holders of the Junior
Subordinated Debentures or the Capital Securities so long as they remain
outstanding) and qualifying, or maintaining the qualification of, the Indenture
under the Trust Indenture Act. The Indenture contains provisions permitting the
Company and the Indenture Trustee, with the consent of the holders of not less
than a majority in principal amount of the outstanding Junior Subordinated
Debentures, to modify the Indenture in a manner affecting the rights of the
holders of the Junior Subordinated Debentures; provided, that, no such
modification may, without the consent of the holder of each outstanding
Subordinated Debenture, (i) change the Stated Maturity of the Junior
Subordinated Debentures or extend the time of payment of interest thereon
(except as described under "Description of Junior Subordinated
Debentures -- General" and "-- Option to Extend Interest Payment Period"), or
reduce the principal amount thereof or the rate of interest thereon, or (ii)
reduce the percentage of principal amount of Junior Subordinated Debentures, the
holders of which are required to consent to any such modification of the
Indenture, provided that so long as any of the Capital Securities remain
outstanding, no such modification may be made that adversely affects the holders
of such Capital Securities in any material respect, and no termination of the
Indenture may occur, and no waiver of any Debenture Event of Default or
compliance with any covenant under the Indenture may be effective, without the
prior consent of the holders of at least a majority of the aggregate Liquidation
Amount of the Capital Securities unless and until the
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principal of the Junior Subordinated Debentures and all accrued and unpaid
interest thereon have been paid in full and certain other conditions are
satisfied.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred and
is continuing constitutes a "Debenture Event of Default" with respect to the
Junior Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Junior Subordinated
Debentures, when due (subject to the deferral of any due date in the case of an
Extension Period); or
(ii) failure to pay any principal on the Junior Subordinated Debentures
when due whether at maturity, upon redemption by declaration or otherwise; or
(iii) failure by the Company to observe or perform in any material respect
certain other covenants contained in the Indenture for 90 days after written
notice to the Company from the Indenture Trustee or to the Company and the
Indenture Trustee by the holders of at least 25% in aggregate outstanding
principal amount of the Junior Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company, including the voluntary commencement of bankruptcy proceedings, entry
of an order for relief against the Company in a bankruptcy proceeding,
appointment of a custodian over substantially all of the Company's property, a
general assignment for the benefit of creditors, or a court order for
liquidation of the Company.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Indenture
Trustee. The Indenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Junior Subordinated Debentures may declare
the principal due and payable immediately upon a Debenture Event of Default. The
holders of a majority in aggregate outstanding principal amount of the Junior
Subordinated Debentures may annul such declaration and waive the default if the
default (other than the non-payment of the principal of the Junior Subordinated
Debentures which has become due solely by such acceleration) 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.
Should the holders of the Junior Subordinated Debentures fail to annul such
declaration and waive such default, the holders of a majority in aggregate
Liquidation Amount of the Capital Securities shall have such right. In case a
Debenture Event of Default shall occur and be continuing, the Property Trustee
will have the right to declare the principal of and the interest on such Junior
Subordinated Debentures, and any other amounts payable under the Indenture, to
be forthwith due and payable and to enforce its other rights as a creditor with
respect to such Junior Subordinated Debentures.
The Company is required to file annually with the Indenture Trustee a
certificate as to whether the Company is in compliance with all the conditions
and covenants applicable to it under the Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF CAPITAL SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay interest or principal
on the Junior Subordinated Debentures on the date such interest or principal is
otherwise payable, a holder of Capital Securities may institute a legal
proceeding directly against the Company for enforcement of payment to such
holder of the principal of or interest on such Junior Subordinated Debentures
having a principal amount equal to the aggregate Liquidation Amount of the
Capital Securities of such holder ("Direct Action"). If the right to bring a
Direct Action is removed, VBC Capital may become subject to the reporting
obligations under the Exchange Act. The Company shall have the right under the
Indenture to set-off any payment made to such holder of Capital Securities by
the Company in connection with a Direct Action.
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The holders of the Capital Securities would not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Junior Subordinated Debentures unless there
shall have been an Event of Default under the Trust Agreement. See "Description
of Capital Securities -- Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall not consolidate with or merge
into any other Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, and no Person shall consolidate with
or merge into the Company or convey, transfer or lease its properties and assets
substantially as an entirety to the Company, unless (i) in case the Company
consolidates with or merges into another Person or conveys or transfers its
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 such successor Person expressly assumes the Company's
obligations on the Junior Subordinated Debentures issued under the Indenture;
(ii) immediately after giving effect thereto, no Debenture Event of Default, and
no event which, after notice or lapse of time or both, would become a Debenture
Event of Default, shall have occurred and be continuing; and (iii) certain other
conditions as prescribed in the Indenture are met.
The provisions of the Indenture do not afford holders of the Junior
Subordinated Debentures protection in the event of a highly leveraged or other
transaction involving the Company that may adversely affect holders of the
Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Junior
Subordinated Debentures not previously delivered to the Indenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and payable
at their Stated Maturity within one year, and the Company deposits or causes to
be deposited with the Indenture Trustee, in trust, funds for the purpose and in
an amount in the currency or currencies in which the Junior Subordinated
Debentures are payable sufficient to pay and discharge the entire indebtedness
on the Junior Subordinated Debentures not previously delivered to the Indenture
Trustee for cancellation, for the principal and interest to the date of the
deposit or to the Stated Maturity, as the case may be, then the Indenture will
cease to be of further effect (except as to the Company's obligations to pay all
other sums due pursuant to the Indenture and to provide the officers'
certificates and opinions of counsel described therein), and the Company will be
deemed to have satisfied and discharged the Indenture.
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by
and construed in accordance with the laws of the State of Colorado.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Indenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Indenture 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.
COVENANTS OF THE COMPANY
The Company will covenant in the Indenture, as to the Junior Subordinated
Debentures, that if and so long as (i) VBC Capital is the holder of all such
Junior Subordinated Debentures, (ii) a Tax Event in respect of VBC Capital has
occurred and is continuing and (iii) the Company has elected, and has not
revoked such election, to pay Additional Sums (as defined under "Description of
the Capital Securities -- Redemption") in
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respect of the Capital Securities, the Company will pay to VBC Capital such
Additional Sums. The Company will also covenant, as to the Junior Subordinated
Debentures, (i) to maintain directly or indirectly 100% ownership of the Common
Securities of VBC Capital to which Junior Subordinated Debentures have been
issued, provided that certain successors which are permitted pursuant to the
Indenture may succeed to the Company's ownership of the Common Securities, (ii)
not to voluntarily terminate, wind up or liquidate VBC Capital, except upon
prior approval of the Federal Reserve if then so required under applicable
capital guidelines or policies of the Federal Reserve, and except (a) in
connection with a distribution of Junior Subordinated Debentures to the holders
of the Capital Securities in liquidation of VBC Capital or (b) in connection
with certain mergers, consolidations, or amalgamations permitted by the Trust
Agreement and (iii) to use its reasonable efforts, consistent with the terms and
provisions of the Trust Agreement, to cause VBC Capital to remain classified as
a grantor trust and not as an association taxable as a corporation for United
States federal income tax purposes.
BOOK-ENTRY ISSUANCE
The Depositary will act as securities depositary for all of the Capital
Securities and the Junior Subordinated Debentures. The Capital Securities and
the Junior Subordinated Debentures will be issued only as fully-registered
securities registered in the name of Cede & Co. (the Depositary's nominee). One
or more fully-registered global certificates will be issued for the Capital
Securities and the Junior Subordinated Debentures and will be deposited with the
Depositary.
The Depositary is a limited purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary holds securities that its Participants deposit with the
Depositary. The Depositary 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. The Depositary
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 Depositary system is also available to
others such as securities brokers and dealers, banks and trust companies that
clear through or maintain custodial relationships with Direct Participants,
either directly or indirectly ("Indirect Participants"). The rules applicable to
the Depositary and its Participants are on file with the Commission.
Purchases of Capital Securities or Junior Subordinated Debentures within
the Depositary system must be made by or through Direct Participants, which will
receive a credit for the Capital Securities or Junior Subordinated Debentures on
the Depositary's records. The ownership interest of each actual purchaser of
each Capital Security and each Junior Subordinated Debenture ("Beneficial
Owner") is in turn to be recorded on the Direct and Indirect Participants'
records. Beneficial Owners will not receive written confirmation from the
Depositary 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 Capital Securities or Junior Subordinated
Debentures. Transfers of ownership interests in the Capital Securities or Junior
Subordinated Debentures 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 interests in Capital
Securities or Junior Subordinated Debentures, except in the event that use of
the book-entry system for the or Junior Subordinated Debentures is discontinued.
The Depositary has no knowledge of the actual Beneficial Owners of the
Capital Securities or Junior Subordinated Debentures; the Depositary's records
reflect only the identity of the Direct Participants to whose accounts such
Capital Securities or Junior Subordinated Debentures are credited, which may or
may not be
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the Beneficial Owners. The Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners and the voting
rights of Direct Participants, Indirect Participants and 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 Capital Securities or Junior Subordinated Debentures. If less than all of
the Capital Securities or the Junior Subordinated Debentures are being redeemed,
the Depositary will determine by lot or pro rata the amount of the Capital
Securities of each Direct Participant to be redeemed.
Although voting with respect to the Capital Securities or the Junior
Subordinated Debentures is limited to the holders of record of the Capital
Securities or the Junior Subordinated Debentures, in those instances in which a
vote is required, neither the Depositary nor Cede & Co. will itself consent or
vote with respect to Capital Securities or Junior Subordinated Debentures. Under
its usual procedures, the Depositary would mail an omnibus proxy (the "Omnibus
Proxy") to the relevant 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 such Capital Securities or Junior Subordinated
Debentures are credited on the record date (identified in a listing attached to
the Omnibus Proxy).
Distribution payments on the Capital Securities or the Junior Subordinated
Debentures will be made by the relevant Trustee to the Depositary. The
Depositary's practice is to credit Direct Participants' accounts on the relevant
payment date in accordance with their respective holdings shown on the
Depositary's records unless the Depositary has reason to believe that it will
not receive payments on such payment date. Payments by Participants to
Beneficial Owners will be governed by standing instructions and customary
practices and will be the responsibility of such Participant and not of the
Depositary, the relevant Trustee, VBC Capital or the Company, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of Distributions to the Depositary is the responsibility of the relevant
Trustee, disbursement of such payments to Direct Participants is the
responsibility of the Depositary, and disbursements of such payments to the
Beneficial Owners is the responsibility of Direct and Indirect Participants.
The Depositary may discontinue providing its services as securities
depositary with respect to any of the Capital Securities or the Junior
Subordinated Debentures at any time by giving reasonable notice to the relevant
Trustee and the Company. In the event that a successor securities depositary is
not obtained, definitive Capital Securities or Subordinated Debenture
certificates representing such Capital Securities or Junior Subordinated
Debentures are required to be printed and delivered. The Company, at its option,
may decide to discontinue use of the system of book-entry transfers through the
Depositary (or a successor depositary). After a Debenture Event of Default, the
holders of a majority in liquidation preference of Capital Securities or
aggregate principal amount of Junior Subordinated Debentures may determine to
discontinue the system of book-entry transfers through the Depositary. In any
such event, definitive certificates for such Capital Securities or Junior
Subordinated Debentures will be printed and delivered.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that VBC Capital
and the Company believe to be accurate, but VBC Capital and the Company assume
no responsibility for the accuracy thereof. Neither VBC Capital nor the Company
has any responsibility for the performance by the Depositary or its Participants
of their respective obligations as described herein or under the rules and
procedures governing their respective operations.
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DESCRIPTION OF GUARANTEE
The Capital Securities Guarantee Agreement (the "Guarantee") will be
executed and delivered by the Company concurrently with the issuance of the
Capital Securities for the benefit of the holders of the Capital Securities.
Wilmington Trust Company will act as trustee under the Guarantee (the "Guarantee
Trustee") for the purposes of compliance with the Trust Indenture Act, and the
Guarantee will be qualified under the Trust Indenture Act. The following summary
of certain provisions of the Guarantee does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all of the provisions
of the Guarantee, including the definitions therein of certain terms, and the
Trust Indenture Act. The form of the Guarantee has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. The Guarantee
Trustee will hold the Guarantee for the benefit of the holders of the Capital
Securities.
GENERAL
The Guarantee will be an irrevocable guarantee on a subordinated basis of
all of VBC Capital's obligations under the Capital Securities, but will apply
only to the extent that VBC Capital has funds sufficient to make such payments,
and is not a guarantee of collection.
The Company will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Capital Securities, as and when due, regardless of any defense,
right of set-off or counterclaim that VBC Capital may have or assert other than
the defense of payment. The following payments with respect to the Capital
Securities, to the extent not paid by or on behalf of VBC Capital (the
"Guarantee Payments"), will be subject to the Guarantee: (i) any accumulated and
unpaid Distributions required to be paid on the Capital Securities, to the
extent that VBC Capital has funds on hand available therefor at such time, (ii)
the Redemption Price with respect to any Capital Securities called for
redemption to the extent that VBC Capital has funds on hand available therefor
at such time, and (iii) upon a voluntary or involuntary dissolution, winding up
or liquidation of VBC Capital (unless the Junior Subordinated Debentures are
distributed to holders of the Capital Securities), the lesser of (a) the
Liquidation Distribution and (b) the amount of assets of VBC Capital remaining
available for distribution to holders of Capital Securities. The Company's
obligation to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by the Company to the holders of the Capital Securities or by
causing VBC Capital to pay such amounts to such holders.
If the Company does not make interest payments on the Junior Subordinated
Debentures held by VBC Capital, VBC Capital will not be able to pay
Distributions on the Capital Securities and will not have funds legally
available therefor. The Guarantee will rank subordinate and junior in right of
payment to all Senior and Subordinated Debt of the Company. See "Status of the
Guarantee" below. Because the Company is a holding company, the right of the
Company to participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise, is subject to the prior
claims of creditors of that subsidiary, except to the extent the Company may
itself be recognized as a creditor of that subsidiary. Accordingly, the
Company's obligations under the Guarantee will be effectively subordinated to
all existing and future liabilities of the Company's subsidiaries, and claimants
should look only to the assets of the Company for payments thereunder. Except as
otherwise described herein, the Guarantee does not limit the incurrence or
issuance of other secured or unsecured debt of the Company, including Senior and
Subordinated Debt whether under the Indenture, any other indenture that the
Company may enter into in the future, or otherwise.
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures, the Indenture and the Expense Agreement, taken
together, fully, irrevocably and unconditionally guaranteed on a subordinated
basis all of VBC Capital's obligations under the Capital Securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee on a subordinated basis of all of VBC Capital's
obligations under the Capital Securities. See "Relationship Among the Capital
Securities, the Junior Subordinated Debentures and the Guarantee."
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STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior and
Subordinated Debt in the same manner as the Junior Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of collection.
The guaranteed party may institute a legal proceeding directly against the
Company to enforce its rights under the Guarantee without first instituting a
legal proceeding against any other person or entity. The Guarantee will be held
for the benefit of the holders of the Capital Securities. The Guarantee will not
be discharged except by payment of the Guarantee Payments in full to the extent
not paid by VBC Capital or upon distribution to the holders of the Capital
Securities of the Junior Subordinated Debentures to the holders of the Capital
Securities. The Guarantee does not place a limitation on the amount of
additional Senior and Subordinated Debt that may be incurred by the Company. The
Company expects from time to time to incur additional indebtedness constituting
Senior and Subordinated Debt.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Capital Securities (in which case no vote will be
required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate Liquidation Amount of such
outstanding Capital Securities. See "Description of the Capital
Securities -- Voting Rights; Amendment of Trust Agreement." All guarantees and
agreements contained in the Guarantee shall bind the successors, assigns,
receivers, trustees and representatives of the Company and shall inure to the
benefit of the holders of the Capital Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder. The
holders of not less than a majority in aggregate Liquidation Amount of the
Capital 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 or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
Any holder of the Capital Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against VBC Capital, the Guarantee Trustee
or any other person or entity.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether the Company is in compliance with all the
conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
a default by the Company in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after
default with respect to the Guarantee, 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 this provision, 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 the Capital Securities unless it is offered reasonable indemnity
against the costs, expenses and liabilities that might be incurred thereby.
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 Capital Securities, upon full
payment of the amounts payable upon liquidation of VBC Capital or upon
distribution of Junior Subordinated Debentures to the holders of the Capital
Securities. The Guarantee
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will continue to be effective or will be reinstated, as the case may be, if at
any time any holder of the Capital Securities must restore payment of any sums
paid under the Capital Securities or the Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of Colorado.
THE EXPENSE AGREEMENT
Pursuant to the Agreement as to Expenses and Liabilities entered into by
the Company under the Trust Agreement (the "Expense Agreement"), the Company
will irrevocably and unconditionally guarantee to each person or entity to whom
VBC Capital becomes indebted or liable, the full payment of any costs, expenses
or liabilities of VBC Capital, other than obligations of VBC Capital to pay to
the holders of the Capital Securities or other similar interests in VBC Capital
of the amounts due such holders pursuant to the terms of the Capital Securities
or such other similar interests, as the case may be.
RELATIONSHIP AMONG THE CAPITAL SECURITIES, THE
JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Capital Securities
(to the extent VBC Capital has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Description of Guarantee." Taken together, the Company's
obligations under the Junior Subordinated Debentures, the Indenture, the Trust
Agreement, the Expense Agreement and the Guarantee provide, in the aggregate, a
full, irrevocable and unconditional guarantee on a subordinated basis of
payments of Distributions and other amounts due on the Capital Securities. No
single document standing alone or operating in conjunction with fewer than all
of the other documents constitutes such guarantee. It is only the combined
operation of those documents that has the effect of providing a full,
irrevocable and unconditional guarantee on a subordinated basis of VBC Capital's
obligations under the Capital Securities. If and to the extent that the Company
does not make payments on the Junior Subordinated Debentures, VBC Capital will
not pay Distributions or other amounts due on the Capital Securities. The
Guarantee does not cover payment of Distributions when VBC Capital does not have
sufficient funds to pay such Distributions. In such event, the remedy of a
holder of the Capital Securities is to institute a legal proceeding directly
against the Company for enforcement of payment of such Distributions to such
holder. The obligations of the Company under the Guarantee are subordinate and
junior in right of payment to all Senior and Subordinated Debt.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Capital Securities, primarily
because: (i) the aggregate principal amount of the Junior Subordinated
Debentures will be equal to the sum of the aggregate Liquidation Amount of the
Capital Securities and Common Securities; (ii) the interest rate and interest
and other payment dates on the Junior Subordinated Debentures will match the
Distribution rate and Distribution and other payment dates for the Capital
Securities; (iii) the Company shall pay for all and any costs, expenses and
liabilities of VBC Capital except VBC Capital's obligations to holders of
Capital Securities; and (iv) the Trust Agreement further provides that VBC
Capital will not engage in any activity that is not consistent with the limited
purposes of VBC Capital.
Notwithstanding anything to the contrary in the Indenture, the Company has
the right to set-off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofore made, or is concurrently on
the date of such payment making, a payment under the Guarantee.
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ENFORCEMENT RIGHTS OF HOLDERS OF THE CAPITAL SECURITIES UNDER THE GUARANTEE
A holder of any the Capital Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, VBC Capital
or any other person or entity,
A default or event of default under any Senior and Subordinated Debt would
not constitute an Event of Default. However, in the event of payment defaults
under, or acceleration of, Senior and Subordinated Debt, the subordination
provisions of the Indenture provide that no payments may be made in respect of
the Junior Subordinated Debentures until such Senior and Subordinated Debt has
been paid in full or any payment default thereunder has been cured or waived.
Failure to make required payments on Junior Subordinated Debentures would
constitute an Event of Default.
LIMITED PURPOSE OF VBC CAPITAL
The Capital Securities evidence a beneficial interest in VBC Capital, and
VBC Capital exists for the sole purpose of issuing the Trust Securities and
investing the proceeds thereof in Junior Subordinated Debentures. A principal
difference between the rights of a holder of the Capital Securities and a holder
of a Subordinated Debenture is that a holder of a Subordinated Debenture is
entitled to receive from the Company the principal amount of and interest
accrued on Junior Subordinated Debentures held, while a holder of the Capital
Securities is entitled to receive Distributions from VBC Capital (or from the
Company under the Guarantee) if and to the extent VBC Capital has funds
available for the payment of such Distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or liquidation of
VBC Capital involving the liquidation of the Junior Subordinated Debentures, the
holders of Capital Securities will be entitled to receive, out of assets held by
VBC Capital, the Liquidation Distribution in cash. See "Description of the
Capital Securities--Liquidation Distribution Upon Termination." Upon any
voluntary or involuntary liquidation or bankruptcy of the Company, the Property
Trustee, as holder of the Junior Subordinated Debentures, would be a
subordinated creditor of the Company, subordinated in right of payment to all
Senior and Subordinated Debt as set forth in the Indenture, but entitled to
receive payment in full of principal and interest, before any stockholders of
the Company receive payments or distributions. Since the Company is the
guarantor under the Guarantee and has agreed to pay for all costs, expenses and
liabilities of VBC Capital (other than VBC Capital's obligations to the holders
of its Capital Securities), the positions of a holder of the Capital Securities
and a holder of Junior Subordinated Debentures relative to other creditors and
to stockholders of the Company in the event of liquidation or bankruptcy of the
Company are expected to be substantially the same.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Jones & Keller, P.C., counsel to the Company ("Counsel"),
the following summary accurately describes the material United States federal
income tax consequences that may be relevant to the purchase, ownership and
disposition of Capital Securities. Unless otherwise stated, this summary deals
only with Capital Securities held as capital assets by United States Persons
(defined below) who purchase the Capital Securities upon original issuance at
their original offering price. As used herein, a "United States Person" means a
person that is (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an estate
the income of which is subject to United States federal income taxation
regardless of its source, or (iv) a trust the income of which is subject to
United States federal income taxation regardless of its source; provided,
however, that for taxable years beginning after December 31, 1996 (or, if a
trustee so elects, for taxable years ending after August 20, 1996), a "United
States Person" shall include any trust if a court within the United States is
able to exercise primary supervision over the administration of such trust and
one or more United States fiduciaries have the authority to control all
substantial decisions of such trust. The tax treatment of holders may vary
depending on their particular situation. This summary does not address all the
tax consequences that may be relevant to a particular holder or to holders who
may be subject to special tax treatment, such as banks, real estate investment
trusts, regulated investment companies, insurance companies, dealers in
securities or currencies, tax-exempt investors, foreign investors or persons
that will hold the Capital Securities as part of a position in a "straddle" or
as part of a "hedging" or other integrated transaction. In addition, this
summary does not include any description of any alternative minimum tax
consequences or the tax laws of any state, local or foreign government that may
be applicable to a holder of Capital Securities. This summary is based on the
Internal Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and administrative and judicial interpretations thereof,
as of the date hereof, all of which are subject to change, possibly on a
retroactive basis. Any such change could cause the tax consequences to vary
substantially from the consequences described below, possibly adversely
affecting an owner of Capital Securities.
The following discussion does not discuss the tax consequences that might
be relevant to persons that are not United States Persons ("non-United States
Persons") . Non-United States Persons should consult their own tax advisors as
to the specific United States federal income tax consequences of the purchase,
ownership and disposition of Capital Securities.
The authorities on which this summary is based are subject to various
interpretations and the opinions of Counsel are not binding on the Internal
Revenue Service ("Service") or the courts, either of which could take a contrary
position. Moreover, no rulings have been or will be sought from the Service with
respect to the transactions described herein. Accordingly, there can be no
assurance that the Service will not challenge the opinions expressed herein or
that a court would not sustain such a challenge. It is therefore possible that
the federal income tax treatment of the purchase, ownership and disposition of
Capital Securities may differ from the treatment described below.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE CAPITAL
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN, AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR
OTHER TAX LAWS. FOR A DISCUSSION OF THE POSSIBLE REDEMPTION OF THE CAPITAL
SECURITIES UPON THE OCCURRENCE OF CERTAIN TAX EVENTS, SEE "DESCRIPTION OF
CAPITAL SECURITIES -- REDEMPTION."
CLASSIFICATION OF VBC CAPITAL
In connection with the issuance of the Capital Securities, Counsel is of
the opinion that, under current law and assuming compliance with the terms of
the Trust Agreement, and based on certain facts and assumptions contained in
such opinion, VBC Capital will be classified as a grantor trust and not as an
association taxable as a corporation for United States federal income tax
purposes. As a result, each beneficial
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owner of the Capital Securities (a "Securityholder") will be treated as owning
an undivided beneficial interest in the Junior Subordinated Debentures.
Accordingly, each Securityholder will be required to include in its gross income
its pro rata share of the interest income or original issue discount that is
paid or accrued on the Junior Subordinated Debentures. See "-- Interest Income
and Original Issue Discount." No amount included in income with respect to the
Capital Securities will be eligible for the dividends received deduction.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
The Company intends to take the position that the Junior Subordinated
Debentures will be classified for United States federal income tax purposes as
indebtedness of the Company under current law, and, by acceptance of a Capital
Security, each holder covenants to treat the Junior Subordinated Debentures as
indebtedness and the Capital Securities as evidence of an indirect beneficial
ownership interest in the Junior Subordinated Debentures. No assurance can be
given, however, that such position of the Company will not be challenged by the
Service or, if challenged, that such a challenge will not be successful. The
remainder of this discussion assumes that the Junior Subordinated Debentures
will be classified for United States federal income tax purposes as indebtedness
of the Company.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Except as set forth below, stated interest on the Junior Subordinated
Debentures generally will be included in income by a Securityholder at the time
such interest income is paid or accrued in accordance with such Securityholder's
regular method of tax accounting.
The Company believes that, under the applicable Treasury regulations, the
Junior Subordinated Debentures will not be considered to have been issued with
"original issue discount" ("OID") within the meaning of Section 1273(a) of the
Code. This is because under recently adopted amendments to the Treasury
regulations a "remote" contingency that stated interest will not be timely paid
will be ignored in determining whether a debt instrument is issued with OID. The
Company believes that the likelihood of exercising its option to defer payments
of interest is "remote" since, among other things, exercising this option would
prevent the Company from declaring dividends or distributions on its capital
stock. If, however, the Company exercises its right to defer payments of
interest on the Junior Subordinated Debentures, the Junior Subordinated
Debentures will become OID instruments at such time and all Securityholders will
be required to accrue the stated interest on the Junior Subordinated Debentures
on a daily basis during the Extension Period, even though the Company will not
pay such interest until the end of the Extension Period, and even though some
Securityholders may use the cash method of tax accounting. Moreover, thereafter
the Junior Subordinated Debentures will be taxed as OID instruments for as long
as they remain outstanding. Thus, even after the end of the Extension Period,
all Securityholders would be required to continue to include the stated interest
on the Junior Subordinated Debentures in income on a daily economic accrual
basis, regardless of their method of tax accounting and in advance of receipt of
the cash attributable to such interest income. Under the OID economic accrual
rules, a Securityholder would accrue an amount of interest income each year that
approximates the stated interest payments called for under the Junior
Subordinated Debentures, and actual cash payments of interest on the Junior
Subordinated Debentures would not be reported separately as taxable income.
The Treasury regulations described above have not yet been addressed in any
rulings or other interpretations by the Service, and it is possible that the
Service could take a contrary position. If the Service were to assert
successfully that the stated interest on the Junior Subordinated Debentures was
OID regardless of whether the Company exercises its right to defer payments of
interest on such debentures, all Securityholders would be required to include
such stated interest in income on a daily economic accrual basis as described
above.
The Company does not anticipate that Additional Sums (as defined in the
Indenture) will be paid. However, if Additional Sums are paid, they will be
taxable to the Securityholder as ordinary income (generally as interest income).
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DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF CAPITAL SECURITIES
Under current law, a distribution by VBC Capital of the Junior Subordinated
Debentures as described under the caption "Description of Capital
Securities -- Liquidation and Distribution Upon Termination" will be non-taxable
and will result in the Securityholder receiving directly its pro rata share of
the Junior Subordinated Debentures previously held indirectly through VBC
Capital, with a holding period and aggregate tax basis equal to the holding
period and aggregate tax basis such Securityholder had in its Capital Securities
before such distribution. If, however, the liquidation of VBC Capital were to
occur because VBC Capital is subject to United States federal income tax with
respect to income accrued or received on the Junior Subordinated Debentures as a
result of a Tax Event or otherwise, the distribution of Junior Subordinated
Debentures to Securityholders by VBC Capital would be a taxable event to VBC
Capital and each Securityholder, and a Securityholder would recognize gain or
loss as if the Securityholder had sold or exchanged its Capital Securities for
the Junior Subordinated Debentures it received upon the liquidation of VBC
Capital. See "-- Sales or Redemption of Capital Securities." A Securityholder
would recognize interest income in respect of Junior Subordinated Debentures
received from VBC Capital in the manner described above under "-- Interest
Income and Original Issue Discount."
SALES OR REDEMPTION OF CAPITAL SECURITIES
Gain or loss will be recognized by a Securityholder on a sale of Capital
Securities (including a redemption for cash) in an amount equal to the
difference between the amount realized (which for this purpose, will exclude
amounts attributable to accrued interest or OID not previously included in
income) and the Securityholder's adjusted tax basis in the Capital Securities
sold or so redeemed. A Securityholder's adjusted tax basis will be its initial
purchase price increased by any accrued OID previously included in such
Securityholder's gross income to the date of disposition and decreased by
payments (other than stated interest on the Junior Subordinated Debentures that
constitutes ordinary income at the time it is paid or accrued) received on the
Capital Securities. Gain or loss recognized by a Securityholder on Capital
Securities held for more than one year will generally be taxable as long-term
capital gain or loss. Amounts attributable to accrued interest with respect to a
Securityholder's pro rata share of the Junior Subordinated Debentures not
previously included in income will be taxable as ordinary income. Subject to
certain limited exceptions, capital losses generally cannot be applied to offset
ordinary income for United States federal income tax purposes.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
The amount of interest paid or OID accrued, if any, on the Junior
Subordinated Debentures, beneficial ownership of which is reflected in the
Capital Securities held of record by United States Persons (other than
corporations and other exempt Securityholders), will be reported to the Service.
Generally, income on the Capital Securities will be reported to Securityholders
on Form 1099, which form should be mailed to Securityholders by January 31
following each calendar year. "Backup" withholding at a rate of 31% will apply
to payments of interest to non-exempt United States Persons unless the
Securityholder furnishes its taxpayer identification number in the manner
prescribed in applicable Treasury Regulations, certifies that such number is
correct, certifies as to no loss of exemption from backup withholding and meets
certain other conditions. Any amounts withheld from a Securityholder under the
backup withholding rules will be allowed as a refund or a credit against such
Securityholder's United States federal income tax liability, provided the
required information is furnished to the Service. Payment of the proceeds from
the disposition of Capital Securities to or through the United States office of
a broker is subject to information reporting and backup withholding unless the
Securityholder or beneficial owner establishes an exemption from information
reporting and backup withholding.
POSSIBLE TAX LAW CHANGES AFFECTING THE CAPITAL SECURITIES
On February 6, 1997, the Clinton Administration submitted Revenue Proposals
(the "Proposals") to the 105th Congress. If enacted, the Proposals would
generally deny deductions for interest on an instrument issued by a publicly
traded corporation (a) that has a maximum weighted average maturity of more than
40 years or (b) has a maximum term of more than 15 years and that is not shown
as indebtedness on the separate balance
64
<PAGE> 65
sheet of the issuer or, where the instrument is issued to a related party (other
than a corporation), where the holder or some other related party issues a
related instrument that is not shown as indebtedness on the issuer's
consolidated balance sheet. For purposes of determining the weighted average
maturity or the term of an instrument, any right to extend would be treated as
exercised. The above-described provisions of the Proposals are proposed to be
effective generally for instruments issued on or after the date of first
Congressional committee action on the Proposals. If either provision were to
apply to the Junior Subordinated Debentures, the Company would not be able to
deduct interest on the Junior Subordinated Debentures. If the proposed
legislation is ultimately enacted and if the effective date provision contained
in the Proposals is followed, such legislation would not apply to the Junior
Subordinated Debentures. There can be no assurance, however, that current or
future legislative proposals or final legislation will not adversely affect the
ability of the Company to deduct interest on the Junior Subordinated Debentures
or otherwise affect the tax treatment of the transaction described herein. Such
a change could give rise to a Tax Event, which may permit the Company, upon
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve, to cause a redemption of the
Capital Securities prior to , 2002. See "Description of the Capital
Securities -- Redemption -- Tax Event Redemption" and "Description of the Junior
Subordinated Debentures -- Redemption."
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below have severally agreed to purchase from VBC Capital an
aggregate of 700,000 Capital Securities in the amounts set forth below opposite
their respective names.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER CAPITAL SECURITIES
----------- ------------------
<S> <C>
Dain Bosworth Incorporated.................................
Howe Barnes Investments, Inc...............................
-------
Total............................................ 700,000
=======
</TABLE>
The Underwriting Agreement provides that the Underwriters' obligations are
subject to conditions precedent and that the Underwriters are committed to
purchase all of the Capital Securities offered hereby if the Underwriters
purchase any Capital Securities.
The Underwriters have advised the Company and VBC Capital that they propose
to offer the Capital Securities to the public at the Price to Public set forth
on the cover page of this Prospectus and to selected dealers at such price less
a concession not in excess of $ per Capital Security. The Underwriters
may allow and such dealers may reallow a discount not in excess of $
per Capital Security to certain other brokers and dealers. After the offering,
the Price to Public, concession, discount, and other selling terms may be
changed by the Underwriters.
In view of the fact that all of the proceeds from the sale of the Capital
Securities will be used to purchase the Junior Subordinated Debentures, the
Underwriting Agreement provides that the Company will pay the Underwriters' as
compensation for arranging the investment therein of such proceeds, $
per Capital Security.
Each of the Company and VBC Capital has agreed to indemnify the
Underwriters and their controlling persons against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Underwriters have advised VBC Capital that they do not intend to
confirm any sales of Capital Securities to any discretionary accounts. In
connection with the offer and sale of the Capital Securities, the Underwriters
will comply with Rule 2810 under the NASD Conduct Rules.
Dain Bosworth Incorporated acted as the managing underwriter of the
Company's initial public offering in 1994. In connection with that offering,
Dain Bosworth Incorporated acquired (and continues to hold)
65
<PAGE> 66
warrants to purchase 20,000 shares of the Company's common stock at $10.20 per
share. Such warrants expire in March 1999.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Capital
Securities, the enforceability of the Trust Agreement and the formation of VBC
Capital will be passed upon by Richards, Layton & Finger, P.A., Wilmington,
Delaware, special Delaware counsel to the Company and VBC Capital. The validity
of the Guarantee and the Junior Subordinated Debentures will be passed upon for
the Company by Jones & Keller, P.C., Denver, Colorado, counsel to the Company.
Certain other legal matters regarding regulatory issues affecting the Company
will be passed upon for the Company to the Underwriters by Slivka Robinson
Waters & O'Dorsio, Denver, Colorado. Certain legal matters in connection with
this Offering will be passed upon for the Underwriters by Sherman & Howard
L.L.C., Denver, Colorado. Jones & Keller, P.C., and Sherman & Howard L.L.C. will
rely on the opinions of Richards, Layton & Finger as to matters of Delaware law.
Certain matters relating to United States federal income tax considerations will
be passed upon for the Company by Jones & Keller, P.C.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31,
1996 and 1995 and for each of the years in the three-year period ended December
31, 1996 have been included and incorporated herein by reference in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere and incorporated herein by reference, and upon
the authority of said firm as experts in accounting and auditing. The report of
KPMG Peat Marwick LLP refers to a change in the method of accounting for
goodwill in 1994.
66
<PAGE> 67
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Shareholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 68
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Vectra Banking Corporation:
We have audited the accompanying consolidated balance sheets of Vectra
Banking Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Vectra
Banking Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, a 1995
business combination accounted for as a pooling of interests included a company
which changed its method of accounting for goodwill during 1994 as a result of
the adoption of the provisions of Statement of Financial Accounting Standards
No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
January 31, 1997
F-2
<PAGE> 69
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
Cash and due from banks (note 3)............................ $ 32,688 $ 17,320
Securities available for sale, at market value (notes 4, 5,
8 and 9).................................................. 180,995 170,384
Securities held to maturity, at cost (market value of $263
and $819 at December 31, 1996 and 1995, respectively)
(notes 4 and 8)........................................... 263 814
Investment in Federal Home Loan Bank stock (note 8)......... 3,610 5,173
Federal funds sold.......................................... -- 2,000
Loans (notes 6, 8 and 9).................................... 319,905 206,664
Less allowance for loan losses............................ (4,238) (2,493)
-------- --------
Net loans......................................... 315,667 204,171
Accrued interest receivable................................. 2,959 2,127
Real estate acquired by foreclosure, net.................... 955 919
Premises and equipment, net (notes 7 and 10)................ 11,949 10,575
Deferred income taxes, net (note 12)........................ 3,036 2,422
Goodwill, net (note 2)...................................... 7,975 284
Other assets................................................ 1,714 1,617
-------- --------
Total assets...................................... $561,811 $417,806
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand.................................................... $122,713 $ 80,058
NOW and money market...................................... 88,466 63,704
Savings................................................... 126,146 99,254
Time deposits under $100,000.............................. 67,617 49,511
Time deposits of $100,000 and over........................ 34,409 14,558
-------- --------
Total deposits.................................... 439,351 307,085
-------- --------
Securities and loans sold under agreements to repurchase
(note 9).................................................. 10,733 7,429
Advances from the Federal Home Loan
Bank and federal funds purchased (note 8)................. 59,700 70,345
Notes payable (note 10)..................................... 4,050 1,051
Accounts payable and other liabilities...................... 2,542 1,711
-------- --------
Total liabilities................................. 516,376 387,621
-------- --------
Shareholders' equity (notes 2 and 11):
Preferred stock, $.10 par value, 1,000,000 shares
authorized:
805,000 shares of Series A Cumulative Preferred issued
and outstanding (liquidation preference of $8,050).... 8,050 8,050
109,709 shares of $100 Series A Convertible Preferred
issued and outstanding (liquidation preference of
$10,971).............................................. 10,971 --
Common stock, $.01 par value: 7,000,000 shares authorized;
3,202,412 and 3,195,279 shares issued and outstanding
at December 31, 1996 and 1995, respectively............ 32 32
Capital in excess of par value............................ 25,716 25,572
Retained earnings......................................... 4,441 170
Unrealized loss on securities available for sale, net of
income tax effect of $2,246 and $2,194 at December 31,
1996 and 1995, respectively............................ (3,775) (3,639)
-------- --------
Total shareholders' equity........................ 45,435 30,185
-------- --------
Commitments and contingencies (note 14)
Total liabilities and shareholders' equity........ $561,811 $417,806
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 70
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans................................ $26,497 $20,133 $16,042
Interest on investments and federal funds sold............ 11,460 14,120 12,501
------- ------- -------
Total interest income.............................. 37,957 34,253 28,543
------- ------- -------
Interest expense:
Interest on deposits:
NOW, money market and savings accounts.................. 6,902 5,567 4,532
Time deposits under $100,000............................ 3,089 2,305 695
Time deposits of $100,000 and over...................... 1,132 638 289
Securities and loans sold under agreements to
repurchase.............................................. 352 240 116
Advances from the Federal Home Loan Bank and federal funds
purchased............................................... 3,547 7,483 5,420
Notes payable............................................. 208 97 120
------- ------- -------
Total interest expense............................. 15,230 16,330 11,172
------- ------- -------
Net interest income................................ 22,727 17,923 17,371
Provision for loan losses (note 6).......................... 916 795 794
------- ------- -------
Net interest income after provision for loan
losses........................................... 21,811 17,128 16,577
------- ------- -------
Other income:
Service fees on deposit accounts.......................... 3,231 2,615 2,690
Net gain on sales of loans................................ 1,441 1,004 582
Gain on sale of securities available for sale............. 118 467 44
Loss on sale of securities available for sale............. (312) (487) (38)
Loss on transfer of securities to trading from available
for sale................................................ (154) -- --
Other..................................................... 169 221 229
------- ------- -------
Total other income................................. 4,493 3,820 3,507
------- ------- -------
Other expenses:
Salaries and employee benefits............................ $10,228 $ 8,444 $ 7,769
Occupancy, net............................................ 2,655 2,349 2,220
Marketing and promotion................................... 1,147 1,205 852
Professional services..................................... 421 747 569
Printing, supplies and postage............................ 824 656 601
Credit quality including write downs of real estate
acquired by foreclosure................................. 404 533 494
Data processing........................................... 507 492 488
FDIC and state bank assessments........................... 66 383 665
Telephone................................................. 428 326 271
Amortization of intangible assets (note 2)................ 231 29 348
Other..................................................... 1,007 707 775
------- ------- -------
Total other expenses............................... 17,918 15,871 15,052
------- ------- -------
Earnings before income taxes and cumulative effect
of change in accounting.......................... 8,386 5,077 5,032
Income tax expense (note 12)................................ 2,941 1,774 820
------- ------- -------
Earnings before cumulative effect of change in
accounting....................................... 5,445 3,303 4,212
Cumulative effect of change in accounting for goodwill (note
1)........................................................ -- -- (1,537)
------- ------- -------
Net earnings....................................... 5,445 3,303 2,675
Preferred stock dividends (note 11)......................... 1,174 765 579
------- ------- -------
Net earnings available to common shareholders...... $ 4,271 $ 2,538 $ 2,096
======= ======= =======
Earnings per share (note 17):
Earnings before cumulative effect of change in
accounting.............................................. $ 1.31 $ .79 $ 1.20
Cumulative effect of change in accounting................. -- -- (.51)
------- ------- -------
Earnings per common share and common equivalent
share............................................ $ 1.31 $ .79 $ .69
======= ======= =======
Earnings per common share assuming full dilution... $ 1.26 $ .78 $ .69
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 71
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
PREFERRED STOCK
------------------------------------------
NUMBER OF SHARES
-------------------------------- COMMON STOCK CAPITAL IN RETAINED
SERIES A ------------------ EXCESS OF EARNINGS
1989 SERIES A CONVERTIBLE AMOUNT SHARES AMOUNT PAR VALUE (DEFICIT)
------- -------- ----------- ------- --------- ------ ---------- ---------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1994..... 26,465 -- -- $ 477 2,538,479 $25 21,508 (4,464)
Redemption and cancellation of
preferred stock for cash
(note 11)..................... (25,080) -- -- (477) -- -- -- --
Common stock issued for cash in
initial public offering, net
of offering costs (note 11)... -- -- -- -- 923,770 9 6,412 --
Preferred stock issued for cash
in initial public offering,
net of offering costs (note
11)........................... -- 805,000 -- 8,050 -- -- -- --
Redemption and cancellation of
common stock for cash
(note 11)..................... -- -- -- -- (270,000) (2) (2,401) --
Exercise of common stock
options....................... -- -- -- -- 3,030 -- 20 --
Amortization of restricted stock
grants........................ -- -- -- -- -- -- 25 --
Dividends on preferred stock.... -- -- -- -- -- -- -- (579)
Cancellation of treasury
stock......................... (1,385) -- -- -- -- -- (18) --
Change in unrealized loss on
securities available for sale,
net of income tax effect...... -- -- -- -- -- -- -- --
Net earnings............ -- -- -- -- -- -- -- 2,675
------- ------- ------- ------- --------- --- ------ ------
BALANCES AT DECEMBER 31, 1994... -- 805,000 -- 8,050 3,195,279 32 25,546 (2,368)
Amortization of restricted stock
grants........................ -- -- -- -- -- -- 26 --
Dividends on preferred stock.... -- -- -- -- -- -- -- (765)
Change in unrealized loss on
securities available for sale,
net of income tax effect...... -- -- -- -- -- -- -- --
Net earnings............ -- -- -- -- -- -- -- 3,303
------- ------- ------- ------- --------- --- ------ ------
BALANCES AT DECEMBER 31, 1995... -- 805,000 -- 8,050 3,195,279 32 25,572 170
Preferred stock issued in
acquisition (notes 2 and
11)........................... -- -- 109,709 10,971 -- -- -- --
Exercise of common stock
options....................... -- -- -- -- 3,633 -- 35 --
Amortization of restricted stock
grants and issuance of
shares........................ -- -- -- -- 3,500 -- 11 --
Dividends on preferred stock.... -- -- -- -- -- -- -- (1,174)
Change in unrealized loss on
securities available for sale,
net of income tax effect...... -- -- -- -- -- -- -- --
Net earnings............ -- -- -- -- -- -- -- 5,445
Tax benefit of restricted stock
grants........................ -- -- -- -- -- -- 98 --
------- ------- ------- ------- --------- --- ------ ------
BALANCES AT DECEMBER 31, 1996... -- 805,000 109,709 $19,021 3,202,412 $32 25,716 4,441
======= ======= ======= ======= ========= === ====== ======
<CAPTION>
UNREALIZED
LOSS ON
SECURITIES
AVAILABLE TOTAL
FOR SALE, TREASURY SHAREHOLDERS'
NET STOCK EQUITY
---------- -------- -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
BALANCES AT JANUARY 1, 1994..... (176) (17) 17,353
Redemption and cancellation of
preferred stock for cash
(note 11)..................... -- -- (477)
Common stock issued for cash in
initial public offering, net
of offering costs (note 11)... -- -- 6,421
Preferred stock issued for cash
in initial public offering,
net of offering costs (note
11)........................... -- -- 8,050
Redemption and cancellation of
common stock for cash
(note 11)..................... -- -- (2,403)
Exercise of common stock
options....................... -- -- 20
Amortization of restricted stock
grants........................ -- -- 25
Dividends on preferred stock.... -- (1) (580)
Cancellation of treasury
stock......................... -- 18 --
Change in unrealized loss on
securities available for sale,
net of income tax effect...... (7,491) -- (7,491)
Net earnings............ -- -- 2,675
------ --- ------
BALANCES AT DECEMBER 31, 1994... (7,667) -- 23,593
Amortization of restricted stock
grants........................ -- -- 26
Dividends on preferred stock.... -- -- (765)
Change in unrealized loss on
securities available for sale,
net of income tax effect...... 4,028 -- 4,028
Net earnings............ -- -- 3,303
------ --- ------
BALANCES AT DECEMBER 31, 1995... (3,639) -- 30,185
Preferred stock issued in
acquisition (notes 2 and
11)........................... -- -- 10,971
Exercise of common stock
options....................... -- -- 35
Amortization of restricted stock
grants and issuance of
shares........................ -- -- 11
Dividends on preferred stock.... -- -- (1,174)
Change in unrealized loss on
securities available for sale,
net of income tax effect...... (136) -- (136)
Net earnings............ -- -- 5,445
Tax benefit of restricted stock
grants........................ -- -- 98
------ --- ------
BALANCES AT DECEMBER 31, 1996... (3,775) -- 45,435
====== === ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 72
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Interest received......................................... $ 37,875 $ 34,898 $ 27,311
Interest paid............................................. (15,344) (16,088) (11,109)
Fees and other income received............................ 4,845 2,836 2,899
Proceeds from sale of loans held for sale................. 45,802 21,562 20,503
Proceeds from sales of trading securities................. 1,989 -- --
Originations of loans held for sale....................... (44,758) (21,769) (19,805)
Payments to employees and suppliers....................... (17,031) (15,320) (13,967)
Income taxes paid......................................... (2,812) (1,710) (242)
-------- --------- ---------
Net cash provided by operating activities........... 10,566 4,349 5,590
-------- --------- ---------
Cash flows from investing activities, net of effects of
acquisitions:
Net loan originations and collections..................... (41,759) (24,310) (40,353)
Net assets acquired in business combinations, net of cash
acquired (note 2)....................................... (5,160) (306) --
Decrease (increase) in federal funds sold................. 13,900 (1,190) 2,620
Proceeds from sale of real estate acquired by
foreclosure............................................. 504 749 246
Purchase of premises and equipment........................ (906) (977) (577)
Purchase of securities available for sale................. (40,175) (6,007) (164,775)
Purchase of securities held to maturity................... -- (3,675) (10,820)
Purchase of Federal Home Loan Bank stock.................. (3,937) (258) (4,757)
Proceeds from sale of Federal Home Loan Bank stock........ 5,500 3,928 --
Proceeds from maturities of securities available for
sale.................................................... 16,074 6,666 15,857
Proceeds from maturities of securities held to maturity... 563 6,033 4,319
Proceeds from sale of securities available for sale....... 29,804 65,425 20,560
Other..................................................... 36 1,870 31
-------- --------- ---------
Net cash provided (used) by investing activities,
net of effects of acquisitions.................... (25,556) 47,948 (177,649)
-------- --------- ---------
Cash flows from financing activities:
Net increase in deposits.................................. 35,839 38,901 18,073
FHLB advances having maturities greater than three
months.................................................. -- 90,000 85,000
Repayment of FHLB advances having maturities greater than
three months............................................ (23,000) (117,000) (13,000)
Net increase (decrease) in other FHLB advances............ 12,355 (64,845) 70,690
Net increase in securities and loans sold under agreement
to repurchase........................................... 3,304 1,541 2,835
Proceeds from note payable................................ 4,050 -- --
Repayment of notes payable................................ (1,051) (58) (968)
Proceeds from issuance of common and preferred stock,
net..................................................... 35 -- 14,491
Common and preferred stock redemption..................... -- -- (2,881)
Preferred stock dividends................................. (1,174) (765) (579)
-------- --------- ---------
Net cash provided (used) by financing activities.... 30,358 (52,226) 173,661
-------- --------- ---------
Net increase in cash and due from banks............. 15,368 71 1,602
Cash and due from banks at beginning of year................ 17,320 17,249 15,647
-------- --------- ---------
Cash and due from banks at end of year...................... $ 32,688 $ 17,320 $ 17,249
======== ========= =========
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings.............................................. $ 5,445 $ 3,303 $ 2,675
Cumulative effect of change in accounting for goodwill.... -- -- 1,537
Provision for loan losses................................. 916 795 794
Net amortization of premiums and discounts on securities
and loans............................................... 110 33 20
Depreciation and amortization of premises and equipment... 1,074 923 892
Amortization of intangible assets......................... 231 29 348
Deferred income tax expense (benefit)..................... (464) 314 501
Decrease (increase) in accrued interest receivable........ (193) 613 (1,276)
Decrease (increase) in loans held for sale................ 1,044 (1,211) 116
Net change in other assets, accounts payable and other
liabilities............................................. 66 (486) 37
Net (gain) loss on sale or transfer of securities......... 348 20 (6)
Securities transferred to trading from available for
sale.................................................... 1,989 -- --
Other..................................................... -- 16 (48)
-------- --------- ---------
Net cash provided by operating activities........... $ 10,566 $ 4,349 $ 5,590
======== ========= =========
Supplemental schedule of noncash investing and financing
activities and other information:
Premises acquired in exchange for note payable and other
liabilities............................................. $ -- $ 262 $ --
======== ========= =========
Real estate acquired by foreclosure....................... $ 330 $ 321 $ 711
======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Summarized below are the significant accounting policies followed by Vectra
Banking Corporation and subsidiaries (Vectra or the Company) in the
determination of financial position, results of operations or cash flows.
Organization and Basis of Financial Statement Presentation
Vectra was organized March 23, 1988, under the laws of the State of
Colorado and has been engaged in the management and operation of financial
institutions located in the Denver/Boulder market area. The Company offers a
full range of loan and deposit products to local consumers and commercial
businesses.
The consolidated financial statements include the accounts of Vectra and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
Securities
The Company accounts for securities in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS 115). SFAS 115 addresses the
accounting and reporting for all investments in debt securities and equity
securities that have readily determinable fair values. Under SFAS 115,
investments are classified into three categories and accounted for as follows:
Held-to-Maturity -- This category includes debt securities that the
Company has the positive intent and ability to hold to maturity. All
securities in this category are recorded at amortized historical cost.
Trading Securities -- These securities are purchased and sold for the
purpose of generating profits on short-term differences in market prices
and are recorded at fair value, with any unrealized gains and losses being
reflected in earnings.
Available-for-Sale -- These securities do not meet the classification
criteria for Held-to-Maturity or Trading Securities and are recorded at
fair value with any unrealized gains and losses, net of income tax effect,
being reflected as a separate component of shareholders' equity.
SFAS 115 does not affect the accounting for amortization of premiums and
accretion of discounts.
Securities held to maturity are recorded at cost and are adjusted for
amortization of premiums and accretion of discounts.
Amortization and accretion are computed using the estimated effective
interest method. Gains or losses on sales of securities are recognized upon
disposal. The adjusted cost of specific securities sold is used to compute
realized gains or losses.
Securities available for sale are recorded at fair value based upon quotes
from brokers who actively participate in the relevant securities' markets or
from other pricing services.
A substantial portion of Vectra's securities are collateralized mortgage
obligations and mortgage backed securities. These investments are usually
purchased at a premium or discount to their stated or par value. The yield on
these investments is impacted by changes in the prepayments of the mortgages
underlying the
F-7
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
securities. When prepayments accelerate, premiums or discounts must be amortized
against interest income at an accelerated rate thereby changing the yield on the
securities. A substantial portion of Vectra's securities are guaranteed as to
the payment of principal and interest (but not premiums) by U.S. government
sponsored entities.
Loans and Interest Income
Interest on loans is accrued daily on the principal balance outstanding.
Unearned income, net of direct origination costs on loans, is recognized in
interest income over the terms of the loans using a method that approximates the
effective interest method. Loans on which payments are past due 90 days or more
are placed on nonaccrual status, unless both interest and principal are
adequately secured or the loans are in the process of renewal.
Loans held for sale are recorded at the lower of cost or market value.
Gains or losses on sales of loans are recognized based on the carrying amount or
allocated basis of the specific loans sold.
Impairment of Loans and Allowance for Loan Losses
Vectra's lending personnel are responsible for the continuous monitoring of
the quality of its loan portfolio. The loan portfolios are also monitored
monthly and examined by the Company's loan review personnel. These reviews
assist in the identification of potential and probable losses, and in the
determination of the level of the allowance for loan losses. The allowance for
loan losses is based primarily on management's estimates of possible loan losses
from these procedures and historical experience. These estimates involve
judgments and a certain level of subjectivity and may be adjusted in the future
depending on economic conditions.
The Company adopted SFAS No. 114, Accounting by Creditors for Impairment of
a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures, (collectively, SFAS 114) effective
January 1, 1995. SFAS 114 requires that certain impaired loans be measured based
on the present value of expected cash flows discounted at the loan's original
effective interest rate. As a practical expedient, impairment may be measured
based on the loan's observable market price or the fair value of the collateral
if the loan is collateral dependent. When the measure of the impaired loan is
less than the recorded investment in the loan, the impairment is recorded
through a valuation allowance.
The Company had previously measured the allowance for loan losses using
methods similar to those prescribed in SFAS 114. Accordingly, the adoption of
SFAS 114 did not result in any additional allowance for loan losses as of
January 1, 1995.
State and federal regulatory agencies, as an integral part of their
examination process, periodically review Vectra's loans and allowance for loan
losses. Such agencies may require the Company to record additional provisions
for losses based upon their evaluation of information available at the time of
their examinations.
Real Estate and Other Assets Acquired by Foreclosure including In-Substance
Foreclosures
Real estate and other assets acquired in satisfaction of indebtedness and
loans accounted for as in-substance foreclosures are recorded at the lower of
estimated fair value or the loan amount. Fair value is determined primarily
based on independent appraisals. Loan losses arising in connection with the
acquisition of such property are charged against the allowance for loan losses.
Subsequent declines in value are charged to operating expense.
Costs incurred in connection with improvements to the properties are
capitalized until such costs result in an amount equal to fair value. In
accordance with SFAS 114, a loan is classified as an in-substance foreclosure
only when the Company has taken possession of the collateral regardless of
whether formal repossession has taken place. At December 31, 1996 and 1995,
loans accounted for as in-substance foreclosures were not significant.
F-8
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Expenses of holding foreclosed property, including operating and selling
expenses, net of rental income, are generally charged against operations as
incurred. Gains and losses on disposition of these properties are recognized in
the year in which the sales occur.
Premises and Equipment
Land, buildings, leasehold improvements, and furniture and equipment are
recorded at cost, less accumulated depreciation and amortization. The provision
for depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets, or the lease term for leasehold
improvements. Lives generally range from 3 to 7 years for furniture and
equipment and 25 to 30 years for buildings and improvements.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(SFAS 121), on January 1, 1996. SFAS 121 requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. Adoption of SFAS
121 did not have a significant impact on the Company's financial position,
results of operations, or liquidity.
Change in Accounting
In connection with the acquisition of First National Bank of Denver by
First Denver Corporation (FDC) (see note 2) in October 1981, goodwill in the
amount of $2,196,000 was recorded by FDC. The goodwill was primarily the result
of the fair value of liabilities assumed exceeding the fair value of
identifiable assets acquired, and was originally being amortized using the
straight-line method over 40 years. During 1994, FDC changed its method of
accounting for goodwill through the adoption of the provisions of SFAS No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions (SFAS 72),
as provided by Emerging Issues Task Force Issue No. 89-19, Accounting for a
Change in Goodwill Amortization for Business Combinations Initiated Prior to the
Effective Date of FASB Statement No. 72. SFAS 72 requires that goodwill
resulting from the fair value of liabilities assumed exceeding the fair value of
identifiable assets acquired be amortized using the interest method over a
period no longer than the discount on the long-term interest-bearing assets
acquired. Accordingly, under SFAS 72, the aforementioned goodwill would be
completely amortized prior to January 1, 1994.
The cumulative effect of this change in accounting, which was applied as of
January 1, 1994, was a decrease in net earnings of $1,537,000. The cumulative
effect of the change in accounting was not tax-effected, as the amortization of
the goodwill was not deductible for tax purposes. The effect of the change in
1994 was not significant and pro forma net earnings for 1994, assuming the
change in accounting was applied retroactively, are not significantly different
from Vectra's historical net earnings.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes (SFAS 109), which prescribes the use of the asset
and liability method of accounting for deferred income taxes.
Shareholders' Equity and Earnings Per Share
Primary earnings per common share and common equivalent share is computed
by dividing net earnings available to common shareholders by the weighted
average number of common shares and common equivalent
F-9
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares outstanding during the period, adjusted for the shares issued in
connection with the business combination with FDC discussed in note 2. Earnings
per common share assuming full dilution is computed by dividing net earnings
less the dividends on the Series A Cumulative Preferred Stock by the sum of
weighted average common shares and common equivalent shares outstanding plus the
weighted average of other dilutive securities assumed to have been outstanding.
Reclassifications
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996
presentation.
(2) BUSINESS COMBINATIONS
Effective November 13, 1995, Vectra acquired all of the outstanding common
stock of FDC in exchange for 508,889 shares of Vectra common stock. The
combination has been accounted for as a pooling of interests and, accordingly,
the accompanying consolidated financial statements reflect the combined
financial condition, results of operations and cash flows of Vectra and FDC as
of and for all periods presented. In addition, shares issued in connection with
the combination have been included as issued and outstanding in 1995 and 1994.
On June 18, 1996, the Company acquired Southwest State Bank (Southwest) and
its parent Bank Land Company for $22.23 million consisting of $10.97 million in
a new issue of $100 Series A Convertible Preferred Stock and $11.26 million
cash. Southwest was a commercial bank operating at a single location in Denver.
The acquisition has been accounted for by the purchase method and, accordingly,
the results of operations of Southwest have been included in Vectra's
consolidated financial statements from June 18, 1996. The excess of the purchase
price over the fair value of the identifiable assets acquired of $7.93 million
has been recorded as goodwill and is being amortized using the straight-line
method over 25 years.
The following unaudited pro forma financial information presents the
combined results of operations of Vectra and Southwest as if the acquisition had
occurred as of January 1, 1996 and 1995, after giving effect to certain
adjustments, including amortization of goodwill. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had Vectra and Southwest been combined during the periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
--------- ---------
(UNAUDITED, AMOUNTS
IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net interest income......................................... $25,256 $23,890
======= =======
Provision for loan losses................................... $ 1,413 $ 930
======= =======
Net earnings................................................ $ 5,663 $ 4,851
======= =======
Earnings per common share and common equivalent share....... $ 1.26 $ 1.03
======= =======
Earnings per common share assuming full dilution............ $ 1.20 $ 1.01
======= =======
</TABLE>
During 1995, the Company acquired the net assets of MacWest Mortgage, a
mortgage origination operation, for total cash consideration of approximately
$300,000. The acquisition was accounted for using the purchase method.
(3) CASH AND DUE FROM BANKS
The Federal Reserve Board requires banks to maintain reserve balances
composed of cash on hand and balances maintained at the Federal Reserve Bank.
These reserve balances are based primarily on deposit levels and totaled
approximately $6,732,000 and $3,345,000 at December 31, 1996 and 1995.
F-10
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) SECURITIES
Securities classified as available for sale at December 31, 1996, are
summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasuries............................... $ 4,967 $ 8 $ (3) $ 4,972
U.S. Government sponsored entities (note 5)... 35,621 123 (466) 35,278
Municipal securities.......................... 2,449 14 (2) 2,461
Collateralized mortgage obligations........... 131,533 5 (5,810) 125,728
Mortgage backed securities.................... 8,812 78 -- 8,890
SBA loan pools................................ 2,164 33 -- 2,197
Other......................................... 1,469 -- -- 1,469
-------- ---- ------- --------
$187,015.. $261 $(6,281) $180,995
======== ==== ======= ========
</TABLE>
Securities classified as held to maturity at December 31, 1996, which
primarily mature beyond ten years, are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Private placement bonds.......................... $200 $-- $-- 200
Asset-backed receivables......................... 63 -- -- 63
---- --- --- ----
$263 $-- $-- $263
==== === === ====
</TABLE>
Securities classified as available for sale at December 31, 1995, are
summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasuries............................ $ 5,032 $ 9 $ -- $ 5,041
U.S. Government sponsored entities (note
5)....................................... 12,377 4 (969) 11,412
Collateralized mortgage obligations........ 147,508 108 (5,174) 142,442
Mortgage-backed securities................. 6,183 126 (4) 6,305
SBA loan pools............................. 4,290 69 -- 4,359
Other...................................... 825 -- -- 825
-------- ---- ------- --------
$176,215 $316 $(6,147) $170,384
======== ==== ======= ========
</TABLE>
Securities classified as held to maturity at December 31, 1995, are
summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Private placement bonds....................... $415 $-- $-- $415
Asset-backed receivables...................... 399 5 -- 404
---- --- --- ----
$814 $ 5 $-- $819
==== === === ====
</TABLE>
During 1996 the Company transferred $2.0 million of securities classified
as available for sale into trading classifications.
Securities with a carrying value of approximately $35.2 million and $10.7
million at December 31, 1996 and 1995, respectively, were pledged to secure
public and trust deposits and securities sold under agreements
F-11
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to repurchase. Securities with a carrying value of approximately $144.1 million
and $165.1 million at December 31, 1996 and 1995, respectively, were pledged to
secure FHLB advances.
The following summary of securities available for sale at December 31, 1996
provides information on expected maturities as well as the amount of fixed and
variable rate securities:
<TABLE>
<CAPTION>
AMORTIZED COSTS
----------------------------------------
FIXED VARIABLE MARKET
RATE RATE TOTAL VALUE
------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Within one year......................... $ 7,602 $ 7,716 $ 15,318 $ 15,858
One to five years....................... 30,248 15,663 45,911 45,659
Five to ten years....................... 778 27,401 28,179 27,065
Over ten years.......................... 1,393 96,214 97,607 92,413
------- -------- -------- --------
$40,021 $146,994 $187,015 $180,995
======= ======== ======== ========
</TABLE>
The maturities of mortgage-related and other amortizing securities included
in the preceding schedule were estimated based on recent prepayment experience
and expected future prepayment rates. Most of the Company's securities are
variable rate securities, which have interest reset dates that range from
monthly to annually with monthly being the most prevalent.
Substantially all of the Company's variable rate securities are subject to
interest rate ceilings. At December 31, 1996, the excess of the rate ceilings
over the current rates ranged from 2% to 5%, with the majority of the excesses
being in the 3% to 4.5% range over current rates. The market values of these
securities would likely decline if the current rates increased to the ceiling
levels or higher. Accordingly, the Company may be subject to market value risk
if interest rates increase significantly. Because substantially all of the
securities are issued or backed by U.S. government agencies, management believes
that the credit risk associated with the portfolio is minimal.
(5) DERIVATIVE FINANCIAL INSTRUMENTS
Under SFAS 119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments, a derivative is defined as a futures, forward,
interest rate swap, or option contract, or other financial instrument with
similar characteristics. Examples of other financial instruments with
characteristics similar to option contracts include interest rate caps or floors
and fixed-rate loan commitments. This definition excludes all on-balance sheet
receivables and payables, including those that derive their values or
contractually required cash flows from the price of some other security or
index, such as mortgage backed securities, interest-only and principal-only
obligations, and indexed debt instruments. Management has identified the
following securities held at December 31, 1996 and 1995 that it believes qualify
as derivatives, as defined in SFAS 119:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
INTEREST FREQUENCY ------------------------------
ISSUER/ PURCHASE MATURITY UNDERLYING RATE OF RATE FACE CURRENT MARKET UNREALIZED
DESCRIPTION DATE DATE INDEX CAP/FLOOR CHANGES VALUE COUPON VALUE LOSS
----------- -------- -------- ------------- --------- --------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FHLB
structured notes.... 6/93 6/97 dual-indexed 24%/0% 6 months $ 5,750 5.38% $ 5,348 (403)
FHLB
structured notes.... 9/93 9/98 3 month-LIBOR 24%/0% Quarterly 5,000 5.41% 4,948 (52)
------- ------- -----
Total......... $10,750 $10,296 (454)
<CAPTION>
DECEMBER 31, 1995
-----------------------------
ISSUER/ CURRENT MARKET UNREALIZED
DESCRIPTION COUPON VALUE LOSS
----------- ------- ------ ----------
<S> <C> <C> <C>
FHLB
structured notes.... 4.94% $5,060 (690)
FHLB
structured notes.... 3.31% 4,725 (275)
------ -----
Total......... $9,785 (965)
</TABLE>
It is the Company's current intention to hold these notes to maturity,
unless market conditions change that would warrant sale. The Company classifies
these securities as available for sale which are reported at estimated market
value.
F-12
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) LOANS
Loans at December 31, consist of the following :
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Commercial.................................................. $ 81,668 $ 58,272
Real estate -- mortgage:
Commercial................................................ 110,093 51,175
Home equity loans......................................... 20,659 23,438
Consumer second and first mortgage........................ 44,676 26,985
Residential real estate -- construction..................... 23,257 21,818
Installment and revolving lines of credit................... 37,061 21,452
Loans held for sale......................................... 2,864 3,916
-------- --------
Total face amount of loans........................ 320,278 207,056
Deferred fees, discounts, and costs, net.................... (373) (392)
-------- --------
Carrying value of loans................................... 319,905 206,664
Less allowance for loan losses.............................. (4,238) (2,493)
-------- --------
Net loans......................................... $315,667 $204,171
======== ========
</TABLE>
The principal balance of loans on which the accrual of interest had been
discontinued totaled $1,247,000, $1,292,000 and $829,000 at December 31, 1996,
1995 and 1994, respectively. If interest on these loans had been accrued, such
income would have amounted to approximately $62,000, $85,000 and $71,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
Substantially all loans are to borrowers located in Vectra's Denver/Boulder
market area. Commercial loan borrowers are generally small to medium-sized
corporations, partnerships and sole proprietors in a wide variety of businesses.
Loans to individuals are both secured and unsecured. Real estate secured loans
are fixed or variable rate and include both amortizing and revolving line of
credit loans.
Commercial real estate loans include loans made to commercial customers
where the collateral for the loan is, among other things, real estate owned by
the business or its owners. Accordingly, certain of these loans can be
characterized as loans for commercial purposes other than to finance real estate
which are secured by real estate.
Loans held for sale consist of mortgage loans and guaranteed portions of
Small Business Administration guaranteed loans which are generally sold within
30 days. Market value equals or exceeds carrying value for these loans.
Loans totaling $44,406,000 and $34,033,000 at December 31, 1996 and 1995,
respectively, were pledged to secure public and trust deposits, FHLB advances
and loans sold under agreements to repurchase.
Transactions in the allowance for loan losses for the years ended December
31, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for loan losses at beginning of year........... $2,493 $1,999 $2,324
Acquired through acquisition............................. 1,346 -- --
Provision for losses..................................... 916 795 794
Loans charged off........................................ (659) (560) (1,292)
Recoveries............................................... 142 259 173
------ ------ ------
Allowance for loan losses at end of year................. $4,238 $2,493 $1,999
====== ====== ======
</TABLE>
F-13
<PAGE> 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1996 and 1995, the Company's recorded investment in
impaired loans was approximately $1,270,000 and $1,350,000, respectively. The
related valuation allowance calculated under SFAS 114 totaled approximately
$178,000 and $139,000, respectively and is included in the allowance for loan
losses above. The average recorded investment in impaired loans for the years
ended December 31, 1996 and 1995, was $1,440,000 and $985,000, respectively.
Interest recorded on impaired loans for the years ended December 31, 1996
and 1995 was $110,000 and $29,000, respectively.
(7) PREMISES AND EQUIPMENT
Premises and equipment at December 31, is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 3,280 $ 3,171
Buildings................................................... 6,917 5,715
Leasehold improvements...................................... 2,146 2,046
Furniture and equipment..................................... 7,135 6,136
------- -------
19,478 17,068
Less accumulated depreciation and amortization.............. (7,529) (6,493)
------- -------
Premises and equipment, net............................... $11,949 $10,575
======= =======
</TABLE>
Depreciation expense totaled $1,074,000, $923,000 and $892,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
(8) ADVANCES FROM THE FEDERAL HOME LOAN BANK AND FEDERAL FUNDS PURCHASED
Vectra's subsidiary bank is a member of the Federal Home Loan Bank of
Topeka (FHLB). Membership in the FHLB offers several benefits to the Company
including the ability to obtain advances which can be used as part of the
overall mix of funding for Vectra's loan and investing activities. Advances are
available with maturities varying from one day to ten years. All advances are
secured by securities and loans which have been pledged under blanket pledges.
In addition, the Company has agreements with three other banks whereby the
Company may purchase up to $12,500,000 of federal funds. Balances, maturities
and interest rates of the advances at December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------- --------------------
INTEREST INTEREST
AMOUNT RATES AMOUNT RATES
------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed rate:
Overnight borrowings from FHLB............. $23,700 7.15% $ 11,345 6.15%
Federal funds purchased.................... 1,000 6.26 1,000 5.80
Due in 60 days or less..................... 35,000 5.35 -- --
Variable rate due in less than one year,
resets monthly at rates indexed to one
month London Interbank Offered Rate........ -- -- 58,000 5.98
------- --------
Total at end of year............... $59,700 6.08% $ 70,345 6.00%
======= ==== ======== ====
Average borrowings outstanding for the
year....................................... $64,743 $123,083
======= ========
Weighted average interest rate for the
year....................................... 5.48% 6.08%
==== ====
Maximum borrowings outstanding at any
month-end during the year.................. $78,700 $167,500
======= ========
</TABLE>
F-14
<PAGE> 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The advance availability, usage, and related collateral for FHLB advances
at December 31, 1996, is summarized as follows (in thousands):
<TABLE>
<S> <C>
Total advances available.................................... $146,797
Balances outstanding........................................ (58,700)
--------
Balances available and unused............................. $ 88,097
========
Book value of assets pledged as collateral:
Securities................................................ $144,101
Investment in FHLB stock.................................. 3,610
Loans..................................................... 44,406
--------
$192,117
========
</TABLE>
Vectra has the right to substitute other acceptable collateral for the
securities and loans pledged as collateral for the advances. The Company is
required to purchase and hold stock in the FHLB to maintain membership and to
obtain advances. The amount of stock required to be held is generally based upon
the portion of Vectra's mortgage related assets to total assets as well as the
amount of advances outstanding. The FHLB paid dividends quarterly during 1996 at
a rate of approximately 6.50%. FHLB stock has always been redeemable at the
preset price of $100 per share; however, there can be no assurance that this
redemption feature and value will continue.
(9) SECURITIES AND LOANS SOLD UNDER AGREEMENTS TO REPURCHASE
Securities and loans sold under agreements to repurchase are used to fund
the purchase of securities and origination of loans and to provide collateral to
customers for funds placed with Vectra. The securities and loans which are
subject to the agreements with customers are under the control of the Company
and are segregated in safekeeping accounts at Vectra's correspondent banks.
Vectra has the right to substitute securities and loans at its discretion. The
interest rate paid to customers under these agreements is not related to the
coupon rate of the securities sold, but rather is a function of the rate earned
on Vectra's federal funds sold and the amount of each customer's balance with
Vectra. The balances outstanding under these agreements may fluctuate daily. The
average rate paid under these agreements was 4.65%, 4.87% and 3.48% during the
years ended December 31, 1996, 1995 and 1994, respectively. The carrying value
of loans and securities available for sale under these agreements was
$16,015,000, $7,462,000 and $6,329,000 at December 31, 1996, 1995 and 1994,
respectively. The highest month-end balances during 1996, 1995 and 1994 were
$10,733,000, $7,429,000 and $5,888,000, respectively, and the average balances
were $7,565,000, $4,899,000 and $3,333,000, respectively.
F-15
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) NOTES PAYABLE
Notes payable at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Note payable to bank, collateralized by common stock of
Vectra Bank, interest payable quarterly based on WSJ prime
minus 0.5%. The entire unpaid balance matures on June 28,
1997. The loan commitment from the lender indicates that
the loan may be renewed annually for a total term of ten
years based on the financial condition of the Company,
with annual principal reductions of $450,000 starting at
the end of the second year. .............................. $4,050 $ --
Note payable to bank, collateralized by real property
(occupied by a subsidiary bank) with a net carrying value
of $987,000 at December 31, 1995. Paid in full in
1996. .................................................... -- 1,051
------ ------
$4,050 $1,051
====== ======
</TABLE>
(11) SHAREHOLDERS' EQUITY
(a) Initial public offering
During 1994, the Company issued 923,770 shares of common stock and 805,000
shares of Series A cumulative preferred stock for proceeds of approximately
$14,471,000, net of offering costs, in an initial public offering.
In connection with the initial public offering, the Company purchased and
retired 270,000 shares of common stock from an existing shareholder for
$2,403,000, with a portion of the proceeds from the offering.
(b) Preferred stock
The $100 Series A Convertible Preferred Stock (Convertible Preferred) is
entitled to receive quarterly dividends, if declared, at the annual rate of $7
per share. In the event of any liquidation of the Company, the holders of the
Convertible Preferred will be entitled to a preferential distribution out of the
assets of the Company of $100 per share plus an amount equal to all accumulated
and unpaid dividends thereon on a pari passu basis with the holders of the
Cumulative Preferred stock. Attached to the shares of Convertible Preferred are
Contingent Warrants which give the holders of the Cumulative Preferred the right
to receive Company common stock to compensate for dividends on the Cumulative
Preferred if they are not declared and paid.
The Company may require the redemption of the Convertible Preferred shares
on or after June 19, 1999, at a redemption price starting at $103.50 for the
first year starting June 19, 1999, and declining over a seven year period to
$100 per share. Notwithstanding the Company's rights to require redemption, the
holders of the Convertible Preferred shall have 30 days after the receipt of a
notice of redemption in which they may elect to instead convert their shares of
Convertible Preferred into Company common stock in accordance with their
conversion rights. As a condition for the Company exercising its right to
require redemption during the two-year period starting June 19, 1999, the
Company's common stock must be trading at no less than $13.72 per share.
Holders of the Convertible Preferred stock may, at their option, convert
all or any part of their Convertible Preferred stock into Company common stock
at a conversion price of $13.25 per common share, or approximately 7.55 shares
of common stock for each share of Convertible Preferred stock. Conversion of all
Convertible Preferred shares would result in the issuance of approximately
828,000 shares of common stock.
The Series A Cumulative Preferred Stock (Cumulative Preferred) is entitled
to receive a cumulative quarterly dividend at the annual rate of $.95 per share.
In the event of any liquidation or change in control of
F-16
<PAGE> 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company, the holders of the Cumulative Preferred will be entitled to a
preferential distribution of $10.00 per share ($8,050,000), plus all accumulated
and unpaid dividends.
The Cumulative Preferred will not be redeemable before March 31, 1997,
except upon change in control of the Company.
On or after March 31, 1997, the Cumulative Preferred will be redeemable at
the option of the Company, subject to prior regulatory approval, for cash, in
whole or in part, at the following redemption prices per share, plus, in each
case an amount equal to accumulated and unpaid dividends, if redeemed during the
twelve-month period ending on and including March 30, in each of the following
years:
<TABLE>
<CAPTION>
REDEMPTION PRICE
PER SHARE
----------------
<S> <C>
1998........................................................ $10.30
1999........................................................ 10.15
2000 and thereafter......................................... 10.00
</TABLE>
The 1989 preferred stock was redeemed in 1994 for approximately $477,000
with a portion of the proceeds from the initial public offering.
(c) Employees equity incentive plan
In March 1994, the Company adopted an employees equity incentive plan under
which options for the purchase of common stock are granted to its key employees
including officers and directors who are employees of Vectra. Stock option terms
under this plan may be adjusted at the discretion of the Board of Directors. The
plan has authorized 450,000 option shares of common stock. The options
outstanding under this plan expire ten years from the date of grant. One-third
of these options became exercisable at the date of grant with an additional
one-third becoming exercisable on each of the first two anniversaries of the
date granted. Upon any change in control of Vectra, options outstanding become
fully vested and exercisable.
Activity under this plan is as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1993................................ -- --
Granted................................................... 95,000 $ 8.50
Balance at December 31, 1994................................ 95,000 8.50
Granted................................................... 20,500 11.04
Balance at December 31, 1995................................ 115,500 8.95
Granted................................................... 2,000 12.00
Exercised................................................. (3,333) 10.00
Forfeited................................................. (1,667) 10.00
Balance at December 31, 1996................................ 112,500 8.96
=======
</TABLE>
At December 31, 1996, the range of exercise prices and the weighted-average
remaining contractual life of outstanding options was $8.50 -- $12.00 and 7.2
years, respectively.
At December 31, 1996, 1995 and 1994, the number of options exercisable was
106,000, 70,167 and 31,667, respectively, and weighted-average exercise price of
those options was $8.80, $8.78 and $8.50, respectively.
F-17
<PAGE> 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Outside directors' stock option plan
In March 1994, the Company also implemented an outside directors stock
option plan that grants options for the purchase of common stock to the
Company's directors who are not employees of Vectra. All outside directors were
immediately granted options to purchase 3,000 shares at the current market price
with an additional 1,500 shares to be granted for each subsequent year of
service. Options issued under this plan become exercisable in the same manner as
those issued under the employees equity incentive plan and expire five years
from the date of grant.
Activity under this plan is as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1993................................ -- --
Granted................................................... 12,000 $ 8.50
------
Balance at December 31, 1994................................ 12,000 8.50
Granted................................................... 6,000 9.63
------
Balance at December 31, 1995................................ 18,000 8.88
Granted................................................... 7,500 13.13
------
Balance at December 31, 1996................................ 25,500 10.13
======
</TABLE>
At December 31, 1996, the range of exercise prices and the weighted-average
remaining contractual life of outstanding options was $8.50 -- $13.13 and 3.1
years, respectively.
At December 31, 1996, 1995 and 1994, the number of options exercisable was
18,500, 10,000 and 4,000, respectively, and weighted-average exercise price of
those options was $9.59, $9.08 and $8.50, respectively.
(e) Nonqualified stock option plan
The Company had a 1989 nonqualified stock option plan (the 1989 Plan) which
permitted Vectra to grant options for the purchase of common stock to selected
key employees at no less than estimated fair value on the date of grant.
Options outstanding under this plan vested 20% on June 30, 1994 and an
additional 20% on each June 30 thereafter until the options are fully vested on
June 30, 1998. The options vest fully in the event of a change of control of the
Company. In 1994, the 1989 Plan was terminated.
Activity under this plan is as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1993................................ 50,530 $ 6.67
Exercised................................................. (3,030) 6.60
Forfeited................................................. (1,000) 10.00
------
Balance at December 31, 1994................................ 46,500 6.60
------
Balance at December 31, 1995................................ 46,500 6.60
Exercised................................................. (300) 6.60
Forfeited................................................. (200) 6.60
------
Balance at December 31, 1996................................ 46,000 6.60
======
</TABLE>
At December 31, 1996, the exercise price and the weighted-average remaining
contractual life of outstanding options was $6.60 and 2.5 years, respectively.
F-18
<PAGE> 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, 1995 and 1994, the number of options exercisable was
27,600, 18,600 and 9,300, respectively, and weighted-average exercise price of
those options was $6.60.
(f) Accounting for stock options
During 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123), which provides an alternative to APB Opinion No. 25,
Accounting for Stock Issued to Employees (Opinion No. 25), in accounting for
stock-based compensation issued to employees. The Statement allows for a fair
value based method of accounting for employee stock options and similar equity
instruments. However, for companies that continue to account for stock-based
compensation arrangements under Opinion No. 25, SFAS 123 requires disclosure of
the pro forma effect on net income and earnings per share, if presented, as if
the fair value based method of accounting defined in SFAS 123 had been applied.
The Company will continue to use the accounting prescribed by Opinion No. 25,
and provide the required disclosures of SFAS 123.
The per share weighted-average fair value of stock options granted during
1996 and 1995 was $4.05 and $4.01 on the dates of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
1996 -- risk-free interest rate of 6.0% and an expected life of 3.4 years;
1995 -- risk-free interest rate of 6.1% and an expected life of 4.6 years, and
expected volatility of 32%. It was assumed in both years that no dividends will
be paid.
As noted above, the Company applies the intrinsic value method in
accounting for its equity incentive plans and, accordingly, no compensation cost
has been recognized for such plans in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options, the Company's net earnings would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net earnings:
As reported............................................... $5,445 $3,303
Pro forma................................................. 5,380 3,282
Earnings per common share assuming full dilution:
As reported............................................... $ 1.26 $ 0.78
Pro forma................................................. 1.24 0.78
</TABLE>
The effects of applying SFAS 123 for providing pro forma disclosures may
not be representative of the effects on reported net earnings for future years.
(g) Restricted stock program
During 1992, Vectra adopted a restricted stock program under which 30,000
shares of restricted common stock were sold to certain employees at a price of
$.01 per share. The shares vested over a four-year period which ended in 1996.
Vectra recorded compensation expense over the vesting period equal to the
difference between the fair value of shares at the time the program was adopted
and sales proceeds.
(h) Underwriter's warrant
In connection with its initial public offering, Vectra sold to its
underwriter a warrant to purchase 20,000 shares of common stock. The warrant is
exercisable at $10.20 per share of common stock and expires in March 1999.
F-19
<PAGE> 86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, consists of
the following:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense:
Federal.................................................. $3,077 $1,245 $319
State.................................................... 328 215 --
------ ------ ----
Total current expense............................ 3,405 1,460 319
------ ------ ----
Deferred tax expense (benefit):
Federal.................................................. (403) 272 403
State.................................................... (61) 42 98
------ ------ ----
Total deferred expense (benefit)................. (464) 314 501
------ ------ ----
Total income tax expense......................... $2,941 $1,774 $820
====== ====== ====
</TABLE>
Income tax expense differs from the amounts computed by applying the U.S.
federal statutory rate to earnings before income taxes and cumulative effect of
change in accounting for the years ended December 31, as a result of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
------ ---- ------ ---- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Expected federal tax expense........... $2,851 34.0% $1,726 34.0% $ 1,711 34.0%
State taxes, net of federal benefit.... 277 3.3 169 3.3 161 3.2
Tax exempt interest.................... (104) (1.3) -- -- -- --
Goodwill amortization.................. 64 0.8 -- -- -- --
Decrease in valuation allowance on
deferred taxes....................... (95) (1.1) (209) (4.1) (1,000) (19.9)
Other.................................. (52) (0.6) 88 1.7 (52) (1.0)
------ ---- ------ ---- ------- -----
$2,941 35.1% $1,774 34.9% $ 820 16.3%
====== ==== ====== ==== ======= =====
</TABLE>
Temporary differences between financial statement carrying amounts and tax
bases of assets and liabilities that result in significant portions of Vectra's
deferred tax asset at December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Unrealized loss on securities available for sale.......... $2,246 $2,194
Net operating loss carryforwards.......................... 225 272
Loans, primarily due to differences in accounting for loan
losses................................................. 722 119
Other..................................................... 211 73
------ ------
Deferred tax asset..................................... 3,404 2,658
Less valuation allowance.................................. (141) (236)
------ ------
Deferred tax asset, net of valuation allowance......... 3,263 2,422
Deferred tax liabilities:
Premises and equipment, primarily due to differences in
original cost basis and depreciation................... (227) --
------ ------
Net deferred tax asset............................ $3,036 $2,422
====== ======
</TABLE>
F-20
<PAGE> 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The valuation allowance recorded at December 31, 1996, was determined based
upon management's estimate of future taxable income and Vectra's ability to
utilize existing net operating loss carryforwards, certain of which are subject
to limitations as to their use to offset such taxable income and the recovery or
realization of unrealized losses on securities. In the opinion of management,
the Company is more likely than not to realize the net deferred tax asset.
At December 31, 1996, Vectra has net operating loss carryforwards for
federal and state income tax purposes of approximately $520,000 which are
available to offset future taxable income through 2004. Vectra also has
approximately $960,000 of additional net operating loss carryforwards for state
income tax purposes which are available to offset future taxable income through
2009. These net operating loss carryforwards are subject to separate return
limitations and "ownership change" limitations, as that term is defined in
Section 382 of the Internal Revenue Code.
(13) RELATED PARTY TRANSACTIONS
Vectra has entered into transactions with its shareholders, directors,
officers and other affiliates. In the opinion of management, such transactions
have been entered into under terms and rates substantially the same as those
offered by Vectra in the ordinary course of business.
(14) COMMITMENTS AND CONTINGENCIES
(a) Lease Commitments
Future minimum rental payments and lease income receipts under
noncancelable operating leases for premises and equipment, expiring at various
dates through 2067, are as follows:
<TABLE>
<CAPTION>
RENTAL RENTAL
PAYMENTS RECEIPTS
-------- --------
(IN THOUSANDS)
<S> <C> <C>
1997........................................................ $ 530 $ 191
1998........................................................ 458 31
1999........................................................ 271 47
2000........................................................ 224 38
2001........................................................ 91 42
Thereafter.................................................. 1,943 660
------ ------
Total minimum..................................... $3,517 $1,059
====== ======
</TABLE>
Total rent expense for all operating leases, including equipment leases,
was $605,000, $774,000 and $705,000 for the years ended December 31, 1996, 1995
and 1994, respectively.
(b) Commitments to Extend Credit
In the normal course of business, the subsidiary bank enters into
commitments to extend credit. The following outstanding commitments at December
31, 1996, which are generally secured and at market rates of interest, are not
reflected in the accompanying financial statements (in thousands):
<TABLE>
<S> <C>
Commitments on lines of credit.............................. $85,628
Outstanding letters of credit............................... 4,214
-------
$89,842
=======
</TABLE>
Commitments to extend credit and outstanding letters of credit are
evaluated for losses by management in a similar manner to existing loans and
real estate acquired by foreclosure.
F-21
<PAGE> 88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Litigation
Vectra is involved in various litigation matters arising in the normal
course of business. In the opinion of management and Vectra's legal counsel, the
ultimate resolution of these matters will not have a significant adverse effect
on the financial condition or results of operations of the Company.
(15) DISCLOSURES OF FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, (SFAS
107) requires that Vectra disclose estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions for Vectra's
financial instruments are as set forth below, and a summary of the carrying
values and fair values of the Company's financial instruments at December 31,
are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks.................. $ 32,688 $ 32,688 $ 17,320 $ 17,320
Securities available for sale:
Structured notes (see note 5)......... 10,296 10,296 9,785 9,785
Other................................. 170,699 170,699 160,599 160,599
Securities held to maturity.............. 263 263 814 819
Investment in FHLB stock................. 3,610 3,610 5,173 5,173
Federal funds sold....................... -- -- 2,000 2,000
Loans.................................... 315,667 322,861 204,171 209,198
Financial liabilities:
Deposits................................. 439,351 439,351 307,085 307,085
Other liabilities........................ 77,025 77,025 80,612 80,612
</TABLE>
(a) Cash and Due From Banks and Federal Funds Sold
The carrying amounts of these instruments are reasonable estimates of fair
value, due to the relatively short period to maturity of these investments.
(b) Securities
The fair value of securities available for sale and securities held to
maturity is estimated based on market quotations received from securities
dealers from whom Vectra normally purchases and sells securities and from other
independent sources. Such estimates of market value are included in note 4.
(c) Investment in Federal Home Loan Bank Stock
The carrying amount of this investment represents a reasonable estimate of
fair value since the stock can only be purchased from or sold to the FHLB, as
discussed in note 8.
(d) Loans
Fair value of loans is estimated in accordance with SFAS 107 for portfolios
of loans with similar financial characteristics. Loans are segregated by type
such as commercial, consumer and mortgages. Each loan category is further
segmented into fixed and adjustable rate interest terms and by performing and
nonperforming categories. Fair value of fixed rate loans is calculated by
discounting cash flows through the estimated maturity based on the Company's
expected experience with repayments for each loan classification. The estimated
market discount rates used in the calculations represent loan rates offered by
the Company on similar types of loans. Adjustable rate loans are segmented into
the two categories of home equity and all other
F-22
<PAGE> 89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adjustable rate loans. Home equity loans generate a higher premium in the loan
secondary market than other adjustable rate loans, which is reflected in the
calculation of the fair market value for these types of loans. All other
performing adjustable rate loans are valued at 1% over the carrying value based
on consideration of average lives and contributions to net earnings of such
loans. The fair market values of all consumer loans were verified with
independent loan brokers.
A summary of carrying value and estimated fair value of loans at December
31 is as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans...................................... $317,041 $319,824 $202,748 $205,231
Loans held for sale........................ 2,864 3,037 3,916 3,967
Allowance for loan losses.................. (4,238) -- (2,493) --
-------- -------- -------- --------
Net loans........................ $315,667 $322,861 $204,171 $209,198
======== ======== ======== ========
</TABLE>
(e) Deposits and Other Liabilities
The fair values of deposits with no stated maturity, such as demand
deposits, NOW and money market accounts and savings are equal to the amounts
payable on demand as included in the accompanying consolidated balance sheets.
The fair value of certificates of deposit is also estimated to be equal to the
amounts included in the accompanying consolidated balance sheets because the
majority of such certificates are of short duration and are at rates
substantially the same as current market rates. The estimated fair values of
advances from the FHLB and of securities and loans sold under agreements to
repurchase are also equal to carrying values because of their short durations or
repricing frequencies. Notes payable carrying values are estimated to
approximate fair values because they are annually renewable and bear interest at
market rates adjustable whenever prime rate changes.
(f) Off-Balance Sheet Financial Instruments
Commitments to extend credit represent the principal category of
off-balance sheet financial instruments. The fair value of these commitments,
based on fees currently charged for similar commitments, is not significant.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
(16) REGULATORY CAPITAL REQUIREMENTS
Vectra is subject to regulations of certain state and federal agencies,
including periodic examinations by those regulatory agencies. Federal
regulations provide for supervisory action at institutions based on their
capital levels as measured by three capital ratios: Tier 1 leverage, Tier 1
risk-based, and total risk-based capital. Based on these capital measures, each
banking institution falls into one of five regulatory capital categories: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. At December 31, 1996,
Vectra's Tier 1 leverage, Tier 1 risk-based and total risk-based capital were
6.98%, 10.50% and 11.58%, respectively, which places Vectra in the well
capitalized category.
F-23
<PAGE> 90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) EARNINGS PER SHARE CALCULATIONS
In addition to its common stock, Vectra's capital structure includes
several other components that impact the calculation of earnings per share.
Common stock equivalents consist of the number of common shares issuable upon
the exercise of the options and warrants when the market price of the common
stock exceeds the exercise prices, reduced by the number of common shares that
are assumed to have been purchased with the proceeds from the exercise of the
stock options and warrants. Those purchases were assumed to have been made at
the average price of the common stock during that part of the year when the
market price of the common stock exceeded the exercise prices.
Other dilutive securities consist of the 828,000 shares of common stock
issuable upon conversion of the $100 Series A Convertible Preferred stock. The
weighted average outstanding shares of these securities is calculated assuming
the conversion occurred on June 18, 1996, when the shares of $100 Series A
Convertible Preferred stock were issued.
The calculation of primary and fully diluted earnings per share is set
forth in the following table:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net earnings............................................. $5,445 $3,303 $2,675
Less dividends on Series A Cumulative Preferred stock.... (765) (765) (579)
------ ------ ------
Earnings available for calculation of earnings per share
assuming full dilution................................. 4,680 2,538 2,096
Less dividends on $100 Series A Convertible Preferred
stock.................................................. (409) -- --
------ ------ ------
Earnings available to common shareholders................ $4,271 $2,538 $2,096
====== ====== ======
Weighted average shares outstanding:
Common shares.......................................... 3,198 3,195 3,023
Common equivalent shares............................... 73 39 36
------ ------ ------
Total common and common equivalent shares...... 3,270 3,234 3,059
Other dilutive securities.............................. 443 -- --
------ ------ ------
Total assuming full dilution................... 3,714 3,234 3,059
====== ====== ======
Earnings per common share and common share equivalent.... $ 1.31 $ 0.79 $ 0.69
====== ====== ======
Earnings per common share assuming full dilution......... $ 1.26 $ 0.78 $ 0.69
====== ====== ======
</TABLE>
F-24
<PAGE> 91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(18) CONDENSED FINANCIAL INFORMATION FOR PARENT COMPANY
Condensed financial information for the parent company only, Vectra Banking
Corporation, is as follows:
CONDENSED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash...................................................... $ 199 $ 304
Investment in bank subsidiaries........................... 47,778 29,219
Investment in other subsidiaries.......................... 987 (58)
Other assets.............................................. 14 787
------- -------
Total assets...................................... $48,978 $30,252
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities......................................... $ 3,543 $ 67
Shareholders' equity...................................... 45,435 30,185
------- -------
Total liabilities and shareholders' equity........ $48,978 $30,252
======= =======
</TABLE>
CONDENSED OPERATIONS INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating income:
Management fees....................................... $ -- $ 600 $ 336
Other................................................. 14 18 46
------ ------ -------
Total operating income........................ 14 618 382
------ ------ -------
Operating expenses:
Salaries and employee benefits........................ 11 328 340
Occupancy expenses.................................... -- 74 62
Interest expense...................................... 162 -- 18
Amortization of intangible asset...................... -- -- 312
Other................................................. 607 534 310
------ ------ -------
Total operating expenses...................... 780 936 1,042
------ ------ -------
Loss before income taxes, equity in earnings of
subsidiaries and cumulative effect of change in
accounting......................................... (766) (318) (660)
Income tax benefit...................................... 196 156 470
------ ------ -------
Loss before equity in earnings of subsidiaries and
cumulative effect of change in accounting.......... (570) (162) (190)
Equity in earnings of subsidiaries...................... 6,015 3,465 4,402
Cumulative effect of change in accounting for
goodwill.............................................. -- -- (1,537)
------ ------ -------
Net earnings.................................. $5,445 $3,303 $ 2,675
====== ====== =======
</TABLE>
F-25
<PAGE> 92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings...................................... $ 5,445 $ 3,303 $ 2,675
Equity in earnings of subsidiaries................ (6,015) (3,465) (4,402)
Cumulative effect of change in accounting......... -- -- 1,537
Depreciation and amortization..................... -- -- 312
Net decrease (increase) in other operating assets
and liabilities................................ 177 (210) (90)
-------- ------- --------
Net cash provided (used) by operating
activities.............................. (393) (372) 32
-------- ------- --------
Cash flows from investing activities:
Dividends received from bank subsidiaries......... 1,400 1,052 353
Capital contribution to subsidiaries.............. (15,021) -- (10,000)
Other............................................. 27 -- (165)
-------- ------- --------
Net cash provided (used) by investing activities.... (13,594) 1,052 (9,812)
-------- ------- --------
Net cash provided (used) by financing activities.... 13,882 (764) 10,103
-------- ------- --------
Net increase (decrease) in cash........... (105) (84) 323
Cash at beginning of year........................... 304 388 65
-------- ------- --------
Cash at end of year................................. $ 199 $ 304 $ 388
======== ======= ========
</TABLE>
F-26
<PAGE> 93
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<PAGE> 94
(This page intentionally left blank)
<PAGE> 95
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THE INFORMATION HEREIN OR INCORPORATED BY REFERENCE
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION OF AN OFFER TO BUY BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 4
Incorporation of Certain Documents by
Reference........................... 4
Prospectus Summary.................... 5
Selected Financial Data............... 9
Risk Factors.......................... 11
Use of Proceeds....................... 17
Accounting Treatment.................. 17
Capitalization........................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Management............................ 34
Description of the Capital
Securities.......................... 35
Description of Junior Subordinated
Debentures.......................... 47
Book-Entry Issuance................... 56
Description of Guarantee.............. 58
Relationship Among the Capital
Securities, the Junior Subordinated
Debentures and the Guarantee........ 60
Certain Federal Income Tax
Consequences........................ 62
Underwriting.......................... 65
Legal Matters......................... 66
Experts............................... 66
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
700,000 CAPITAL SECURITIES
VBC CAPITAL I
% CUMULATIVE CAPITAL SECURITIES
(LIQUIDATION AMOUNT $25 PER CAPITAL SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED,
AS DESCRIBED HEREIN, BY
VECTRA BANKING CORPORATION
[VECTRA BANK LOGO]
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P R O S P E C T U S
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DAIN BOSWORTH
Incorporated
HOWE BARNES
INVESTMENTS, INC.
, 1997
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