-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VpNIjwF/6ZhHSOlDO+d44g2Cchln9pLX6uOZkogtJTfcsBVIdfmi7JQI31c00xwv MeaaCjkWycSxETBWmzktjg== 0000950137-04-010019.txt : 20041115 0000950137-04-010019.hdr.sgml : 20041115 20041115153107 ACCESSION NUMBER: 0000950137-04-010019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041115 DATE AS OF CHANGE: 20041115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLUE VALLEY BAN CORP CENTRAL INDEX KEY: 0000901842 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 481070996 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15933 FILM NUMBER: 041144816 BUSINESS ADDRESS: STREET 1: 11935 RILEY CITY: OVERLAND PARK STATE: KS ZIP: 66225 BUSINESS PHONE: 9133381000 MAIL ADDRESS: STREET 1: 11935 RILEY CITY: OVERLAND PARK STATE: KS ZIP: 66225 10-Q 1 c89771e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ COMMISSION FILE NUMBER: 001-15933 BLUE VALLEY BAN CORP (Exact name of registrant as specified in its charter) KANSAS 48-1070996 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11935 RILEY 66225-6128 OVERLAND PARK, KANSAS (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (913) 338-1000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- Guarantee with respect to the American Stock Exchange Trust Preferred Securities, $8.00 par value, of BVBC Capital Trust I Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by checkmark whether the registrant is an accelerated filer. Yes [ ] No [X] As of September 30, 2004, the registrant had 2,313,061 shares of Common Stock ($1.00 par value) outstanding. BLUE VALLEY BAN CORP INDEX PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm........................................... 3 Consolidated Balance Sheets - September 30, 2004 (unaudited) and December 31, 2003................ 4 Consolidated Statements of Income (unaudited) - three months and nine months ended September 30, 2004 and 2003.................................. 6 Consolidated Statements of Stockholders' Equity (unaudited) - nine months ended September 30, 2004 and 2003 .................................................. 7 Consolidated Statements of Cash Flows (unaudited) - nine months ended September 30, 2004 and 2003................................................... 8 Notes to Consolidated Financial Statements (unaudited) - nine months ended September 30, 2004 and 2003................................................... 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................................. 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................... 24 ITEM 4. CONTROLS AND PROCEDURES...................................................................... 26 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS............................................................................ 27 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.................................. 27 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.............................................................. 27 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................... 27 ITEM 5. OTHER INFORMATION............................................................................ 27 ITEM 6. EXHIBITS .................................................................................... 27
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Audit Committee, Board of Directors and Shareholders Blue Valley Ban Corp Overland Park, Kansas We have reviewed the accompanying consolidated balance sheet of Blue Valley Ban Corp as of September 30, 2004, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2004 and 2003 and the consolidated statements of stockholders' equity and cash flows for the nine-month periods ended September 30, 2004 and 2003. These interim financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2003 and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended (not presented herein), and in our report dated February 13, 2004 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ BKD, LLP Kansas City, Missouri October 28, 2004 3 BLUE VALLEY BAN CORP CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 (dollars in thousands, except share data) ASSETS
SEPTEMBER 30, DECEMBER 31, 2004 2003 --------------- --------------- (Unaudited) Cash and due from banks $ 31,020 $ 21,317 Federal funds sold 27,500 29,400 --------------- --------------- Cash and cash equivalents 58,520 50,717 Available-for-sale securities 74,605 106,036 Mortgage loans held for sale 27,673 18,297 Loans, net of allowance for loan losses of $7,605 and $7,051 in 2004 and 2003, respectively 470,155 417,569 Premises and equipment 20,083 18,250 Foreclosed assets held for sale, net 2,459 416 Interest receivable 2,052 1,923 Deferred income taxes 2,239 1,302 Prepaid expenses and other assets 3,170 3,593 Federal Home Loan Bank stock, Federal Reserve Bank stock and other securities 7,922 7,842 Core deposit intangible asset, at amortized cost 1,014 1,128 --------------- --------------- Total assets $ 669,892 $ 627,073 =============== ===============
See Accompanying Notes to Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. 4 BLUE VALLEY BAN CORP CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 (dollars in thousands, except share data) LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31, 2004 2003 ------------- ------------ (Unaudited) LIABILITIES Deposits Demand $ 83,561 $ 74,717 Savings, NOW and money market 228,828 190,631 Time 218,309 205,147 ------------- ------------ Total deposits 530,698 470,495 Other interest-bearing liabilities 24,058 23,447 Short-term debt 1,000 - Long-term debt 66,694 88,294 Interest payable and other liabilities 5,414 4,639 ------------- ------------ Total liabilities 627,864 586,875 ------------- ------------ STOCKHOLDERS' EQUITY Capital stock Common stock, par value $1 per share; authorized 15,000,000 shares; issued and outstanding 2004 - 2,313,061 shares; 2003 - 2,279,161 shares 2,313 2,279 Additional paid-in capital 7,777 7,404 Retained earnings 32,268 30,344 Unearned compensation (289) (399) Accumulated other comprehensive income Unrealized appreciation (depreciation) on available-for-sale securities, net of income taxes (credit) of $(27) in 2004 and $380 in 2003 (41) 570 ------------- ------------ Total stockholders' equity 42,028 40,198 ------------- ------------ Total liabilities and stockholders' equity $ 669,892 $ 627,073 ============= ============
See Accompanying Notes to Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. 5 BLUE VALLEY BAN CORP CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (dollars in thousands, except share data)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) INTEREST INCOME Interest and fees on loans $ 7,345 $ 7,640 $ 21,059 $ 21,972 Federal funds sold 48 6 140 19 Available-for-sale securities 624 445 1,805 1,550 ------------- ------------- ------------- ------------- Total interest income 8,017 8,091 23,004 23,541 ------------- ------------- ------------- ------------- INTEREST EXPENSE Interest-bearing demand deposits 43 41 115 131 Savings and money market deposit accounts 775 591 2,138 1,561 Other time deposits 1,930 1,747 5,240 5,214 Federal funds purchased and other interest-bearing liabilities 41 50 106 166 Short-term debt - 96 - 256 Long-term debt 964 1,014 2,951 2,786 ------------- ------------- ------------- ------------- Total interest expense 3,753 3,539 10,550 10,114 ------------- ------------- ------------- ------------- NET INTEREST INCOME 4,264 4,552 12,454 13,427 PROVISION FOR LOAN LOSSES 400 150 1,050 1,350 ------------- ------------- ------------- ------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,864 4,402 11,404 12,077 ------------- ------------- ------------- ------------- NONINTEREST INCOME Loans held for sale fee income 2,106 5,974 7,992 16,979 Service fees 629 557 1,843 1,631 Realized gain on available-for-sale securities 391 - 524 - Other income 143 106 425 331 ------------- ------------- ------------- ------------- Total noninterest income 3,269 6,637 10,784 18,941 ------------- ------------- ------------- ------------- NONINTEREST EXPENSE Salaries and employee benefits 3,836 6,092 12,240 16,169 Net occupancy expense 903 833 2,503 2,296 Other operating expense 1,688 1,788 4,758 4,918 ------------- ------------- ------------- ------------- Total noninterest expense 6,427 8,713 19,501 23,383 ------------- ------------- ------------- ------------- INCOME BEFORE INCOME TAXES 706 2,326 2,687 7,635 PROVISION FOR INCOME TAXES 173 831 763 2,738 ------------- ------------- ------------- ------------- NET INCOME $ 533 $ 1,495 $ 1,924 $ 4,897 ============= ============= ============= ============= BASIC EARNINGS PER SHARE $ 0.23 $ 0.66 $ 0.84 $ 2.19 ============= ============= ============= ============= DILUTED EARNINGS PER SHARE $ 0.23 $ 0.64 $ 0.82 $ 2.12 ============= ============= ============= =============
See Accompanying Notes to Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. 6 BLUE VALLEY BAN CORP CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (dollars in thousands, except share data)
ACCUMULATED ADDITIONAL OTHER COMPREHENSIVE COMMON PAID-IN RETAINED UNEARNED COMPREHENSIVE INCOME STOCK CAPITAL EARNINGS COMPENSATION INCOME TOTAL ------------- -------- ---------- -------- ------------ ------------- -------- BALANCE, DECEMBER 31, 2002 $ 2,223 $ 6,284 $ 25,052 $ -- $ 785 $ 34,344 Issuance of 31,875 shares of common stock -- 32 602 -- -- -- 634 Net income 4,897 -- -- 4,897 -- -- 4,897 Change in unrealized appreciation on available-for-sale securities, net of income tax credit of $(164) (246) -- -- -- -- (246) (246) ------------- -------- ---------- -------- ------------ ------------- -------- $ 4,651 ============= BALANCE, SEPTEMBER 30, 2003 $ 2,255 $ 6,886 $ 29,949 $ -- $ 539 $ 39,629 ======== ========== ======== ============ ============= ======== $ 768 ============= BALANCE, DECEMBER 31, 2003 $ 2,279 $ 7,404 $ 30,344 $ (399) $ 570 $ 40,198 Issuance of 33,900 shares of common stock -- 34 373 -- -- -- 407 Net income 1,924 -- -- 1,924 -- -- 1,924 Restricted stock earned and forfeited -- -- -- -- 110 -- 110 Change in unrealized appreciation on available-for-sale securities, net of income tax credit of $(407) (611) -- -- -- -- (611) (611) ------------- -------- ---------- -------- ----------- ------------- -------- $ 1,313 ============= BALANCE, SEPTEMBER 30, 2004 $ 2,313 $ 7,777 $ 32,268 $ (289) $ (41) $ 42,028 ======== ========== ======== ============ ============= ========
SEPTEMBER 30, SEPTEMBER 30, 2004 2003 ------------- ------------- RECLASSIFICATION DISCLOSURE Unrealized depreciation on available-for-sale securities, net of income tax credit of $(198), and $(164) for the periods ended September 30, 2004 and September 30, 2003, respectively $ (297) $ (246) Less: reclassification adjustments for appreciation included in net income, net of income taxes of $210 and $0 for the periods ended September 30, 2004 and September 30, 2003, respectively 314 - ------------- ------------- Change in unrealized appreciation on available-for-sale securities, net of income tax credit of $(407) and $(164) for the periods ended September 30, 2004 and September 30, 2004, respectively $ (611) $ (246) ============= =============
See Accompanying Notes to Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. 7 BLUE VALLEY BAN CORP CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (dollars in thousands, except share data)
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 ------------------ ------------------ (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,924 $ 4,897 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation and amortization 1,365 1,139 Amortization (accretion) of premiums and discounts on securities (19) 34 Provision for loan losses 1,050 1,350 Net realized gain on available-for-sale securities (524) - Net loss on sale of foreclosed assets 102 39 Net loss (gain) on sale of premises and equipment 5 (18) Restricted stock earned and forfeited 110 - Originations of loans held for sale (688,991) (1,385,560) Proceeds from the sale of loans held for sale 679,616 1,442,697 Changes in Interest receivable (129) 220 Prepaid expenses and other assets (384) (348) Interest payable and other liabilities 775 1,341 ------------------ ------------------ Net cash provided by (used in) operating activities (5,100) 65,791 ------------------ ------------------ CASH FLOWS FROM INVESTING ACTIVITIES Net originations of loans (59,228) (34,995) Proceeds from sales of loan participations 3,053 - Purchase of premises and equipment (2,812) (7,977) Proceeds from the sale of premises and equipment - 18 Proceeds from the sale of foreclosed assets 393 610 Proceeds from sales of available-for-sale securities 21,271 - Proceeds from maturities of available-for-sale securities 41,659 72,487 Purchases of available-for-sale securities (31,974) (75,527) Proceeds from the sale or maturities of Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities 95 - Purchases of Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities (175) (2,250) ------------------ ------------------ Net cash used in investing activities (27,718) (47,634) ------------------ ------------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand deposits, money market, NOW and savings accounts 47,041 8,065 Net increase in time deposits 13,162 33,118 Repayments of long-term debt (21,600) (4,525) Proceeds from long-term debt - 15,325 Net proceeds from guaranteed preferred beneficial interest in Company's subordinated debt - 7,500 Net proceeds (payments) on short-term debt 1,000 (35,000) Proceeds from sale of common stock 407 634 Net increase (decrease) in other borrowings 611 (14,864) ------------------ ------------------ Net cash provided by financing activities 40,621 10,253 ------------------ ------------------ INCREASE IN CASH AND CASH EQUIVALENTS 7,803 28,410 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 50,717 27,755 ------------------ ------------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 58,520 $ 56,165 ================== ==================
See Accompanying Notes to Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. 8 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED) NOTE 1: BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the Company's consolidated financial position as of September 30, 2004, and the consolidated results of its operations, changes in stockholders' equity and cash flows for the periods ended September 30, 2004 and 2003, and are of a normal recurring nature. Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's December 31, 2003 Form 10-K filed with the Securities and Exchange Commission. Certain reclassifications to prior year amounts have been made to conform to current year presentation. The results of operations for the period are not necessarily indicative of the results to be expected for the full year. The Company applies Accounting Principles Board No. 25 and related Interpretations in accounting for its stock option plan and no compensation cost has been recognized. Pro forma compensation costs for the Company's plan are determined based on the fair value at the option grant dates using the minimum value method under Statement of Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation." During the period ended September 30, 2004, the Company issued no stock options; consequently, reported and pro forma net income were identical. During the period ended September 30, 2004, the Company applied the provisions of Financial Accounting Standards Board Interpretation 46 (Revised), Consolidation of Variable Interest Entities, to its trust preferred securities. The primary impact of this change was to report the Company's subordinated debt to the trust on the face of the accompanying balance sheet rather than the minority interest in the trust, as previously presented. This change has been made for all periods presented. This change did not have a material impact on the Company's total assets, liabilities, stockholders' equity or results of operations. The report of BKD, LLP on its review accompanies the consolidated financial statements included in Item 1 of Part I. NOTE 2: EARNINGS PER SHARE Basic earnings per share is computed based on the weighted average number of shares outstanding during each year. Diluted earnings per share is computed using the weighted average common shares and all potential dilutive common shares outstanding during the period. See Accompanying Notes to Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. 9 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED) The computation of per share earnings for the three and nine-months ended September 30, 2004 and 2003 is as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2004 2003 --------------- --------------- --------------- --------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) (amounts in thousands, except (amounts in thousands, except share and per share data) share and per share data) Net income, as reported $ 533 $ 1,495 $ 1,924 $ 4,897 Add: Total stock-based employee compensation recognized in net income, net of income taxes of $10 and $33 for the three- and nine-month periods ended September 30, 2004, respectively 21 - 63 - Less: Total stock-based compensation cost determined under the fair value based method, net of income tax credit of $(10) and $(33) for the three- and nine-month periods ended September 30, 2004, respectively (21) - (63) - --------------- --------------- --------------- --------------- Pro forma net income $ 533 $ 1,495 $ 1,924 $ 4,897 =============== =============== =============== =============== Average common shares outstanding 2,309,341 2,254,139 2,298,286 2,238,536 Average common share stock options outstanding 55,441 79,381 59,331 74,467 --------------- --------------- --------------- --------------- Average diluted common shares 2,364,782 2,333,520 2,357,617 2,313,003 =============== =============== =============== =============== Basic earnings per share $ 0.23 $ 0.66 $ 0.84 $ 2.19 =============== =============== =============== =============== Diluted earnings per share $ 0.23 $ 0.64 $ 0.82 $ 2.12 =============== =============== =============== ===============
See Accompanying Notes to Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. 10 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED) NOTE 3: SHORT-TERM DEBT Short-term debt at September 30, 2004 and December 31, 2003, consisted of the following components:
SEPTEMBER 30, DECEMBER 31, 2004 2003 ------------- ------------ (Unaudited) (in thousands) Note Payable - other (a) $ 1,000 $ - ------------- ------------ Total Short-term debt $ 1,000 $ - ============= ============
(a) Revolving line of credit collateralized by common stock of the Company's subsidiary bank. Interest accrues at the Federal Funds Rate plus 1.68%. NOTE 4: LONG-TERM DEBT Long-term debt at September 30, 2004 and December 31, 2003, consisted of the following components:
SEPTEMBER 30, DECEMBER 31, 2004 2003 ---------------- ---------------- (Unaudited) (in thousands) Note Payable - other (A) $ - $ 1,281 Note Payable - bank (B) 4,606 4,925 Federal Home Loan Bank advances (C) 42,500 62,500 Trust Preferred Securities - BVBC Capital Trust I (D) 11,856 11,856 Trust Preferred Securities - BVBC Capital Trust II (E) 7,732 7,732 ---------------- ---------------- Total long-term debt $ 66,694 $ 88,294 =============== ================
(A) Due in August 2009, payable in monthly installments of $23,175, plus interest at 7.5%; collateralized by land, building and assignment of future rents. This note was paid off during the first quarter of 2004. (B) Due in December 2012, payable in quarterly installments of principal plus interest at the Federal Funds Rate plus 1.68%; collateralized by common stock of the Company's subsidiary bank. The interest rate on this note has been fixed by the use of a swap See Accompanying Notes to Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. 11 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED) agreement (see Note 5). (C) Due in 2008, 2010, 2011 and 2013; collateralized by various assets including mortgage-backed loans. The interest rates on the advances range from 1.84% to 5.682%. (D) Due in 2030; interest only at 10.375% due quarterly; fully and unconditionally guaranteed by the Company on a subordinated basis to the extent that the funds are held by the Trust. (E) Due in 2033; interest only at LIBOR + 3.25% due quarterly; fully and unconditionally guaranteed by the Company on a subordinated basis to the extent that the funds are held by the Trust. Subordinated to the trust preferred securities (D) due in 2030. Aggregate annual maturities of long-term debt at September 30, 2004 are as follows:
(in thousands) October 1 to December 31, 2004 $ 106 2005 450 2006 475 2007 500 2008 10,530 Thereafter 54,633 ---------------- $ 66,694 ================
NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS As a strategy to reduce the exposure to the risk of changes in future cash flows due to interest rate fluctuations, the Company entered into an interest rate swap agreement for a portion of its floating rate debt (see Note 4). The agreement provides for the Company to receive interest from the counterparty at the note's variable rate and to pay interest to the counterparty at a fixed rate of 5.45% on the notional amount over the term of the note. Under the agreement, the Company pays or receives the net interest amount quarterly, with the quarterly settlements included in interest expense. Management has designated the interest rate swap agreement as a cash flow hedging instrument. The hedge was fully effective through September 30, 2004. Under the cash flow hedging method, the effective portion of the gain or loss related to the derivative is recognized as a component of other comprehensive income. The ineffective portion, if any, is recognized in current earnings. See Accompanying Notes to Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. 12 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED) NOTE 6: MORTGAGE LOANS HELD FOR SALE CHARGE AND SUBSEQUENT EVENTS In the third quarter of 2004, the Company recorded a reduction in its Loans Held for Sale Income of $350,000 and also recorded an offsetting Other Liability to account for the anticipated refund of fee income on residential mortgage loans underwritten with documentation altered by a former employee of the Company. Because the affected loans were sold to investors, it is probable that the Company will either repurchase these loans and refund the $350,000 of fee income that was earned on these loans when they were sold to investors or indemnify the investor. Through the date of this report, the Company had repurchased approximately $9 million of these loans into the Company's existing residential mortgage loan portfolio. The anticipated repurchase of the remaining $5 million of affected loans is expected to be made in the fourth quarter of 2004 with liquidity currently available and is not expected to have a significant impact on the Company's overall liquidity position. Although the exact amount is not currently determinable, the Company will record an appropriate charge to the provision for loan losses upon the repurchase of these mortgage loans. Almost all of the affected mortgage loans are currently paying as agreed, and therefore the Company expects minimal credit losses from these loans. The Company expects the anticipated repurchase to have an immaterial impact on its earnings in the fourth quarter of 2004. Management of the Company, pursuant to an operational risk assessment of the situation, has put procedures in place to prevent such documentation issues in the future. On October 14th, the Company became a co-defendant in a class action lawsuit. The plaintiffs are eighteen former mortgage loan originators claiming that the Company did not compensate them appropriately for overtime in accordance with United States Department of Labor rules. The Company believes that these claims are without merit and intends to vigorously defend against them. In addition, the Company is exploring whether any financial implications are covered by the Company's insurance policies. At this time, the Company has no estimate of the financial implications of this suit. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of those safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, can generally be identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company is unable to predict the actual results of its future plans or strategies with certainty. Factors which could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, fluctuations in market rates of interest and loan and deposit pricing; a deterioration of general economic conditions or the demand for housing in the Company's market areas; a deterioration in the demand for mortgage financing; legislative or regulatory changes; adverse developments in the Company's loan or investment portfolio; any inability to obtain funding on favorable terms; the loss of key personnel; significant increases in competition; and the possible dilutive effect of potential acquisitions or expansions. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. GENERAL CRITICAL ACCOUNTING POLICIES Our critical accounting policies are largely proscribed by accounting principles generally accepted in the United States of America. After a review of our policies, we determined that accounting for the allowance for loan losses, income taxes, and stock-based compensation are deemed critical accounting policies because of the valuation techniques used, and the sensitivity of these financial statement amounts to the methods, as well as the assumptions and estimates underlying these balances. Accounting for these critical areas requires the most subjective and complex judgments that could be subject to revision as new information becomes available. There have not been any material changes in our critical accounting policies since December 31, 2003. Further description of our critical accounting policies can be found in our Annual Report on Form 10-K for the year ended December 31, 2003. RESULTS OF OPERATIONS Three months ended September 30, 2004 and 2003. Net income for the quarter ended September 30, 2004, was $533,000, compared to net income of $1.5 million for the quarter ended September 30, 2003, representing a decrease of $962,000, or 64.35%. Diluted earnings per share decreased 64.07% to $0.23 during the third quarter of 2003 from $0.64 in the same period of 2003. The Company's annualized return on average assets and average stockholders' equity for the three-month period ended September 30, 2004 were 0.32% and 5.16%, compared to 0.89% and 15.31%, respectively, for the same period in 2003, decreases of 64.05% and 66.30%, respectively. The principal contributing factors to our decrease in net income in the current year third quarter from the prior year were a decrease in non-interest income resulting from a decline in loans held 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for sale fee income and a decrease in net interest income resulting from lower levels of earnings assets as well as an increase in the average rate paid on total interest-bearing liabilities. The strong demand for residential mortgage loan originations, particularly refinancing, experienced by the Company since 2001 decelerated as mortgage interest rates rose during the second half of 2003. The effects of lower mortgage origination volume continued into the third quarter of 2004 and had an adverse impact on our net income. Nine months ended September 30, 2004 and 2003. Net income for the nine months ended September 30, 2004 was $1.9 million, compared to net income of $4.9 million for the nine-month period ended September 30, 2003, representing a decrease of $3.0 million, or 60.72%. Diluted earnings per share decreased 61.33% to $0.82 during the nine months ended September 30, 2004 from $2.12 in the same period of 2003. The Company's annualized returns on average assets and average stockholders' equity for the nine-month period ended September 30, 2004 were 0.40% and 6.27%, compared to 1.05% and 17.62%, respectively, for the same period in 2003, decreases of 61.91% and 64.42%, respectively. The principal contributing factors to our decrease in net income from the nine months ended September 30, 2003 to the current year were a decrease in non-interest income, specifically loans held for sale fee income, and a decrease in net interest income resulting from a change in the mix of earning assets. NET INTEREST INCOME Fully tax equivalent (FTE) net interest income for the three-month period ended September 30, 2004 was $4.3 million, a decrease of $312,000 or 6.75%, from $4.6 million for the three-month period ended September 30, 2003. FTE interest income for the current year third quarter was $8.1 million, a decrease of $99,000, or 1.22%, from $8.2 million in the prior year third quarter. This decrease was primarily a result of an overall decrease in average earning assets. Average earning asset volume decreased from the third quarter of 2003 to the current period by $25.8 million, or 4.08%. Partially offsetting the decrease in average earning assets was an increase in yield on interest-earning assets. The yield on average earning assets increased 15 basis points to 5.28% in the third quarter of 2004, compared to 5.13% in the prior year third quarter. The 15 basis point increase in yield resulted primarily from increases in market interest rates during the third quarter of 2004. Interest expense for the current year third quarter was $3.8 million, an increase of $214,000, or 6.04%, from $3.5 million in the prior year third quarter. This increase was primarily a result of an increase in the rate paid on average interest-bearing liabilities resulting from promotional rates offered on our time deposits. The rate paid on total average interest-bearing liabilities increased 17 basis points to 2.80% during the three-month period ended September 30, 2004 compared to 2.63% during the same period in 2003. Partially offsetting the effect of this increase in rate was a decline in the balance of average interest-bearing liabilities. Average interest-bearing liabilities decreased $3.0 million or 0.57% to $530.9 million during the third quarter of 2004 compared to $533.9 million during the prior year period. This decrease was primarily the result of lower short- and long-term debt average balances which were partially offset by an increase in interest-bearing deposit average balances. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FTE net interest income for the nine-month period ended September 30, 2004 was $12.6 million, a decrease of $1.0 million or 7.51%, from $13.7 million for the nine-month period ended September 30, 2003. FTE interest income for the nine months ended September 30, 2004 was $23.2 million, a decrease of $589,000, or 2.48%, from $23.8 million for the nine months ended September 30, 2003. This decrease primarily resulted from a change in the mix of earning assets. The yield on average earning assets declined 18 basis points to 5.28% for the first nine months of 2004, compared to 5.46% for the first nine months of 2003. The 18 basis point decrease in yield resulted primarily from decreases in market interest rates during 2003 and the impact of the low interest rates on new and repriced assets during 2003 and 2004. Partially offsetting the decrease in yield was an increase in average earning asset volume. Average earning asset volume increased from September 30, 2003 to the current period by $4.5 million, or 0.76%. Interest expense for the nine-month period ended September 30, 2004 was $10.5 million, an increase of $436,000, or 4.31%, from $10.1 million in the same period of the prior year. The increase is attributable to an increase in average interest-bearing liabilities. Average interest-bearing deposits increased by $41.2 million, or 11.29% from the prior year while other interest-bearing liabilities, comprised of short-term borrowings and long-term debt, decreased by $21.5 million or 16.43%. The rate paid on total average interest-bearing liabilities increased 1 basis point to 2.74% during the nine-month period ended September 30, 2004 compared to 2.73% during the same period in 2003. Average Balance Sheets. The following table sets forth, for the periods and as of the dates indicated, information regarding our average balances of assets and liabilities as well as the dollar amounts of FTE interest income from interest-earning assets and interest expense on interest-bearing liabilities and the resultant yields or costs. Ratio, yield and rate information are based on average daily balances where available; otherwise, average monthly balances have been used. Nonaccrual loans are included in the calculation of average balances for loans for the periods indicated. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AVERAGE BALANCES, YIELDS AND RATES
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------------- 2004 2003 ------------------------------- ----------------------------------- AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE --------- --------- ------- ----------- --------- ------- ASSETS Federal funds sold........................ $ 18,946 $ 140 0.99% $ 2,696 $ 19 0.94% Investment securities - taxable........... 73,826 1,459 2.64 51,262 1,102 2.87 Investment securities - non-taxable (1)... 10,112 525 6.94 13,246 680 6.86 Mortgage loans held for sale.............. 32,385 1,252 5.16 107,101 3,765 4.70 Loans, net of unearned discount and fees.. 451,698 19,807 5.86 408,194 18,206 5.96 --------- --------- ----------- --------- Total earning assets.................... 586,967 23,183 5.28 582,499 23,772 5.46 --------- --------- ----------- --------- Cash and due from banks - non-interest bearing................................... 21,467 19,050 Allowance for possible loan losses........ (7,367) (7,732) Premises and equipment, net............... 19,489 15,920 Other assets.............................. 17,346 11,599 --------- ----------- Total assets............................ $ 637,902 $ 621,336 ========= =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits-interest bearing: Interest-bearing demand accounts.......... $ 27,663 $ 115 0.56% $ 26,847 $ 131 0.65% Savings and money market deposits......... 181,201 2,138 1.58 145,288 1,561 1.44 Time deposits............................. 197,158 5,240 3.55 192,695 5,214 3.62 --------- --------- ----------- --------- Total interest-bearing deposits......... 406,022 7,493 2.47 364,830 6,906 2.53 --------- --------- ----------- --------- Short-term borrowings..................... 25,443 106 0.56 51,207 422 1.10 Long-term debt ........................... 83,778 2,951 4.71 79,472 2,786 4.69 --------- --------- ----------- --------- Total interest-bearing liabilities ..... 515,243 10,550 2.74 495,509 10,114 2.73 --------- --------- ----------- --------- Non-interest bearing deposits............. 76,662 83,642 Other liabilities ........................ 4,981 5,013 Stockholders' equity...................... 41,016 37,172 --------- ----------- Total liabilities and stockholders' equity ................................ $ 637,902 $ 621,336 ========= =========== Net interest income/spread ............... $ 12,633 2.54% $ 13,658 2.73% ========= ==== ========= ==== Net interest margin....................... 2.87% 3.13%
- ----------------- (1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%. For the nine months ending September 30, 2004 and 2003, the tax equivalency adjustment amounted to $179,000 and $231,000 respectively. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes. The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the increase or decrease related to changes in balances and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: - changes in volume, reflecting changes in volume multiplied by the prior period rate; and - changes in rate, reflecting changes in rate multiplied by the prior period volume. CHANGES IN INTEREST INCOME AND EXPENSE VOLUME AND RATE VARIANCES
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO 2003 ----------------------------------- CHANGE CHANGE DUE TO DUE TO TOTAL RATE VOLUME CHANGE ------- -------- -------- (DOLLARS IN THOUSANDS) Federal funds sold................................................ $ 1 $ 120 $ 121 Investment securities - taxable................................... (91) 448 357 Investment securities - non-taxable (1)........................... 8 (163) (155) Mortgage loans held for sale...................................... 372 (2,885) (2,513) Loans, net of unearned discount .................................. (327) 1,928 1,601 ------- -------- -------- Total interest income.................................. (37) (552) (589) ------- -------- -------- Interest-bearing demand accounts.................................. (19) 3 (16) Savings and money market deposits................................. 152 425 577 Time deposits..................................................... (121) 147 26 Short-term borrowings............................................. (209) (107) (316) Long-term debt.................................................... 12 153 165 ------- -------- -------- Total interest expense................................. (185) 621 436 ------- -------- -------- Net interest income............................................... $ 148 $ (1,173) $ (1,025) ======= ======== ========
- --------------- (1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PROVISION FOR LOAN LOSSES The provision for loan losses for the third quarter of 2004 was $400,000, compared to $150,000 for the same period of 2003. For the nine-months ended September 30, 2004 and 2003, the provision was $1.1 million and $1.4 million, respectively. The increase in the provision for loan losses recorded in the three-month period ended September 30, 2004 compared to the same period in the prior year was the result of growth in our loan portfolio. The decrease in the provision for loan losses recorded in the nine-month period ended September 30, 2004 compared to the same period in the prior year was the result of improvements in the overall credit exposure in the loan portfolio. The Company's credit administration function performs monthly analyses on the loan portfolio to assess and report on risk levels, delinquencies, an internal ranking system and overall credit exposure. Management and the Board of Directors reviews the allowance for loan losses monthly, considering such factors as current and projected economic conditions, loan growth, the composition of the loan portfolio, loan trends and classifications, and other factors. We make provisions for loan losses in amounts that management deems necessary to maintain the allowance for loan losses at an appropriate level. NON-INTEREST INCOME
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2004 2003 2004 2003 ------ ------ ------- -------- (IN THOUSANDS) Loans held for sale fee income................... $2,106 $5,974 $ 7,992 $ 16,979 NSF charges and service fees..................... 334 333 1,005 943 Other service charges............................ 295 224 838 688 Net realized gain on investment securities....... 391 - 524 - Other income .................................... 143 106 425 331 ------ ------ ------- -------- Total non-interest income.................. $3,269 $6,637 $10,784 $ 18,941 ====== ====== ======= ========
Non-interest income decreased $3.4 million, or 50.75%, to $3.3 million during the three-month period ended September 30, 2004, from $6.6 million during the three-month period ended September 30, 2003. Non-interest income for the nine-months ended September 30, 2004 was $10.8 million, a decrease of $8.2 million, or 43.07%, from $18.9 million for the nine-months ended September 30, 2003. These decreases are attributable primarily to decreases in loans held for sale fee income. Loans held for sale fee income decreased $3.9 million, or 64.75%, and $9.0 million, or 52.93%, for the three-month and nine-month periods ended September 30, 2004, respectively. During 2002 and the first half of 2003, we experienced significant growth in our loans held for sale fee income due to the expansion of our National and Local mortgage divisions concurrent with a relatively low interest rate environment. The low interest rate environment resulted in a surge of mortgage refinancing activity. However, during the second half of 2003 and early in the first half of 2004, mortgage interest rates increased causing a decline in the volume of mortgage origination activity, particularly refinancing volume. In addition, as discussed in Note 6 to the Consolidated Financial Statements, the Company recorded a $350,000 reduction in its Loans Held for Sale Fee Income to account for the anticipated refund of fee income on residential mortgage loans underwritten with documentation altered by a former employee of the Company. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During 2004, we took advantage of opportunities to mitigate the risk of longer-term rate volatility in our available-for-sale investment portfolio and sold approximately $20.7 million of available-for-sale investment securities and realized $524,000 in net gains on those sales. Included in this amount are $391,000 of gains realized during the third quarter of 2004 from sales of $14.7 million of available-for-sale securities. NON-INTEREST EXPENSE
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2004 2003 2004 2003 ------- ------- ------- ------- (IN THOUSANDS) Salaries and employee benefits............ $ 3,836 $ 6,092 $ 12,240 $16,169 Occupancy................................. 903 833 2,503 2,296 FDIC and other insurance expense.......... 59 59 180 178 General and administrative ............... 1,629 1,729 4,578 4,740 ------- ------- -------- ------- Total non-interest expense.......... $ 6,427 $ 8,713 $ 19,501 $23,383 ------- ------- -------- -------
Non-interest expense decreased to $6.4 million, or 26.24%, during the three-month period ended September 30, 2004 and to $19.5 million, or 16.61%, during the nine-month period ended September 30, 2004, from $8.7 million and $23.4 million in the prior year periods, respectively. These decreases are attributable primarily to a decrease in salaries and employee benefits expense which decreased $2.3 million, or 37.04%, during the third quarter of 2004 and $3.9 million, or 24.30%, during the nine-month period ended September 30, 2004, compared to the prior year periods. Salaries and employee benefits expense decreased primarily due to decreased volume-based incentive compensation in our mortgage operations. We had 273 full-time equivalent employees at September 30, 2004 compared to 288 at September 30, 2003. FINANCIAL CONDITION Total assets for the Company at September 30, 2004, were $669.9 million, an increase of $42.8 million, or 6.82%, compared to $627.1 million at December 31, 2003. Deposits and stockholders' equity at September 30, 2004, were $530.7 million and $42.0 million, respectively, compared with $470.5 million and $40.2 million, respectively, at December 31, 2003, increases of $60.2 million, or 12.79%, and $1.8 million, or 4.55%, respectively. Loans at September 30, 2004 totaled $477.8 million, reflecting an increase of $53.1 million, or 12.51%, compared to December 31, 2003. The loan to deposit ratio at September 30, 2004 was 90.02% compared to 90.25% at December 31, 2003. Mortgage loans held for sale at September 30, 2004 totaled $27.7 million, an increase of $9.4 million, or 51.24% compared to December 31, 2003. The Company's principal funding source for mortgage loans held for sale is deposits and advances from the Federal Home Loan Bank. Advance availability with the Federal Home Loan Bank is determined quarterly and at September 30, 2004, approximately $36.2 million was available. The Company's Federal Home Loan Bank advance availability fluctuates depending on levels of available collateral, which includes mortgage loans held for sale. 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Non-performing assets consist primarily of loans past due 90 days or more, nonaccrual loans and foreclosed real estate. The following table sets forth our non-performing assets as of the dates indicated: NON-PERFORMING ASSETS
AS OF --------------------------------------- SEPTEMBER 30, DECEMBER 31, 2004 2003 2003 --------- ------ ------------ (Dollars in thousands) REAL ESTATE LOANS: Past due 90 days or more $ -- $1,538 $ 337 Nonaccrual 476 -- 1,991 INSTALLMENT LOANS: Past due 90 days or more -- 1 4 Nonaccrual -- -- -- CREDIT CARDS AND RELATED PLANS: Past due 90 days or more -- 4 39 Nonaccrual -- -- -- COMMERCIAL (TIME AND DEMAND) AND ALL OTHER LOANS: Past due 90 days or more 583 788 117 Nonaccrual 1,860 1,440 318 LEASE FINANCING RECEIVABLES: Past due 90 days or more 1 27 -- Nonaccrual 310 141 249 DEBT SECURITIES AND OTHER ASSETS (EXCLUDE OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS): Past due 90 days or more -- -- -- Nonaccrual -- -- -- ------ ------ ------ Total non-performing loans 3,230 3,939 3,055 FORECLOSED ASSETS HELD FOR SALE 2,459 652 416 ------ ------ ------ Total non-performing assets $5,689 $4,591 $3,471 ====== ====== ====== Total nonperforming loans to total loans 0.68% 0.95% 0.72% Total nonperforming loans to total assets 0.48% 0.63% 0.50% Allowance for loan losses to nonperforming loans 235.45% 192.87% 230.79% Nonperforming assets to loans and foreclosed assets held for sale 1.18% 1.11% 0.82%
As of September 30, 2004, non-performing loans equaled 0.68% of total loans, reflecting a decrease in non-performing loans from December 31, 2003. The overall credit exposure in the Company's total loan portfolio continued to improve; consequently, the Company recorded a lower provision for loan losses during the nine month period ending September 30, 2004 compared to the nine month period ending September 30, 2003 The level of loans charged-off decreased during the third quarter of 2004, as evidenced by the decrease in our ratio of net charge-offs to average loans, to 0.14% for the period ending September 30, 2004 compared to 0.30% for the period ending December 31, 2003. We closely monitor non-performing credit relationships and our philosophy has been to value non-performing loans at their estimated collectible value and to aggressively manage these situations. Generally, the Company maintains its allowance for loan losses in excess 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS of its non-performing loans. As of September 30, 2004, our ratio of allowance for loan losses to non-performing loans was 235.45%. At September 30, 2004, the $2.5 million balance of foreclosed assets held for sale represents one property acquired during the third quarter of 2004. The following table sets forth information regarding changes in our allowance for loan and valuation losses for the periods indicated. SUMMARY OF LOAN LOSS EXPERIENCE AND RELATED INFORMATION
AS OF AND FOR THE --------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED ---------------------- DECEMBER 31, 2004 2003 2003 -------- -------- -------- (Dollars in thousands) BALANCE AT BEGINNING OF PERIOD $ 7,051 $ 6,914 $ 6,914 LOANS CHARGED-OFF Commercial real estate -- 392 395 Residential real estate 18 -- -- Commercial 445 260 802 Personal 73 64 68 Home Equity -- 10 10 Construction -- 3 -- Leases 215 202 279 -------- -------- -------- Total loans charged-off 751 931 1,554 -------- -------- -------- RECOVERIES: Commercial real estate 7 5 10 Residential real estate 48 2 -- Commercial 26 72 77 Personal 35 32 35 Home Equity -- -- -- Construction -- 3 -- Leases 139 150 219 -------- -------- -------- Total recoveries 255 264 341 -------- -------- -------- NET LOANS CHARGED-OFF 496 667 1,213 PROVISION FOR LOAN LOSSES 1,050 1,350 1,350 -------- -------- -------- BALANCE AT END OF PERIOD $ 7,605 $ 7,597 $ 7,051 ======== ======== ======== LOANS OUTSTANDING: Average $451,698 $408,194 $410,593 End of period 477,760 413,724 424,620 RATIO OF ALLOWANCE FOR LOAN LOSSES TO LOANS OUTSTANDING: Average 1.68% 1.86% 1.72% End of period 1.59% 1.84% 1.66% RATIO OF ANNUALIZED NET CHARGE-OFFS TO Average loans 0.15% 0.21% 0.30% End of period loans 0.14% 0.22% 0.29%
22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The allowance for loan losses as a percent of total loans decreased to 1.59% as of September 30, 2004, compared to 1.66% at December 31, 2003. As of September 30, 2004, net charge-offs equaled 0.14% of average total loans on an annualized basis. Liquidity is measured by a financial institution's ability to raise funds through deposits, borrowed funds, capital, or the sale of marketable assets, such as residential mortgage loans or a portfolio of SBA loans. Other sources of liquidity, including cash flow from the repayment of loans, are also considered in determining whether liquidity is satisfactory. Liquidity is also achieved through growth of core deposits and liquid assets, and accessibility to the money and capital markets. The funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans and operate the organization. Core deposits, defined as demand deposits, interest-bearing transaction accounts, savings deposits and time deposits less than $100,000 (excluding brokered deposits), were 81.88% and 82.54% of our total deposits at September 30, 2004, and December 31, 2003, respectively. Generally, the Company's funding strategy is to utilize Federal Home Loan Bank borrowings to fund originations of mortgage loans held for sale and fund balances generated by other lines of business with deposits. In addition, the Company uses other forms of short-term borrowings for cash management and liquidity management purposes on a limited basis. These forms of borrowings include federal funds purchased and revolving lines of credit. The Company's Asset-Liability Management Committee utilizes a variety of liquidity monitoring tools, including an asset/liability modeling service, to analyze and manage the Company's liquidity. Management has established internal guidelines and analytical tools to measure liquid assets, alternative sources of liquidity, as well as relevant ratios concerning asset levels and purchased funds. These indicators are reported to the board of directors monthly, and at September 30, 2004, the Bank was within the established guidelines. At September 30, 2004, our total stockholders' equity was $42.0 million and our equity to asset ratio was 6.27%. At September 30, 2004, our Tier 1 capital ratio was 9.45% compared to 10.04% at December 31, 2003, while our total risk-based capital ratio was 11.66% compared to 12.41% at December 31, 2003. As of September 30, 2004, we had capital in excess of the requirements for a "well-capitalized" institution. SUBSEQUENT EVENTS See Note 6 to the Consolidated Financial Statements. 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a continuing part of our financial strategy, we attempt to manage the impact of fluctuations in market interest rates on our net interest income. This effort entails providing a reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield. Our funds management policy is established by our Bank Board of Directors and monitored by our Asset/Liability Management Committee. Our funds management policy sets standards within which we are expected to operate. These standards include guidelines for exposure to interest rate fluctuations, liquidity, loan limits as a percentage of funding sources, exposure to correspondent banks and brokers, and reliance on non-core deposits. Our funds management policy also establishes the reporting requirements to our Bank Board of Directors. Our investment policy complements our funds management policy by establishing criteria by which we may purchase securities. These criteria include approved types of securities, brokerage sources, terms of investment, quality standards, and diversification. We use an asset/liability modeling service to analyze the Company's current sensitivity to instantaneous and permanent changes in interest rates. The system simulates the Company's asset and liability base and projects future net interest income results under several interest rate assumptions. This allows management to view how changes in interest rates will affect the spread between the yield received on assets and the cost of deposits and borrowed funds. The asset/liability modeling service is also used to analyze the net economic value of equity at risk under instantaneous shifts in interest rates. The "net economic value of equity at risk" is defined as the market value of assets less the market value of liabilities plus/minus the market value of any off-balance sheet positions. By effectively looking at the present value of all future cash flows on or off the balance sheet, the net economic value of equity modeling takes a longer-term view of interest rate risk. We strive to maintain a position such that current changes in interest rates will not affect net interest income or the economic value of equity by more than 5%, per 50 basis points. The following table sets forth the estimated percentage change in the Bank of Blue Valley's net interest income over the next twelve month period and net economic value of equity at risk at September 30, 2004 based on the indicated instantaneous and permanent changes in interest rates.
NET INTEREST NET ECONOMIC INCOME VALUE OF CHANGES IN INTEREST RATES (NEXT 12 MONTHS) EQUITY AT RISK - ------------------------- ---------------- -------------- 300 basis point rise 23.96% 5.72% 200 basis point rise 16.11% 4.00% 100 basis point rise 8.27% 2.13% Base Rate Scenario - - 25 basis point decline (4.18%) 0.00% 50 basis point decline (8.92%) (0.04%) 75 basis point decline (13.39%) (0.06%)
24 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The above table indicates that, at September 30, 2004, in the event of a sudden and sustained increase in prevailing market rates, our net interest income would be expected to increase as our assets would be expected to reprice quicker than our liabilities, while a decrease in rates would indicate just the opposite. Generally, in the decreasing rate scenarios, not only would adjustable rate assets (loans) reprice to lower rates faster than our liabilities, but our liabilities - long-term Federal Home Loan Bank of Topeka (FHLB) advances and existing time deposits - would not decrease in rate as much as market rates. In addition, fixed rate loans might experience an increase in prepayments, further decreasing yields on earning assets and causing net interest income to decrease. Another consideration with a rising interest rate scenario is the impact on mortgage loan refinancing, which would likely decline, leading to lower loans held for sale fee income, though the impact is difficult to quantify or project. The above table also indicates that, at September 30, 2004, in the event of a sudden decrease in prevailing market rates, the economic value of our equity would decrease. Given our current asset/liability position, a 25, 50 or 75 basis point decline in interest rates will result in a lower or unchanged economic value of our equity as the change in estimated loss on liabilities exceeds the change in estimated gain on assets in these interest rate scenarios. Currently, under a falling rate environment, the Company's estimated market value of loans could increase as a result of fixed rate loans, net of possible prepayments. The estimated market value of investment securities could also rise as our portfolio contains higher yielding securities. However, the estimated market value increase in fixed rate loans and investment securities is offset by time deposits unable to reprice to lower rates immediately and fixed-rate callable advances from FHLB. The likelihood of advances being called in a decreasing rate environment is diminished resulting in the advances existing until final maturity, which has the effect of lowering the economic value of equity. 25 ITEM 4. CONTROLS AND PROCEDURES In accordance with Item 307 of Regulation S-K promulgated under the Securities Act of 1933, as amended, and within 90 days of the date of this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Financial Officer of the Company (the "Certifying Officers") have conducted evaluations of the Company's disclosure controls and procedures. As defined under Sections 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the term "disclosure controls and procedures" means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Certifying Officers have reviewed the Company's disclosure controls and procedures and have concluded that those disclosure controls and procedures are effective as of the date of this Quarterly Report on Form 10-Q. In compliance with Section 302 of the Sarbanes-Oxley Act of 2002, (18 U.S.C. 1350), each of the Certifying Officers executed an Officer's Certification included in this Quarterly Report on 10-Q. As of the date of this Quarterly Report on Form 10-Q, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 26 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS (F) EXHIBITS 11. Computation of Earnings Per Share. Please see p. 9. 15. Letter regarding Unaudited Interim Financial Information 31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) 31.2 Certification of the Treasurer pursuant to Rule 13a-14(a)/15d-14(a) 32.1 Certification of the Chief Executive Officer and Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BLUE VALLEY BAN CORP Date: November 15, 2004 By: /s/ Robert D. Regnier --------------------------------- Robert D. Regnier, President and Chief Executive Officer Date: November 15, 2004 By: /s/ Mark A. Fortino --------------------------------- Mark A. Fortino, Treasurer 28 EX-15 2 c89771exv15.txt LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION EXHIBIT 15 LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 We are aware that our report dated October 28, 2004 on our review of the interim financial information of Blue Valley Ban Corp for the periods ended September 30, 2004 and 2003 and included in the Company's quarterly report on Form 10-Q for the quarter then ended, is incorporated by reference in Registration Statement 333-46022. Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not be considered part of the registration statement prepared or certified by us within the meaning of Sections 7 and 11 of that Act. /s/ BKD, LLP Kansas City, Missouri October 28, 2004 EX-31.1 3 c89771exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER I, Robert D. Regnier, certify that: 1. I have reviewed this annual report on Form 10-Q of Blue Valley Ban Corp (the "Company"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. November 15th, 2004 /s/ Robert D. Regnier --------------------- Robert D. Regnier, President and Chief Executive Officer EX-31.2 4 c89771exv31w2.txt CERTIFICATION OF THE TREASURER EXHIBIT 31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER I, Mark A. Fortino, certify that: 1. I have reviewed this annual report on Form 10-Q of Blue Valley Ban Corp (the "Company"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. November 15th, 2004 /s/ Mark A. Fortino ------------------- Mark A. Fortino, Treasurer (Chief Financial Officer) EX-32.1 5 c89771exv32w1.txt CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Blue Valley Ban Corp (the "Company") on Form 10-Q for the period ended September 30, 2004, as filed with the United States Securities and Exchange Commission on the date hereof (the "Report"), we certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. November 15th, 2004 /s/ Robert D. Regnier --------------------- Robert D. Regnier, President and Chief Executive Officer /s/ Mark A. Fortino ------------------- Mark A. Fortino, Treasurer (Chief Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----