10-Q 1 c97700e10vq.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 JUNE 30, 2005 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 incorporation (I.R.S. Employer 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 Trust Preferred American Stock Exchange Securities, $8.00 par value, of BVBC Capital Trust I
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by checkmark whether the registrant is an accelerated filer. Yes [ ] No [X] As of June 30, 2005 the registrant had 2,346,371 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 - June 30, 2005 (unaudited) and December 31, 2004....... 4 Consolidated Statements of Income (unaudited) - three months and six months ended June 30, 2005 and 2004......................... 6 Consolidated Statements of Stockholders' Equity (unaudited) - six months ended June 30, 2005 and 2004.......................................... 7 Consolidated Statements of Cash Flows (unaudited) - six months ended June 30, 2005 and 2004.......................................... 8 Notes to Consolidated Financial Statements (unaudited) - six months ended June 30, 2005 and 2004.......................................... 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........................................................................ 28
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors Blue Valley Ban Corp Overland Park, Kansas 66225 We have reviewed the accompanying consolidated balance sheet of Blue Valley Ban Corp as of June 30, 2005, and the related consolidated statements of income, stockholders' equity and cash flows for the three-month and six-month periods ended June 30, 2005 and 2004. 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, 2004 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 18, 2005 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, 2004 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 August 3, 2005 3 BLUE VALLEY BAN CORP CONSOLIDATED BALANCE SHEETS JUNE 30, 2005 AND DECEMBER 31, 2004 (dollars in thousands, except share data) ASSETS
JUNE 30, DECEMBER 31, 2005 2004 -------- ------------ (Unaudited) Cash and due from banks $ 19,793 $ 19,994 Federal funds sold 14,500 2,500 ---------- ---------- Cash and cash equivalents 34,293 22,494 Available-for-sale securities 76,498 66,350 Mortgage loans held for sale 39,877 44,144 Loans, net of allowance for loan losses of $6,893 and $7,333 in 2005 and 2004, respectively 505,243 499,837 Premises and equipment, net 19,249 19,988 Foreclosed assets held for sale, net 83 2,645 Interest receivable 2,719 2,375 Deferred income taxes 2,440 2,383 Prepaid expenses and other assets 4,360 3,538 Federal Home Loan Bank stock, Federal Reserve Bank stock and other securities 8,196 7,987 Core deposit intangible asset, at amortized cost 900 976 ---------- ---------- Total assets $ 693,858 $ 672,717 ========== ==========
See Accompanying Notes to Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. 4 BLUE VALLEY BAN CORP CONSOLIDATED BALANCE SHEETS JUNE 30, 2005 AND DECEMBER 31, 2004 (dollars in thousands, except share data) LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, DECEMBER 31, 2005 2004 ---------- ------------ (Unaudited) LIABILITIES Deposits Demand $ 94,824 $ 84,764 Savings, NOW and money market 203,915 220,104 Time 238,524 217,778 ---------- ---------- Total deposits 537,263 522,646 Other interest-bearing liabilities 25,749 22,381 Long-term debt 79,641 80,088 Interest payable and other liabilities 7,862 6,218 ---------- ---------- Total liabilities 650,515 631,333 ---------- ---------- STOCKHOLDERS' EQUITY Capital stock Common stock, par value $1 per share; authorized 15,000,000 shares; issued and outstanding 2005 - 2,346,371 shares; 2004 - 2,327,086 shares 2,346 2,327 Additional paid-in capital 8,330 8,099 Retained earnings 33,408 31,809 Unearned compensation (454) (594) Accumulated other comprehensive income Unrealized depreciation on available-for-sale securities, net of income tax credits of $(191) in 2005 and $(171) in 2004 (287) (257) ---------- ---------- Total stockholders' equity 43,343 41,384 ---------- ---------- Total liabilities and stockholders' equity $ 693,858 $ 672,717 ========== ==========
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 SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (dollars in thousands, except share data)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2005 2004 2005 2004 ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) INTEREST INCOME Interest and fees on loans $ 9,104 $ 6,869 $ 17,821 $ 13,714 Federal funds sold 159 49 181 92 Available-for-sale securities 448 526 863 1,181 ----------- ----------- ----------- ----------- Total interest income 9,711 7,444 18,865 14,987 ----------- ----------- ----------- ----------- INTEREST EXPENSE Interest-bearing demand deposits 23 43 56 72 Savings and money market deposit accounts 982 714 1,879 1,363 Other time deposits 2,284 1,629 4,349 3,310 Federal funds purchased and other interest-bearing liabilities 126 35 217 65 Short-term debt - - 17 - Long-term debt 1,074 987 2,131 1,987 ----------- ----------- ----------- ----------- Total interest expense 4,489 3,408 8,649 6,797 ----------- ----------- ----------- ----------- NET INTEREST INCOME 5,222 4,036 10,216 8,190 PROVISION FOR LOAN LOSSES - 300 155 650 ----------- ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,222 3,736 10,061 7,540 ----------- ----------- ----------- ----------- NONINTEREST INCOME Loans held for sale fee income 1,858 3,390 3,899 5,886 Service fees 557 649 1,051 1,214 Realized gain (loss) on available-for-sale securities - (82) - 133 Other income 254 146 526 282 ----------- ----------- ----------- ----------- Total noninterest income 2,669 4,103 5,476 7,515 ----------- ----------- ----------- ----------- NONINTEREST EXPENSE Salaries and employee benefits 4,095 4,505 8,042 8,404 Net occupancy expense 809 833 1,629 1,600 Other operating expense 1,690 1,573 3,284 3,070 ----------- ----------- ----------- ----------- Total noninterest expense 6,594 6,911 12,955 13,074 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 1,297 928 2,582 1,981 PROVISION FOR INCOME TAXES 494 247 983 590 ----------- ----------- ----------- ----------- NET INCOME $ 803 $ 681 $ 1,599 $ 1,391 =========== =========== =========== =========== BASIC EARNINGS PER SHARE $ 0.34 $ 0.30 $ 0.68 $ 0.61 =========== =========== =========== =========== DILUTED EARNINGS PER SHARE $ 0.34 $ 0.29 $ 0.67 $ 0.59 =========== =========== =========== ===========
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 SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (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, 2003 $ 2,279 $ 7,404 $ 30,344 $ (399) $ 570 $ 40,198 Issuance of 26,950 shares of common stock 27 341 -- -- -- 368 Net income $ 1,391 -- -- 1,391 -- -- 1,391 Restricted stock earned -- -- -- 70 -- 70 Change in unrealized appre- ciation on available-for- sale securities, net of income tax credit of $(426) (639) -- -- -- -- (639) (639) ------------- --------- ---------- -------- ------------ ------------- -------- $ 752 ============= BALANCE, JUNE 30, 2004 $ 2,306 $ 7,745 $ 31,735 $ (329) $ (69) $ 41,388 ========= ========== ======== ============ ============= ======== BALANCE, DECEMBER 31, 2004 $ 2,327 $ 8,099 $ 31,809 $ (594) $ (257) $ 41,384 --------- ---------- -------- ------------ ------------- -------- Issuance of 19,285 shares of common stock 19 231 -- -- -- 250 Net income $ 1,599 -- -- 1,599 -- -- 1,599 Restricted stock earned -- -- -- 140 -- 140 Change in unrealized appre- ciation on available-for- sale securities, net of income tax credit of $(20) (30) -- -- -- -- (30) (30) ------------- --------- ---------- -------- ------------ ------------- -------- $ 1,569 ============= BALANCE, JUNE 30, 2005 $ 2,346 $ 8,330 $ 33,408 $ (454) $ (287) $ 43,343 ========= ========== ======== ============ ============= ========
JUNE 30, 2005 JUNE 30, 2004 ------------- ------------- RECLASSIFICATION DISCLOSURE Unrealized depreciation on available-for-sale securities, net of income taxes credits of $(20) and $(373) for the periods ended June 30, 2005 and 2004, respectively $ (30) $ (559) Less: reclassification adjustments for appreciation included in net income, net of income taxes of $0 and $53 for the periods ended June 30, 2005 and 2004, respectively - 80 ------------- ------------ Change in unrealized depreciation on available-for-sale securities, net of income tax credits of $(20) and $(426) for the periods ended June 30, 2005 and 2004, respectively $ (30) $ (639) ============= ============
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 SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (dollars in thousands, except share data)
JUNE 30, 2005 JUNE 30, 2004 ------------- ------------- (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,599 $ 1,391 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation and amortization 947 882 Amortization (accretion) of premiums and discounts on securities (17) (10) Provision for loan losses 155 650 Deferred income taxes (37) - Net realized gain on available-for-sale securities - (133) Net loss on sale of foreclosed assets 8 62 Net loss (gain) on sale of premises and equipment (2) 5 Restricted stock earned 140 70 Originations of loans held for sale (338,827) (499,863) Proceeds from the sale of loans held for sale 343,094 490,771 Changes in Interest receivable (344) 23 Prepaid expenses and other assets (994) (401) Interest payable and other liabilities 1,687 1,031 ------------- ------------- Net cash provided by (used in) operating activities 7,409 (5,522) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Net originations of loans (12,003) (34,930) Proceeds from sales of loan participations 6,400 3,053 Purchase of premises and equipment (360) (2,527) Proceeds from the sale of premises and equipment 402 - Proceeds from the sale of foreclosed assets 2,596 364 Proceeds from sales of available-for-sale securities - 6,210 Proceeds from maturities of available-for-sale securities 5,815 37,047 Purchases of available-for-sale securities (15,996) (21,977) 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 (209) (117) ------------- ------------- Net cash used in investing activities (13,355) (12,782) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Net (decrease) increase in demand deposits, money market, NOW and savings accounts (6,129) 27,339 Net increase (decrease) in time deposits 20,746 (18,843) Repayments of long-term debt (4,878) (1,494) Proceeds from long-term debt 4,388 - Proceeds from sale of common stock 250 368 Net increase in other borrowings 3,368 1,057 ------------- ------------- Net cash provided by financing activities 17,745 8,427 ------------- ------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,799 (9,877) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,494 50,717 ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 34,293 $ 40,840 ============= =============
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 SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (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 June 30, 2005, and the consolidated results of its operations, changes in stockholders' equity and cash flows for the periods ended June 30, 2005 and 2004, 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, 2004 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 June 30, 2005, the Company issued no stock options; consequently, reported and pro forma net income were identical. The report of BKD, LLP commenting upon their review accompanies the consolidated financial statements included in Item 1 of Part I. NOTE 2: EARNINGS PER SHARE Basic earnings per share is computed based on the weighted average number of shares outstanding during each year. Diluted earnings per share is computed using the weighted average common shares and all potential dilutive common shares outstanding during the period. The computation of per share earnings for the three and six-months ended June 30, 2005 and 2004 is as follows: 9 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, 2005 2004 2005 2004 ------------- ------------- ------------ --------------- (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 $ 803 $ 681 $ 1,599 $ 1,391 Add: Total stock-based employee compensation recognized in net income, net of income taxes of $25 and $49 for the three- and six-month periods ended June 30, 2005, respectively, and $13 and $26 for the three- and six-month periods ended June 30, 2004, respectively 37 20 74 39 Less: Total stock-based compensation cost determined under the fair value based method, net of income tax credit of $(25) and $(49) for the three- and six-month periods ended June 30, 2005, respectively and of $(13) and $(26) for the three- and six-month periods ended June 30, 2004, respectively (37) (20) (74) (39) ------------- ------------- ------------ --------------- Pro forma net income $ 803 $ 681 $ 1,599 $ 1,391 ============= ============= ============ =============== Average common shares outstanding 2,340,014 2,300,818 2,335,804 2,292,697 Average common share stock options outstanding 42,629 55,211 41,255 61,580 ------------- ------------- ------------ --------------- Average diluted common shares 2,382,643 2,356,029 2,377,059 2,354,277 ============= ============= ============ =============== Basic earnings per share $ 0.34 $ 0.30 $ 0.68 $ 0.61 ============= ============= ============ =============== Diluted earnings per share $ 0.34 $ 0.29 $ 0.67 $ 0.59 ============= ============= ============ ===============
10 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED) NOTE 3: LONG-TERM DEBT Long-term debt at June 30, 2005 and December 31, 2004, consisted of the following components:
JUNE 30, DECEMBER 31, 2005 2004 ----------- ------------ (Unaudited) (in thousands) Note Payable - Blue Valley Ban Corp (A) $ 4,281 $ 4,500 Note Payable - Blue Valley Building Corp. (B) 7,272 7,500 Federal Home Loan Bank advances (C) 48,500 48,500 Subordinated Debentures - BVBC Capital Trust I (D) 11,856 11,856 Subordinated Debentures - BVBC Capital Trust II (E) 7,732 7,732 --------- ---------- Total long-term debt $ 79,641 $ 80,088 ========= ==========
(A) Due in 2012, payable in quarterly installments of principal plus interest at the Federal Funds Rate plus 1.63%; collateralized by common stock of the Company's subsidiary bank. The interest rate on this note has been fixed at 5.45% by the use of a swap agreement (see Note 4). (B) Two notes due in 2017; payable in monthly installments totaling $70,084 including interest at 5.19%; collateralized by land, buildings, and assignment of future rents. This debt is guaranteed by the Company. (C) Due in 2008, 2009, 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%. Federal Home Loan Bank advance availability is determined quarterly and at June 30, 2005, approximately $34,412,000 was available. (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. The Company may prepay the subordinated debentures beginning in 2005, in whole or in part, at their face value plus accrued interest. (See Note 7) (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. The Company may prepay the subordinated debentures beginning in 2008, in whole or in part, at their face value plus accrued interest. 11 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED) Aggregate annual maturities of long-term debt at June 30, 2005 are as follows:
(in thousands) July 1 to December 31, 2005 $ 495 2006 1,085 2007 1,111 2008 11,138 2009 7,167 Thereafter 58,645 --------- $ 79,641 =========
NOTE 4: 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 3). 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 June 30, 2005. Under the cash flow hedging method, the effective portion of the gain or loss related to the derivative, if any, is recognized as a component of other comprehensive income. The ineffective portion, if any, is recognized in current earnings. NOTE 5: LEGAL PROCEEDINGS On October 13th, 2004, we became a defendant in a lawsuit filed in the United States District Court, Kansas District by one current mortgage loan originator and twenty three former mortgage loan originators. The plaintiffs are claiming that the Bank did not compensate them appropriately for overtime hours worked in accordance with the Fair Labor Standards Act. While the plaintiffs' claims total $5.6 million, we believe the Company has meritorious defenses to the claims made and we intend to vigorously defend against these claims. In fourth quarter of 2004, the Company recorded a $550,000 liability for the estimated potential cost of this litigation. We currently do not anticipate any significant additional financial impact from this litigation. Other than this claim, there are no other pending legal proceedings that are likely to have a material adverse effect on our consolidated financial condition, results of operations or cash flows. 12 BLUE VALLEY BAN CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED) NOTE 6: NEW ACCOUNTING STANDARDS In December 2004, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), Share Based Payment, which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, and focuses primarily on accounting for transactions in which an entity obtains employee services. The SFAS requires a public entity to measure the cost of employee services received in exchange for its equity instruments based on the fair value at the grant date (with limited exceptions) and recognize that cost over the service period. SFAS 123 (revised 2004) revises SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." The provisions of SFAS 123 (revised 2004) will be effective for the Company beginning January 1, 2006. The Company does not believe that the adoption of SFAS 123 (revised 2004) will have a material impact on the consolidated financial statements. NOTE 7: SUBSEQUENT EVENTS On July 29, 2005, the Company completed the private placement of $11.5 million in trust preferred securities through a newly formed and wholly-owned trust subsidiary, BVBC Capital Trust III. The proceeds of the debt securities issued by the trust will be used on September 30, 2005 to redeem, in whole, the Company's Junior Subordinated Debentures issued by BVBC Capital Trust I on July 21, 2000. The $11.5 million in trust preferred securities bears interest at a variable rate which will reset quarterly at the three-month LIBOR rate plus 1.60%. Interest on the trust preferred securities is payable quarterly in arrears, but may be deferred from time to time at the election of the Company for up to 20 consecutive quarters. The trust preferred securities mature on September 30, 2035, but are redeemable by the Company at par commencing on September 30, 2010. 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, 2004. Further description of our critical accounting policies can be found in our Annual Report on Form 10-K for the year ended December 31, 2004. RESULTS OF OPERATIONS Three months ended June 30, 2005 and 2004. Net income for the quarter ended June 30, 2005, was $803,000, compared to net income of $681,000 for the quarter ended June 30, 2004, representing an increase of $122,000, or 17.91%. Diluted earnings per share increased 17.24% to $0.34 during the second quarter of 2005 from $0.29 in the same period of 2004. The Company's annualized returns on average assets and average stockholders' equity for the three-month period ended June 30, 2005 were 0.46% and 7.53%, compared to 0.43% and 6.64%, respectively, for the same period in 2004, increases of 6.97% and 13.40%, respectively. The principal contributing factor to our increase in net income in the current year second quarter from the prior year was an increase in net interest income resulting from a higher level of average 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS earning assets and higher yields on those assets. However, the increase in net interest income was partially offset by lower noninterest income, primarily mortgage loans held for sale fee income. Lower mortgage origination volume, resulting from higher interest rates, led to a decline in mortgage loans held for sale fee income. Six months ended June 30, 2005 and 2004. Net income for the six months ended June 30, 2005 was $1.6 million, compared to net income of $1.4 million for the six-month period ended June 30, 2004, representing an increase of $208,000, or 14.95%. Diluted earnings per share increased 13.55% to $0.67 during the six months ended June 30, 2005 from $0.59 in the same period of 2004. The Company's annualized returns on average assets and average stockholders' equity for the six-month period ended June 30, 2005 were 0.47% and 7.61%, compared to 0.45% and 6.85%, respectively, for the same period in 2004, increases of 4.44% and 11.09%, respectively. The principal contributing factor to our increase in net income from the six months ended June 30, 2004 to the current year was an increase in net interest income resulting from a higher level of average earning assets and higher yields on those assets. However, the increase in net interest income was partially offset by lower noninterest income, primarily mortgage loans held for sale fee income. Lower mortgage origination volume, resulting from higher interest rates, led to a decline in mortgage loans held for sale fee income. Our effective tax rate for the period ending June 30, 2005 is higher compared to the rate for the period ending June 30, 2004 because of tax reserves utilized during 2004. NET INTEREST INCOME Fully tax equivalent (FTE) net interest income for the three-month period ended June 30, 2005 was $5.2 million, an increase of $1.1 million or 27.58%, from $4.1 million for the three-month period ended June 30, 2004. FTE interest income for the current year second quarter was $9.7 million, an increase of $2.2 million, or 29.46%, from $7.5 million in the prior year second quarter. This increase was primarily a result of an overall increase in yields on earning assets. The overall yield on average earning assets increased by 95 basis points to 6.09% in the second quarter of 2005 compared to 5.14% in the prior year second quarter. The 95 basis point increase in yield resulted primarily from increases in market interest rates beginning in the second half of 2004. In addition, FTE interest income also increased due to an increase in average earning assets, particularly loans. Average earning asset volume increased from the second quarter of 2004 to the current period by $54.1 million, or 9.23%. Interest expense for the current year second quarter was $4.5 million, an increase of $1.1 million, or 31.71%, from $3.4 million in the prior year second 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 as well as the impact of rising market interest rates on our savings and money market deposits and short- and long-term borrowings. The rate paid on total average interest-bearing liabilities increased 58 basis points to 3.25% during the three month period ending June 30, 2005 compared to 2.67% during the same period in 2004. In addition, average interest-bearing liabilities increased $42.4 million or 8.28% to $553.7 million during the second quarter of 2005 compared to $511.4 million during the prior year period. This increase was primarily the result of higher 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 six-month period ended June 30, 2005 was $10.2 million, an increase of $1.9 million or 23.04%, from $8.3 million for the six-month period ended June 30, 2004. FTE interest income for the six months ended June 30, 2005 was $18.9 million, an increase of $3.8 million, or 24.93%, from $15.1 million for the six months ended June 30, 2004. This increase was primarily a result of an overall increase in average earning assets, particularly loans. Average earning asset volume increased from the period ending June 30, 2004 to the current period by $54.6 million, or 9.44%. In addition, the overall yield on average earning assets increased by 78 basis points to 6.03% for the period ending June 30, 2005 compared to 5.25% for the prior year period. The 78 basis point increase in yield resulted primarily from increases in market interest rates beginning in the second half of 2004. Interest expense for the six-month period ended June 30, 2005 was $8.6 million, an increase of $1.9 million, or 27.24%, from $6.8 million in the same period of the prior year. The increase is attributable to an increase in average interest-bearing liabilities and rates paid thereon. Average interest-bearing liabilities increased by $38.8 million, or 7.65% from the prior year period. The rates paid on average interest-bearing liabilities during the first six months of 2005 increased compared to the same period in 2004 due to an overall increase in market interest rates and promotional rates offered on our time deposits. The rate paid on total average interest-bearing liabilities increased 50 basis points to 3.19% during the six-month period ended June 30, 2005 compared to 2.69% during the same period in 2004. 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
SIX MONTHS ENDED JUNE 30, -------------------------------------------------------------- 2005 2004 ----------------------------- ------------------------------ AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE --------- -------- ------- --------- -------- ------- ASSETS Federal funds sold ................................. $ 12,928 $ 181 2.82% $ 20,865 $ 92 0.88% Investment securities - taxable .................... 62,928 823 2.64 72,093 931 2.59 Investment securities - non-taxable (1) ............ 1,728 60 6.96 10,978 379 6.92 Mortgage loans held for sale ....................... 37,116 980 5.33 31,554 786 5.00 Loans, net of unearned discount and fees ........... 517,201 16,841 6.57 441,858 12,928 5.87 --------- -------- --------- -------- Total earning assets ............................ 631,901 18,885 6.03 577,348 15,116 5.25 --------- -------- --------- -------- Cash and due from banks - non-interest bearing ..... 22,112 20,673 Allowance for possible loan losses ................. (7,257) (7,339) Premises and equipment, net ........................ 19,683 19,213 Other assets ....................................... 17,780 18,015 --------- --------- Total assets .................................... $ 684,219 $ 627,910 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits-interest bearing: Interest-bearing demand accounts ................... $ 26,335 $ 56 0.43% $ 27,193 $ 72 0.53% Savings and money market deposits .................. 184,502 1,879 2.05 176,088 1,363 1.55 Time deposits ...................................... 230,818 4,349 3.80 191,934 3,310 3.46 --------- -------- --------- -------- Total interest-bearing deposits ................. 441,655 6,284 2.87 395,215 4,745 2.41 --------- -------- --------- -------- Short-term borrowings .............................. 25,258 235 1.87 25,460 65 0.51 Long-term debt ..................................... 79,307 2,130 5.42 86,713 1,987 4.59 --------- -------- --------- -------- Total interest-bearing liabilities .............. 546,220 8,649 3.19 507,388 6,797 2.69 --------- -------- --------- -------- Non-interest bearing deposits ...................... 88,775 75,003 Other liabilities .................................. 6,836 4,701 Stockholders' equity ............................... 42,388 40,818 --------- --------- Total liabilities and stockholders' equity ...... $ 684,219 $ 627,910 ========= ========= Net interest income/spread ......................... $ 10,236 2.84% $ 8,319 2.56% ======== ===== ======== ==== Net interest margin ................................ 3.27% 2.89%
--------------- (1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%. 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
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO 2004 -------------------------------- CHANGE CHANGE DUE TO DUE TO TOTAL RATE VOLUME CHANGE -------- --------- -------- (DOLLARS IN THOUSANDS) Federal funds sold ....................................... $ 200 $ (111) $ 89 Investment securities - taxable .......................... 13 (121) (108) Investment securities - non-taxable (1) .................. - (319) (319) Mortgage loans held for sale ............................. 47 147 194 Loans, net of unearned discount and fees ................. 1,459 2,454 3,913 -------- -------- ------- Total interest income ............................. 1,719 2,050 3,769 -------- -------- ------- Interest-bearing demand accounts ......................... (13) (3) (16) Savings and money market deposits ........................ 430 86 516 Time deposits ............................................ 305 734 1,039 Short-term borrowings .................................... 172 (3) 169 Long-term debt ........................................... 342 (198) 144 -------- -------- ------- Total interest expense ............................ 1,236 616 1,852 -------- -------- ------- Net interest income ...................................... $ 483 $ 1,434 $ 1,917 ======== ======== =======
------- (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 second quarter of 2005 was $0, compared to $300,000 for the same period of 2004. For the six-months ended June 30, 2005 and 2004, the provision was $155,000 and $650,000, respectively. As discussed further in the Financial Condition section, the decrease in the provision for loan losses recorded in the three- and six-month periods ended June 30, 2005 compared to the same periods in the prior year was the result of improvements in the overall credit exposure in the loan portfolio. The Company's credit administration function performs monthly analyses on the loan portfolio to assess and report on risk levels, delinquencies, an internal ranking system and overall credit exposure. Management and the Board of Directors reviews the allowance for loan losses monthly, considering such factors as current and projected economic conditions, loan growth, the composition of the loan portfolio, loan trends and classifications, and other factors. We make provisions for loan losses in amounts that management deems necessary to maintain the allowance for loan losses at an appropriate level. NON-INTEREST INCOME
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- ------------------ 2005 2004 2005 2004 --------- -------- ------- -------- (IN THOUSANDS) Loans held for sale fee income ......................... $ 1,858 $ 3,390 $ 3,899 $ 5,886 NSF charges and service fees ........................... 302 341 557 671 Other service charges .................................. 255 308 494 543 Realized (loss) gain on investment securities .......... - (82) - 133 Other income ........................................... 254 146 526 282 --------- -------- ------- -------- Total non-interest income ....................... $ 2,669 $ 4,103 $ 5,476 $ 7,515 ========= ======== ======= ========
Non-interest income decreased $1.4 million, or 34.96%, to $2.7 million during the three-month period ended June 30, 2005, from $4.1 million during the three-month period ended June 30, 2004. Non-interest income for the six-months ended June 30, 2005 was $5.5 million, a decrease of $2.0 million, or 27.13%, from $7.5 million for the six-months ended June 30, 2004. These decreases are attributable primarily to decreases in loans held for sale fee income. Loans held for sale fee income decreased $1.5 million, or 45.20%, and $2.0 million, or 33.76%, for the three-month and six-month periods ended June 30, 2005, respectively. We experienced a decline in our mortgage loans held for sale fee income due to a decline in residential mortgage origination and refinancing resulting from higher interest rates. During the second quarter of 2004, the Company recorded an $82,000 charge for an other-than-temporary impairment on an equity investment. In addition, during the first quarter of 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 $6 million of available-for-sale investment securities and realized $215,000 in gains on the sales. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NON-INTEREST EXPENSE
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2005 2004 2005 2004 -------- ---------- --------- --------- (IN THOUSANDS) Salaries and employee benefits ................. $ 4,095 $ 4,505 $ 8,042 $ 8,404 Occupancy ...................................... 809 833 1,629 1,600 FDIC and other insurance expense ............... 70 60 140 121 General and administrative ..................... 1,620 1,513 3,144 2,949 -------- ---------- --------- --------- Total non-interest expense ............... $ 6,594 $ 6,911 $ 12,955 $ 13,074 ======== ========== ========= =========
Non-interest expense decreased $317,000, or 4.59%, to $6.6 million during the three-month period ended June 30, 2005 compared to $6.9 million in the prior year period. For the six-month period ending June 30, 2005, non-interest expense decreased $119,000, or 0.91% to $13.0 million compared to $13.1 million in the prior year period. These decreases are attributable primarily to a decrease in salaries and employee benefits expense which decreased $410,000, or 9.10%, during the second quarter of 2005 and $362,000, or 4.31%, during the six-month period ended June 30, 2005, compared to the prior year periods. Salaries and employee benefits expense decreased due to decreased volume-based incentive compensation in our mortgage operations. We had 275 full-time equivalent employees at June 30, 2005 compared to 277 at June 30, 2004. Offsetting some of the decrease in salaries and employee benefits expense were increases in general and administrative expenses. For the three- and six-month periods ending June 30, 2005, general and administrative expenses increased $107,000, or 7.07%, and $195,000, or 6.61%, respectively. FINANCIAL CONDITION Total assets for the Company at June 30, 2005, were $693.9 million, an increase of $21.1 million, or 3.14%, compared to $672.7 million at December 31, 2004. Deposits and stockholders' equity at June 30, 2005, were $537.3 million and $43.3 million, respectively, compared with $522.6 million and $41.4 million, respectively, at December 31, 2004, increases of $14.6 million, or 2.79%, and $2.0 million, or 4.73%, respectively. Loans at June 30, 2005 totaled $512.1 million, reflecting an increase of $5.0 million, or 0.97%, compared to December 31, 2004. The loan to deposit ratio at June 30, 2005 was 95.32% compared to 97.03% at December 31, 2004. Available-for-sale securities at June 30, 2005 totaled $76.5 million, reflecting an increase of $10.1 million or 15.29% compared to December 31, 2004. Mortgage loans held for sale at June 30, 2005 totaled $39.9 million, a decrease of $4.3 million, or 9.67% compared to December 31, 2004. 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 June 30, 2005, approximately $34,412,000 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:
AS OF ----------------------------------- JUNE 30, JUNE 30, DECEMBER 31, 2005 2004 2004 -------- -------- ------------ (Dollars in thousands) COMMERCIAL AND ALL OTHER LOANS: Past due 90 days or more $ 545 $ 222 $ 2,008 Nonaccrual 599 1,689 543 COMMERCIAL REAL ESTATE LOANS: Past due 90 days or more - 255 - Nonaccrual - - 158 CONSTRUCTION LOANS: Past due 90 days or more 650 - - Nonaccrual - - - LEASE FINANCING: Past due 90 days or more - - 1 Nonaccrual 441 364 80 RESIDENTIAL REAL ESTATE LOANS: Past due 90 days or more 330 164 153 Nonaccrual 1,135 1,390 1,315 CONSUMER LOANS: Past due 90 days or more 69 18 17 Nonaccrual - - - HOME EQUITY LOANS: Past due 90 days or more 24 - - Nonaccrual 75 1,071 75 DEBT SECURITIES AND OTHER ASSETS (EXCLUDING OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS) Past due 90 days or more - - - Nonaccrual - - - -------- -------- -------- Total non-performing loans 3,868 5,173 4,350 -------- -------- -------- FORECLOSED ASSETS HELD FOR SALE 83 - 2,645 -------- -------- -------- Total non-performing assets $ 3,951 $ 5,173 $ 6,995 ======== ======== ======== Total nonperforming loans to total loans 0.76% 1.13% 0.86% Total nonperforming loans to total assets 0.56% 0.81% 0.65% Allowance for loan losses to nonperforming loans 178.20% 142.86% 168.60% Nonperforming assets to loans and foreclosed assets held for sale 0.77% 1.13% 1.37%
As of June 30, 2005, non-performing loans equaled 0.76% of total loans, reflecting a decrease in non-performing loans from December 31, 2004. The overall credit exposure in the Company's total loan portfolio continued to improve. Consequently, management lowered the general reserve factors based upon an assessment of the Company's historical charge-off experience for certain loan categories as well as improvements in the ability of the Company's loan review process to identify credit quality deterioration on a timely basis. As such, the Company recorded a lower provision for loan losses during the six month period ending June 30, 2005 compared to the six month period ending June 30, 2004. The level of loans charged-off decreased during the first half of 2005, as evidenced by the decrease in our ratio of net charge-offs to average loans, to 0.23% for the period ending June 30, 2005 compared to 0.36% for the year ended December 31, 2004. We 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 Bank maintains its allowance for loan losses in excess of its non-performing loans. As of June 30, 2005, our ratio of allowance for loan losses to non-performing loans was 178.20%. 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 ---------------------------------- SIX MONTHS ENDED JUNE 30, YEAR ENDED ------------------- DECEMBER 31, 2005 2004 2004 -------- -------- ------------ (Dollars in thousands) BALANCE AT BEGINNING OF PERIOD $ 7,333 $ 7,051 $ 7,051 LOANS CHARGED-OFF Commercial loans 638 386 1,665 Commercial real estate loans - - - Construction loans - - - Lease financing 21 58 220 Residential real estate loans - - 18 Consumer loans 38 50 80 Home equity loans - - - -------- -------- -------- Total loans charged-off 698 494 1,983 -------- -------- -------- RECOVERIES: Commercial loans 11 14 41 Commercial real estate loans - 7 7 Construction loans - - - Lease financing 67 81 166 Residential real estate loans - 48 48 Consumer loans 24 33 38 Home equity loans - - - -------- -------- -------- Total recoveries 102 183 300 -------- -------- -------- NET LOANS CHARGED-OFF 595 311 1,683 PROVISION FOR LOAN LOSSES 155 650 1,965 -------- -------- -------- BALANCE AT END OF PERIOD $ 6,893 $ 7,390 $ 7,333 ======== ======== ======== LOANS OUTSTANDING: Average $517,201 $441,858 $463,833 End of period 512,136 456,175 507,170 RATIO OF ALLOWANCE FOR LOAN LOSSES TO LOANS OUTSTANDING: Average 1.33% 1.67% 1.58% End of period 1.35% 1.62% 1.45%
22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RATIO OF ANNUALIZED NET CHARGE-OFFS TO Average loans 0.23% 0.14% 0.36% End of period loans 0.23% 0.14% 0.33%
The allowance for loan losses as a percent of total loans decreased to 1.35% as of June 30, 2005, compared to 1.45% at December 31, 2004. 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 76.98% and 81.56% of our total deposits at June 30, 2005, and December 31, 2004, respectively. The change in the percentage of core deposits to total deposits during the first two quarters of 2005 was the resulted of the Company raising $23.0 million of additional funding through the brokered deposit market. 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. At June 30, 2005, our total stockholders' equity was $43.3 million and our equity to asset ratio was 6.24%. At June 30, 3005, our Tier 1 capital ratio was 9.34% compared to 9.00% at December 31, 2004, while our total risk-based capital ratio was 11.28% compared to 11.15% at December 31, 2004. As of June 30, 2005, we had capital in excess of the requirements for a "well-capitalized" institution. 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 June 30, 2005 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 31.67% 1.88% 200 basis point rise 21.46% 1.42% 100 basis point rise 10.60% 0.84% Base Rate Scenario - - 50 basis point decline (5.97%) 0.23% 100 basis point decline (13.83%) 0.48% 200 basis point decline (29.56%) (2.06%)
24 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The above table indicates that, at June 30, 2005, in the event of a sudden and sustained increase in prevailing market rates, our net interest income would be expected to increase as our assets would be expected to reprice quicker than our liabilities, while a decrease in rates would indicate just the opposite. Generally, in the decreasing rate scenarios, not only would adjustable rate assets (loans) reprice to lower rates faster than our liabilities, but our liabilities - long-term Federal Home Loan Bank of Topeka (FHLB) advances and existing time deposits - would not decrease in rate as much as market rates. In addition, fixed rate loans might experience an increase in prepayments, further decreasing yields on earning assets and causing net interest income to decrease. Another consideration with a rising interest rate scenario is the impact on mortgage loan refinancing, which would likely decline, leading to lower loans held for sale fee income, though the impact is difficult to quantify or project. The table also indicates that, at June 30, 2005, in the event of a sudden increase or decrease in prevailing market rates, the current net economic value of our equity would increase. Given our current asset/liability position, a 50, 100 or 200 basis point decline in interest rates will generally result in a higher economic value of our equity as the change in estimated gain on assets exceeds the change in estimated loss on liabilities 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 fixed-rate securities. However, the estimated market value increase in fixed rate loans and investment securities is partially 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 On May 25, 2005, the Company held its Annual Meeting of Stockholders. There were 2,334,871 shares outstanding and entitled to vote at the Annual Meeting, of which 2,025,582 shares were represented in person or by proxy. The following items were submitted at the Annual Meeting for consideration by the stockholders: 1. Election of Directors Don H. Alexander was elected at the Annual Meeting to serve a three year term or until his successor is duly elected and qualified. The voting results for both were as follows: Shares Voted For: 2,013,728 Shares Voted Against 11,854 Shares Abstained 0
C. Ted McCarter was elected at the Annual Meeting to serve a three year term or until his successor is duly elected and qualified. The voting results for both were as follows: Shares Voted For: 2,012,390 Shares Voted Against 13,192 Shares Abstained 0
The directors of the Company whose terms of office extended beyond the date of the Annual Meeting include: Wayne A. Henry, Jr. Thomas A. McDonnell Robert D. Regnier ITEM 5. OTHER INFORMATION Not applicable 27 PART II: OTHER INFORMATION ITEM 6. EXHIBITS 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 Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) 32.1 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 28 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: August 12, 2005 By: /s/ Robert D. Regnier ---------------------------------------- Robert D. Regnier, President and Chief Executive Officer Date: August 12, 2005 By: /s/ Mark A. Fortino ---------------------------------------- Mark A. Fortino, Chief Financial Officer 29