-----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, UII+E6d+difw+mYPHnAFfdg5WqUekw1F4IpBQ9hKVY89yZlyTLPI7/BaoK8PY6KH FrUqLqgq5v4jX4sjtNHGtw== 0000950137-06-012328.txt : 20061113 0000950137-06-012328.hdr.sgml : 20061113 20061113162558 ACCESSION NUMBER: 0000950137-06-012328 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061113 DATE AS OF CHANGE: 20061113 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: 061209285 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 c10026e10vq.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, 2006 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 - ------------------- ----------------------------------------- None None 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 check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check One): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Securities Act Yes [ ] No [ ] As of September 30, 2006 the registrant had 2,409,069 shares of Common Stock ($1.00 par value) outstanding. BLUE VALLEY BAN CORP FORM 10-Q INDEX PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm.............................................3 Condensed Consolidated Balance Sheets - September 30, 2006 (unaudited) and December 31, 2005..............................................4 Condensed Consolidated Statements of Income (unaudited) - three and nine months ended September 30, 2006 and 2005...........................................6 Condensed Consolidated Statements of Stockholders' Equity (unaudited) - nine months ended September 30, 2006 and 2005 ....................................................7 Condensed Consolidated Statements of Cash Flows (unaudited) - nine months ended September 30, 2006 and 2005.....................................................8 Notes to Condensed Consolidated Financial Statements (unaudited) - nine months ended September 30, 2006 and 2005.....................................................9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................................13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................23 ITEM 4. CONTROLS AND PROCEDURES.......................................................................25 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS.............................................................................26 ITEM 1A. RISK FACTORS.................................................................................26 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS...................................26 ITEM 3. DEFAULTS UPON SENIOR SECURITIES...............................................................26 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................26 ITEM 5. OTHER INFORMATION.............................................................................26 ITEM 6. EXHIBITS......................................................................................26
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 66225 We have reviewed the accompanying condensed consolidated balance sheet of Blue Valley Ban Corp as of September 30, 2006, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2006 and 2005 and the condensed consolidated statements of stockholders' equity and cash flows for the nine-month periods ended September 30, 2006 and 2005. These interim financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with 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 with 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 condensed 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, 2005 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 17, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2005 is fairly stated, in all material respects, in relation to the condensed consolidated balance sheet from which it has been derived. /s/ BKD, LLP Kansas City, Missouri November 2, 2006 BLUE VALLEY BAN CORP CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2006 AND DECEMBER 31, 2005 (dollars in thousands, except share data) ASSETS
SEPTEMBER 30, DECEMBER 31, 2006 2005 ------------------------------ (Unaudited) Cash and due from banks $ 14,565 $ 16,493 Interest-bearing deposits in other financial institutions 380 12,163 Federal funds sold 394 11,401 -------- -------- Cash and cash equivalents 15,339 40,057 Available-for-sale securities 86,162 99,987 Mortgage loans held for sale 21,791 13,906 Loans, net of allowance for loan losses of $6,693 and $6,704 in 2006 and 2005, respectively 527,864 496,439 Premises and equipment, net 18,037 18,593 Foreclosed assets held for sale, net 682 711 Interest receivable 4,324 3,372 Deferred income taxes 2,366 2,564 Prepaid expenses and other assets 1,279 4,647 Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities 6,382 8,490 Core deposit intangible asset, at amortized cost 709 823 -------- -------- Total assets $684,935 $689,589 ======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. 4 BLUE VALLEY BAN CORP CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2006 AND DECEMBER 31, 2005 (dollars in thousands, except share data) LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31, 2006 2005 -------------------------- (Unaudited) LIABILITIES Deposits Demand $ 95,832 $ 94,452 Savings, NOW and money market 157,279 185,234 Time 276,901 249,655 --------- --------- Total deposits 530,012 529,341 Other interest-bearing liabilities 30,750 26,288 Long-term debt 67,293 78,106 Interest payable and other liabilities 4,685 9,599 --------- --------- Total liabilities 632,740 643,334 --------- --------- STOCKHOLDERS' EQUITY Capital stock Common stock, par value $1 per share; authorized 15,000,000 shares; issued and outstanding 2006 -- 2,409,069 shares; 2005 -- 2,382,046 shares 2,409 2,382 Additional paid-in capital 9,452 9,212 Retained earnings 40,606 35,782 Unearned compensation -- (648) Accumulated other comprehensive loss, net of income tax credits of $(181) in 2006 and $(315) in 2005 (272) (473) --------- --------- Total stockholders' equity 52,195 46,255 --------- --------- Total liabilities and stockholders' equity $ 684,935 $ 689,589 ========= =========
See Accompanying Notes to Condensed Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. 5 BLUE VALLEY BAN CORP CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (dollars in thousands, except share data)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2006 2005 2006 2005 --------------------------------------------------------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) INTEREST INCOME Interest and fees on loans $ 11,621 $ 9,804 $ 32,832 $ 27,625 Federal funds sold and other short-term investments 66 110 104 291 Available-for-sale securities 960 618 3,069 1,481 ------------- ------------- ------------- ------------- Total interest income 12,647 10,532 36,005 29,397 ------------- ------------- ------------- ------------- INTEREST EXPENSE Interest-bearing demand deposits 22 18 71 74 Savings and money market deposit accounts 1,180 1,000 3,274 2,879 Other time deposits 2,928 2,335 8,031 6,684 Federal funds purchased and other interest-bearing liabilities 288 143 718 360 Short-term debt 21 -- 315 17 Long-term debt, net 942 1,178 2,893 3,309 ------------- ------------- ------------- ------------- Total interest expense 5,381 4,674 15,302 13,323 ------------- ------------- ------------- ------------- NET INTEREST INCOME 7,266 5,858 20,703 16,074 PROVISION FOR LOAN LOSSES 540 -- 1,205 155 ------------- ------------- ------------- ------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,726 5,858 19,498 15,919 ------------- ------------- -------------- ------------- NONINTEREST INCOME Loans held for sale fee income 1,341 2,179 3,669 6,078 Service fees 664 558 1,848 1,609 Other income 359 591 1,018 1,117 ------------- ------------- ------------- ------------- Total noninterest income 2,364 3,328 6,535 8,804 ------------- ------------- ------------- ------------- NONINTEREST EXPENSE Salaries and employee benefits 3,546 4,201 11,165 12,243 Net occupancy expense 770 838 2,281 2,467 Other operating expense 1,564 1,589 4,834 4,873 ------------- ------------- ------------- ------------- Total noninterest expense 5,880 6,628 18,280 19,583 ------------- ------------- ------------- ------------- INCOME BEFORE INCOME TAXES 3,210 2,558 7,753 5,140 PROVISION FOR INCOME TAXES 1,219 964 2,929 1,946 ------------- ------------- ------------- ------------- NET INCOME $ 1,991 $ 1,594 $ 4,824 $ 3,194 ============= ============= ============= ============= BASIC EARNINGS PER SHARE $ 0.84 $ 0.68 $ 2.04 $ 1.36 ============= ============= ============= ============= DILUTED EARNINGS PER SHARE $ 0.83 $ 0.67 $ 2.01 $ 1.34 ============= ============= ============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. 6 BLUE VALLEY BAN CORP CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (dollars in thousands, except share data)
ACCUMULATED ADDITIONAL OTHER COMPREHENSIVE COMMON PAID-IN RETAINED UNEARNED COMPREHENSIVE INCOME (LOSS) STOCK CAPITAL EARNINGS COMPENSATION LOSS TOTAL ---------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2004 $ 2,327 $ 8,099 $ 31,809 $ (594) $ (257) $ 41,384 Issuance of 34,210 shares of common stock 34 470 -- -- -- 504 Net income $ 3,194 -- -- 3,194 -- -- 3,194 Restricted stock earned, net of forfeitures -- -- -- -- 218 -- 218 Change in unrealized depreciation, net of income taxes (credit) of $(20) (176) -- -- -- -- (176) (176) ---------- ---------- ---------- ---------- ---------- ----------- ---------- BALANCE, SEPTEMBER 30, 2005 $ 3,018 $ 2,361 $ 8,569 $ 35,003 $ (376) $ (433) $ 45,124 ========== ========== ========== ========== ========== =========== ========== BALANCE, DECEMBER 31, 2005 $ 2,382 $ 9,212 $ 35,782 $ (648) $ (473) $ 46,255 ---------- ---------- ---------- ---------- ----------- ---------- Issuance of 27,023 shares of common stock 27 516 -- -- -- 543 Net income $ 4,824 -- -- 4,824 -- -- 4,824 Restricted stock earned, net of forfeitures -- -- 372 -- -- -- 372 Reclassification of unearned compensation in accordance with adoption of SFAS No. 123R -- -- (648) -- 648 -- -- Change in derivative financial instrument, net of income taxes of $48 72 -- -- -- -- 72 72 Change in unrealized depreciation on available-for-sale securities, net of income taxes of $86 129 -- -- -- -- 129 129 ---------- ---------- ---------- ---------- ---------- ----------- ---------- BALANCE, SEPTEMBER 30, 2006 $ 5,025 $ 2,409 $ 9,452 $ 40,606 $ -- $ (272) $ 52,195 ========== ========== ========== ========== ========== =========== ==========
See Accompanying Notes to Condensed Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. 7 BLUE VALLEY BAN CORP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (dollars in thousands, except share data)
SEPTEMBER 30, SEPTEMBER 30, 2006 2005 ---------------------------- (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,824 $ 3,194 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation and amortization 1,093 1,431 Amortization (accretion) of premiums and discounts on securities (72) (27) Provision for loan losses 1,205 155 Deferred income taxes 111 (38) Stock dividends on FHLB securities (210) -- Net loss (gain) on sale of foreclosed assets (29) 34 Net loss (gain) on sale of premises and equipment 6 (344) Restricted stock earned and forfeited 372 218 Originations of loans held for sale (246,932) (557,755) Proceeds from the sale of loans held for sale 239,047 568,803 Changes in Interest receivable (952) (577) Prepaid expenses and other assets 3,478 (1,101) Interest payable and other liabilities (4,367) 2,279 --------- --------- Net cash provided by (used in) operating activities (2,426) 16,272 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Net originations of loans (33,410) (14,825) Proceeds from sales of loan participations -- 6,400 Purchase of premises and equipment (418) (488) Proceeds from the sale of premises and equipment -- 993 Proceeds from the sale of foreclosed assets, net of expenses 838 2,976 Proceeds from maturities of available-for-sale securities 20,110 16,245 Purchases of available-for-sale securities (5,998) (26,494) Proceeds from the sale or maturities of Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities 2,319 -- Purchases of Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities -- (428) --------- --------- Net cash used in investing activities (16,559) (15,621) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net decrease in demand deposits, money market, NOW and savings accounts (26,575) (5,253) Net increase in time deposits 27,246 28,300 Repayments of long-term debt (10,813) (17,001) Proceeds from long-term debt -- 21,244 Net proceeds (payments) from other financing activities (53) 504 Net increase (decrease) in other borrowings 4,462 1,162 --------- --------- Net cash provided by (used in) financing activities (5,733) 28,956 --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (24,718) 29,607 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 40,057 22,494 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,339 $ 52,101 ========= =========
See Accompanying Notes to Condensed Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. 8 BLUE VALLEY BAN CORP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED) NOTE 1: BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the Company's condensed consolidated financial position as of September 30, 2006, and the condensed consolidated results of its operations, changes in stockholders' equity and cash flows for the periods ended September 30, 2006 and 2005, 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 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's December 31, 2005 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 report of BKD, LLP commenting upon their review accompanies the condensed consolidated financial statements included in Item 1 of Part I. NOTE 2: STOCK BASED COMPENSATION Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004). As a result of adopting SFAS No. 123R on January 1, 2006, the Company did not record any additional compensation expense, as no stock options had been granted in recent years and options granted were fully vested prior to adoption. However, on January 1, 2006, the Company reclassified $648,000 of unearned compensation related to previously recognized compensation for restricted share awards that had not been vested as of that date to additional paid-in capital as these awards represent equity awards as defined in SFAS No. 123R. NOTE 3: EARNINGS PER SHARE Basic earnings per share is computed based on the weighted average number of shares outstanding during each year. Diluted earnings per share is computed using the weighted average common shares and all potential dilutive common shares outstanding during the period. The computation of per share earnings for the three- and nine-months ended September 30, 2006 and 2005 is as follows: 9 BLUE VALLEY BAN CORP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2006 2005 2006 2005 ----------------------------------------------------------- (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 $ 1,991 $ 1,594 $ 4,824 $ 3,194 ========== ========== ========== ========== Average common shares outstanding 2,372,489 2,356,062 2,361,349 2,342,631 Average common share stock options outstanding 37,904 38,871 42,057 40,452 ---------- ---------- ---------- ---------- Average diluted common shares 2,410,393 2,394,933 2,403,406 2,383,083 ========== ========== ========== ========== Basic earnings per share $ 0.84 $ 0.68 $ 2.04 $ 1.36 ========== ========== ========== ========== Diluted earnings per share $ 0.83 $ 0.67 $ 2.01 $ 1.34 ========== ========== ========== ==========
NOTE 4: SHORT-TERM DEBT The Company has a $15 million operating line of credit with a bank bearing a variable interest rate of the Federal Funds rate plus 1.63%. The line of credit is secured by stock in the Company's subsidiary bank and matures during 2007. As of September 30, 2006 and December 31, 2005, the Company had no outstanding balance on this line of credit. NOTE 5: LONG-TERM DEBT Long-term debt at September 30, 2006 and December 31, 2005, consisted of the following components:
SEPTEMBER 30, DECEMBER 31, 2006 2005 ------------- ------------ (Unaudited) (in thousands) Note Payable -- Blue Valley Ban Corp (A) $ 3,531 $ 3,981 Note Payable -- Blue Valley Building Corp. (B) 6,674 7,037 Federal Home Loan Bank advances (C) 37,500 47,500 Subordinated Debentures -- BVBC Capital Trust II (D) 7,732 7,732 Subordinated Debentures -- BVBC Capital Trust III (E) 11,856 11,856 ------- ------- Total long-term debt $67,293 $78,106 ======= =======
10 BLUE VALLEY BAN CORP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED) (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 6). (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, 2011, 2013 and 2015; collateralized by various assets including mortgage-backed loans. The interest rates on the advances range from 2.62% to 5.682%. Federal Home Loan Bank advance availability is determined quarterly and at September 30, 2006, approximately $82,702,000 was available. (D) 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. The Company may prepay the subordinated debentures beginning in 2008, in whole or in part, at their face value plus accrued interest. (E) Due in 2035; interest only at LIBOR + 1.60% 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 2033. The Company may prepay the subordinated debentures beginning in 2010, in whole or in part, at their face value plus accrued interest. Aggregate annual maturities of long-term debt at September 30, 2006 are as follows:
(in thousands) October 1 to December 31, 2006 $ 274 2007 1,113 2008 11,140 2009 1,169 2010 1,199 Thereafter 52,398 --------------- $ 67,293 ===============
11 BLUE VALLEY BAN CORP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED) NOTE 6: 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 5). 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, 2006. A $72,000 unrealized gain has been recognized as a component of other comprehensive loss. NOTE 7: SUBSEQUENT EVENT On November 2nd, 2006 the Company announced the signing of a definitive Agreement and Plan of Merger for the acquisition of Unison Bancorp, Inc. ("Unison"), the holding company for Western National Bank of Lenexa, Kansas. Subsequent to the acquisition, the Company intends to merge Western National Bank with and into the Bank of Blue Valley. This transaction continues Blue Valley's expansion in Johnson County and represents its first presence in Lenexa. Under the terms of the merger agreement, shareholders of Unison will receive aggregate consideration of approximately $10.2 million in cash. The transaction is subject to the satisfaction of certain conditions, including Unison stockholder and regulatory approval, and is expected to close during the first quarter of 2007. Western National Bank, with assets of approximately $40 million, is located at 95th and Lackman Road in Lenexa, Kansas. The Company expects to fund the acquisition through excess liquidity including short-term borrowing. In addition, the Company does not anticipate the acquisition will change the bank's capital risk-rating. 12 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, 2005, except for the adoption of SFAS No. 123R "Accounting for Stock-Based Compensation" on January 1, 2006. Further description of our critical accounting policies can be found in our Annual Report on Form 10-K for the year ended December 31, 2005. RESULTS OF OPERATIONS Three months ended September 30, 2006 and 2005. Net income for the quarter ended September 30, 2006, was $2.0 million, compared to net income of $1.6 million for the quarter ended September 30, 2005, representing an increase of $397,000, or 24.90%. Diluted earnings per share increased 31.74% to $0.83 during the third quarter of 2006 from $0.63 in the same period of 2005. The Company's annualized returns on average assets and average stockholders' equity for the three-month period ended September 30, 2006 were 1.16% and 15.43%, compared to 0.90% and 14.34%, respectively, for the same period in 2005, increases of 28.88% and 7.60%, respectively. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The principal contributing factor to our increase in net income in the current year third quarter from the prior year was an increase in net interest income resulting from a higher yield on average earning assets. However, the increase in net interest income was partially offset by lower noninterest income, specifically 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. Nine months ended September 30, 2006 and 2005. Net income for the nine months ended September 30, 2006 was $4.8 million, compared to net income of $3.2 million for the nine-month period ended September 30, 2005, representing an increase of $1.6 million, or 51.03%. Diluted earnings per share increased 50.00% to $2.01 during the nine months ended September 30, 2006 from $1.34 in the same period of 2005. The Company's annualized returns on average assets and average stockholders' equity for the nine-month period ended September 30, 2006 were 0.94% and 13.17%, compared to 0.62% and 9.92%, respectively, for the same period in 2005, increases of 51.61% and 32.76%, respectively. The principal contributing factor to our increase in net income from the nine months ended September 30, 2005 to the current year was an increase in net interest income resulting from higher yields on average earning assets. However, the increase in net interest income was partially offset by lower noninterest income, specifically 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. NET INTEREST INCOME Fully tax equivalent (FTE) net interest income for the three-month period ended September 30, 2006 was $7.3 million, an increase of $1.4 million or 23.95%, from $5.9 million for the three-month period ended September 30, 2005. FTE interest income for the current year third quarter was $12.7 million, an increase of $2.1 million, or 20.05%, from $10.5 million in the prior year third 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 149 basis points to 7.88% in the third quarter of 2006 compared to 6.39% in the prior year third quarter. The 149 basis point increase in yield resulted from increases in market interest rates. Partially offsetting the increase in yield on average earning assets was a decrease in those assets. Average earning assets decreased $17.1 million or 2.62% to $636.7 million during the third quarter of 2006 compared to $653.8 million during the prior year period primarily due to a decrease in mortgage loans held for sale due to lower origination volume. Interest expense for the current year third quarter was $5.4 million, an increase of $707,000, or 15.12%, from $4.7 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 the impact of rising market interest rates on our time deposits, savings and money market deposits and short-term borrowings. The rate paid on total average interest-bearing liabilities increased 68 basis points to 4.02% during the three month period ending September 30, 2006 compared to 3.34% during the same period in 2005. Partially offsetting the increase in rate paid on average interest-bearing liabilities was a decrease in those liabilities. Average interest-bearing liabilities decreased $24.4 million or 4.41% to $530.8 million during the third quarter of 2006 compared to $555.3 million 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS during the prior year period. More specifically, savings, NOW and money market account average balances declined from $178.2 million during the third quarter of 2005 to $144.7 million during the current year third quarter, a decline of $33.5 million or 18.78%, primarily due to strong market competition in those products. FTE net interest income for the nine-month period ended September 30, 2006 was $20.7 million, an increase of $4.6 million or 28.65%, from $16.1 million for the nine-month period ended September 30, 2005. FTE interest income for the nine months ended September 30, 2006 was $36.0 million, an increase of $6.6 million, or 22.40%, from $29.4 million for the nine months ended September 30, 2005. This increase was primarily a result of an overall increase in yields on earning assets. The overall yield on average earning assets increased by 138 basis points to 7.53% for the period ending September 30, 2006 compared to 6.15% for the prior year period. The 138 basis point increase in yield resulted from increases in market interest rates. In addition, while average earning asset volume increased only slightly from the period ending September 30, 2005 to the current period, the change in mix of earning assets was beneficial as increases in loans and investment securities were offset by decreases in federal funds sold and mortgage loans held for sale. Interest expense for the nine-month period ended September 30, 2006 was $15.3 million, an increase of $2.0 million, or 14.85%, from $13.3 million in the same period of the prior year. This increase was primarily a result of an increase in the rate paid on average interest-bearing liabilities resulting from the impact of rising market interest rates on our time deposits, savings and money market deposits and short-term borrowings. The rate paid on total average interest-bearing liabilities increased 56 basis points to 3.80% during the nine-month period ending September 30, 2006 compared to 3.24% during the same period in 2005. 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. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AVERAGE BALANCES, YIELDS AND RATES
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------------------ 2006 2005 -------------------------------- ---------------------------------- AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE --------- ---------- ------- ---------- ---------- ------- ASSETS Federal funds sold................................. $ 4,172 $ 156 5.01% $ 12,159 $ 291 3.19% Investment securities -- taxable................... 94,236 2,996 4.25 67,469 1,430 2.83 Investment securities -- non-taxable (1)........... 586 31 7.08 1,489 77 6.95 Mortgage loans held for sale....................... 17,110 817 6.39 39,791 1,577 5.30 Loans, net of unearned discount and fees........... 523,373 32,015 8.18 518,456 26,048 6.72 --------- --------- ---------- --------- Total earning assets............................. 639,477 36,015 7.53 639,364 29,423 6.15 --------- --------- ---------- --------- Cash and due from banks -- non-interest bearing.... 19,348 21,480 Allowance for possible loan losses................. (6,573) (7,122) Premises and equipment, net........................ 18,388 19,493 Other assets....................................... 16,979 17,750 --------- ---------- Total assets..................................... $ 687,619 $ 690,965 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits-interest bearing: Interest-bearing demand accounts................... $ 25,185 $ 71 0.38% $ 25,472 $ 74 0.39% Savings and money market deposits.................. 152,193 3,274 2.88 182,695 2,879 2.11 Time deposits...................................... 255,842 8,031 4.20 234,450 6,684 3.81 --------- --------- ---------- --------- Total interest-bearing deposits.................. 433,220 11,376 3.51 442,617 9,637 2.91 --------- --------- ---------- --------- Short-term borrowings.............................. 32,695 1,033 4.22 24,636 377 2.05 Long-term debt .................................... 72,872 2,893 5.31 82,060 3,309 5.39 --------- --------- ---------- --------- Total interest-bearing liabilities .............. 538,787 15,302 3.80 549,313 13,323 3.24 --------- --------- ---------- --------- Non-interest bearing deposits...................... 94,004 91,104 Other liabilities ................................. 5,858 7,492 Stockholders' equity............................... 48,970 43,056 --------- ---------- Total liabilities and stockholders' equity............................................. $ 687,619 $ 690,965 ========= ========== Net interest income/spread ........................ $ 20,713 3.73% $ 16,100 2.91% ========= ==== ========= ==== Net interest margin................................ 4.33% 3.37%
- ------------------ (1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%. For the quarters ending September 30, 2006 and 2005, the tax equivalency adjustment amounted to $10,000 and $26,000 respectively. 16 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 rate, reflecting changes in rate multiplied by the prior period volume; and - changes in volume, reflecting changes in volume multiplied by the current period rate. CHANGES IN INTEREST INCOME AND EXPENSE VOLUME AND RATE VARIANCES
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO 2005 ------------------------------------------ CHANGE CHANGE DUE TO DUE TO TOTAL RATE VOLUME CHANGE ---------- ---------- --------- (DOLLARS IN THOUSANDS) Federal funds sold and other short-term investments............... $ 165 $ (300) $ (135) Investment securities -- taxable.................................. 715 851 1,566 Investment securities -- non-taxable (1).......................... 2 (48) (46) Mortgage loans held for sale...................................... 324 (1,084) (760) Loans, net of unearned discount and fees ......................... 5,666 301 5,967 ---------- --------- -------- Total interest income.................................. 6,872 (280) 6,592 ---------- --------- -------- Interest-bearing demand accounts.................................. (2) (1) (3) Savings and money market deposits................................. 1,051 (656) 395 Time deposits..................................................... 675 672 1,347 Short-term borrowings............................................. 402 254 656 Long-term debt.................................................... (51) (365) (416) ---------- --------- -------- Total interest expense................................. 2,075 (96) 1,979 ---------- --------- -------- Net interest income............................................... $ 4,797 $ (184) $ 4,613 ========== ========= =========
- --------------- (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 PROVISION FOR LOAN LOSSES The provision for loan losses for the third quarter of 2006 was $540,000, compared to $0 for the same period of 2005. For the nine-months ended September 30, 2006 and 2005, the provision was $1.2 million and $155,000, respectively. The increase in the provision for loan losses recorded in the three- and nine-month periods ended September 30, 2006 compared to the same periods in the prior year was the result of a couple of large credits which management is aggressively pursuing collection on and growth 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, ------------------------- ------------------------ 2006 2005 2006 2005 --------- ---------- --------- --------- (IN THOUSANDS) Loans held for sale fee income................... $ 1,341 $ 2,179 $ 3,669 $ 6,078 NSF charges and service fees..................... 319 281 910 839 Other service charges............................ 345 277 938 770 Other income .................................... 359 591 1,018 1,117 --------- ---------- -------- -------- Total non-interest income.................. $ 2,364 $ 3,328 $ 6,535 $ 8,804 ========= ========== ======== ========
Non-interest income decreased $964,000, or 28.97%, to $2.4 million during the three-month period ended September 30, 2006, from $3.3 million during the three-month period ended September 30, 2005. Non-interest income for the nine-months ended September 30, 2006 was $6.5 million, a decrease of $2.3 million, or 25.78%, from $8.8 million for the nine-months ended September 30, 2005. These decreases are attributable primarily to decreases in loans held for sale fee income. Loans held for sale fee income decreased $838,000, or 38.46%, and $2.4 million, or 39.64%, for the three-month and nine-month periods ended September 30, 2006, 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. NON-INTEREST EXPENSE
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------ 2006 2005 2006 2005 ---------- ---------- --------- --------- (IN THOUSANDS) Salaries and employee benefits............ $ 3,546 $ 4,201 $ 11,165 $ 12,243 Occupancy................................. 770 838 2,281 2,467 General and administrative ............... 1,564 1,589 4,834 4,873 ---------- --------- --------- --------- Total non-interest expense.......... $ 5,880 $ 6,628 $ 18,280 $ 19,583 ========== ========= ========= =========
18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Non-interest expense decreased $748,000, or 11.29%, to $5.9 million during the three-month period ended September 30, 2006 compared to $6.6 million in the prior year period. For the nine-month period ended September 30, 2006, non-interest expense decreased $1.3 million, or 6.66% to $18.3 million compared to $19.6 million in the prior year period. These decreases are attributable primarily to a decrease in salaries and employee benefits expense which decreased $655,000, or 15.60%, during the third quarter of 2006 and $1.1 million, or 8.81%, during the nine-month period ended September 30, 2006, compared to the prior year periods. Salaries and employee benefits expense decreased due to lower compensation costs in our mortgage division. We had 237 full-time equivalent employees at September 30, 2006 compared to 264 at September 30, 2005. The decrease in full-time equivalent employees is mainly due to a reduction in force in our mortgage operation due to the decline in mortgage volume. For the three- and nine-month periods ended September 30, 2006, occupancy expenses decreased $68,000, or 8.12%, and $186,000, or 7.54%, respectively. For the three- and nine-month periods ended September 30, 2006, general and administrative expenses decreased $25,000, or 1.58%, and $39,000, or 0.81%, respectively. FINANCIAL CONDITION Total assets for the Company at September 30, 2006, were $684.9 million, a decrease of $4.7 million, or 0.68%, compared to $689.6 million at December 31, 2005. Deposits and stockholders' equity at September 30, 2006, were $530.0 million and $52.2 million, respectively, compared with $529.3 million and $46.3 million, respectively, at December 31, 2005, increases of $671,000, or 0.12%, and $5.9 million, or 12.84%, respectively. Loans at September 30, 2006 totaled $534.6 million, reflecting an increase of $31.4 million, or 6.24%, compared to December 31, 2005 with the majority of the loan growth occurring towards the end of the quarter. The loan to deposit ratio at September 30, 2006 was 100.85% compared to 95.05% at December 31, 2005. Available-for-sale securities at September 30, 2006 totaled $86.2 million, reflecting a decrease of $13.8 million or 13.83% compared to December 31, 2005 with more securities maturing during the third quarter, resulting in a higher average balance for the nine-month period ending September 30, 2006. Mortgage loans held for sale at September 30, 2006 totaled $21.8 million, an increase of $7.9 million, or 56.70% compared to December 31, 2005. Mortgage loans held for sale balance are seasonally lower during the winter months which accounts for this increase. The Company's principal funding source for mortgage loans held for sale is short- and long-term advances from the Federal Home Loan Bank. Advance availability with the Federal Home Loan Bank is determined quarterly and at September 30, 2006, approximately $82,702,000 was available. 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: 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NON-PERFORMING ASSETS
AS OF -------------------------------------------------- SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 2006 2005 2005 -------------------------------------------------- (Dollars in thousands) COMMERCIAL AND ALL OTHER LOANS: Past due 90 days or more $ 609 $ 2,513 $ 781 Nonaccrual 873 760 769 COMMERCIAL REAL ESTATE LOANS: Past due 90 days or more 9,155 460 598 Nonaccrual -- -- -- CONSTRUCTION LOANS: Past due 90 days or more 487 309 585 Nonaccrual 136 325 452 LEASE FINANCING: Past due 90 days or more 104 -- 5 Nonaccrual 1 145 119 RESIDENTIAL REAL ESTATE LOANS: Past due 90 days or more -- 80 -- Nonaccrual 554 902 1,016 CONSUMER LOANS: Past due 90 days or more 12 66 49 Nonaccrual -- -- -- HOME EQUITY LOANS: Past due 90 days or more 35 -- -- Nonaccrual -- -- -- 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 11,966 5,560 4,374 ------------- ---------- ---------- FORECLOSED ASSETS HELD FOR SALE 682 723 711 ------------- ---------- ---------- Total non-performing assets $ 12,648 $ 6,282 $ 5,085 ============= ========== ========== Total nonperforming loans to total loans 2.24% 1.08% 0.87% Total nonperforming loans to total assets 1.75% 0.79% 0.63% Allowance for loan losses to nonperforming loans 55.94% 124.22% 153.27% Nonperforming assets to loans and foreclosed assets held for sale 2.36% 1.22% 1.01%
As of September 30, 2006, non-performing loans equaled 2.24% of total loans, reflecting an increase in non-performing loans from December 31, 2005. The overall credit exposure in the Company's total loan portfolio worsened during the third quarter of 2006 as two large commercial real estate loan relationships became 90 days or more past due. 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. We expect one of these past due commercial real estate relationships totaling approximately $5.5 million to be made current during the fourth quarter of 2006. The level of loans charged-off increased during the first three quarters of 2006. Consequently, the Company experienced an annualized ratio of net charge-offs to average loans of 0.31% for the period ended September 30, 2006. The 0.31% ratio is comparable with historical charge off ratios, however it is higher than the historically low ratio of 0.17% achieved for the year ended December 31, 2005. 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Generally, the Bank maintains its allowance for loan losses in excess of its non-performing loans. However, due to the factors noted above, as of September 30, 2006, our ratio of allowance for loan losses to non-performing loans was 55.94%. 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, 2006 2005 2005 ------------ ------------ ------------- (Dollars in thousands) BALANCE AT BEGINNING OF PERIOD $ 6,704 $ 7,333 $ 7,333 LOANS CHARGED-OFF Commercial loans 850 638 949 Commercial real estate loans -- -- -- Construction loans 100 -- -- Lease financing 105 66 86 Residential real estate loans 263 -- -- Consumer loans 53 56 77 Home equity loans 8 16 16 ------------ ------------ ------------ Total loans charged-off 1,379 776 1,128 ------------ ------------ ------------ RECOVERIES: Commercial loans 78 92 154 Commercial real estate loans -- -- 3 Construction loans -- -- -- Lease financing 32 72 76 Residential real estate loans 44 -- 1 Consumer loans 9 30 35 Home equity loans -- -- -- ------------ ------------ ------------ Total recoveries 163 194 269 ------------ ------------ ------------ NET LOANS CHARGED-OFF 1,216 582 859 PROVISION FOR LOAN LOSSES 1,205 155 230 ------------ ------------ ------------ BALANCE AT END OF PERIOD $ 6,693 $ 6,906 $ 6,704 ============ ============ ============ LOANS OUTSTANDING: Average $ 523,373 $ 518,456 $ 516,643 End of period 534,557 513,924 503,143 RATIO OF ALLOWANCE FOR LOAN LOSSES TO LOANS OUTSTANDING: Average 1.28% 1.33% 1.30% End of period 1.25% 1.34% 1.33% RATIO OF ANNUALIZED NET CHARGE-OFFS TO Average loans 0.31% 0.15% 0.17% End of period loans 0.30% 0.15% 0.17%
21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 69.56% and 74.26% of our total deposits at September 30, 2006, and December 31, 2005, respectively. Generally, the Company's funding strategy is to utilize Federal Home Loan Bank of Topeka 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 September 30, 2006, our total stockholders' equity was $52.2 million and our equity to asset ratio was 7.62%. At September 30, 3006, our Tier 1 capital ratio was 10.07% compared to 8.86% at December 31, 2005, while our total risk-based capital ratio was 12.38% compared to 12.04% at December 31, 2005. As of September 30, 2006, we had capital in excess of the requirements for a "well-capitalized" institution. 22 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, 2006 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 - ------------------------- ------------------------------------ 200 basis point rise 15.73% (0.18)% Base Rate Scenario -- -- 200 basis point decline (7.55)% (5.85)%
23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The above table indicates that, at September 30, 2006, 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, 2006, 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 200 basis point decline in interest rates will result in a lower economic value of our equity as the change in estimated loss on liabilities exceeds the change in estimated gain on assets in these interest rate scenarios. Currently, under a falling rate environment, the Company's estimated market value of loans could increase as a result of fixed rate loans, net of possible prepayments. The estimated market value of investment securities could also rise as our portfolio contains higher yielding securities. However, the estimated market value increase in fixed rate loans and investment securities is offset by time deposits unable to reprice to lower rates immediately and fixed-rate callable advances from FHLB. The likelihood of advances being called in a decreasing rate environment is diminished resulting in the advances existing until final maturity, which has the effect of lowering the economic value of equity. 24 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 other 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. 25 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable ITEM 1A. RISK FACTORS No changes 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 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 26 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 13, 2006 By: /s/ Robert D. Regnier ---------------------------------- Robert D. Regnier, President and Chief Executive Officer and Director (Principal Executive Officer) Date: November 13, 2006 By: /s/ Mark A. Fortino ---------------------------------- Mark A. Fortino, Chief Financial Officer (Principal Financial [and Accounting] Officer) 27 EX-15 2 c10026exv15.txt LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION EXHIBIT 15 ACCOUNTANTS' ACKNOWLEDGEMENT Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 We are aware that our report dated November 2, 2006 on our review of the interim financial information of Blue Valley Ban Corp for the periods ended September 30, 2006 and 2005 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 November 7, 2006 EX-31.1 3 c10026exv31w1.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 13, 2006 /s/ Robert D. Regnier --------------------- Robert D. Regnier, President and Chief Executive Officer EX-31.2 4 c10026exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER 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 13, 2006 /s/ Mark A. Fortino ------------------- Mark A. Fortino, Chief Financial Officer EX-32.1 5 c10026exv32w1.txt CERTIFICATION OF CEO AND CFO 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 Quarterly Report of Blue Valley Ban Corp (the "Company") on Form 10-Q for the period ended September 30, 2006, 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 13, 2006 /s/ Robert D. Regnier --------------------- Robert D. Regnier, President and Chief Executive Officer /s/ Mark A. Fortino ------------------- Mark A. Fortino, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----