10-Q 1 c21553e10vq.htm QUARTERLY REPORT e10vq
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
OR
     
o   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    
Overland Park, Kansas   66225-6128
(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
Securities, $8.00 par value of BVBC Capital
Trust I (None of which are currently outstanding)
  American Stock Exchange
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 þ No o
     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 o     Accelerated filer o     Non-accelerated filer þ
     Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Securities Act Yes o No þ
     As of September 30, 2007 the registrant had 2,439,448 shares of Common Stock ($1.00 par value) outstanding.
 
 

 

 

Blue Valley Ban Corp.
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 Letter Regarding Unaudited Interim Financial Information
 Certification of Chief Executive Officer
 Certification of Treasurer
 Section 906 Certifications

2 

Table of Contents

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, 2007, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2007 and 2006 and the condensed consolidated statements of stockholders’ equity and cash flows for the nine-month periods ended September 30, 2007 and 2006. 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 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, 2006 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 March 21, 2007 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, 2006 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
November 12, 2007

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Table of Contents

Blue Valley Ban Corp.
Condensed Consolidated Balance Sheets
September 30, 2007 and December 31, 2006
(dollars in thousands, except share data)
Assets
                 
           
    September 30,
2007		     December 31,
2006		  
    (Unaudited)          
 
                
Cash and due from banks
   $ 17,077     $ 21,499  
Interest-bearing deposits in other financial institutions
     347       356  
Federal funds sold
     19,647       5,375  
 
            
Cash and cash equivalents
     37,071       27,230  
 
                
Available-for-sale securities
     92,590       87,206  
Mortgage loans held for sale
     4,691       21,805  
 
                
Loans, net of allowance for loan losses of $7,361 and $6,106 in 2007 and 2006, respectively
     554,161       522,409  
 
                
Premises and equipment, net
     19,089       17,953  
Foreclosed assets held for sale, net
     756       717  
Interest receivable
     5,654       4,200  
Deferred income taxes
     1,308       2,276  
Prepaid expenses and other assets
     2,136       1,305  
Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities
     6,977       6,447  
Goodwill
     4,821       —  
Core deposit intangible asset, at amortized cost
     1,195       671  
 
            
 
                
Total assets
   $ 730,449     $ 692,219  
 
            
     
See Accompanying Notes to Condensed Consolidated Financial Statements
     and Report of Independent Registered Public Accounting Firm
  4 

 

Table of Contents

Blue Valley Ban Corp.
Condensed Consolidated Balance Sheets
September 30, 2007 and December 31, 2006
(dollars in thousands, except share data)
Liabilities and Stockholders’ Equity
                 
           
    September 30,
2007		     December 31,
2006		  
    (Unaudited)          
 
                
Liabilities
                
Deposits
                
Demand
   $ 93,045     $ 94,823  
Savings, NOW and money market
     201,099       156,069  
Time
     254,420       284,972  
 
            
Total deposits
     548,564       535,864  
 
                
Other interest-bearing liabilities
     37,569       29,558  
Long-term debt
     81,187       67,019  
Interest payable and other liabilities
     4,341       5,958  
 
            
 
                
Total liabilities
     671,661       638,399  
 
            
 
                
Stockholders’ Equity
                
Capital stock
                
Common stock, par value $1 per share; authorized 15,000,000 shares; issued and outstanding 2007 — 2,439,448 shares; 2006 — 2,409,490 shares
     2,439       2,409  
Additional paid-in capital
     10,224       9,561  
Retained earnings
     45,792       41,982  
Accumulated other comprehensive income (loss), net of income taxes of $222 in 2007 and $(88) in 2006
     333       (132 )
 
            
 
                
Total stockholders’ equity
     58,788       53,820  
 
            
 
                
Total liabilities and stockholders’ equity
   $ 730,449     $ 692,219  
 
            
     
See Accompanying Notes to Condensed Consolidated Financial Statements
     and Report of Independent Registered Public Accounting Firm
  5 

 

Table of Contents

Blue Valley Ban Corp.
Condensed Consolidated Statements of Income
Three and Nine Months Ended September 30, 2007 and 2006
(dollars in thousands, except share data)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2007     2006     2007     2006  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
Interest Income
                                
Interest and fees on loans
   $ 11,716     $ 11,621     $ 35,715     $ 32,832  
Federal funds sold and other short-term investments
     256       66       499       104  
Available-for-sale securities
     1,171       960       3,290       3,069  
 
                        
Total interest income
     13,143       12,647       39,504       36,005  
 
                        
 
                                
Interest Expense
                                
Interest-bearing demand deposits
     193       22       447       71  
Savings and money market deposit accounts
     1,758       1,180       4,870       3,274  
Other time deposits
     3,377       2,928       9,951       8,031  
Federal funds purchased and other interest-bearing liabilities
     296       288       923       718  
Short-term debt
     1       21       72       315  
Long-term debt, net
     1,109       942       3,022       2,893  
 
                        
Total interest expense
     6,734       5,381       19,285       15,302  
 
                        
 
                                
Net Interest Income
     6,409       7,266       20,219       20,703  
 
                                
Provision for Loan Losses
     590       540       990       1,205  
 
                        
 
                                
Net Interest Income After Provision for Loan Losses
     5,819       6,726       19,229       19,498  
 
                        
 
                                
Noninterest Income
                                
Loans held for sale fee income
     701       1,341       2,613       3,669  
Service fees
     762       664       2,154       1,848  
Other income
     298       359       797       1,018  
 
                        
Total noninterest income
     1,761       2,364       5,564       6,535  
 
                        
 
                                
Noninterest Expense
                                
Salaries and employee benefits
     3,196       3,546       10,661       11,165  
Net occupancy expense
     839       770       2,373       2,281  
Other operating expense
     1,813       1,564       5,709       4,834  
 
                        
Total noninterest expense
     5,848       5,880       18,743       18,280  
 
                        
 
                                
Income Before Income Taxes
     1,732       3,210       6,050       7,753  
 
                                
Provision for Income Taxes
     646       1,219       2,240       2,929  
 
                        
 
                                
Net Income
   $ 1,086     $ 1,991     $ 3,810     $ 4,824  
 
                        
 
                                
Basic Earnings Per Share
   $ 0.45     $ 0.84     $ 1.58     $ 2.04  
 
                        
Diluted Earnings Per Share
   $ 0.44     $ 0.83     $ 1.56     $ 2.01  
 
                        
     
See Accompanying Notes to Condensed Consolidated Financial Statements
     and Report of Independent Registered Public Accounting Firm
  6 

 

Table of Contents

Blue Valley Ban Corp.
Condensed Consolidated Statements of Stockholders’ Equity
Nine Months Ended September 30, 2007 and 2006
(dollars in thousands, except share data)
                                                         
                                            Accumulated        
                    Additional                     Other        
    Comprehensive     Common     Paid-In     Retained     Unearned     Comprehensive        
    Income     Stock     Capital     Earnings     Compensation     Income (Loss)     Total  
     
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  
 
                                          
 
   $ 5,025                                                  
 
                                                      
Balance, September 30, 2006
           $ 2,409     $ 9,452     $ 40,606     $ —     $ (272 )   $ 52,195  
 
                                            
 
                                                        
Balance, December 31, 2006
           $ 2,409     $ 9,561     $ 41,982     $ —     $ (132 )   $ 53,820  
 
                                            
 
                                                        
Issuance of 30 shares of common stock
             1       6       —       —       —       7  
Issuance of 11,575 shares of restricted stock, net of forfeiture
             11       252       —       —       —       263  
Issuance of 13,825 shares of common stock through stock options exercised
             14       293       —       —       —       307  
Issuance of 4,558 shares common stock for the employee stock purchase plan
             4       112       —       —       —       116  
Net income
   $ 3,810       —       —       3,810       —       —       3,810  
Change in derivative financial instrument, net of income taxes (credit) of $(26)
     (38 )     —       —       —       —       (38 )     (38 )
Change in unrealized depreciation on available-for-sale securities, net of income taxes of $336
     503       —       —       —       —       503       503  
 
                                          
 
   $ 4,275                                                  
 
                                                      
Balance, September 30, 2007
           $ 2,439     $ 10,224     $ 45,792     $ —     $ 333     $ 58,788  
 
                                            
         
See Accompanying Notes to Condensed Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm
     7   

 

Table of Contents

Blue Valley Ban Corp.
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2007 and 2006
(dollars in thousands, except share data)
                 
    September 30, 2007     September 30, 2006  
     
    (Unaudited)     (Unaudited)  
Cash Flows From Operating Activities
                
Net income
   $ 3,810     $ 4,824  
Adjustments to reconcile net income to net cash flow
                
From operating activities:
                
Depreciation and amortization
     1,174       1,093  
Accretion of premiums on securities
     (30 )     (72 )
Provision for loan losses
     990       1,205  
Provision for other real estate
     5       —  
Deferred income taxes
     271       111  
Stock dividends on FHLB securities
     (198 )     (210 )
Net (gain) loss on sale of foreclosed assets
     97       (29 )
Net gain on sale of premises and equipment
     —       6  
Restricted stock earned and forfeited
     264       372  
Compensation expense related to the employee stock purchase plan
     15       10  
Originations of loans held for sale
     (146,073 )     (246,932 )
Proceeds from the sale of loans held for sale
     163,187       239,047  
Changes in
                
Interest receivable
     (1,265 )     (952 )
Prepaid expenses and other assets
     (260 )     3,478  
Interest payable and other liabilities
     (1,376 )     (4,377 )
 
            
Net cash provided by (used in) operating activities
     20,611       (2,426 )
 
            
 
                
Cash Flows From Investing Activities
                
Net originations of loans
     (4,739 )     (33,410 )
Purchase of premises and equipment
     (606 )     (418 )
Proceeds from the sale of foreclosed assets, net of expenses
     1,074       838  
Purchases of available-for-sale securities
     (32,971 )     (5,998 )
Proceeds from maturities of available-for-sale securities
     30,050       20,110  
Purchases of Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities
     (314 )     —  
Proceeds from the redemption of Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities
     686       2,319  
Sale of Western National Bank charter and other assets
     392       —  
Purchase of Unison Bancorp, Inc. and subsidiary, net of cash received
     (6,255 )     —  
Proceeds from other investing activities
     123       —  
 
            
Net cash used in investing activities
     (12,560 )     (16,559 )
 
            
 
                
Cash Flows From Financing Activities
                
Net increase (decrease) in demand deposits, money market, NOW and savings accounts
     15,273       (26,575 )
Net increase (decrease) in time deposits
     (33,814 )     27,246  
Repayments of long-term debt
     (1,482 )     (10,813 )
Proceeds from long-term debt
     15,000       —  
Dividends paid on common stock
     (723 )     (596 )
Net proceeds (payments) from other financing activities
     429       543  
Net increase in other borrowings
     7,107       4,462  
 
            
Net cash provided by (used in) financing activities
     1,790       (5,733 )
 
            
 
                
         
See Accompanying Notes to Condensed Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm
     8  

 

Table of Contents

Blue Valley Ban Corp.
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2007 and 2006
(dollars in thousands, except share data)
                 
    September 30, 2007     September 30, 2006  
     
    (Unaudited)     (Unaudited)  
Increase (decrease) in Cash and Cash Equivalents
     9,841       (24,718 )
Cash and Cash Equivalents, Beginning of Period
     27,230       40,057  
 
            
Cash and Cash Equivalents, End of Period
   $ 37,071     $ 15,339  
 
            
Supplemental Cash Flows Information
The Company purchased Unison Bancorp, Inc. and its subsidiary, Western National Bank, Lenexa, Kansas for a premium of $5,531,000. In conjunction with this acquisition, liabilities were assumed as follows:
         
Fair value of assets acquired
   $ 39,923,000  
Less cash paid (net of cash received)
     6,255,000  
 
      
 
        
Liabilities assumed
   $ 33,668,000  
 
      
         
See Accompanying Notes to Condensed Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm
     9  

 

Table of Contents

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2007 and 2006
(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, 2007, and the condensed consolidated results of its operations, changes in stockholders’ equity and cash flows for the periods ended September 30, 2007 and 2006, and are of a normal recurring nature. The condensed consolidated balance sheet of the Company, as of December 31, 2006, has been derived from the audited consolidated balance sheet of the Company as of that date.
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, 2006 Form 10-K filed with the Securities and Exchange Commission. 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: New Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of SFAS No. 109 (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 as of January 1, 2007, and the adoption had no significant impact on the Company’s consolidated financial statements. The Company and subsidiaries file income tax returns in the U.S. Federal jurisdiction and the state jurisdictions of Kansas and Missouri. With few exceptions, the Company is no longer subject to U.S Federal or state income tax examinations by tax authorities for years before 2004.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements, which provides guidance for using fair value to measure assets and liabilities. The statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. FASB Statement No. 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact, if any, that FASB Statement No. 157 may have on the Company’s financial statements. On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 provides an option to report selected financial

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Table of Contents

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2007 and 2006
(Unaudited)
assets and liabilities at fair value. The statement is effective as of the beginning of the fiscal year for fiscal years beginning after November 15, 2007. Early adoption is permitted provided, among other things, an entity elects to adopt within the first 120 days of that fiscal year. The Company does not anticipate adopting SFAS No. 159 before the required implementation date of January 1, 2008. The Company has not yet determined the impact of SFAS No. 159 might have on the consolidated financial statements upon adoption.
Note 3: 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 4: 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-month and nine-months ended September 30, 2007 and 2006 is as follows:
                                 
    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2007     2006     2007     2006  
    (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
   $ 1,086     $ 1,991     $ 3,810     $ 4,824  
 
                        
 
                                
Average common shares outstanding
     2,412,603       2,372,489       2,408,285       2,361,349  
Diluted effect of stock options outstanding
     30,930       37,904       29,976       42,057  
 
                        
 
                                
Average diluted common shares
     2,443,533       2,410,393       2,438,261       2,403,406  
 
                        
 
                                
Basic earnings per share
   $ 0.45     $ 0.84     $ 1.58     $ 2.04  
 
                        
Diluted earnings per share
   $ 0.44     $ 0.83     $ 1.56     $ 2.01  
 
                        

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Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2007 and 2006
(Unaudited)
Note 5: 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 in May 2008. As of September 30, 2007 and December 31, 2006, the Company had no outstanding balance on this line of credit.
Note 6: Long-Term Debt
Long-term debt at September 30, 2007 and December 31, 2006, consisted of the following components:
                 
    September 30,     December 31,  
    2007     2006  
    (Unaudited)          
    (in thousands)  
 
                
Note payable — Blue Valley Ban Corp (A)
   $ 2,931     $ 3,381  
Note payable — Blue Valley Building Corp. (B)
     6,168       6,550  
Federal Home Loan Bank advances (C)
     52,500       37,500  
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
   $ 81,187     $ 67,019  
 
            

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Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2007 and 2006
(Unaudited)
  (A)   Due in December 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 7).
 
  (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, 2012, 2013, 2015 and 2016; 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, 2007, approximately $48,042,000 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, 2007 are as follows:
         
    (in thousands)  
 
        
October 1 to December 31, 2007
   $ 281  
2008
     11,140  
2009
     1,169  
2010
     1,199  
2011
     8,731  
Thereafter
     58,667  
 
      
 
        
 
   $ 81,187  
 
      

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Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2007 and 2006
(Unaudited)
Note 7: 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 6). The agreement provides for the Company to receive interest from the counterparty at an amount which offsets 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, 2007. A $38,000 unrealized loss has been recognized as a component of other comprehensive income (loss).
Note 8: Business Acquisition
On February 16, 2007, the Company acquired 100% of the outstanding common stock of Unison Bancorp, Inc. (“Unison”) and its subsidiary, Western National Bank of Lenexa, Kansas (“Western”) for $10,180,000 in cash and merged Unison into the Company. On March 29, 2007, the Company sold Western to Northland National Bank, Kansas City, Missouri, and simultaneously the Company’s subsidiary, Bank of Blue Valley, purchased the assets and assumed the liabilities of Western, with the exception of the bank charter and some miscellaneous assets and received $392,000 cash as a net result. As a result of the acquisition, the Company will have an opportunity to continue its expansion in Johnson County and this represents its first presence in Lenexa. Their results of operations have been included in the consolidated financial statements since February 16, 2007.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

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Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2007 and 2006
(Unaudited)
         
    (in thousands)  
Cash and cash equivalents
   $ 4,134  
Available-for-sale securities
     1,594  
Loans
     29,200  
Premises and equipment
     1,508  
Core deposits intangible
     1,000  
Western National Bank charter — intangible
     325  
Goodwill
     4,531  
Other assets
     1,660  
 
      
 
Total assets
     43,952  
 
      
 
Deposits
     31,241  
Other interest-bearing liabilities
     903  
Long-term debt
     650  
Other liabilities
     874  
 
      
 
Total liabilities assumed
     33,668  
 
      
 
Net assets acquired
   $ 10,284  
 
      
The Company acquired identifiable intangibles which consisted of the core deposit base of $1,000,000, which has a useful life of approximately seven years and is being amortized using the straight-line method and the bank charter, which was subsequently sold to Northland National Bank on March 29, 2007. The $4,531,000 of goodwill is not considered deductible for income tax purposes.

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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 is deemed a critical accounting policy 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 that policy. Accounting for this critical area 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 policy since December 31, 2006. Further description of our critical accounting policy can be found in our Annual Report on Form 10-K for the year ended December 31, 2006.
Results of Operations
Three months ended September 30, 2007 and 2006. Net income for the quarter ended September 30, 2007, was $1.1 million, compared to net income of $2.0 million for the quarter ended September 30, 2006, representing a decrease of $905,000, or 45.45%. Diluted earnings per share decreased 46.99% to $0.44 during the third quarter of 2007 from $0.83 in the same period of 2006. The Company’s annualized returns on average assets and average stockholders’ equity for the three-month period ended September 30, 2007 were 0.60% and 7.46%, compared to 1.16% and 15.43%, respectively, for the same period in 2006, decreases of 48.28% and 51.65%, respectively.
The contributing factors to our decrease in net income in the current year third quarter from the prior year was a decrease in net interest income resulting from higher costs and balances on average interest-bearing liabilities. In addition, the decrease in net income was a result of lower non-interest income, specifically mortgage loans held for sale fee income. Lower mortgage origination volume, resulting from higher interest rates and an industry wide decline in the housing market, led to a decline in mortgage loans held for sale fee income.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations
Nine months ended September 30, 2007 and 2006. Net income for the nine months ended September 30, 2007, was $3.8 million, compared to net income of $4.8 million for the nine months ended September 30, 2006, representing a decrease of $1.0 million, or 21.02%. Diluted earnings per share decreased 22.39% to $1.56 during the nine months ended September 30, 2007 from $2.01 in the same period of 2006. The Company’s annualized return on average assets and average stockholders’ equity for the nine-month period ended September 30, 2007 were 0.70% and 9.09%, compared to 0.94% and 13.17%, respectively, for the same period in 2006, decreases of 25.53% and 30.98%, respectively.
The contributing factors to our decrease in net income from the nine months ended September 30, 2006 to the current year was an increase in interest expense resulting from a certificate of deposit promotion offered by the Company during the second quarter of 2007 and an increase in our deposit account rates during the first quarter of 2007. The decrease was partly offset by an increase interest income due to an increase in average earning assets. The decrease was also due to lower noninterest income, specifically mortgage loans held for sale fee income. Lower mortgage origination volume, resulting from higher interest rates and an industry wide decline in the housing market, led to a decline in mortgage loans held for sale fee income. Additionally, the decrease was partially due to an increase in noninterest expense, specifically other operating expenses related to the purchase of Unison Bancorp, Inc. and its subsidiary, Western National Bank, marketing efforts focused on our new location in Lenexa and consulting services related to the mortgage division.
Net Interest Income
Three months ended September 30, 2007 and 2006. Fully tax equivalent (FTE) net interest income for the three-month period ended September 30, 2007 was $6.4 million, a decrease of $857,000, or 11.79%, from $7.3 million for the three-month period ended September 30, 2006.
FTE interest income for the current year third quarter was $13.1 million, an increase of $494,000, or 3.90%, from $12.7 million in the prior year third quarter. This increase was primarily a result of an overall increase in balances on average earning assets. The overall yield on average earning assets decreased by 19 basis points to 7.69% during the three-month period ending September 30, 2007 compared to 7.88% during the same period in 2006. The 19 basis point decrease in yield resulted from increases in market interest rates, which was partly offset by a few loans placed on non-accrual status during the third quarter 2007. In addition, FTE interest income also increased due to an increase in average earning assets, particularly loans. The average balance of loans increased approximately $31 million, or 5.79%, from prior year third quarter primarily due to the acquisition of Unison Bancorp, Inc. and its subsidiary in February 2007.
Interest expense for the current year third quarter was $6.7 million, an increase of $1.3 million, or 25.14%, from $5.4 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 all of our deposit products. The rate paid on total average interest-bearing liabilities increased 59 basis points to 4.61% during the three month period ending September 30, 2007 compared to 4.02% during the same period in 2006. In addition, average interest-bearing liabilities increased $48.2 million or 9.09% to $579.1 million during the third quarter of 2007 compared to $530.8 million during the prior year period. The increase in average interest-bearing liabilities was primarily the result of the acquisition of Unison Bancorp, Inc. and its subsidiary in February 2007.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations
Nine months ended September 30, 2007 and 2006. FTE net interest income for the nine -month period ended September 30, 2007 was $20.2 million, a decrease of $487,000 or 2.35% from $20.7 million for the nine-month period ended September 30, 2006.
FTE interest income for the nine months ended September 30, 2007 was $39.5 million, an increase of $3.5 million, or 9.70%, from $36.0 million for the nine months ended September 30, 2006. This increase was primarily a result of an overall increase in balances and yields on average earning assets. The overall yield on average earning assets increased by 32 basis points to 7.85% for the period ending September 30, 2007 compared to 7.53% for the prior year period. The 32 basis point increase in yield resulted from increases in market interest rates. In addition, FTE interest income also increased due to an increase in average earning assets, particularly loans. The average balance of loans increased approximately $35 million, or 6.77%, from prior year primarily due to the acquisition of Unison Bancorp, Inc. and its subsidiary in February 2007.
Interest expense for the nine-month period ended September 30, 2007 was $19.3 million, an increase of $4.0 million, or 26.02%, from $15.3 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 all of our deposit products as well as short-term and long-term borrowings. The rate paid on total average interest-bearing liabilities increased 71 basis points to 4.51% during the nine-month period ending September 30, 2007 compared to 3.80% during the same period in 2006. In addition, average interest-bearing liabilities increased $33.4, or 6.19%, to $572.2 million during the nine-month period ending September 30, 2007 compared to $538.8 million during the prior year period. The increase in average interest-bearing liabilities was primarily the result of the acquisition of Unison Bancorp, Inc. and its subsidiary in February 2007.
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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations
Average Balances, Yields and Rates
                                                 
    Nine Months Ended September 30,  
    2007     2006  
    Average             Average     Average             Average  
    Balance     Interest     Yield/ Rate     Balance     Interest     Yield/ Rate  
    (Dollars in thousands)  
Assets
                                                
Federal funds sold
   $ 12,888     $ 499       5.17 %   $ 4,172     $ 156       5.01 %
Investment securities — taxable
     90,045       3,279       4.87       94,236       2,996       4.25  
Investment securities — non-taxable (1)
     346       17       6.71       586       31       7.08  
Mortgage loans held for sale
     10,457       498       6.37       17,110       817       6.39  
Loans, net of unearned discount and fees
     558,793       35,217       8.43       523,373       32,015       8.18  
 
                                        
 
                                                
Total earning assets
     672,529       39,510       7.85       639,477       36,015       7.53  
 
                                        
 
                                                
Cash and due from banks — non-interest bearing
     17,658                       19,348                  
Allowance for possible loan losses
     (6,693 )                     (6,573 )                
Premises and equipment, net
     19,103                       18,388                  
Other assets
     20,822                       16,979                  
 
                                            
 
                                                
Total assets
   $ 723,419                     $ 687,619                  
 
                                            
 
                                                
Liabilities and Stockholders’ Equity
                                                
Deposits-interest bearing:
                                                
Interest-bearing demand accounts
   $ 29,794     $ 447       2.01 %   $ 25,185     $ 71       0.38 %
Savings and money market deposits
     161,711       4,870       4.03       152,193       3,274       2.88  
Time deposits
     276,004       9,951       4.82       255,842       8,031       4.20  
 
                                        
 
                                                
Total interest-bearing deposits
     467,509       15,268       4.37       433,220       11,376       3.51  
 
                                        
 
                                                
Short-term borrowings
     31,382       995       4.24       32,695       1,033       4.22  
Long-term debt
     73,259       3,022       5.51       72,872       2,893       5.31  
 
                                        
 
                                                
Total interest-bearing liabilities
     572,150       19,285       4.51       538,787       15,302       3.80  
 
                                        
 
                                                
Non-interest bearing deposits
     90,474                       94,004                  
Other liabilities
     4,770                       5,858                  
Stockholders’ equity
     56,025                       48,970                  
 
                                            
 
                                                
Total liabilities and stockholders’ equity
   $ 723,419                     $ 687,619                  
 
                                            
 
                                                
Net interest income/spread
           $ 20,225       3.35 %           $ 20,713       3.73 %
 
                                          
 
                                                
Net interest margin
                     4.02 %                     4.33 %
 
                                            
 
(1)   Presented on a fully tax-equivalent basis assuming a tax rate of 34%. For the quarters ending September 30, 2007 and 2006, the tax equivalency adjustment amounted to $6,000 and $10,000 respectively.

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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,  
    2007 Compared to 2006  
    Change     Change        
    Due to     Due to     Total  
    Rate     Volume     Change  
    (Dollars in thousands)  
Federal funds sold and other short-term investments
   $ 5     $ 338     $ 343  
Investment securities — taxable
     435       (152 )     283  
Investment securities — non-taxable (1)
     (2 )     (12 )     (14 )
Mortgage loans held for sale
     (2 )     (317 )     (319 )
Loans, net of unearned discount
     970       2,232       3,202  
 
                  
Total interest income
     1,406       2,089       3,495  
 
                  
Interest-bearing demand accounts
     307       69       376  
Savings and money market deposits
     1,309       287       1,596  
Time deposits
     1,193       727       1,920  
Short-term borrowings
     5       (43 )     (38 )
Long-term debt
     113       16       129  
 
                  
Total interest expense
     2,927       1,056       3,983  
 
                  
Net interest income
   $ (1,521 )   $ 1,033     $ (488 )
 
                  
 
(1)   Presented on a fully tax-equivalent basis assuming a tax rate of 34%.

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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 2007 was $590,000, compared to $540,000 for the same period of 2006. For the nine-months ended September 30, 2007 and 2006, the provision was $990,000 and $1.2 million, respectively. The increase in provision for loan losses recorded during the three-month period ended September 30, 2007 compared to the same period in the prior year was a result of growth in the loan portfolio as well as a slight decline in the credit quality of the real estate and construction portfolios. The decrease in provision for loan losses recorded during the nine-month period ended September 30, 2007 compared to 2006 was the result of two larger credits for which management was aggressively pursuing collection during 2006 that were paid off during the second quarter of 2007. 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 Bank’s Board of Directors review 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. The Company makes 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,  
    2007     2006     2007     2006  
    (Dollars in thousands)  
Loans held for sale fee income
   $ 701     $ 1,341     $ 2,613     $ 3,669  
NSF charges and service fees
     364       319       1,073       910  
Other service charges
     398       345       1,081       938  
Other income
     298       359       797       1,018  
 
                        
Total non-interest income
   $ 1,761     $ 2,364     $ 5,564     $ 6,535  
 
                        
Non-interest income decreased $603,000, or 25.51%, to $1.8 million during the three-month period ended September 30, 2007, from $2.4 million during the three-month period ended September 30, 2006. Non-interest income for the nine-months period ended September 30, 2007 was $5.6 million, a decrease of $971,000, or 14.86%, from $6.5 million for the nine-months ended September 30, 2006. The decreases are primarily attributable to a decrease in loans held for sale fee income of $640,000, or 47.73%, and $1.1 million, or 28.78%, for the three-month and nine-month periods ended September 30, 2007, 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 as well as an industry wide decline in the housing market. This decrease was partly offset by an increase in other service charges income for the three-month and nine-month periods ended September 30, 2007 of $53,000, or 15.34%, and $143,000, or 15.71%, respectively, specifically related to our debit card interchange fee income produced by our new performance checking account product.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
      Non-interest Expense
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2007     2006     2007     2006  
    (In thousands)  
Salaries and employee benefits
   $ 3,196     $ 3,546     $ 10,661     $ 11,165  
Occupancy
     839       770       2,373       2,281  
General and administrative
     1,813       1,564       5,709       4,834  
 
                        
Total non-interest expense
   $ 5,848     $ 5,880     $ 18,743     $ 18,280  
 
                        
Non-interest expense decreased $32,000, or 0.54%, to $5.8 million during the three-month period ended September 30, 2007, compared to $5.9 million during the prior year period. For the nine-month period ended September 30, 2007, non-interest expense increased $463,000, or 2.53% to $18.7 million compared to $18.3 million in the prior year period. These changes are attributed primarily to an increase in general and administrative costs, which increased $249,000, or 15.92%, during the three-month period ended September 30, 2007 and $875,000, or 18.10%, during the nine-month period ended September 30, 2007. These costs increased primarily due to the purchase of Unison Bancorp, Inc. and its subsidiary, Western National Bank, marketing efforts focused on our new location in Lenexa and consulting services related to the mortgage operations restructuring. The increase was partly offset by a decrease in salaries and employee benefits expense for the three-month and nine-month periods ended September 30, 2007 of $350,000, or 9.87%, and $504,000, or 4.51%, respectively. Salaries and employee benefits expense decreased due to lower compensation costs within our mortgage division. The Company had 220 full-time equivalent employees at September 30, 2007 compared to 237 full-time equivalent employees at the same period last year. The decrease is mainly due to reducing our mortgage division staffing due to the decline in mortgage volume.
     Financial Condition
Total assets for the Company at September 30, 2007, were $730.4 million, an increase of $38.2 million, or 5.52%, compared to $692.2 million at December 31, 2006. Deposits and stockholders’ equity at September 30, 2007, were $548.6 million and $58.8 million, respectively, compared with $535.9 million and $53.8 million, respectively, at December 31, 2006, increases of $12.7 million or 2.37%, and $5.0 million or 9.23%, respectively.
Available-for-sale securities at September 30, 2007 totaled $92.6 million, reflecting a 6.17% increase from $87.2 million at December 31, 2006.
Mortgage loans held for sale at September 30, 2007 totaled $4.7 million, a decrease of $17.1 million, or 78.49%, compared to $21.8 million at December 31, 2006. The Company’s principal funding source for mortgage loans held for sale is short-term 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, 2007, approximately $48,042,000 was available.
Loans at September 30, 2007 totaled $561.5 million, reflecting an increase of $33.0 million, or 6.25%, compared to $528.5 million at December 31, 2006. The increase in the loan portfolio during the third quarter is primarily the result of the acquisition of Unison. The loan to deposit ratio at September 30, 2007 was 102.36% compared to 98.63% at December 31, 2006.

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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 and nonaccrual loans and foreclosed real estate. The following table sets forth our non-performing assets as of the dates indicated:
Non-Performing Assets
                         
    As of  
    September 30,     September 30,     December 31,  
    2007     2006     2006  
    (Dollars in thousands)  
Commercial and all other loans:
                        
Past due 90 days or more
   $ —     $ 609     $ 802  
Nonaccrual
     295       873       381  
Commercial real estate loans:
                        
Past due 90 days or more
     1,296       9,155       4,951  
Nonaccrual
     3,506       —       —  
Construction loans:
                        
Past due 90 days or more
     814       487       —  
Nonaccrual
     8,497       136       136  
Lease financing:
                        
Past due 90 days or more
     —       104       186  
Nonaccrual
     1,251       1       —  
Residential real estate loans:
                        
Past due 90 days or more
     —       —       —  
Nonaccrual
     144       554       410  
Consumer loans:
                        
Past due 90 days or more
     483       12       13  
Nonaccrual
     —       —       47  
Home equity loans:
                        
Past due 90 days or more
     —       35       —  
Nonaccrual
     —       —       —  
Debt securities and other assets (exclude other real estate owned and other repossessed assets)
                        
Past due 90 days or more
     —       —       —  
Nonaccrual
     —       —       —  
 
                  
Total non-performing loans
     16,286       11,966       6,926  
 
                  
Foreclosed assets held for sale
     756       682       717  
 
                  
Total non-performing assets
   $ 17,042     $ 12,648     $ 7,643  
 
                  
 
Total nonperforming loans to total loans
     2.90 %     2.24 %     1.31 %
Total nonperforming loans to total assets
     2.23 %     1.75 %     1.00 %
Allowance for loan losses to nonperforming loans
     45.20 %     55.94 %     88.16 %
Nonperforming assets to loans and foreclosed assets held for sale
     3.03 %     2.36 %     1.44 %
As of September 30, 2007, non-performing loans equaled 2.90% of total loans, representing an increase in non-performing loans from December 31, 2006. The overall credit exposure in the Company’s total loan portfolio increased as several large relationships in commercial real estate, construction and lease loans were placed on nonaccrual status during the quarter. 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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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     Nine months        
    ended     ended     Year ended  
    September 30,     September 30,     December 31,  
    2007     2006     2006  
            (Dollars in thousands)          
 
                        
Balance at Beginning of Period
   $ 6,106     $ 6,704     $ 6,704  
 
                        
Loans Charged Off
                        
Commercial loans
     82       850       1,417  
Commercial real estate loans
     —       —       —  
Construction loans
     25       100       100  
Lease financing
     16       105       134  
Residential real estate loans
     49       263       318  
Consumer loans
     16       53       83  
Home equity loans
     —       8       8  
 
                  
Total loans charged-off
     188       1,379       2,060  
 
                  
 
                        
Recoveries
                        
Commercial loans
     64       78       117  
Commercial real estate loans
     1       —       —  
Construction loans
     —       —       —  
Lease financing
     9       32       32  
Residential real estate loans
     6       44       47  
Consumer loans
     14       9       11  
Home equity loans
     —       —       —  
 
                  
Total recoveries
     94       163       207  
 
                  
 
                        
Net Loans Charged Off
     94       1,216       1,853  
Allowance for Loan Loss attributed to acquisition
     359       —       —  
 
                        
Provision for Loan Losses
     990       1,205       1,255  
 
                  
 
                        
Balance at End of Period
   $ 7,361     $ 6,693     $ 6,106  
 
                  
 
                        
Loans Outstanding
                        
Average
   $ 558,793     $ 523,373     $ 525,471  
End of period
     561,522       534,557       528,515  
 
                        
Ratio of Allowance for Loan Losses to Loans Outstanding
                        
Average
     1.32 %     1.28 %     1.16 %
End of period
     1.31 %     1.25 %     1.16 %
 
                        
Ratio of Net Charge-Offs (Recoveries) to
                        
Average loans
     0.02 %     0.31 %     0.35 %
End of period loans
     0.02 %     0.30 %     0.35 %
The allowance for loan losses as a percent of total loans increased to 1.32% as of September 30, 2007, compared to 1.16% as of December 31, 2006.

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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 72.63% and 73.40% of our total deposits at September 30, 2007, and December 31, 2006, 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, 2007, our total stockholders’ equity was $58.8 million and our equity to asset ratio was 8.05%. At September 30, 2007, our Tier 1 capital ratio was 9.85% compared to 10.29% at December 31, 2006, while our total risk-based capital ratio was 11.97% compared to 12.47% at December 31, 2006. As of September 30, 2007, we had capital in excess of the requirements for a “well-capitalized” institution.

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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 software 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 software 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, 2007 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
     11.30 %     2.63 %
Base Rate Scenario
     —       —  
200 basis point decline
     (17.50 %)     (11.50 )%
The above table indicates that, at September 30, 2007, 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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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, 2007, 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.

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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.

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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
          None
     Item 6. Exhibits
          EXHIBITS
  11.   Computation of Earnings Per Share. Please see p. 11.
 
  15.   Letter regarding Unaudited Interim Financial Information
 
  31.1   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
 
  31.2   Certification of the Treasurer pursuant to Rule 13a-14(a)/15d-14(a)
 
  32.1   Certification of the Chief Executive Officer and Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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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 14, 2007  By:   /s/ Robert D. Regnier    
    Robert D. Regnier, President and   
    Chief Executive Officer and Director (Principal Executive Officer)   
 
     
     Date: November 14, 2007  By:   /s/ Mark A. Fortino    
    Mark A. Fortino, Chief Financial Officer   
    (Principal Financial [and Accounting] Officer)   
 

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