NOTE 13: REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Company's regulators could require adjustments to regulatory capital not reflected in these consolidated financial statements.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital to average assets (as defined). As of December 31, 2011 and 2010, the Company and the Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2011, the Bank had capital in excess of regulatory requirements for a well-capitalized institution. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since December 31, 2011 that management believes have changed the Bank's position.

The Company and the Bank's actual capital amounts and ratios are also presented in the table.


										To Be Well Capitalized
						For Capital				Under Prompt Corrective
		Actual				Adequacy Purposes				Action Provisions
		Amount	Ratio			Amount	Ratio			Amount	Ratio
(In thousands)
December 31, 2011:
Total Capital
(to Risk Weighted Assets)
Consolidated	$	65,917	12.08	%	$	43,640	8.00	%		N/A
Bank Only	$	70,736	12.98	%	$	43,587	8.00	%	$	54,484	10.00	%

Tier 1 Capital
(to Risk Weighted Assets)
Consolidated	$	53,455	9.80	%	$	21,820	4.00	%		N/A
Bank Only	$	63,838	11.72	%	$	21,794	4.00	%	$	32,691	6.00	%

Tier 1 Capital
(to Average Assets)
Consolidated	$	53,455	8.04	%	$	26,609	4.00	%		N/A
Bank Only	$	63,838	9.61	%	$	26,571	4.00	%	$	33,214	5.00	%


										To Be Well Capitalized
						For Capital				Under Prompt Corrective
		Actual				Adequacy Purposes				Action Provisions
		Amount	Ratio			Amount	Ratio			Amount	Ratio
(In thousands)
December 31, 2010:
Total Capital
(to Risk Weighted Assets)
Consolidated	$	73,320	12.66	%	$	46,347	8.00	%		N/A
Bank Only	$	76,043	13.15	%	$	46,260	8.00	%	$	57,825	10.00	%

Tier 1 Capital
(to Risk Weighted Assets)
Consolidated	$	65,986	11.39	%	$	23,173	4.00	%		N/A
Bank Only	$	68,722	11.88	%	$	23,130	4.00	%	$	34,695	6.00	%

Tier 1 Capital
(to Average Assets)
Consolidated	$	65,986	9.04	%	$	29,213	4.00	%		N/A
Bank Only	$	68,722	9.41	%	$	29,215	4.00	%	$	36,519	5.00	%

The Company and Bank are subject to certain restrictions on the amounts of dividends that it may declare without prior regulatory approval. At December 31, 2011, any dividend declaration would require regulatory approval.

Preferred Stock and Warrants

On December 5, 2008, the Company issued and sold to the United States Department of Treasury (the "Treasury") 21,750 shares of Fixed Rate Cumulative Perpetual Preferred Stock (the "Preferred Shares"), along with a ten year warrant to purchase 111,083 shares of the Company's common stock for $29.37 per share, for a total cash price of $21,750,000 (the "Transaction"). The Preferred Shares have a liquidation preference of $1,000 per share. The Transaction occurred pursuant to, and is governed by the U.S. Treasury's Capital Purchase Plan (the "CPP"), which was designed to attract broad participation by institutions, to stabilize the financial system, and to increase lending for the benefit of the U.S. economy. In connection with the transaction, the Company entered into a letter agreement with the Treasury which includes a Securities Purchase Agreement-Standard Terms (the "SPA"). The Preferred Shares carry a 5% per year cumulative preferred dividend rate, payable quarterly. The dividend rate increases to 9% after five years. Dividends compound if they accrue and are not paid. During the first three years after the transaction, the Company may not redeem the Preferred Shares except in conjunction with a qualified equity offering meeting certain requirements. During the time that the Preferred Shares are outstanding, a number of restrictions apply to the Company, including, among others:

The Preferred Shares have a senior rank. The Company is not free to issue other preferred stock that is senior to the Preferred Shares.
Until the third anniversary of the sale of the Preferred Shares, unless the Preferred Shares have been redeemed in whole or the Treasury has transferred all of the shares to a non-affiliated third party, the Company may not declare or pay a common stock dividend in an amount greater than the amount of the last quarterly cash dividend per share declared prior to October 14, 2008, or repurchase common stock or other equity shares (subject to certain limited exceptions) without the Treasury's approval.
If the Company were to pay a cash dividend in the future, any such dividend would have to be discontinued if a Preferred Share dividend were missed. Thereafter, dividends on common stock could be resumed only if all Preferred Share dividends in arrears were paid. Similar restrictions apply to the Company's ability to repurchase common stock if Preferred Share dividends are missed.
Failure to pay the Preferred Share dividend is not an event of default. However, a failure to pay a total of six Preferred Share dividends, whether or not consecutive, gives the holders of the Preferred Shares the right to elect two directors to the Company's Board of Directors. That right would continue until the Company pays all dividends in arrears.
In conformity with requirements of the SPA and Section 111(b) of the Emergency Economic Stabilization Act of 2008 (the "EESA"), the Company and its subsidiary, Bank of Blue Valley, and each of its senior executive officers agreed to limit certain compensation, bonus, incentive and other benefits plans, arrangements, and policies with respect to the senior executive officers during the period that the Treasury owns any debt or equity securities acquired in connection with the Transaction. The applicable senior executive officers have entered into letter agreements with the Company consenting to the foregoing and have executed a waiver voluntarily waiving any claim against the Treasury or the Company for any changes to such senior executive officer's compensation or benefits that are required to comply with Section 111(b) of EESA.

The Company's preferred stock qualifies as Tier 1 capital in accordance with regulatory capital requirements.

The Warrant is exercisable immediately and expires in ten years. The Warrant has anti-dilution protections and certain other protections for the holder, as well as potential registration rights upon written request from the Treasury. If requested by the Treasury, the Warrant (and the underlying common stock) may need to be listed on a national securities exchange. The Treasury has agreed not to exercise voting rights with respect to common shares it may acquire upon exercise of the Warrant. If the Preferred Shares are redeemed in whole, the Company has the right to purchase any common shares held by the Treasury at their fair market value at that time.

The Board of Directors of Blue Valley Ban Corp. and its wholly owned subsidiary, Bank of Blue Valley, entered into a written agreement with the Federal Reserve Bank of Kansas City as of November 4, 2009. This agreement was a result of an examination that was completed by the regulators in May 2009, and relates primarily to the Bank's asset quality. Under the terms of the agreement, the Company and the Bank agreed, among other things, to submit an enhanced written plan to strengthen credit risk management practices and improve the Bank's position on the past due loans, classified loans, and other real estate owned; review and revise its allowance for loan and lease loss methodology and maintain an adequate allowance for loan loss; maintain sufficient capital at the Company and Bank level; and improve the Bank's earnings and overall condition. The Company and Bank have also agreed not to increase or guarantee any debt, purchase or redeem any shares of stock or declare or pay any dividends without prior written approval from the Federal Reserve Bank. The Company and the Bank have substantially complied will all items in the agreement.

At the request of the Federal Reserve Bank of Kansas City, the Company notified the Treasury of its intention to defer the quarterly dividend payments on the Preferred Shares due to the Treasury since May 15, 2009. As part of the Capital Purchase Plan, the Company entered into a letter agreement with the Treasury on December 5, 2008, which includes a Securities Purchase Agreement-Standard Terms. As part of the agreement, dividends compound if they accrue and are not paid. Failure by the Company to pay the Preferred Share dividend is not an event of default. However, a failure to pay a total of six Preferred Share dividends, whether or not consecutive, gives the holders of the Preferred Shares the right to elect two directors to the Company's Board of Directors. That right would continue until the Company pays all dividends in arrears. As of December 31, 2011, the Company has deferred eleven dividend payments. At this time, the Treasury has not elected any directors to serve on the Company's Board of Directors; however, in November 2010 the Treasury assigned an observer to attend the Company's board meetings. The Company has accrued for the dividends and interest and has every intention to bring the obligation current as soon as permitted. As of December 31, 2011, the Company had accrued $3,205,000 for the dividends and interest on outstanding Preferred Shares.

At December 31, 2011 and 2010, the Company had loans outstanding to executive officers, directors and to companies in which the Company's and Bank's executive officers or directors were principal owners, in the amount of $13,076,000 and $20,549,000, respectively. Annual activity consisted of the following:


		2011			2010
(In thousands)
Balance, beginning of year	$	20,549		$	22,387
New loans and advances		7,191			9,450
Repayments and reclassifications		(14,664	)		(11,288	)

Balance, end of year	$	13,076		$	20,549

In management's opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management's opinion, when originated these loans did not involve more than the normal risk of collectability or present other unfavorable features.

Deposits from executive officers and directors held by the Company at December 31, 2011, and 2010 totaled $4,514,000 and $5,997,000, respectively.