Blue Valley Ban 10Q 2010 Q1 Quarterly report

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 March 31, 2010


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)		None currently

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. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):


Large accelerated filero	Accelerated filero	Non-accelerated filero	Smaller reporting companyþ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Securities Act Yeso Noþ

As of March 31, 2010 the registrant had 2,824,270 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 - March 31, 2010 (unaudited) and December 31, 2009			4
Condensed Consolidated Statements of Operations (unaudited) - three months ended March 31, 2010 and 2009			6
Condensed Consolidated Statements of Stockholders’ Equity (unaudited) - three months ended March 31, 2010 and 2009			7
Condensed Consolidated Statements of Cash Flows (unaudited) - three months ended March 31, 2010 and 2009			8
Notes to Condensed Consolidated Financial Statements (unaudited) - three months ended March 31, 2010 and 2009			10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26

Item 3. Quantitative and Qualitative Disclosures About Market Risk			40

Item 4. Controls and Procedures			42

Part II. Other Information

Item 1. Legal Proceedings			43

Item 1A. Risk Factors			43

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			43

Item 3. Defaults Upon Senior Securities			43

Item 4. Submission of Matters to a Vote of Security Holders			43

Item 5. Other Information			43

Item 6. Exhibits			43
EX-15
EX-31.1
EX-31.2
EX-32.1

Part I. Financial Information

Item 1. Financial Statements

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders
Blue Valley Ban Corp.
Overland Park, Kansas 66225

We have reviewed the accompanying condensed consolidated balance sheet of Blue Valley Ban Corp. as of March 31, 2010, and the related condensed consolidated statements of operations for the three-month periods ended March 31, 2010 and 2009 and the condensed consolidated statements of stockholders’ equity and cash flows for the three-month periods ended March 31, 2010 and 2009. 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, 2009 and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended (not presented herein), and in our report dated March 23, 2010 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, 2009 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
May 12, 2010

See Accompanying Notes to Condensed Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm

Blue Valley Ban Corp.

Condensed Consolidated Balance Sheets

March 31, 2010 and December 31, 2009

(In thousands, except share data)


	March 31, 2010		December 31, 2009
	(Unaudited)
ASSETS

Cash and due from banks	$	30,333	$	32,126
Interest-bearing deposits in other financial institutions		116,913		64,858
Federal funds sold		20,000		—

Cash and cash equivalents		167,246		96,984

Available-for-sale securities		100,774		72,757
Mortgage loans held for sale, fair value		2,604		8,752

Loans, net of allowance for loan losses of $19,211 and $20,000 in 2010 and 2009, respectively		507,910		534,111

Premises and equipment, net		16,755		16,930
Foreclosed assets held for sale, net		23,680		19,435
Interest receivable		2,313		2,303
Deferred income taxes		9,425		9,480
Income taxes receivable		3,197		2,746
Prepaid expenses and other assets		2,668		2,803
Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities		7,085		7,059
Core deposit intangible asset, at amortized cost		571		607


Total assets	$	844,228	$	773,967

See Accompanying Notes to Condensed Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm

Blue Valley Ban Corp.

Condensed Consolidated Balance Sheets

March 31, 2010 and December 31, 2009

(In thousands, except share data)


	March 31, 2010		December 31, 2009
	(Unaudited)
LIABILITIES

Deposits
Demand	$	89,254	$	91,158
Savings, NOW and money market		216,154		204,245
Time		355,953		294,707

Total deposits		661,361		590,110

Other interest-bearing liabilities		15,725		16,120
Long-term debt		102,088		102,088
Interest payable and other liabilities		5,471		5,046


Total liabilities		784,645		713,364


STOCKHOLDERS’ EQUITY

Capital stock
Preferred stock, $1 par value, $1,000 liquidation preference; authorized 15,000,000 shares; issued and outstanding 2010 — 21,750 shares; 2009 — 21,750 shares		22		22
Common stock, par value $1 per share; authorized 15,000,000 shares; issued and outstanding 2010 — 2,824,270 shares; 2009 — 2,817,650 shares		2,824		2,818
Additional paid-in capital		38,085		37,975
Retained earnings		18,540		19,685
Accumulated other comprehensive income, net of income tax of $75 in 2010 and $69 in 2009		112		103


Total stockholders’ equity		59,583		60,603


Total liabilities and stockholders’ equity	$	844,228	$	773,967

See Accompanying Notes to Condensed Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm

Blue Valley Ban Corp.

Condensed Consolidated Statements of Operations

Three Months Ended March 31, 2010 and 2009

(In thousands, except share data)


	Three Months Ended March 31,
	2010			2009
	(Unaudited)			(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	7,133		$	9,099
Federal funds sold and other short-term investments		62			31
Available-for-sale securities		435			567

Total interest income		7,630			9,697


INTEREST EXPENSE
Interest-bearing demand deposits		680			563
Savings and money market deposit accounts		114			131
Other time deposits		2,244			2,969
Federal funds purchased and other interest-bearing liabilities		9			17
Long-term debt, net		968			1,028

Total interest expense		4,015			4,708


NET INTEREST INCOME		3,615			4,989

PROVISION FOR LOAN LOSSES		250			12,925


NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES		3,365			(7,936	)


NON-INTEREST INCOME
Loans held for sale fee income		721			786
Service fees		737			790
Realized gains on available-for-sale securities		—			346
Other income		141			248

Total non-interest income		1,599			2,170


NON-INTEREST EXPENSE
Salaries and employee benefits		2,974			3,051
Net occupancy expense		732			736
Other operating expense		2,647			3,272

Total non-interest expense		6,353			7,059


LOSS BEFORE INCOME TAXES		(1,389	)		(12,825	)
BENEFIT FOR INCOME TAXES		(516	)		(4,720	)


NET LOSS		(873	)		(8,105	)


DIVIDENDS ON PREFERRED STOCK		(272	)		(212	)


NET LOSS AVAILABLE TO COMMON STOCKHOLDERS	$	(1,145	)	$	(8,317	)


BASIC EARNINGS (LOSS) PER SHARE	$	(0.41	)	$	(3.02	)

DILUTED EARNINGS (LOSS) PER SHARE	$	(0.41	)	$	(3.02	)

See Accompanying Notes to Condensed Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm

Blue Valley Ban Corp.

Condensed Consolidated Statements of Stockholders’Equity

Three Months Ended March 31, 2010 and 2009

(In thousands, except share data)


													Accumulated
								Additional					Other
	Comprehensive			Preferred		Common		Paid-In		Retained			Comprehensive
	Income (Loss)			Stock		Stock		Capital		Earnings			Income (Loss)			Total

BALANCE, DECEMBER 31, 2008				$	22	$	2,760	$	37,666	$	35,340		$	651		$	76,439

Issuance of 14,900 shares of restricted stock, net of forfeiture					—		15		215		—			—			230
Issuance of 2,495 shares common stock for the employee stock purchase plan					—		2		60		—			—			62
Dividend on preferred stock					—		—		—		(212	)		—			(212	)
Net loss	$	(8,105	)		—		—		—		(8,105	)		—			(8,105	)
Change in unrealized depreciation on available-for-sale securities, net of income taxes (credit) of $(338)		(506	)		—		—		—		—			(506	)		(506	)

	$	(8,611	)

BALANCE, MARCH 31, 2009				$	22	$	2,777	$	37,941	$	27,023		$	145		$	67,908


BALANCE, DECEMBER 31, 2009				$	22	$	2,818	$	37,975	$	19,685		$	103		$	60,603

Issuance of 3,155 shares of restricted stock, net of forfeiture					—		3		78		—			—			81
Issuance of 3,465 shares common stock for the employee stock purchase plan					—		3		32		—			—			35
Dividends on preferred stock					—		—		—		(272	)		—			(272	)
Net loss	$	(873	)		—		—		—		(873	)		—			(873	)
Change in unrealized depreciation on available-for-sale securities, net of income taxes of $5		9			—		—		—		—			9			9

	$	(864	)

BALANCE, MARCH 31, 2010				$	22	$	2,824	$	38,085	$	18,540		$	112		$	59,583

See Accompanying Notes to Condensed Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm

Blue Valley Ban Corp.

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31, 2010 and 2009

(In thousands)


	March 31, 2010			March 31, 2009
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(873	)	$	(8,105	)
Adjustments to reconcile net loss to net cash flow
From operating activities:
Depreciation and amortization		260			345
Amortization (accretion) of premiums and discounts on available-for-sale securities		(13	)		21
Provision for loan losses		250			12,925
Provision for foreclosed assets held for sale		59			918
Deferred income taxes		50			(1,984	)
Stock dividends on Federal Home Loan Bank (FHLB) stock		(26	)		(24	)
Gain on sale of available-for-sale securities		—			(346	)
Net (gain) loss on sale of foreclosed assets		(80	)		51
Restricted stock earned and forfeited		81			230
Compensation expense related to the employee stock purchase plan		—			2
Originations of loans held for sale		(22,332	)		(56,238	)
Proceeds from the sale of loans held for sale		28,594			57,632
Realized gain on loans held for sale fair value adjustment		(114	)		—
Changes in
Interest receivable		(10	)		210
Net fair value of loan related commitments		164			—
Prepaid expenses and other assets		(513	)		(1,530	)
Interest payable and other liabilities		186			1,645

Net cash provided by operating activities		5,683			5,752

CASH FLOWS FROM INVESTING ACTIVITIES
Net (origination) collection of loans		18,697			15,761
Proceeds from the sale of loan participations		32			—
Purchase of premises and equipment		(49	)		(18	)
Proceeds from the sale of foreclosed assets, net of expenses		2,998			1,229
Purchases of available-for-sale securities		(44,990	)		(14,999	)
Proceeds from maturities of available-for-sale securities		17,000			23,000
Proceeds from sale of available-for-sale securities		—			11,346
Purchases of Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities		—			(152	)

Net cash provided by (used in) investing activities		(6,312	)		36,167

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, money market, NOW and savings accounts		10,005			9,053
Net increase in time deposits		61,246			27,419
Net decrease in federal funds purchased and other interest-bearing liabilities		(395	)		(1,590	)
Repayments of long-term debt		—			(139	)
Dividends paid on preferred stock		—			(212	)
Net proceeds from the sale of additional stock through Employee Stock Purchase Plan (ESPP) and stock options exercised		35			62

Net cash provided by financing activities		70,891			34,593

Increase in cash and cash equivalents		70,262			76,512
Cash and cash equivalents, beginning of period		96,984			44,973

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	167,246		$	121,485

See Accompanying Notes to Condensed Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm

Blue Valley Ban Corp.

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31, 2010 and 2009

(In thousands)


	March 31, 2010		March 31, 2009
	(Unaudited)		(Unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest		4,144		5,131
Income taxes, net of refunds		—		(1,340	)
Noncash investing and financing activities:
Transfer of loans to foreclosed property		7,222		10,943
Restricted stock issued		3		15
Preferred dividends accrued but not paid		272		—

See Accompanying Notes to Condensed Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm

Blue Valley Ban Corp.

Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(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 March 31, 2010, and the condensed consolidated results of its operations, changes in stockholders’ equity and cash flows for the periods ended March 31, 2010 and 2009, and are of a normal recurring nature. The condensed consolidated balance sheet of the Company, as of December 31, 2009, 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, 2009 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 ofBKD, LLPcommenting upon their review accompanies the condensed consolidated financial statements included in Item 1 of Part I.

Note 2: Recent and Future Accounting Pronouncements

On June 12, 2009, the Financial Accounting Standards Board (FASB) issued revisions to Accounting Standards Codification (ASC) 860-10, ASC 860-40, ASC 860-50 which enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and the company’s continuing involvement in transferred assets. This statement removes the concept of qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires enhanced disclosures to provide financial statement users with greater transparency about transfers of financial assets and a transferor’s continuing involvement with transfers of financial assets accounted for as sales. This update is effective for annual reporting periods beginning after November 15, 2009, for interim periods within the first annual reporting period and for interim and annual reporting periods thereafter (effective January 1, 2010 for the Company). There is currently no material impact on the Company’s consolidated financial statements from the adoption of this update.

On June 12, 2009, the FASB issued revisions to ASC 805-20, ASC 810-10 which requires a company to perform a qualitative analysis when determining whether it must consolidate a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the company that has both the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance, and the obligation to absorb losses of the entity that could be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. This statement requires the company to perform ongoing reassessments to determine if it must consolidate a variable interest entity. This statement requires disclosures about the company’s involvement with the variable interest entities and any significant changes in risk exposure due to that involvement, how the involvement affects the company’s financial statements, and significant judgments and assumptions made in determining whether it must consolidate the variable interest entity.

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(Unaudited)

Note 2: New Accounting Pronouncements (Continued)

This update is effective for annual reporting periods beginning after November 15, 2009, for interim periods within the first annual reporting period and for interim and annual reporting periods thereafter (effective January 1, 2010 for the Company). There is currently no material impact on the Company’s consolidated financial statements from the adoption of this update.

On January 10, 2010, the FASB issued Accounting Standards Update (ASU) 2010-06. This ASU amends ASC 820,Fair Value Measurements,and adds new requirements for disclosures about transfers into and out of Levels 1 and 2 in the fair value hierarchy and additional disclosures regarding purchases, sales, issuances and settlements related to Level 3 fair value measurements. Additionally, the update clarifies existing fair value disclosures about the level of disaggregation about inputs and valuation techniques used to measure fair value. The ASU also amends guidance on employers’ disclosures about post retirement benefit plan assets under ASC 715 to require that disclosures be provided by classes of assets instead of by major classes of assets. The ASU is generally effective for the first reporting period beginning after December 15, 2009 (effective January 1, 2010 for the Company). The only exception is the requirement to provide the Level 3 activity on a gross basis, which has an effective date for fiscal year ends beginning after December 15, 2010. Early adoption is permitted. The ASU currently has no material impact on the Company’s consolidated financial statements.

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(Unaudited)

Note 3: Earnings Per Share

Basic earnings (loss) per share represents income available to common stockholders divided by the weighted average number of shares outstanding during each year. Diluted earnings (loss) per share reflects additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The computation of per share earnings (loss) for the three months ended March 31, 2010 and 2009 is as follows:


	March 31, 2010			March 31, 2009
	(Unaudited)			(Unaudited)
	(In thousands, except
	share and per share data)
Net loss	$	(873	)	$	(8,105	)
Preferred dividends		(272	)		(212	)

Net loss available to common stockholders	$	(1,145	)	$	(8,317	)


Average common shares outstanding		2,763,131			2,749,893
Average common share stock options outstanding and restricted stock (B)		13,278			10,406

Average diluted common shares (B)		2,776,409			2,760,299


Basic loss per share	$	(0.41	)	$	(3.02	)

Diluted loss per share (A)	$	(0.41	)	$	(3.02	)


(A)		No shares of stock options, restricted stock or warrants were included in the computation of diluted earnings per share for any period there was a loss.

(B)		Warrants to purchase 111,083 shares of common stock at an exercise price of $29.37 per share were outstanding at March 31, 2010 and March 31, 2009, but were not included in the computation of diluted earnings per share because the warrant’s exercise price was greater than the average market price of the common shares, thus making the warrants anti-dilutive. Stock options to purchase 33,875 shares of common stock were outstanding at March 31, 2010, but were not included in the computation of diluted earnings per share because the option’s exercise price was greater than the average market price of the common shares, thus making the options anti-dilutive.

Income available for common stockholders is reduced by dividends declared in the period on preferred stock (whether or not they are paid) and the accretion of the warrants.

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(Unaudited)

Note 4: Available-for-Sale Securities

The amortized cost and estimated fair value of available-for-sale securities are as follows:


	March 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
			(In thousands)
U.S. Government sponsored agencies	$	99,987	$	405	$	(217	)	$	100,175
Equity and other securities		600		—		(1	)		599


	$	100,587	$	405	$	(218	)	$	100,774


	December 31, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
			(In thousands)
U.S. Government sponsored agencies	$	71,984	$	338	$	(159	)	$	72,163
Equity and other securities		600		—		(6	)		594


	$	72,584	$	338	$	(165	)	$	72,757

The amortized cost and estimated fair value of available-for-sale securities at March 31, 2010, by contractual maturity are shown below. Expected maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized		Fair
	Cost		Value
	(In thousands)
Due in one year or less	$	—	$	—
Due after one through five years		82,992		83,344
Due after five years through ten years		11,995		11,972
Due after five years		5,000		4,859

Total		99,987		100,175
Equity and other securities		600		599

	$	100,587	$	100,774

The book value and estimated fair value of securities pledged as collateral to secure public deposits amounted to $28,994,000 and $28,961,000 at March 31, 2010 and $16,995,000 and $17,117,000 at December 31, 2009. Securities pledged as collateral to secure public deposits were in excess of public deposits held by the Company as of March 31, 2010 and December 31, 2009.

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(Unaudited)

Note 4: Available-for-Sale Securities (Continued)

The Company enters into sales of securities under agreements to repurchase. The amounts deposited under these agreements represent short-term debt and are reflected as a liability in the consolidated balance sheets. The securities underlying the agreements are book-entry securities. During the period, securities held in safekeeping were pledged to the depositors under a written custodial agreement that explicitly recognizes the depositors’ interest in the securities. At March 31, 2010 and at December 31, 2009, or at any month end during the period, no material amount of agreements to repurchase securities sold was outstanding with any individual entity. Information on sales of securities under agreements to repurchase is as follows:


	March 31, 2010		December 31, 2009
	(In thousands)
Balance	$	15,385	$	15,417
Carrying value of securities pledged to secure agreements to repurchase at period end		27,234		29,182
Average balance during the period of securities sold under agreements to repurchase		15,333		22,546
Maximum amount outstanding at any month-end during the period		15,385		25,189

Gross gains of $0 and $346,000 were realized for the three months ended March 31, 2010 and 2009, respectively, and no gross losses were realized for the three months ended March 31, 2010 and, 2009 respectively, from sales of available-for-sale securities.

Certain investments in debt and marketable equity securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at March 31, 2010 and December 31, 2009, was $34,373,000 and $20,426,000, which is approximately 34.1% and 28.0% of the Company’s available-for-sale investment portfolio. These declines in fair value resulted primarily from changes in market interest rates. Based on evaluation of available information and evidence, particularly recent volatility in market yields on debt securities, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period in which the other-than-temporary impairment is identified.

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(Unaudited)

Note 4: Available-for-Sale Securities (Continued)

Unrealized losses and fair value, aggregated by investment type and length of time that individual securities have been in a continuous unrealized loss position are as follows:


	March 31, 2010
	(In thousands)
	Less than 12 Months				12 Months or More				Total		Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Government sponsored agencies	$	33,774	$	217	$	—	$	—	$	33,774	$	217
Equity and other securities		599		1		—		—		599		1


Total temporarily impaired securities	$	34,373	$	218	$	—	$	—	$	34,373	$	218


	December 31, 2009
	(In thousands)
	Less than 12 Months				12 Months or More				Total		Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Government sponsored agencies	$	19,832	$	159	$	—	$	—	$	19,832	$	159
Equity and other securities		594		6		—		—		594		6


Total temporarily impaired securities	$	20,426	$	165	$	—	$	—	$	20,426	$	165

The unrealized losses on the Company’s investments in direct obligations of U.S. government sponsored agencies were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2010.

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(Unaudited)

Note 5: Short-Term Debt

The Company has a line of credit with the Federal Home Loan Bank which is collateralized by various assets including mortgage-backed loans. At March 31, 2010 and December 31, 2009, there was no outstanding balance on the line of credit. The variable interest rate was 0.20% on March 31, 2010 and 0.18% on December 31, 2009. At March 31, 2010 approximately $24,350,000 was available.

The Company also has a line of credit with the Federal Reserve Bank of Kansas City which is collateralized by various assets, including commercial and commercial real estate loans. At March 31, 2010 and December 31, 2009, there was no outstanding balance on the line of credit. The line of credit bears a variable interest rate of federal funds rate plus 75 basis points and at March 31, 2010 approximately $40,738,000 was available. Advances are made at the discretion of the Federal Reserve Bank of Kansas City.

Note 6: Long-Term Debt

Long-term debt at March 31, 2010 and December 31, 2009, consisted of the following components:


	March 31,		December 31,
	2010		2009
	(Unaudited)
	(In thousands)
Federal Home Loan Bank advances (A)		82,500		82,500
Subordinated Debentures — BVBC Capital Trust II (B)		7,732		7,732
Subordinated Debentures — BVBC Capital Trust III (C)		11,856		11,856


Total long-term debt	$	102,088	$	102,088


(A)		Due in 2011, 2012, 2013, 2015, 2016 and 2018; collateralized by various assets including mortgage-backed loans. The interest rates on the advances range from 2.62% to 5.03%. Federal Home Loan Bank advance availability is determined quarterly and at March 31, 2010, approximately $24,350,000 was available.

(B)		Due in 2033; interest only at LIBOR + 3.25% (3.50% at March 31, 2010 and 3.53% at December 31, 2009) 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.

(C)		Due in 2035; interest only at LIBOR + 1.60% (1.89% at March 31, 2010 and 1.85% at December 31, 2009) 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 (B) 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.

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(Unaudited)

Note 6: Long-Term Debt (Continued)

At the request of the Federal Reserve Bank of Kansas City, quarterly payments are being deferred on the Company’s outstanding trust preferred securities. Under the governing documents of BVBC Capital Trust II and III, the quarterly payments due on April 24, 2009, July 24, 2009, October 24, 2009, January 24, 2010 and April 24, 2010 for BVBC Capital Trust II and March 31, 2009, June 30, 2009, September 30, 2009, December 31, 2009 and March 31, 2010 for BVBC Capital Trust III were deferred. The Company has the right to declare such a deferral for up to 20 consecutive quarterly periods and deferral may only be declared as long as the Company is not then in default under the provisions of the Amended and Restated Trust Agreement. During the deferral period, interest on the indebtedness continues to accrue and the unpaid interest is compounded. In addition, for BVBC Capital Trust III, the Company must also accrue additional interest that is equal to the three month LIBOR rate plus 1.60% during the deferral period. All accrued interest and compounded interest must be paid at the end of the deferral period. As of March 31, 2010, the Company had accrued $975,000 for interest on outstanding trust preferred securities.

For both BVBC Capital Trust II and BVBC Capital Trust III, as long as the deferral period continues, the Company is prohibited from: (i) declaring or paying any dividend on any of its capital stock, which would include both its common stock and the outstanding preferred stock issued to the United States Department of Treasury (the “Treasury”), or (ii) making any payment on any debt security that is ranked pair passu with the debt securities issued by the respective trusts. Because the Preferred Shares issued under the U.S. Treasury’s Capital Purchase Plan (the “CPP”) are subordinate to the trust preferred securities, the Company will be restricted from paying dividends on these Preferred Shares until such time as all trust preferred dividends have been brought current.

Aggregate annual maturities of long-term debt at March 31, 2010 are as follows:


	(In thousands)
April 1 to December 31, 2010		—
2011		7,500
2012		15,000
2013		20,000
2014		—
Thereafter		59,588


	$	102,088

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(Unaudited)

Note 7: Derivative Instruments

The Company has commitments outstanding to extend credit on residential mortgages that have not closed prior to the end of the period. As the Company enters into commitments to originate these loans, it also enters into commitments to sell the loans in the secondary market on a best-efforts basis. The Company acquires such commitments to reduce interest rate risk on mortgage loans in the process of origination and mortgage loans held for sale. These commitments to originate or sell loans on a best efforts basis are considered derivative instruments under ASC 815.These statements require the Company to recognize all derivative instruments in the balance sheet and to measure those instruments at fair value. As a result of measuring the fair value of the commitments to originate loans, the Company recorded an increase in other assets of $27,000, a decrease in other liabilities of $35,000, and an increase in other income of $62,000 for the three month period ended March 31, 2010.

Additionally, the Company has commitments to sell loans that have closed prior to the end of the period on a best efforts basis. Due to the mark to market adjustment on commitments to sell loans held for sale, the Company recorded a decrease in other assets of $224,000, an increase in other liabilities of $2,000, and a decrease in other income of $226,000 for the three month period ended March 31, 2010.

Total mortgage loans in the process of origination amounted to $3,997,000 at March 31, 2010. Related forward commitments to sell mortgage loans amounted to approximately $2,604,000 at March 31, 2010.

The balance of derivative instruments related to commitments to originate and sell loans at March 31, 2010, is disclosed in Note 9, Disclosures About Fair Value of Assets and Liabilities.

Note 8: Fair Value Option

Effective April 1, 2009, the Company adoptedThe Fair Value Option for Financial Assets and Financial Liabilities — including an Amendment of FASB Statement No. 115,which was subsequently incorporated into FASB Accounting Standards Codification in Topic 825, for mortgage loans held for sale originated after April 1, 2009. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. An entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each reporting date.

In accordance with ASC 825, the Company has elected to measure loans held for sale at fair value. Loans held for sale is made up entirely of mortgage loans held for immediate sale in the secondary market with servicing release. These loans are sold prior to origination at a contracted price to an outside investor on a best efforts basis and remain on the Company’s balance sheet for a short period of time (typically 30 to 60 days). It is management’s opinion given the short-term nature of these loans, that fair value provides a reasonable measure of the economic value of these assets. In addition, carrying such loans at fair value eliminates some measure of volatility created by the timing of sales proceeds from outside investors, which typically occur in the month following origination.

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(Unaudited)

Note 8: Fair Value Option (Continued)

The difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale was $3,000 at March 31, 2010. Losses from fair value changes included in loans held for sale fee income were $114,000 for the three months ended March 31, 2010. Interest income on loans held for sale is included in interest and fees on loan in the Company’s condensed consolidated statement of operations. See Note 9 for additional disclosures regarding fair value of mortgage loans held for sale.

Note 9: Disclosures About Fair Value of Assets and Liabilities

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:


Level 1		Quoted prices in active markets for identical assets or liabilities.

Level 2		Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the Company’s condensed consolidated balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Government sponsored agencies. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include other less liquid securities.

Mortgage Loans Held for Sale

Mortgage loans held for sale are valued using market prices for loans with similar characteristics. This measurement is classified as Level 2 within the hierarchy.

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(Unaudited)

Note 9: Disclosures About Fair Value of Assets and Liabilities (Continued)

Commitments to Originate Loans and Forward Sales Commitments

Commitments to originate loans and forward sales commitments are valued using a valuation model which considers differences between quoted prices for loans with similar characteristics in the secondary market and the committed rates. The valuation model includes assumptions which adjust the price for the likelihood that the commitment will ultimately result in a closed loan. These measurements are significant unobservable inputs and are classified as Level 3 within the hierarchy.

The following table presents the fair value measurements of assets and liabilities recognized in the Company’s condensed consolidated balance sheet and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2010 and December 31, 2009:

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(Unaudited)

Note 9: Disclosures About Fair Value of Assets and Liabilities (Continued)


	Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
March 31, 2010:
Assets:
Available-for-sale securities:
U.S. Government sponsored agencies	$	100,175	$	—	$	100,175	$	—
Equity and other securities		599		599		—		—
Mortgage loans held for sale		2,604		—		2,604		—
Commitments to originate loans		27		—		—		27
Forward sales commitments		59		—		—		59

Total assets	$	103,464	$	599	$	102,779	$	86


Liabilities:
Commitments to originate loans	$	12	$	—	$	—	$	12
Forward sales commitments		2		—		—		2

Total liabilities	$	14	$	—	$	—	$	14


December 31, 2009:
Assets:
Available-for-sale securities:
U.S. Government sponsored agencies	$	72,163	$	—	$	72,163	$	—
Equity and other securities		594		594		—		—
Mortgage loans held for sale		8,752		—		8,752		—
Commitments to originate loans		—		—		—		—
Forward sales commitments		283		—		—		283

Total assets	$	81,792	$	594	$	80,915	$	283


Liabilities:
Commitments to originate loans	$	47	$	—	$	—	$	47
Forward sales commitments		—		—		—		—

Total liabilities	$	47	$	—	$	—	$	47

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(Unaudited)

Note 9: Disclosures About Fair Value of Assets and Liabilities (Continued)

The following table is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the Company’s condensed consolidated balance sheet using significant unobservable (Level 3) inputs:


	Commitments to			Forward Sales
	Originate Loans			Commitments
	(Unaudited)
	(In thousands)
Balance as of December 31, 2009	$	(47	)	$	283
Total realized and unrealized gains (losses):
Included in net income		62			(226	)
Included in other comprehensive income		—			—
Transfers in and/or out due to changes in significant inputs		—			—


Balance as of March 31, 2010	$	15		$	57

Realized and unrealized gains and losses noted in the table above and included in net income for the period ended March 31, 2010 are reported in the condensed consolidated statement of operations in other income.

Following is a description of the valuation methodologies used for financial and nonfinancial instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Impaired Loans (Collateral Dependent)

Loans for which it is probable that the Company will not collect all principal and interest due according to the contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Foreclosed Assets Held for Sale

Foreclosed assets held for sale are carried at the fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell.

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(Unaudited)

Note 9: Disclosures About Fair Value of Assets and Liabilities (Continued)

The following table presents the fair value measurement of assets and liabilities measured at fair value on a non-recurring basis at March 31, 2010 and December 31, 2009:


	Fair Value Measurements Using
					Significant
			Quoted Prices in		Other
			Active Markets		Observable		Unobservable
			for Identical		Inputs		Inputs
	Fair Value		Assets (Level 1)		(Level 2)		(Level 3)
	(In thousands)
March 31, 2010:
Impaired loans, net of reserves	$	30,080	$	—	$	—	$	30,080
Foreclosed assets held for sale		1,631		—		—		1,631

Total	$	31,711	$	—	$	—	$	31,711


December 31, 2009:
Impaired loans, net of reserves	$	28,393	$	—	$	—	$	28,393
Foreclosed assets held for sale		8,231		—		—		8,231

Total	$	36,624	$	—	$	—	$	36,624

The following methods and assumptions were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value.

Cash and Cash Equivalents

For these short-term instruments, the carrying amount approximates fair value.

Loans

The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.

Federal Home Loan Bank Stock, Federal Reserve Bank Stock, and other securities

The carrying amounts for these securities approximate their fair value.

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(Unaudited)

Note 9: Disclosures About Fair Value of Assets and Liabilities (Continued)

Deposits

The fair value of demand deposits, savings accounts, NOW accounts and certain money market deposits is the amount payable on demand at the reporting date (i.e., their carrying amount). The fair value of fixed maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

Securities Sold Under Agreement to Repurchase and Other Interest-Bearing Liabilities

For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Long-Term Debt

Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Commitments to Extend Credit, Letters of Credit and Lines of Credit

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit and lines of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(Unaudited)

Note 9: Disclosures About Fair Value of Assets and Liabilities (Continued)

The following table presents estimated fair values of the Company’s financial instruments not previously disclosed at March 31, 2010 and December 31, 2009.


	March 31, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(In thousands)
Financial assets:
Cash and cash equivalents	$	167,246	$	167,246	$	96,984	$	96,984
Loans, net of allowance for loan losses		507,910		510,558		534,111		536,973
Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities		7,085		7,085		7,059		7,059
Interest receivable		2,313		2,313		2,303		2,303

Financial liabilities:
Deposits		661,361		665,513		590,110		593,345
Securities Sold Under Agreement to Repurchase and Other Interest-Bearing Liabilities		15,725		15,725		16,120		16,120
Long-term debt		102,088		95,905		102,088		95,762
Interest payable		2,569		2,569		2,698		2,698

Unrecognized financial instruments (net of amortization):
Commitments to extend credit		—		—		—		—
Letters of credit		—		—		—		—
Lines of credit		—		—		—		—

Note 10: Dividends on Preferred Shares

At the request of the Federal Reserve Bank of Kansas City, the Company notified the United States Department of the Treasury (the “Treasury”) of its intention to defer the quarterly dividend payment on the Preferred Shares due to the Treasury on May 15, 2009, August 15, 2009, November 15, 2009, February 15, 2010, and May 15, 2010. 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. The Company has accrued for the dividends and interest and has every intention to bring the obligation current as soon as permitted. As of March 31, 2010, the Company had accrued $1,115,000 for dividends and interest on outstanding Preferred Shares.

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 “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” or the negative of these terms or other comparable terminology. 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; inability to maintain or increase deposit base and secure adequate funding; a continued 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; regulatory action; continued adverse developments in the Company’s loan or investment portfolio; any inability to obtain funding on favorable terms; the Company’s non-payment on TARP funds or Trust Preferred Securities; the loss of key personnel; significant increases in competition; potential unfavorable results of litigation to which the Company may become a party; 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. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time, and it is not possible for us to predict all risk factors. Nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking 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 and income taxes are deemed critical accounting policies because of the valuation techniques used and the sensitivity of certain 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. Further description of our critical accounting policy can be found in our Annual Report on Form 10-K for the year ended December 31, 2009.

Results of Operations

Three months ended March 31, 2010 and 2009. Net loss for the quarter ended March 31, 2010, was $873,000 compared to net loss of $8.1 million for the quarter ended March 31, 2009, representing an improvement of $7.2 million, or 89.23%. The loss per share on a diluted basis was $0.41 for the three months ended March 31, 2010, which represented an improvement of 86.42% from diluted loss per share of $3.02 in the same period of 2009. The Company’s annualized returns on average assets and average stockholders’ equity for the three month period ended March 31, 2010, were negative 0.44% and negative 12.04%, compared to negative 3.94% and negative

Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations

62.43%, respectively, for the same period in 2009, representing improvements of 88.83% and 80.71%, respectively.

The primary factor contributing to the improvement in the current year first quarter compared with the prior year period was a decrease in the provision for loan losses. The provision for loan losses for the three month period ended March 31, 2010 was $250,000, compared to $12.9 million provision for the same period in the prior year, a decrease of $12.7 million, or 98.07%. The decline in the provision for loan losses for the quarter as compared to the prior year quarter was a result of management’s decision in March 2009 to refine its allowance for loan losses methodology to reflect the weakened economic condition, and based on the analysis management made a provision for loan losses of $12.9 million in the first quarter of 2009. Based on a similar analysis as of March 2010, a $250,000 provision for loan losses was deemed necessary.

Net interest income decreased $1.4 million, or 27.54%, for the three month period ended March 31, 2010, as compared to the same period in 2009. The decline in net interest income was a result of a change in asset mix, specifically higher federal funds sold and other short-term investment balances with lower yields. Lower average outstanding loan balances have also contributed to the decline in interest income. Average outstanding loan balances for the three month period ended March 31, 2010, as compared to the same period in the prior year, declined by $112.4 million, or 17.22%, as a result of several large loan payoffs, loan foreclosures, and lower loan origination volume as a result of the current economic environment.

Non-interest income decreased $571,000, or 26.31%, for the three month period ended March 31, 2010, as compared to the same period in 2009. The decrease was a result of gains realized on the sale of available-for-sale securities of $346,000 in 2009. There were no securities sold during the first quarter of 2010. The decrease in non-interest income was also a result of a decrease in other income by $107,000, or 43.15%, during the first quarter of 2010, as compared with the first quarter of 2009, due to the effect of recording the net fair value of certain mortgage loan-related commitments. Loans held for sale fee income decreased $65,000, or 8.27%, primarily due to a decrease in the volume of mortgage loans held for sale originations. The decline in loans held for sale fee income was offset by the gains realized on mortgage loans held for sale of $114,000 for the three months ended March 31, 2010 as a result of the Company adopting the fair value option for financial assets and financial liabilities (ASC 825) as of April 1, 2009.

Non-interest expense decreased $706,000, or 10.00%, for the three month period ended March 31, 2010, as compared to the same period in the prior year. The decrease in non-interest expense was attributed to a decrease in the provision for other real estate recorded by the Company for declines in real estate values. The Company recorded a provision of $59,000 for the three month period ended March 31, 2010, as compared to a provision of $918,000 for the same period in 2009. The decrease was partly offset by a higher insurance assessment by Federal Deposit Insurance Corporation (FDIC) for the three month period ended March 31, 2010 as a result of the increase in assessment rates by the FDIC during 2009.

Net Interest Income

Three months ended March 31, 2010 and 2009.Fully tax equivalent (FTE) net interest income for the three month period ended March 31, 2010, was $3.6 million, a decrease of $1.4 million, or 27.54%, from $5.0 million for the three month period ended March 31, 2009.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations

FTE interest income for the current year first quarter was $7.6 million, a decrease of $2.1 million, or 21.32%, from $9.7 million in the prior year first quarter. This decrease was primarily a result of a decline in rates earned on average earning assets and a change in asset mix, specifically higher average federal funds sold and other short-term investment balances with lower yields. The overall yield on average earning assets decreased 80 basis points to 4.26% during the three month period ending March 31, 2010, compared to 5.06% during the same period in 2009. Another factor contributing to lower interest income was a decrease in the average outstanding balance of loans. The average outstanding balance of loans has decreased by $112.4 million, or 17.22%, as a result of several larger loan payoffs, loan foreclosures, and lower loan origination volume due to the current economic environment. Average available federal funds sold and other short-term investments increased by $48.6 million, or 84.03%. The increase in average federal funds sold and other short-term investments was a result of a decline in average outstanding balance of loans. Interest income on available-for-sale securities decreased $132,000, or 23.28%. As the higher yielding available-for-sale securities were called or matured in 2009 the securities available for investing had lower yields due to the current rate environment, thus resulting in lower interest income.

Interest expense for the current year first quarter was $4.0 million, a decrease of $693,000, or 14.72%, from $4.7 million in the prior year first quarter. This decrease resulted from a decrease in the rate paid on average interest-bearing liabilities resulting from the impact of the lower market interest rates on interest-bearing demand accounts, time deposits, other interest-bearing liabilities and long-term debt. The rate paid on total average interest-bearing liabilities decreased to 2.46% for the three month period ending March 31, 2010, compared to 2.85% in the same period of 2009, a decrease of 39 basis points. Total average interest-bearing liabilities decreased $9.5 million, or 1.42%, to $660.9 million during the first quarter of 2010, compared to $670.5 million during the prior year period. The decrease was attributed to decreases in time deposits, savings and money market deposits, other interest-bearing liabilities and long-term debt. Average time deposits decreased as a result of the Company not renewing $42.0 million in brokered deposits as they matured. The Company worked on replacing brokered funds with core deposits by generating increased interest in our performance checking product and time deposit promotions. Average other interest-bearing liabilities decreased $11.1 million due to an overall decrease in repurchase agreement balances as customers have moved their funds into the Certificate of Deposit Account Registry Service (“CDARS”) program. The decrease in average long-term debt by $5.5 million, or 5.11%, was due to the Company paying off $5.3 million related to Blue Valley Building Corp. debt in June 2009. The decrease in average interest-bearing liabilities was partly offset by an increase in average interest-bearing demand accounts by $41.1 million, or 52.08%, as a result of an increase in the performance checking product.

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. Non-accrual loans are included in the calculation of average balances for loans for the periods indicated. For explanation of changes between periods reported within the table see Net Interest Income and the Financial Condition sections under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations

Average Balances, Yields and Rates


	Three Months Ended March 31,
	2010								2009
						Avg.								Avg.
	Average					Yield/			Average					Yield/
	Balance			Interest		Rate			Balance			Interest		Rate
	(In thousands)
Assets
Federal funds sold and other short-term investments	$	106,443		$	62		0.24	%	$	57,840		$	31		0.22	%
Available-for-sale securities – taxable		76,518			435		2.31			53,314			567		4.31
Mortgage loans held for sale		4,205			50		4.82			13,141			156		4.81
Loans, net of unearned discount and fees		540,063			7,083		5.32			652,413			8,943		5.56


Total earning assets		727,229			7,630		4.26			776,708			9,697		5.06


Cash and due from banks – non-interest bearing		37,541								24,461
Allowance for possible loan losses		(19,711	)							(13,160	)
Premises and equipment, net		16,866								17,903
Other assets		44,872								28,863


Total assets	$	806,797							$	834,775


Liabilities and Stockholders’ Equity
Deposits-interest bearing:
Interest-bearing demand accounts	$	119,950		$	680		2.30	%	$	78,872		$	563		2.89	%
Savings and money market deposits		87,817			114		0.53			100,146			131		0.53
Time deposits		335,786			2,244		2.71			357,519			2,969		3.37


Total interest-bearing deposits		543,553			3,038		2.27			536,537			3,663		2.77


Other interest-bearing liabilities		15,875			9		0.23			26,975			17		0.26
Long-term debt		101,500			968		3.87			106,961			1,028		3.90


Total interest-bearing liabilities		660,928			4,015		2.46			670,473			4,708		2.85


Non-interest bearing deposits		80,366								85,300
Other liabilities		5,152								3,224
Stockholders’ equity		60,351								75,778


Total liabilities and stockholders’ equity	$	806,797							$	834,775


FTE Net interest income/spread				$	3,615		1.80	%				$	4,989		2.21	%


FTE Net interest margin							2.02	%							2.60	%

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.

For explanation of changes see Net Interest Income section under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Changes in Interest Income and
Expense Volume and Rate Variances


	Three Months Ended March 31,
	2010 Compared to 2009
	Change			Change
	Due to			Due to			Total
	Rate			Volume			Change
	(In thousands)
Federal funds sold and other short-term investments	$	(10	)	$	41		$	31
Available-for-sale securities – taxable		(264	)		132			(132	)
Mortgage loans held for sale		—			(106	)		(106	)
Loans, net of unearned discount and fees		(387	)		(1,473	)		(1,860	)

Total interest income		(661	)		(1,406	)		(2,067	)

Interest-bearing demand accounts		(116	)		233			117
Savings and money market deposits		(1	)		(16	)		(17	)
Time deposits		(580	)		(145	)		(725	)
Other interest-bearing liabilities		(2	)		(6	)		(8	)
Long-term debt		(8	)		(52	)		(60	)

Total interest expense		(707	)		14			(693	)

Net interest income	$	46		$	(1,420	)	$	(1,374	)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations

Provision for Loan Losses

The provision for loan losses recorded for the first quarter of 2010 was $250,000 compared to $12.9 million for the same period of 2009. The significant provision for loan losses recorded during 2009 was a result of refining the Company’s allowance for loan loss methodology to better reflect the inherent losses in the loan portfolio and a result of worsening economic conditions in the economy. Economic conditions monitored include, but are not limited to: Johnson County, KS unemployment rate; Johnson County, KS consumer confidence; foreclosure rates; vacancy property rates; stock market performance; inflation; and interest rates. Management assessed the loan portfolio, specifically the non-performing loans, on a credit by credit basis, to assess the reserve requirement. Management believes they have identified the significant non-performing loans and will continue to aggressively pursue collection of these loans. If the recent trend is more prolonged than management anticipates and losses continue to increase we could experience higher than anticipated loan losses in the future.

The Company makes provisions for loan losses in amounts that management deems necessary to maintain the allowance for loan losses at an appropriate level. The allowance for loan losses is based upon the analysis of several factors, including general economic conditions, analysis of impaired loans, the general reserve factors, changes in loan mix, and current and historical charge-offs by loan type. Historical charge off information currently utilized is based on three year weighted average of net charge offs by loan type with more weight given to more current data due to the current economic environment. The Company’s credit administration function performs monthly analyses on the loan portfolio to assess and report on risk levels, delinquencies, 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 allowance for loan losses represents our best estimate of probable losses that have been incurred as of the respective balance sheet dates.

Non-interest Income


	Three Months Ended
	March 31,
	2010		2009
	(In thousands)
Loans held for sale fee income	$	721	$	786
NSF charges and service fees		283		386
Other service charges		454		404
Realized gains on available-for-sale securities		—		346
Other income		141		248

Total non-interest income	$	1,599	$	2,170

Non-interest income decreased $571,000, or 26.31%, to $1.6 million during the three month period ended March 31, 2010, from $2.2 million during the three month period ended March 31, 2009. The primary reason for the decrease in non-interest income was gains realized on the sale of available-for-sale securities in 2009. In the first quarter of 2009, the Company sold $11.0 million in available-for-sale securities to restructure the investment portfolio for the current rate

Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations

environment and realized gains on the sale of the securities of $346,000. There were no securities sold during the first quarter of 2010.

Other factors contributing to changes in non-interest income include a decrease in loans held for sale fee income by $65,000 for the three month period ended March 31, 2010. This decrease was primarily due to a decline in the volume of mortgage loans held for sale originations and refinancing. The decline in volume was offset by gains realized on mortgage loans held for sale of $114,000 for the three months ended March 31, 2010 as a result of the Company adopting the fair value option for financial assets and financial liabilities (ASC 825) as of April 1, 2009. NSF charges and service fees decreased by $103,000, or 26.68%, for the three month period ended March 31, 2010, as compared to the same period in 2009. The decrease for the three month period ended March 31, 2010 was due to fewer overdraft items by our customers and a decrease in account service charges on commercial accounts as a result of a slight increase in the earnings credit rate they receive on their accounts. Other service charges income, which includes income from trust services, investment brokerage, merchant bankcard processing and debit card processing, increased by $50,000, or 12.38%, for the three month period ended March 31, 2010, as compared to the same period in 2009. The increase was primarily attributed to income generated from signature based debit card transactions associated with our performance checking product. Other income decreased $107,000, or 43.15%, for the three month period ended March 31, 2010, as compared to the same period in 2009. The decrease experienced during the first quarter was primarily a result of the Company recording the net fair value of certain mortgage loan-related commitments which resulted in a decrease of other income by $164,000. This was offset by gains realized on the sale of foreclosed assets held for sale during the three months ended March 31, 2010. Future growth of other non-interest income categories is dependent on new product development and growth in our customer base.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations

Non-interest Expense


	Three Months Ended
	March 31,
	2010		2009
	(In thousands)
Salaries and employee benefits	$	2,974	$	3,051
Net Occupancy expense		732		736
Other operating expenses		2,647		3,272

Total non-interest expense	$	6,353	$	7,059

Non-interest expense decreased $706,000, or 10.00%, to $6.4 million during the three month period ended March 31, 2010, compared to $7.1 million during the prior year period. The change was attributed to a decrease in other operating expenses of $625,000, or 19.10%, during the three month period ended March 31, 2010, as compared to the same period in 2009. The decline in other operating expenses was a result of the Company recording a $59,000 provision for other real estate in 2010 compared to $918,000 in 2009 as a result of the decline in real estate values. The decrease was partly offset by a higher deposit insurance assessment by the FDIC as a result of the increase in assessment rates by the FDIC during 2009.

Another factor contributing to the decrease in non-interest expense was a decrease in salaries and employee benefits of $77,000, or 2.52%, during the three month periods ended March 31, 2010. The decrease in salaries and employee benefits was a result of lower commissions paid during the first quarter of 2010, as compared to the prior year period, on mortgage loans originated and sold in the secondary market as a result of decreased origination volume.

Financial Condition

Total assets for the Company at March 31, 2010, were $844.2 million, an increase of $70.3 million, or 9.08%, compared to $774.0 million at December 31, 2009. Deposits were $661.4 million compared with $590.1 million at December 31, 2009, an increase of $71.3 million, or 12.07%. Stockholders’ equity was $59.6 million at March 31, 2010, compared with $60.6 million at December 31, 2009, a decrease of $1.0 million, or 1.68%.

Investments.Available-for-sale securities at March 31, 2010, totaled $100.8 million, reflecting a 38.51% increase from $72.8 million at December 31, 2009. The increase was a result of the purchase of $45.0 million in available-for-sale securities during the first quarter of 2010. The Company purchased the investments to replace $17.0 million called or matured securities and to invest excess liquidity in higher yielding investments.

Loans Held for Sale.Mortgage loans held for sale at March 31, 2010, totaled $2.6 million, a decrease of $6.2 million, or 70.25%, compared to $8.8 million at December 31, 2009. As of April 1, 2009, the Company elected to carry loans held for sale at fair value. The volume of loans held for sale originated during the first quarter slowed as a result of a slow down in mortgage refinancing due to the slight increase in mortgage rates experienced during the quarter.

Loans.Loans at March 31, 2010, totaled $527.1 million, reflecting a decrease of $27.0 million, or 4.87%, compared to $554.1 million at December 31, 2009. The decrease in the loan portfolio was

Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations

attributed to several larger loans paying off, the foreclosure of approximately $7.2 million of other real estate properties during 2010, and lower loan originations due to the current economic conditions. The loan to deposit ratio at March 31, 2010, was 79.70% compared to 93.90% at December 31, 2009.

Non-performing assets consist primarily of loans past due 90 days or more, non-accrual loans and foreclosed real estate. Generally, loans are placed on non-accrual status at 90 days past due and interest accrued to date is considered a loss, unless the loan is well-secured and in the process of collection. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. The interest on these loans is generally accounted for on a cost recovery basis, meaning interest is not recognized until the past due balance has been collected. Loans may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations

The following table sets forth our non-performing assets as of the dates indicated:

Non-Performing Assets


	As of
	March 31,			March 31,			December 31,
	2010			2009			2009
	(In thousands)
Commercial and all other loans:
Past due 90 days or more	$	—		$	—		$	—
Non-accrual		947			4,467			1,327
Commercial real estate loans:
Past due 90 days or more		—			—			—
Non-accrual		13,094			7,509			13,267
Construction loans:
Past due 90 days or more		—			—			—
Non-accrual		16,032			22,252			11,205
Home equity loans :
Past due 90 days or more		—			—			—
Non-accrual		292			419			344
Residential real estate loans:
Past due 90 days or more		—			—			—
Non-accrual		6,692			5,874			8,404
Lease financing:
Past due 90 days or more		—			—			—
Non-accrual		63			352			335
Consumer loans:
Past due 90 days or more		—			—			—
Non-accrual		308			59			6
Debt securities and other assets (exclude other real estate owned and other repossessed assets):
Past due 90 days or more		—			—			—
Non-accrual		—			—			—

Total non-performing loans		37,428			40,932			34,888

Foreclosed assets held for sale		23,680			13,528			19,434

Total non-performing assets	$	61,108		$	54,460		$	54,322


Total non-performing loans to total loans		7.10	%		6.44	%		6.30	%
Total non-performing loans to total assets		4.43	%		4.85	%		4.51	%
Allowance for loan losses to non-performing loans		51.33	%		60.68	%		57.33	%
Non-performing assets to loans and foreclosed assets held for sale		11.09	%		8.39	%		9.47	%

Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations

Non-performing loans increased to $37.4 million at March 31, 2010, from $34.9 million at December 31, 2009. The increase in non-performing loans was attributed to an increase in non-performing construction loans by $4.8 million, or 43.08%, from December 31, 2009. This increase was primarily the result of one builder relationship placed on non-accrual during the first quarter of 2010. The increase was partly offset by a decrease in non-performing residential real estate by $1.7 million, primarily the result of the foreclosure on one builder portfolio. The increase in the construction loan portfolio was a result of the continued industry decline in the real estate market and general economy. If the trend continues in the construction and commercial real estate portfolios, it could result in an increase in non-performing assets and foreclosed assets held for sale. 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.

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
	Three months			Three months
	ended			ended				Year ended
	March 31,			March 31,				December 31,
	2010			2009				2009
				(In thousands)
Balance at Beginning of Period	$	20,000		$	12,368			$	12,368

Loans Charged Off
Commercial loans		134			51				4,713
Commercial real estate loans		—			96				374
Construction loans		853			614				7,716
Home equity loans		100			164				653
Residential real estate loans		80			105				1,480
Lease financing		6			44				109
Consumer loans		—			6				58

Total loans charged-off		1,173			1,080				15,103


Recoveries
Commercial loans		111			52				259
Commercial real estate loans		—			—				123
Construction loans		1			556				592
Home equity loans		—			—				31
Residential real estate loans		2			13				72
Lease financing		6			2				21
Consumer loans		14			—				2

Total recoveries		134			623				1,100


Net Loans Charged Off		1,039			457				14,003

Provision for Loan Losses		250			12,925				21,635


Balance at End of Period	$	19,211		$	24,836			$	20,000


Loans Outstanding
Average	$	540,063		$	652,413			$	608,080
End of period		527,121			635,240				554,111

Ratio of Allowance for Loan Losses to Loans Outstanding
Average		3.56	%		3.81	%			3.29	%
End of period		3.64	%		3.91	%			3.61	%

Ratio of Net Charge-Offs to
Average loans		0.19	%		0.07	%			2.30	%
End of period loans		0.20	%		0.07	%			2.53	%

The allowance for loan losses as a percent of total loans increased slightly to 3.64% as of March 31, 2010, compared to 3.61% as of December 31, 2009.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations

Deposits.Deposits grew by $71.3 million, or 12.07%, to $661.4 million as of March 31, 2010, compared with $590.1 million at December 31, 2009. The increase was primarily attributed to an increase in time deposits of $61.2 million was a result of the time deposit promotion during the first quarter of 2010 and the increased activity by our customers in the CDARS program. The Company’s subsidiary, Bank of Blue Valley (the “Bank”), is a member of the Certificate of Deposit Account Registry Service (“CDARS”) which effectively allows depositors to receive FDIC insurance on amounts larger than the FDIC insurance limit, which is currently $250,000. CDARS allows the Bank to break large deposits into smaller amounts and place them in a network of other CDARS banks to ensure that full FDIC insurance coverage is gained on the entire deposit. The increase in time deposits from the promotions during the first quarter was partially offset by a decrease in brokered time deposits as $10.1 million were not renewed as they matured during 2010. The increase in savings, NOW and money market deposits of $11.9 million, or 5.83%, was specifically due to growth experienced in our performance checking accounts. The performance checking product has been attractive to our market as it pays a higher rate of interest to the customer on balances up to $25,000 as long as the customer has 12 signature based debit card transactions and at least one ACH direct deposit each statement cycle. The Company realizes non-interest income from the signature based debit card transactions that when netted against the high rate paid to the customer, results in a very attractive cost of funds for the Company.

Liquidity.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 65.00% and 69.76% of our total deposits at March 31, 2010, and December 31, 2009, respectively. Although classified as brokered deposits for regulatory purpose, funds placed through the CDARS program are Bank customer relationships that management views as core deposits. If CDARS deposits under $100,000 placed in the CDARS program are added back, our core deposit ratio would be 68.38% at March 31, 2010, and 74.11% at December 31, 2009. Generally, the Company’s funding strategy is to fund loan growth with core deposits and utilize alternative sources of funds such as advances/borrowings from the Federal Home Loan Bank of Topeka (“FHLBank”), as well as the brokered CD market to provide for additional liquidity needs and take advantage of opportunities for lower costs. If needed, FHLBank borrowings are used to fund originations of mortgage loans held for sale. Advance availability with the FHLBank fluctuates depending on levels of available collateral and is determined daily with regards to mortgage loans held for sale and quarterly with regards to overall availability and at March 31, 2010, approximately $24.3 million was available.

In addition, the Company uses other forms of short-term debt 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 Bank has a line of credit with the Federal Reserve Bank of Kansas City. The availability on the line of credit fluctuates depending on the level of available collateral, which includes commercial and commercial real estate loans. Availability on the line of credit at March 31, 2010, was approximately $40.7 million. Advances are made at the discretion of the Federal Reserve Bank of Kansas City.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations

The Company also uses the brokered market as a source of liquidity. As of March 31, 2010, excluding CDARS as described above, the Company had approximately $35.6 million in brokered deposits compared to $45.6 million at December 31, 2009, a decrease of $10.0 million, or 22.05%. The decrease in brokered deposits was the result of the Company not renewing the deposits as they mature.

As a result of an agreement with the Federal Reserve Bank and the Office of the State Banking Commissioner of Kansas, prior regulatory approval is currently required prior to the payment of dividends by the Bank. In prior years, the Company has relied on dividends from the Bank to assist in making debt service and dividend payments. The Company has also agreed at the request of the Federal Reserve Bank to defer interest payments and not pay dividends on trust preferred securities or any of its equity securities without prior regulatory approval in an effort to preserve capital. As a result, the Company deferred the payment of interest related to trust preferred securities of BVBC Capital Trust III due March 31, 2009, June 30, 2009, September 30, 2009, December 31, 2009 and March 31, 2010 and the payment of interest related to trust preferred securities of BVBC Capital Trust II due on April, 24, 2009, July 24, 2009, October 24, 2009, January 24, 2010 and April 24, 2010. In addition, at the request of the Federal Reserve Bank of Kansas City, the Company notified the United States Department of the Treasury (the “Treasury”) of its intention to defer the quarterly dividend payment on the Preferred Shares due to the Treasury on May 15, 2009, August 15, 2009, November 15, 2009, February 15, 2010 and May 15, 2010. 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. The Company has accrued for interest and the dividends and has every intention to bring the obligation current as soon as permitted. As of March 31, 2010, the Company has accrued $2.1 million for dividends and interest on outstanding trust preferred securities and Preferred Shares. There are other ancillary expenses related to the legal and accounting fees which could be impaired without the ability of the Bank to dividend to the Company. The Company currently maintains cash balances sufficient to cover such ancillary expenses for several years based on historical expense amounts.

The Company’s Asset-Liability Management Committee utilizes a variety of liquidity monitoring tools, including an asset/liability modeling software, to analyze and manage the Company’s liquidity. Management has established internal guidelines and analytical tools to measure liquid assets, alternative sources of liquidity, as well as relevant ratios concerning asset levels and purchased funds. These indicators are reported to the Bank’s Board of Directors monthly.

Capital.At March 31, 2010, our total stockholders’ equity was $59.6 million and our equity to asset ratio was 7.06%. At March 31, 2010, our Tier 1 capital ratio was 11.41% compared to 11.26% at December 31, 2009, while our total risk-based capital ratio was 12.68% compared to 12.54% at December 31, 2009. As of March 31, 2010, the Company had capital in excess of the requirements for an “adequately-capitalized” bank holding company. At March 31, 2010, the Bank’s Tier 1 capital ratio was 11.61% compared to 11.39% at December 31, 2009, while our total risk-based capital ratio was 12.88% compared to 12.67% at December 31, 2009. As of March 31, 2010, the Bank had capital in excess of the requirements for a “well-capitalized” institution.

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. Our liquidity contingency funding plan is established by our Bank Board of Directors and monitored by our Asset/Liability Management Committee. Our liquidity contingency funding plan sets guidelines for the Company to monitor and control its liquidity position as well as ensure appropriate contingency liquidity plans are actively in place and consistent with the current and forecasted needs of the Company.

We use 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 March 31, 2010 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		17.76	%		(9.37	)%
Base Rate Scenario		—			—
200 basis point decline		8.44	%		0.49	%

The above table indicates that, at March 31, 2010, in the event of a sudden and sustained increase in prevailing market rates, our net interest income would be expected to increase. This is a result of an increase in our interest-bearing demand deposit balances, specifically our performance checking accounts. The increase in interest-bearing demand deposit balances provides the Company with greater control over the cost of its funding base and enables the Company to expand

Item 3. Quantitative and Qualitative Disclosures About Market Risk

its net interest margin in an increasing or decreasing rate environment. The Bank has placed floors on its loans over the last several years which would limit the decline in yield earned on the loan portfolio in a declining rate environment while the cost of funding would decrease resulting in a greater net interest margin. Another consideration in a rising interest rate scenario is the impact of mortgage financing, which would likely decline, leading to lower loans held for sale fee income, though the impact is difficult to quantify or project. In the decreasing rate scenarios, the adjustable rate assets (loans) reprice to lower rates faster than our liabilities, but our liabilities – long-term 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 income to decrease.

The above table also indicates that, at March 31, 2010, in the event of a sudden increase in prevailing market rates, the economic value of our equity would decrease. Given our current asset/liability position, a 200 basis point increase in interest rates will result in a lower economic value of our equity due to the estimated loss of liabilities and assets in this interest rate scenario. Currently, under an increasing rate environment, the Company’s estimated market value of loans could decrease slightly due to fixed rate loans and investments with rates lower than market rates. These assets have a likelihood to remain until maturity in this rate environment. However, the estimated market value decrease in fixed rate loans and investment securities would be offset by time deposits unable to reprice to higher rates immediately and fixed-rate callable advances from FHLBank. The likelihood of advances being called in a rising rate environment increases resulting in advances being repriced prior to maturity. Given our current asset/liability position, a 200 basis point decline in interest rates will result in a slight increase in the economic value of our equity as the change in estimated gain on assets exceeds the estimated loss on liabilities in this interest rate scenario. 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. However, the estimated market value increase in fixed rate loans is offset by time deposits unable to reprice to lower rates immediately and fixed-rate callable advances from FHLBank. 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.

Item 4. Controls and Procedures

In accordance with Item 307 of Regulation S-K promulgated under the Securities Act of 1933, as amended, 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-15(e) and 15d-15(e) 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.

There have not been any changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2010, which have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Item 1. Legal Proceedings

We are periodically involved in routine litigation incidental to our business. We are not a party to any pending litigation that we believe is likely to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

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 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

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: May 12, 2010	By:	/s/ Robert D. Regnier
		Robert D. Regnier, President and
		Chief Executive Officer and Director (Principal Executive Officer)


Date: May 12, 2010	By:	/s/ Mark A. Fortino
		Mark A. Fortino, Chief Financial Officer
		(Principal Financial and Accounting Officer)

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Blue Valley Ban (BVBC) Inactive 10-Q2010 Q1 Quarterly report

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