Blue Valley Ban (BVBC) 10-Q 2010 Q2 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 June 30, 2010

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission file number: 001-15933

BLUE VALLEY BAN CORP.

(Exact name of registrant as specified in its charter)

Kansas
(State or other jurisdiction of
incorporation or organization) 48-1070996
(I.R.S. Employer
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(Do not check if a smaller reporting company) Smaller reporting companyþ

     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 June 30, 2010 the registrant had 2,819,295 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 - June 30, 2010 (unaudited) and December 31, 2009	4
Condensed Consolidated Statements of Operations (unaudited) - three and six months ended June 30, 2010 and 2009	6
Condensed Consolidated Statements of Stockholders’ Equity (unaudited) - six months ended June 30, 2010 and 2009	7
Condensed Consolidated Statements of Cash Flows (unaudited) - six months ended June 30, 2010 and 2009	8
Notes to Condensed Consolidated Financial Statements (unaudited) - six months ended June 30, 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	41
Item 4. Controls and Procedures	43
Part II. Other Information
Item 1. Legal Proceedings	44
Item 1A. Risk Factors	44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3. Defaults Upon Senior Securities	44
Item 4. Submission of Matters to a Vote of Security Holders	44
Item 5. Other Information	45
Item 6. Exhibits	45
EX-15
EX-31.1
EX-31.2
EX-32.1

2

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 June 30, 2010, and the related condensed consolidated statements of operations for the three-month and six-month periods ended June 30, 2010 and 2009 and the condensed consolidated statements of stockholders’ equity and cash flows for the six-month periods ended June 30, 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
August 10, 2010

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

3

Blue Valley Ban Corp.

Condensed Consolidated Balance Sheets

June 30, 2010 and December 31, 2009

(In thousands, except share data)

	June 30, 2010		December 31, 2009
	(Unaudited)
ASSETS
Cash and due from banks	$	29,580	$	32,126
Interest-bearing deposits in other financial institutions		116,597		64,858
Cash and cash equivalents		146,177		96,984
Available-for-sale securities		106,759		72,757
Mortgage loans held for sale, fair value		4,784		8,752
Loans, net of allowance for loan losses of $18,690 and $20,000 in 2010 and 2009, respectively		498,238		534,111
Premises and equipment, net		16,586		16,930
Foreclosed assets held for sale, net		22,738		19,435
Interest receivable		2,240		2,303
Deferred income taxes		10,148		9,480
Income taxes receivable		–		2,746
Prepaid expenses and other assets		2,958		2,803
Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities		7,111		7,059
Core deposit intangible asset, at amortized cost		536		607
Total assets	$	818,275	$	773,967

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

4

Blue Valley Ban Corp.

Condensed Consolidated Balance Sheets

June 30, 2010 and December 31, 2009

(In thousands, except share data)

	June 30, 2010		December 31, 2009
	(Unaudited)
LIABILITIES
Deposits
Demand	$	90,831	$	91,158
Savings, NOW and money market		208,251		204,245
Time		333,376		294,707
Total deposits		632,458		590,110
Other interest-bearing liabilities		18,640		16,120
Long-term debt		102,088		102,088
Interest payable and other liabilities		6,303		5,046
Total liabilities		759,489		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 – 2,819,295 shares; 2009 – 2,817,650 shares		2,819		2,818
Additional paid-in capital		38,167		37,975
Retained earnings		17,056		19,685
Accumulated other comprehensive income, net of income tax of $481 in 2010 and $69 in 2009		722		103
Total stockholders’ equity		58,786		60,603
Total liabilities and stockholders’ equity	$	818,275	$	773,967

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

5

Blue Valley Ban Corp.

Condensed Consolidated Statements of Operations

Three and Six Months Ended June 30, 2010 and 2009

(In thousands, except share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	6,969		$	8,694		$	14,102		$	17,793
Federal funds sold and other short-term investments		63			32			125			63
Available-for-sale securities		600			471			1,035			1,038
Total interest income		7,632			9,197			15,262			18,894
INTEREST EXPENSE
Interest-bearing demand deposits		585			696			1,265			1,259
Savings and money market deposit accounts		112			120			226			251
Other time deposits		2,212			2,802			4,456			5,771
Federal funds purchased and other interest-bearing liabilities		12			15			21			32
Long-term debt, net		988			1,083			1,956			2,111
Total interest expense		3,909			4,716			7,924			9,424
NET INTEREST INCOME		3,723			4,481			7,338			9,470
PROVISION FOR LOAN LOSSES		1,200			–			1,450			12,925
NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES		2,523			4,481			5,888			(3,455	)
NON-INTEREST INCOME
Loans held for sale fee income		663			558			1,384			1,344
Service fees		796			832			1,533			1,622
Realized gains on available-for-sale securities		95			–			95			346
Other income		257			1,140			398			1,388
Total non-interest income		1,811			2,530			3,410			4,700
NON-INTEREST EXPENSE
Salaries and employee benefits		2,862			3,095			5,836			6,146
Net occupancy expense		668			697			1,400			1,433
Other operating expense		2,696			2,895			5,343			6,167
Total non-interest expense		6,226			6,687			12,579			13,746
INCOME (LOSS) BEFORE INCOME TAXES		(1,892	)		324			(3,281	)		(12,501	)
PROVISION (BENEFIT) FOR INCOME TAXES		(680	)		118			(1,196	)		(4,602	)
NET INCOME (LOSS)		(1,212	)		206			(2,085	)		(7,899	)
DIVIDENDS ON PREFERRED STOCK		272			271			544			483
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS	$	(1,484	)	$	(65	)	$	(2,629	)	$	(8,382	)
BASIC EARNINGS (LOSS) PER SHARE	$	(0.54	)	$	(0.02	)	$	(0.95	)	$	(3.04	)
DILUTED EARNINGS (LOSS) PER SHARE	$	(0.54	)	$	(0.02	)	$	(0.95	)	$	(3.04	)

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

6

Blue Valley Ban Corp.

Condensed Consolidated Statements of Stockholders’Equity

Six Months Ended June 30, 2010 and 2009

(In thousands, except share data)

(Unaudited)

														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			269		–			–			284
Issuance of 2,495 shares common stock for the employee stock purchase plan					–		2			60		–			–			62
Dividend on preferred stock					–		–			–		(483	)		–			(483	)
Net loss	$	(7,899	)		–		–			–		(7,899	)		–			(7,899	)
Change in unrealized depreciation on available-for-sale securities, net of income taxes (credit) of $(363)		(545	)		–		–			–		–			(545	)		(545	)
	$	(8,444	)
BALANCE, JUNE 30, 2009				$	22	$	2,777		$	37,995	$	26,958		$	106		$	67,858
BALANCE, DECEMBER 31, 2009				$	22	$	2,818		$	37,975	$	19,685		$	103		$	60,603
Issuance of 4,800 shares of restricted stock, net of forfeiture of 6,620 shares					–		(2	)		160		–			–			158
Issuance of 3,465 shares common stock for the employee stock purchase plan					–		3			32		–			–			35
Dividends on preferred stock					–		–			–		(544	)		–			(544	)
Net loss	$	(2,085	)		–		–			–		(2,085	)		–			(2,085	)
Change in unrealized depreciation on available-for-sale securities, net of income taxes of $412		619			–		–			–		–			619			619
	$	(1,466	)
BALANCE, JUNE 30, 2010				$	22	$	2,819		$	38,167	$	17,056		$	722		$	58,786

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

7

Blue Valley Ban Corp.

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2010 and 2009

(In thousands)

	June 30, 2010			June 30, 2009
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(2,085	)	$	(7,899	)
Adjustments to reconcile net loss to net cash flow
From operating activities:
Depreciation and amortization		522			795
Amortization (accretion) of premiums and discounts on available-for-sale securities		(29	)		48
Provision for loan losses		1,450			12,925
Provision for foreclosed assets held for sale		178			918
Deferred income taxes		(1,080	)		(1,839	)
Stock dividends on Federal Home Loan Bank (FHLB) stock		(52	)		(48	)
Gain on sale of available-for-sale securities		(95	)		(346	)
Net gain on sale of foreclosed assets		(41	)		(242	)
Restricted stock earned and forfeited		158			284
Compensation expense related to the Employee Stock Purchase Plan (ESPP)		1			4
Originations of loans held for sale		(48,189	)		(122,598	)
Proceeds from the sale of loans held for sale		52,348			117,032
Realized (gain) loss on loans held for sale fair value adjustment		(191	)		321
Changes in
Interest receivable		63			628
Net fair value of loan related commitments		179			(400	)
Prepaid expenses and other assets		2,372			(169	)
Interest payable and other liabilities		752			1,491
Net cash provided by operating activities		6,261			905
CASH FLOWS FROM INVESTING ACTIVITIES
Net collection of loans		26,052			31,791
Proceeds from the sale of loan participations		32			2,546
Purchase of premises and equipment		(107	)		(21	)
Proceeds from the sale of foreclosed assets, net of expenses		4,899			8,634
Purchases of available-for-sale securities		(69,942	)		(60,749	)
Proceeds from maturities of available-for-sale securities		32,000			51,000
Proceeds from sale of available-for-sale securities		5,095			11,346
Purchases of Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities		–			(521	)
Proceeds from the redemption of Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities		–			1,451
Net cash provided by (used in) investing activities		(1,971	)		45,477
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, money market, NOW and savings accounts		3,679			13,113
Net increase in time deposits		38,669			2,568
Net increase (decrease) in federal funds purchased and other interest-bearing liabilities		2,520			(7,819	)
Repayments of long-term debt		–			(5,396	)
Discount on repayment of long-term debt		–			(100	)
Dividends paid on preferred stock		–			(212	)
Net proceeds from the sale of additional stock through ESPP and stock options exercised		35			62
Net cash provided by financing activities		44,903			2,216
Increase in cash and cash equivalents		49,193			48,598
Cash and cash equivalents, beginning of period		96,984			44,973
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	146,177		$	93,571

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

8

Blue Valley Ban Corp.

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2010 and 2009

(In thousands)

	June 30, 2010			June 30, 2009
	(Unaudited)			(Unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest		7,565			9,130
Income taxes, net of refunds		(2,747	)		(3,292	)
Noncash investing and financing activities:
Transfer of loans to foreclosed property		8,339			17,297
Restricted stock issued, net of forfeitures		(2	)		15
Preferred dividends accrued but not paid		544			271

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

9

Blue Valley Ban Corp.

Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 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 June 30, 2010, and the condensed consolidated results of its operations, changes in stockholders’ equity and cash flows for the periods ended June 30, 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 was no 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.

10

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 2010 and 2009
(Unaudited)

Note 2: Recent and Future 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 was no 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. There was no impact on the Company’s consolidated financial statements from the adoption of this update.

On July 21, 2010, the FASB issued ASU 2010-20,Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU amends FASB ASC Topic 310,Receivables, to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate, by portfolio segment or class of financing receivable, certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses.

Existing disclosures are amended to require an entity to provide a rollforward schedule of the allowance for credit losses from the beginning of the reporting period to the end of the reporting period on a portfolio segment basis, with the ending balance further disaggregated on the basis of the impairment method. For each disaggregated ending balance in the rollforward schedule, the related recorded investment in financing receivables must be disclosed. The disclosure would include the nonaccrual status of financing receivables by class of financing receivables, as well as the impaired financing receivables by class of financing receivables.

The amendments in the ASU also require an entity to provide the following additional disclosures about its financing receivables: (1) the credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables; (2) the aging of past due financing receivables at the end of the reporting period by class of financing receivables; (3) the nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses; (4) the nature and extent of financing receivables modified as troubled debt restructurings within the previous 12 months that defaulted during the reporting period by class of financing receivables and their effect on the allowance for credit losses; and (5) significant purchases and sales of financing receivables during the reporting period disaggregated by portfolio segment.

For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Upon adoption, management does not anticipate that this update will have a material impact on the Company’s consolidated financial statements.

11

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 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 and six months ended June 30, 2010 and 2009 is as follows:

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2010			2009			2010			2009
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
	(amounts in thousands, except						(amounts in thousands, except
	share and per share data)						share and per share data)
Net income (loss)	$	(1,212	)	$	206		$	(2,085	)	$	(7,899	)
Preferred dividends		(272	)		(271	)		(544	)		(483	)
Net loss available to common stockholders	$	(1,484	)	$	(65	)	$	(2,629	)	$	(8,382	)
Average common shares outstanding		2,772,944			2,755,900			2,768,064			2,752,913
Average common share stock options outstanding and restricted stock (B)		11,205			6,923			14,851			8,083
Average diluted common shares (B)		2,784,149			2,762,823			2,782,915			2,760,996
Basic loss per share	$	(0.54	)	$	(0.02	)	$	(0.95	)	$	(3.04	)
Diluted loss per share (A)	$	(0.54	)	$	(0.02	)	$	(0.95	)	$	(3.04	)

(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 June 30, 2010 and 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 and 50,725 shares of common stock were outstanding at June 30, 2010 and 2009, respectively, 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.

12

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 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:

	June 30, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In thousands)
U.S. Government sponsored agencies	$	104,956	$	1,193	$	—	$	106,149
Equity and other securities		600		10		—		610
	$	105,556	$	1,203	$	—	$	106,759

	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 June 30, 2010, by contractual maturity are shown below. Expected maturities will 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	$	10,000	$	10,000
Due after one through five years		82,960		83,941
Due after five years through ten years		11,996		12,208
Due after ten years		—		—
Total		104,956		106,149
Equity and other securities		600		610
	$	105,556	$	106,759

The book value and estimated fair value of securities pledged as collateral to secure public deposits amounted to $24,001,000 and $24,160,000 at June 30, 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 June 30, 2010 and December 31, 2009.

13

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 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 June 30, 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:

	June 30, 2010		December 31, 2009
	(In thousands)
Balance	$	18,550	$	15,417
Carrying value of securities pledged to secure agreements to repurchase at period end		23,328		29,182
Average balance during the period of securities sold under agreements to repurchase		16,562		22,546
Maximum amount outstanding at any month-end during the period		18,550		25,189

Gross gains of $95,000 and $346,000 were realized for the six months ended June 30, 2010 and 2009, respectively, and no gross losses were realized for the six months ended June 30, 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 June 30, 2010 and December 31, 2009, was $0 and $20,426,000, which is approximately 0.0% and 28.0% of the Company’s available-for-sale investment portfolio.

14

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 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:

June 30, 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

$

—

$

—

$

—

$

—

$

—

$

—

Equity and other securities

—

—

—

—

—

—

Total temporarily impaired securities

$

—

$

—

$

—

$

—

$

—

$

—

	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

15

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 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 June 30, 2010 and December 31, 2009, there was no outstanding balance on the line of credit. The variable interest rate was 0.20% on June 30, 2010 and 0.18% on December 31, 2009. At June 30, 2010 approximately $11,903,000 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 June 30, 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 June 30, 2010 approximately $35,794,000 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 June 30, 2010 and December 31, 2009, consisted of the following components:

	June 30,		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 June 30, 2010, approximately $11,903,000 was available.
(B)	Due in 2033; interest only at LIBOR + 3.25% (3.59% at June 30, 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% (2.13% at June 30, 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.

16

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 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 through July 24, 2010 for BVBC Capital Trust II and March 31, 2009 through June 30, 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 June 30, 2010, the Company had accrued $1,163,000 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 June 30, 2010 are as follows:

	(In thousands)
July 1 to December 31, 2010	$	—
2011		7,500
2012		15,000
2013		20,000
2014		—
Thereafter		59,588
	$	102,088

17

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 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 no change in other assets, a decrease in other liabilities of $8,000 and an increase in other income of $8,000 for the three month period ended June 30, 2010. The Company recorded an increase in other assets of $26,000, a decrease in other liabilities of $44,000, and an increase in other income of $70,000 for the six month period ended June 30, 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 $21,000, an increase in other liabilities of $2,000 and a decrease in other income of $23,000 for the three month period ended June 30, 2010. The Company recorded a decrease in other assets of $245,000, an increase in other liabilities of $4,000, and a decrease in other income of $249,000 for the six month period ended June 30, 2010.

Total mortgage loans in the process of origination amounted to $3,744,000 at June 30, 2010. Related forward commitments to sell mortgage loans amounted to approximately $4,784,000 at June 30, 2010.

The balance of derivative instruments related to commitments to originate and sell loans at June 30, 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

18

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 2010 and 2009
(Unaudited)

Note 8: Fair Value Option (Continued)

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.

The difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale was $80,000 at June 30, 2010. Gains from fair value changes included in loans held for sale fee income were $77,000 and $191,000 for the three and six months ended June 30, 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.

19

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 2010 and 2009
(Unaudited)

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

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.

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 June 30, 2010 and December 31, 2009:

20

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 2010 and 2009
(Unaudited)

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

	Fair Value Measurements Using
			Quoted Prices in
			Active Markets for		Significant Other
			Identical Assets		Observable Inputs		Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
			(In thousands)
June 30, 2010:
Assets:
Available-for-sale securities:
U.S. Government sponsored agencies	$	106,149	$	–	$	106,149	$	–
Equity and other securities		610		610		–		–
Mortgage loans held for sale		4,784		–		4,784		–
Commitments to originate loans		26		–		–		26
Forward sales commitments		38		–		–		38
Total assets	$	111,607	$	610	$	110,933	$	64
Liabilities:
Commitments to originate loans	$	3	$	–	$	–	$	3
Forward sales commitments		4		–		–		4
Total liabilities	$	7	$	–	$	–	$	7
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

21

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 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		70			(249	)
Included in other comprehensive income		–			–
Transfers in and/or out due to changes in significant inputs		–			–
Balance as of June 30, 2010	$	23		$	34

Realized and unrealized gains and losses noted in the table above and included in net income for the period ended June 30, 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.

22

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 2010 and 2009
(Unaudited)

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

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.

The following table presents the fair value measurement of assets and liabilities measured at fair value on a non-recurring basis at June 30, 2010 and December 31, 2009:

	Fair Value Measurements Using
			Quoted Prices in
			Active Markets for		Significant Other
			Identical Assets		Observable Inputs		Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
			(In thousands)
June 30, 2010:
Impaired loans, net of reserves	$	32,202	$	–	$	–	$	32,202
Foreclosed assets held for sale		816		–		–		816
Total	$	33,018	$	–	$	–	$	33,018
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.

23

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 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.

24

Blue Valley Ban Corp.
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 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 June 30, 2010 and December 31, 2009.

	June 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
			(In thousands)
Financial assets:
Cash and cash equivalents	$	146,177	$	146,177	$	96,984	$	96,984
Loans, net of allowance for loan losses		498,238		500,009		534,111		536,973
Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities		7,111		7,111		7,059		7,059
Interest receivable		2,240		2,240		2,303		2,303
Financial liabilities:
Deposits		632,458		635,742		590,110		593,345
Securities Sold Under Agreement to Repurchase and Other Interest-Bearing Liabilities		18,640		18,640		16,120		16,120
Long-term debt		102,088		96,955		102,088		95,762
Interest payable		3,056		3,056		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 payments on the Preferred Shares due to the Treasury since May 15, 2009. The dividend payment due on August 15, 2010 will be the sixth dividend payment deferred by the Company. 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 June 30, 2010, the Company had accrued $1,402,000 for dividends and interest on outstanding Preferred Shares.

25

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 June 30, 2010 and 2009. Net loss for the quarter ended June 30, 2010, was $1.2 million compared to net income of $206,000 for the quarter ended June 30, 2009, representing a decrease of $1.4 million, or 688.35%. The loss per share on a diluted basis was $0.54 for the three months ended June 30, 2010, compared to diluted loss per share of $0.02 in the same period of 2009. The Company’s annualized returns on average assets and average stockholders’ equity for the three month period ended June 30, 2010, were negative 0.59% and negative 15.90%, compared

26

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

to 0.10% and negative 0.57%, respectively, for the same period in 2009, representing decreases of 690.00% and 2,689.47%, respectively.

The primary factor contributing to the net loss in the current year second quarter compared with the prior year period was an increase in the provision for loan losses. The provision for loan losses for the three month period ended June 30, 2010 was $1.2 million, compared to no provision for the same period in the prior year. The increase in the provision for loan losses was a result of one construction and one commercial credit relationship which experienced deterioration in credit quality during the period. In addition, the Company increased the general reserves required due to changes in economic conditions reviewed and analyzed by the Company on a monthly basis.

Net interest income decreased $758,000, or 16.92%, for the three month period ended June 30, 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 June 30, 2010, as compared to the same period in the prior year, declined by $91.4 million, or 14.81%, as a result of several large loan payoffs, loan foreclosures, and lower loan origination volume as a result of the current economic environment. The decline in interest income was partly offset by lower interest expense. As market rates have declined, the rates paid on deposits have also declined.

Non-interest income decreased $719,000, or 28.42%, for the three month period ended June 30, 2010, as compared to the same period in 2009. The decrease was a result of a decrease in other income by $883,000, or 77.46%, during the second quarter of 2010, as compared with the second quarter of 2009, due to the effect of recording the net fair value of certain mortgage loan-related commitments. The net fair value of certain mortgage loan-related commitments recorded for the three months ended June 30, 2010 was a loss of $15,000 compared to a $400,000 net gain adjustment recorded for the same period in 2009. In addition, other income has declined as a result of lower gains realized on foreclosed assets held for sale as compared to the same period in the prior year.

Non-interest expense decreased $461,000, or 6.89%, for the three month period ended June 30, 2010, as compared to the same period in the prior year. The decrease in non-interest expense was attributed to the decrease in salaries and employee benefits of $233,000, or 7.53%. The salaries and employee benefits expense decreased due to lower commissions paid during the period on mortgage loans originated and sold in the secondary market as a result of the decreased origination and refinancing volume and the change in the commission structure for each loan originated and sold. In addition, other operating expense decreased $199,000, or 6.87%, due to lower expense related to the insurance assessment by Federal Deposit Insurance Corporation (FDIC) for the three month period ended June 30, 2010. During the second quarter of 2009, the FDIC imposed a special assessment on each FDIC-insured depository institution’s assets less its Tier 1 Capital as of June 30, 2009. The FDIC has not imposed a special assessment thus far in 2010. In addition, the Company incurred approximately $105,000 in expenses related to the payoff of long term debt in June 2009.

Six months ended June 30, 2010 and 2009. Net loss for the six months ended June 30, 2010, was $2.1 million, compared to net loss of $7.9 million for the six months ended June 30, 2009, representing an improvement of $5.8 million, or 73.60%. Diluted loss per share was negative

27

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

$0.95 during the six months ended June 30, 2010, compared to negative $3.04 in the same period of 2009, an improvement of 68.75%. The Company’s annualized return on average assets and average stockholders’ equity for the six month period ended June 30, 2010, were negative 0.51% and negative 13.95%, compared to negative 1.92% and negative 33.29%, respectively, for the same period in 2009, improvement of 73.44% and 58.10%, respectively.

The primary factor contributing to the improvement in the current results for the six month period ended June 30, 2010, as compared to the prior year period, was a decrease in the provision for loan losses. The provision for loan losses for the six month period ended June 30, 2010 was $1.5 million, compared to $12.9 million for the same period in the prior year, a decrease of $11.4 million, or 88.78%. The decline in the provision for loan losses was a result of management’s decision in March of 2009 to refine its allowance for loan losses methodology to reflect the weakened economic conditions, and based on the analysis management made a provision of $12.9 million in the first quarter of 2009. Based on similar analysis in 2010, a $1.5 million provision for loan losses was deemed necessary.

Net interest income declined $2.1 million, or 22.51%, for the six month period ended June 30, 2010, as compared to the same period in 2009. The decrease 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 six month period ended June 30, 2010, as compared to the same period in the prior year, declined $101.8 million, or 16.04%, as a result of several large loan payoffs, loan foreclosures, and lower loan origination volume as a result of the current economic environment. The decline in interest income was offset by lower interest expense. As market rates have declined, the rates paid on deposits have also declined.

Non-interest income declined by $1.3 million, or 27.45%, for the six month period ended June 30, 2010. This was the result of a decrease in other income of $990,000, or 71.33%, due to the effect of recording the net fair value of certain mortgage loan-related commitments. The effect of recording the net fair value of certain mortgage loan-related commitments was a loss of $178,000 for the six month period ended June 30, 2010, compared to a gain of $400,000 for the same period in the prior year. Other income also declined as a result of lower gains realized on the sale of foreclosed assets held for sale as compared to the prior year period. In addition, the decrease in non-interest income was a result of lower gains realized on the sale of available-for-sale securities by $251,000, or 72.54%. There were $5.0 million securities sold during 2010 compared to $11.0 million in 2009.

Non-interest expense decreased $1.2 million, or 8.49%, for the six month period ended June 30, 2010, as compared to the same period in 2009. The decrease 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 $178,000 for the six month period ended June 30, 2010, as compared to a provision of $918,000 for the same period in 2009. Also contributing to the decrease in non-interest expense was a decline in salaries and employee benefits by $310,000, or 5.04%, as a result of lower commissions paid during the period on mortgage loans originated and sold in the secondary market as a result of decreased origination volume and a change in the commission structure for each loan originated and sold. The decrease was partly offset by a higher insurance assessment by the Federal Deposit Insurance Corporation (FDIC) for the six month period ended June 30, 2010 as a result the increase in assessment rates by the FDIC in 2009.

28

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

Net Interest Income

Three months ended June 30, 2010 and 2009.Fully tax equivalent (FTE) net interest income for the three month period ended June 30, 2010, was $3.7 million, a decrease of $758,000, or 16.92%, from $4.5 million for the three month period ended June 30, 2009.

FTE interest income for the current year second quarter was $7.6 million, a decrease of $1.6 million, or 17.02%, from $9.2 million in the prior year second 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 81 basis points to 4.09% during the three month period ending June 30, 2010, compared to 4.90% 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 $91.4 million, or 14.81%, 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 $46.7 million, or 70.00%. 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 increased $129,000, or 27.39%, as a result of an increase in the average balance of available-for-sale securities by $47.4 million, or 81.90%, over the same period in the prior year. The Company invested excess funds from deposit funding and loan collections into available-for-sale securities.

Interest expense for the current year second quarter was $3.9 million, a decrease of $807,000, or 17.11%, from $4.7 million in the prior year second 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 and long-term debt. The rate paid on total average interest-bearing liabilities decreased to 2.32% for the three month period ending June 30, 2010, compared to 2.83% in the same period of 2009, a decrease of 51 basis points. Total average interest-bearing liabilities increased $8.6 million, or 1.29%, to $676.2 million during the second quarter of 2010, compared to $667.6 million during the prior year period. The increase was attributed to an increase in average interest-bearing demand accounts by $30.7 million, or 32.08%, as a result of an increase in the performance checking product. The increase was offset by decreases in time deposits, savings and money market deposits, other interest-bearing liabilities and long-term debt. Average time deposits decreased $5.6 million, or 1.60%, as a result of the Company not renewing 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 $6.6 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 $3.7 million, or 3.51%, was due to the Company paying off $5.3 million related to Blue Valley Building Corp. debt in June 2009.

Six months ended June 30, 2010 and 2009. FTE net interest income for the six month period ended June 30, 2010, was $7.3 million, a decrease of $2.1 million, or 22.51%, from $9.5 million for the six month period ended June 30, 2009.

FTE interest income for the six months ended June 30, 2010, was $15.3 million, a decrease of $3.6 million, or 19.22%, from $18.9 million for the six months ended June 30, 2009. This decrease was

29

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

a result of an overall decrease in rates earned on average earning assets and a change in asset mix, specifically higher federal funds sold and other short-term investment balances with lower yields. The overall yield on average earning assets decreased by 81 basis points to 4.17% for the period ending June 30, 2010, compared to 4.98% for the prior year period. Another factor contributing to lower interest income was a decrease in the average outstanding balance of loans. The average balance of loans has decreased by $101.8 million, or 16.04%, 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 $47.7 million, or 76.48%. The increase in average federal funds sold and other short-term investments was a result of a decline in average outstanding balance of loans along with the increase in the Company’s deposit funding.

Interest expense for the six month period ended June 30, 2010, was $7.9 million, a decrease of $1.5 million, or 15.92%, from $9.4 million in the same period of the prior year. The decline in interest expense resulted from a decrease in the rate paid on average interest-bearing liabilities resulting from the impact of lower market interest rates on interest-bearing demand accounts, time deposits and long-term debt. The rate paid on total average interest-bearing liabilities decreased 45 basis points to 2.39% during the six month period ending June 30, 2010, compared to 2.84% during the same period in 2009. Average interest-bearing liabilities decreased $868,000, or 0.13%, to $668.6 million during the six month period ending June 30, 2010, compared to $669.5 million during the prior year period. Average interest-bearing demand deposits increased $35.8 million, or 41.07%, as a result of growth experienced in balances of our performance checking product. This increase was offset by decreases in average time deposits of $13.6 million, or 3.86%, as a result of the Company not renewing $41.0 million in brokered deposits as they matured. The Company worked on replacing brokered funds with core deposits by generating increased interest in performance checking product and time deposit promotions. Average other interest-bearing liabilities decreased $8.9 million, or 34.20%, due to an overall decrease in repurchase agreement balances as customers have moved their funds into Certificate of Deposit Account Registry Service (“CDARS”) program. The decrease in average long-term debt by $5.0 million, or 4.67%, was due to the Company paying off $5.3 million related to Blue Valley Building Corp. debt in June 2009.

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.

30

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

Average Balances, Yields and Rates

	Six Months Ended June 30,
	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	$	109,962		$	125		0.23	%	$	62,309		$	63		0.20	%
Available-for-sale securities — taxable		90,959			1,035		2.29			55,600			1,038		3.76
Mortgage loans held for sale		3,950			95		4.85			12,302			290		4.75
Loans, net of unearned discount and fees		532,859			14,007		5.30			634,686			17,503		5.56
Total earning assets		737,730			15,262		4.17			764,897			18,894		4.98
Cash and due from banks — non-interest bearing		37,436								32,589
Allowance for possible loan losses		(19,326	)							(18,450	)
Premises and equipment, net		16,778								18,709
Other assets		45,514								32,246
Total assets	$	818,132							$	829,991
Liabilities and Stockholders’ Equity
Deposits-interest bearing:
Interest-bearing demand accounts	$	123,119		$	1,265		2.07	%	$	87,275		$	1,259		2.91	%
Savings and money market deposits		87,457			226		0.52			96,729			251		0.52
Time deposits		339,471			4,456		2.65			353,086			5,771		3.30
Total interest-bearing deposits		550,047			5,947		2.18			537,090			7,281		2.73
Other interest-bearing liabilities		17,039			21		0.25			25,894			32		0.25
Long-term debt		101,500			1,956		3.89			106,470			2,111		4.00
Total interest-bearing liabilities		668,586			7,924		2.39			669,454			9,424		2.84
Non-interest bearing deposits		83,683								84,185
Other liabilities		6,089								3,830
Stockholders’ equity		59,774								72,522
Total liabilities and stockholders’ equity	$	818,132							$	829,991
FTE Net interest income/spread				$	7,338		1.78	%				$	9,470		2.14	%
FTE Net interest margin							2.01	%							2.50	%

31

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

	Six Months Ended June 30,
	2010 Compared to 2009
	Change			Change
	Due to			Due to			Total
	Rate			Volume			Change
	(In thousands)
Federal funds sold and other short-term investments	$	8		$	54		$	62
Available-for-sale securities — taxable		(406	)		403			(3	)
Mortgage loans held for sale		6			(201	)		(195	)
Loans, net of unearned discount and fees		(822	)		(2,674	)		(3,496	)
Total interest income		(1,214	)		(2,418	)		(3,632	)
Interest-bearing demand accounts		(363	)		369			6
Savings and money market deposits		(2	)		(23	)		(25	)
Time deposits		(1,135	)		(180	)		(1,315	)
Other interest-bearing liabilities		—			(11	)		(11	)
Long-term debt		(58	)		(97	)		(155	)
Total interest expense		(1,558	)		58			(1,500	)
Net interest income	$	344		$	(2,476	)	$	(2,132	)

32

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 second quarter of 2010 was $1.2 million compared to no provision in the same period of 2009. The increase in the provision for loan losses for the second quarter was a result of one construction and one commercial credit relationship which experienced deterioration in credit quality during the period. In addition, the Company increased the general reserves required due to changes in economic conditions reviewed and analyzed by the Company on a monthly basis. For the six months ended June 30, 2010 and 2009, the provision for loan losses was $1.5 million and $12.9 million, respectively. 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				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
	(In thousands)
Loans held for sale fee income	$	663	$	558	$	1,384	$	1,344
NSF charges and service fees		295		389		578		775
Other service charges		501		443		955		847
Realized gains on available-for-sale securities		95		—		95		346
Other income		257		1,140		398		1,388
Total non-interest income	$	1,811	$	2,530	$	3,410	$	4,700

Non-interest income decreased $719,000, or 28.42%, to $1.8 million during the three month period ended June 30, 2010, from $2.5 million during the three month period ended June 30, 2009. Non-interest income for the six month period ended June 30, 2010, was $3.4 million, a decrease of $1.3

33

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

million, or 27.45%, from $4.7 million for the six months ended June 30 2009. The primary reason for the decrease in non-interest income was a decrease in other income of $883,000, or 77.46%, and $990,000, or 71.33%, for the three and six month periods ended June 30, 2010, as compared to the same periods in 2009. The decrease was primarily a result of the Company recording the net fair value of certain mortgage loan-related commitments. The effect of recording the net fair value of certain mortgage loan-related commitments to other income was a loss of $15,000 and a gain of $400,000 for the three month period ended June 30, 2010 and 2009, respectively and a loss of $178,000 and a gain of $400,000 for the six month period ended June 30, 2010 and 2009, respectively. Other income also declined due to lower gains realized on the sale of foreclosed assets held for sale as compared to the prior year period.

Other factors contributing to changes in non-interest income include an increase in loans held for sale fee income of $105,000, or 18.82% and $40,000, or 2.98%, for the three and six month periods ended June 30, 2010. This increase was primarily due to the gains realized on mortgage loans held for sale of $77,000 and $191,000 for the three and six month periods ended June 30, 2010, as compared to a loss of $321,000 for the same periods in 2009 as a result of the Company adopting the fair value option for financial assets and financial liabilities (ASC 825) as of April 1, 2009. The increase was partially offset by a decline in the volume of mortgage loans held for sale originations and refinancing. NSF charges and service fees decreased by $94,000, or 24.16%, and $197,000, or 25.42%, for the three and six month periods ended June 30, 2010, as compared to the same periods in 2009. The decrease 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 $58,000, or 13.09%, and $108,000, or 12.75%, for the three and six month periods ended June 30, 2010, as compared to the same periods in 2009. The increase was primarily attributed to income generated from signature based debit card transactions associated with our performance checking product. Future growth of other non-interest income categories is dependent on new product development and growth in our customer base.

Non-interest Expense

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
	(In thousands)
Salaries and employee benefits	$	2,862	$	3,095	$	5,836	$	6,146
Net occupancy expense		668		697		1,400		1,433
Other operating expenses		2,696		2,895		5,343		6,167
Total non-interest expense	$	6,226	$	6,687	$	12,579	$	13,746

Non-interest expense decreased $461,000, or 6.89%, to $6.2 million during the three month period ended June 30, 2010, compared to $6.7 million during the prior year period. For the six month period ended June 30, 2010, non-interest expense decreased $1.2 million, or 8.49%, to $12.6 million compared to $13.7 million in the prior year period. The change was attributed to a decrease in other operating expenses of $199,000, or 6.87%, and $824,000, or 13.36%, during the three and six month periods ended June 30, 2010, as compared to the same period in 2009. The decline in other operating expenses was a result of the Company recording a $178,000 provision for other real estate in 2010 compared to $918,000 in 2009 as a result of the decline in real estate values. In addition, the Company incurred approximately $105,000 in expenses related to the payoff of long

34

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

term debt in June 2009. 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 $233,000, or 7.53%, and $310,000, or 5.04%, during the three and six month periods ended June 30, 2010. The decrease in salaries and employee benefits was a result of lower commissions paid during 2010, as compared to the prior year period, on mortgage loans originated and sold in the secondary market as a result of decreased origination and refinancing volume and a change in the commission structure for each loan originated and sold. Net occupancy expense decreased slightly by $29,000, or 4.16%, and $33,000, or 2.30%, for the three and six month periods ended June 30, 2010 as a result of lower repairs and maintenance expenses.

Financial Condition

Total assets for the Company at June 30, 2010, were $818.3 million, an increase of $44.3 million, or 5.72%, compared to $774.0 million at December 31, 2009. Deposits were $632.5 million compared with $590.1 million at December 31, 2009, an increase of $42.3 million, or 7.18%. Stockholders’ equity was $58.8 million at June 30, 2010, compared with $60.6 million at December 31, 2009, a decrease of $1.8 million, or 3.00%.

Investments.Available-for-sale securities at June 30, 2010, totaled $106.8 million, reflecting a 46.73% increase from $72.8 million at December 31, 2009. The increase was a result of the purchase of $69.9 million in available-for-sale securities during 2010. The Company purchased the investments to replace $32.0 million called or matured securities and to invest excess liquidity in higher yielding investments. In addition, the Company sold $5.0 million in available-for-sale securities to reduce long term maturity risk within the investment portfolio.

Loans Held for Sale.Mortgage loans held for sale at June 30, 2010, totaled $4.8 million, a decrease of $4.0 million, or 45.34%, 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 2010 slowed as a result of a slow down in mortgage originations and refinancing due to rate and economic environment.

Loans.Loans at June 30, 2010, totaled $516.9 million, reflecting a decrease of $37.2 million, or 6.71%, compared to $554.1 million at December 31, 2009. The decrease in the loan portfolio was attributed to several larger loans paying off, the foreclosure of approximately $8.3 million of foreclosed assets held for sale during 2010, and lower loan originations due to the current economic conditions. The loan to deposit ratio at June 30, 2010, was 81.73% 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 assets. 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.

35

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
	June 30,			June 30,			December 31,
	2010			2009			2009
	(In thousands)
Commercial and all other loans:
Past due 90 days or more	$	—		$	—		$	—
Non-accrual		2,661			2,839			1,327
Commercial real estate loans:
Past due 90 days or more		—			—			—
Non-accrual		14,837			7,624			13,267
Construction loans:
Past due 90 days or more		—			—			—
Non-accrual		13,956			16,654			11,205
Home equity loans :
Past due 90 days or more		—			—			—
Non-accrual		375			436			344
Residential real estate loans:
Past due 90 days or more		—			—			—
Non-accrual		7,192			5,215			8,404
Lease financing:
Past due 90 days or more		—			—			—
Non-accrual		268			276			335
Consumer loans:
Past due 90 days or more		—			—			—
Non-accrual		114			22			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		39,403			33,066			34,888
Foreclosed assets held for sale		22,738			12,770			19,434
Total non-performing assets	$	62,141		$	45,836		$	54,322
Total non-performing loans to total loans		7.62	%		5.47	%		6.30	%
Total non-performing loans to total assets		4.82	%		4.08	%		4.51	%
Allowance for loan losses to non-performing loans		47.43	%		57.01	%		57.33	%
Non-performing assets to loans and foreclosed assets held for sale		11.51	%		7.43	%		9.47	%

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

Non-performing loans increased to $39.4 million at June 30, 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 $2.8 million, non-performing commercial real estate loans by $1.6 million, and non-performing commercial loans by $1.3 million from December 31, 2009. These increases were primarily the result of the deterioration of three credit relationships placed on non-accrual during 2010. The increase was partly offset by a decrease in non-performing residential real estate by $1.2 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, commercial real estate and commercial 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.

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

The following table sets forth information regarding changes in our allowance for loan and valuation losses for the periods indicated.

Summary of Loan Loss Experience and Related Information

	As of and for the
	Six months			Six months
	ended			ended			Year ended
	June 30,			June 30,			December 31,
	2010			2009			2009
				(In thousands)
Balance at Beginning of Period	$	20,000		$	12,368		$	12,368
Loans Charged Off
Commercial loans		145			2,631			4,713
Commercial real estate loans		256			96			374
Construction loans		2,410			3,907			7,716
Home equity loans		125			164			653
Residential real estate loans		121			412			1,480
Lease financing		6			45			109
Consumer loans		—			37			58
Total loans charged-off		3,063			7,292			15,103
Recoveries
Commercial loans		224			82			259
Commercial real estate loans		10			121			123
Construction loans		36			559			592
Home equity loans		2			—			31
Residential real estate loans		5			67			72
Lease financing		12			21			21
Consumer loans		14			1			2
Total recoveries		303			851			1,100
Net Loans Charged Off		2,760			6,441			14,003
Provision for Loan Losses		1,450			12,925			21,635
Balance at End of Period	$	18,690		$	18,852		$	20,000
Loans Outstanding
Average	$	532,859		$	634,686		$	608,080
End of period		516,928			604,326			554,111
Ratio of Allowance for Loan Losses to Loans Outstanding
Average		3.51	%		2.97	%		3.29	%
End of period		3.62	%		3.12	%		3.61	%
Ratio of Net Charge-Offs to
Average loans		0.52	%		1.01	%		2.30	%
End of period loans		0.53	%		1.07	%		2.53	%

The allowance for loan losses as a percent of total loans has remained consistent at 3.62% as of June 30, 2010, compared to 3.61% as of December 31, 2009.

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

Deposits.Deposits grew by $42.3 million, or 7.18%, to $632.5 million as of June 30, 2010, compared with $590.1 million at December 31, 2009. The increase was primarily attributed to an increase in time deposits of $38.7 million as 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 $17.1 million were not renewed as they matured during 2010. The increase in savings, NOW and money market deposits of $4.0 million, or 1.96%, 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 66.81% and 69.76% of our total deposits at June 30, 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 70.17% at June 30, 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 June 30, 2010, approximately $11.9 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 June 30, 2010, was approximately $35.8 million. Advances are made at the discretion of the Federal Reserve Bank of Kansas City.

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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 June 30, 2010, excluding CDARS as described above, the Company had approximately $28.6 million in brokered deposits compared to $45.6 million at December 31, 2009, a decrease of $17.1 million, or 37.43%. 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 quarterly interest related to trust preferred securities of BVBC Capital Trust III due March 31, 2009 through June 30, 2010 and the quarterly payment of interest related to trust preferred securities of BVBC Capital Trust II due on April, 24, 2009 through July 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 payments on the Preferred Shares since May 15, 2009. The dividend payment due August 15, 2010 will be the sixth dividend deferred by the Company. 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 June 30, 2010, the Company has accrued $2.6 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 June 30, 2010, our total stockholders’ equity was $58.8 million and our equity to asset ratio was 7.18%. At June 30, 2010, our Tier 1 capital ratio was 11.06% compared to 11.26% at December 31, 2009, while our total risk-based capital ratio was 12.34% compared to 12.54% at December 31, 2009. As of June 30, 2010, the Company had capital in excess of the requirements for an “adequately-capitalized” bank holding company. At June 30, 2010, the Bank’s Tier 1 capital ratio was 11.39% compared to 11.39% at December 31, 2009, while our total risk-based capital ratio was 12.67% compared to 12.67% at December 31, 2009. As of June 30, 2010, the Bank had capital in excess of the requirements for a “well-capitalized” institution.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a continuing part of our financial strategy, we attempt to manage the impact of fluctuations in market interest rates on our net interest income. This effort entails providing a reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield. Our funds management policy is established by our Bank Board of Directors and monitored by our Asset/Liability Management Committee. Our funds management policy sets standards within which we are expected to operate. These standards include guidelines for exposure to interest rate fluctuations, liquidity, loan limits as a percentage of funding sources, exposure to correspondent banks and brokers, and reliance on non-core deposits. Our funds management policy also establishes the reporting requirements to our Bank Board of Directors. Our investment policy complements our funds management policy by establishing criteria by which we may purchase securities. These criteria include approved types of securities, brokerage sources, terms of investment, quality standards, and diversification. 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 June 30, 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		9.74	%		(8.04	)%
Base Rate Scenario		—			—
200 basis point decline		4.58	%		(0.07	)%

The above table indicates that, at June 30, 2010, in the event of a sudden and sustained increase or decrease 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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Company to expand 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 June 30, 2010, in the event of a sudden increase or decrease 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 as the change in estimated gain on liabilities exceeds the change in estimated loss on 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 decrease in the economic value of our equity as the change in estimated loss on liabilities exceeds the change in estimated gain on assets 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.

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Item 4. Controls and Procedures

In accordance with Item 307 of Regulation S-K promulgated under the Securities Act of 1933, as amended, 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 June 30, 2010, which have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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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

On May 12, 2010, the Company held its Annual Meeting of Stockholders. There were 2,824,270 shares outstanding and entitled to vote at the Annual Meeting, of which 2,313,076 shares were represented in person or by proxy. The following items were submitted at the Annual Meeting for consideration by the stockholders:

1. Election of Directors

Michael J. Brown was elected at the Annual Meeting to serve a three year term or until his successor is duly elected and qualified. The voting results were as follows:

Shares Voted For:	2,028,179
Shares Voted Against:	0
Shares Abstained:	125,271
Broker Non-Votes:	159,626

Anne D. St. Peter was elected at the Annual Meeting to serve a three year term or until his successor is duly elected and qualified. The voting results were as follows:

Shares Voted For:	2,047,363
Shares Voted Against:	0
Shares Abstained:	106,087
Broker Non-Votes:	159,626

The directors of the Company whose terms of office extended beyond the date of the Annual Meeting include:

Robert D. Regnier

Donald H. Alexander

Robert D. Taylor

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2.	Advisory (Non-Binding) Proposal on Executive Compensation
	The proposal, commonly known as a “Say on Pay” proposal, gives each stockholder the opportunity to endorse or not to endorse the compensation of the Company’s executives as disclosed in this Proxy Statement. The vote is advisory and not binding upon the Board. The voting results were as follows:

Shares Voted For:	2,280,437
Shares Voted Against:	8,789
Shares Abstained:	23,850

Item 5. Other Information

Anne D. St. Peter resigned as member of the Board of Directors of Blue Valley Ban Corp., effective August 4, 2010. Ms. St. Peter was a member of the Audit Committee and the Compensation Committee. Ms. St. Peter’s decision to resign was not a result of a disagreement with the Company, known to an executive officer of the Company, on any matter relating to the Company’s operations, policies or practices.

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

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Blue Valley Ban Corp.
Date: August 10, 2010	By:	/s/ Robert D. Regnier
		Robert D. Regnier, President and
		Chief Executive Officer and Director (Principal Executive Officer)
Date: August 10, 2010	By:	/s/ Mark A. Fortino
		Mark A. Fortino, Chief Financial Officer
		(Principal Financial and Accounting Officer)

46