UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________________ to __________________
COMMISSION FILE NUMBER: 001-15933
BLUE VALLEY BAN CORP
(Exact name of registrant as specified in its charter)
KANSAS 48-1070996
State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
11935 RILEY 66225-6128
OVERLAND PARK, KANSAS
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (913) 338-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Guarantee with respect to the Trust Preferred American Stock Exchange
Securities, $8.00 par value, of BVBC Capital
Trust I
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer.
Yes [ ] No [X]
As of June 30, 2005 the registrant had 2,346,371 shares of Common Stock
($1.00 par value) outstanding.
BLUE VALLEY BAN CORP
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm............................. 3
Consolidated Balance Sheets - June 30, 2005 (unaudited) and December 31, 2004....... 4
Consolidated Statements of Income (unaudited) -
three months and six months ended June 30, 2005 and 2004......................... 6
Consolidated Statements of Stockholders' Equity (unaudited) -
six months ended June 30, 2005 and 2004.......................................... 7
Consolidated Statements of Cash Flows (unaudited) -
six months ended June 30, 2005 and 2004.......................................... 8
Notes to Consolidated Financial Statements (unaudited) -
six months ended June 30, 2005 and 2004.......................................... 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................................... 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................... 24
ITEM 4. CONTROLS AND PROCEDURES......................................................... 26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................... 27
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS..................... 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................. 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................. 27
ITEM 5. OTHER INFORMATION............................................................... 27
ITEM 6. EXHIBITS........................................................................ 28
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Blue Valley Ban Corp
Overland Park, Kansas 66225
We have reviewed the accompanying consolidated balance sheet of Blue Valley Ban
Corp as of June 30, 2005, and the related consolidated statements of income,
stockholders' equity and cash flows for the three-month and six-month periods
ended June 30, 2005 and 2004. 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
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 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, 2004 and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended (not presented
herein), and in our report dated February 18, 2005 we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 2004 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 3, 2005
3
BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND DECEMBER 31, 2004
(dollars in thousands, except share data)
ASSETS
JUNE 30, DECEMBER 31,
2005 2004
-------- ------------
(Unaudited)
Cash and due from banks $ 19,793 $ 19,994
Federal funds sold 14,500 2,500
---------- ----------
Cash and cash equivalents 34,293 22,494
Available-for-sale securities 76,498 66,350
Mortgage loans held for sale 39,877 44,144
Loans, net of allowance for loan losses of $6,893
and $7,333 in 2005 and 2004, respectively 505,243 499,837
Premises and equipment, net 19,249 19,988
Foreclosed assets held for sale, net 83 2,645
Interest receivable 2,719 2,375
Deferred income taxes 2,440 2,383
Prepaid expenses and other assets 4,360 3,538
Federal Home Loan Bank stock, Federal Reserve Bank stock
and other securities 8,196 7,987
Core deposit intangible asset, at amortized cost 900 976
---------- ----------
Total assets $ 693,858 $ 672,717
========== ==========
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
4
BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND DECEMBER 31, 2004
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, DECEMBER 31,
2005 2004
---------- ------------
(Unaudited)
LIABILITIES
Deposits
Demand $ 94,824 $ 84,764
Savings, NOW and money market 203,915 220,104
Time 238,524 217,778
---------- ----------
Total deposits 537,263 522,646
Other interest-bearing liabilities 25,749 22,381
Long-term debt 79,641 80,088
Interest payable and other liabilities 7,862 6,218
---------- ----------
Total liabilities 650,515 631,333
---------- ----------
STOCKHOLDERS' EQUITY
Capital stock
Common stock, par value $1 per share;
authorized 15,000,000 shares; issued
and outstanding 2005 - 2,346,371
shares; 2004 - 2,327,086 shares 2,346 2,327
Additional paid-in capital 8,330 8,099
Retained earnings 33,408 31,809
Unearned compensation (454) (594)
Accumulated other comprehensive income
Unrealized depreciation on
available-for-sale securities,
net of income tax credits of
$(191) in 2005 and $(171) in 2004 (287) (257)
---------- ----------
Total stockholders' equity 43,343 41,384
---------- ----------
Total liabilities and stockholders'
equity $ 693,858 $ 672,717
========== ==========
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
5
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(dollars in thousands, except share data)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
INTEREST INCOME
Interest and fees on loans $ 9,104 $ 6,869 $ 17,821 $ 13,714
Federal funds sold 159 49 181 92
Available-for-sale securities 448 526 863 1,181
----------- ----------- ----------- -----------
Total interest income 9,711 7,444 18,865 14,987
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest-bearing demand deposits 23 43 56 72
Savings and money market deposit accounts 982 714 1,879 1,363
Other time deposits 2,284 1,629 4,349 3,310
Federal funds purchased and other interest-bearing liabilities 126 35 217 65
Short-term debt - - 17 -
Long-term debt 1,074 987 2,131 1,987
----------- ----------- ----------- -----------
Total interest expense 4,489 3,408 8,649 6,797
----------- ----------- ----------- -----------
NET INTEREST INCOME 5,222 4,036 10,216 8,190
PROVISION FOR LOAN LOSSES - 300 155 650
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,222 3,736 10,061 7,540
----------- ----------- ----------- -----------
NONINTEREST INCOME
Loans held for sale fee income 1,858 3,390 3,899 5,886
Service fees 557 649 1,051 1,214
Realized gain (loss) on available-for-sale securities - (82) - 133
Other income 254 146 526 282
----------- ----------- ----------- -----------
Total noninterest income 2,669 4,103 5,476 7,515
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits 4,095 4,505 8,042 8,404
Net occupancy expense 809 833 1,629 1,600
Other operating expense 1,690 1,573 3,284 3,070
----------- ----------- ----------- -----------
Total noninterest expense 6,594 6,911 12,955 13,074
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,297 928 2,582 1,981
PROVISION FOR INCOME TAXES 494 247 983 590
----------- ----------- ----------- -----------
NET INCOME $ 803 $ 681 $ 1,599 $ 1,391
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.34 $ 0.30 $ 0.68 $ 0.61
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE $ 0.34 $ 0.29 $ 0.67 $ 0.59
=========== =========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
6
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(dollars in thousands, except share data)
ACCUMULATED
ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED UNEARNED COMPREHENSIVE
INCOME STOCK CAPITAL EARNINGS COMPENSATION INCOME TOTAL
------------- --------- ---------- -------- ------------ ------------- --------
BALANCE, DECEMBER 31, 2003 $ 2,279 $ 7,404 $ 30,344 $ (399) $ 570 $ 40,198
Issuance of 26,950 shares of
common stock 27 341 -- -- -- 368
Net income $ 1,391 -- -- 1,391 -- -- 1,391
Restricted stock earned -- -- -- 70 -- 70
Change in unrealized appre-
ciation on available-for-
sale securities, net of
income tax credit of $(426) (639) -- -- -- -- (639) (639)
------------- --------- ---------- -------- ------------ ------------- --------
$ 752
=============
BALANCE, JUNE 30, 2004 $ 2,306 $ 7,745 $ 31,735 $ (329) $ (69) $ 41,388
========= ========== ======== ============ ============= ========
BALANCE, DECEMBER 31, 2004 $ 2,327 $ 8,099 $ 31,809 $ (594) $ (257) $ 41,384
--------- ---------- -------- ------------ ------------- --------
Issuance of 19,285 shares of
common stock 19 231 -- -- -- 250
Net income $ 1,599 -- -- 1,599 -- -- 1,599
Restricted stock earned -- -- -- 140 -- 140
Change in unrealized appre-
ciation on available-for-
sale securities, net of
income tax credit of $(20) (30) -- -- -- -- (30) (30)
------------- --------- ---------- -------- ------------ ------------- --------
$ 1,569
=============
BALANCE, JUNE 30, 2005 $ 2,346 $ 8,330 $ 33,408 $ (454) $ (287) $ 43,343
========= ========== ======== ============ ============= ========
JUNE 30, 2005 JUNE 30, 2004
------------- -------------
RECLASSIFICATION DISCLOSURE
Unrealized depreciation on available-for-sale securities, net of income taxes
credits of $(20) and $(373) for the periods ended June 30, 2005 and
2004, respectively $ (30) $ (559)
Less: reclassification adjustments for appreciation included in net income,
net of income taxes of $0 and $53 for the periods ended June 30, 2005
and 2004, respectively - 80
------------- ------------
Change in unrealized depreciation on available-for-sale securities, net of
income tax credits of $(20) and $(426) for the periods ended June 30,
2005 and 2004, respectively $ (30) $ (639)
============= ============
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
7
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(dollars in thousands, except share data)
JUNE 30, 2005 JUNE 30, 2004
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,599 $ 1,391
Adjustments to reconcile net income to net cash flow from
operating activities:
Depreciation and amortization 947 882
Amortization (accretion) of premiums and discounts on securities (17) (10)
Provision for loan losses 155 650
Deferred income taxes (37) -
Net realized gain on available-for-sale securities - (133)
Net loss on sale of foreclosed assets 8 62
Net loss (gain) on sale of premises and equipment (2) 5
Restricted stock earned 140 70
Originations of loans held for sale (338,827) (499,863)
Proceeds from the sale of loans held for sale 343,094 490,771
Changes in
Interest receivable (344) 23
Prepaid expenses and other assets (994) (401)
Interest payable and other liabilities 1,687 1,031
------------- -------------
Net cash provided by (used in) operating activities 7,409 (5,522)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net originations of loans (12,003) (34,930)
Proceeds from sales of loan participations 6,400 3,053
Purchase of premises and equipment (360) (2,527)
Proceeds from the sale of premises and equipment 402 -
Proceeds from the sale of foreclosed assets 2,596 364
Proceeds from sales of available-for-sale securities - 6,210
Proceeds from maturities of available-for-sale securities 5,815 37,047
Purchases of available-for-sale securities (15,996) (21,977)
Proceeds from the sale or maturities of Federal Home Loan Bank stock,
Federal Reserve Bank stock, and other securities - 95
Purchases of Federal Home Loan Bank stock, Federal Reserve Bank
stock, and other securities (209) (117)
------------- -------------
Net cash used in investing activities (13,355) (12,782)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in demand deposits, money market,
NOW and savings accounts (6,129) 27,339
Net increase (decrease) in time deposits 20,746 (18,843)
Repayments of long-term debt (4,878) (1,494)
Proceeds from long-term debt 4,388 -
Proceeds from sale of common stock 250 368
Net increase in other borrowings 3,368 1,057
------------- -------------
Net cash provided by financing activities 17,745 8,427
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,799 (9,877)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,494 50,717
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 34,293 $ 40,840
============= =============
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
8
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the Company's consolidated financial position as of June 30, 2005, and the
consolidated results of its operations, changes in stockholders' equity
and cash flows for the periods ended June 30, 2005 and 2004, and are of a
normal recurring nature.
Certain information and note disclosures normally included in the
Company's annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
have been omitted. These consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes
thereto included in the Company's December 31, 2004 Form 10-K filed with
the Securities and Exchange Commission. Certain reclassifications to prior
year amounts have been made to conform to current year presentation.
The results of operations for the period are not necessarily indicative of
the results to be expected for the full year.
The Company applies Accounting Principles Board No. 25 and related
Interpretations in accounting for its stock option plan and no
compensation cost has been recognized. Pro forma compensation costs for
the Company's plan are determined based on the fair value at the option
grant dates using the minimum value method under Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-based Compensation."
During the period ended June 30, 2005, the Company issued no stock
options; consequently, reported and pro forma net income were identical.
The report of BKD, LLP commenting upon their review accompanies the
consolidated financial statements included in Item 1 of Part I.
NOTE 2: EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average number
of shares outstanding during each year. Diluted earnings per share is
computed using the weighted average common shares and all potential
dilutive common shares outstanding during the period.
The computation of per share earnings for the three and six-months ended
June 30, 2005 and 2004 is as follows:
9
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
2005 2004 2005 2004
------------- ------------- ------------ ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(amounts in thousands, except (amounts in thousands, except
share and per share data) share and per share data)
Net income, as reported $ 803 $ 681 $ 1,599 $ 1,391
Add: Total stock-based employee compensation
recognized in net income, net of income taxes of
$25 and $49 for the three- and six-month
periods ended June 30, 2005, respectively, and
$13 and $26 for the three- and six-month
periods ended June 30, 2004, respectively 37 20 74 39
Less: Total stock-based compensation cost
determined under the fair value based method,
net of income tax credit of $(25) and $(49) for
the three- and six-month periods ended June 30,
2005, respectively and of $(13) and $(26) for the
three- and six-month periods ended June 30,
2004, respectively (37) (20) (74) (39)
------------- ------------- ------------ ---------------
Pro forma net income $ 803 $ 681 $ 1,599 $ 1,391
============= ============= ============ ===============
Average common shares outstanding 2,340,014 2,300,818 2,335,804 2,292,697
Average common share stock options outstanding 42,629 55,211 41,255 61,580
------------- ------------- ------------ ---------------
Average diluted common shares 2,382,643 2,356,029 2,377,059 2,354,277
============= ============= ============ ===============
Basic earnings per share $ 0.34 $ 0.30 $ 0.68 $ 0.61
============= ============= ============ ===============
Diluted earnings per share $ 0.34 $ 0.29 $ 0.67 $ 0.59
============= ============= ============ ===============
10
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
NOTE 3: LONG-TERM DEBT
Long-term debt at June 30, 2005 and December 31, 2004, consisted of the
following components:
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
(Unaudited)
(in thousands)
Note Payable - Blue Valley Ban Corp (A) $ 4,281 $ 4,500
Note Payable - Blue Valley Building Corp. (B) 7,272 7,500
Federal Home Loan Bank advances (C) 48,500 48,500
Subordinated Debentures - BVBC Capital Trust I (D) 11,856 11,856
Subordinated Debentures - BVBC Capital Trust II (E) 7,732 7,732
--------- ----------
Total long-term debt $ 79,641 $ 80,088
========= ==========
(A) Due in 2012, payable in quarterly installments of principal plus
interest at the Federal Funds Rate plus 1.63%; collateralized by
common stock of the Company's subsidiary bank. The interest rate on
this note has been fixed at 5.45% by the use of a swap agreement
(see Note 4).
(B) Two notes due in 2017; payable in monthly installments totaling
$70,084 including interest at 5.19%; collateralized by land,
buildings, and assignment of future rents. This debt is guaranteed
by the Company.
(C) Due in 2008, 2009, 2010, 2011 and 2013; collateralized by various
assets including mortgage-backed loans. The interest rates on the
advances range from 1.84% to 5.682%. Federal Home Loan Bank advance
availability is determined quarterly and at June 30, 2005,
approximately $34,412,000 was available.
(D) Due in 2030; interest only at 10.375% 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 2005, in whole or in
part, at their face value plus accrued interest. (See Note 7)
(E) Due in 2033; interest only at LIBOR + 3.25% due quarterly; fully and
unconditionally guaranteed by the Company on a subordinated basis to
the extent that the funds are held by the Trust. Subordinated to the
trust preferred securities (D) due in 2030. The Company may prepay
the subordinated debentures beginning in 2008, in whole or in part,
at their face value plus accrued interest.
11
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
Aggregate annual maturities of long-term debt at June 30, 2005 are as follows:
(in thousands)
July 1 to December 31, 2005 $ 495
2006 1,085
2007 1,111
2008 11,138
2009 7,167
Thereafter 58,645
---------
$ 79,641
=========
NOTE 4: DERIVATIVE FINANCIAL INSTRUMENTS
As a strategy to reduce the exposure to the risk of changes in future cash
flows due to interest rate fluctuations, the Company entered into an
interest rate swap agreement for a portion of its floating rate debt (see
Note 3). The agreement provides for the Company to receive interest from
the counterparty at the note's variable rate and to pay interest to the
counterparty at a fixed rate of 5.45% on the notional amount over the term
of the note. Under the agreement, the Company pays or receives the net
interest amount quarterly, with the quarterly settlements included in
interest expense.
Management has designated the interest rate swap agreement as a cash flow
hedging instrument. The hedge was fully effective through June 30, 2005.
Under the cash flow hedging method, the effective portion of the gain or
loss related to the derivative, if any, is recognized as a component of
other comprehensive income. The ineffective portion, if any, is recognized
in current earnings.
NOTE 5: LEGAL PROCEEDINGS
On October 13th, 2004, we became a defendant in a lawsuit filed in the
United States District Court, Kansas District by one current mortgage loan
originator and twenty three former mortgage loan originators. The
plaintiffs are claiming that the Bank did not compensate them
appropriately for overtime hours worked in accordance with the Fair Labor
Standards Act. While the plaintiffs' claims total $5.6 million, we believe
the Company has meritorious defenses to the claims made and we intend to
vigorously defend against these claims. In fourth quarter of 2004, the
Company recorded a $550,000 liability for the estimated potential cost of
this litigation. We currently do not anticipate any significant additional
financial impact from this litigation. Other than this claim, there are no
other pending legal proceedings that are likely to have a material adverse
effect on our consolidated financial condition, results of operations or
cash flows.
12
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
NOTE 6: NEW ACCOUNTING STANDARDS
In December 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), Share Based Payment, which
establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services, and focuses
primarily on accounting for transactions in which an entity obtains
employee services. The SFAS requires a public entity to measure the cost
of employee services received in exchange for its equity instruments based
on the fair value at the grant date (with limited exceptions) and
recognize that cost over the service period. SFAS 123 (revised 2004)
revises SFAS No. 123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
The provisions of SFAS 123 (revised 2004) will be effective for the
Company beginning January 1, 2006. The Company does not believe that the
adoption of SFAS 123 (revised 2004) will have a material impact on the
consolidated financial statements.
NOTE 7: SUBSEQUENT EVENTS
On July 29, 2005, the Company completed the private placement of $11.5
million in trust preferred securities through a newly formed and
wholly-owned trust subsidiary, BVBC Capital Trust III. The proceeds of the
debt securities issued by the trust will be used on September 30, 2005 to
redeem, in whole, the Company's Junior Subordinated Debentures issued by
BVBC Capital Trust I on July 21, 2000.
The $11.5 million in trust preferred securities bears interest at a
variable rate which will reset quarterly at the three-month LIBOR rate
plus 1.60%. Interest on the trust preferred securities is payable
quarterly in arrears, but may be deferred from time to time at the
election of the Company for up to 20 consecutive quarters. The trust
preferred securities mature on September 30, 2035, but are redeemable by
the Company at par commencing on September 30, 2010.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. The
Company intends such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and is including this statement
for purposes of those safe harbor provisions. Forward-looking statements,
which are based on certain assumptions and describe future plans,
strategies and expectations of the Company, can generally be identified by
use of the words "believe," "expect," "intend," "anticipate," "estimate,"
"project," or similar expressions. The Company is unable to predict the
actual results of its future plans or strategies with certainty. Factors
which could have a material adverse effect on the operations and future
prospects of the Company include, but are not limited to, fluctuations in
market rates of interest and loan and deposit pricing; a deterioration of
general economic conditions or the demand for housing in the Company's
market areas; a deterioration in the demand for mortgage financing;
legislative or regulatory changes; adverse developments in the Company's
loan or investment portfolio; any inability to obtain funding on favorable
terms; the loss of key personnel; significant increases in competition;
and the possible dilutive effect of potential acquisitions or expansions.
These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements.
GENERAL
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are largely proscribed by accounting
principles generally accepted in the United States of America. After a
review of our policies, we determined that accounting for the allowance
for loan losses, income taxes, and stock-based compensation are deemed
critical accounting policies because of the valuation techniques used, and
the sensitivity of these financial statement amounts to the methods, as
well as the assumptions and estimates underlying these balances.
Accounting for these critical areas requires the most subjective and
complex judgments that could be subject to revision as new information
becomes available. There have not been any material changes in our
critical accounting policies since December 31, 2004. Further description
of our critical accounting policies can be found in our Annual Report on
Form 10-K for the year ended December 31, 2004.
RESULTS OF OPERATIONS
Three months ended June 30, 2005 and 2004. Net income for the quarter
ended June 30, 2005, was $803,000, compared to net income of $681,000 for
the quarter ended June 30, 2004, representing an increase of $122,000, or
17.91%. Diluted earnings per share increased 17.24% to $0.34 during the
second quarter of 2005 from $0.29 in the same period of 2004. The
Company's annualized returns on average assets and average stockholders'
equity for the three-month period ended June 30, 2005 were 0.46% and
7.53%, compared to 0.43% and 6.64%, respectively, for the same period in
2004, increases of 6.97% and 13.40%, respectively.
The principal contributing factor to our increase in net income in the
current year second quarter from the prior year was an increase in net
interest income resulting from a higher level of average
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
earning assets and higher yields on those assets. However, the increase in
net interest income was partially offset by lower noninterest income,
primarily mortgage loans held for sale fee income. Lower mortgage
origination volume, resulting from higher interest rates, led to a decline
in mortgage loans held for sale fee income.
Six months ended June 30, 2005 and 2004. Net income for the six months
ended June 30, 2005 was $1.6 million, compared to net income of $1.4
million for the six-month period ended June 30, 2004, representing an
increase of $208,000, or 14.95%. Diluted earnings per share increased
13.55% to $0.67 during the six months ended June 30, 2005 from $0.59 in
the same period of 2004. The Company's annualized returns on average
assets and average stockholders' equity for the six-month period ended
June 30, 2005 were 0.47% and 7.61%, compared to 0.45% and 6.85%,
respectively, for the same period in 2004, increases of 4.44% and 11.09%,
respectively.
The principal contributing factor to our increase in net income from the
six months ended June 30, 2004 to the current year was an increase in net
interest income resulting from a higher level of average earning assets
and higher yields on those assets. However, the increase in net interest
income was partially offset by lower noninterest income, primarily
mortgage loans held for sale fee income. Lower mortgage origination
volume, resulting from higher interest rates, led to a decline in mortgage
loans held for sale fee income.
Our effective tax rate for the period ending June 30, 2005 is higher
compared to the rate for the period ending June 30, 2004 because of tax
reserves utilized during 2004.
NET INTEREST INCOME
Fully tax equivalent (FTE) net interest income for the three-month period
ended June 30, 2005 was $5.2 million, an increase of $1.1 million or
27.58%, from $4.1 million for the three-month period ended June 30, 2004.
FTE interest income for the current year second quarter was $9.7 million,
an increase of $2.2 million, or 29.46%, from $7.5 million in the prior
year second quarter. This increase was primarily a result of an overall
increase in yields on earning assets. The overall yield on average earning
assets increased by 95 basis points to 6.09% in the second quarter of 2005
compared to 5.14% in the prior year second quarter. The 95 basis point
increase in yield resulted primarily from increases in market interest
rates beginning in the second half of 2004. In addition, FTE interest
income also increased due to an increase in average earning assets,
particularly loans. Average earning asset volume increased from the second
quarter of 2004 to the current period by $54.1 million, or 9.23%.
Interest expense for the current year second quarter was $4.5 million, an
increase of $1.1 million, or 31.71%, from $3.4 million in the prior year
second quarter. This increase was primarily a result of an increase in the
rate paid on average interest-bearing liabilities resulting from
promotional rates offered on our time deposits as well as the impact of
rising market interest rates on our savings and money market deposits and
short- and long-term borrowings. The rate paid on total average
interest-bearing liabilities increased 58 basis points to 3.25% during the
three month period ending June 30, 2005 compared to 2.67% during the same
period in 2004. In addition, average interest-bearing liabilities
increased $42.4 million or 8.28% to $553.7 million during the second
quarter of 2005 compared to $511.4 million during the prior year period.
This increase was primarily the result of higher interest-bearing deposit
average balances.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FTE net interest income for the six-month period ended June 30, 2005 was
$10.2 million, an increase of $1.9 million or 23.04%, from $8.3 million
for the six-month period ended June 30, 2004.
FTE interest income for the six months ended June 30, 2005 was $18.9
million, an increase of $3.8 million, or 24.93%, from $15.1 million for
the six months ended June 30, 2004. This increase was primarily a result
of an overall increase in average earning assets, particularly loans.
Average earning asset volume increased from the period ending June 30,
2004 to the current period by $54.6 million, or 9.44%. In addition, the
overall yield on average earning assets increased by 78 basis points to
6.03% for the period ending June 30, 2005 compared to 5.25% for the prior
year period. The 78 basis point increase in yield resulted primarily from
increases in market interest rates beginning in the second half of 2004.
Interest expense for the six-month period ended June 30, 2005 was $8.6
million, an increase of $1.9 million, or 27.24%, from $6.8 million in the
same period of the prior year. The increase is attributable to an increase
in average interest-bearing liabilities and rates paid thereon. Average
interest-bearing liabilities increased by $38.8 million, or 7.65% from the
prior year period. The rates paid on average interest-bearing liabilities
during the first six months of 2005 increased compared to the same period
in 2004 due to an overall increase in market interest rates and
promotional rates offered on our time deposits. The rate paid on total
average interest-bearing liabilities increased 50 basis points to 3.19%
during the six-month period ended June 30, 2005 compared to 2.69% during
the same period in 2004.
Average Balance Sheets. The following table sets forth, for the periods
and as of the dates indicated, information regarding our average balances
of assets and liabilities as well as the dollar amounts of FTE interest
income from interest-earning assets and interest expense on
interest-bearing liabilities and the resultant yields or costs. Ratio,
yield and rate information are based on average daily balances where
available; otherwise, average monthly balances have been used. Nonaccrual
loans are included in the calculation of average balances for loans for
the periods indicated.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AVERAGE BALANCES, YIELDS AND RATES
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------
2005 2004
----------------------------- ------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- -------- ------- --------- -------- -------
ASSETS
Federal funds sold ................................. $ 12,928 $ 181 2.82% $ 20,865 $ 92 0.88%
Investment securities - taxable .................... 62,928 823 2.64 72,093 931 2.59
Investment securities - non-taxable (1) ............ 1,728 60 6.96 10,978 379 6.92
Mortgage loans held for sale ....................... 37,116 980 5.33 31,554 786 5.00
Loans, net of unearned discount and fees ........... 517,201 16,841 6.57 441,858 12,928 5.87
--------- -------- --------- --------
Total earning assets ............................ 631,901 18,885 6.03 577,348 15,116 5.25
--------- -------- --------- --------
Cash and due from banks - non-interest bearing ..... 22,112 20,673
Allowance for possible loan losses ................. (7,257) (7,339)
Premises and equipment, net ........................ 19,683 19,213
Other assets ....................................... 17,780 18,015
--------- ---------
Total assets .................................... $ 684,219 $ 627,910
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits-interest bearing:
Interest-bearing demand accounts ................... $ 26,335 $ 56 0.43% $ 27,193 $ 72 0.53%
Savings and money market deposits .................. 184,502 1,879 2.05 176,088 1,363 1.55
Time deposits ...................................... 230,818 4,349 3.80 191,934 3,310 3.46
--------- -------- --------- --------
Total interest-bearing deposits ................. 441,655 6,284 2.87 395,215 4,745 2.41
--------- -------- --------- --------
Short-term borrowings .............................. 25,258 235 1.87 25,460 65 0.51
Long-term debt ..................................... 79,307 2,130 5.42 86,713 1,987 4.59
--------- -------- --------- --------
Total interest-bearing liabilities .............. 546,220 8,649 3.19 507,388 6,797 2.69
--------- -------- --------- --------
Non-interest bearing deposits ...................... 88,775 75,003
Other liabilities .................................. 6,836 4,701
Stockholders' equity ............................... 42,388 40,818
--------- ---------
Total liabilities and stockholders' equity ...... $ 684,219 $ 627,910
========= =========
Net interest income/spread ......................... $ 10,236 2.84% $ 8,319 2.56%
======== ===== ======== ====
Net interest margin ................................ 3.27% 2.89%
- ---------------
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 volume, reflecting changes in volume multiplied by the
prior period rate; and
- changes in rate, reflecting changes in rate multiplied by the prior
period volume.
CHANGES IN INTEREST INCOME AND
EXPENSE VOLUME AND RATE VARIANCES
SIX MONTHS ENDED JUNE 30,
2005 COMPARED TO 2004
--------------------------------
CHANGE CHANGE
DUE TO DUE TO TOTAL
RATE VOLUME CHANGE
-------- --------- --------
(DOLLARS IN THOUSANDS)
Federal funds sold ....................................... $ 200 $ (111) $ 89
Investment securities - taxable .......................... 13 (121) (108)
Investment securities - non-taxable (1) .................. - (319) (319)
Mortgage loans held for sale ............................. 47 147 194
Loans, net of unearned discount and fees ................. 1,459 2,454 3,913
-------- -------- -------
Total interest income ............................. 1,719 2,050 3,769
-------- -------- -------
Interest-bearing demand accounts ......................... (13) (3) (16)
Savings and money market deposits ........................ 430 86 516
Time deposits ............................................ 305 734 1,039
Short-term borrowings .................................... 172 (3) 169
Long-term debt ........................................... 342 (198) 144
-------- -------- -------
Total interest expense ............................ 1,236 616 1,852
-------- -------- -------
Net interest income ...................................... $ 483 $ 1,434 $ 1,917
======== ======== =======
- -------
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PROVISION FOR LOAN LOSSES
The provision for loan losses for the second quarter of 2005 was $0,
compared to $300,000 for the same period of 2004. For the six-months ended
June 30, 2005 and 2004, the provision was $155,000 and $650,000,
respectively. As discussed further in the Financial Condition section, the
decrease in the provision for loan losses recorded in the three- and
six-month periods ended June 30, 2005 compared to the same periods in the
prior year was the result of improvements in the overall credit exposure
in the loan portfolio. The Company's credit administration function
performs monthly analyses on the loan portfolio to assess and report on
risk levels, delinquencies, an internal ranking system and overall credit
exposure. Management and the Board of Directors reviews the allowance for
loan losses monthly, considering such factors as current and projected
economic conditions, loan growth, the composition of the loan portfolio,
loan trends and classifications, and other factors. We make provisions for
loan losses in amounts that management deems necessary to maintain the
allowance for loan losses at an appropriate level.
NON-INTEREST INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
2005 2004 2005 2004
--------- -------- ------- --------
(IN THOUSANDS)
Loans held for sale fee income ......................... $ 1,858 $ 3,390 $ 3,899 $ 5,886
NSF charges and service fees ........................... 302 341 557 671
Other service charges .................................. 255 308 494 543
Realized (loss) gain on investment securities .......... - (82) - 133
Other income ........................................... 254 146 526 282
--------- -------- ------- --------
Total non-interest income ....................... $ 2,669 $ 4,103 $ 5,476 $ 7,515
========= ======== ======= ========
Non-interest income decreased $1.4 million, or 34.96%, to $2.7 million
during the three-month period ended June 30, 2005, from $4.1 million
during the three-month period ended June 30, 2004. Non-interest income for
the six-months ended June 30, 2005 was $5.5 million, a decrease of $2.0
million, or 27.13%, from $7.5 million for the six-months ended June 30,
2004. These decreases are attributable primarily to decreases in loans
held for sale fee income. Loans held for sale fee income decreased $1.5
million, or 45.20%, and $2.0 million, or 33.76%, for the three-month and
six-month periods ended June 30, 2005, respectively. We experienced a
decline in our mortgage loans held for sale fee income due to a decline in
residential mortgage origination and refinancing resulting from higher
interest rates.
During the second quarter of 2004, the Company recorded an $82,000 charge
for an other-than-temporary impairment on an equity investment. In
addition, during the first quarter of 2004, we took advantage of
opportunities to mitigate the risk of longer-term rate volatility in our
available-for-sale investment portfolio and sold approximately $6 million
of available-for-sale investment securities and realized $215,000 in gains
on the sales.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NON-INTEREST EXPENSE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2005 2004 2005 2004
-------- ---------- --------- ---------
(IN THOUSANDS)
Salaries and employee benefits ................. $ 4,095 $ 4,505 $ 8,042 $ 8,404
Occupancy ...................................... 809 833 1,629 1,600
FDIC and other insurance expense ............... 70 60 140 121
General and administrative ..................... 1,620 1,513 3,144 2,949
-------- ---------- --------- ---------
Total non-interest expense ............... $ 6,594 $ 6,911 $ 12,955 $ 13,074
======== ========== ========= =========
Non-interest expense decreased $317,000, or 4.59%, to $6.6 million during
the three-month period ended June 30, 2005 compared to $6.9 million in the
prior year period. For the six-month period ending June 30, 2005,
non-interest expense decreased $119,000, or 0.91% to $13.0 million
compared to $13.1 million in the prior year period. These decreases are
attributable primarily to a decrease in salaries and employee benefits
expense which decreased $410,000, or 9.10%, during the second quarter of
2005 and $362,000, or 4.31%, during the six-month period ended June 30,
2005, compared to the prior year periods. Salaries and employee benefits
expense decreased due to decreased volume-based incentive compensation in
our mortgage operations. We had 275 full-time equivalent employees at June
30, 2005 compared to 277 at June 30, 2004. Offsetting some of the decrease
in salaries and employee benefits expense were increases in general and
administrative expenses. For the three- and six-month periods ending June
30, 2005, general and administrative expenses increased $107,000, or
7.07%, and $195,000, or 6.61%, respectively.
FINANCIAL CONDITION
Total assets for the Company at June 30, 2005, were $693.9 million, an
increase of $21.1 million, or 3.14%, compared to $672.7 million at
December 31, 2004. Deposits and stockholders' equity at June 30, 2005,
were $537.3 million and $43.3 million, respectively, compared with $522.6
million and $41.4 million, respectively, at December 31, 2004, increases
of $14.6 million, or 2.79%, and $2.0 million, or 4.73%, respectively.
Loans at June 30, 2005 totaled $512.1 million, reflecting an increase of
$5.0 million, or 0.97%, compared to December 31, 2004. The loan to deposit
ratio at June 30, 2005 was 95.32% compared to 97.03% at December 31, 2004.
Available-for-sale securities at June 30, 2005 totaled $76.5 million,
reflecting an increase of $10.1 million or 15.29% compared to December 31,
2004.
Mortgage loans held for sale at June 30, 2005 totaled $39.9 million, a
decrease of $4.3 million, or 9.67% compared to December 31, 2004. The
Company's principal funding source for mortgage loans held for sale is
deposits and advances from the Federal Home Loan Bank. Advance
availability with the Federal Home Loan Bank is determined quarterly and
at June 30, 2005, approximately $34,412,000 was available. The Company's
Federal Home Loan Bank advance availability fluctuates depending on levels
of available collateral, which includes mortgage loans held for sale.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Non-performing assets consist primarily of loans past due 90 days or more,
nonaccrual loans and foreclosed real estate. The following table sets
forth our non-performing assets as of the dates indicated:
AS OF
-----------------------------------
JUNE 30, JUNE 30, DECEMBER 31,
2005 2004 2004
-------- -------- ------------
(Dollars in thousands)
COMMERCIAL AND ALL OTHER LOANS:
Past due 90 days or more $ 545 $ 222 $ 2,008
Nonaccrual 599 1,689 543
COMMERCIAL REAL ESTATE LOANS:
Past due 90 days or more - 255 -
Nonaccrual - - 158
CONSTRUCTION LOANS:
Past due 90 days or more 650 - -
Nonaccrual - - -
LEASE FINANCING:
Past due 90 days or more - - 1
Nonaccrual 441 364 80
RESIDENTIAL REAL ESTATE LOANS:
Past due 90 days or more 330 164 153
Nonaccrual 1,135 1,390 1,315
CONSUMER LOANS:
Past due 90 days or more 69 18 17
Nonaccrual - - -
HOME EQUITY LOANS:
Past due 90 days or more 24 - -
Nonaccrual 75 1,071 75
DEBT SECURITIES AND OTHER ASSETS (EXCLUDING OTHER REAL
ESTATE OWNED AND OTHER REPOSSESSED ASSETS)
Past due 90 days or more - - -
Nonaccrual - - -
-------- -------- --------
Total non-performing loans 3,868 5,173 4,350
-------- -------- --------
FORECLOSED ASSETS HELD FOR SALE 83 - 2,645
-------- -------- --------
Total non-performing assets $ 3,951 $ 5,173 $ 6,995
======== ======== ========
Total nonperforming loans to total loans 0.76% 1.13% 0.86%
Total nonperforming loans to total assets 0.56% 0.81% 0.65%
Allowance for loan losses to nonperforming loans 178.20% 142.86% 168.60%
Nonperforming assets to loans and foreclosed
assets held for sale 0.77% 1.13% 1.37%
As of June 30, 2005, non-performing loans equaled 0.76% of total loans,
reflecting a decrease in non-performing loans from December 31, 2004. The
overall credit exposure in the Company's total loan portfolio continued to
improve. Consequently, management lowered the general reserve factors
based upon an assessment of the Company's historical charge-off experience
for certain loan categories as well as improvements in the ability of the
Company's loan review process to identify credit quality deterioration on
a timely basis. As such, the Company recorded a lower provision for loan
losses during the six month period ending June 30, 2005 compared to the
six month period ending June 30, 2004. The level of loans charged-off
decreased during the first half of 2005, as evidenced by the decrease in
our ratio of net charge-offs to average loans, to 0.23% for the period
ending June 30, 2005 compared to 0.36% for the year ended December 31,
2004. We
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. Generally, the Bank maintains
its allowance for loan losses in excess of its non-performing loans. As of
June 30, 2005, our ratio of allowance for loan losses to non-performing
loans was 178.20%.
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 ENDED
JUNE 30, YEAR ENDED
------------------- DECEMBER 31,
2005 2004 2004
-------- -------- ------------
(Dollars in thousands)
BALANCE AT BEGINNING OF PERIOD $ 7,333 $ 7,051 $ 7,051
LOANS CHARGED-OFF
Commercial loans 638 386 1,665
Commercial real estate loans - - -
Construction loans - - -
Lease financing 21 58 220
Residential real estate loans - - 18
Consumer loans 38 50 80
Home equity loans - - -
-------- -------- --------
Total loans charged-off 698 494 1,983
-------- -------- --------
RECOVERIES:
Commercial loans 11 14 41
Commercial real estate loans - 7 7
Construction loans - - -
Lease financing 67 81 166
Residential real estate loans - 48 48
Consumer loans 24 33 38
Home equity loans - - -
-------- -------- --------
Total recoveries 102 183 300
-------- -------- --------
NET LOANS CHARGED-OFF 595 311 1,683
PROVISION FOR LOAN LOSSES 155 650 1,965
-------- -------- --------
BALANCE AT END OF PERIOD $ 6,893 $ 7,390 $ 7,333
======== ======== ========
LOANS OUTSTANDING:
Average $517,201 $441,858 $463,833
End of period 512,136 456,175 507,170
RATIO OF ALLOWANCE FOR LOAN LOSSES TO
LOANS OUTSTANDING:
Average 1.33% 1.67% 1.58%
End of period 1.35% 1.62% 1.45%
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RATIO OF ANNUALIZED NET CHARGE-OFFS TO
Average loans 0.23% 0.14% 0.36%
End of period loans 0.23% 0.14% 0.33%
The allowance for loan losses as a percent of total loans decreased to
1.35% as of June 30, 2005, compared to 1.45% at December 31, 2004.
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 76.98% and
81.56% of our total deposits at June 30, 2005, and December 31, 2004,
respectively. The change in the percentage of core deposits to total
deposits during the first two quarters of 2005 was the resulted of the
Company raising $23.0 million of additional funding through the brokered
deposit market. Generally, the Company's funding strategy is to utilize
Federal Home Loan Bank borrowings to fund originations of mortgage loans
held for sale and fund balances generated by other lines of business with
deposits. In addition, the Company uses other forms of short-term
borrowings for cash management and liquidity management purposes on a
limited basis. These forms of borrowings include federal funds purchased
and revolving lines of credit. The Company's Asset-Liability Management
Committee utilizes a variety of liquidity monitoring tools, including an
asset/liability modeling service, to analyze and manage the Company's
liquidity.
Management has established internal guidelines and analytical tools to
measure liquid assets, alternative sources of liquidity, as well as
relevant ratios concerning asset levels and purchased funds.
At June 30, 2005, our total stockholders' equity was $43.3 million and our
equity to asset ratio was 6.24%. At June 30, 3005, our Tier 1 capital
ratio was 9.34% compared to 9.00% at December 31, 2004, while our total
risk-based capital ratio was 11.28% compared to 11.15% at December 31,
2004. As of June 30, 2005, we had capital in excess of the requirements
for a "well-capitalized" institution.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a continuing part of our financial strategy, we attempt to manage the
impact of fluctuations in market interest rates on our net interest
income. This effort entails providing a reasonable balance between
interest rate risk, credit risk, liquidity risk and maintenance of yield.
Our funds management policy is established by our Bank Board of Directors
and monitored by our Asset/Liability Management Committee. Our funds
management policy sets standards within which we are expected to operate.
These standards include guidelines for exposure to interest rate
fluctuations, liquidity, loan limits as a percentage of funding sources,
exposure to correspondent banks and brokers, and reliance on non-core
deposits. Our funds management policy also establishes the reporting
requirements to our Bank Board of Directors. Our investment policy
complements our funds management policy by establishing criteria by which
we may purchase securities. These criteria include approved types of
securities, brokerage sources, terms of investment, quality standards, and
diversification.
We use an asset/liability modeling service to analyze the Company's
current sensitivity to instantaneous and permanent changes in interest
rates. The system simulates the Company's asset and liability base and
projects future net interest income results under several interest rate
assumptions. This allows management to view how changes in interest rates
will affect the spread between the yield received on assets and the cost
of deposits and borrowed funds.
The asset/liability modeling service is also used to analyze the net
economic value of equity at risk under instantaneous shifts in interest
rates. The "net economic value of equity at risk" is defined as the market
value of assets less the market value of liabilities plus/minus the market
value of any off-balance sheet positions. By effectively looking at the
present value of all future cash flows on or off the balance sheet, the
net economic value of equity modeling takes a longer-term view of interest
rate risk.
We strive to maintain a position such that current changes in interest
rates will not affect net interest income or the economic value of equity
by more than 5%, per 50 basis points. The following table sets forth the
estimated percentage change in the Bank of Blue Valley's net interest
income over the next twelve month period and net economic value of equity
at risk at June 30, 2005 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
- ------------------------- ---------------- --------------
300 basis point rise 31.67% 1.88%
200 basis point rise 21.46% 1.42%
100 basis point rise 10.60% 0.84%
Base Rate Scenario - -
50 basis point decline (5.97%) 0.23%
100 basis point decline (13.83%) 0.48%
200 basis point decline (29.56%) (2.06%)
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The above table indicates that, at June 30, 2005, in the event of a sudden
and sustained increase in prevailing market rates, our net interest income
would be expected to increase as our assets would be expected to reprice
quicker than our liabilities, while a decrease in rates would indicate
just the opposite. Generally, in the decreasing rate scenarios, not only
would adjustable rate assets (loans) reprice to lower rates faster than
our liabilities, but our liabilities - long-term Federal Home Loan Bank of
Topeka (FHLB) advances and existing time deposits - would not decrease in
rate as much as market rates. In addition, fixed rate loans might
experience an increase in prepayments, further decreasing yields on
earning assets and causing net interest income to decrease. Another
consideration with a rising interest rate scenario is the impact on
mortgage loan refinancing, which would likely decline, leading to lower
loans held for sale fee income, though the impact is difficult to quantify
or project.
The table also indicates that, at June 30, 2005, in the event of a sudden
increase or decrease in prevailing market rates, the current net economic
value of our equity would increase. Given our current asset/liability
position, a 50, 100 or 200 basis point decline in interest rates will
generally result in a higher economic value of our equity as the change in
estimated gain on assets exceeds the change in estimated loss on
liabilities in these interest rate scenarios. Currently, under a falling
rate environment, the Company's estimated market value of loans could
increase as a result of fixed rate loans, net of possible prepayments. The
estimated market value of investment securities could also rise as our
portfolio contains fixed-rate securities. However, the estimated market
value increase in fixed rate loans and investment securities is partially
offset by time deposits unable to reprice to lower rates immediately and
fixed-rate callable advances from FHLB. The likelihood of advances being
called in a decreasing rate environment is diminished resulting in the
advances existing until final maturity, which has the effect of lowering
the economic value of equity.
25
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Item 307 of Regulation S-K promulgated under the
Securities Act of 1933, as amended, and within 90 days of the date of this
Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief
Financial Officer of the Company (the "Certifying Officers") have
conducted evaluations of the Company's disclosure controls and procedures.
As defined under Sections 13a-14(c) and 15d-14(c) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the term
"disclosure controls and procedures" means controls and other procedures
of an issuer that are designed to ensure that information required to be
disclosed by the issuer in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by
an issuer in the reports that it files or submits under the Exchange Act
is accumulated and communicated to the issuer's management, including its
principal executive officer or officers and principal financial officer or
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. The Certifying Officers
have reviewed the Company's disclosure controls and procedures and have
concluded that those disclosure controls and procedures are effective as
of the date of this Quarterly Report on Form 10-Q. In compliance with
Section 302 of the Sarbanes-Oxley Act of 2002, (18 U.S.C. 1350), each of
the Certifying Officers executed an Officer's Certification included in
this Quarterly Report on 10-Q.
As of the date of this Quarterly Report on Form 10-Q, there have not been
any significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
26
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
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 25, 2005, the Company held its Annual Meeting of Stockholders.
There were 2,334,871 shares outstanding and entitled to vote at the Annual
Meeting, of which 2,025,582 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
Don H. Alexander was elected at the Annual Meeting to serve a three
year term or until his successor is duly elected and qualified. The
voting results for both were as follows:
Shares Voted For: 2,013,728
Shares Voted Against 11,854
Shares Abstained 0
C. Ted McCarter was elected at the Annual Meeting to serve a three
year term or until his successor is duly elected and qualified. The
voting results for both were as follows:
Shares Voted For: 2,012,390
Shares Voted Against 13,192
Shares Abstained 0
The directors of the Company whose terms of office extended beyond
the date of the Annual Meeting include:
Wayne A. Henry, Jr.
Thomas A. McDonnell
Robert D. Regnier
ITEM 5. OTHER INFORMATION
Not applicable
27
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS
EXHIBITS
11. Computation of Earnings Per Share. Please see p. 9.
15. Letter regarding Unaudited Interim Financial Information
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
28
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 12, 2005 By: /s/ Robert D. Regnier
----------------------------------------
Robert D. Regnier, President and
Chief Executive Officer
Date: August 12, 2005 By: /s/ Mark A. Fortino
----------------------------------------
Mark A. Fortino, Chief Financial Officer
29