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 SEPTEMBER 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 (I.R.S. Employer
incorporation or organization) Identification No.)
11935 RILEY OVERLAND PARK, KANSAS 66225-6128
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (913) 338-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Guarantee with respect to the Trust American Stock Exchange
Preferred 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]
Indicate by checkmark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.
Yes [ ] No [X]
As of September 30, 2005, the registrant had 2,361,296 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 - September 30, 2005 (unaudited) and
December 31, 2004............................................... 4
Consolidated Statements of Income (unaudited) -
three months and nine months ended September 30, 2005 and 2004.. 6
Consolidated Statements of Stockholders' Equity (unaudited) -
nine months ended September 30, 2005 and 2004 .................. 7
Consolidated Statements of Cash Flows (unaudited) -
nine months ended September 30, 2005 and 2004................... 8
Notes to Consolidated Financial Statements (unaudited) -
nine months ended September 30, 2005 and 2004................... 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................. 13
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
Audit Committee,
Board of Directors and Stockholders
Blue Valley Ban Corp
Overland Park, Kansas
We have reviewed the accompanying consolidated balance sheet of Blue Valley Ban
Corp as of September 30, 2005, and the related consolidated statements of income
for the three-month and nine-month periods ended September 30, 2005 and 2004 and
the consolidated statements of stockholders' equity and cash flows for the
nine-month periods ended September 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
with the standards of the Public Company Accounting Oversight Board, 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
November 2, 2005
3
BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
(dollars in thousands, except share data)
ASSETS
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
(Unaudited)
Cash and due from banks $ 19,927 $ 19,994
Federal funds sold 32,174 2,500
-------- --------
Cash and cash equivalents 52,101 22,494
Available-for-sale securities 76,333 66,350
Mortgage loans held for sale 33,096 44,144
Loans, net of allowance for loan losses of $6,906
and $7,333 in 2005 and 2004, respectively 507,018 499,837
Premises and equipment, net 18,759 19,988
Foreclosed assets held for sale, net 723 2,645
Interest receivable 2,952 2,375
Deferred income taxes 2,538 2,383
Prepaid expenses and other assets 4,392 3,538
Federal Home Loan Bank stock, Federal Reserve Bank stock
and other securities 8,415 7,987
Core deposit intangible asset, at amortized cost 861 976
-------- --------
Total assets $707,188 $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
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(Unaudited)
LIABILITIES
Deposits
Demand $105,558 $ 84,764
Savings, NOW and money market 194,057 220,104
Time 246,078 217,778
-------- --------
Total deposits 545,693 522,646
Other interest-bearing liabilities 23,543 22,381
Long-term debt 84,374 80,088
Interest payable and other liabilities 8,454 6,218
-------- --------
Total liabilities 662,064 631,333
-------- --------
STOCKHOLDERS' EQUITY
Capital stock
Common stock, par value $1 per share;
authorized 15,000,000 shares; issued and
outstanding 2005 - 2,361,296 shares; 2004
- 2,327,086 shares 2,361 2,327
Additional paid-in capital 8,569 8,099
Retained earnings 35,003 31,809
Unearned compensation (376) (594)
Accumulated other comprehensive income
Unrealized depreciation on available-for-sale
securities, net of income tax credits of
$(289) in 2005 and $(171) in 2004 (433) (257)
-------- --------
Total stockholders' equity 45,124 41,384
-------- --------
Total liabilities and stockholders' equity $707,188 $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 NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(dollars in thousands, except share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
INTEREST INCOME
Interest and fees on loans $ 9,804 $7,345 $27,625 $21,059
Federal funds sold 110 48 291 140
Available-for-sale securities 618 624 1,481 1,805
------- ------ ------- -------
Total interest income 10,532 8,017 29,397 23,004
------- ------ ------- -------
INTEREST EXPENSE
Interest-bearing demand deposits 18 43 74 115
Savings and money market deposit accounts 1,000 775 2,879 2,138
Other time deposits 2,335 1,930 6,684 5,240
Federal funds purchased and other interest-bearing
liabilities 143 41 360 106
Short-term debt -- -- 17 --
Long-term debt 1,178 964 3,309 2,951
------- ------ ------- -------
Total interest expense 4,674 3,753 13,323 10,550
------- ------ ------- -------
NET INTEREST INCOME 5,858 4,264 16,074 12,454
PROVISION FOR LOAN LOSSES -- 400 155 1,050
------- ------ ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,858 3,864 15,919 11,404
------- ------ ------- -------
NONINTEREST INCOME
Loans held for sale fee income 2,179 2,106 6,078 7,992
Service fees 558 629 1,609 1,843
Realized gain on available-for-sale securities -- 391 -- 524
Other income 591 143 1,117 425
------- ------ ------- -------
Total noninterest income 3,328 3,269 8,804 10,784
------- ------ ------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 4,201 3,836 12,243 12,240
Net occupancy expense 838 903 2,467 2,503
Other operating expense 1,589 1,688 4,873 4,758
------- ------ ------- -------
Total noninterest expense 6,628 6,427 19,583 19,501
------- ------ ------- -------
INCOME BEFORE INCOME TAXES 2,558 706 5,140 2,687
PROVISION FOR INCOME TAXES 964 173 1,946 763
------- ------ ------- -------
NET INCOME $ 1,594 $ 533 $ 3,194 $ 1,924
======= ====== ======= =======
BASIC EARNINGS PER SHARE $ 0.68 $ 0.23 $ 1.36 $ 0.84
======= ====== ======= =======
DILUTED EARNINGS PER SHARE $ 0.67 $ 0.23 $ 1.34 $ 0.82
======= ====== ======= =======
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
NINE MONTHS ENDED SEPTEMBER 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 33,900 shares of
common stock 34 373 -- -- -- 407
Net income 1,924 -- -- 1,924 -- -- 1,924
Restricted stock earned, net of
forfeitures -- -- -- 110 -- 110
Change in unrealized
depreciation on
available-for-sale
securities, net of
income tax credit of $(407) (611) -- -- -- -- (611) (611)
------ ------ ------ ------- ----- ----- -------
BALANCE, SEPTEMBER 30, 2004 $1,313 $2,313 $7,777 $32,268 $(289) $ (41) $42,028
====== ====== ====== ======= ===== ===== =======
BALANCE, DECEMBER 31, 2004 $2,327 $8,099 $31,809 $(594) $(257) $41,384
------ ------ ------- ----- ----- -------
Issuance of 34,210 shares of
common stock 34 470 -- -- -- 504
Net income 3,194 -- -- 3,194 -- -- 3,194
Restricted stock earned, net of
forfeitures -- -- -- 218 -- 218
Change in unrealized
depreciation on
available-for-sale
securities, net of
income tax credit of $(117) (176) -- -- -- -- (176) (176)
------ ------ ------ ------- ----- ----- -------
BALANCE, SEPTEMBER 30, 2005 $3,018 $2,361 $8,569 $35,003 $(376) $(433) $45,124
====== ====== ====== ======= ===== ===== =======
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------
RECLASSIFICATION DISCLOSURE
Unrealized depreciation on available-for-sale securities, net of
income tax credits of $(117), and $(198) for the periods ended
September 30, 2005 and 2004, respectively $(176) $(297)
Less: reclassification adjustments for appreciation included in
net income, net of income taxes of $0 and $210 for the periods
ended September 30, 2005 and 2004, respectively -- 314
----- -----
Change in unrealized appreciation on available-for-sale
securities, net of income tax credits of $(117) and $(407) for
the periods ended September 30, 2005 and 2004, respectively $(176) $(611)
===== =====
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
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(dollars in thousands, except share data)
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,194 $ 1,924
Adjustments to reconcile net income to net cash flow from
operating activities:
Depreciation and amortization 1,431 1,365
Amortization (accretion) of premiums and discounts on securities (27) (19)
Provision for loan losses 155 1,050
Deferred income taxes (38) --
Net realized gain on available-for-sale securities -- (524)
Net loss on sale of foreclosed assets 34 102
Net loss (gain) on sale of premises and equipment (344) 5
Restricted stock earned and forfeited 218 110
Originations of loans held for sale (557,755) (688,991)
Proceeds from the sale of loans held for sale 568,803 679,616
Changes in
Interest receivable (577) (129)
Prepaid expenses and other assets (1,101) (384)
Interest payable and other liabilities 2,279 775
--------- ---------
Net cash provided by (used in) operating activities 16,272 (5,100)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net originations of loans (14,825) (59,228)
Proceeds from sales of loan participations 6,400 3,053
Purchase of premises and equipment (488) (2,812)
Proceeds from the sale of premises and equipment 993 --
Proceeds from the sale of foreclosed assets 2,976 393
Proceeds from sales of available-for-sale securities -- 21,271
Proceeds from maturities of available-for-sale securities 16,245 41,659
Purchases of available-for-sale securities (26,494) (31,974)
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 (428) (175)
-------- ---------
Net cash used in investing activities (15,621) (27,718)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, money market,
NOW and savings accounts (5,253) 47,041
Net increase in time deposits 28,300 13,162
Repayments of long-term debt (17,001) (21,600)
Proceeds from long-term debt 21,244 --
Net proceeds (payments) on short-term debt -- 1,000
Proceeds from sale of common stock 504 407
Net increase (decrease) in other liabilities 1,162 611
-------- ---------
Net cash provided by financing activities 28,956 40,621
-------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 29,607 7,803
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,494 50,717
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 52,101 $ 58,520
======== =========
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
NINE MONTHS ENDED SEPTEMBER 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 September 30, 2005, and
the consolidated results of its operations, changes in stockholders' equity
and cash flows for the periods ended September 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
September 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 nine-months ended
September 30, 2005 and 2004 is as follows:
9
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(amounts in thousands, (amounts in thousands,
except share and per except share and per
share data) share data)
Net income, as reported $ 1,594 $ 533 $ 3,194 $ 1,924
Add: Total stock-based employee compensation recognized in net
income, net of income taxes of $21 and $70 for the
three- and nine-month periods ended September 30, 2005,
respectively, and $13 and $38 for the three- and nine-month
periods ended September 30, 2004, respectively 31 18 105 58
Less: Total stock-based compensation cost determined under the
fair value based method, net of income tax credit of $(21)
and $(70) for the three- and nine-month periods ended
September 30, 2005, respectively, and of $(13) and $(38)
for the three- and nine-month periods ended September 30, 2004,
respectively (31) (18) (105) (58)
---------- ---------- ---------- ----------
Pro forma net income $ 1,594 $ 533 $ 3,194 $ 1,924
========== ========== ========== ==========
Average common shares outstanding 2,356,062 2,309,341 2,342,631 2,298,286
Average common share stock options outstanding 38,871 55,441 40,452 59,331
---------- ---------- ---------- ----------
Average diluted common shares 2,394,933 2,364,782 2,383,083 2,357,617
========== ========== ========== ==========
Basic earnings per share $ 0.68 $ 0.23 $ 1.36 $ 0.84
========== ========== ========== ==========
Diluted earnings per share $ 0.67 $ 0.23 $ 1.34 $ 0.82
========== ========== ========== ==========
10
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
NOTE 3: LONG-TERM DEBT
Long-term debt at September 30, 2005 and December 31, 2004, consisted of
the following components:
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(Unaudited)
(in thousands)
Note Payable - Blue Valley Ban Corp (A) $ 4,131 $ 4,500
Note Payable - Blue Valley Building Corp (B) 7,155 7,500
Federal Home Loan Bank advances (C) 53,500 48,500
Subordinated Debentures - BVBC Capital Trust I (D) -- 11,856
Subordinated Debentures - BVBC Capital Trust II (E) 7,732 7,732
Subordinated Debentures - BVBC Capital Trust III (F) 11,856 --
------- -------
Total long-term debt $84,374 $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, 2013 and 2015; 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 September 30, 2005, approximately $75,415,000
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 prepaid the
subordinated debentures on September 30, 2005 (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. The Company may prepay the
subordinated debentures beginning in 2008, in whole or in part, at their
face value plus accrued interest.
(F) Due in 2035; interest only at LIBOR + 1.60% due quarterly; fully and
unconditionally guaranteed by the Company on a subordinated basis to the
extent that the funds are held
11
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
by the Trust. Subordinated to the trust preferred securities (E) 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 (see Note 7).
Aggregate annual maturities of long-term debt at September 30, 2005 are as
follows:
(in thousands)
--------------
October 1 to December 31, 2005 $ 228
2006 1,085
2007 1,111
2008 11,138
2009 7,167
Thereafter 63,645
-------
$84,374
=======
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 an amount which offsets the note's variable rate and to
pay interest to the counterparty at a fixed rate of 5.45% on the notional
amount over the term of the note. Under the agreement, the Company pays or
receives the net interest amount quarterly, with the quarterly settlements
included in interest expense. The notional amount of the interest rate swap
is equal to the principal balance of the note and decreases as payments are
made on the note.
Management has designated the interest rate swap agreement as a cash flow
hedging instrument. The hedge was fully effective through September 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 twenty-four 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 the 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
12
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
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.
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: SUBORDINATED DEBENTURES
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 were 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.
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 September 30, 2005 and 2004. Net income for the quarter
ended September 30, 2005, was $1.6 million, compared to net income of
$533,000 for the quarter ended September 30, 2004, representing an increase
of $1.1 million, or 199.06%. Diluted earnings per share increased 191.30%
to $0.67 during the third quarter of 2005 from $0.23 in the same period of
2004. The Company's annualized return on average assets and average
stockholders' equity for the three-month period ended September 30, 2005
were 0.90% and 14.34%, compared to 0.32% and 5.16%, respectively, for the
same period in 2004, increases of 181.25% and 177.90%, respectively.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The principal contributing factor to our increase in net income in the
current year third quarter from the prior year was an increase in net
interest income resulting from higher yields on average earning assets and
a higher level of average earning assets.
Nine months ended September 30, 2005 and 2004. Net income for the nine
months ended September 30, 2005 was $3.2 million, compared to net income of
$1.9 million for the nine-month period ended September 30, 2004,
representing an increase of $1.3 million, or 66.00%. Diluted earnings per
share increased 63.41% to $1.34 during the nine months ended September 30,
2005 from $0.82 in the same period of 2004. The Company's annualized
returns on average assets and average stockholders' equity for the
nine-month period ended September 30, 2005 were 0.62% and 9.92%, compared
to 0.40% and 6.27%, respectively, for the same period in 2004, increases of
55.00% and 58.21%, respectively.
The principal contributing factor to our increase in net income from the
nine months ended September 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 September 30, 2005 is higher
compared to the rate for the period ending September 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 September 30, 2005 was $5.9 million, an increase of $1.5 million or
35.89%, from $4.3 million for the three-month period ended September 30,
2004.
FTE interest income for the current year third quarter was $10.5 million,
an increase of $2.5 million, or 30.63%, from $8.1 million in the prior year
third 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 109 basis points to 6.39% in the third quarter of 2005
compared to 5.30% in the prior year third quarter. The 109 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 third
quarter of 2004 to the current period by $48.0 million, or 7.92%.
Interest expense for the current year third quarter was $4.7 million, an
increase of $921,000, or 24.54%, from $3.8 million in the prior year third
quarter. This increase was primarily a result of an increase in the rate
paid on average interest-bearing liabilities resulting from 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 54 basis points to 3.34% during the three-month
period ended September 30, 2005 compared to 2.80% during the same period in
2004. In addition, average interest-bearing liabilities increased $24.4
million or 4.58% to $555.3 million during the third quarter of 2005
compared to $530.9 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 nine-month period ended September 30, 2005
was $16.1 million, an increase of $3.5 million or 27.44%, from $12.6
million for the nine-month period ended September 30, 2004.
FTE interest income for the nine months ended September 30, 2005 was $29.4
million, an increase of $6.2 million, or 26.91%, from $23.2 million for the
nine months ended September 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 September 30,
2004 to the current period by $52.4 million, or 8.92%. In addition, the
overall yield on average earning assets increased by 87 basis points to
6.15% for the period ending September 30, 2005 compared to 5.28% for the
prior year period. The 87 basis point increase in yield resulted primarily
from increases in market interest rates beginning in the second half of
2004.
Interest expense for the nine-month period ended September 30, 2005 was
$13.3 million, an increase of $2.8 million, or 26.28%, from $10.6 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 $34.1 million, or 6.61%
from the prior year period. The rates paid on average interest-bearing
liabilities during the first nine 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 3.24%
during the nine-month period ended September 30, 2005 compared to 2.74%
during the same period in 2004.
Average Balance Sheets. The following table sets forth, for the periods
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
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------
2005 2004
---------------------------- ---------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- -------- ------- -------- -------- -------
ASSETS
Federal funds sold................................ $ 12,159 $ 291 3.19% $ 18,946 $ 140 0.99%
Investment securities - taxable................... 67,469 1,430 2.83 73,826 1,459 2.64
Investment securities - non-taxable (1)........... 1,489 77 6.95 10,112 525 6.94
Mortgage loans held for sale...................... 39,791 1,577 5.30 32,385 1,252 5.16
Loans, net of unearned discount and fees.......... 518,456 26,048 6.72 451,698 19,807 5.86
-------- ------- -------- -------
Total earning assets........................... 639,364 29,423 6.15 586,967 23,183 5.28
-------- ------- -------- -------
Cash and due from banks - non-interest bearing.... 21,480 21,467
Allowance for possible loan losses................ (7,122) (7,367)
Premises and equipment, net....................... 19,493 19,489
Other assets...................................... 17,750 17,346
-------- --------
Total assets................................... $690,965 $637,902
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits-interest bearing:
Interest-bearing demand accounts................. $ 25,472 $ 74 0.39% $ 27,663 $ 115 0.56%
Savings and money market deposits................ 182,695 2,879 2.11 181,201 2,138 1.58
Time deposits.................................... 234,450 6,684 3.81 197,158 5,240 3.55
-------- ------- ------- -----
Total interest-bearing deposits................ 442,617 9,637 2.91 406,022 7,493 2.47
-------- ------- ------- -----
Short-term borrowings............................. 24,636 377 2.05 25,443 106 0.56
Long-term debt ................................... 82,060 3,309 5.39 83,778 2,951 4.71
-------- ------- ------- -----
Total interest-bearing liabilities ............ 549,313 13,323 3.24 515,243 10,550 2.74
-------- ------- ------- -----
Non-interest bearing deposits..................... 91,104 76,662
Other liabilities ................................ 7,492 4,981
Stockholders' equity.............................. 43,056 41,016
-------- --------
Total liabilities and stockholders' equity .... $690,965 $637,902
======== ========
Net interest income/spread ....................... $16,100 2.91% $12,633 2.54%
======= ==== ======= ====
Net interest margin............................... 3.37% 2.87%
- ----------
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%. For
the nine months ending September 30, 2005 and 2004, the tax equivalency
adjustment amounted to $26,000 and $179,000 respectively.
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
NINE MONTHS ENDED SEPTEMBER 30,
2005 COMPARED TO 2004
-------------------------------
CHANGE CHANGE
DUE TO DUE TO TOTAL
RATE VOLUME CHANGE
------ ------ ------
(DOLLARS IN THOUSANDS)
Federal funds sold .......................... $ 312 $ (161) $ 151
Investment securities - taxable ............. 113 (142) (29)
Investment securities - non-taxable (1) ..... 1 (449) (448)
Mortgage loans held for sale ................ 32 293 325
Loans, net of unearned discount ............. 2,897 3,344 6,241
------ ------ -----
Total interest income .................... 3,355 2,885 6,240
------ ------ -----
Interest-bearing demand accounts ............ (35) (6) (41)
Savings and money market deposits ........... 718 23 741
Time deposits ............................... 384 1060 1,444
Short-term borrowings ....................... 283 (12) 271
Long-term debt .............................. 427 (69) 358
------ ------ ------
Total interest expense ................... 1,777 996 2,773
------ ------ ------
Net interest income ......................... $1,578 $1,889 $3,467
====== ====== ======
- ----------
(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 third quarter of 2005 was $0,
compared to $400,000 for the same period of 2004. For the nine-months ended
September 30, 2005 and 2004, the provision was $155,000 and $1.1 million,
respectively. As discussed further in the Financial Condition section, the
decrease in the provision for loan losses recorded in the three- and
nine-month periods ended September 30, 2005 compared to the same periods in
the prior year was the result of a lower growth rate of 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. The Company makes provisions for loan
losses in amounts that management deems necessary to maintain the allowance
for loan losses at an appropriate level.
NON-INTEREST INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2005 2004 2005 2004
------ ------ ------ ------
(IN THOUSANDS)
Loans held for sale fee income .............. $2,179 $2,106 $6,078 $ 7,992
NSF charges and service fees ................ 281 334 839 1,005
Other service charges ....................... 277 295 770 838
Net realized gain on investment securities .. -- 391 -- 524
Other income ................................ 591 143 1,117 425
------ ------ ------ -------
Total non-interest income ................ $3,328 $3,269 $8,804 $10,784
====== ====== ====== =======
Non-interest income increased $59,000, or 1.80%, to $3.3 million during the
three-month period ended September 30, 2005, from $3.3 million during the
three-month period ended September 30, 2004. This increase is primarily
attributable to a $342,000 pre-tax gain (included in other income) on the
sale of the old Olathe banking center facility. During September, the
Company completed the sale of the Olathe property located on the northwest
corner of Ridgeview and Santa Fe. This property used to be the location of
the Olathe Banking Center until it was moved to a more suitable location
across the street during 2001. Partially offsetting this increase were
decreases in NSF charges and services fees and net realized gains on
investment securities. Loans held for sale fee income for the third quarter
of 2005 was up $73,000 or 3.46% compared to the third quarter of 2004.
However, during the third quarter of 2004, the Company recorded a $350,000
reduction in loans held for sale fee income to account for the refund of
fee income on residential mortgage loans underwritten with documentation
altered by a former employee of the Company. Absent this nonrecurring
charge, loans held for sale fee income during the third quarter of 2005
decreased $277,000 or 12.71% compared to the third quarter of 2004 due to a
decline in residential mortgage origination and refinancing resulting from
higher interest rates.
Non-interest income for the nine-months ended September 30, 2005 was $8.8
million, a decrease of $2.0 million, or 18.37%, from $10.8 million for the
nine-months ended September 30, 2004. This decrease is attributable
primarily to decreases in loans held for sale fee income and NSF charges
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
and service fees. Loans held for sale fee income decreased $1.9 million, or
23.95% for the nine-month period ended September 30, 2005 compared to the
prior year period. 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 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 $20.7 million of available-for-sale investment
securities and realized $524,000 in net gains on those sales. Included in
this amount are $391,000 of gains realized during the third quarter of 2004
from sales of $14.7 million of available-for-sale securities.
NON-INTEREST EXPENSE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2005 2004 2005 2004
------ ------ ------- -------
(IN THOUSANDS)
Salaries and employee benefits .... $4,201 $3,836 $12,243 $12,240
Occupancy ......................... 838 903 2,467 2,503
FDIC and other insurance expense .. 44 59 132 180
General and administrative ........ 1,545 1,629 4,741 4,578
------ ------ ------- -------
Total non-interest expense ..... $6,628 $6,427 $19,583 $19,501
====== ====== ======= =======
Non-interest expense increased $201,000, or 3.12%, to $6.6 million during
the three-month period ended September 30, 2005 compared to $6.4 million in
the prior year period. For the nine-month period ending September 30, 2005,
non-interest expense increased $82,000, or 0.42% to $19.6 million compared
to $19.5 million in the prior year period. This increase is primarily
attributable to an increase in general and administrative costs,
specifically mortgage lead generation costs and data processing expenses.
Partially offsetting the increase in general and administrative costs were
decreases in occupancy and FDIC and other insurance expenses.
We had 263 full-time equivalent employees at September 30, 2005 compared to
273 at September 30, 2004.
FINANCIAL CONDITION
Total assets for the Company at September 30, 2005, were $707.2 million, an
increase of $34.5 million, or 5.12%, compared to $672.7 million at December
31, 2004. Deposits and stockholders' equity at September 30, 2005, were
$545.7 million and $45.1 million, respectively, compared with $522.6
million and $41.4 million, respectively, at December 31, 2004, increases of
$23.0 million, or 4.40%, and $3.7 million, or 9.03%, respectively.
Loans at September 30, 2005 totaled $513.9 million, reflecting an increase
of $6.8 million, or 1.33%, compared to December 31, 2004. The loan to
deposit ratio at September 30, 2005 was 94.17% compared to 97.03% at
December 31, 2004.
Available-for-sale securities at September 30, 2005 totaled $76.3 million,
reflecting an increase of $10.0 million or 15.04% compared to December 31,
2004.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Mortgage loans held for sale at September 30, 2005 totaled $33.1 million, a
decrease of $11.0 million, or 25.03% 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 September
30, 2005, approximately $75,415,000 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.
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
--------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
2005 2004 2004
------------- ------------- ------------
(Dollars in thousands)
COMMERCIAL AND ALL OTHER LOANS:
Past due 90 days or more $ 2,513 $ 583 $ 2,008
Nonaccrual 760 1,859 543
COMMERCIAL REAL ESTATE LOANS:
Past due 90 days or more 460 -- --
Nonaccrual -- -- 158
CONSTRUCTION LOANS:
Past due 90 days or more 309 -- --
Nonaccrual 325 -- --
LEASE FINANCING:
Past due 90 days or more -- 1 1
Nonaccrual 145 310 80
RESIDENTIAL REAL ESTATE LOANS:
Past due 90 days or more 80 -- 153
Nonaccrual 902 402 1,315
CONSUMER LOANS:
Past due 90 days or more 66 -- 17
Nonaccrual -- -- --
HOME EQUITY LOANS:
Past due 90 days or more -- -- --
Nonaccrual -- 75 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 5,559 3,230 4,350
------- ------- -------
FORECLOSED ASSETS HELD FOR SALE 723 2,459 2,645
------- ------- -------
Total non-performing assets $ 6,282 $ 5,689 $ 6,995
======= ======= =======
Total nonperforming loans to total loans 1.08% 0.68% 0.86%
Total nonperforming loans to total assets 0.79% 0.48% 0.65%
Allowance for loan losses to nonperforming loans 124.22% 235.48% 168.60%
Nonperforming assets to loans and foreclosed
assets held for sale 1.22% 1.18% 1.37%
As of September 30, 2005, non-performing loans equaled 1.08% of total
loans, reflecting an increase in non-performing loans from December 31,
2004. However, the overall growth of the
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
loan portfolio has slowed. Loans grew by $6.8 million or 1.33% during the
first nine months of 2005 compared to $53.1 million or 12.51% during the
first nine months of 2004. In addition, the level of loans charged-off
decreased during the first nine months of 2005, as evidenced by the
decrease in our ratio of net charge-offs to average loans, to 0.15% for the
period ending September 30, 2005 compared to 0.36% for the year ended
December 31, 2004. As such, the Company recorded a lower provision for loan
losses during the nine month period ending September 30, 2005 compared to
the nine month period ending September 30, 2004. 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. Generally, the Bank maintains its
allowance for loan losses in excess of its non-performing loans. As of
September 30, 2005, our ratio of allowance for loan losses to
non-performing loans was 124.22%.
The following table sets forth information regarding changes in our
allowance for loan and valuation losses for the periods indicated.
SUMMARY OF LOAN LOSS EXPERIENCE
AND RELATED INFORMATION
AS OF AND FOR THE
--------------------------------
NINE MONTHS ENDED
SEPTEMBER 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 638 445 1,665
Commercial real estate loans -- -- --
Construction loans -- -- --
Lease financing 66 215 220
Residential real estate loans -- 18 18
Consumer loans 56 73 80
Home equity loans 16 -- --
------ ------ ------
Total loans charged-off 776 751 1,983
------ ------ ------
RECOVERIES:
Commercial 92 26 41
Commercial real estate -- 7 7
Construction -- -- --
Leases 72 139 166
Residential real estate -- 48 48
Personal 30 35 38
Home Equity -- -- --
------ ------ ------
Total recoveries 194 255 300
------ ------ ------
NET LOANS CHARGED-OFF 582 496 1,683
PROVISION FOR LOAN LOSSES 155 1,050 1,965
------ ------ ------
BALANCE AT END OF PERIOD $6,906 $7,605 $7,333
====== ====== ======
LOANS OUTSTANDING:
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Average $518,456 $451,698 $463,833
End of period 513,924 477,760 507,170
RATIO OF ALLOWANCE FOR LOAN LOSSES TO
LOANS OUTSTANDING:
Average 1.33% 1.68% 1.58%
End of period 1.34% 1.59% 1.45%
RATIO OF ANNUALIZED NET CHARGE-OFFS TO
Average loans 0.15% 0.15% 0.36%
End of period loans 0.15% 0.14% 0.33%
The allowance for loan losses as a percent of total loans decreased to
1.34% as of September 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 74.17% and
81.56% of our total deposits at September 30, 2005, and December 31, 2004,
respectively. The change in the percentage of core deposits to total
deposits during the first three quarters of 2005 was the result 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 September 30, 2005, our total stockholders' equity was $45.1 million and
our equity to asset ratio was 6.38%. At September 30, 3005, our Tier 1
capital ratio was 9.61% compared to 9.00% at December 31, 2004, while our
total risk-based capital ratio was 11.42% compared to 11.15% at December
31, 2004. As of September 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 September 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
- ------------------------- ---------------- --------------
200 basis point rise 19.86% 8.99%
Base Rate Scenario -- --
200 basis point decline (28.30%) (18.63%)
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The above table indicates that, at September 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 above table also indicates that, at September 30, 2005, in the event of
a sudden decrease in prevailing market rates, the economic value of our
equity would decrease. Given our current asset/liability position, a 200
basis point decline in interest rates will result in a lower economic value
of our equity as the change in estimated loss on liabilities exceeds the
change in estimated gain on assets in these interest rate scenarios.
Currently, under a falling rate environment, the Company's estimated market
value of loans could increase as a result of fixed rate loans, net of
possible prepayments. The estimated market value of investment securities
could also rise as our portfolio contains higher yielding securities.
However, the estimated market value increase in fixed rate loans and
investment securities is offset by time deposits unable to reprice to lower
rates immediately and fixed-rate callable advances from FHLB. The
likelihood of advances being called in a decreasing rate environment is
diminished resulting in the advances existing until final maturity, which
has the effect of lowering the economic value of equity.
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.
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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
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS
(G) 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 Treasurer pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of the Chief Executive Officer and Treasurer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLUE VALLEY BAN CORP
Date: November 14, 2005 By: /s/ Robert D. Regnier
------------------------------------
Robert D. Regnier, President and
Chief Executive Officer
Date: November 14, 2005 By: /s/ Mark A. Fortino
------------------------------------
Mark A. Fortino, Chief Financial
Officer
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