UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer as
defined in Rule 405 of the Securities Act Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act Yes [X] No [ ]
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 check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See the definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check One):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company as defined
in Rule 12b-2 of the Securities Act Yes [ ] No [X]
As of February 28, 2006 1,175,890 shares of the Registrant's common stock
were held by non-affiliates. The aggregate market value of these common shares,
computed based on the June 30, 2005 closing price of the stock, was
approximately $31.7 million. As of February 28, 2006 the registrant had
2,385,969 shares of Common Stock ($1.00 par value) outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Part III - Proxy Statement for the 2006 Annual Meeting of Stockholders
BLUE VALLEY BAN CORP
FORM 10-K/A
AMENDMENT NO. 1 TO FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
EXPLANATORY NOTE
The Company's Form 10-K Annual Report for the fiscal year ended December 31,
2005 is being amended hereby solely for the purpose of restating the fair value
of deposits in the table on page F-25 (Note 17) of Part IV. This restatement is
done to correct an error in the calculation of the fair value of deposits. This
Form 10-K/A does not otherwise change or update the disclosures set forth in the
Form 10-K as originally filed and does not otherwise reflect the occurrence of
any events after the filing of the Form 10-K.
BLUE VALLEY BAN CORP
FORM 10-K INDEX
Page No.
--------
PART I.
Item 1. Business 2
Item 1A. Risk Factors 15
Item 1B. Unresolved Staff Comments 16
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II.
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities 18
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk 38
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 40
Item 9A. Controls and Procedures 40
Item 9B. Other Information 40
PART III.
Item 10. Directors and Executive Officers of the Registrant 41
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 41
Item 13. Certain Relationships and Related Transactions 41
Item 14. Principal Accountant Fees and Services 42
PART IV.
Item 15. Exhibits, Financial Statement Schedules 42
1
PART I
ITEM 1: BUSINESS
THE COMPANY AND SUBSIDIARIES
Blue Valley Ban Corp ("Blue Valley" or the "Company") is a bank
holding company organized in 1989. In 2001, Blue Valley elected to become a
financial holding company and such status was granted. The Company's
wholly-owned subsidiary, Bank of Blue Valley (the "Bank") was also organized in
1989 to provide banking services to closely-held businesses and their owners,
professionals and residents in Johnson County, Kansas, a high growth,
demographically attractive area within the Kansas City, Missouri - Kansas
Metropolitan Statistical Area (the "Kansas City MSA"). The focus of Blue Valley
has been to take advantage of the current and anticipated growth in our market
area as well as to serve the needs of small and mid-sized commercial borrowers -
customers that we believe currently are underserved as a result of banking
consolidation in the industry generally and within our market specifically. In
addition, Blue Valley has established a national presence by originating
residential mortgages nationwide through the Bank's InternetMortgage.com
website.
We have experienced significant internal growth since our inception.
We currently have five banking center locations in Johnson County, Kansas,
including our main office and a mortgage operations office in Overland Park,
both of which include lobby banking centers, and full-service offices in
Leawood, Olathe and Shawnee, Kansas.
Our lending activities focus on commercial lending and residential
mortgage origination services, and to a lesser extent, consumer lending and
leasing. We strive to identify, develop and maintain diversified lines of
business which provide acceptable returns on a risk-adjusted basis. Our primary
lines of business consist of commercial lending, commercial real estate lending,
construction lending, lease financing, residential real estate lending, consumer
lending, and home equity loans.
We also seek to develop lines of business which diversify our revenue
sources, increase our non-interest income and offer additional value-added
services to our customers. We develop these new or existing lines of business
while monitoring related risk factors. In addition to fees generated in
conjunction with our lending activities, we derive non-interest income by
providing mortgage origination services, deposit and cash management services,
investment brokerage services and trust services.
In addition to the Bank, we have four wholly-owned subsidiaries: Blue
Valley Building Corp., which owns the buildings and real property that comprise
our headquarters, mortgage operations facility and the Leawood banking center;
Blue Valley Insurance Services, Inc., an insurance agency created to offer
insurance products to our customers; and BVBC Capital Trust II and BVBC Capital
Trust III, which were created to offer the Company's trust preferred securities
and to purchase our junior subordinated debentures. On December 31, 2004, Blue
Valley Insurance Services, Inc. ceased operations as we decided not to further
pursue this line of business.
We also have a 49% ownership in Homeland Title, LLC. Homeland Title,
LLC was established in June 2005 and provides title and settlement services.
Consolidated financial information, including a measure of profit and
loss and total assets can be found in Part IV of this report.
OUR MARKET AREA
We operate primarily as a community bank, serving the banking needs of
small and medium-sized companies and individuals in the Kansas City MSA
generally, and in suburban Johnson County, Kansas, in particular. Our trade area
generally consists of Johnson County, Kansas. We believe that coupling our
strategy of providing exceptional customer service and local decision making
with attractive market demographics has led to a rate of growth which exceeds
the national total asset and deposit growth rates of the banking industry as
well as the growth experienced locally by many of our competitors.
2
The income levels and growth rate of Johnson County, Kansas compare
favorably to national averages. Johnson County's population growth rate ranks in
the top 8% of counties nationally, and its per capita income ranks in the top 2%
of counties nationally. Johnson County is also a significant banking market in
the State of Kansas and in the Kansas City MSA. According to available industry
data, as of June 30, 2005, total deposits in Johnson County, including those of
banks, thrifts and credit unions, were approximately $12.0 billion, which
represented 24.84% of total deposits in the state of Kansas and 36.81% of total
deposits in the Kansas City MSA.
As our founders anticipated, the trade area surrounding our main
banking facility in Overland Park, Kansas has become one of the most highly
developed retail areas in the Kansas City MSA. Our Olathe, Kansas facility is
located approximately 10 miles west of our main office. We opened our Olathe
facility in 1994 when we acquired the deposits of a branch of a failed savings
and loan association. We made this acquisition because it was located in a
contiguous market area and we believed that it represented a stable deposit
base. The Shawnee, Kansas banking facility is approximately 20 miles northwest
of our headquarters location. We entered into the Shawnee market in 1999 with
the opening of a grocery store branch. During the first quarter of 2001,
construction of our freestanding banking facility in Shawnee was completed and
operations commenced, and then in 2004, we merged our Shawnee grocery store
branch into our Shawnee freestanding facility. The Leawood, Kansas banking
facility is approximately 5 miles southeast of our headquarters location. We
entered into the Leawood market in 2002 with the opening of a grocery store
branch. During the second quarter of 2004, we completed construction of our
freestanding banking facility in Leawood and operations commenced. In 2005, we
merged our Leawood grocery store branch into our Leawood freestanding facility.
During 2003 we acquired an office building in Overland Park, Kansas
approximately 1 mile northwest of our headquarters location. At this location,
we consolidated our mortgage operations and opened a banking facility.
LENDING ACTIVITIES
Overview. Our principal loan categories include commercial, commercial
real estate, construction, leasing and residential mortgages. We also offer a
variety of consumer loans. Our primary source of interest income is interest
earned on our loan portfolio. As of December 31, 2005, our loans represented
approximately 72.96% of our total assets, our legal lending limit to any one
borrower was $16.9 million, and our largest single borrower as of that date had
outstanding loans of $7.4 million.
We have been successful in expanding our loan portfolio because of the
commitment of our staff and the economic growth in our area of operation. Our
staff has significant experience in lending and has been successful in offering
our products to both potential customers and existing customers. We believe that
we have been successful in maintaining our customers because of our staff's
attentiveness to their financial needs and the development of professional
relationships with them. We strive to become a strategic business partner with
our customers, not just a source of funds.
We conduct our lending activities pursuant to the loan policies
adopted by our board of directors. These policies currently require the approval
of our loan committee of all commercial credits in excess of $1.25 million and
all real estate credits in excess of $2.0 million. Credits up to $1.25 million
on commercial loans and $2.0 million on real estate loans can be approved by the
Bank's President and a combination of two senior loan management officers. Our
management information systems and loan review policies are designed to monitor
lending sufficiently to ensure adherence to our loan policies. The following
table shows the composition of our loan portfolio at December 31, 2005.
3
LOAN PORTFOLIO
AS OF DECEMBER 31, 2005
-----------------------
AMOUNT PERCENT
-------- -------
(DOLLARS IN THOUSANDS)
Commercial ........................ $112,452 22.35%
Commercial real estate ............ 114,562 22.77
Construction ...................... 139,662 27.76
Lease financing ................... 18,238 3.62
Residential real estate ........... 39,371 7.83
Consumer .......................... 45,221 8.99
Home equity ....................... 33,637 6.68
-------- ------
Total loans and leases ......... 503,143 100.00%
Less allowance for loan losses .... 6,704
--------
Loans receivable, net ............. $496,439
========
Commercial loans. As of December 31, 2005, approximately $112.5
million, or 22.35%, of our loan portfolio represented commercial loans. The Bank
has developed a strong reputation in providing and servicing small business and
commercial loans. We have expanded this portfolio through the addition of
commercial lending staff, their business development efforts and our reputation.
Commercial loans have historically been a significant portion of our loan
portfolio and we expect to continue our emphasis on this loan category.
The Bank's commercial lending activities historically have been
directed to small and medium-sized companies in or near Johnson County, Kansas,
with annual sales generally between $100,000 and $20 million. The Bank's
commercial customers are primarily firms engaged in manufacturing, service,
retail, construction, distribution and sales with significant operations in our
market areas. The Bank's commercial loans are primarily secured by real estate,
accounts receivable, inventory and equipment, and the Bank may seek to obtain
personal guarantees for its commercial loans. The Bank primarily underwrites its
commercial loans on the basis of the borrowers' cash flow and ability to service
the debt, as well as the value of any underlying collateral and the financial
strength of any guarantors.
Approximately $6.8 million, or 6.01%, of our commercial loans are
Small Business Administration (SBA) loans, of which $5.0 million is government
guaranteed. The SBA guarantees the repayment of a portion of the principal on
these loans, plus accrued interest on the guaranteed portion of the loan. Under
the federal Small Business Act, the SBA may guarantee up to 85% of qualified
loans of $150,000 or less and up to 75% of qualified loans in excess of
$150,000, up to a maximum guarantee of $1.0 million. We are an active SBA lender
in our market area and have been approved to participate in the SBA Certified
Lender Program.
Commercial lending is subject to risks specific to the business of
each borrower. In order to address these risks, we seek to understand the
business of each borrower, place appropriate value on any personal guarantee or
collateral pledged to secure the loan, and structure the loan amortization to
maintain the value of any collateral during the term of the loan.
Commercial real estate loans. The Bank also makes loans to provide
permanent financing for retail and office buildings, multi-family properties and
churches. As of December 31, 2005, approximately $114.6 million, or 22.77%, of
our loan portfolio represented commercial real estate loans. Our commercial real
estate loans are underwritten on the basis of the appraised value of the
property, the cash flow of the underlying property, and the financial strength
of any guarantors.
Risks inherent in commercial real estate lending are related to the
market value of the property taken as collateral, the underlying cash flows and
documentation. Commercial real estate lending involves more risk than
residential real estate lending because loan balances may be greater and
repayment is dependent on the borrower's operations. We attempt to mitigate
these risks by carefully assessing property values, investigating the source of
cash flow servicing the loan on the property and adhering to our lending and
underwriting policies and procedures.
4
Construction loans. Our construction loans include loans to
developers, home building contractors and other companies and consumers for the
construction of single-family homes, land development, and commercial buildings,
such as retail and office buildings and multi-family properties. As of December
31, 2005, approximately $139.7 million, or 27.76%, of our loan portfolio
represented real estate construction loans. The builder and developer loan
portfolio has been a consistent and profitable component of our loan portfolio
over our history. We attribute this success to our expertise, availability and
prompt service. The Bank's experience and reputation in this area have grown,
thereby enabling the Bank to focus on relationships with a smaller number of
larger builders and increasing the total value of the Bank's real estate
construction portfolio. Construction loans are made to qualified builders to
build houses to be sold following construction, pre-sold houses and model
houses. These loans are generally underwritten based upon several factors,
including the experience and current financial condition of the borrowing
entity, amount of the loan to appraised value, and general conditions of the
housing market. Construction loans are also made to individuals for whom houses
are being constructed by builders with whom the Bank has an existing
relationship. Such loans are made on the basis of the individual's financial
condition, the loan to value ratio, the reputation of the builder, and whether
the individual will be pre-qualified for permanent financing.
Risks related to construction lending include assessment of the market
for the finished product, reasonableness of the construction budget, ability of
the borrower to fund cost overruns, and the borrower's ability to liquidate and
repay the loan at a point when the loan-to-value ratio is the greatest. We seek
to manage these risks by, among other things, ensuring that the collateral value
of the property throughout the construction process does not fall below
acceptable levels, ensuring that funds disbursed are within parameters set by
the original construction budget, and properly documenting each construction
draw.
Lease financing. Our lease portfolio includes capital leases that we
have originated and leases that we have acquired from brokers or third parties.
As of December 31, 2005, our lease portfolio totaled $18.2 million, or 3.62% of
our total loan portfolio, consisting of $13.3 million principal amount of leases
originated by us and $4.9 million principal amount of leases that we purchased.
We provide lease financing for a variety of equipment and machinery, including
office equipment, heavy equipment, telephone systems, tractor trailers and
computers. Lease terms are generally from three to five years. Management
believes this area is attractive because of its ability to provide a source of
both interest and fee income. Our leases are generally underwritten based upon
several factors, including the overall credit worthiness, experience and current
financial condition of the lessee, the amount of the financing to collateral
value, and general conditions of the market.
The primary risks related to our lease portfolio are the value of the
underlying collateral and specific risks related to the business of each
borrower. To address these risks, we attempt to understand the business of each
borrower, value the underlying collateral appropriately and structure the loan
amortization to ensure that the value of the collateral exceeds the lease
balance during the term of the lease.
Residential real estate loans. Our residential real estate loan
portfolio consists primarily of first and second mortgage loans on residential
properties. As of December 31, 2005, $39.4 million, or 7.83%, of our loan
portfolio represented residential mortgage loans. The terms of these loans
typically include 2-5 year balloon payments based on a 15 to 30 year
amortization, and accrue interest at a fixed or variable rate. By offering these
products, we can offer credit to individuals who are self-employed or have
significant income from partnerships or investments. These individuals are often
unable to satisfy the underwriting criteria permitting the sale of their
mortgages into the secondary market.
In addition, we also originate residential mortgage loans with the
intention of selling these loans in the secondary market. During 2005, we
originated approximately $675.6 million of residential mortgage loans, and we
sold approximately $705.9 million in the secondary market. We originate
conventional first mortgage loans through our internet website as well as
through referrals from real estate brokers, builders, developers, prior
customers and media advertising. We have offered customers the ability to apply
for mortgage loans and to pre-qualify for mortgage loans over the Internet since
1999. In 2001, we expanded our internet mortgage application capacity with the
acquisition of the internet domain name InternetMortgage.com and created a
separate National Mortgage division. The timing of this expansion allowed us to
establish this division in a relatively low-rate environment, and reap the
benefits of a significant increase in mortgage originations and refinancing
experienced from 2001 through 2003. While the volume of mortgage originations
and refinancing declined in 2004 and 2005, we continue to take advantage of the
national presence established in previous years and originate residential
mortgage loans through
5
our InternetMortgage.com website. The origination of a mortgage loan from the
date of initial application through closing normally takes 15 to 60 days. We
acquire forward commitments from investors on mortgage loans that we intend to
sell into the secondary market to reduce interest rate risk on mortgage loans to
be sold in the secondary market.
Our mortgage loan credit review process is consistent with the
standards set by traditional secondary market sources. We review appraised value
and debt service ratios, and we gather data during the underwriting process in
accordance with various laws and regulations governing real estate lending.
Loans originated by the Bank are sold with servicing released to increase
current income and reduce the costs associated with retaining servicing rights.
Commitments are obtained from the purchasing investor on a loan-by-loan basis on
a 30, 45 or 60-day delivery commitment. Interest rates are committed to the
borrower when a rate commitment is obtained from the investor. Loans are funded
by the Bank and purchased by the investor within 30 days following closing
pursuant to commitments obtained at the time of origination. We sell
conventional conforming loans and all loans that are non-conforming as to credit
quality to secondary market investors for cash on a limited recourse basis.
Consequently, foreclosure losses on all sold loans are generally the
responsibility of the investor and not that of the Bank.
As with other loans to individuals, the risks related to residential
mortgage loans include primarily the value of the underlying property and the
financial strength and employment stability of the borrower. We attempt to
manage these risks by performing a pre-funding underwriting that consists of the
verification of employment and utilizes a detailed checklist of loan
qualification requirements, including the source and amount of down payments,
bank accounts, existing debt and overall credit.
Consumer loans. As of December 31, 2005, our consumer loans totaled
$45.2 million, or 8.99% of our total loan portfolio. A substantial part of this
amount consisted of installment loans to individuals in our market area.
Installment lending offered directly by the Bank in our market area includes
automobile loans, recreational vehicle loans, home improvement loans, unsecured
lines of credit and other loans to professionals, people employed in education,
industry and government, as well as retired individuals and others. A
significant portion of our consumer loan portfolio consists of indirect
automobile loans offered through automobile dealerships located primarily in our
trade area. As of December 31, 2005, approximately $32.9 million, or 6.56%, of
our loan portfolio represented indirect installment loans. Our loans made
through this program generally represent loans to purchase new or late model
automobiles. There are currently 13 dealerships participating in this program.
Our consumer and other loans are underwritten based on the borrower's income,
current debt, past credit history, collateral, and the reputation of the
originating dealership with respect to indirect automobile loans.
Consumer loans are subject to the same risks as other loans to
individuals, including the financial strength and employment stability of the
borrower. In addition, some consumer loans are subject to the additional risk
that the loan is not secured by collateral. For some of the loans that are
secured, the underlying collateral may be rapidly depreciating and not provide
an adequate source of repayment if we are required to repossess the collateral.
We attempt to mitigate these risks by requiring a down payment and carefully
verifying and documenting the borrower's credit quality, employment stability,
monthly income, and with respect to indirect automobile loans, understanding and
documenting the value of the collateral and the reputation of the originating
dealership.
Home equity loans. As of December 31, 2005, our home equity loans
totaled $33.6 million, or 6.68% of our total loan portfolio. Home equity loans
are generally secured by second liens on residential real estate and are
underwritten in a similar manner as our consumer loans.
INVESTMENT ACTIVITIES
The objectives of our investment policies are to:
- secure the safety of principal;
- provide adequate liquidity;
- provide securities for use in pledging for public funds or
repurchase agreements; and
- maximize after-tax income.
6
We invest primarily in obligations of agencies of the United States
and bank-qualified obligations of state and local political subdivisions.
Although direct obligations of the United States and obligations guaranteed as
to principal and interest by the United States are permitted by our investment
policy, we currently do not hold any in our portfolio. In order to ensure the
safety of principal, we typically do not invest in mortgage-backed securities,
corporate debt, or other securities even though they are permitted by our
investment policy. In addition, we enter into federal funds transactions with
our principal correspondent banks, and depending on our liquidity position, act
as a net seller or purchaser of these funds. The sale of federal funds is
effectively short-term loans from us to other banks; while conversely, the
purchase of federal funds is effectively short-term loans from other banks to
us.
DEPOSIT SERVICES
The principal sources of funds for the Bank are core deposits from the
local market areas surrounding the Bank's offices, including demand deposits,
interest-bearing transaction accounts, money market accounts, savings deposits
and time deposits of less than $100,000. Transaction accounts include
interest-bearing and non-interest-bearing accounts, which provide the Bank with
a source of fee income and cross-marketing opportunities as well as a low-cost
source of funds. Since 2001, the Bank has realized a significant level of
deposit growth from commercial checking accounts. While these accounts do not
earn interest, many of them receive an earnings credit on their average balance
to offset the cost of other services provided by the Bank. The Bank also offers
two types of short-term investment accounts. The Bank's money market account is
a daily access account that bears a higher rate than a personal interest-bearing
checking account and allows for limited check-writing ability. We also offer our
Money Management Account, or "short-term parking account." The Money Management
Account provides a hybrid of the features available from a traditional money
market account and a traditional time deposit. The account requires a minimum
balance of $10,000 and allows for daily deposits but limits withdrawals to the
first day and the 15th day of each month. This account typically pays a tiered
rate of interest which is higher than a customer could receive on a traditional
money market account but lower than the rates generally available on time
deposits. We believe that the trade-off to depositors between higher interest
rates but more limited access to withdrawals has proven to be an attractive
product in our market areas and provides us with a more attractive source of
funds than other alternatives such as Federal Home Loan Bank borrowings, as it
provides us with the potential to cross-sell additional services to these
account holders. Time and savings accounts also provide a relatively stable
customer base and source of funding. Because of the nature and behavior of these
deposit products, management reviews and analyzes our pricing strategy in
comparison not only to competitor rates, but versus other alternative funding
sources to determine the most advantageous source. The Bank's Funds Management
policy also allows for acceptance of brokered deposits which can be utilized to
support the growth of the Bank. As of December 31, 2005, the Bank had $27.1
million in brokered deposits. The Bank does not anticipate brokered deposits
becoming a significant percentage of its deposit base; however, we continue to
evaluate their potential role in the Bank's overall funding and liquidity
strategies. In pricing deposit rates, management considers profitability, the
matching of term lengths with assets, the attractiveness to customers and rates
offered by our competitors.
INVESTMENT BROKERAGE SERVICES
In 1999, the Bank began offering investment brokerage services through
an unrelated broker-dealer. These services are currently offered at all of our
locations. Four individuals responsible for providing these services are joint
employees of the Bank and the registered broker-dealer. Investment brokerage
services provide a source of fee income for the Bank. In 2005, the amount of our
fee income generated from investment brokerage services was $233,000.
TRUST SERVICES
We began offering trust services in 1996. Until 1999, the Bank's trust
services were offered exclusively through the employees of an unaffiliated trust
company. The Bank hired a full-time officer in 1999 to develop the Bank's trust
business. Trust services are marketed to both existing Bank customers and new
customers. We believe that the ability to offer trust services as a part of our
financial services to new customers of the Bank presents a significant
cross-marketing opportunity. The services currently offered by the Bank's trust
department include the administration of self-directed individual retirement
accounts, qualified retirement plans, and custodial and directed trust accounts.
As of December 31, 2005, the Bank's trust department administered 241 accounts,
with assets under
7
administration of approximately $94.0 million. Trust services provide the Bank
with a source of fee income and additional deposits. In 2005, the amount of our
fee income from trust services was $367,000.
COMPETITION
We encounter competition primarily in seeking deposits and in
obtaining loan customers. The level of competition for deposits in our market
area is high. Our principal competitors for deposits are other financial
institutions within a few miles of our locations including other banks, savings
institutions and credit unions. Competition among these institutions is based
primarily on interest rates offered, the quality of service provided, and the
convenience of banking facilities. Additional competition for depositors' funds
comes from U.S. government securities, private issuers of debt obligations and
other providers of investment alternatives for depositors.
We compete in our lending, investment brokerage and trust activities
with other financial institutions, such as banks and thrift institutions, credit
unions, automobile financing companies, mortgage companies, securities firms,
investment companies and other finance companies. Many of our competitors are
not subject to the same extensive federal regulations that govern bank holding
companies and federally insured banks and state regulations governing
state-chartered banks. As a result, these non-bank competitors have some
advantages over us in providing certain products and services. Many of the
financial institutions with which we compete are larger and possess greater
financial resources, name recognition and market presence.
EMPLOYEES
At December 31, 2005, the Bank had approximately 265 full-time
employees. The Company and its other subsidiaries did not have any employees.
None of the Bank's employees are subject to a collective bargaining agreement.
We consider the Bank's relationship with its employees to be excellent.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For each of our directors and our executive officers, we have set
forth below their ages as of December 31, 2005, and their principal positions.
8
Name Age Positions
- ---- --- ---------
Directors
Robert D. Regnier ...................... 57 President, Chief Executive Officer and Chairman of the
Board of Directors of Blue Valley; President, Chief
Executive Officer and Chairman of the Board of
Directors of the Bank
Donald H. Alexander..................... 67 Director of Blue Valley and the Bank
Michael J. Brown........................ 49 Director of Blue Valley
Wayne A. Henry, Jr...................... 53 Director of Blue Valley
Thomas A. McDonnell..................... 60 Director of Blue Valley
Additional Directors of the Bank
Harvey S. Bodker........................ 70 Director of the Bank
Suzanne E. Dotson....................... 59 Director of the Bank
Charles H. Hunter....................... 63 Director of the Bank
Executive Officers who are not Directors
Mark A. Fortino......................... 39 Senior Vice President and Chief Financial Officer of
the Bank; Chief Financial Officer of Blue Valley
Ralph J. Schramp........................ 56 Senior Vice President - Commercial Lending and
Business Development for the Bank
Gary L. Sherrer......................... 65 Senior Vice President - Mortgage Division of the Bank
Sheila C. Stokes........................ 44 Senior Vice President - Retail Division of the Bank
REGULATION AND SUPERVISION
Blue Valley and its subsidiaries are extensively regulated under both
federal and state laws. Laws and regulations to which Blue Valley and the Bank
are subject govern, among other things, the scope of business, investments,
reserve levels, capital levels relative to operations, the nature and amount of
collateral for loans, the establishment of branches, mergers and consolidations
and the payment of dividends. These laws and regulations are intended primarily
to protect depositors, not stockholders. Any change in applicable laws or
regulations may have a material effect on Blue Valley's business and prospects,
and legislative and policy changes may affect Blue Valley's operations. Blue
Valley cannot predict the nature or the extent of the effects on its business
and earnings that fiscal or monetary policies, economic controls or new federal
or state legislation may have in the future.
The following references to statutes and regulations affecting Blue
Valley and the Bank are brief summaries only and do not purport to be complete
and are qualified in their entirety by reference to the statutes and
regulations.
APPLICABLE LEGISLATION
The enactment of legislation described below has significantly
affected the banking industry generally and will have an on-going effect on Blue
Valley and its subsidiaries.
USA PATRIOT ACT. The USA PATRIOT Act of 2001 was signed into law on
October 26, 2001. This legislation enhances the powers of domestic law
enforcement organizations and makes numerous other changes aimed at countering
the international terrorist threat to the security of the United States. Title
III of the legislation most directly affects the financial services industry. It
is intended to enhance the federal government's ability to fight money
laundering by monitoring currency transactions and suspicious financial
activities. The USA PATRIOT Act has significant implications for depository
institutions involved in the transfer of money. Under the
9
USA PATRIOT Act, a financial institution must establish due diligence policies,
procedures, and controls reasonably designed to detect and report money
laundering through correspondent accounts and private banking accounts.
Financial institutions must follow regulations adopted by the Treasury
Department to encourage financial institutions, their regulatory authorities,
and law enforcement authorities to share information about individuals,
entities, and organizations engaged in or suspected of engaging in terrorist
acts or money laundering activities. Financial institutions must follow
regulations setting forth minimum standards regarding customer identification.
These regulations require financial institutions to implement reasonable
procedures for verifying the identity of any person seeking to open an account,
maintain records of the information used to verify the person's identity, and
consult lists of known or suspected terrorists and terrorist organizations
provided to the financial institution by government agencies. Every financial
institution must establish anti-money laundering programs, including the
development of internal policies and procedures, designation of a compliance
officer, employee training, and an independent audit function.
GRAMM-LEACH-BLILEY ACT. The Gramm-Leach-Bliley Act was signed into law
on November 12, 1999. This major banking legislation expands the permissible
activities of bank holding companies such as Blue Valley by permitting them to
engage in activities, or affiliate with entities that engage in activities, that
are "financial in nature." Activities that the Act expressly deems to be
financial in nature include, among other things, securities and insurance
underwriting and agency, investment management and merchant banking. The Federal
Reserve and the Treasury Department, in cooperation with one another, determine
what additional activities are "financial in nature." With certain exceptions,
the Gramm-Leach-Bliley Act similarly expands the authorized activities of
subsidiaries of national banks. The provisions of the Gramm-Leach-Bliley Act
authorizing the expanded powers became effective March 11, 2000.
Bank holding companies that intend to engage in activities that are
"financial in nature" must elect to become "financial holding companies."
Financial holding company status is only available to a bank holding company if
all of its affiliated depository institutions are "well capitalized" and "well
managed," based on applicable banking regulations, and have a Community
Reinvestment Act rating of at least "a satisfactory record of meeting community
credit needs." Financial holding companies and banks may continue to engage in
activities that are financial in nature only if they continue to satisfy the
well capitalized and well managed requirements. Bank holding companies that do
not elect to be financial holding companies or that do not qualify for financial
holding company status may engage only in non-banking activities deemed "closely
related to banking" prior to adoption of the Gramm-Leach-Bliley Act.
The Act also calls for "functional regulation" of financial services
businesses in which functionally regulated subsidiaries of bank holding
companies will continue to be regulated by the regulator that ordinarily has
supervised their activities. As a result, state insurance regulators will
continue to oversee the activities of insurance companies and agencies, and the
Securities and Exchange Commission will continue to regulate the activities of
broker-dealers and investment advisers, even where the companies or agencies are
affiliated with a bank holding company. Federal Reserve authority to examine and
adopt rules regarding functionally regulated subsidiaries is limited.
The Gramm-Leach-Bliley Act imposed an "affirmative and continuing"
obligation on all financial service providers (not just banks and their
affiliates) to safeguard consumer privacy and requires federal and state
regulators, including the Federal Reserve and the FDIC, to establish standards
to implement this privacy obligation. With certain exceptions, the Act prohibits
banks from disclosing to non-affiliated parties any non-public personal
information about customers unless the bank has provided the customer with
certain information and the customer has had the opportunity to prohibit the
bank from sharing the information with non-affiliates. The new privacy
obligations became effective July 1, 2001.
The Gramm-Leach-Bliley Act has been and may continue to be the subject
of extensive rule making by federal banking regulators and others.
ECONOMIC GROWTH AND REGULATORY PAPERWORK REDUCTION ACT OF 1996. The
Economic Growth and Regulatory Paperwork Reduction Act of 1996 became law on
September 30, 1996. This Act streamlined the non-banking activities application
process for well-capitalized and well-managed bank holding companies by
permitting qualified bank holding companies to commence an approved non-banking
activity without prior notice to the
10
Federal Reserve, although written notice is required within 10 days after
commencing the activity. Also, the Act reduced the prior notice period to 12
days in the event of any non-banking acquisition or share purchase, assuming the
size of the acquisition does not exceed 10% of risk-weighted assets of the
acquiring bank holding company and the consideration does not exceed 15% of a
bank holding company's Tier 1 capital.
BANK HOLDING COMPANY REGULATION
Blue Valley is a registered bank holding company subject to periodic
examination by the Federal Reserve and required to file periodic reports of its
operations and such additional information as the Federal Reserve may require.
INVESTMENTS AND ACTIVITIES. A bank holding company must obtain
approval from the Federal Reserve before:
- Acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after
the acquisition, it would own or control more than 5% of the
shares of the bank or bank holding company (unless it already
owns or controls the majority of the shares);
- Acquiring all or substantially all of the assets of another bank
or bank holding company; or
- Merging or consolidating with another bank holding company.
The Federal Reserve will not approve any acquisition, merger or
consolidation that would have a substantially anticompetitive result unless the
anticompetitive effects of the proposed transaction are clearly outweighed by a
greater public interest in meeting the convenience and needs of the community to
be served. The Federal Reserve also considers capital adequacy and other
financial and managerial factors in reviewing acquisitions or mergers.
With certain exceptions, a bank holding company is also prohibited
from:
- Acquiring or retaining direct or indirect ownership or control of
more than 5% of the voting shares of any company that is not a
bank or bank holding company; and
- Engaging, directly or indirectly, in any business other than that
of banking, managing and controlling banks or furnishing services
to banks and their subsidiaries.
Bank holding companies may, however, engage in businesses found by the
Federal Reserve to be "financial in nature," as described above. As a financial
holding company, Blue Valley is authorized to engage in the expanded activities
permitted under the Gramm-Leach-Bliley Act as long as it continues to qualify
for financial holding company status.
Finally, subject to certain exceptions, the Bank Holding Company Act
and the Change in Bank Control Act, and the Federal Reserve's implementing
regulations, require Federal Reserve approval prior to any acquisition of
"control" of a bank holding company, such as Blue Valley. In general, a person
or company is presumed to have acquired control if it acquires 10% of the
outstanding shares of a bank or bank holding company and is conclusively
determined to have acquired control if it acquires 25% or more of the
outstanding shares of a bank or bank holding company.
SOURCE OF STRENGTH. The Federal Reserve expects Blue Valley to act as
a source of financial strength and support for the Bank and to take measures to
preserve and protect the Bank in situations where additional investments in the
Bank may not otherwise be warranted. The Federal Reserve may require a bank
holding company to terminate any activity or relinquish control of a non-bank
subsidiary (other than a non-bank subsidiary of a bank) upon the Federal
Reserve's determination that the activity or control constitutes a serious risk
to the financial soundness or stability of any subsidiary depository institution
of the bank holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself of any
bank or non-bank subsidiary if the agency determines that divestiture may aid
the depository institution's
11
financial condition. Blue Valley Building Corp., BVBC Capital Trust II, BVBC
Capital Trust III and Homeland Title, LLC are Blue Valley's only active direct
subsidiaries that are not banks.
CAPITAL REQUIREMENTS. The Federal Reserve uses capital adequacy
guidelines in its examination and regulation of bank holding companies and
banks. If the capital falls below minimum guideline levels, a bank holding
company, among other things, may be denied approval to acquire or establish
additional banks or non-bank businesses. The Federal Reserve's capital
guidelines establish a risk-based requirement expressed as a percentage of total
risk-weighted assets and a leverage requirement expressed as a percentage of
total assets. The risk-based requirement consists of a minimum ratio of total
capital to total risk-weighted assets of 8%, of which at least one-half must be
Tier 1 capital (which consists principally of stockholders' equity). The
leverage requirement consists of a minimum ratio of Tier 1 capital to total
assets of 3%.
The risk-based and leverage standards presently used by the Federal
Reserve are minimum requirements, and higher capital levels may be required if
warranted by the particular circumstances or risk profiles of individual banking
organizations. Further, any banking organization experiencing or anticipating
significant growth would be expected to maintain capital ratios, including
tangible capital positions, which is Tier 1 capital less all intangible assets,
well above the minimum levels.
DIVIDENDS. The Federal Reserve has issued a policy statement
concerning the payment of cash dividends by bank holding companies. The policy
statement provides that a bank holding company experiencing earnings weaknesses
should not pay cash dividends exceeding its net income or which could only be
funded in ways that weakened the bank holding company's financial health, such
as by borrowing. Also, the Federal Reserve possesses enforcement powers over
bank holding companies and their non-bank subsidiaries to prevent or remedy
actions that represent unsafe or unsound practices or violations of applicable
statutes and regulations. Among these powers is the ability to proscribe the
payment of dividends by banks and bank holding companies.
BANK REGULATIONS
The Bank operates under a Kansas state bank charter and is subject to
regulation by the Kansas Banking Department and the Federal Reserve Bank. The
Kansas Banking Department and the Federal Reserve Bank regulate or monitor all
areas of the Bank's operations, including capital requirements, issuance of
stock, declaration of dividends, interest rates, deposits, record keeping,
establishment of branches, acquisitions, mergers, loans, investments, borrowing,
security devices and procedures and employee responsibility and conduct. The
Kansas Banking Department places limitations on activities of the Bank including
the issuance of capital notes or debentures and the holding of real estate and
personal property and requires the Bank to maintain a certain ratio of reserves
against deposits. The Kansas Banking Department requires the Bank to file a
report annually showing receipts and disbursements of the Bank, in addition to
any periodic report requested.
DEPOSIT INSURANCE. The FDIC, through its Bank Insurance Fund, insures
the Bank's deposit accounts to a maximum of $100,000 for each insured depositor.
The FDIC, through its Savings Association Insurance Fund, insures certain
deposit accounts acquired by the Bank in 1994 from a branch of a failed savings
institution. These deposit accounts are insured to a maximum of $100,000 for
each insured depositor. The FDIC bases deposit insurance premiums on the
perceived risk each bank presents to its deposit insurance fund. In addition,
all Bank Insurance Fund-insured and Savings Association Insurance Fund-insured
institutions currently pay an assessment based on insured deposits to service
debt issued by the Financing Corporation, a federal agency established to
finance the recapitalization of the former Federal Savings and Loan Insurance
Corporation. The FDIC may terminate the deposit insurance of any insured
depository institution if the FDIC determines, after a hearing, that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, order, or any condition imposed in writing by, or
written agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of insurance
if the institution has no tangible capital. Management is not aware of any
activity or condition that could result in termination of the deposit insurance
of the Bank.
CAPITAL REQUIREMENTS. The FDIC has established the following minimum
capital standards for state-chartered, insured non-member banks, such as the
Bank: (1) a leverage requirement consisting of a minimum ratio of Tier 1 capital
to total assets of 3%; and (2) a risk-based capital requirement consisting of a
minimum ratio of total
12
capital to total risk-weighted assets of 8%, at least one-half of which must be
Tier 1 capital. These capital requirements are minimum requirements, and higher
capital levels may be required if warranted by the particular circumstances or
risk profiles of individual institutions.
The federal banking regulators also have broad power to take "prompt
corrective action" to resolve the problems of undercapitalized institutions. The
extent of the regulators' powers depends upon whether the institution in
question is "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Under the
prompt corrective action rules, an institution is:
- "Well-capitalized" if the institution has a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater, and a leverage ratio of 5% or greater,
and the institution is not subject to an order, written
agreement, capital directive, or prompt corrective action
directive to meet and maintain a specific capital level for any
capital measure;
- "Adequately capitalized" if the institution has a total
risk-based capital ratio of 8% or greater, a Tier 1 risk-based
capital ratio of 4% or greater, and a leverage ratio of 4% or
greater;
- "Undercapitalized" if the institution has a total risk-based
capital ratio that is less than 8%, a Tier 1 risk-based capital
ratio that is less than 4%, or a leverage ratio that is less than
4%;
- "Significantly undercapitalized" if the institution has a total
risk-based capital ratio that is less than 6%, a Tier 1
risk-based capital ratio that is less than 3%, or a leverage
ratio that is less than 3%; and
- "Critically undercapitalized" if the institution has a ratio of
tangible equity to total assets that is equal to or less than 2%.
The federal banking regulators must take prompt corrective action with
respect to capital deficient institutions. Depending upon the capital category
to which an institution is assigned, the regulators' corrective powers include:
- Placing limits on asset growth and restrictions on activities,
including the establishing of new branches;
- Requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired;
- Restricting transactions with affiliates;
- Restricting the interest rate the institution may pay on
deposits;
- Requiring that senior executive officers or directors be
dismissed;
- Requiring the institution to divest subsidiaries;
- Prohibiting the payment of principal or interest on subordinated
debt; and
- Appointing a receiver for the institution.
Companies controlling an undercapitalized institution are also
required to guarantee the subsidiary institution's compliance with the capital
restoration plan subject to an aggregate limitation of the lesser of 5% of the
institution's assets at the time it received notice that it was undercapitalized
or the amount of the capital deficiency when the institution first failed to
meet the plan. The Federal Deposit Insurance Act generally requires the
appointment of a conservator or receiver within 90 days after an institution
becomes critically undercapitalized.
As of December 31, 2005, the Bank had capital in excess of the
requirements for a "well-capitalized" institution.
13
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT. The Bank,
having over $500 million in total assets, is subject to numerous reporting
requirements of Section 112 of the Federal Deposit Insurance Corporation Act
(FDICIA 112). The primary purpose of FDICIA 112 is to provide a framework for
early risk identification in financial management through independent audits,
more stringent reporting requirements and an effective system of internal
controls.
INSIDER TRANSACTIONS. The Bank is subject to restrictions on
extensions of credit to executive officers, directors, principal stockholders or
any related interest of these persons. Extensions of credit must be made on
substantially the same terms, including interest rates and collateral as the
terms available for third parties and must not involve more than the normal risk
of repayment or present other unfavorable features. The Bank is also subject to
lending limits and restrictions on overdrafts to these persons.
COMMUNITY REINVESTMENT ACT REQUIREMENTS. The Community Reinvestment
Act (CRA) of 1977 requires that, in connection with examinations of financial
institutions within their jurisdiction, the federal banking regulators must
evaluate the record of the financial institutions in meeting the credit needs of
their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those banks. These factors are
also considered in evaluating mergers, acquisitions and applications to open a
branch or facility. In its most recent CRA examination dated June 1, 2004, the
Bank received a rating of "Satisfactory."
STATE BANK ACTIVITIES. With limited exceptions, FDIC-insured state
banks, like the Bank, may not make or retain equity investments of a rate or in
an amount that are not permissible for national banks and also may not engage as
a principal in any activity that is not permitted for a national bank or its
subsidiary, respectively, unless the bank meets, and continues to meet, its
minimum regulatory capital requirements and the FDIC determines that the
activity would not pose a significant risk to the deposit insurance fund of
which the bank is a member.
REGULATIONS GOVERNING EXTENSIONS OF CREDIT. The Bank is subject to
restrictions on extensions of credit to Blue Valley and on investments in Blue
Valley's securities and using those securities as collateral for loans. These
regulations and restrictions may limit Blue Valley's ability to obtain funds
from the Bank for its cash needs, including funds for acquisitions and for
payment of dividends, interest and operating expenses. Further, the Bank Holding
Company Act and Federal Reserve regulations prohibit a bank holding company and
its subsidiaries from engaging in various tie-in arrangements in connection with
extensions of credit, leases or sales of property or furnishing of services.
RESERVE REQUIREMENTS. The Federal Reserve requires all depository
institutions to maintain reserves against their transaction accounts. Reserves
of 3% must be maintained against net transaction accounts of $7.8 million to
$48.3 million plus 10% must be maintained against that portion of net
transaction accounts in excess $48.3 million (subject to adjustment by the
Federal Reserve). The balances maintained to meet the reserve requirements
imposed by the Federal Reserve may be used to satisfy liquidity requirements.
OTHER REGULATIONS
Interest and various other charges collected or contracted for by the
Bank are subject to state usury laws and other federal laws concerning interest
rates. The Bank's loan operations are also subject to federal laws applicable to
credit transactions. The federal Truth in Lending Act governs disclosures of
credit terms to consumer borrowers. The Home Mortgage Disclosure Act of 1975
requires financial institutions to provide information to enable the public and
public officials to determine whether a financial institution is fulfilling its
obligation to help meet the housing needs of the community it serves. The Equal
Credit Opportunity Act prohibits discrimination on the basis of race, creed or
other prohibited factors in extending credit. The Fair Credit Reporting Act of
1978 governs the use and provision of information to credit reporting agencies.
The Fair Debt Collection Act governs the manner in which consumer debts may be
collected by collection agencies. The various federal agencies charged with the
responsibility of implementing these federal laws have adopted various rules and
regulations. The deposit operations of the Bank are also subject to the Right to
Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds Transfer
Act, and Regulation E issued by the Federal Reserve to implement that Act, which
govern automatic deposits to and withdrawals from the use of ATMs and other
electronic banking services.
14
ITEM 1A: RISK FACTORS
Our operations may be adversely affected if we are unable to maintain and
increase our deposit base and secure adequate funding.
We fund our banking and lending activities primarily through demand,
savings and time deposits and, to a lesser extent, lines of credit,
sale/repurchase facilities from various financial institutions, and Federal Home
Loan Bank borrowings. The success of our business depends in part on our ability
to maintain and increase our deposit base and our ability to maintain access to
other funding sources. Our inability to obtain funding on favorable terms, on a
timely basis, or at all, would adversely affect our operations and financial
condition.
The loss of our key personnel could adversely affect our operations.
We are a relatively small organization and depend on the services of
all of our employees. Our growth and development to date has depended in a large
part on a few key employees who have primary responsibility for maintaining
personal relationships with our largest customers. The unexpected loss of
services of one or more of these key employees could have a material adverse
effect on our operations. Our key employees are Robert D. Regnier, Mark A.
Fortino, Ralph J. Schramp, Sheila C. Stokes and Gary L. Sherrer. Each of these
persons is an officer of the Bank. We do not have written employment or
non-compete agreements with any of these key employees. We carry a $1 million
"key person" life insurance policy on the life of Mr. Regnier.
Changes in interest rates may adversely affect our earnings and cost of funds.
Changes in interest rates affect our operating performance and
financial condition in diverse ways. A substantial part of our profitability
depends on the difference between the rates we receive on loans and investments
and the rates we pay for deposits and other sources of funds. Our net interest
spread will depend on many factors that are partly or entirely outside our
control, including competition, federal monetary and fiscal policies, and
economic conditions generally. Historically, net interest spreads for many
financial institutions have widened and narrowed in response to these and other
factors, which are often collectively referred to as "interest rate risk." We
try to minimize our exposure to interest rate risk, but are unable to eliminate
it.
Because our business is concentrated in the Kansas City MSA, a downturn in the
economy of the Kansas City MSA may adversely affect our business.
Our success is dependent to a significant extent upon the general
economic conditions in the Kansas City MSA, including Johnson County, Kansas,
and, in particular, the conditions for the medium- and small-sized businesses
that are the focus of our customer base. Although currently the economy in these
areas is favorable, we do not know whether these conditions will continue.
Adverse changes in economic conditions in the Kansas City MSA, including Johnson
County, Kansas, could impair our ability to collect loans, reduce our growth
rate and have a negative effect on our overall financial condition.
If our allowance for loan losses is insufficient to absorb in our loan
portfolio, it will adversely affect our financial condition and results of
operations.
Some borrowers may not repay loans that we make to them. This risk is
inherent in the banking business. Like all financial institutions, we maintain
an allowance for loan losses to absorb probable loan losses in our loan
portfolio. However, we cannot predict loan losses with certainty, and we cannot
assure you that our allowance will be sufficient. Loan losses in excess of our
reserves would have an adverse effect on our financial condition and results of
operations.
In addition, various regulatory agencies, as an integral part of the
examination process, periodically review our loan portfolio. These agencies may
require us to add to the allowance for loan losses based on their judgments and
interpretations of information available to them at the time of their
examinations. If these agencies require us to increase our allowance for loan
losses, our earnings will be adversely affected in the period in which the
increase occurs.
15
We may incur significant costs if we foreclose on environmentally contaminated
real estate.
If we foreclose on a defaulted real estate loan to recover our
investment, we may be subject to environmental liabilities in connection with
the underlying real property. It is also possible that hazardous substances or
wastes may be discovered on these properties during our ownership or after they
are sold to a third party. If they are discovered on a property that we have
acquired through foreclosure or otherwise, we may be required to remove those
substances and clean up the property. We may have to pay for the entire cost of
any removal and clean-up without the contribution of any other third parties. We
may also be liable to tenants and other users of neighboring properties. These
costs or liabilities may exceed the fair value of the property. In addition, we
may find it difficult or impossible to sell the property prior to or following
any environmental clean-up.
If we are not able to compete effectively in the highly competitive banking
industry, our business will be adversely affected.
Our business is extremely competitive. Many of our competitors are, or
are affiliates of, enterprises that have greater resources, name recognition and
market presence than we do. Some of our competitors are not regulated as
extensively as we are and, therefore, may have greater flexibility in competing
for business. Some of these competitors are subject to similar regulation but
have the advantages of established customer bases, higher lending limits,
extensive branch networks, numerous ATMs, and more ability to absorb the costs
of maintaining technology or other factors.
ITEM 1B: UNRESOLVED STAFF COMMENTS
No items are reportable.
ITEM 2: PROPERTIES
The Company's principal office is located at 11935 Riley on the corner
of 119th and Riley streets in Overland Park, Kansas. In addition to the
principal office, the Bank also has three banking center locations and one
mortgage and banking center location.
MORTGAGE INDEBTEDNESS
LOCATION YEAR OCCUPIED AS OF DECEMBER 31, 2005 OCCUPANCY
- ---------------------------- ------------- ----------------------- ----------------------------
Overland Park Banking Center
11935 Riley 78%
Overland Park, Kansas 1994 $2.6 Million One sublease occupying 22%
Olathe Banking Center
1235 E. Santa Fe
Olathe, Kansas 2001 None 100%
Shawnee Banking Center
5520 Hedge Lane Terrace
Shawnee, Kansas 2001 None 100%
Mortgage and Banking Center
7900 College Boulevard 97%
Overland Park, Kansas 2003 $4.4 Million One sublease occupying 3%
Leawood Banking Center
13401 Mission Road 58%
Leawood, Kansas 2004 None Four subleases occupying 42%
16
ITEM 3: LEGAL PROCEEDINGS
On October 13, 2004, we became a defendant in a lawsuit filed in the United
States District Court, Kansas District by former mortgage loan originators. The
plaintiffs claimed that the Bank did not compensate them appropriately for
overtime hours worked in accordance with the Fair Labor Standards Act. On
November 18, 2005, we entered into an agreement to settle the existing claims
and potential claims asserted by the mortgage loan originators of approximately
$1.1 million. Associated costs to defend the litigation totaled approximately
$58,500 in 2004 and $189,600 in 2005. In consideration of payments to be made to
the plaintiffs and plaintiffs' attorney, all claims and potential wage and hour
claims asserted in and/or which could have been asserted by such plaintiffs were
released. We currently do not anticipate any significant additional financial
impact from this litigation. 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.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
17
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET FOR COMMON STOCK
We are a reporting company under the Securities Exchange Act as a
result of a trust preferred securities offering we completed during July 2000.
Shares of our common stock have traded on the Over-The-Counter Bulletin Board
since July 2002 under the symbol "BVBC." As of February 28, 2006, there were
approximately 192 stockholders of record of our common stock. The following
table sets forth the high and low prices of the Company's common stock based on
closing stock price quotations provided by Yahoo.com. These prices reflect
inter-dealer prices, without retail mark-up, mark-down or commission.
2005 2004
--------------- ---------------
Fiscal Quarter High Low High Low
- -------------- ------ ------ ------ ------
First $24.05 $23.00 $27.00 $25.10
Second 27.00 26.00 27.95 23.75
Third 27.75 26.50 27.00 26.00
Fourth 30.00 26.50 26.75 24.00
DIVIDENDS
Our board of directors declared cash dividends on our common stock as
follows:
DECLARATION DATE AMOUNT PER SHARE RECORD DATE PAY DATE
- ----------------- ---------------- ----------------- ----------------
December 16, 2002 $0.10 December 31, 2002 January 15, 2003
December 15, 2003 $0.15 December 31, 2003 January 30, 2004
December 17, 2004 $0.20 December 31, 2004 January 31, 2005
December 15, 2005 $0.25 December 30, 2005 January 31, 2006
Because our consolidated net income consists largely of the net income
of the Bank, our ability to pay dividends on our common stock is subject to our
receipt of dividends from the Bank. The ability of the Bank to pay dividends to
us, and our ability to pay dividends to our stockholders, is regulated by
federal banking laws. In addition, if we elect to defer interest payments on our
outstanding junior subordinated debentures, we will be prohibited from paying
dividends on our common stock during such deferral. At December 31, 2005,
approximately $12,390,000 of retained earnings were available for dividend
declaration without prior regulatory approval.
Our board of directors intends to declare future dividends, subject to
limitations imposed by regulatory capital guidelines in addition to
consideration of the Company's profitability and liquidity.
18
ITEM 6: SELECTED FINANCIAL DATA
The following table presents our consolidated financial data as of and
for the five years ended December 31, 2005, and should be read in conjunction
with the consolidated financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," each
of which is included elsewhere in this Form 10-K. The selected statements of
condition and statements of income data, insofar as they relate to the five
years in the five-year period ended December 31, 2005, have been derived from
our audited consolidated financial statements.
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SELECTED STATEMENT OF INCOME DATA
Interest income:
Loans, including fees................................... $ 37,492 $ 29,245 $ 28,293 $ 26,857 $ 27,921
Federal funds sold and interest-bearing deposits........ 580 157 49 297 679
Securities.............................................. 2,317 2,301 2,070 3,405 4,541
---------- ---------- ---------- ---------- ----------
Total interest income................................ 40,389 31,703 30,412 30,559 33,141
---------- ---------- ---------- ---------- ----------
Interest expense:
Interest-bearing demand deposits........................ 94 169 165 388 815
Savings and money market deposit accounts............... 3,861 2,932 2,204 2,711 4,846
Other time deposits .................................... 9,171 7,297 6,935 7,759 9,775
Funds borrowed.......................................... 4,867 4,115 4,245 3,368 2,958
---------- ---------- ---------- ---------- ----------
Total interest expense............................... 17,993 14,513 13,549 14,226 18,394
---------- ---------- ---------- ---------- ----------
Net interest income.................................. 22,396 17,190 16,863 16,333 14,747
Provision for loan losses.................................. 230 1,965 1,350 2,920 2,400
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses.. 22,166 15,225 15,513 13,413 12,347
---------- ---------- ---------- ---------- ----------
Non-interest income:
Loans held for sale fee income.......................... 7,408 10,358 19,866 16,690 6,931
NSF charges & service fees.............................. 1,129 1,326 1,283 1,026 836
Other service charges................................... 1,037 1,115 924 821 796
Realized gain on available-for-sale securities.......... -- 524 -- 193 500
Other income............................................ 1,727 617 463 281 203
---------- ---------- ---------- ---------- ----------
Total non-interest income............................ 11,301 13,940 22,536 19,011 9,266
---------- ---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits.......................... 15,986 16,670 19,670 16,437 10,063
Occupancy............................................... 3,307 3,433 3,137 2,101 1,574
FDIC and other insurance................................ 176 175 174 161 140
General & administrative................................ 6,665 6,292 6,304 5,417 3,933
---------- ---------- ---------- ---------- ----------
Total non-interest expense........................... 26,134 26,570 29,285 24,116 15,710
---------- ---------- ---------- ---------- ----------
Income before income taxes.............................. 7,333 2,595 8,764 8,308 5,903
Income tax provision................................. 2,764 665 3,130 2,912 1,960
---------- ---------- ---------- ---------- ----------
Net income........................................... $ 4,569 $ 1,930 $ 5,634 $ 5,396 $ 3,943
========== ========== ========== ========== ==========
PER SHARE DATA
Basic earnings.......................................... $ 1.95 $ 0.84 $ 2.51 $ 2.48 $ 1.82
Diluted earnings........................................ 1.91 0.82 2.43 2.40 1.77
Dividends............................................... 0.25 0.20 0.15 0.10 --
Book value basic (at end of period)..................... 19.42 17.78 17.64 15.47 13.11
Weighted average common shares outstanding:
Basic............................................. 2,348,805 2,302,564 2,244,930 2,178,803 2,165,030
Diluted........................................... 2,388,531 2,360,061 2,320,840 2,252,929 2,222,166
Dividend payout ratio 12.82% 23.80% 5.98% 4.04% --%
19
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA
(AT END OF PERIOD):
Total securities.................................... $ 99,987 $ 66,350 $106,036 $ 61,720 $ 78,032
Total mortgage loans held for sale.................. 13,906 44,144 18,297 119,272 41,853
Total loans......................................... 503,143 507,170 424,620 380,082 334,075
Total assets........................................ 689,589 672,717 627,073 605,539 492,379
Total deposits...................................... 529,341 522,646 470,495 423,787 394,245
Funds borrowed...................................... 104,394 102,469 111,741 141,737 65,530
Total stockholders' equity.......................... 46,255 41,384 40,198 34,344 28,525
Trust assets under administration................... 93,988 118,074 90,389 44,245 41,571
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Net interest margin (1)....................... 3.50% 2.91% 3.01% 3.35% 3.51%
Non-interest income to average assets......... 1.63 2.16 3.62 3.55 2.02
Non-interest expense to average assets........ 3.77 4.11 4.71 4.51 3.43
Net overhead ratio (2)........................ 2.14 1.96 1.08 0.95 1.41
Efficiency ratio (3).......................... 77.56 85.35 74.33 68.23 65.42
Return on average assets (4).................. 0.66 0.30 0.91 1.01 0.86
Return on average equity (5).................. 10.44 4.69 14.85 17.34 15.26
Asset Quality Ratios:
Non-performing loans to total loans........... 0.87% 0.86% 0.72% 0.29% 0.92%
Allowance for possible loan losses to:
Total loans................................ 1.33 1.45 1.66 1.82 1.58
Non-performing loans....................... 153.27 168.60 230.79 618.29 171.96
Net charge-offs to average total loans........ 0.17 0.36 0.30 0.36 0.51
Non-performing loans to total assets.......... 0.63 0.65 0.50 0.18 0.62
Balance Sheet Ratios:
Loans to deposits............................. 95.05% 97.04% 90.25% 89.69% 84.74%
Average interest-earning assets to average
interest-bearing liabilities............... 116.78 114.38 114.61 115.64 114.50
Capital Ratios:
Total equity to total assets.................. 6.71% 6.15% 6.42% 5.67% 5.80%
Total capital to risk-weighted assets ratio... 12.04 11.15 12.41 10.13 10.69
Tier 1 capital to risk-weighted assets ratio.. 10.25 9.00 10.04 8.82 8.87
Tier 1 capital to average assets ratio........ 8.86 8.45 8.31 7.74 7.17
Average equity to average assets ratio........ 6.31 6.37 6.10 5.82 5.64
- ----------
(1) Net interest income, on a full tax-equivalent basis, divided by average
interest-earning assets.
(2) Non-interest expense less non-interest income divided by average total
assets.
(3) Non-interest expense divided by the sum of net interest income plus
non-interest income.
(4) Net income divided by average total assets.
(5) Net income divided by average common equity.
20
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following presents management's discussion and analysis of our
financial condition and results of operations as of the dates and for the
periods indicated. You should read this discussion in conjunction with our
"Selected Consolidated Financial Data," our consolidated financial statements
and the accompanying notes, and the other financial data contained elsewhere in
this report.
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; potential
unfavorable results of litigation, 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.
CRITICAL ACCOUNTING POLICIES
Please refer to Note 1 of our consolidated financial statements where
we present a listing and discussion of our most significant accounting policies.
After a review of these 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 certain financial statement amounts to the methods, as well as
the assumptions and estimates, underlying these policies. Accounting for these
critical areas requires the most subjective and complex judgments that could be
subject to revision as new information becomes available.
As presented in Note 1 and Note 3 to the consolidated financial
statements, the allowance for loan losses represents management's estimate of
probable credit losses inherent in the loan portfolio as of the balance sheet
date. This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available. The
adequacy of the allowance is analyzed monthly based on internal loan reviews and
qualitative measurements of our loan portfolio. Management assesses the adequacy
of the allowance for loan losses based upon a number of factors including, among
others:
- analytical reviews of loan loss experience in relationship to
outstanding loans and commitments;
- unfunded loan commitments;
- problem and non-performing loans and other loans presenting
credit concerns;
- trends in loan growth, portfolio composition and quality;
- appraisals of the value of collateral; and
- management's judgment with respect to current economic conditions
and their impact on the existing loan portfolio.
The Bank computes its allowance by assigning specific reserves to
impaired loans, plus a general reserve based on loss factors applied to the rest
of the loan portfolio. The specific reserve on impaired loans is computed as the
amount of the loan in excess of the present value of the estimated future cash
flows discounted at the loan's
21
effective interest rate, or based on the loan's observable market value or the
fair value of the collateral if the loan is collateral dependent. The general
reserve loss factors are determined based on such items as management's
evaluation of risk in the portfolio, local economic conditions, and historical
loss experience. The Bank has further refined its risk grading system by
developing associated reserve factors for each risk grade.
The income tax amounts in Note 7 to the consolidated financial
statements reflect the current period income tax expense for all periods
presented, as well as future tax liabilities and benefits associated with
differences in timing of expenses and income recognition for book and tax
accounting purposes. Our current tax liability and expense amounts are
determined using estimates and these estimates are subject to review and
possible revision by taxing authorities.
We discuss our accounting for stock-based compensation in greater
detail in Note 1 to our consolidated financial statements. Included in Note 1 is
the effect on our net income if Statement of Financial Accounting Standards No.
123 "Accounting for Stock-Based Compensation" is applied. This accounting
standard will be effective for all fiscal periods beginning January 1, 2006. Our
current policy follows Accounting Principles Board Opinion No. 25.
OVERVIEW
2005 was a year of transition for the Company's earnings composition.
Compared to the previous two years, interest income from commercial lending had
a much larger impact on the overall profitability of the Company compared to fee
income from mortgage lending. During the year, we saw our net interest margin
expand dramatically as eight 25 basis point increases in the prime lending rate
had a positive effect on our net interest income. However, longer term interest
rates continued to increase slightly and stabilize which further curtailed
mortgage refinancing. This had an adverse effect on the mortgage origination
side of our business, resulting in lower origination volumes and declining fee
income. During most of 2005 we experienced moderate commercial loan growth,
increasing our average loan balances during the year. However, this growth
slowed and reversed during the final months of the year and our year-end 2005
loan balance ended up slightly below 2004's year-end balance. We also
experienced moderate growth in deposits during 2005 and this growth, along with
existing liquidity carried forward from 2004, was used to expand our investment
portfolio. We expect moderate growth in both loans and deposits during 2006, and
we expect that any further increases in the prime lending rate will continue to
have a positive effect on our net interest margin.
Net income for 2005 was $4.6 million, a $2.6 million, or 136.73%
increase from the $1.9 million earned in 2004. Diluted earnings per share
increased 132.92% to $1.91 for the year ended December 31, 2005 from $0.82 in
the previous year. The Company's returns on average assets and average
stockholders' equity for 2005 were 0.66% and 10.44%, compared to 0.30% and
4.69%, respectively, for 2004.
Net interest income for 2005 was $22.4 million compared to $17.2
million earned during 2004. The increase of $5.2 million or 30.28% was primarily
the result of increases in yields earned on average earning assets.
The provision for loan losses in 2005 was $230,000 compared to $2.0
million in 2004. The decrease in the provision in 2005 was essentially the
result of decreases in net charge-offs, improvements in overall portfolio credit
quality, and slower loan growth during 2005.
Non-interest income decreased 18.94% to $11.3 million in 2005 from
$13.9 million in 2004. Increases in market interest rates and other demand
factors resulted in a significant industry-wide decline in the volume of
residential mortgage loans originated in 2005 compared to 2004, particularly
refinancing volume. This trend resulted in lower origination fees during 2005
than during 2004 for our Company. Future market interest rate fluctuations and
their resultant impact on loans held for sale fee income are difficult to
project or quantify; however, it is likely that further increases in interest
rates will have a detrimental impact on mortgage loan refinancing and loans held
for sale fee income.
Total assets for the Company at December 31, 2005, were $689.6
million, an increase of $16.9 million, or 2.50%, from $672.7 million at December
31, 2004. Deposits and stockholders' equity at December 31, 2005 were
22
$529.3 million and $46.2 million, compared with $522.6 million and $41.4 million
at December 31, 2004, increases of $6.7 million, or 1.28%, and $4.9 million, or
11.77%, respectively.
Loans at December 31, 2005 totaled $503.1 million, a decrease of $4.0
million, or 0.80%, compared to December 31, 2004. The loan to deposit ratio at
December 31, 2005 was 95.05% compared to 97.04% at December 31, 2004. The
decrease in the loan to deposit ratio was due to deposit growth which, on a
relative basis, outpaced loan growth. Our funding philosophy for loans not held
for sale has been to primarily increase deposits from retail and commercial
deposit sources and secondarily use other borrowing sources as necessary to fund
loans within the limits of the Bank's capital base.
Historically, our ratio of total non-performing assets to total assets
reflects the Bank's conservative underwriting policies and aggressive management
of impaired loans and has resulted in low levels of nonaccrual loans. For the
five years ended December 31, 2005, our average year-end ratio of non-performing
loans to total loans was 0.73%. As of December 31, 2005, our ratio of
non-performing loans to total loans was 0.87%, which was slightly above, but
well in line with, our historical averages. Our non-performing credit
relationships are regularly reviewed and closely monitored. 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 December
31, 2005, our ratio of allowance for loan losses to non-performing loans was
153.27%, compared to 168.60% at December 31, 2004.
The average net charge-off ratio was 0.34% for the five years ended
December 31, 2005. Our net charge-off ratio for the year ended December 31, 2005
was 0.17%, which was below our historical average. The Bank continues to
aggressively manage defaults in the loan portfolio. Management intends to
vigorously pursue collection of all charged-off loans.
NET INTEREST INCOME
A primary component of our net income is our net interest income. Net
interest income is determined by the spread between the fully tax equivalent
(FTE) yields we earn on our interest-earning assets and the rates we pay on our
interest-bearing liabilities, as well as the relative amounts of such assets and
liabilities. FTE net interest margin is determined by dividing FTE net interest
income by average interest-earning assets. The following discussion should be
read along with analysis of the "Average Balances, Yields and Rates" table on
the next page.
Years ended December 31, 2005 and 2004. FTE net interest income for
2005 increased to $22.4 million from $17.4 million in 2004, a $5 million, or
29.00%, increase.
FTE interest income for 2005 was $40.4 million, an increase of $8.5
million, or 26.72%, from $31.9 million in 2004, primarily as a result of an
increase in the yield on average earning assets. The yield on average earning
assets increased 95 basis points to 6.31% in 2005 compared to 5.36% in 2004.
Average interest earning assets increased $45.8 million, or 7.69%, during 2005.
Due to the increase in the yield and in earning asset volume, loan interest and
fee income increased to $37.5 million in 2005 from $29.2 million in 2004, an
$8.3 million or 28.19% increase. Interest income on investment securities
decreased by $147,000, or 5.90%, in 2005 compared to the prior year due to lower
average balances of investment securities. Interest income earned on Federal
Funds Sold increased $423,000 or 269.42% in 2005 compared to the prior year due
primarily to higher yields on those earning assets.
Interest expense for 2005 was $18.0 million, up $3.5 million, or
23.97%, from $14.5 million in 2004. The increase resulted from an increase in
the overall rate paid on our average interest-bearing liabilities as well as an
increase in the level of interest bearing liabilities, primarily
interest-bearing deposits. The rate paid on our total average interest bearing
liabilities increased to 3.28% in 2005 compared to 2.79% in 2004, an increase of
49 basis points. This increase resulted from increases in rates paid on savings
deposits, money market deposits, time deposits, and long-term debt. Total
average interest bearing liabilities increased $28.5 million or 5.47% during
2005 primarily due to increases in time deposits.
23
Years ended December 31, 2004 and 2003. FTE net interest income for
2004 increased to $17.4 million from $17.2 million in 2003, a $221,000, or
1.29%, increase.
FTE interest income for 2004 was $31.9 million, an increase of $1.2
million, or 3.86%, from $30.7 million in 2003, as a result of growth in earning
assets. Average interest earning assets increased $24.1 million, or 4.22%,
during 2004. Due to the increase in earning asset volume, loan interest and fee
income increased to $29.2 million in 2004 from $28.3 million in 2002, or 3.36%.
Interest income on investment securities increased by $125,000, or 5.27%, in
2004 compared to the prior year. The yield on average interest-earning assets
fell to 5.36%, as compared to 5.38% in 2003, a decline of 2 basis points.
Interest expense for 2004 was $14.5 million, up $964,000, or 7.11%,
from $13.5 million in 2003. The increase resulted from an increase in the level
of interest bearing liabilities, primarily interest-bearing deposits, as well as
an increase in the overall rate paid on our average interest-bearing
liabilities. Total average interest bearing liabilities increased $22.1 million
or 4.44% during 2004 mostly due to increases in money market and time deposits.
The rate paid on our total average interest bearing liabilities increased to
2.79% in 2004 compared to 2.72% in 2003, an increase of 7 basis points. This
increase resulted from increases in rates paid on savings deposits, money market
deposits, time deposits, and long-term debt.
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 interest income from
interest-earning assets and interest expense on interest-bearing liabilities and
the resultant rates 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.
AVERAGE BALANCES, YIELDS AND RATES
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
2005 2004 2003
--------------------------- --------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Federal funds sold......................... $ 16,076 $ 580 3.61% $ 15,077 $ 157 1.04% $ 5,500 $ 49 0.89%
Investment securities - taxable............ 71,695 2,256 3.15 72,830 1,926 2.64 55,259 1,489 2.69
Investment securities - non-taxable (1).... 1,317 92 6.95 8,206 569 6.93 12,885 881 6.84
Mortgage loans held for sale............... 35,232 1,903 5.40 35,219 1,813 5.15 86,808 4,460 5.14
Loans, net of unearned discount and
fees (2)................................ 516,642 35,589 6.89 463,833 27,432 5.91 410,593 23,833 5.80
-------- ------- -------- ------- -------- -------
Total earning assets................. 640,962 40,420 6.31 595,165 31,897 5.36 571,045 30,712 5.38
-------- ------- -------- ------- -------- -------
Cash and due from banks - non-interest
bearing................................. 22,733 21,152 30,453
Allowance for possible loan losses......... (7,067) (7,434) (7,592)
Premises and equipment, net................ 19,304 19,613 16,388
Other assets............................... 18,119 17,366 12,129
-------- -------- --------
Total assets $694,051 $645,862 $622,423
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits-interest bearing:
Interest-bearing demand accounts........ $ 25,104 $ 94 0.38% $ 28,268 $ 169 0.60% $ 26,415 $ 165 0.63%
Savings and money market deposits....... 178,947 3,861 2.16 182,468 2,932 1.61 150,503 2,204 1.46
Time deposits........................... 238,051 9,171 3.85 202,649 7,297 3.60 195,599 6,935 3.55
-------- ------- -------- ------- -------- -------
Total interest-bearing deposits...... 442,102 13,126 2.97 413,385 10,398 2.52 372,517 9,304 2.50
-------- ------- -------- ------- -------- -------
Short-term borrowings...................... 24,511 557 2.27 26,734 211 0.79 44,230 451 1.02
Long-term debt ............................ 82,243 4,310 5.24 80,226 3,904 4.87 81,499 3,794 4.66
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities... 548,856 17,993 3.28 520,345 14,513 2.79 498,246 13,549 2.72
-------- ------- -------- ------- -------- -------
Non-interest bearing deposits.............. 93,447 79,171 81,269
Other liabilities ......................... 7,982 5,202 4,959
Stockholders' equity....................... 43,766 41,144 37,949
-------- -------- --------
Total liabilities and stockholders'
equity............................ $694,051 $645,862 $622,423
======== ======== ========
FTE net interest income/spread ............ $22,427 3.03% $17,384 2.57% $17,163 2.66%
======= ==== ======= ==== ======= ====
FTE net interest margin.................... 3.50% 2.91% 3.01%
==== ==== ====
24
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%.
For the three years ended December 31, 2005, 2004 and 2003, the tax
equivalency adjustment amounted to $31,000, $194,000, and 300,000,
respectively.
(2) Includes average balances and income from loans on nonaccrual status
Analysis of Changes in Net Interest Income Due to Changes in Interest
Rates and Volumes. The following table presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the increase
or decrease related to changes in balances and changes in interest rates. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to:
- changes in rate, reflecting changes in rate multiplied by the
prior period volume; and
- changes in volume, reflecting changes in volume multiplied by the
current period rate.
CHANGES IN INTEREST INCOME AND EXPENSE VOLUME AND RATE VARIANCES
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2005 COMPARED TO 2004 2004 COMPARED TO 2003
------------------------ --------------------------
CHANGE CHANGE CHANGE CHANGE
DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL
RATE VOLUME CHANGE RATE VOLUME CHANGE
------ ------ ------ ------ ------- -------
Federal funds sold $ 387 $ 36 $ 423 $ 8 $ 100 $ 108
Investment securities - taxable 366 (36) 330 (28) 465 437
Investment securities - non-taxable (1) 2 (479) (477) 12 (324) (312)
Mortgage loans held for sale 89 1 90 8 (2,655) (2,647)
Loans, net of unearned discount 4,519 3,638 8,157 451 3,148 3,599
------ ------ ------ ----- ------- -------
Total interest income 5,363 3,160 8,523 451 734 1,185
------ ------ ------ ----- ------- -------
Interest-bearing demand accounts (63) (12) (75) (7) 11 4
Savings and money market deposits 1,005 (76) 929 214 514 728
Time deposits 510 1,364 1,874 108 254 362
Short-term borrowings 397 (51) 346 (102) (138) (240)
Long-term debt 300 106 406 172 (62) 110
------ ------ ------ ----- ------- -------
Total interest expense 2,149 1,331 3,480 385 579 964
------ ------ ------ ----- ------- -------
Net interest income $3,214 $1,829 $5,043 $ 66 $ 155 $ 221
====== ====== ====== ===== ======= =======
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%.
PROVISION FOR LOAN LOSSES
We make provisions for loan losses in amounts management deems
necessary to maintain the allowance for loan losses at an appropriate level.
During the year ended December 31, 2005, we provided $230,000 for loan losses,
as compared to $2.0 million for the year ended December 31, 2004, a decrease of
$1.7 million, or 88.30%. During 2005, our provision for loan losses decreased
due to overall improvement in the credit quality of the loan portfolio as well
as a decrease in net charge-offs and impaired loans. In addition, the size of
the loan portfolio actually declined during the last few months of 2005 making
the existing allowance for loan losses sufficient to cover the inherent losses
in the loan portfolio. The loan portfolio decreased 0.80% to $503.1 million in
2005 from $507.2 million at December 31, 2004. Total impaired loans decreased
13.76% to $11.1 million at December 31, 2005, with a related reserve of $1.2
million, from $12.8 million at December 31, 2004, with a related reserve of $1.8
million. Net charge-offs decreased to $859,000 in 2005 from $1.7 million in
2004. During 2004, the provision for
25
loan losses increased due to overall growth in the loan portfolio as well as an
increase in net charge-offs and impaired loans. During the year ended December
31, 2004, we provided $2.0 million for loan losses, as compared to $1.4 million
for the year ended December 31, 2003, an increase of $615,000, or 45.56%.
The allowance for loan losses as a percentage of loans was 1.33% at
December 31, 2005, compared to 1.45% in 2004 and 1.66% in 2003. The decrease in
this percentage from December 31, 2004 was primarily due to net charge-offs as
well as a lower provision for loan loss during the year.
Overall, we decreased the total balance of the allowance for loan
losses in 2005 and 2004 based upon an analysis of several factors, including an
analysis of impaired loans, the general reserve factor analysis referred to in
our Critical Accounting Policies and changes in the loan mix. The allowance for
loan losses represents our best estimate of probable losses that have been
incurred as of the respective balance sheet dates.
NON-INTEREST INCOME
The following table describes the items of our non-interest income for
the periods indicated:
NON-INTEREST INCOME
YEAR ENDED DECEMBER 31
---------------------------
2005 2004 2003
------- ------- -------
(IN THOUSANDS)
Loans held for sale fee income......................... $ 7,408 $10,358 $19,866
NSF charges and service fees........................... 1,129 1,326 1,283
Other service charges.................................. 1,037 1,115 924
Realized gains on available for sale securities, net... -- 524 --
Other income 1,727 617 463
------- ------- -------
Total non-interest income........................... $11,301 $13,940 $22,536
======= ======= =======
Non-interest income decreased to $11.3 million, or 18.94%, during
2005, from $13.9 million during 2004. This decrease is attributable to a
decrease in loans held for sale fee income of $3.0 million. We experienced a
decline in our loans held for sale fee income due to a decline in residential
mortgage origination and refinancing resulting from higher interest rates. The
volume of closed residential mortgages fell to $675.6 million in 2005 from
$883.4 million and $1.5 billion in 2004 and 2003, respectively. Sustainability
of the level of our loans held for sale fee income is primarily dependent upon
the interest rate environment, and secondarily dependent on our ability to
develop new products and alternative delivery channels. In 2004, we realized
$524,000 of net gains on the sale of available-for-sale securities. We took
advantage of opportunities to mitigate the risk of long-term rate volatility in
our available-for-sale investment portfolio and also provide a funding source
for loan growth by selling some of our longer-term bonds. We sold no securities
during 2005. Other income increased $1.1 million or 179.90% due primarily to
gains on the sale of our old Olathe banking facility and an increase in rental
income from subleases in our Leawood facility. Future growth of other
non-interest income categories is dependent upon new product development, and
growth in our customer base.
Non-interest income decreased to $13.9 million, or 38.14%, during
2004, from $22.5 million during 2003. This decrease is attributable to a
decrease in loans held for sale fee income of $9.5 million. We experienced a
decline in our loans held for sale fee income due to a decline in residential
mortgage origination and refinancing resulting from higher interest rates. The
volume of closed residential mortgages fell to $883.4 million in 2004 from $1.5
billion and $1.3 billion in 2003 and 2002, respectively. Sustainability of the
level of our loans held for sale fee income is primarily dependent upon the
interest rate environment, and secondarily dependent on our ability to develop
new products and alternative delivery channels. Other service charge income,
which includes trust services income, investment brokerage income, merchant
bankcard processing and debit card processing income, increased by $191,000 or
20.67% from 2003 to 2004. In 2004, we realized $524,000 of net gains on the sale
of available-for-sale securities. We took advantage of opportunities to mitigate
the risk of long-term rate volatility in our available-for-sale investment
portfolio and also provide a funding source for loan growth by selling some of
our longer-term
26
bonds. Future growth of other non-interest income categories is dependent upon
new product development, and growth in our customer base.
NON-INTEREST EXPENSE
The following table describes the items of our non-interest expense
for the periods indicated.
NON-INTEREST EXPENSE
YEAR ENDED DECEMBER 31
---------------------------
2005 2004 2003
------- ------- -------
(IN THOUSANDS)
Salaries and employee benefits .......... $15,986 $16,670 $19,670
Occupancy ............................... 3,307 3,433 3,137
General and administrative .............. 6,841 6,467 6,478
------- ------- -------
Total non-interest expenses .......... $26,134 $26,570 $29,285
======= ======= =======
Non-interest expense decreased 1.65% to $26.1 million during 2005,
compared to $26.6 million in the prior year primarily due to a decrease in
salaries and employee benefits. Our salaries and employee benefits expense
decreased 4.11% to $16.0 million in 2005 from $16.7 million in 2004, mainly due
to a decline in incentive compensation related to mortgage origination activity.
General and administrative expenses increased $373,000 or 5.92% primarily due to
increased data processing costs and other miscellaneous expenses.
Non-interest expense decreased 9.27% to $26.6 million during 2004, as
compared to $29.3 million in the prior year primarily due to a decrease in
salaries and employee benefits. Our salaries and employee benefits expense
decreased 15.25% to $16.7 million in 2004 from $19.7 million in 2003, mainly due
to a decline in incentive compensation related to mortgage origination activity.
This decline was partially offset by increases in staffing costs due to the
opening of our Leawood banking center as well as a $550,000 accrued expense
recorded in 2004 to reflect the estimated potential cost of litigation related
to claimed violations of the Fair Labor Standards Act. Occupancy expenses
increased 9.43% to $3.4 million in 2004 from $3.1 million in 2003, primarily due
to the opening of our Leawood banking center in May 2004 and the incremental
costs associated with the operation of our Mortgage Banking facility for a full
year.
INCOME TAXES
Our income tax expense during 2005 was $2.8 million, compared to
$665,000 during 2004, and $3.1 million during 2003. The increase in 2005
reflects our higher earnings for the current fiscal year. In addition, the
Company recognized tax reserves provided in prior tax years during 2004. Our
consolidated effective income tax rates of 37.69%, 25.63% and 35.71% for the
three years ended December 31, 2005, 2004, and 2003, respectively, varies from
the statutory rate principally due to the effects of state income taxes and
interest income earned on our municipal securities portfolio which is generally
tax-exempt for federal income tax purposes.
FINANCIAL CONDITION
Lending Activities. Our loan portfolio is a key source of income, and
since our inception, has been a principal component of our revenue growth. Our
loan portfolio reflects an emphasis on commercial and commercial real estate,
construction, lease financing, residential real estate, consumer and home equity
lending. We emphasize commercial lending to professionals, businesses and their
owners. Commercial loans and loans secured by commercial real estate accounted
for 45.12%, 48.07% and 46.45% of our total loans at December 31, 2005, 2004 and
2003, respectively.
27
Loans were $503.1 million at December 31, 2005, a decrease of $4.1
million, or 0.80%, compared to December 31, 2004. Loans were $507.2 million at
December 31, 2004, an increase of $82.6 million, or 19.44%, compared to December
31, 2003. The loan to deposit ratio decreased to 95.05%, compared to 97.04% at
December 31, 2003, and 90.25% at December 31, 2003.
We experienced increases in construction, residential real estate, and
home equity loan categories during 2005. The growth of our construction,
residential real estate, and home equity portfolios is a result of the economic
growth and development of our market area, coupled with the efforts and
experience of our lending staff. The Company targets consumer lending lines of
business in an effort to broadly diversify our risk across multiple lines of
business. The following table sets forth the composition of our loan portfolio
by loan type as of the dates indicated. The amounts in the following table are
shown net of discounts and other deductions.
AS OF DECEMBER 31,
---------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
----------------- ----------------- ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Commercial................. $112,452 22.35% $117,604 23.19% $109,818 25.86% $ 93,658 24.64% $ 85,311 25.54%
Commercial real estate..... 114,562 22.77 126,205 24.88 87,438 20.59 71,295 18.76 63,756 19.08
Construction............... 139,662 27.76 130,631 25.76 123,445 29.08 127,071 33.43 93,656 28.03
Lease financing............ 18,238 3.62 21,203 4.18 22,175 5.22 22,600 5.95 24,221 7.25
Residential real estate.... 39,371 7.83 30,886 6.09 27,017 6.37 21,581 5.68 24,460 7.32
Consumer................... 45,221 8.99 48,950 9.65 29,701 6.99 26,750 7.04 29,895 8.96
Home equity................ 33,637 6.68 31,691 6.25 25,026 5.89 17,127 4.50 12,776 3.82
-------- ------ -------- ------ -------- ------ -------- ------ ------- ------
Total loans and leases.. 503,143 100.00% 507,170 100.00% 424,620 100.00% 380,082 100.00% 334,075 100.00%
====== ====== ====== ====== ======
Less allowance for loan
losses.................. 6,704 7,333 7,051 6,914 5,267
-------- -------- -------- -------- --------
Loans receivable, net...... $496,439 $499,837 $417,569 $373,168 $328,808
======== ======== ======== ======== ========
Collateral and Concentration. Management monitors concentrations of
loans to individuals or businesses involved in a single industry over 5% of
total loans. At December 31, 2005, 2004 and 2003, substantially all of our loans
were collateralized with real estate, inventory, accounts receivable and/or
other assets or were guaranteed by the Small Business Administration. Loans to
individuals and businesses in the construction industry totaled $139.7 million,
or 27.76%, of total loans, as of December 31, 2005. The Bank does not have any
other concentrations of loans to individuals or businesses involved in a single
industry exceeding 5% of total loans. The Bank's lending limit under federal law
to any one borrower was $16.9 million at December 31, 2005. The Bank's largest
single borrower, net of participations, at December 31, 2005 had outstanding
loans of $7.4 million.
The following table presents the aggregate maturities of loans in each
major category of our loan portfolio as of December 31, 2005, excluding the
allowance for loan and valuation losses. Additionally, the table presents the
dollar amount of all loans due more than one year after December 31, 2005 which
have predetermined interest rates (fixed) or adjustable interest rates
(variable). Actual maturities may differ from the contractual maturities shown
below as a result of renewals and prepayments or the timing of loan sales.
MATURITIES AND SENSITIVITIES OF LOANS TO
CHANGES IN INTEREST RATES
AS OF DECEMBER 31, 2005
------------------------------------------------------------------
MORE THAN ONE YEAR
LESS THAN ONE TO OVER FIVE ------------------
ONE YEAR FIVE YEARS YEARS TOTAL FIXED VARIABLE
--------- ---------- --------- -------- ------- --------
(IN THOUSANDS)
Commercial ................... $ 57,351 $44,768 $10,332 $112,451 $18,238 $36,862
Commercial Real Estate........ 31,613 67,624 15,329 114,566 44,052 38,901
Construction ................. 107,047 30,219 2,396 139,661 5,624 26,991
28
NON-PERFORMING ASSETS
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:
NON-PERFORMING ASSETS
AS OF DECEMBER 31,
------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Commercial and all other loans:
Past due 90 days or more ........................ $ 781 $2,008 $ 118 $ 1 $ 9
Nonaccrual ...................................... 769 543 318 234 752
Commercial real estate loans:
Past due 90 days or more ........................ 598 -- -- -- --
Nonaccrual ...................................... -- 158 -- 175 322
Construction loans:
Past due 90 days or more ........................ 585 -- -- -- --
Nonaccrual ...................................... 452 -- 487 -- --
Lease financing:
Past due 90 days or more ........................ 5 1 -- 3 --
Nonaccrual ...................................... 119 80 249 223 1,364
Residential real estate loans:
Past due 90 days or more ........................ -- 153 336 -- --
Nonaccrual ...................................... 1,016 1,315 437 407 503
Consumer loans:
Past due 90 days or more ........................ 49 17 42 22 100
Nonaccrual ...................................... -- -- -- 13 13
Home equity loans:
Past due 90 days or more ........................ -- -- -- -- --
Nonaccrual ...................................... -- 75 1,068 40 --
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 ................... 4,374 4,350 3,055 1,118 3,063
------ ------ ------ ------ ------
Foreclosed assets held for sale .................... 711 2,645 416 614 49
------ ------ ------ ------ ------
Total non-performing assets .................. $5,085 $6,995 $3,471 $1,732 $3,112
====== ====== ====== ====== ======
Total non-performing loans to total loans .......... 0.87% 0.86% 0.72% 0.29% 0.92%
Total non-performing loans to total assets ......... 0.63 0.65 0.49 0.18 0.62
Allowance for loan losses to non-performing loans .. 153.27 168.60 230.79 618.29 171.96
Non-performing assets to loans and foreclosed assets
held for sale ................................... 1.01 1.37 0.82 0.46 0.93
Non-performing assets. Non-performing assets decreased to $5.1 million
at December 31, 2005 from $7.0 million at December 31, 2004. The decrease
related primarily to decreases in commercial and all other loans, residential
real estate loans and foreclosed assets held for sale. Foreclosed assets held
for sale declined $1.9 million during 2005, as the Company sold one foreclosed
residential real estate property for $2.4 million.
Impaired Loans. A loan is considered impaired when it is probable that
we will not receive all amounts due according to the contractual terms of the
loan. This includes loans that are delinquent 90 days or more, nonaccrual loans,
and certain other loans identified by management. Accrual of interest is
discontinued, and interest accrued and unpaid is removed, at the time the loans
are delinquent 90 days or when management believes that full collection of
principal and interest under the original loan contract is unlikely to occur.
Interest is recognized for nonaccrual loans only upon receipt, and only after
all principal amounts are current according to the terms of the contract.
29
Impaired loans totaled $11.1 million at December 31, 2005, $12.8
million at December 31, 2004, and $10.2 million at December 31, 2003, with
related allowances for loan losses of $1.2 million, $1.8 million, and $1.5
million, respectively.
Total interest income of $742,000, $745,000 and $736,000 was
recognized on average impaired loans of $10.4 million, $13.8 million and $11.7
million for 2005, 2004 and 2003, respectively. Included in this total is cash
basis interest income of $15,000, $46,000 and $67,000 recognized on nonaccrual
impaired loans during 2005, 2004 and 2003, respectively.
Allowance For Loan Losses. The allowance for loan losses is increased
by provisions charged to expense and reduced by loans charged off, net of
recoveries. The adequacy of the allowance is analyzed monthly based on internal
loan reviews and quality measurements of our loan portfolio. The Bank computes
its allowance by assigning specific reserves to impaired loans, and then applies
general reserves, based on loss factors, to the remainder of the loan portfolio.
The loss factors are determined based on such items as management's evaluation
of risk in the portfolio, local economic conditions, and historical loss
experience. Specific allowances are accrued on specific loans evaluated for
impairment for which the basis of each loan, including accrued interest, exceeds
the discounted amount of expected future collections of interest and principal
or, alternatively, the fair value of the loan collateral.
The following table sets forth information regarding changes in our
allowance for loan and valuation losses for the periods indicated.
30
SUMMARY OF LOAN LOSS EXPERIENCE
AND RELATED INFORMATION
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period ........ $ 7,333 $ 7,051 $ 6,914 $ 5,267 $ 4,440
Loans charged-off:
Commercial loans ................... 949 1,665 802 323 1,015
Commercial real estate loans ....... -- -- 395 323 --
Construction loans ................. -- -- -- -- --
Lease financing .................... 86 220 279 870 836
Residential real estate loans ...... -- 18 -- -- 5
Consumer loans ..................... 77 80 68 66 80
Home equity loans .................. 16 -- 10 -- --
-------- -------- -------- -------- --------
Total loans charged-off ......... 1,128 1,983 1,554 1,582 1,936
Recoveries:
Commercial loans ................... 154 41 77 123 119
Commercial real estate loans ....... 3 7 10 1 --
Construction loans ................. -- -- -- -- --
Lease financing .................... 76 166 219 162 198
Residential real estate loans ...... 1 48 -- -- 5
Consumer loans ..................... 35 38 35 23 41
Home equity loans .................. -- -- -- -- --
-------- -------- -------- -------- --------
Total recoveries ...................... 269 300 341 309 363
-------- -------- -------- -------- --------
Net loans charged-off ................. 859 1,683 1,213 1,273 1,573
Provision for loan losses ............. 230 1,965 1,350 2,920 2,400
-------- -------- -------- -------- --------
Balance at end of period .............. $ 6,704 $ 7,333 $ 7,051 $ 6,914 $ 5,267
======== ======== ======== ======== ========
Loans outstanding:
Average ......................... $516,643 $463,833 $410,593 $349,879 $310,727
End of period ................... 503,143 507,170 424,620 380,082 334,075
Ratio of allowance for loan losses to
loans outstanding:
Average ......................... 1.30% 1.58% 1.72% 1.98% 1.70%
End of period ................... 1.33 1.45 1.66 1.82 1.58
Ratio of net charge-offs to:
Average loans ................... 0.17 0.36 0.30 0.36 0.51
End of period loans ............. 0.17 0.33 0.29 0.33 0.47
The following table shows our allocation of the allowance for loan
losses by specific category at the end of each of the periods shown. Management
attempts to allocate specific portions of the allowance for loan losses based on
specifically identifiable problem loans. However, the allocation of the
allowance to each category is not necessarily indicative of future losses and
does not restrict the use of the allowance to absorb losses in any category.
31
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
As of December 31,
--------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------------ ------------------ ------------------ ------------------ ------------------
% of Total % of Total % of Total % of Total % of Total
Amount Allowance Amount Allowance Amount Allowance Amount Allowance Amount Allowance
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
Commercial $1,863 27.79% $3,016 41.13% $2,899 41.12% $3,012 43.56% $1,181 22.42%
Commercial real estate 1,441 21.49 1,432 19.53 1,161 16.47 1,008 14.58 888 16.86
Construction 1,776 26.51 1,475 20.11 1,581 22.42 1,405 20.32 1,070 20.32
Lease financing 582 8.68 583 7.95 690 9.78 813 11.76 1,440 27.34
Residential real estate 536 7.99 209 2.85 273 3.87 293 4.24 400 7.59
Consumer 294 4.38 404 5.51 288 4.09 256 3.70 210 3.99
Home equity 212 3.16 214 2.92 159 2.25 127 1.84 78 1.48
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $6,704 100.00% $7,333 100.00% $7,051 100.00% $6,914 100.00% $5,267 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Investment securities. The primary objectives of our investment
portfolio are to secure the safety of principal, to provide adequate liquidity
and to provide securities for use in pledging for public funds or repurchase
agreements. Income is a secondary consideration. As a result, we generally do
not invest in mortgage-backed securities and other higher yielding investments.
Total investment securities increased by $33.6 million or 50.69%
during 2005, as we utilized the liquidity carried forward from 2004 and growth
in deposits to expand our investment portfolio.
As of December 31, 2005, all of the securities in our investment
portfolio were classified as available-for-sale in order to provide us with an
additional source of liquidity when necessary and as pledging requirements
permitted.
The following table presents the composition of our available for sale
investment portfolio by major category at the dates indicated.
INVESTMENT SECURITIES PORTFOLIO COMPOSITION
AT DECEMBER 31,
----------------------------
2005 2004 2003
------- ------- --------
(IN THOUSANDS)
U.S. government agency securities... $98,667 $63,561 $ 93,790
State and municipal obligations..... 674 2,133 11,451
Equity and other.................... 646 656 795
------- ------- --------
Total............................ $99,987 $66,350 $106,036
======= ======= ========
The following table sets forth the maturities, carrying value, and
average yields for securities in our investment portfolio at December 31, 2005.
Yields are presented on a tax equivalent basis. Expected maturities will differ
from contractual maturities due to unscheduled repayments.
32
MATURITY OF INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES
MORE THAN TEN TOTAL INVESTMENT
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS YEARS SECURITIES
----------------- ----------------- ----------------- ----------------- -----------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
AVAILABLE-FOR-SALE
U.S. government agency
securities..................... $31,684 2.77% $66,983 4.46% $-- --% $-- --% $98,667 3.62%
State and municipal Obligations... 313 7.54 361 6.94 -- -- -- -- 674 4.78
Equity and other securities
with no defined maturity....... -- -- -- -- -- -- -- -- 646 2.60
------- ------- --- --- -------
Total available for sale....... $31,997 2.81% $67,344 4.48% $-- --% $-- --% $99,987 3.63%
======= ======= === === =======
Deposits. Deposits grew by $6.7 million, or 1.28%, for the year ended
December 31, 2005, compared to 2004 year-end. The primary source of deposit
growth in 2005 was in demand and time deposit balances, which increased by $9.7
million and $31.9 million, respectively. The increase in time deposit balances
was primarily due to our purchase of $27 million of brokered time deposits. We
have traditionally offered market-competitive rates on our time deposit products
and believe they provide us with a more attractive source of funds than other
alternatives such as Federal Home Loan Bank borrowings, due to our ability to
cross-sell additional services to these account holders. However, we continue to
analyze alternative strategies to grow our deposits including opening additional
banking centers in markets management considers underserved, offering new
products, and obtaining brokered deposits as allowed by our Funds Management
policy and as deemed prudent by management and our board of directors.
The following table sets forth the balances for each major category of
our deposit accounts and the weighted-average interest rates paid for
interest-bearing deposits for the periods indicated:
DEPOSITS
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
2005 2004 2003
---------------------------- ---------------------------- ----------------------------
PERCENT WEIGHTED PERCENT WEIGHTED PERCENT WEIGHTED
OF AVERAGE OF AVERAGE OF AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Demand.................... $ 94,452 17.85% --% $ 84,764 16.22% --% $ 74,717 15.88% --%
Savings................... 9,669 1.82 0.49 9,100 1.74 0.49 7,740 1.64 0.62
Interest-bearing demand... 26,560 5.01 0.38 36,342 6.95 0.59 26,260 5.58 0.63
Money Market.............. 27,583 5.21 0.57 30,139 5.77 0.42 30,594 6.50 0.68
Money Management.......... 121,422 22.94 2.60 144,523 27.65 1.93 126,037 26.79 1.79
Time Deposits............. 249,655 47.17 3.85 217,778 41.67 3.60 205,147 43.61 3.55
-------- ------ -------- ------ -------- ------
Total deposits......... $529,341 100.00% $522,646 100.00% $470,495 100.00%
======== ====== ======== ====== ======== ======
33
The following table sets forth the amount of our time deposits that
are greater than $100,000 by time remaining until maturity as of December 31,
2005:
AMOUNTS AND MATURITIES OF
TIME DEPOSITS OF $100,000 OR MORE
AS OF DECEMBER 31, 2005
---------------------------
WEIGHTED AVERAGE
AMOUNT RATE PAID
-------- ----------------
(DOLLARS IN THOUSANDS)
Three months or less.................... $ 5,885 3.08%
Over three months through six months.... 5,051 3.19
Over six months through twelve months... 27,200 4.41
Over twelve months...................... 94,007 4.12
--------
Total................................ $132,143 4.10%
========
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Liquidity is measured by a financial institution's ability
to raise funds through deposits, borrowed funds, capital, or the sale of
marketable assets, such as residential mortgage loans or a portfolio of SBA
loans. Other sources of liquidity, including cash flow from the repayment of
loans, are also considered in determining whether liquidity is satisfactory.
Liquidity is also achieved through growth of core deposits and liquid assets,
and accessibility to the money and capital markets. The funds are used to meet
deposit withdrawals, maintain reserve requirements, fund loans and operate the
organization. Core deposits, defined as demand deposits, interest-bearing
transaction accounts, savings deposits and time deposits less than $100,000
(excluding brokered deposits), were 74.26% of our total deposits at December 31,
2005, and 81.56% and 76.20% of total deposits at December 31, 2004 and 2003,
respectively. Generally, the Company's funding strategy is to utilize Federal
Home Loan Bank of Topeka ("FHLBank") borrowings to fund originations of mortgage
loans held for sale and fund balances generated by other lines of business with
deposits. Advance availability with the FHLBank is determined quarterly and at
December 31, 2005, approximately $68.1 million was available. The Company's
FHLBank advance availability fluctuates depending on levels of available
collateral, which includes mortgage loans held for sale. 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 (see Note 8 of the
Financial Statements). 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.
The Bank is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks governed and regulated by the
Federal Housing Finance Board. The Federal Home Loan Banks provide a central
credit facility for member institutions. The Bank, as a member of the FHLBank of
Topeka, is required to acquire and hold shares of capital stock in the FHLBank
of Topeka in an amount at least equal to 1.00% of the aggregate principal amount
of its unpaid residential mortgage loans or 5.00% of our total outstanding
FHLBank advances. The Bank is currently in compliance with this requirement,
with a $7.2 million investment in stock of the FHLBank of Topeka as of December
31, 2005. The Bank had $47.5 million and $48.5 million in outstanding long-term
advances from the FHLBank of Topeka at December 31, 2005 and 2004, respectively.
On July 29, 2005 the Company completed a pooled offering 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
were used on September 30, 2005 to redeem, in whole, the Company's $11.5 million
Junior Subordinated Debentures issued by BVBC Capital Trust I in July 2000.
Management has established internal guidelines and analytical tools to
measure liquid assets, alternative sources of liquidity, as well as relevant
ratios concerning asset levels and purchased funds. These indicators are
reported to the board of directors monthly.
34
The following table sets forth a summary of our short-term borrowings
during and as of the end of each period indicated.
SHORT-TERM BORROWINGS
WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT AMOUNT MAXIMUM INTEREST INTEREST
OUTSTANDING OUTSTANDING OUTSTANDING RATE RATE
AT DURING THE AT ANY DURING THE AT PERIOD
PERIOD END PERIOD (1) MONTH END PERIOD END
----------- ----------- ----------- ---------- ---------
(DOLLARS IN THOUSANDS)
At or for the year ended December 31, 2005:
Federal Home Loan Bank borrowings................ $ -- $ 596 $ -- 2.90% --%
Federal Funds purchased.......................... -- 136 -- 3.04 --
Repurchase agreements............................ 24,929 23,152 25,252 2.22 2.95
------- -------
Total......................................... $24,929 $23,884 2.25 2.95
======= =======
At or for the year ended December 31, 2004:
Federal Home Loan Bank borrowings................ $ -- $ 510 $ 6,000 2.26% --%
Federal Funds purchased.......................... -- 1,107 -- 1.96 --
Repurchase agreements............................ 21,118 24,100 25,134 0.65 1.28
------- -------
Total......................................... $21,118 $25,717 0.73 1.28
======= =======
At or for the year ended December 31, 2003:
Federal Home Loan Bank borrowings................ $ -- $15,118 $40,000 1.29% --%
Federal Funds purchased.......................... -- 3,674 11,000 1.22 --
Repurchase agreements............................ 22,648 23,264 25,661 0.60 0.50
------- -------
Total......................................... $22,648 $42,056 0.90 0.50
======= =======
- ----------
(1) Calculations are based on daily averages where available and monthly
averages otherwise.
Capital Resources. At December 31, 2005, our total stockholders'
equity was $46.2 million, and our equity to asset ratio was 6.71%. At December
31, 2004, our total stockholders' equity was $41.4 million, and our equity to
asset ratio was 6.15%.
The Federal Reserve Board's risk-based guidelines establish a
risk-adjusted ratio, relating capital to different categories of assets and
off-balance sheet exposures, such as loan commitments and standby letters of
credit. These guidelines place a strong emphasis on tangible stockholder's
equity as the core element of the capital base, with appropriate recognition of
other components of capital. At December 31, 2005, our Tier 1 capital ratio was
10.25%, while our total risk-based capital ratio was 12.04%, both of which
exceed the capital minimums established in the risk-based capital requirements.
35
Our risk-based capital ratios at December 31, 2005, 2004 and 2003 are
presented below.
RISK-BASED CAPITAL
DECEMBER 31,
------------------------------
2005 2004 2003
-------- -------- --------
(DOLLARS IN THOUSANDS)
Tier 1 capital
Stockholders' equity.................................. $ 46,255 $ 41,384 $ 40,198
Intangible assets..................................... (823) (976) (1,128)
Unrealized (appreciation) depreciation on
available-for-sale securities...................... 473 257 (570)
Trust preferred securities (1)........................ 15,576 13,880 13,210
-------- -------- --------
Total Tier 1 capital 61,481 54,545 51,710
-------- -------- --------
Tier 2 capital
Qualifying allowance for loan losses.................. 6,704 7,333 6,448
Trust preferred securities(1)......................... 4,012 5,708 5,790
-------- -------- --------
Total Tier 2 capital............................... 10,716 13,041 12,238
-------- -------- --------
Total risk-based capital........................... $ 72,197 $ 67,586 $ 63,948
======== ======== ========
Risk weighted assets.................................. $599,880 $605,886 $515,201
======== ======== ========
Ratios at end of period
Total capital to risk-weighted assets ratio........ 12.04% 11.15% 12.41%
Tier 1 capital to average assets ratio
(leverage ratio)................................ 8.86% 8.45% 8.31%
Tier 1 capital to risk-weighted assets ratio....... 10.25% 9.00% 10.04%
Minimum guidelines
Total capital to risk-weighted assets ratio........ 8.00% 8.00% 8.00%
Tier 1 capital to average assets ratio
(leverage ratio)................................ 4.00% 4.00% 4.00%
Tier 1 capital to risk-weighted assets ratio....... 4.00% 4.00% 4.00%
(1) Federal Reserve guidelines for calculation of Tier 1 capital limits the
amount of cumulative trust preferred securities which can be included in
Tier 1 capital to 25% of total Tier 1 capital (Tier 1 capital before
reduction of intangibles). Approximately $15.6 million, $13.9 million and
$13.2 million of the trust preferred securities have been included as Tier
1 capital as of December 31, 2005, 2004 and 2003, respectively. The balance
of the trust preferred securities have been included as Tier 2 capital.
CONTRACTUAL OBLIGATIONS
Our known contractual obligations outstanding as of December 31, 2005
are presented below.
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
-----------------------------------------------------------
LESS THAN 1 MORE THAN 5
TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
------- ----------- --------- --------- -----------
Long-term Debt Obligations $78,106 $1,087 $12,253 $7,368 $57,398
36
INFLATION
The consolidated financial statements and related data presented in
this report have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, substantially all
of our assets and liabilities are monetary in nature. As a result, interest
rates have a more significant impact on our performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as inflation. Additional discussion of the
impact of interest rate changes is included in Item 7A: Qualitative and
Quantitative Disclosure About Market Risk. In addition, we disclose the
estimated fair value of our financial instruments in accordance with Statement
of Financial Accounting Standards No. 107. See Note 17 to the consolidated
financial statements included in this report.
OFF-BALANCE SHEET ARRANGEMENTS
The Company enters into off-balance sheet arrangements in the ordinary
course of business. Our off-balance sheet arrangements generally are limited to
commitments to extend credit, mortgage loans in the process of origination and
forward commitments to sell those mortgage loans, letters of credit and lines of
credit.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the agreement.
They generally have fixed expiration dates or other termination clauses. The
commitments extend over varying periods of time with the majority being
disbursed within a one-year period. Since a portion of the commitments may
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary, is based on management's credit evaluation of the counterparty.
Collateral held varies, but may include accounts receivable, inventory,
property, plant and equipment, commercial real estate and residential real
estate. At December 31, 2005, the Company had outstanding commitments to
originate loans aggregating approximately $13,513,000.
Mortgage loans in the process of origination represent amounts that
the Company plans to fund within a normal period of 60 to 90 days and which are
intended for sale to investors in the secondary market. Forward commitments to
sell mortgage loans are obligations to deliver loans at a specified price on or
before a specified future date. The Bank acquires such commitments to reduce
market risk on mortgage loans in the process of origination and mortgage loans
held for sale. Total mortgage loans in the process of origination amounted to
$36,179,000 and mortgage loans held for sale amounted to $13,906,000 at December
31, 2005. As a result, we had combined forward commitments to sell mortgage
loans totaling approximately $50,085,000. Mortgage loans in the process of
origination represent commitments to originate loans at both fixed and variable
rates.
Letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers. The Company had total outstanding letters of
credit amounting to $14,679,000 at December 31, 2005.
Lines of credit are agreements to lend to a customer as long as there
is no violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may expire
without being drawn upon, the total unused lines do not necessarily represent
future cash requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management's credit evaluation of the counterparty. Collateral held
varies, but may include accounts receivable, inventory, property, plant and
equipment, commercial real estate and residential real estate. Management uses
the same credit policies in granting lines of credit as it does for on-balance
sheet instruments. At December 31, 2005 unused lines of credit borrowings
aggregated approximately $182,983,000.
37
RECENT AND FUTURE ACCOUNTING REQUIREMENTS
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's first interim reporting period beginning after December 15, 2005.
We do not expect the adoption of SFAS 123 (revised 2004) will have a material
impact on the consolidated financial statements.
ITEM 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURE 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 system 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 system 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's net interest income over the next twelve month
period and net economic value of equity at risk at December 31, 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 19.98% 8.35%
Base Rate Scenario -- --
200 basis point decline (27.00%) (14.61%)
38
The above table indicates that, at December 31, 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 FHLBank 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 December 31, 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.
The following table summarizes the anticipated maturities or repricing
of our interest-earning assets and interest-bearing liabilities as of December
31, 2005, based on the information and assumptions set forth below.
INTEREST-RATE SENSITIVITY ANALYSIS
Expected Maturity or Repricing Date
----------------------------------------------------------------------------------------
0-90 Days 91-365 Days 1 year 1 to 2 years 2 to 5 years Thereafter Total
--------- ----------- -------- ------------ ------------ ---------- --------
INTEREST-EARNING ASSETS:
Fixed Rate Loans...................... $ 7,807 $ 28,157 $ 35,964 $ 27,560 $ 53,209 $ 8,692 $125,425
Average Interest Rate.............. 6.76% 6.66% 6.69% 6.53% 6.61% 6.84% 6.63%
Variable Rate Loans................... 351,445 19,848 371,293 11,158 8,065 730 391,246
Average Interest Rate.............. 7.65% 7.35% 7.64% 7.23% 7.19% 5.99% 7.61%
Fixed Rate Investments................ 6,109 37,226 43,335 51,024 5,699 -- 100,058
Average Interest Rate.............. 2.28% 3.67% 3.47% 4.42% 4.59% --% 4.02%
Variable Rate Investments............. -- -- -- -- -- -- --
Average Interest Rate.............. -- -- -- -- -- -- --
Federal Funds Sold.................... 23,564 -- 23,564 -- -- -- 23,564
Average Interest Rate.............. 4.25% -- 4.25% -- -- -- 4.25%
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets... $388,925 $ 85,231 $474,156 $ 89,742 $ 66,973 $ 9,422 $640,293
======== ======== ======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand............... $ 26,559 $ -- $ 26,559 $ -- $ -- $ -- $ 26,559
Average Interest Rate............. 0.40% -- 0.40% -- -- -- 0.40%
Savings and money market.............. 159,810 -- 159,810 -- -- -- 159,810
Average Interest Rate............. 2.34% -- 2.34% -- -- -- 2.34%
Time deposits......................... 15,727 54,618 70,345 126,450 38,404 14,461 249,660
Average Interest Rate............. 2.96% 4.06% 3.82% 4.16% 4.04% 4.03% 4.04%
Funds borrowed........................ 46,145 20,818 66,963 1,113 32,240 4,078 104,394
Average Interest Rate............. 4.61% 3.80% 4.36% 5.33% 4.64% 5.21% 4.49%
-------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities.................. $248,241 $ 75,436 $323,677 $127,563 $ 70,644 $ 18,539 $540,423
======== ======== ======== ======== ======== ======== ========
CUMULATIVE:
Rate sensitive assets (RSA)........ $388,925 $474,156 $474,156 $563,898 $630,871 $640,293 $640,293
Rate sensitive liabilities (RSL)... 248,241 323,677 323,677 451,240 521,884 540,423 540,423
GAP (GAP = RSA - RSL)........... 140,684 150,479 150,479 112,658 108,987 99,870 99,870
RSA/RSL............................... 156.67% 146.49% 146.49% 124.97% 120.88% 118.48%
RSA/Total assets...................... 56.40 68.76 68.76 81.77 91.49 92.85
RSL/Total assets...................... 36.00 46.94 46.94 65.44 75.68 78.37
GAP/Total assets...................... 20.40 21.82 21.82 16.34 15.80 14.48
GAP/RSA............................... 36.17 31.74 31.74 19.98 17.28 15.60
Certain assumptions are contained in the above table which affect the
presentation. Although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes
39
in market interest rates, while interest rates on other types of assets and
liabilities lag behind changes in market interest rates.
Disclosures about fair values of financial instruments, which reflect
changes in market prices and rates, can be found in note 17 to the consolidated
financial statements included in this report.
ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS OF BLUE VALLEY BAN CORP
See index to Blue Valley Ban Corp financial statements on page F-1.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No items are reportable.
ITEM 9A: CONTROLS AND PROCEDURES
Management, including the Company's Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the design
and operation of the Company's disclosure controls and procedures as of December
31, 2005. Based upon the evaluation, management concluded that the Company's
disclosure controls and procedures are effective to ensure that all material
information requiring disclosure in this annual report was made known to them in
a timely manner.
During the year, the Company made no significant changes in internal
controls over financial reporting or in other factors that could materially
affect the Company's internal control over financial reporting.
ITEM 9B: OTHER INFORMATION
On August 17, 2005 the Board increased the size of Class I directors
and approved Michael J. Brown as a new director of the Company.
On December 31, 2005 C. Ted McCarter resigned as Class II director of
the Company. Mr. McCarter's position on the Board currently remains vacant.
40
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors and executive officers
is included in the Company's Proxy Statement for the 2006 Annual Meeting of
Stockholders and is hereby incorporated by reference.
Information regarding the Bank's directors and executive officers is
included in Part I of this Form 10-K under the caption "Directors and Executive
Officers of the Registrant."
The Company has adopted a code of conduct that applies to our
principal executive, financial, and accounting officers. A copy of our code of
conduct can be obtained by contacting us directly at:
Investor Relations
11935 Riley
Overland Park, KS 66213
913.338.1000
Email: ir@bankbv.com
ITEM 11: EXECUTIVE COMPENSATION
This information is included in the Company's Proxy Statement for the
2006 Annual Meeting of Stockholders and is hereby incorporated by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
This information is included in the Company's Proxy Statement for the
2006 Annual Meeting of Stockholders and is hereby incorporated by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank periodically makes loans to our executive officers and
directors, the members of their immediate families and companies that they are
affiliated with. As of December 31, 2005, the Bank had aggregate loans
outstanding to such persons of approximately $12.3 million, which represented
26.50% of our stockholders' equity of $46.2 million on that date. These loans:
- were made in the ordinary course of business;
- were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for
comparable transactions with other persons; and
- did not involve more than the normal risk of collectibility or
present other unfavorable features.
41
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
This information is included in the Company's Proxy Statement for the
2006 Annual Meeting of Stockholders and is hereby incorporated by reference.
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The financial statements and financial statement schedules listed in the
accompanying index to consolidated financial statements and financial
statement schedules are filed as part of this Form 10-K.
(b) The exhibits listed in the accompanying exhibit index are filed as part of
this Form 10-K.
(c) None
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Date: March 30, 2006 By: /s/ Robert D. Regnier
------------------------------------
Robert D. Regnier, President,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities listed on the dates indicated
Date: March 30, 2006 By: /s/ Robert D. Regnier
------------------------------------
Robert D. Regnier, President,
Chief Executive Officer and Director
(Principal Executive Officer)
Date: March 30, 2006 By: /s/ Mark A. Fortino
------------------------------------
Mark A. Fortino, Chief Financial
Officer
(Principal Financial [and
Accounting] Officer)
Date: March 30, 2006 By: /s/ Donald H. Alexander
------------------------------------
Donald H. Alexander, Director
Date: March 30, 2006 By: /s/ Michael J. Brown
------------------------------------
Michael J. Brown, Director
Date: March 30, 2006 By: /s/ Wayne A. Henry, Jr.
------------------------------------
Wayne A. Henry, Jr., Director
Date: March 30, 2006 By: /s/ Thomas A. McDonnell
------------------------------------
Thomas A. McDonnell, Director
43
Exhibits
3.1 Amended and Restated Articles of Incorporation of Blue Valley Ban Corp. *
3.2 Bylaws, as amended, of Blue Valley Ban Corp. *
4.1 1998 Equity Incentive Plan. *
4.2 1994 Stock Option Plan. *
4.3 Form of Agreement as to Expenses and Liabilities. *
4.4 Form of Indenture dated April 10, 2003, between Blue Valley Ban Corp and
Wilmington Trust Company **
4.5 Amended and Restated Declaration of Trust dated April 10, 2003 **
4.6 Guarantee Agreement dated April 10, 2003 **
4.7 Fee Agreement dated April 10, 2003 **
4.8 Specimen of Floating Rate Junior Subordinated Debt Security **
4.9 Form of Indenture dated as of July 29, 2005 between Blue Valley Ban Corp
and Wilmington Trust Company***
4.10 Amended and Restated Declaration of Trust dated July 29, 2005***
4.11 Guarantee Agreement dated July 29, 2005***
10.1 Promissory Note of Blue Valley Building dated July 15, 1994. *
10.2 Mortgage, Assignment of Leases and Rents and Security Agreement between
Blue Valley Building and Businessmen's Assurance Company of America,
dated July 15, 1994. *
10.3 Assignment of Leases and Rents between Blue Valley Building and
Businessmen's Assurance Company of America dated July 15, 1994. *
10.4 Line of Credit Note with JP Morgan Chase dated June 15, 2005 ****
10.5 Term Note with JP Morgan Chase dated June 15, 2005 ****
11.1 Statement regarding computation of per share earnings. Please see p.
F-12.
21.1 Subsidiaries of Blue Valley Ban Corp.
23.3 Consent of BKD, LLP.
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)
44
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
* Filed with the Commission on April 10, 2000 as an Exhibit to Blue
Valley's Registration Statement on Form S-1, Amendment No. 1, File No.
333-34328. Exhibit incorporated herein by reference.
** Filed with the Commission on March 19, 2004 as an Exhibit to Blue
Valley's Annual Report on Form 10-K. Exhibit incorporated herein by
reference.
*** Filed with the Commission on July 29, 2005 as an Exhibit to Blue Valley's
Current Report on Form 8-K. Exhibit incorporated herein by reference.
**** Filed with the Commission on March 24, 2005 as an Exhibit to Blue
Valley's Annual Report on Form 10-K. Exhibit incorporated herein by
reference.
45
BLUE VALLEY BAN CORP
DECEMBER 31, 2005, 2004 AND 2003
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.................. F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets........................................................ F-3
Statements of Income.................................................. F-5
Statements of Stockholders' Equity.................................... F-6
Statements of Cash Flows.............................................. F-7
Notes to Financial Statements......................................... F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee,
Board of Directors and Stockholders
Blue Valley Ban Corp
Overland Park, Kansas
We have audited the accompanying consolidated balance sheets of Blue Valley
Ban Corp (the "Company") as of December 31, 2005 and 2004, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2005. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Blue Valley
Ban Corp as of December 31, 2005 and 2004, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2005
in conformity with accounting principles generally accepted in the United States
of America.
/s/ BKD, LLP
Kansas City, Missouri
February 17, 2006
F-2
BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
(dollars in thousands, except share data)
ASSETS
2005 2004
-------- --------
Cash and due from banks $ 16,493 $ 19,645
Interest bearing deposits in other financial institutions 12,163 349
Federal funds sold 11,401 2,500
-------- --------
Cash and cash equivalents 40,057 22,494
Available-for-sale securities 99,987 66,350
Mortgage loans held for sale 13,906 44,144
Loans, net of allowance for loan losses of $6,704 and $7,333 in 2005 and
2004, respectively 496,439 499,837
Premises and equipment, net 18,593 19,988
Foreclosed assets held for sale, net 711 2,645
Interest receivable 3,372 2,375
Deferred income taxes 2,564 2,383
Prepaid expenses and other assets 4,647 3,538
Federal Home Loan Bank stock, Federal Reserve Bank stock,
and other securities 8,490 7,987
Core deposit intangible asset, at amortized cost 823 976
-------- --------
Total assets $689,589 $672,717
======== ========
See Notes to Consolidated Financial Statements
F-3
BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2005 2004
-------- --------
LIABILITIES
Deposits
Demand $ 94,452 $ 84,764
Savings, NOW and money market 185,234 220,104
Time 249,655 217,778
-------- --------
Total deposits 529,341 522,646
Other interest-bearing liabilities 26,288 22,381
Long-term debt 78,106 80,088
Interest payable and other liabilities 9,599 6,218
-------- --------
Total liabilities 643,334 631,333
-------- --------
STOCKHOLDERS' EQUITY
Capital stock
Common stock, par value $1 per share;
Authorized 15,000,000 shares; issued and outstanding
2005 - 2,382,046 shares; 2004 - 2,327,086 shares 2,382 2,327
Additional paid-in capital 9,212 8,099
Retained earnings 35,782 31,809
Unearned compensation (648) (594)
Accumulated other comprehensive income
Unrealized depreciation on available-for-sale securities, net of
income taxes (credit) of $(315) in 2005 and $(171) in 2004 (473) (257)
-------- --------
Total stockholders' equity 46,255 41,384
-------- --------
Total liabilities and stockholders' equity $689,589 $672,717
======== ========
See Notes to Consolidated Financial Statements
F-4
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(dollars in thousands, except per share data)
2005 2004 2003
------- ------- -------
INTEREST INCOME
Interest and fees on loans $37,492 $29,245 $28,293
Federal funds sold 580 157 49
Available-for-sale securities 2,317 2,301 2,070
------- ------- -------
Total interest income 40,389 31,703 30,412
------- ------- -------
INTEREST EXPENSE
Interest-bearing demand deposits 94 169 165
Savings and money market deposit accounts 3,861 2,932 2,204
Other time deposits 9,171 7,297 6,935
Federal funds purchased and other interest-bearing liabilities 540 186 195
Short-term debt 17 25 256
Long-term debt 4,310 3,904 3,794
------- ------- -------
Total interest expense 17,993 14,513 13,549
------- ------- -------
NET INTEREST INCOME 22,396 17,190 16,863
PROVISION FOR LOAN LOSSES 230 1,965 1,350
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 22,166 15,225 15,513
------- ------- -------
NONINTEREST INCOME
Loans held for sale fee income 7,408 10,358 19,866
Service fees 2,166 2,441 2,207
Gains on available for sale securities, net -- 524 --
Other income 1,727 617 463
------- ------- -------
Total noninterest income 11,301 13,940 22,536
------- ------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 15,986 16,670 19,670
Net occupancy expense 3,307 3,433 3,137
Other operating expense 6,841 6,467 6,478
------- ------- -------
Total noninterest expense 26,134 26,570 29,285
------- ------- -------
INCOME BEFORE INCOME TAXES 7,333 2,595 8,764
PROVISION FOR INCOME TAXES 2,764 665 3,130
------- ------- -------
NET INCOME $ 4,569 $ 1,930 $ 5,634
======= ======= =======
BASIC EARNINGS PER SHARE $ 1.95 $ 0.84 $ 2.51
======= ======= =======
DILUTED EARNINGS PER SHARE $ 1.91 $ 0.82 $ 2.43
======= ======= =======
DIVIDENDS PER SHARE $ 0.25 $ 0.20 $ 0.15
======= ======= =======
See Notes to Consolidated Financial Statements
F-5
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(dollars in thousands, except share data)
Additional
Comprehensive Common Paid-In Retained
Income Stock Capital Earnings
------------- ------ ---------- --------
BALANCE, DECEMBER 31, 2002 $2,223 $6,284 $25,052
Issuance of 56,450 shares of common stock 56 1,120
Dividends on common stock ($0.15 per share) (342)
Net income $5,634 5,634
Change in unrealized appreciation on
available-for-sale securities, net of
income taxes (credit) of $(143) (215)
------ ------ ------ -------
$5,419
======
BALANCE, DECEMBER 31, 2003 $2,279 $7,404 $30,344
====== ====== =======
Issuance of 47,925 shares of common stock 48 695
Dividends on common stock ($0.20 per share) (465)
Net income 1,930 1,930
Restricted stock earned, net of forfeitures
Change in unrealized appreciation on available-for-sale
securities, net of income taxes (credit) of $(552) (827)
------ ------ ------ -------
$1,103
======
BALANCE, DECEMBER 31, 2004 $2,327 $8,099 $31,809
====== ====== =======
Issuance of 54,960 shares of common stock 55 1,113
Dividends on common stock ($0.25 per share) (596)
Net income 4,569 4,569
Restricted stock earned, net of forfeitures
Change in unrealized appreciation on available-for-sale
securities, net of income taxes (credit) of $(144) (216)
------ ------ ------ -------
$4,353
======
$2,382 $9,212 $35,782
BALANCE, DECEMBER 31, 2005 ====== ====== =======
Accumulated
Other
Unearned Comprehensive
Compensation Income Total
------------ ------------- -------
BALANCE, DECEMBER 31, 2002 $ -- $ 785 $34,344
Issuance of 56,450 shares of common stock (399) 777
Dividends on common stock ($0.15 per share) (342)
Net income 5,634
Change in unrealized appreciation on
available-for-sale securities, net of
income taxes (credit) of $(143) (215) (215)
----- ----- -------
BALANCE, DECEMBER 31, 2003 $(399) $ 570 $40,198
===== ===== =======
Issuance of 47,925 shares of common stock (338) 405
Dividends on common stock ($0.20 per share) (465)
Net income 1,930
Restricted stock earned, net of forfeitures 143 143
Change in unrealized appreciation on available-for-sale
securities, net of income taxes (credit) of $(552) (827) (827)
----- ----- -------
BALANCE, DECEMBER 31, 2004 $(594) $(257) $41,384
===== ===== =======
Issuance of 54,960 shares of common stock (355) 813
Dividends on common stock ($0.25 per share) (596)
Net income 4,569
Restricted stock earned, net of forfeitures 301 301
Change in unrealized appreciation on available-for-sale
securities, net of income taxes (credit) of $(144) (216) (216)
----- ----- -------
BALANCE, DECEMBER 31, 2005 $(648) $(473) $46,255
===== ===== =======
Years Ended December 31,
------------------------
2005 2004 2003
----- ----- -----
Reclassification Disclosure
Unrealized depreciation on available-for-sale securities,
net of income taxes (credit) of $(144), $(342) and $(143)
for the periods ended December 31, 2005, 2004 and 2003, respectively $(216) $(513) $(215)
Less: reclassification adjustments for appreciation included in net
income, net of income taxes of $0, $210 and $0 for the periods ended
December 31, 2005, 2004 and 2003, respectively -- 314 --
----- ----- -----
Change in unrealized depreciation on available-for-sale securities,
net of income taxes (credit) of $(144), $(552), and $(143) for the
periods ended December 31, 2005, 2004 and 2003, respectively $(216) $(827) $(215)
===== ===== =====
See Notes to Consolidated Financial Statements
F-6
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(dollars in thousands)
2005 2004 2003
--------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,569 $ 1,930 $ 5,634
Adjustments to reconcile net income to net cash flow
From operating activities:
Depreciation and amortization 1,857 1,863 1,579
Amortization (accretion) of premiums and discounts on securities (44) (28) 38
Provision for loan losses 230 1,965 1,350
Deferred income taxes 149 (530) 529
Stock dividend on FHLB securities (353) (240) --
Net gain on available-for-sale securities -- (524) --
Net loss on sale of foreclosed assets 34 104 58
Net (gain) loss on sale of premises and equipment (344) 5 (18)
Restricted stock earned and forfeited 301 143 --
Originations of loans held for sale (675,636) (883,406) (1,544,916)
Proceeds from the sale of loans held for sale 705,874 857,560 1,645,891
Changes in:
Interest receivable (997) (452) 91
Prepaid expenses and other assets (1,546) (305) (1,353)
Interest payable and other liabilities 3,293 1,114 (1,374)
--------- --------- -----------
Net cash provided by (used in) operating activities 37,387 (20,801) 107,509
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net originations of loans (4,334) (90,650) (46,439)
Proceeds from sales of loan participations 6,400 3,635 --
Purchase of premises and equipment (707) (3,094) (9,099)
Proceeds from sale of premises and equipment 993 -- 18
Proceeds from the sale of foreclosed assets 3,002 448 828
Proceeds from sales of available-for-sale securities -- 21,270 --
Proceeds from maturities of available-for-sale securities 26,440 49,564 80,168
Purchases of available-for-sale securities (60,393) (31,974) (124,936)
Purchases of Federal Home Loan Bank stock, Federal Reserve Bank stock,
and other securities (150) -- (2,345)
Proceeds from the sale of Federal Home Loan Bank stock, Federal
Reserve Bank stock, and other securities -- 95 --
--------- --------- -----------
Net cash used in investing activities (28,749) (50,706) (101,805)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in demand deposits, money market, NOW and
savings accounts (25,182) 39,520 11,204
Net increase in time deposits 31,877 12,631 35,504
Repayments of long-term debt (23,269) (21,706) (4,670)
Proceeds from long-term debt 21,244 13,500 22,825
Net payments on short-term debt -- -- (35,000)
Net proceeds from other financing activities 348 405 777
Net increase (decrease) in federal funds purchased and other
interest-bearing liabilities 3,907 (1,066) (13,382)
--------- ---------- -----------
Net cash provided by financing activities 8,925 43,284 17,258
--------- --------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,563 (28,223) 22,962
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 22,494 50,717 27,755
--------- --------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 40,057 $ 22,494 $ 50,717
========= ========= ===========
SUPPLEMENTAL CASH FLOWS INFORMATION
Loans transferred to foreclosed assets held for sale $ 1,102 $ 2,781 $ 688
Restricted stock issued $ 355 $ 338 $ 399
Cash dividends declared on common stock $ 596 $ 465 $ 342
Interest paid $ 17,742 $ 14,511 $ 13,195
Income taxes paid (net of refunds) $ 1,289 $ 635 $ 4,771
See Notes to Consolidated Financial Statements
F-7
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is a holding company for Bank of Blue Valley (the Bank), Blue
Valley Building Corp., Blue Valley Insurance Services, Inc., BVBC Capital Trust
II and BVBC Capital Trust III through 100% ownership of each. In addition, the
Company owns 49% of Homeland Title, LLC.
The Bank is primarily engaged in providing a full range of banking and
mortgage services to individual and corporate customers in southern Johnson
County, Kansas. The Bank also originates residential mortgages locally and
nationwide through its InternetMortgage.com website. The Bank is subject to
competition from other financial institutions. The Bank also is subject to the
regulation of certain federal and state agencies and undergoes periodic
examinations by those regulatory authorities.
The Blue Valley Building Corp. is primarily engaged in leasing real
property at its facilities in Overland Park and Leawood, Kansas.
BVBC Capital Trust II and III are Delaware business trusts created in 2003
and 2005, respectively, to offer trust preferred securities and to purchase the
Company's prior subordinated debentures. The Trusts have terms of 35 years, but
may dissolve earlier as provided in their trust agreements.
Homeland Title, LLC is a company providing title and settlement services.
OPERATING SEGMENT
The Company provides community banking services through its subsidiary
bank, including such products and services as loans; time deposits, checking and
savings accounts; mortgage originations; trust services; and investment
services. These activities are reported as a single operating segment.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for loan losses and
the valuation of foreclosed assets held for sale, management obtains independent
appraisals for significant properties.
Management believes that the allowances for loan losses and the valuation
of foreclosed assets held for sale are adequate. While management uses available
information to recognize losses on loans and foreclosed assets held for sale,
changes in economic conditions may necessitate revision of these estimates in
future years. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowances for loan
losses and valuation of foreclosed assets held for sale. Such agencies may
require the Company to recognize additional losses based on their judgments of
information available to them at the time of their examination.
F-8
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Blue Valley
Ban Corp and its 100% owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents. At December 31, 2005, cash
equivalents consisted of federal funds sold.
The Bank is required to maintain reserve funds in cash and/or on deposit
with the Federal Reserve Bank. The reserve required at December 31, 2005 was
$824,000.
INVESTMENT IN DEBT SECURITIES
Available-for-sale securities, which include any security for which the
Company has no immediate plan to sell, but which may be sold in the future, are
carried at fair value. Realized gains and losses, based on amortized cost of the
specific security, are included in other income. Unrealized gains and losses are
recorded, net of related income tax effects, in stockholders' equity. Premiums
and discounts are amortized and accreted, respectively, to interest income using
a method which approximates the level-yield method over the period to maturity.
Interest on investments in debt securities is included in income when
earned.
OTHER INVESTMENTS
The Company, as a member of the Federal Home Loan Bank (FHLB) and Federal
Reserve Bank (FRB) systems, is required to maintain an investment in capital
stock of both the FHLB and FRB. No ready market exists for either stock, and the
stocks have no quoted market value. Such stock is recorded at cost.
The Company uses the equity method of accounting for Homeland Title, LLC.
As such, the Company's investment in Homeland Title, LLC is included in Other
Assets and its share of Homeland Title, LLC's net income is included in Other
Income.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of cost or fair
value, determined using an aggregate basis. Write-downs to fair value are
recognized as a charge to earnings at the time the decline in value occurs.
Forward commitments to sell mortgage loans are acquired to reduce market risk on
mortgage loans in the process of origination and mortgage loans held for sale.
Amounts paid to investors to obtain forward commitments, if any, are deferred
until such time as the related loans are sold. The fair values of the forward
commitments are not recognized in the financial statements if their terms match
those of the underlying mortgage. Gains and losses resulting from sales of
mortgage loans are recognized when the respective loans are sold to investors.
Gains and losses are determined by the difference between the selling price and
the carrying amount of the loans sold, net of discounts collected or paid,
commitment fees paid and considering a normal servicing rate. Fees received from
borrowers to guarantee the funding of mortgage loans held for sale are
recognized as income or expense when the loans are sold or when it becomes
evident that the commitment will not be used.
F-9
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-offs are reported at their
outstanding principal balance adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
ALLOWANCE FOR LOAN LOSSES
The allowance is management's estimate of probable losses which have
occurred as of the balance sheet date based on management's evaluation of risk
in the loan portfolio. The allowance for loan losses is increased by provisions
charged to expense and reduced by loans charged off when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance.
The adequacy of the allowance is evaluated on a monthly basis by management
based on management's periodic review of the collectibility of the loans in
consideration of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available. The
Bank computes its allowance by assigning specific reserves to impaired loans,
and then applies general reserve factors to the rest of the loan portfolio. A
loan is considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management when determining impairment include
payment status, collateral value and probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of delay, the reason
for the delay, the borrower's prior payment record and the amount of the
shortfall in relation to the principal and interest owed.
Impairment is measured on a loan-by-loan basis by either the present value
of expected future cash flows discounted at the loan's effective interest rate,
the loan's obtainable market price or the fair value of the collateral if the
loan is collateral dependent.
PREMISES AND EQUIPMENT
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line method over the
estimated useful lives of the assets.
FORECLOSED ASSETS HELD FOR SALE
Assets acquired by foreclosure or in settlement of debt and held for sale
are valued at their estimated fair value as of the date of foreclosure, and a
related valuation allowance is provided for estimated costs to sell the assets.
Management evaluates the value of foreclosed assets held for sale periodically
and increases the valuation allowance for any subsequent declines in fair value.
Increases in the valuation allowance and gains/losses on sales of foreclosed
assets are included in non-interest expenses, net.
CORE DEPOSIT INTANGIBLE ASSETS
Unamortized core deposit intangible assets aggregated $823,000 and $976,000
(originally $2,576,000) at December 31, 2005 and 2004, respectively, and are
amortized over a 15-year period using the straight-line method.
F-10
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CORE DEPOSIT INTANGIBLE ASSETS (CONTINUED)
Amortization expense related to core deposit intangible assets was $152,000
for each of the years 2005, 2004 and 2003. Expected amortization for each of the
next five years is $152,000 and $63,000 in total thereafter.
FEE INCOME
Loan origination fees, net of direct origination costs, are recognized as
income using the level-yield method over the term of the loans.
RECLASSIFICATION
Certain reclassifications have been made to the 2004 and 2003 financial
statements to conform to the 2005 financial statement presentation. These
reclassifications had no effect on net income.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effect of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
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 year. The computation of per share earnings is as
follows:
2005 2004 2003
----------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
Net income, as reported $ 4,569 $ 1,930 $ 5,634
----------- ----------- ----------
Add: Total stock-based employee compensation
recognized in net income, net of income
taxes of $89, $51 and $0 for the years ended
December 31, 2005, 2004 and 2003,
respectively 133 77 --
Less: Total stock-based compensation cost
determined under the fair value based method,
net of income tax credits of $(89), $(51) and $0
for the years ended December 31, 2005, 2004 and
2003, respectively (133) (77) --
----------- ----------- ----------
Pro forma net income $ 4,569 $ 1,930 $ 5,634
=========== =========== ==========
Average common shares outstanding 2,348,805 2,302,564 2,244,930
Average common share stock options outstanding 39,726 57,497 75,910
----------- ----------- ----------
Average diluted common shares 2,388,531 2,360,061 2,320,840
=========== =========== ==========
Basic earnings per share $ 1.95 $ 0.84 $ 2.51
=========== =========== ==========
Diluted earnings per share $ 1.91 $ 0.82 $ 2.43
=========== =========== ==========
F-11
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its Equity Incentive Plan and no compensation
cost has been recognized. Had compensation cost for the Company's stock options
issued under its Equity Incentive Plan been determined based on the fair value
of the options at the grant dates using the minimum value method under Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated as follows:
2005 2004 2003
------ ------ ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net income As reported $4,569 $1,930 $5,634
Pro forma $4,569 $1,930 $5,618
Basic earnings per share As reported $ 1.95 $ 0.84 $ 2.51
Pro forma $ 1.95 $ 0.84 $ 2.50
Diluted earnings per share As reported $ 1.91 $ 0.82 $ 2.43
Pro forma $ 1.91 $ 0.82 $ 2.42
The expected life of options outstanding is based on the historical
experience of the Company. During 2005, 2004 and 2003, the Company issued no
stock options.
NOTE 2: AVAILABLE-FOR-SALE SECURITIES
The amortized cost and estimated fair value of available-for-sale
securities are as follows:
December 31, 2005
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(dollars in thousands)
U.S. Government agencies $ 99,387 $40 $(760) $98,667
State and political subdivisions 670 4 -- 674
Equity and other securities 718 -- (72) 646
-------- --- ----- -------
$100,775 $44 $(832) $99,987
======== === ===== =======
December 31, 2004
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(dollars in thousands)
U.S. Government agencies $63,950 $ 6 $(395) $63,561
State and political subdivisions 2,110 23 - 2,133
Equity and other 718 - (62) 656
------- --- ----- -------
$66,778 $29 $(457) $66,350
======= === ===== =======
F-12
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 2: AVAILABLE-FOR-SALE SECURITIES (CONTINUED)
The amortized cost and estimated fair value of available-for-sale
securities at December 31, 2005, by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Estimated
Cost Fair Value
--------- ----------
(dollars in thousands)
Due in one year or less $ 32,292 $31,997
Due after one through five years 67,765 67,344
Due after five years -- --
-------- -------
Total 100,057 99,341
Equity and other securities 718 646
-------- -------
$100,775 $99,987
======== =======
The book value and estimated fair value of securities pledged as collateral
to secure public deposits amounted to $20,736,000 at December 31, 2005 and
$24,968,000 at December 31, 2004.
The Company enters into sales of securities under agreements to repurchase.
The amounts deposited under these agreements represent short-term borrowings and
are reflected as a liability in the consolidated balance sheets. The securities
underlying the agreements are book-entry securities. During the period,
securities held in safekeeping were pledged to the depositors under a written
custodial agreement that explicitly recognizes the depositors' interest in the
securities. At December 31, 2005, or at any month end during the period, no
material amount of agreements to repurchase securities sold was outstanding with
any individual entity. Information on sales of securities under agreements to
repurchase is as follows:
2005 2004
------- -------
(dollars in
thousands)
Balance as of December 31 $24,929 $21,118
Carrying value of securities pledged to secure
agreements to repurchases at December 31 $24,703 $33,761
Average balance during the year of securities sold
under agreements to repurchase $23,152 $24,100
Maximum amount outstanding at any month-end during
the year $25,252 $25,134
Gross gains of $0, $606,000, and $0 were realized in 2005, 2004 and 2003,
respectively, and no gross losses were realized in 2005, 2004 and 2003,
respectively, from sales of available-for-sale securities. During 2004, the
Company recorded an $82,000 loss on an investment security for an impairment
which was determined to be other than temporary.
Certain investments in debt and marketable equity securities are reported
in the financial statements at an amount less than their historical cost. These
declines in fair value resulted primarily from increases in market interest
rates. Based on evaluation of available information and evidence, particularly
recent volatility in market yields on debt securities, management believes the
declines in fair value for these securities are temporary. Should the impairment
of any of these become other than temporary, the cost basis of the investment
will be reduced and the resulting loss recognized in net income in the period in
which the other-than-temporary impairment is identified.
F-13
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 2: AVAILABLE-FOR-SALE SECURITIES (CONTINUED)
Unrealized losses and fair value, aggregated by investment type and length
of time that individual securities have been in a continuous unrealized loss
position are as follows:
December 31, 2005
-------------------------------------------------
Less than 12 Months 12 Months or More Total
----------------------- ----------------------- -----------------------
Description of Unrealized Unrealized Unrealized
Securities Fair Value Losses Fair Value Losses Fair Value Losses
- ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
U.S. Government agencies $41,131 $344 $34,575 $416 $75,706 $760
State and political subdivisions -- -- -- -- -- --
Equity and other securities -- -- 646 72 646 72
------- ---- ------- ---- ------- ----
Total temporarily impaired securities $41,131 $344 $35,221 $488 $76,352 $832
======= ==== ======= ==== ======= ====
December 31, 2004
-------------------------------------------------
Less than 12 Months 12 Months or More Total
----------------------- ----------------------- -----------------------
Description of Unrealized Unrealized Unrealized
Securities Fair Value Losses Fair Value Losses Fair Value Losses
- ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
U.S. Government agencies $37,741 $231 $18,830 $164 $56,571 $395
State and political subdivisions -- -- -- -- -- --
Equity and other securities -- -- 656 62 656 62
------- ---- ------- ---- ------- ----
Total temporarily impaired securities $37,741 $231 $19,486 $226 $57,227 $457
======= ==== ======= ==== ======= ====
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at December 31, 2005 and 2004 include the following:
2005 2004
-------- --------
(dollars in
thousands)
Commercial loans $112,452 $117,604
Commercial real estate loans 114,562 126,205
Construction loans 139,662 130,631
Lease financing 18,238 21,203
Residential real estate loans 39,371 30,886
Consumer loans 45,221 48,950
Home equity loans 33,637 31,691
-------- --------
Total loans 503,143 507,170
Less: Allowance for loan losses 6,704 7,333
-------- --------
Net loans $496,439 $499,837
======== ========
F-14
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Activity in the allowance for loan losses was as follows:
2005 2004 2003
------ ------- -------
(dollars in thousands)
Balance, beginning of year $7,333 $ 7,051 $ 6,914
Provision charged to expense 230 1,965 1,350
Losses charged off, net of recoveries
of $269,000, $300,000 and $341,000
for 2005, 2004 and 2003, respectively (859) (1,683) (1,213)
------ ------- -------
Balance, end of year $6,704 $ 7,333 $ 7,051
====== ======= =======
Impaired loans totaled $11,080,000 and $12,847,000 at December 31, 2005 and
2004, respectively, with related allowances for loan losses of $1,200,000 and
$1,754,000, respectively. At December 31, 2005 and 2004, accruing loans
delinquent 90 days or more totaled $2.0 million and $2.2 million respectively.
Non-accrual loans were $2.4 million and $2.2 million at December 31, 2005 and
2004, respectively.
Total interest income of $742,000, $745,000 and $736,000 was recognized on
average impaired loans of $10.4 million, $13.8 million and $11.7 million for
2005, 2004 and 2003, respectively. Included in this total is cash-basis interest
income of $15,000, $46,000 and $67,000 recognized on impaired loans on
nonaccrual during 2005, 2004 and 2003, respectively.
NOTE 4: PREMISES AND EQUIPMENT
Major classifications of these assets are as follows:
2005 2004
------- -------
(dollars in
thousands)
Land $ 4,185 $ 4,724
Building and improvements 14,511 14,375
Furniture and equipment 6,187 5,853
Land improvements, net 285 285
------- -------
25,168 25,237
Less accumulated depreciation 6,575 5,249
------- -------
Total premises and equipment $18,593 $19,988
======= =======
NOTE 5: INTEREST-BEARING DEPOSITS
Interest-bearing time deposits in denominations of $100,000 or more were
$132,143,000 on December 31, 2005 and $95,819,000 on December 31, 2004. The
Company acquires brokered deposits in the normal course of business. At December
31, 2005 and 2004, brokered deposits of $27,073,000 and $471,000, respectively,
were included in the Company's time deposit balance.
F-15
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 5: INTEREST-BEARING DEPOSITS (CONTINUED)
At December 31, 2005, the scheduled maturities of time deposits are as
follows:
(dollars in thousands)
2006 $ 70,341
2007 126,441
2008 11,801
2009 13,711
2010 12,898
2011 and thereafter 14,463
--------
$249,655
========
NOTE 6: OPERATING LEASES
Blue Valley Building Corp. leases office space to others under
noncancellable operating leases expiring in various years through 2012. Minimum
future rent receivable under noncancellable operating leases at December 31,
2005 was as follows:
(dollars in thousands)
2006 $377
2007 191
2008 105
2009 78
2010 78
2011 and thereafter 143
----
$972
====
Effective June 30, 2005, the Company no longer leases space from others
under noncancellable operating leases. Consolidated rental and operating lease
expenses were $34,000 in 2005 and $289,000 in 2004 and 2003.
NOTE 7: INCOME TAXES
The provision for income taxes consists of the following:
2005 2004 2003
------ ------ ------
(dollars in thousands)
Taxes currently payable $2,615 $1,195 $2,601
Deferred income taxes 149 (530) 529
------ ------ ------
$2,764 $ 665 $3,130
====== ====== ======
F-16
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 7: INCOME TAXES (CONTINUED)
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
2005 2004 2003
------ ----- ------
(dollars in thousands)
Computed at the statutory rate (34%) $2,493 $ 882 $2,980
Increase (decrease) resulting from:
Tax-exempt interest (54) (167) (225)
State income taxes 232 103 232
Other 93 (153) 143
------ ----- ------
Actual tax provision $2,764 $ 665 $3,130
====== ===== ======
The tax effects of temporary differences related to deferred taxes shown on
the December 31, 2005 and 2004 consolidated balance sheets are as follows:
2005 2004
------ ------
(dollars in
thousands)
Deferred tax assets:
Allowance for loan losses $2,547 $2,597
Accrued compensated absences 22 41
Accumulated depreciation on available-for-
sale securities 315 171
Mark to market - Mortgage loans held for sale 39 139
Other 513 269
------ ------
3,436 3,217
------ ------
Deferred tax liabilities:
Accumulated depreciation (600) (696)
Accumulated appreciation on available-for-
sale securities -- --
FHLBank stock basis (272) (138)
Other -- --
------ ------
(872) (834)
------ ------
Net deferred tax asset $2,564 $2,383
====== ======
NOTE 8: SHORT TERM DEBT
The Company has a $15 million operating line of credit with a bank bearing
a variable interest rate of the Federal Funds rate plus 1.63%. The line of
credit is secured by stock in the Company's subsidiary bank and matures during
2006. As of December 31, 2005 and 2004, the Company had no outstanding balance
on this line of credit.
F-17
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 9: LONG TERM DEBT
Long-term debt at December 31, 2005 and 2004 consisted of the following
components:
2005 2004
------- -------
(dollars in
thousands)
Note payable - Ban Corp (A) $ 3,981 $ --
Note payable - Blue Valley Building Corp. (B) 7,037 7,500
Federal Home Loan Bank advances (C) 47,500 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 $78,106 $80,088
======= =======
(A) Due in December 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 10).
(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.
(C) Due in 2008, 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 December 31, 2005, approximately $68,094,000
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.
(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 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.
Aggregate annual maturities of long-term debt at December 31, 2005 are as
follows:
(dollars in thousands)
2006 $ 1,087
2007 1,113
2008 11,140
2009 1,169
2010 6,199
Thereafter 57,398
-------
$78,106
=======
F-18
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 10: 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 9). 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.
Management has designated the interest rate swap agreement as a cash flow
hedging instrument. The hedge was fully effective through December 31, 2005. No
gain or loss has been recognized related to the derivative as the amount is
insignificant to the financial statements.
NOTE 11: REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below). Management believes, as of December 31, 2005, that
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 2005, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well-capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Company and the Bank's actual capital amounts and ratios are also
presented in the table.
F-19
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 11: REGULATORY MATTERS (CONTINUED)
To Be Well Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
(dollars in thousands)
AS OF DECEMBER 31, 2005:
Total Capital
(to Risk Weighted Assets)
Consolidated $72,197 12.04% $47,990 8.00% N/A
======= ===== ======= ====
Bank Only $67,637 11.63% $46,511 8.00% $58,138 10.00%
======= ===== ======= ==== ======= =====
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated $61,481 10.25% $23,995 4.00% N/A
======= ===== ======= ====
Bank Only $60,934 10.48% $23,255 4.00% $34,883 6.00%
======= ===== ======= ==== ======= =====
Tier 1 Capital
(to Average Assets)
Consolidated $61,481 8.86% $27,762 4.00% N/A
======= ===== ======= ====
Bank Only $60,934 8.91% $27,358 4.00% $34,198 5.00%
======= ===== ======= ==== ======= =====
To Be Well Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
(dollars in thousands)
AS OF DECEMBER 31, 2004:
Total Capital
(to Risk Weighted Assets)
Consolidated $67,586 11.15% $48,471 8.00% N/A
======= ===== ======= ====
Bank Only $62,180 10.58% $47,031 8.00% $58,789 10.00%
======= ===== ======= ==== ======= =====
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated $54,545 9.00% $24,235 4.00% N/A
======= ===== ======= ====
Bank Only $54,847 9.33% $23,515 4.00% $35,273 6.00%
======= ===== ======= ==== ======= =====
Tier 1 Capital
(to Average Assets)
Consolidated $54,545 8.45% $25,834 4.00% N/A
======= ===== ======= ====
Bank Only $54,847 8.43% $26,031 4.00% $32,539 5.00%
======= ===== ======= ==== ======= =====
The Bank is subject to certain restrictions on the amounts of dividends
that it may declare without prior regulatory approval. At December 31, 2005,
approximately $12,390,000 of retained earnings were available for dividend
declaration without prior regulatory approval.
F-20
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 12: TRANSACTIONS WITH RELATED PARTIES
At December 31, 2005 and 2004, the Company had loans outstanding to
executive officers, directors and to companies in which the Bank's executive
officers or directors were principal owners, in the amounts of $12,258,000 and
$14,195,000, respectively. Related party transactions for 2005 and 2004 were as
follows:
2005 2004
------- -------
(dollars in
thousands)
Balance, beginning of year $14,195 $ 5,976
New loans 2,416 10,270
Repayments and reclassifications (4,353) (2,051)
------- -------
Balance, end of year $12,258 $14,195
======= =======
In management's opinion, such loans and other extensions of credit and
deposits were made in the ordinary course of business and were made on
substantially the same terms (including interest rates and collateral) as those
prevailing at the time for comparable transactions with other persons. Further,
in management's opinion, these loans did not involve more than the normal risk
of collectibility or present other unfavorable features.
NOTE 13: PROFIT SHARING AND 401(K) PLANS
The Company's profit sharing and 401(k) plans cover substantially all
employees. Contributions to the profit sharing plan are determined annually by
the Board of Directors, and participant interests are vested over a five-year
period. The Company's 401(k) plan permits participants to make contributions by
salary reduction, based on which the Company matches a ratable portion. The
Company's matching contributions to the 401(k) plan are vested immediately.
Combined Company contributions charged to expense for 2005, 2004 and 2003 were
$698,000, $658,000 and $681,000, respectively.
NOTE 14: EQUITY INCENTIVE COMPENSATION
The Company has an Equity Incentive Plan (the "Plan") which allows the
Company to issue equity incentive compensation awards to its employees and
directors in the forms of stock options, restricted shares or deferred share
units.
Under the fixed option provisions of the Plan, the Company may grant
options that vest two years from the date of grant to its employees for shares
of common stock. At December 31, 2005, the Company had 228,334 shares available
to be granted (options granted prior to 1998 were subject to an earlier plan
with similar terms). The exercise price of each option is intended to equal the
fair value of the Company's stock on the date of grant, and maximum terms are 10
years.
During 2005, 2004 and 2003, the Company granted no stock options, but did
grant 12,400, 14,100 and 13,275 shares of restricted common stock, respectively.
Recipients of the restricted stock grant who are employees vest in the stock
after three years from the date of the grant. Recipients of the restricted stock
grant who are directors vest in the stock after three years for the 2003 grant,
two years for the 2004 grant, and one year for the 2005 grant. The basis of the
restricted shares granted, equal to the fair value of the Company's stock on the
date of grant, will be amortized to compensation expense ratably over the
applicable vesting period. During 2005, 2004 and 2003, 2,925, 500 and 0 shares
of restricted stock were forfeited, respectively.
F-21
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
A summary of the status of option shares under the plan at December 31,
2005, 2004 and 2003, and changes during the years then ended, is presented
below:
NOTE 14: EQUITY INCENTIVE COMPENSATION (CONTINUED)
2005 2004 2003
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
Outstanding, beginning of year 155,000 $17.80 188,300 $16.70 235,575 $17.02
Granted -- -- -- -- -- --
Exercised (41,425) 16.00 (31,825) 10.96 (41,675) 17.77
Forfeited (2,175) 22.47 (1,475) 25.00 (5,600) 22.30
------- ------- -------
Outstanding, end of year 111,400 $18.38 155,000 $17.80 188,300 $16.70
======= ======= =======
Options exercisable, end of year 111,400 $18.38 155,000 $17.80 164,350 $15.49
======= ======= =======
The weighted-average remaining contractual life of option shares at
December 31, 2005 was 5.30 years. Exercise prices ranged from $6.25 to $25.00.
Information about options outstanding and exercisable as of December 31, 2005 is
set forth in the following table.
Options Outstanding and Exercisable
Exercise Number Outstanding and Weighted Average Weighted Average
Prices Exercisable at 12/31/05 Remaining Contractual Life Exercise Price
- -------- ----------------------- -------------------------- ----------------
$ 6.25 3,000 1 year $ 6.25
7.50 5,000 2 years 7.50
11.25 8,400 3 years 11.25
14.38 10,700 4 years 14.38
16.50 21,550 5 years 16.50
19.50 33,000 6 years 19.50
25.00 29,750 7 years 25.00
-------
111,400
=======
NOTE 15: EMPLOYEE STOCK PURCHASE PLAN
The 2004 Blue Valley Ban Corp employee stock purchase plan ("ESPP")
provides the right to subscribe to 100,000 shares of common stock to
substantially all employees of the Company and subsidiaries, except those who
are 5% or greater shareholders of the Company. The purchase price for shares
under the plan is determined by the Company's Board of Directors (or a
designated Committee thereof) and was set to 85% of the market price on either
the grant date or the offering date, whichever is lower, for the plan year
beginning in February, 2004. At the end of the plan year ending January 2005,
4,060 shares were purchased under this plan at a price of $19.55 per share.
F-22
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 16: OTHER INCOME/EXPENSE
Other operating expenses consist of the following:
2005 2004 2003
------ ------ ------
(dollars in thousands)
Advertising $1,413 $1,315 $1,277
Data processing 863 712 556
Professional fees 790 815 810
Other expense 3,775 3,625 3,835
------ ------ ------
Total $6,841 $6,467 $6,478
====== ====== ======
Other income consists of the following:
2005 2004 2003
------ ---- ----
(dollars in
thousands)
Rental income $ 351 $192 $154
Other income 1,376 425 309
------ ---- ----
Total $1,727 $617 $463
====== ==== ====
NOTE 17: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term instruments, the carrying amount approximates fair
value.
AVAILABLE-FOR-SALE SECURITIES
Fair values for available-for-sale securities, which also are the amounts
recognized in the consolidated balance sheets, equal quoted market prices if
available. If quoted market prices are not available, fair values are estimated
based on quoted market prices of similar securities.
MORTGAGE LOANS HELD FOR SALE
For homogeneous categories of loans, such as mortgage loans held for sale,
fair value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics.
LOANS
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. Loans with similar
characteristics were aggregated for purposes of the calculations. The carrying
amount of accrued interest approximates its fair value.
FEDERAL HOME LOAN BANK STOCK, FEDERAL RESERVE BANK STOCK, AND OTHER SECURITIES
F-23
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
The carrying amounts for these securities approximate their fair value.
NOTE 17: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
DEPOSITS
The fair value of demand deposits, savings accounts, NOW accounts and
certain money market deposits is the amount payable on demand at the reporting
date (i.e., their carrying amount). The fair value of fixed maturity time
deposits is estimated using a discounted cash flow calculation that applies the
rates currently offered for deposits of similar remaining maturities. The
carrying amount of accrued interest payable approximates its fair value.
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE AND OTHER LIABILITIES
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
SHORT-TERM AND LONG-TERM DEBT
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT, LETTERS OF CREDIT AND LINES OF CREDIT
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For fixed
rate loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of letters of
credit and lines of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate or otherwise settle the
obligations with the counterparties at the reporting date.
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments were
calculated by discounting expected cash flows, which involves significant
judgments by management and uncertainties. Fair value is the estimated amount at
which financial assets or liabilities could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
Because no market exists for certain of these financial instruments, and because
management does not intend to sell these financial instruments, the Company does
not know whether the fair values shown below represent values at which the
respective financial instruments could be sold individually or in the aggregate.
F-24
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 17: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
2005 2004
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Financial assets: (dollars in thousands)
Cash and cash equivalents $ 40,057 $ 40,057 $ 22,494 $ 22,494
Available-for-sale securities 99,987 99,987 66,350 66,350
Mortgage loans held for sale 13,906 13,906 44,144 44,144
Interest receivable 3,372 3,372 2,375 2,375
Loans, net of allowance for loan losses 496,439 492,320 499,837 497,809
Federal Home Loan Bank stock, Federal Reserve Bank
stock, and other securities 8,490 8,490 7,987 7,987
Financial liabilities:
Deposits 529,341 530,326 522,646 521,936
Other interest bearing liabilities 26,288 26,288 22,381 22,381
Long-term debt 78,106 77,326 80,088 81,265
Interest payable 1,678 1,678 1,190 1,190
Unrecognized financial instruments
(net of amortization):
Commitments to extend credit -- -- -- --
Letters of credit -- -- -- --
Lines of credit -- -- -- --
Forward commitments -- -- -- --
NOTE 18: COMMITMENTS AND CREDIT RISKS
The Company extends credit for commercial real estate mortgages,
residential mortgages, working capital financing and consumer loans to
businesses and residents principally in southern Johnson County. The Bank also
purchases indirect leases from various leasing companies throughout Kansas and
Missouri.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require a payment of a fee. Since a portion of the commitments may
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary, is based on management's credit evaluation of the counterparty.
Collateral held varies, but may include accounts receivable, inventory,
property, plant and equipment, commercial real estate and residential real
estate.
At December 31, 2005 and 2004, the Company had outstanding commitments to
originate loans aggregating approximately $13,513,000 and $36,980,000,
respectively. The commitments extend over varying periods of time with the
majority being disbursed within a one-year period.
Mortgage loans in the process of origination represent amounts that the
Company plans to fund within a normal period of 60 to 90 days and which are
intended for sale to investors in the secondary market.
F-25
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 18: COMMITMENTS AND CREDIT RISKS (CONTINUED)
Forward commitments to sell mortgage loans are obligations to deliver loans
at a specified price on or before a specified future date. The Bank acquires
such commitments to reduce market risk on mortgage loans in the process of
origination and mortgage loans held for sale.
Total mortgage loans in the process of origination amounted to $36,179,000
and $57,378,000 and mortgage loans held for sale amounted to $13,906,000 and
$44,144,000 at December 31, 2005 and 2004, respectively. Related forward
commitments to sell mortgage loans amounted to approximately $50,085,000 and
$101,522,000 at December 31, 2005 and 2004, respectively. Mortgage loans in the
process of origination represent commitments to originate loans at both fixed
and variable rates.
Letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
The Company had total outstanding letters of credit amounting to
$14,679,000 and $13,604,000 at December 31, 2005 and 2004, respectively.
Lines of credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may expire
without being drawn upon, the total unused lines do not necessarily represent
future cash requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management's credit evaluation of the counterparty. Collateral held
varies, but may include accounts receivable, inventory, property, plant and
equipment, commercial real estate and residential real estate. Management uses
the same credit policies in granting lines of credit as it does for on-balance
sheet instruments.
At December 31, 2005 and 2004, unused lines of credit borrowings aggregated
approximately $182,983,000 and $168,840,000, respectively.
Additionally, the Company periodically has excess funds, which are loaned
to other banks as federal funds sold. At December 31, 2005 and 2004, federal
funds sold totaling $11,401,000 and $2,500,000, respectively, were loaned to
various banks, as approved by the Board of Directors, with the largest balance
at any one bank being $8,401,000 and $2,500,000 on those dates, respectively.
F-26
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 19: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents the unaudited results of operations for the
past two years by quarter. See discussion on earnings per share in "Note 1:
Nature of Operations and Summary of Significant Accounting Policies" in the
Company's Consolidated Financial Statements.
2005 2004
----------------------------------------- -----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Operations
Net interest income after provision
for loan losses $ 6,247 $ 5,858 $ 5,222 $ 4,840 $ 3,821 $ 3,865 $ 3,736 $ 3,803
Noninterest income 2,498 3,328 2,669 2,807 3,155 3,270 4,103 3,412
Noninterest expense 6,551 6,628 6,594 6,361 7,069 6,428 6,911 6,162
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes 2,194 2,558 1,297 1,286 (93) 707 928 1,053
Income taxes 819 964 494 490 (99) 174 247 343
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 1,375 $ 1,594 $ 803 $ 796 $ 6 $ 533 $ 681 $ 710
======== ======== ======== ======== ======== ======== ======== ========
Net Income per Share Data
Basic $ 0.58 $ 0.68 $ 0.34 $ 0.34 $ 0.00 $ 0.23 $ 0.30 $ 0.31
======== ======== ======== ======== ======== ======== ======== ========
Diluted $ 0.57 $ 0.67 $ 0.34 $ 0.34 $ 0.00 $ 0.23 $ 0.29 $ 0.30
======== ======== ======== ======== ======== ======== ======== ========
Balance Sheet
Total assets $689,589 $707,188 $693,858 $684,643 $672,717 $669,892 $637,353 $626,036
Total loans, net 496,439 507,018 505,243 513,616 499,837 470,155 448,785 444,277
Stockholders' equity 46,255 45,124 43,343 42,179 41,384 42,028 41,388 41,150
The above unaudited financial information reflects all adjustments that
are, in the opinion of management, necessary to present a fair statement of the
results of operations for the interim periods presented.
NOTE 20: LEGAL PROCEEDINGS
On October 13, 2004, we became a defendant in a lawsuit filed in the United
States District Court, Kansas District by former mortgage loan originators. The
plaintiffs claimed that the Bank did not compensate them appropriately for
overtime hours worked in accordance with the Fair Labor Standards Act. On
November 18, 2005, we entered into an agreement to settle the existing claims
and potential claims asserted by the mortgage loan originators of approximately
$1.1 million. Associated costs to defend the litigation totaled approximately
$58,500 in 2004 and $189,600 in 2005. In consideration of payments to be made to
the plaintiffs and plaintiffs' attorney, all claims and potential wage and hour
claims asserted in and/or which could have been asserted by such plaintiffs were
released. We currently do not anticipate any significant additional financial
impact from this litigation. 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 21: FUTURE CHANGE IN ACCOUNTING PRINCIPLE
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
F-27
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
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
NOTE 21: FUTURE CHANGE IN ACCOUNTING PRINCIPLE (CONTINUED)
Employees." The provisions of SFAS 123 (revised 2004) will be effective for the
Company's first interim reporting period beginning after December 15, 2005. We
do not expect the adoption of SFAS 123 (revised 2004) will have a material
impact on the consolidated financial statements.
NOTE 22: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
2005 2004
------- -------
(In thousands)
ASSETS
Cash and cash equivalents $ 964 $ 2,058
Investments in subsidiaries:
Bank of Blue Valley 61,284 55,566
Blue Valley Building Corp. 7,918 7,648
Blue Valley Insurance Services, Inc. 16 18
BVBC Capital Trust I -- 356
BVBC Capital Trust II 232 232
BVBC Capital Trust III 356 --
Other assets 3,461 2,781
------- -------
Total Assets $74,231 $68,659
======= =======
LIABILITIES
Long-term debt $ 3,981 $ 4,500
Subordinated debentures 19,588 19,588
Other liabilities 4,407 3,187
------- -------
Total Liabilities 27,976 27,275
------- -------
STOCKHOLDERS' EQUITY
Common stock 2,382 2,327
Additional paid-in capital 9,212 8,099
Retained earnings 35,782 31,809
Unearned compensation (648) (594)
Unrealized depreciation on available-for-sale securities,
net of income tax credits of $(316) and $(171) at 2005 and
2004, respectively (473) (257)
------- -------
Total Stockholders' Equity 46,255 41,384
------- -------
Total Liabilities and Stockholders' Equity $74,231 $68,659
======= =======
F-28
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 22: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003
------- ------- -------
(In thousands)
Income
Dividends from subsidiaries $ 52 $11,328 $ 445
Other income 64 7 39
------- ------- -------
116 11,335 484
Expenses 2,572 2,514 2,189
------- ------- -------
Income (loss) before income taxes and equity in
undistributed net income of subsidiaries (2,456) 8,821 (1,705)
Credit for income taxes (835) (1,086) (716)
------- ------- -------
Income (loss) before equity in undistributed net income of
subsidiaries (1,621) 9,907 (989)
Equity in undistributed (distributions in excess of) net
income of subsidiaries 6,190 (7,977) 6,623
------- ------- -------
Net income $ 4,569 $ 1,930 $ 5,634
======= ======= =======
F-29
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
NOTE 22: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2003 2003
-------- ------- -------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,569 $ 1,930 $ 5,634
Items not requiring (providing) cash:
Deferred income taxes 835 836 82
Equity in undistributed income of subsidiaries (6,190) 7,977 (6,623)
Restricted stock earned 301 143 --
Changes in:
Other assets (1,515) (1,338) (517)
Other liabilities 624 451 504
-------- ------- -------
Net cash provided by (used in) operating activities (1,376) 9,999 (920)
-------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES
Capital contributed to subsidiary (12) (8,727) (7,943)
-------- ------- -------
Net cash used in investing activities (12) (8,727) (7,943)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt (12,375) (425) (4,495)
Proceeds from long-term debt 11,856 -- 13,057
Proceeds from sale of common stock 813 405 777
-------- ------- -------
Net cash provided by (used in) financing activities 294 (20) 9,339
-------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,094) 1,252 476
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,058 806 330
-------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 964 $ 2,058 $ 806
======== ======= =======
F-30