UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
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 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 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 June 30, 2006 the registrant had 2,403,669 shares of Common Stock
($1.00 par value) outstanding.
1
BLUE VALLEY BAN CORP
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm.............. 3
Condensed Consolidated Balance Sheets -
June 30, 2006 (unaudited) and December 31, 2005................... 4
Condensed Consolidated Statements of Income (unaudited) -
three and six months ended June 30, 2006 and 2005................. 6
Condensed Consolidated Statements of Stockholders' Equity (unaudited)
- six months ended June 30, 2006 and 2005......................... 7
Condensed Consolidated Statements of Cash Flows (unaudited) -
six months ended June 30, 2006 and 2005........................... 8
Notes to Condensed Consolidated Financial Statements (unaudited) -
six months ended June 30, 2006 and 2005........................... 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 23
ITEM 4. CONTROLS AND PROCEDURES......................................... 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................... 26
ITEM 1A. RISK FACTORS................................................... 26
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS..... 26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................. 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 26
ITEM 5. OTHER INFORMATION............................................... 27
ITEM 6. EXHIBITS........................................................ 27
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee, Board of Directors and Shareholders
Blue Valley Ban Corp
Overland Park, Kansas 66225
We have reviewed the accompanying condensed consolidated balance sheet of Blue
Valley Ban Corp as of June 30, 2006, and the related condensed consolidated
statements of income for the three-month and six-month periods ended June 30,
2006 and 2005 and the condensed consolidated statements of stockholders' equity
and cash flows for the six-month periods ended June 30, 2006 and 2005. These
interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet as of December 31, 2005 and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended (not presented
herein), and in our report dated February 17, 2006, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2005 is fairly stated, in all material respects, in relation
to the condensed consolidated balance sheet from which it has been derived.
/s/ BKD, LLP
Kansas City, Missouri
July 28, 2006
BLUE VALLEY BAN CORP
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2006 AND DECEMBER 31, 2005
(dollars in thousands, except share data)
ASSETS
JUNE 30, DECEMBER 31,
2006 2005
----------- ------------
(Unaudited)
Cash and due from banks $ 19,202 $ 16,493
Interest-bearing deposits in other financial institutions 291 12,163
Federal funds sold 58 11,401
-------- --------
Cash and cash equivalents 19,551 40,057
Available-for-sale securities 89,206 99,987
Mortgage loans held for sale 16,903 13,906
Loans, net of allowance for loan losses of $6,735
and $6,704 in 2006 and 2005, respectively 515,922 496,439
Premises and equipment, net 18,269 18,593
Foreclosed assets held for sale, net 449 711
Interest receivable 3,615 3,372
Deferred income taxes 2,698 2,564
Prepaid expenses and other assets 1,506 4,647
Federal Home Loan Bank stock, Federal Reserve Bank stock,
and other securities 6,320 8,490
Core deposit intangible asset, at amortized cost 747 823
-------- --------
Total assets $675,186 $689,589
======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
4
BLUE VALLEY BAN CORP
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2006 AND DECEMBER 31, 2005
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, DECEMBER 31,
2006 2005
----------- ------------
(Unaudited)
LIABILITIES
Deposits
Demand $100,836 $ 94,452
Savings, NOW and money market 171,967 185,234
Time 261,115 249,655
-------- --------
Total deposits 533,918 529,341
Other interest-bearing liabilities 20,092 26,288
Long-term debt 67,566 78,106
Interest payable and other liabilities 4,173 9,599
-------- --------
Total liabilities 625,749 643,334
-------- --------
STOCKHOLDERS' EQUITY
Capital stock
Common stock, par value $1 per share;
authorized 15,000,000 shares; issued and outstanding
2006 - 2,403,669 shares; 2005 - 2,382,046 shares 2,404 2,382
Additional paid-in capital 9,211 9,212
Retained earnings 38,615 35,782
Unearned compensation -- (648)
Accumulated other comprehensive loss, net of income taxes
(credit) of $(528) in 2006 and $(315) in 2005 (793) (473)
-------- --------
Total stockholders' equity 49,437 46,255
-------- --------
Total liabilities and stockholders' equity $675,186 $689,589
======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
5
BLUE VALLEY BAN CORP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(dollars in thousands, except share data)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
INTEREST INCOME
Interest and fees on loans $11,015 $9,104 $21,212 $17,821
Federal funds sold and other short-term investments 8 159 90 181
Available-for-sale securities 1,008 448 2,056 863
------- ------ ------- -------
Total interest income 12,031 9,711 23,358 18,865
------- ------ ------- -------
INTEREST EXPENSE
Interest-bearing demand deposits 26 23 49 56
Savings and money market deposit accounts 1,134 982 2,094 1,879
Other time deposits 2,616 2,284 5,103 4,349
Federal funds purchased and other
interest-bearing liabilities 213 126 430 217
Short-term debt 223 -- 294 17
Long-term debt, net 982 1,074 1,951 2,131
------- ------ ------- -------
Total interest expense 5,194 4,489 9,921 8,649
------- ------ ------- -------
NET INTEREST INCOME 6,837 5,222 13,437 10,216
PROVISION FOR LOAN LOSSES 590 -- 665 155
------- ------ ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 6,247 5,222 12,772 10,061
------- ------ ------- -------
NONINTEREST INCOME
Loans held for sale fee income 1,192 1,858 2,328 3,899
Service fees 601 557 1,184 1,051
Other income 346 254 659 526
------- ------ ------- -------
Total noninterest income 2,139 2,669 4,171 5,476
------- ------ ------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 3,581 4,095 7,617 8,042
Net occupancy expense 754 809 1,513 1,629
Other operating expense 1,619 1,690 3,270 3,284
------- ------ ------- -------
Total noninterest expense 5,954 6,594 12,400 12,955
------- ------ ------- -------
INCOME BEFORE INCOME TAXES 2,432 1,297 4,543 2,582
PROVISION FOR INCOME TAXES 916 494 1,710 983
------- ------ ------- -------
NET INCOME $ 1,516 $ 803 $ 2,833 $ 1,599
======= ====== ======= =======
BASIC EARNINGS PER SHARE $ 0.64 $ 0.34 $ 1.20 $ 0.68
======= ====== ======= =======
DILUTED EARNINGS PER SHARE $ 0.63 $ 0.34 $ 1.18 $ 0.67
======= ====== ======= =======
See Accompanying Notes to Condensed Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
6
BLUE VALLEY BAN CORP
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(dollars in thousands, except share data)
ACCUMULATED
ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED UNEARNED COMPREHENSIVE
INCOME (LOSS) STOCK CAPITAL EARNINGS COMPENSATION LOSS TOTAL
------------- ------ ---------- -------- ------------ ------------- ------
BALANCE, DECEMBER 31, 2004 $2,327 $ 8,099 $31,809 $(594) $(257) $41,384
Issuance of 19,285 shares of
common stock 19 231 -- -- -- 250
Net income $1,599 -- -- 1,599 -- -- 1,599
Restricted stock earned, net of
forfeitures -- -- -- -- 140 -- 140
Change in unrealized
depreciation, net of income
taxes (credit) of $(20) (30) -- -- -- -- (30) (30)
------ ------ -------- ------- ----- ----- -------
$1,569
======
BALANCE, JUNE 30, 2005 $2,346 $ 8,330 $33,408 $(454) $(287) $43,343
====== ======== ======= ===== ===== =======
BALANCE, DECEMBER 31, 2005 $2,382 $ 9,212 $35,782 $(648) $(473) $46,255
------ -------- ------- ----- ----- -------
Issuance of 21,623 shares of
common stock 22 405 -- -- -- 427
Net income $2,833 -- -- 2,833 -- -- 2,833
Restricted stock earned, net of
forfeitures -- -- 242 -- -- -- 242
Reclassification of unearned
compensation in accordance
with adoption of SFAS No. 123R -- -- (648) -- 648 -- --
Change in derivative financial
instrument, net of income
taxes of $74 111 -- -- -- -- 111 111
Change in unrealized
depreciation on
available-for-sale
securities, net of income
taxes (credit) of $(287) (431) -- -- -- -- (431) (431)
------ ------ -------- ------- ----- ----- -------
$2,513
======
BALANCE, JUNE 30, 2006 $2,404 $ 9,211 $38,615 $ -- $(793) $49,437
====== ======== ======= ===== ===== =======
See Accompanying Notes to Condensed Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
7
BLUE VALLEY BAN CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(dollars in thousands, except share data)
JUNE 30, 2006 JUNE 30, 2005
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,833 $ 1,599
Adjustments to reconcile net income to net cash flow
From operating activities:
Depreciation and amortization 724 947
Amortization (accretion) of premiums and discounts on
securities (49) (17)
Provision for loan losses 665 155
Deferred income taxes 152 (37)
Stock dividends on FHLB securities (149) --
Net loss (gain) on sale of foreclosed assets (31) 8
Net loss (gain) on sale of premises and equipment 6 (2)
Restricted stock earned and forfeited 242 140
Originations of loans held for sale (167,278) (338,827)
Proceeds from the sale of loans held for sale 164,281 343,094
Changes in
Interest receivable (243) (344)
Prepaid expenses and other assets 3,320 (994)
Interest payable and other liabilities (4,904) 1,687
--------- ---------
Net cash provided by (used in) operating activities (431) 7,409
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net originations of loans (20,672) (12,003)
Proceeds from sales of loan participations -- 6,400
Purchase of premises and equipment (323) (360)
Proceeds from the sale of premises and equipment -- 402
Proceeds from the sale of foreclosed assets, net of expenses 817 2,596
Proceeds from maturities of available-for-sale securities 16,110 5,815
Purchases of available-for-sale securities (5,998) (15,996)
Proceeds from the sale or maturities of Federal Home Loan Bank
stock, Federal Reserve Bank stock, and other securities 2,319 --
Purchases of Federal Home Loan Bank stock, Federal Reserve Bank
stock, and other securities -- (209)
--------- ---------
Net cash used in investing activities (7,747) (13,355)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in demand deposits, money market,
NOW and savings accounts (6,883) (6,129)
Net increase in time deposits 11,460 20,746
Repayments of long-term debt (10,540) (4,878)
Proceeds from long-term debt -- 4,388
Net proceeds (payments) from other financing activities (169) 250
Net increase (decrease) in other borrowings (6,196) 3,368
--------- ---------
Net cash provided by (used in) financing activities (12,328) 17,745
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (20,506) 11,799
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 40,057 22,494
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,551 $ 34,293
========= =========
See Accompanying Notes to Condensed Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
8
BLUE VALLEY BAN CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the Company's condensed consolidated financial position as
of June 30, 2006, and the condensed consolidated results of its operations,
changes in stockholders' equity and cash flows for the periods ended June
30, 2006 and 2005, and are of a normal recurring nature.
Certain information and note disclosures normally included in the company's
annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
omitted. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's December 31, 2005 Form 10-K filed with the
Securities and Exchange Commission. Certain reclassifications to prior year
amounts have been made to conform to current year presentation. The results
of operations for the period are not necessarily indicative of the results
to be expected for the full year.
The report of BKD, LLP commenting upon their review accompanies the
consolidated financial statements included in Item 1 of Part I.
NOTE 2: STOCK BASED COMPENSATION
Effective January 1, 2006, the Company adopted the provisions of SFAS No.
123 (revised 2004). As a result of adopting SFAS No. 123R on January 1,
2006, the Company did not record any additional compensation expense, as no
stock options had been granted in recent years and options granted were
fully vested prior to adoption. However, on January 1, 2006, the Company
reclassified $648,000 of unearned compensation related to previously
recognized compensation for restricted share awards that had not been
vested as of that date to additional paid-in capital as these awards
represent equity awards as defined in SFAS No. 123R.
NOTE 3: EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average number
of shares outstanding during each year. Diluted earnings per share is
computed using the weighted average common shares and all potential
dilutive common shares outstanding during the period.
The computation of per share earnings for the three and six-months ended
June 30, 2006 and 2005 is as follows:
9
BLUE VALLEY BAN CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(amounts in thousands, except (amounts in thousands, except
share and per share data) share and per share data)
Net income, as reported $ 1,516 $ 803 $ 2,833 $ 1,599
========== ========== ========== ==========
Average common shares outstanding 2,362,292 2,340,014 2,355,687 2,335,804
Average common share stock options outstanding 39,047 42,629 41,070 41,255
---------- ---------- ---------- ----------
Average diluted common shares 2,401,339 2,382,643 2,396,757 2,377,059
========== ========== ========== ==========
Basic earnings per share $ 0.64 $ 0.34 $ 1.20 $ 0.68
========== ========== ========== ==========
Diluted earnings per share $ 0.63 $ 0.34 $ 1.18 $ 0.67
========== ========== ========== ==========
NOTE 4: LONG-TERM DEBT
Long-term debt at June 30, 2006 and December 31, 2005, consisted of the
following components:
JUNE 30, DECEMBER 31,
2006 2005
----------- ------------
(Unaudited)
(in thousands)
Note Payable - Blue Valley Ban Corp (A) $ 3,681 $ 3,981
Note Payable - Blue Valley Building Corp. (B) 6,797 7,037
Federal Home Loan Bank advances (C) 37,500 47,500
Subordinated Debentures - BVBC Capital Trust II (D) 7,732 7,732
Subordinated Debentures - BVBC Capital Trust III (E) 11,856 11,856
------- -------
Total long-term debt $67,566 $78,106
======= =======
10
BLUE VALLEY BAN CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
(A) Due in 2012, payable in quarterly installments of principal plus
interest at the Federal Funds Rate plus 1.63%; collateralized by
common stock of the Company's subsidiary bank. The interest rate on
this note has been fixed at 5.45% by the use of a swap agreement (see
Note 5).
(B) Two notes due in 2017; payable in monthly installments totaling
$70,084 including interest at 5.19%; collateralized by land,
buildings, and assignment of future rents. This debt is guaranteed by
the Company.
(C) Due in 2008, 2011, 2013 and 2015; collateralized by various assets
including mortgage-backed loans. The interest rates on the advances
range from 2.62% to 5.682%. Federal Home Loan Bank advance
availability is determined quarterly and at June 30, 2006,
approximately $84,935,000 was available.
(D) 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.
(E) 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 (D) 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 June 30, 2006 are as follows:
(in thousands)
--------------
July 1 to December 31, 2006 $ 547
2007 1,113
2008 11,140
2009 1,169
2010 1,199
Thereafter 52,398
-------
$67,566
=======
11
BLUE VALLEY BAN CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
NOTE 5: 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 4). The agreement provides for the Company to receive interest from
the counterparty at the note's variable rate and to pay interest to the
counterparty at a fixed rate of 5.45% on the notional amount over the term
of the note. Under the agreement, the Company pays or receives the net
interest amount quarterly, with the quarterly settlements included in
interest expense.
Management has designated the interest rate swap agreement as a cash flow
hedging instrument. The hedge was fully effective through June 30, 2006. A
$111,000 unrealized gain has been recognized as a component of other
comprehensive loss.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. The Company
intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and is including this statement
for purposes of those safe harbor provisions. Forward-looking statements,
which are based on certain assumptions and describe future plans,
strategies and expectations of the Company, can generally be identified by
use of the words "believe," "expect," "intend," "anticipate," "estimate,"
"project," or similar expressions. The Company is unable to predict the
actual results of its future plans or strategies with certainty. Factors
which could have a material adverse effect on the operations and future
prospects of the Company include, but are not limited to, fluctuations in
market rates of interest and loan and deposit pricing; a deterioration of
general economic conditions or the demand for housing in the Company's
market areas; a deterioration in the demand for mortgage financing;
legislative or regulatory changes; adverse developments in the Company's
loan or investment portfolio; any inability to obtain funding on favorable
terms; the loss of key personnel; significant increases in competition; and
the possible dilutive effect of potential acquisitions or expansions. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
GENERAL
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are largely proscribed by accounting
principles generally accepted in the United States of America. After a
review of our policies, we determined that accounting for the allowance for
loan losses, income taxes, and stock-based compensation are deemed critical
accounting policies because of the valuation techniques used, and the
sensitivity of these financial statement amounts to the methods, as well as
the assumptions and estimates underlying these balances. Accounting for
these critical areas requires the most subjective and complex judgments
that could be subject to revision as new information becomes available.
There have not been any material changes in our critical accounting
policies since December 31, 2005, except for the adoption of SFAS No. 123R
"Accounting for Stock-Based Compensation" on January 1, 2006. Further
description of our critical accounting policies can be found in our Annual
Report on Form 10-K for the year ended December 31, 2005.
RESULTS OF OPERATIONS
Three months ended June 30, 2006 and 2005. Net income for the quarter ended
June 30, 2006, was $1.5 million, compared to net income of $803,000 for the
quarter ended June 30, 2005, representing an increase of $713,000, or
88.79%. Diluted earnings per share increased 85.29% to $0.63 during the
second quarter of 2006 from $0.34 in the same period of 2005. The Company's
annualized returns on average assets and average stockholders' equity for
the three-month period ended June 30, 2006 were 0.88% and 12.47%, compared
to 0.46% and 7.53%, respectively, for the same period in 2005, increases of
91.30% and 65.60%, respectively.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The principal contributing factor to our increase in net income in the
current year second quarter from the prior year was an increase in net
interest income resulting from a higher yield on average earning assets.
However, the increase in net interest income was partially offset by lower
noninterest income, specifically mortgage loans held for sale fee income.
Lower mortgage origination volume, resulting from higher interest rates,
led to a decline in mortgage loans held for sale fee income.
Six months ended June 30, 2006 and 2005. Net income for the six months
ended June 30, 2006 was $2.8 million, compared to net income of $1.6
million for the six-month period ended June 30, 2005, representing an
increase of $1.2 million, or 77.17%. Diluted earnings per share increased
76.11% to $1.18 during the six months ended June 30, 2006 from $0.67 in the
same period of 2005. The Company's annualized returns on average assets and
average stockholders' equity for the six-month period ended June 30, 2006
were 0.83% and 11.96%, compared to 0.47% and 7.61%, respectively, for the
same period in 2005, increases of 76.59% and 57.16%, respectively.
The principal contributing factor to our increase in net income from the
six months ended June 30, 2005 to the current year was an increase in net
interest income resulting from higher yields on average earning assets.
However, the increase in net interest income was partially offset by lower
noninterest income, specifically mortgage loans held for sale fee income.
Lower mortgage origination volume, resulting from higher interest rates,
led to a decline in mortgage loans held for sale fee income.
NET INTEREST INCOME
Fully tax equivalent (FTE) net interest income for the three-month period
ended June 30, 2006 was $6.8 million, an increase of $1.6 million or
30.75%, from $5.2 million for the three-month period ended June 30, 2005.
FTE interest income for the current year second quarter was $12.0 million,
an increase of $2.3 million, or 23.80%, from $9.7 million in the prior year
second quarter. This increase was primarily a result of an overall increase
in yields on earning assets. The overall yield on average earning assets
increased by 143 basis points to 7.52% in the second quarter of 2006
compared to 6.09% in the prior year second quarter. The 143 basis point
increase in yield resulted from increases in market interest rates.
Interest expense for the current year second quarter was $5.2 million, an
increase of $704,000, or 15.67%, from $4.5 million in the prior year second
quarter. This increase was primarily a result of an increase in the rate
paid on average interest-bearing liabilities resulting from the impact of
rising market interest rates on our time deposits, savings and money market
deposits and short-term borrowings. The rate paid on total average
interest-bearing liabilities increased 58 basis points to 3.83% during the
three month period ending June 30, 2006 compared to 3.25% during the same
period in 2005. Partially offsetting the increase in rate paid on average
interest-bearing liabilities was a decrease in those liabilities. Average
interest-bearing liabilities decreased $9.8 million or 1.78% to $543.9
million during the second quarter of 2006 compared to $553.7 million during
the prior year period.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FTE net interest income for the six-month period ended June 30, 2006 was
$13.4 million, an increase of $3.2 million or 31.34%, from $10.2 million
for the six-month period ended June 30, 2005.
FTE interest income for the six months ended June 30, 2006 was $23.4
million, an increase of $4.5 million, or 23.72%, from $18.9 million for the
six months ended June 30, 2005. This increase was primarily a result of an
overall increase in yields on earning assets. The overall yield on average
earning assets increased by 134 basis points to 7.37% for the period ending
June 30, 2006 compared to 6.03% for the prior year period. The 134 basis
point increase in yield resulted from increases in market interest rates.
In addition, average earning asset volume increased from the period ending
June 30, 2005 to the current period by $8.8 million, or 1.39%, primarily
due to an increase in taxable investment securities and loans.
Interest expense for the six-month period ended June 30, 2006 was $9.9
million, an increase of $1.3 million, or 14.70%, from $8.6 million in the
same period of the prior year. This increase was primarily a result of an
increase in the rate paid on average interest-bearing liabilities resulting
from the impact of rising market interest rates on our time deposits,
savings and money market deposits and short-term borrowings. The rate paid
on total average interest-bearing liabilities increased 50 basis points to
3.69% during the six-month period ending June 30, 2006 compared to 3.19%
during the same period in 2005.
Average Balance Sheets. The following table sets forth, for the periods and
as of the dates indicated, information regarding our average balances of
assets and liabilities as well as the dollar amounts of FTE interest income
from interest-earning assets and interest expense on interest-bearing
liabilities and the resultant yields or costs. Ratio, yield and rate
information are based on average daily balances where available; otherwise,
average monthly balances have been used. Nonaccrual loans are included in
the calculation of average balances for loans for the periods indicated.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AVERAGE BALANCE, YIELDS AND RATES
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------
2006 2005
----------------------------- -----------------------------
AVERAGE AVERAGE
AVERAGE INTEREST YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- -------
ASSETS
Federal funds sold.............................. $ 3,686 $ 90 4.94% $ 12,928 $ 181 2.82%
Investment securities - taxable................. 97,867 2,042 4.21 62,928 823 2.64
Investment securities - non-taxable (1)......... 599 21 7.12 1,728 60 6.96
Mortgage loans held for sale.................... 17,898 567 6.39 37,116 980 5.33
Loans, net of unearned discount and fees........ 520,685 20,645 8.00 517,201 16,841 6.57
-------- ------- -------- -------
Total earning assets......................... 640,735 23,365 7.35 631,901 18,885 6.03
-------- ------- -------- -------
Cash and due from banks - non-interest 20,542 22,112
bearing.........................................
Allowance for possible loan losses.............. (6,581) (7,257)
Premises and equipment, net..................... 18,495 19,683
Other assets.................................... 18,124 17,780
-------- --------
Total assets................................. $691,315 $684,219
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits-interest bearing:
Interest-bearing demand accounts................ $ 26,226 $ 49 0.38% $ 26,335 $ 56 0.43%
Savings and money market deposits............... 156,001 2,094 2.71 184,502 1,879 2.05
Time deposits................................... 249,706 5,103 4.12 230,818 4,349 3.80
-------- ------- -------- -------
Total interest-bearing deposits.............. 431,933 7,246 3.38 441,655 6,284 2.87
-------- ------- -------- -------
Short-term borrowings........................... 34,991 724 4.17 25,258 235 1.87
Long-term debt ................................. 75,910 1,951 5.18 79,307 2,130 5.42
-------- ------- -------- -------
Total interest-bearing liabilities .......... 542,834 9,921 3.69 546,220 8,649 3.19
-------- ------- -------- -------
Non-interest bearing deposits................... 94,309 88,775
Other liabilities .............................. 6,416 6,836
Stockholders' equity............................ 47,756 42,388
-------- --------
Total liabilities and stockholders' equity... $691,315 $684,219
======== ========
Net interest income/spread ..................... $13,444 3.68% $10,236 2.84%
======= ==== ======= ====
Net interest margin............................. 4.24% 3.27%
- ----------
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%. For
the quarters ending June 30, 2006 and 2005, the tax equivalency adjustment
amounted to $7,000 and $20,000 respectively.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Analysis of Changes in Net Interest Income Due to Changes in Interest Rates
and Volumes. The following table presents the dollar amount of changes in
interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between the increase or decrease related to changes in balances and changes
in interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes
attributable to:
- changes in rate, reflecting changes in rate multiplied by the
prior period volume; and
- changes in volume, reflecting changes in volume multiplied by the
current period rate.
CHANGES IN INTEREST INCOME AND
EXPENSE VOLUME AND RATE VARIANCES
SIX MONTHS ENDED JUNE 30,
2006 COMPARED TO 2005
-------------------------
CHANGE CHANGE
DUE TO DUE TO TOTAL
RATE VOLUME CHANGE
------ ------ ------
(DOLLARS IN THOUSANDS)
Federal funds sold and other short-term investments .. $ 136 $(227) $ (91)
Investment securities - taxable ...................... 489 730 1,219
Investment securities - non-taxable (1) .............. 1 (40) (39)
Mortgage loans held for sale ......................... 196 (609) (413)
Loans, net of unearned discount and fees ............. 3,666 138 3,804
------ ----- ------
Total interest income ............................. 4,488 (8) 4,480
------ ----- ------
Interest-bearing demand accounts ..................... (7) -- (7)
Savings and money market deposits .................... 598 (383) 215
Time deposits ........................................ 368 386 754
Short-term borrowings ................................ 288 201 489
Long-term debt ....................................... (92) (87) (179)
------ ----- ------
Total interest expense ............................ 1,155 117 1,272
------ ----- ------
Net interest income .................................. $3,333 $(125) $3,208
====== ===== ======
- ----------
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PROVISION FOR LOAN LOSSES
The provision for loan losses for the second quarter of 2006 was $590,000,
compared to $0 for the same period of 2005. For the six-months ended June
30, 2006 and 2005, the provision was $655,000 and $155,000, respectively.
The increase in the provision for loan losses recorded in the three- and
six-month periods ended June 30, 2006 compared to the same periods in the
prior year was the result of growth in the loan portfolio. The Company's
credit administration function performs monthly analyses on the loan
portfolio to assess and report on risk levels, delinquencies, an internal
ranking system and overall credit exposure. Management and the Board of
Directors reviews the allowance for loan losses monthly, considering such
factors as current and projected economic conditions, loan growth, the
composition of the loan portfolio, loan trends and classifications, and
other factors. We make provisions for loan losses in amounts that
management deems necessary to maintain the allowance for loan losses at an
appropriate level.
NON-INTEREST INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2006 2005 2006 2005
------ ------ ------ ------
(IN THOUSANDS)
Loans held for sale fee income... $1,192 $1,858 $2,328 $3,899
NSF charges and service fees..... 306 302 591 557
Other service charges............ 295 255 593 494
Other income..................... 346 254 659 526
------ ------ ------ ------
Total non-interest income..... $2,139 $2,669 $4,171 $5,476
====== ====== ====== ======
Non-interest income decreased $530,000, or 19.86%, to $2.1 million during
the three-month period ended June 30, 2006, from $2.7 million during the
three-month period ended June 30, 2005. Non-interest income for the
six-months ended June 30, 2006 was $4.2 million, a decrease of $1.3
million, or 23.84%, from $5.5 million for the six-months ended June 30,
2005. These decreases are attributable primarily to decreases in loans held
for sale fee income. Loans held for sale fee income decreased $666,000, or
35.85%, and $1.6 million, or 40.30%, for the three-month and six-month
periods ended June 30, 2006, respectively. We experienced a decline in our
mortgage loans held for sale fee income due to a decline in residential
mortgage origination and refinancing resulting from higher interest rates.
NON-INTEREST EXPENSE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2006 2005 2006 2005
------ ------ ------- -------
(IN THOUSANDS)
Salaries and employee benefits .. $3,581 $4,095 $ 7,617 $ 8,042
Occupancy ....................... 754 809 1,513 1,629
General and administrative ...... 1,619 1,690 3,270 3,284
------ ------ ------- -------
Total non-interest expense ... $5,954 $6,594 $12,400 $12,955
====== ====== ======= =======
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Non-interest expense decreased $640,000, or 9.71%, to $6.0 million during
the three-month period ended June 30, 2006 compared to $6.6 million in the
prior year period. For the six-month period ended June 30, 2006,
non-interest expense decreased $555,000, or 4.29% to $12.4 million compared
to $13.0 million in the prior year period. These decreases are attributable
primarily to a decrease in salaries and employee benefits expense which
decreased $514,000, or 12.56%, during the second quarter of 2006 and
$425,000, or 5.29%, during the six-month period ended June 30, 2006,
compared to the prior year periods. Salaries and employee benefits expense
decreased due to decreased volume-based incentive compensation in our
mortgage operations. In addition, we had 251 full-time equivalent employees
at June 30, 2006 compared to 275 at June 30, 2005. The decrease in
full-time equivalent employees is mainly due to a reduction in force in our
mortgage operation due to the decline in mortgage volume. For the three-
and six-month periods ended June 30, 2006, occupancy expenses decreased
$55,000, or 6.80%, and $116,000, or 7.13%, respectively. For the three- and
six-month periods ended June 30, 2006, general and administrative expenses
decreased $71,000, or 4.21%, and $14,000, or 0.43%, respectively.
FINANCIAL CONDITION
Total assets for the Company at June 30, 2006, were $675.2 million, a
decrease of $14.4 million, or 2.09%, compared to $689.6 million at December
31, 2005. Deposits and stockholders' equity at June 30, 2006, were $533.9
million and $49.4 million, respectively, compared with $529.3 million and
$46.3 million, respectively, at December 31, 2005, increases of $4.6
million, or 0.86%, and $3.2 million, or 6.87%, respectively.
Loans at June 30, 2006 totaled $522.7 million, reflecting an increase of
$19.5 million, or 3.87%, compared to December 31, 2005. The loan to deposit
ratio at June 30, 2006 was 97.89% compared to 95.05% at December 31, 2005.
Available-for-sale securities at June 30, 2006 totaled $89.2 million,
reflecting a decrease of $10.8 million or 10.79% compared to December 31,
2005.
Mortgage loans held for sale at June 30, 2006 totaled $16.9 million, an
increase of $3.0 million, or 21.55% compared to December 31, 2005. The
Company's principal funding source for mortgage loans held for sale is
short- and long-term advances from the Federal Home Loan Bank. Advance
availability with the Federal Home Loan Bank is determined quarterly and at
June 30, 2006, approximately $84,935,000 was available.
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:
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NON-PERFORMING ASSETS
AS OF
----------------------------------
JUNE 30, JUNE 30, DECEMBER 31,
2006 2005 2005
-------- -------- ------------
(Dollars in thousands)
COMMERCIAL AND ALL OTHER LOANS:
Past due 90 days or more $ 437 $ 545 $ 781
Nonaccrual 1,392 599 769
COMMERCIAL REAL ESTATE LOANS:
Past due 90 days or more -- -- 598
Nonaccrual -- -- --
CONSTRUCTION LOANS:
Past due 90 days or more -- 650 585
Nonaccrual -- -- 452
LEASE FINANCING:
Past due 90 days or more 29 -- 5
Nonaccrual 13 441 119
RESIDENTIAL REAL ESTATE LOANS:
Past due 90 days or more -- 330 --
Nonaccrual 828 1,135 1,016
CONSUMER LOANS:
Past due 90 days or more 17 69 49
Nonaccrual -- -- --
HOME EQUITY LOANS:
Past due 90 days or more 35 24 --
Nonaccrual -- 75 --
DEBT SECURITIES AND OTHER ASSETS (EXCLUDING OTHER
REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS)
Past due 90 days or more -- -- --
Nonaccrual -- -- --
------- ------- -------
Total non-performing loans 2,751 3,868 4,374
------- ------- -------
FORECLOSED ASSETS HELD FOR SALE 449 83 711
------- ------- -------
Total non-performing assets $ 3,200 $ 3,951 $ 5,085
======= ======= =======
Total nonperforming loans to total loans 0.53% 0.76% 0.87%
Total nonperforming loans to total assets 0.41% 0.56% 0.63%
Allowance for loan losses to nonperforming loans 244.85% 178.20% 153.27%
Nonperforming assets to loans and foreclosed
assets held for sale 0.61% 0.77% 1.01%
As of June 30, 2006, non-performing loans equaled 0.53% of total loans,
reflecting a decrease in non-performing loans from December 31, 2005. The
overall credit exposure in the Company's total loan portfolio continued to
improve. However, the level of loans charged-off increased slightly during
the first half of 2006. Consequently, the Company experienced an annualized
ratio of net charge-offs to average loans of 0.24% for the period ended
June 30, 2006 compared to 0.17% for the year ended December 31, 2005. We
closely monitor non-performing credit relationships and our philosophy has
been to value non-performing loans at their estimated collectible value and
to aggressively manage these situations. Generally, the Bank maintains its
allowance for loan losses in excess of its non-performing loans. As of June
30, 2006, our ratio of allowance for loan losses to non-performing loans
was 244.85%.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth information regarding changes in our
allowance for loan and valuation losses for the periods indicated.
SUMMARY OF LOAN LOSS EXPERIENCE
AND RELATED INFORMATION
AS OF AND FOR THE
----------------------------------
SIX MONTHS ENDED
JUNE 30, YEAR ENDED
------------------- DECEMBER 31,
2006 2005 2005
-------- -------- ------------
(Dollars in thousands)
BALANCE AT BEGINNING OF PERIOD $ 6,704 $ 7,333 $ 7,333
LOANS CHARGED-OFF
Commercial loans 299 638 949
Commercial real estate loans -- -- --
Construction loans 100 -- --
Lease financing 98 21 86
Residential real estate loans 196 -- --
Consumer loans 38 38 77
Home equity loans 8 -- 16
-------- -------- --------
Total loans charged-off 739 698 1,128
-------- -------- --------
RECOVERIES:
Commercial loans 67 11 154
Commercial real estate loans -- -- 3
Construction loans -- -- --
Lease financing 30 67 76
Residential real estate loans -- -- 1
Consumer loans 8 24 35
Home equity loans -- -- --
-------- -------- --------
Total recoveries 105 102 269
-------- -------- --------
NET LOANS CHARGED-OFF 634 595 859
PROVISION FOR LOAN LOSSES 665 155 230
-------- -------- --------
BALANCE AT END OF PERIOD $ 6,735 $ 6,893 $ 6,704
======== ======== ========
LOANS OUTSTANDING:
Average $520,685 $517,201 $516,643
End of period 522,657 512,136 503,143
RATIO OF ALLOWANCE FOR LOAN LOSSES TO
LOANS OUTSTANDING:
Average 1.29% 1.33% 1.30%
End of period 1.29% 1.35% 1.33%
RATIO OF ANNUALIZED NET CHARGE-OFFS TO
Average loans 0.24% 0.23% 0.17%
End of period loans 0.24% 0.23% 0.17%
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 71.57% and
74.26% of our total deposits at June 30, 2006, and December 31, 2005,
respectively. Generally, the Company's funding strategy is to utilize
Federal Home Loan Bank of Topeka borrowings to fund originations of
mortgage loans held for sale and fund balances generated by other lines of
business with deposits. In addition, the Company uses other forms of
short-term borrowings for cash management and liquidity management purposes
on a limited basis. These forms of borrowings include federal funds
purchased and revolving lines of credit. The Company's Asset-Liability
Management Committee utilizes a variety of liquidity monitoring tools,
including an asset/liability modeling service, to analyze and manage the
Company's liquidity.
Management has established internal guidelines and analytical tools to
measure liquid assets, alternative sources of liquidity, as well as
relevant ratios concerning asset levels and purchased funds.
At June 30, 2006, our total stockholders' equity was $49.4 million and our
equity to asset ratio was 7.32%. At June 30, 3006, our Tier 1 capital ratio
was 9.58% compared to 8.86% at December 31, 2005, while our total
risk-based capital ratio was 12.19% compared to 12.04% at December 31,
2005. As of June 30, 2006, we had capital in excess of the requirements for
a "well-capitalized" institution.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a continuing part of our financial strategy, we attempt to manage the
impact of fluctuations in market interest rates on our net interest income.
This effort entails providing a reasonable balance between interest rate
risk, credit risk, liquidity risk and maintenance of yield. Our funds
management policy is established by our Bank Board of Directors and
monitored by our Asset/Liability Management Committee. Our funds management
policy sets standards within which we are expected to operate. These
standards include guidelines for exposure to interest rate fluctuations,
liquidity, loan limits as a percentage of funding sources, exposure to
correspondent banks and brokers, and reliance on non-core deposits. Our
funds management policy also establishes the reporting requirements to our
Bank Board of Directors. Our investment policy complements our funds
management policy by establishing criteria by which we may purchase
securities. These criteria include approved types of securities, brokerage
sources, terms of investment, quality standards, and diversification.
We use an asset/liability modeling service to analyze the Company's current
sensitivity to instantaneous and permanent changes in interest rates. The
system simulates the Company's asset and liability base and projects future
net interest income results under several interest rate assumptions. This
allows management to view how changes in interest rates will affect the
spread between the yield received on assets and the cost of deposits and
borrowed funds.
The asset/liability modeling service is also used to analyze the net
economic value of equity at risk under instantaneous shifts in interest
rates. The "net economic value of equity at risk" is defined as the market
value of assets less the market value of liabilities plus/minus the market
value of any off-balance sheet positions. By effectively looking at the
present value of all future cash flows on or off the balance sheet, the net
economic value of equity modeling takes a longer-term view of interest rate
risk.
We strive to maintain a position such that current changes in interest
rates will not affect net interest income or the economic value of equity
by more than 5%, per 50 basis points. The following table sets forth the
estimated percentage change in the Bank of Blue Valley's net interest
income over the next twelve month period and net economic value of equity
at risk at June 30, 2006 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 12.58% 2.23%
Base Rate Scenario -- --
200 basis point decline (12.21%) (6.62%)
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The above table indicates that, at June 30, 2006, in the event of a sudden
and sustained increase in prevailing market rates, our net interest income
would be expected to increase as our assets would be expected to reprice
quicker than our liabilities, while a decrease in rates would indicate just
the opposite. Generally, in the decreasing rate scenarios, not only would
adjustable rate assets (loans) reprice to lower rates faster than our
liabilities, but our liabilities - long-term Federal Home Loan Bank of
Topeka (FHLB) advances and existing time deposits - would not decrease in
rate as much as market rates. In addition, fixed rate loans might
experience an increase in prepayments, further decreasing yields on earning
assets and causing net interest income to decrease. Another consideration
with a rising interest rate scenario is the impact on mortgage loan
refinancing, which would likely decline, leading to lower loans held for
sale fee income, though the impact is difficult to quantify or project.
The above table also indicates that, at June 30, 2006, 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.
24
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Item 307 of Regulation S-K promulgated under the
Securities Act of 1933, as amended, and within 90 days of the date of this
Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief
Financial Officer of the Company (the "Certifying Officers") have conducted
evaluations of the Company's disclosure controls and procedures. As defined
under Sections 13a-14(c) and 15d-14(c) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the term "disclosure controls and
procedures" means controls and other procedures of an issuer that are
designed to ensure that information required to be disclosed by the issuer
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
the Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by an issuer in the reports that
it files or submits under the Exchange Act is accumulated and communicated
to the issuer's management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding
required disclosure. The Certifying Officers have reviewed the Company's
disclosure controls and procedures and have concluded that those disclosure
controls and procedures are effective as of the date of this Quarterly
Report on Form 10-Q. In compliance with Section 302 of the Sarbanes-Oxley
Act of 2002, (18 U.S.C. 1350), each of the Certifying Officers executed an
Officer's Certification included in this Quarterly Report on 10-Q.
As of the date of this Quarterly Report on Form 10-Q, there have not been
any other significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
25
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 1A. RISK FACTORS
No changes
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 10, 2006, the Company held its Annual Meeting of Stockholders. There
were 2,387,969 shares outstanding and entitled to vote at the Annual
Meeting, of which 1,918,407 shares were represented in person or by proxy.
The following items were submitted at the Annual Meeting for consideration
by the stockholders:
1. Election of Directors
Robert D. Regnier was elected at the Annual Meeting to serve a three
year term or until his successor is duly elected and qualified. The
voting results for both were as follows:
Shares Voted For: 1,918,407
Shares Voted Against 0
Shares Abstained 0
Thomas A. McDonnell was elected at the Annual Meeting to serve a three
year term or until his successor is duly elected and qualified. The
voting results for both were as follows:
Shares Voted For: 1,912,816
Shares Voted Against 175
Shares Abstained 5,416
The directors of the Company whose terms of office extended beyond the
date of the Annual Meeting include:
Don H. Alexander
Michael J. Brown
Wayne A. Henry, Jr.
Robert D. Taylor
26
PART II: OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS
EXHIBITS
11. Computation of Earnings Per Share. Please see p. 9.
15. Letter regarding Unaudited Interim Financial Information
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLUE VALLEY BAN CORP
Date: August 11, 2006 By: /s/ Robert D. Regnier
------------------------------------
Robert D. Regnier, President and
Chief Executive Officer and Director
(Principal Executive Officer)
Date: August 11, 2006 By: /s/ Mark A. Fortino
------------------------------------
Mark A. Fortino, Chief Financial
Officer (Principal Financial [and
Accounting] Officer)
28