UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 66225-6128
OVERLAND PARK, KANSAS
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (913) 338-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
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 [ ]
Indicate by check mark whether the registrant is a shell company as defined
in Rule 12b-2 of the Securities Act Yes [ ] No [ ]
As of September 30, 2006 the registrant had 2,409,069 shares of Common
Stock ($1.00 par value) outstanding.
BLUE VALLEY BAN CORP
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm.............................................3
Condensed Consolidated Balance Sheets -
September 30, 2006 (unaudited) and December 31, 2005..............................................4
Condensed Consolidated Statements of Income (unaudited) -
three and nine months ended September 30, 2006 and 2005...........................................6
Condensed Consolidated Statements of Stockholders' Equity (unaudited) -
nine months ended September 30, 2006 and 2005 ....................................................7
Condensed Consolidated Statements of Cash Flows (unaudited) -
nine months ended September 30, 2006 and 2005.....................................................8
Notes to Condensed Consolidated Financial Statements (unaudited) -
nine months ended September 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.............................................................................26
ITEM 6. EXHIBITS......................................................................................26
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 September 30, 2006, and the related condensed consolidated
statements of income for the three-month and nine-month periods ended September
30, 2006 and 2005 and the condensed consolidated statements of stockholders'
equity and cash flows for the nine-month periods ended September 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
November 2, 2006
BLUE VALLEY BAN CORP
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
(dollars in thousands, except share data)
ASSETS
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------------------------
(Unaudited)
Cash and due from banks $ 14,565 $ 16,493
Interest-bearing deposits in other financial institutions 380 12,163
Federal funds sold 394 11,401
-------- --------
Cash and cash equivalents 15,339 40,057
Available-for-sale securities 86,162 99,987
Mortgage loans held for sale 21,791 13,906
Loans, net of allowance for loan losses of $6,693
and $6,704 in 2006 and 2005, respectively 527,864 496,439
Premises and equipment, net 18,037 18,593
Foreclosed assets held for sale, net 682 711
Interest receivable 4,324 3,372
Deferred income taxes 2,366 2,564
Prepaid expenses and other assets 1,279 4,647
Federal Home Loan Bank stock, Federal Reserve Bank stock,
and other securities 6,382 8,490
Core deposit intangible asset, at amortized cost 709 823
-------- --------
Total assets $684,935 $689,589
======== ========
</Table>
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
SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2006 2005
--------------------------
(Unaudited)
LIABILITIES
Deposits
Demand $ 95,832 $ 94,452
Savings, NOW and money market 157,279 185,234
Time 276,901 249,655
--------- ---------
Total deposits 530,012 529,341
Other interest-bearing liabilities 30,750 26,288
Long-term debt 67,293 78,106
Interest payable and other liabilities 4,685 9,599
--------- ---------
Total liabilities 632,740 643,334
--------- ---------
STOCKHOLDERS' EQUITY
Capital stock
Common stock, par value $1 per share;
authorized 15,000,000 shares; issued and outstanding
2006 -- 2,409,069 shares; 2005 -- 2,382,046 shares 2,409 2,382
Additional paid-in capital 9,452 9,212
Retained earnings 40,606 35,782
Unearned compensation -- (648)
Accumulated other comprehensive loss, net of income tax credits
of $(181) in 2006 and $(315) in 2005 (272) (473)
--------- ---------
Total stockholders' equity 52,195 46,255
--------- ---------
Total liabilities and stockholders' equity $ 684,935 $ 689,589
========= =========
</Table>
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 NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(dollars in thousands, except share data)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2006 2005
---------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
INTEREST INCOME
Interest and fees on loans $ 11,621 $ 9,804 $ 32,832 $ 27,625
Federal funds sold and other short-term
investments 66 110 104 291
Available-for-sale securities 960 618 3,069 1,481
------------- ------------- ------------- -------------
Total interest income 12,647 10,532 36,005 29,397
------------- ------------- ------------- -------------
INTEREST EXPENSE
Interest-bearing demand deposits 22 18 71 74
Savings and money market deposit accounts 1,180 1,000 3,274 2,879
Other time deposits 2,928 2,335 8,031 6,684
Federal funds purchased and other
interest-bearing liabilities 288 143 718 360
Short-term debt 21 -- 315 17
Long-term debt, net 942 1,178 2,893 3,309
------------- ------------- ------------- -------------
Total interest expense 5,381 4,674 15,302 13,323
------------- ------------- ------------- -------------
NET INTEREST INCOME 7,266 5,858 20,703 16,074
PROVISION FOR LOAN LOSSES 540 -- 1,205 155
------------- ------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,726 5,858 19,498 15,919
------------- ------------- -------------- -------------
NONINTEREST INCOME
Loans held for sale fee income 1,341 2,179 3,669 6,078
Service fees 664 558 1,848 1,609
Other income 359 591 1,018 1,117
------------- ------------- ------------- -------------
Total noninterest income 2,364 3,328 6,535 8,804
------------- ------------- ------------- -------------
NONINTEREST EXPENSE
Salaries and employee benefits 3,546 4,201 11,165 12,243
Net occupancy expense 770 838 2,281 2,467
Other operating expense 1,564 1,589 4,834 4,873
------------- ------------- ------------- -------------
Total noninterest expense 5,880 6,628 18,280 19,583
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 3,210 2,558 7,753 5,140
PROVISION FOR INCOME TAXES 1,219 964 2,929 1,946
------------- ------------- ------------- -------------
NET INCOME $ 1,991 $ 1,594 $ 4,824 $ 3,194
============= ============= ============= =============
BASIC EARNINGS PER SHARE $ 0.84 $ 0.68 $ 2.04 $ 1.36
============= ============= ============= =============
DILUTED EARNINGS PER SHARE $ 0.83 $ 0.67 $ 2.01 $ 1.34
============= ============= ============= =============
</Table>
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
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(dollars in thousands, except share data)
<Table>
<Caption>
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 34,210 shares of
common stock 34 470 -- -- -- 504
Net income $ 3,194 -- -- 3,194 -- -- 3,194
Restricted stock earned, net of
forfeitures -- -- -- -- 218 -- 218
Change in unrealized
depreciation, net of income
taxes (credit) of $(20) (176) -- -- -- -- (176) (176)
---------- ---------- ---------- ---------- ---------- ----------- ----------
BALANCE, SEPTEMBER 30, 2005 $ 3,018 $ 2,361 $ 8,569 $ 35,003 $ (376) $ (433) $ 45,124
========== ========== ========== ========== ========== =========== ==========
BALANCE, DECEMBER 31, 2005 $ 2,382 $ 9,212 $ 35,782 $ (648) $ (473) $ 46,255
---------- ---------- ---------- ---------- ----------- ----------
Issuance of 27,023 shares of
common stock 27 516 -- -- -- 543
Net income $ 4,824 -- -- 4,824 -- -- 4,824
Restricted stock earned, net of
forfeitures -- -- 372 -- -- -- 372
Reclassification of unearned
compensation in accordance
with adoption of SFAS No. 123R -- -- (648) -- 648 -- --
Change in derivative financial
instrument, net of income
taxes of $48 72 -- -- -- -- 72 72
Change in unrealized
depreciation on
available-for-sale
securities, net of income
taxes of $86 129 -- -- -- -- 129 129
---------- ---------- ---------- ---------- ---------- ----------- ----------
BALANCE, SEPTEMBER 30, 2006 $ 5,025 $ 2,409 $ 9,452 $ 40,606 $ -- $ (272) $ 52,195
========== ========== ========== ========== ========== =========== ==========
</Table>
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
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(dollars in thousands, except share data)
<Table>
<Caption>
SEPTEMBER 30, SEPTEMBER 30,
2006 2005
----------------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,824 $ 3,194
Adjustments to reconcile net income to net cash flow
from operating activities:
Depreciation and amortization 1,093 1,431
Amortization (accretion) of premiums and discounts on
securities (72) (27)
Provision for loan losses 1,205 155
Deferred income taxes 111 (38)
Stock dividends on FHLB securities (210) --
Net loss (gain) on sale of foreclosed assets (29) 34
Net loss (gain) on sale of premises and equipment 6 (344)
Restricted stock earned and forfeited 372 218
Originations of loans held for sale (246,932) (557,755)
Proceeds from the sale of loans held for sale 239,047 568,803
Changes in
Interest receivable (952) (577)
Prepaid expenses and other assets 3,478 (1,101)
Interest payable and other liabilities (4,367) 2,279
--------- ---------
Net cash provided by (used in) operating activities (2,426) 16,272
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net originations of loans (33,410) (14,825)
Proceeds from sales of loan participations -- 6,400
Purchase of premises and equipment (418) (488)
Proceeds from the sale of premises and equipment -- 993
Proceeds from the sale of foreclosed assets, net of expenses 838 2,976
Proceeds from maturities of available-for-sale securities 20,110 16,245
Purchases of available-for-sale securities (5,998) (26,494)
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 -- (428)
--------- ---------
Net cash used in investing activities (16,559) (15,621)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in demand deposits, money market,
NOW and savings accounts (26,575) (5,253)
Net increase in time deposits 27,246 28,300
Repayments of long-term debt (10,813) (17,001)
Proceeds from long-term debt -- 21,244
Net proceeds (payments) from other financing activities (53) 504
Net increase (decrease) in other borrowings 4,462 1,162
--------- ---------
Net cash provided by (used in) financing activities (5,733) 28,956
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (24,718) 29,607
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 40,057 22,494
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,339 $ 52,101
========= =========
</Table>
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
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(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 September 30, 2006, and the condensed consolidated results of its
operations, changes in stockholders' equity and cash flows for the
periods ended September 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
condensed 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 nine-months
ended September 30, 2006 and 2005 is as follows:
9
BLUE VALLEY BAN CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
<Table>
<Caption>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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 $ 1,991 $ 1,594 $ 4,824 $ 3,194
========== ========== ========== ==========
Average common shares outstanding 2,372,489 2,356,062 2,361,349 2,342,631
Average common share stock options outstanding 37,904 38,871 42,057 40,452
---------- ---------- ---------- ----------
Average diluted common shares 2,410,393 2,394,933 2,403,406 2,383,083
========== ========== ========== ==========
Basic earnings per share $ 0.84 $ 0.68 $ 2.04 $ 1.36
========== ========== ========== ==========
Diluted earnings per share $ 0.83 $ 0.67 $ 2.01 $ 1.34
========== ========== ========== ==========
</Table>
NOTE 4: 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 2007. As of September 30, 2006 and December 31, 2005,
the Company had no outstanding balance on this line of credit.
NOTE 5: LONG-TERM DEBT
Long-term debt at September 30, 2006 and December 31, 2005, consisted
of the following components:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
(Unaudited)
(in thousands)
Note Payable -- Blue Valley Ban Corp (A) $ 3,531 $ 3,981
Note Payable -- Blue Valley Building Corp. (B) 6,674 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 $67,293 $78,106
======= =======
</Table>
10
BLUE VALLEY BAN CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(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 6).
(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
September 30, 2006, approximately $82,702,000 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 September 30, 2006 are as
follows:
<Table>
<Caption>
(in thousands)
October 1 to December 31, 2006 $ 274
2007 1,113
2008 11,140
2009 1,169
2010 1,199
Thereafter 52,398
---------------
$ 67,293
===============
</Table>
11
BLUE VALLEY BAN CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
NOTE 6: 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 5). 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 September
30, 2006. A $72,000 unrealized gain has been recognized as a component
of other comprehensive loss.
NOTE 7: SUBSEQUENT EVENT
On November 2nd, 2006 the Company announced the signing of a definitive
Agreement and Plan of Merger for the acquisition of Unison Bancorp, Inc.
("Unison"), the holding company for Western National Bank of Lenexa,
Kansas. Subsequent to the acquisition, the Company intends to merge
Western National Bank with and into the Bank of Blue Valley. This
transaction continues Blue Valley's expansion in Johnson County and
represents its first presence in Lenexa.
Under the terms of the merger agreement, shareholders of Unison will
receive aggregate consideration of approximately $10.2 million in cash.
The transaction is subject to the satisfaction of certain conditions,
including Unison stockholder and regulatory approval, and is expected to
close during the first quarter of 2007. Western National Bank, with
assets of approximately $40 million, is located at 95th and Lackman Road
in Lenexa, Kansas.
The Company expects to fund the acquisition through excess liquidity
including short-term borrowing. In addition, the Company does not
anticipate the acquisition will change the bank's capital risk-rating.
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 September 30, 2006 and 2005. Net income for the
quarter ended September 30, 2006, was $2.0 million, compared to net
income of $1.6 million for the quarter ended September 30, 2005,
representing an increase of $397,000, or 24.90%. Diluted earnings per
share increased 31.74% to $0.83 during the third quarter of 2006 from
$0.63 in the same period of 2005. The Company's annualized returns on
average assets and average stockholders' equity for the three-month
period ended September 30, 2006 were 1.16% and 15.43%, compared to 0.90%
and 14.34%, respectively, for the same period in 2005, increases of
28.88% and 7.60%, 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 third 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.
Nine months ended September 30, 2006 and 2005. Net income for the nine
months ended September 30, 2006 was $4.8 million, compared to net income
of $3.2 million for the nine-month period ended September 30, 2005,
representing an increase of $1.6 million, or 51.03%. Diluted earnings
per share increased 50.00% to $2.01 during the nine months ended
September 30, 2006 from $1.34 in the same period of 2005. The Company's
annualized returns on average assets and average stockholders' equity
for the nine-month period ended September 30, 2006 were 0.94% and
13.17%, compared to 0.62% and 9.92%, respectively, for the same period
in 2005, increases of 51.61% and 32.76%, respectively.
The principal contributing factor to our increase in net income from the
nine months ended September 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 September 30, 2006 was $7.3 million, an increase of $1.4
million or 23.95%, from $5.9 million for the three-month period ended
September 30, 2005.
FTE interest income for the current year third quarter was $12.7
million, an increase of $2.1 million, or 20.05%, from $10.5 million in
the prior year third quarter. This increase was primarily a result of an
overall increase in yields on earning assets. The overall yield on
average earning assets increased by 149 basis points to 7.88% in the
third quarter of 2006 compared to 6.39% in the prior year third quarter.
The 149 basis point increase in yield resulted from increases in market
interest rates. Partially offsetting the increase in yield on average
earning assets was a decrease in those assets. Average earning assets
decreased $17.1 million or 2.62% to $636.7 million during the third
quarter of 2006 compared to $653.8 million during the prior year period
primarily due to a decrease in mortgage loans held for sale due to lower
origination volume.
Interest expense for the current year third quarter was $5.4 million, an
increase of $707,000, or 15.12%, from $4.7 million in the prior year
third quarter. This increase was primarily a result of an increase in
the rate paid on average interest-bearing liabilities resulting from 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 68 basis points to 4.02%
during the three month period ending September 30, 2006 compared to
3.34% 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 $24.4
million or 4.41% to $530.8 million during the third quarter of 2006
compared to $555.3 million
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
during the prior year period. More specifically, savings, NOW and
money market account average balances declined from $178.2 million
during the third quarter of 2005 to $144.7 million during the current
year third quarter, a decline of $33.5 million or 18.78%, primarily
due to strong market competition in those products.
FTE net interest income for the nine-month period ended September 30,
2006 was $20.7 million, an increase of $4.6 million or 28.65%, from
$16.1 million for the nine-month period ended September 30, 2005.
FTE interest income for the nine months ended September 30, 2006 was
$36.0 million, an increase of $6.6 million, or 22.40%, from $29.4
million for the nine months ended September 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 138 basis
points to 7.53% for the period ending September 30, 2006 compared to
6.15% for the prior year period. The 138 basis point increase in yield
resulted from increases in market interest rates. In addition, while
average earning asset volume increased only slightly from the period
ending September 30, 2005 to the current period, the change in mix of
earning assets was beneficial as increases in loans and investment
securities were offset by decreases in federal funds sold and mortgage
loans held for sale.
Interest expense for the nine-month period ended September 30, 2006 was
$15.3 million, an increase of $2.0 million, or 14.85%, from $13.3
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 56 basis points to 3.80% during
the nine-month period ending September 30, 2006 compared to 3.24% 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 BALANCES, YIELDS AND RATES
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------
2006 2005
-------------------------------- ----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- ---------- ------- ---------- ---------- -------
ASSETS
Federal funds sold................................. $ 4,172 $ 156 5.01% $ 12,159 $ 291 3.19%
Investment securities -- taxable................... 94,236 2,996 4.25 67,469 1,430 2.83
Investment securities -- non-taxable (1)........... 586 31 7.08 1,489 77 6.95
Mortgage loans held for sale....................... 17,110 817 6.39 39,791 1,577 5.30
Loans, net of unearned discount and fees........... 523,373 32,015 8.18 518,456 26,048 6.72
--------- --------- ---------- ---------
Total earning assets............................. 639,477 36,015 7.53 639,364 29,423 6.15
--------- --------- ---------- ---------
Cash and due from banks -- non-interest bearing.... 19,348 21,480
Allowance for possible loan losses................. (6,573) (7,122)
Premises and equipment, net........................ 18,388 19,493
Other assets....................................... 16,979 17,750
--------- ----------
Total assets..................................... $ 687,619 $ 690,965
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits-interest bearing:
Interest-bearing demand accounts................... $ 25,185 $ 71 0.38% $ 25,472 $ 74 0.39%
Savings and money market deposits.................. 152,193 3,274 2.88 182,695 2,879 2.11
Time deposits...................................... 255,842 8,031 4.20 234,450 6,684 3.81
--------- --------- ---------- ---------
Total interest-bearing deposits.................. 433,220 11,376 3.51 442,617 9,637 2.91
--------- --------- ---------- ---------
Short-term borrowings.............................. 32,695 1,033 4.22 24,636 377 2.05
Long-term debt .................................... 72,872 2,893 5.31 82,060 3,309 5.39
--------- --------- ---------- ---------
Total interest-bearing liabilities .............. 538,787 15,302 3.80 549,313 13,323 3.24
--------- --------- ---------- ---------
Non-interest bearing deposits...................... 94,004 91,104
Other liabilities ................................. 5,858 7,492
Stockholders' equity............................... 48,970 43,056
--------- ----------
Total liabilities and stockholders'
equity............................................. $ 687,619 $ 690,965
========= ==========
Net interest income/spread ........................ $ 20,713 3.73% $ 16,100 2.91%
========= ==== ========= ====
Net interest margin................................ 4.33% 3.37%
</Table>
- ------------------
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%. For
the quarters ending September 30, 2006 and 2005, the tax equivalency adjustment
amounted to $10,000 and $26,000 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
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 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............... $ 165 $ (300) $ (135)
Investment securities -- taxable.................................. 715 851 1,566
Investment securities -- non-taxable (1).......................... 2 (48) (46)
Mortgage loans held for sale...................................... 324 (1,084) (760)
Loans, net of unearned discount and fees ......................... 5,666 301 5,967
---------- --------- --------
Total interest income.................................. 6,872 (280) 6,592
---------- --------- --------
Interest-bearing demand accounts.................................. (2) (1) (3)
Savings and money market deposits................................. 1,051 (656) 395
Time deposits..................................................... 675 672 1,347
Short-term borrowings............................................. 402 254 656
Long-term debt.................................................... (51) (365) (416)
---------- --------- --------
Total interest expense................................. 2,075 (96) 1,979
---------- --------- --------
Net interest income............................................... $ 4,797 $ (184) $ 4,613
========== ========= =========
</Table>
- ---------------
(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 third quarter of 2006 was
$540,000, compared to $0 for the same period of 2005. For the
nine-months ended September 30, 2006 and 2005, the provision was $1.2
million and $155,000, respectively. The increase in the provision for
loan losses recorded in the three- and nine-month periods ended
September 30, 2006 compared to the same periods in the prior year was
the result of a couple of large credits which management is aggressively
pursuing collection on and 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
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
2006 2005 2006 2005
--------- ---------- --------- ---------
(IN THOUSANDS)
Loans held for sale fee income................... $ 1,341 $ 2,179 $ 3,669 $ 6,078
NSF charges and service fees..................... 319 281 910 839
Other service charges............................ 345 277 938 770
Other income .................................... 359 591 1,018 1,117
--------- ---------- -------- --------
Total non-interest income.................. $ 2,364 $ 3,328 $ 6,535 $ 8,804
========= ========== ======== ========
</Table>
Non-interest income decreased $964,000, or 28.97%, to $2.4 million
during the three-month period ended September 30, 2006, from $3.3
million during the three-month period ended September 30, 2005.
Non-interest income for the nine-months ended September 30, 2006 was
$6.5 million, a decrease of $2.3 million, or 25.78%, from $8.8 million
for the nine-months ended September 30, 2005. These decreases are
attributable primarily to decreases in loans held for sale fee income.
Loans held for sale fee income decreased $838,000, or 38.46%, and $2.4
million, or 39.64%, for the three-month and nine-month periods ended
September 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
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
2006 2005 2006 2005
---------- ---------- --------- ---------
(IN THOUSANDS)
Salaries and employee benefits............ $ 3,546 $ 4,201 $ 11,165 $ 12,243
Occupancy................................. 770 838 2,281 2,467
General and administrative ............... 1,564 1,589 4,834 4,873
---------- --------- --------- ---------
Total non-interest expense.......... $ 5,880 $ 6,628 $ 18,280 $ 19,583
========== ========= ========= =========
</Table>
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Non-interest expense decreased $748,000, or 11.29%, to $5.9 million
during the three-month period ended September 30, 2006 compared to $6.6
million in the prior year period. For the nine-month period ended
September 30, 2006, non-interest expense decreased $1.3 million, or
6.66% to $18.3 million compared to $19.6 million in the prior year
period. These decreases are attributable primarily to a decrease in
salaries and employee benefits expense which decreased $655,000, or
15.60%, during the third quarter of 2006 and $1.1 million, or 8.81%,
during the nine-month period ended September 30, 2006, compared to the
prior year periods. Salaries and employee benefits expense decreased due
to lower compensation costs in our mortgage division. We had 237
full-time equivalent employees at September 30, 2006 compared to 264 at
September 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 nine-month periods ended
September 30, 2006, occupancy expenses decreased $68,000, or 8.12%, and
$186,000, or 7.54%, respectively. For the three- and nine-month periods
ended September 30, 2006, general and administrative expenses decreased
$25,000, or 1.58%, and $39,000, or 0.81%, respectively.
FINANCIAL CONDITION
Total assets for the Company at September 30, 2006, were $684.9 million,
a decrease of $4.7 million, or 0.68%, compared to $689.6 million at
December 31, 2005. Deposits and stockholders' equity at September 30,
2006, were $530.0 million and $52.2 million, respectively, compared with
$529.3 million and $46.3 million, respectively, at December 31, 2005,
increases of $671,000, or 0.12%, and $5.9 million, or 12.84%,
respectively.
Loans at September 30, 2006 totaled $534.6 million, reflecting an
increase of $31.4 million, or 6.24%, compared to December 31, 2005 with
the majority of the loan growth occurring towards the end of the
quarter. The loan to deposit ratio at September 30, 2006 was 100.85%
compared to 95.05% at December 31, 2005.
Available-for-sale securities at September 30, 2006 totaled $86.2
million, reflecting a decrease of $13.8 million or 13.83% compared to
December 31, 2005 with more securities maturing during the third
quarter, resulting in a higher average balance for the nine-month period
ending September 30, 2006.
Mortgage loans held for sale at September 30, 2006 totaled $21.8
million, an increase of $7.9 million, or 56.70% compared to December 31,
2005. Mortgage loans held for sale balance are seasonally lower during
the winter months which accounts for this increase. 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 September
30, 2006, approximately $82,702,000 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
<Table>
<Caption>
AS OF
--------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
2006 2005 2005
--------------------------------------------------
(Dollars in thousands)
COMMERCIAL AND ALL OTHER LOANS:
Past due 90 days or more $ 609 $ 2,513 $ 781
Nonaccrual 873 760 769
COMMERCIAL REAL ESTATE LOANS:
Past due 90 days or more 9,155 460 598
Nonaccrual -- -- --
CONSTRUCTION LOANS:
Past due 90 days or more 487 309 585
Nonaccrual 136 325 452
LEASE FINANCING:
Past due 90 days or more 104 -- 5
Nonaccrual 1 145 119
RESIDENTIAL REAL ESTATE LOANS:
Past due 90 days or more -- 80 --
Nonaccrual 554 902 1,016
CONSUMER LOANS:
Past due 90 days or more 12 66 49
Nonaccrual -- -- --
HOME EQUITY LOANS:
Past due 90 days or more 35 -- --
Nonaccrual -- -- --
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 11,966 5,560 4,374
------------- ---------- ----------
FORECLOSED ASSETS HELD FOR SALE 682 723 711
------------- ---------- ----------
Total non-performing assets $ 12,648 $ 6,282 $ 5,085
============= ========== ==========
Total nonperforming loans to total loans 2.24% 1.08% 0.87%
Total nonperforming loans to total assets 1.75% 0.79% 0.63%
Allowance for loan losses to nonperforming loans 55.94% 124.22% 153.27%
Nonperforming assets to loans and foreclosed
assets held for sale 2.36% 1.22% 1.01%
</Table>
As of September 30, 2006, non-performing loans equaled 2.24% of total
loans, reflecting an increase in non-performing loans from December 31,
2005. The overall credit exposure in the Company's total loan portfolio
worsened during the third quarter of 2006 as two large commercial real
estate loan relationships became 90 days or more past due. 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. We expect one of these past due
commercial real estate relationships totaling approximately $5.5 million
to be made current during the fourth quarter of 2006.
The level of loans charged-off increased during the first three quarters
of 2006. Consequently, the Company experienced an annualized ratio of
net charge-offs to average loans of 0.31% for the period ended September
30, 2006. The 0.31% ratio is comparable with historical charge off
ratios, however it is higher than the historically low ratio of 0.17%
achieved for the year ended December 31, 2005.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Generally, the Bank maintains its allowance for loan losses in excess of
its non-performing loans. However, due to the factors noted above, as of
September 30, 2006, our ratio of allowance for loan losses to
non-performing loans was 55.94%.
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
<Table>
<Caption>
AS OF AND FOR THE
---------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 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 850 638 949
Commercial real estate loans -- -- --
Construction loans 100 -- --
Lease financing 105 66 86
Residential real estate loans 263 -- --
Consumer loans 53 56 77
Home equity loans 8 16 16
------------ ------------ ------------
Total loans charged-off 1,379 776 1,128
------------ ------------ ------------
RECOVERIES:
Commercial loans 78 92 154
Commercial real estate loans -- -- 3
Construction loans -- -- --
Lease financing 32 72 76
Residential real estate loans 44 -- 1
Consumer loans 9 30 35
Home equity loans -- -- --
------------ ------------ ------------
Total recoveries 163 194 269
------------ ------------ ------------
NET LOANS CHARGED-OFF 1,216 582 859
PROVISION FOR LOAN LOSSES 1,205 155 230
------------ ------------ ------------
BALANCE AT END OF PERIOD $ 6,693 $ 6,906 $ 6,704
============ ============ ============
LOANS OUTSTANDING:
Average $ 523,373 $ 518,456 $ 516,643
End of period 534,557 513,924 503,143
RATIO OF ALLOWANCE FOR LOAN LOSSES TO
LOANS OUTSTANDING:
Average 1.28% 1.33% 1.30%
End of period 1.25% 1.34% 1.33%
RATIO OF ANNUALIZED NET CHARGE-OFFS TO
Average loans 0.31% 0.15% 0.17%
End of period loans 0.30% 0.15% 0.17%
</Table>
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 69.56% and 74.26% of our total
deposits at September 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 September 30, 2006, our total stockholders' equity was $52.2 million
and our equity to asset ratio was 7.62%. At September 30, 3006, our Tier
1 capital ratio was 10.07% compared to 8.86% at December 31, 2005, while
our total risk-based capital ratio was 12.38% compared to 12.04% at
December 31, 2005. As of September 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 September 30, 2006
based on the indicated instantaneous and permanent changes in interest rates.
<Table>
<Caption>
NET INTEREST NET ECONOMIC
INCOME VALUE OF
CHANGES IN INTEREST RATES (NEXT 12 MONTHS) EQUITY AT RISK
- ------------------------- ------------------------------------
200 basis point rise 15.73% (0.18)%
Base Rate Scenario -- --
200 basis point decline (7.55)% (5.85)%
</Table>
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The above table indicates that, at September 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 September 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
Not applicable
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
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLUE VALLEY BAN CORP
Date: November 13, 2006 By: /s/ Robert D. Regnier
----------------------------------
Robert D. Regnier, President and
Chief Executive Officer and Director
(Principal Executive Officer)
Date: November 13, 2006 By: /s/ Mark A. Fortino
----------------------------------
Mark A. Fortino, Chief Financial
Officer
(Principal Financial [and Accounting]
Officer)
27