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 MARCH 31, 2007
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
(Address of principal executive 66225-6128
offices) (Zip Code)
Registrant's telephone number, including area code: (913) 338-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Guarantee with respect to the Trust American Stock Exchange
Preferred Securities, $8.00 par
value of BVBC Capital Trust I
(None of which are currently
outstanding)
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 March 31, 2007 the registrant had 2,433,498 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 -
March 31, 2007 (unaudited) and December 31, 2006................ 4
Condensed Consolidated Statements of Income (unaudited) -
three months ended March 31, 2007 and 2006....................... 6
Condensed Consolidated Statements of Stockholders' Equity
(unaudited) - three months ended March 31, 2007 and 2006 ........ 7
Condensed Consolidated Statements of Cash Flows (unaudited) -
three months ended March 31, 2007 and 2006....................... 8
Notes to Condensed Consolidated Financial Statements (unaudited) -
three months ended March 31, 2007 and 2006....................... 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................... 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 25
ITEM 4. CONTROLS AND PROCEDURES........................................ 27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................. 28
ITEM 1A. RISK FACTORS.................................................. 28
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.... 28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................ 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 28
ITEM 5. OTHER INFORMATION.............................................. 28
ITEM 6. EXHIBITS....................................................... 28
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee, Board of Directors and 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 March 31, 2007, and the related condensed consolidated
statements of income, stockholders' equity and cash flows for the three-month
periods ended March 31, 2007 and 2006. These interim financial statements are
the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with the standards of the Public Company Accounting Oversight Board (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, 2006 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 March 21, 2007 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, 2006 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
/s/ BKD, LLP
Kansas City, Missouri
May 15, 2007
3
BLUE VALLEY BAN CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2007 AND DECEMBER 31, 2006
(dollars in thousands, except share data)
ASSETS
MARCH 31, DECEMBER 31,
2007 2006
----------- ------------
(Unaudited)
Cash and due from banks $ 16,919 $ 21,499
Interest-bearing deposits in other financial institutions 215 356
Federal funds sold 32,522 5,375
-------- --------
Cash and cash equivalents 49,656 27,230
Available-for-sale securities 89,006 87,206
Mortgage loans held for sale 6,429 21,805
Loans, net of allowance for loan losses of $6,759
and $6,106 in 2007 and 2006, respectively 552,288 522,409
Premises and equipment, net 19,418 17,953
Foreclosed assets held for sale, net 1,287 717
Interest receivable 5,328 4,200
Deferred income taxes 1,561 2,276
Prepaid expenses and other assets 1,917 1,305
Federal Home Loan Bank stock, Federal Reserve Bank stock,
and other securities 6,848 6,447
Goodwill 4,783 --
Core deposit intangible asset, at amortized cost 1,343 671
-------- --------
Total assets $739,864 $692,219
======== ========
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
MARCH 31, 2007 AND DECEMBER 31, 2006
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, DECEMBER 31,
2007 2006
----------- ------------
(Unaudited)
LIABILITIES
Deposits
Demand $ 97,094 $ 94,823
Savings, NOW and money market 194,093 156,069
Time 289,750 284,972
-------- --------
Total deposits 580,937 535,864
Other interest-bearing liabilities 32,300 29,558
Long-term debt 66,743 67,019
Interest payable and other liabilities 4,465 5,958
-------- --------
Total liabilities 684,445 638,399
-------- --------
STOCKHOLDERS' EQUITY
Capital stock
Common stock, par value $1 per share;
authorized 15,000,000 shares; issued and
outstanding 2007 - 2,433,498 shares;
2006 - 2,409,490 shares 2,433 2,409
Additional paid-in capital 9,871 9,561
Retained earnings 43,146 41,982
Accumulated other comprehensive loss, net of income
taxes (credit) of $(21) in 2007 and $(88) in 2006 (31) (132)
-------- --------
Total stockholders' equity 55,419 53,820
-------- --------
Total liabilities and stockholders' equity $739,864 $692,219
======== ========
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 ENDED MARCH 31, 2007 AND 2006
(dollars in thousands, except share data)
THREE MONTHS ENDED MARCH 31,
----------------------------
2007 2006
----------- -----------
(Unaudited) (Unaudited)
INTEREST INCOME
Interest and fees on loans $11,637 $10,197
Federal funds sold and other short-term investments 99 82
Available-for-sale securities 1,020 1,048
------- -------
Total interest income 12,756 11,327
------- -------
INTEREST EXPENSE
Interest-bearing demand deposits 80 23
Savings and money market deposit accounts 1,312 960
Other time deposits 3,344 2,487
Federal funds purchased and other interest-bearing liabilities 297 217
Short-term debt 42 71
Long-term debt, net 915 969
------- -------
Total interest expense 5,990 4,727
------- -------
NET INTEREST INCOME 6,766 6,600
PROVISION FOR LOAN LOSSES 400 75
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,366 6,525
------- -------
NONINTEREST INCOME
Loans held for sale fee income 1,102 1,136
Service fees 654 583
Other income 241 313
------- -------
Total noninterest income 1,997 2,032
------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 3,898 4,036
Net occupancy expense 769 759
Other operating expense 1,917 1,651
------- -------
Total noninterest expense 6,584 6,446
------- -------
INCOME BEFORE INCOME TAXES 1,779 2,111
PROVISION FOR INCOME TAXES 615 794
------- -------
NET INCOME $ 1,164 $ 1,317
======= =======
BASIC EARNINGS PER SHARE $ 0.48 $ 0.56
======= =======
DILUTED EARNINGS PER SHARE $ 0.48 $ 0.55
======= =======
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
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(dollars in thousands, except share data)
ACCUMULATED
ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED UNEARNED COMPREHENSIVE
INCOME STOCK CAPITAL EARNINGS COMPENSATION INCOME (LOSS) TOTAL
------------- ------- ---------- -------- ------------ ------------- -------
BALANCE, DECEMBER 31, 2005 $2,382 $9,212 $35,782 $(648) $(473) $46,255
Issuance of 7,923 shares of
common stock 8 144 -- -- -- 152
Net income $1,317 -- -- 1,317 -- -- 1,317
Restricted stock earned, net
of forfeitures -- -- 117 -- -- -- 117
Reclassification of unearned
compensation in accordance
with adoption of SFAS No
123R -- -- (648) -- 648 -- --
Change in derivative financial
instrument, net of income
taxes of $65 97 -- -- -- -- 97 97
Change in unrealized
depreciation on
available-for-sale
securities, net of income
taxes (credit) of $(131) (196) -- -- -- -- (196) (196)
------ ------ ------ ------- ----- ----- -------
BALANCE, MARCH 31, 2006 $1,218 $2,390 $8,825 $37,099 $ -- $(572) $47,742
====== ====== ====== ======= ===== ===== =======
BALANCE, DECEMBER 31, 2006 $2,409 $9,561 $41,982 $ -- $(132) $53,820
------ ------ ------- ----- ----- -------
Issuance of 30 shares of
common stock 5 -- -- -- 5
Issuance of 13,600 shares of
restricted stock, net of
forfeiture 14 52 -- -- -- 66
Issuance of 5,950 shares of
common stock through stock
options exercised 6 141 -- -- -- 147
Issuance of 4,558 shares
common stock for the
employee stock purchase plan 4 112 -- -- -- 116
Net income $1,164 -- -- 1,164 -- -- 1,164
Change in derivative financial
instrument, net of income
taxes (credit) of $(13) (19) -- -- -- -- (19) (19)
Change in unrealized
depreciation on
available-for-sale
securities, net of income
taxes of $80 120 -- -- -- -- 120 120
------ ------ ------ ------- ----- ----- -------
BALANCE, MARCH 31, 2007 $1,265 $2,433 $9,871 $43,146 $ -- $ (31) $55,419
====== ====== ====== ======= ===== ===== =======
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
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(dollars in thousands, except share data)
MARCH 31, 2007 MARCH 31, 2006
-------------- --------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,164 $ 1,317
Adjustments to reconcile net income to net cash flow
From operating activities:
Depreciation and amortization 343 359
Accretion of premiums on securities (7) (26)
Provision for loan losses 400 75
Deferred income taxes 255 154
Stock dividends on FHLB securities (69) (77)
Net (gain) loss on sale of foreclosed assets 62 (31)
Restricted stock earned and forfeited 79 117
Compensation expense related to the employee stock purchase plan 6 5
Originations of loans held for sale (59,172) (85,433)
Proceeds from the sale of loans held for sale 74,548 78,740
Changes in
Interest receivable (939) (560)
Prepaid expenses and other assets 121 1,062
Interest payable and other liabilities (1,257) (4,939)
-------- --------
Net cash provided by (used in) operating activities 15,534 (9,237)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net originations of loans (2,071) (26,210)
Purchase of premises and equipment (258) (215)
Proceeds from the sale of foreclosed assets, net of expenses 378 519
Purchases of available-for-sale securities (1,999) (5,998)
Proceeds from maturities of available-for-sale securities 2,000 6,110
Purchases of Federal Home Loan Bank stock, Federal Reserve Bank
stock, and other securities (314) --
Proceeds from the redemption of Federal Home Loan Bank stock,
Federal Reserve Bank stock, and other securities 619 --
Sale of Western National Bank charter and other assets 392 --
Purchase of Unison Bancorp, Inc. and subsidiary, net of cash received (6,131) --
-------- --------
Net cash used in investing activities (7,384) (25,794)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, money market, NOW
and savings accounts 12,316 5,615
Net increase (decrease) in time deposits 1,516 (2,904)
Net proceeds from short-term debt -- 19,000
Repayments of long-term debt (926) (269)
Dividends paid on common stock (723) (596)
Net proceeds from other financing activities 255 152
Net increase (decrease) in other borrowings 1,838 (1,366)
-------- --------
Net cash provided by financing activities 14,276 19,632
-------- --------
See Accompanying Notes to Condensed Consolidated Financial Statements and
Report of Independent Registered Public Accounting Firm
8
BLUE VALLEY BAN CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(dollars in thousands, except share data)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,426 (15,399)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 27,230 40,057
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $49,656 $ 24,658
======= ========
SUPPLEMENTAL CASH FLOWS INFORMATION
The Company purchased Unison Bancorp, Inc. and its subsidiary, Western
National Bank, Lenexa, Kansas for a premium of $5,493,000. In conjunction
with this acquisition, liabilities were assumed as follows:
Fair value of assets acquired $39,799,000
Less cash paid (net of cash received) 6,131,000
-----------
Liabilities assumed $33,668,000
===========
See Accompanying Notes to Condensed Consolidated Financial Statements and
Report of Independent Registered Public Accounting Firm
9
BLUE VALLEY BAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(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 March 31, 2007, and the condensed consolidated results of its
operations, changes in stockholders' equity and cash flows for the periods
ended March 31, 2007 and 2006, and are of a normal recurring nature. The
condensed consolidated balance sheet of the Company, as of December 31,
2006, has been derived from the audited consolidated balance sheet of the
Company as of that date.
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, 2006 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: NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an interpretation of SFAS No. 109 (FIN 48).
FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The interpretation also provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company
adopted FIN 48 as of January 1, 2007, and the adoption had no significant
impact on the Company's consolidated financial statements. The Company and
subsidiaries file income tax returns in the U.S. Federal jurisdiction and
the state jurisdictions of Kansas and Missouri. With few exceptions, the
Company is no longer subject to U.S Federal or state income tax
examinations by tax authorities for years before 2003.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value
Measurements, which provides guidance for using fair value to measure
assets and liabilities. The statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. FASB
Statement No. 157 applies under other accounting pronouncements that
require or permit fair value measurements and does not require any new fair
value measurements. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact, if any, that FASB Statement No. 157 may
have on the Company's financial statements.
10
BLUE VALLEY BAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities. SFAS No. 159 provides an
option to report selected financial assets and liabilities at fair value.
The statement is effective as of the beginning of the fiscal year for
fiscal years beginning after November 15, 2007. Early adoption is permitted
provided, among other things, an entity elects to adopt within the first
120 days of that fiscal year. The Company does not anticipate adopting SFAS
No. 159 before the required implementation date of January 1, 2008. The
Company has not yet determined the impact of SFAS No. 159 might have on the
consolidated financial statements upon adoption.
NOTE 3: 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 4: 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-months ended March 31,
2007 and 2006 is as follows:
MARCH 31, MARCH 31,
2007 2006
----------- ---------
(Unaudited) (Unaudited)
(dollars in thousands,
except share and per
share data)
Net income, as reported $ 1,164 $ 1,317
========== ==========
Average common shares outstanding 2,403,837 2,349,009
Average common share stock options outstanding 34,581 44,637
---------- ----------
Average diluted common shares 2,438,418 2,393,646
========== ==========
Basic earnings per share $ 0.48 $ 0.56
========== ==========
Diluted earnings per share $ 0.48 $ 0.55
========== ==========
11
BLUE VALLEY BAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
NOTE 5: 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 March 31, 2007 and December 31, 2006, the Company had no
outstanding balance on this line of credit.
NOTE 6: LONG-TERM DEBT
Long-term debt at March 31, 2007 and December 31, 2006, consisted of the
following components:
MARCH 31, DECEMBER 31,
2007 2006
---------- ------------
(Unaudited)
(in thousands)
Note payable - Blue Valley Ban Corp (A) $ 3,231 $ 3,381
Note payable - Blue Valley Building Corp. (B) 6,424 6,550
Federal Home Loan Bank advances (C) 37,500 37,500
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 $66,743 $67,019
======= =======
12
BLUE VALLEY BAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
(A) Due in December 2012, payable in quarterly installments of principal
plus interest at the Federal Funds rate plus 1.63%; collateralized by
common stock of the Company's subsidiary bank. The interest rate on
this note has been fixed at 5.45% by the use of a swap agreement (see
Note 7).
(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, 2015 and 2016; 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 March 31, 2007,
approximately $69,074,000 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 March 31, 2007 are as follows:
(in thousands)
April 1 to December 31, 2007 $ 837
2008 11,140
2009 1,169
2010 1,199
2011 8,731
Thereafter 43,667
-------
$66,743
=======
13
BLUE VALLEY BAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
NOTE 7: 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 6). The agreement provides for the Company to receive interest from
the counterparty at an amount which offsets the note's variable rate and to
pay interest to the counterparty at a fixed rate of 5.45% on the notional
amount over the term of the note. Under the agreement, the Company pays or
receives the net interest amount quarterly, with the quarterly settlements
included in interest expense.
Management has designated the interest rate swap agreement as a cash flow
hedging instrument. The hedge was fully effective through March 31, 2007. A
$19,000 unrealized loss has been recognized as a component of other
comprehensive income (loss) during the first quarter.
NOTE 8: BUSINESS ACQUISITION
On February 16, 2007, the Company acquired 100% of the outstanding common
stock of Unison Bancorp, Inc. ("Unison") and its subsidiary, Western
National Bank of Lenexa, Kansas ("Western") for $10,180,000 in cash and
merged Unison into the Company. On March 29, 2007, the Company sold Western
to Northland National Bank, Kansas City, Missouri, and simultaneously the
Company's subsidiary, Bank of Blue Valley, purchased the assets and assumed
the liabilities of Western, with the exception of the bank charter and some
miscellaneous assets and received $392,000 cash as a net result. As a
result of the acquisition, the Company will have an opportunity to continue
its expansion in Johnson County and this represents its first presence in
Lenexa. Their results of operations have been included in the consolidated
financial statements since February 16, 2007.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
14
BLUE VALLEY BAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
(in thousands)
Cash and cash equivalents $ 4,134
Available-for-sale securities 1,594
Loans 29,200
Premises and equipment 1,508
Core deposits intangible 1,000
Western National Bank charter - intangible 325
Goodwill 4,493
Other assets 1,679
-------
Total assets 43,933
-------
Deposits 31,241
Other interest-bearing liabilities 903
Long-term debt 650
Other liabilities 874
-------
Total liabilities assumed 33,668
-------
Net assets acquired $10,265
=======
The Company acquired identifiable intangibles which consisted of the core
deposit base of $1,00,000, which has a useful life of approximately seven
years and is being amortized using the straight-line method and the bank
charter, which was subsequently sold to Northland National Bank on March
29, 2007. The $4,493,000 of goodwill is not considered deductible for
income tax purposes. The Company has obtained preliminary third-party
valuations; however, because of the proximity of this transaction to
quarter-end, the values of certain assets and liabilities are based on
preliminary valuations and are subject to adjustment as additional
information is obtained. Such additional information includes, but is not
limited to: valuations and final income tax returns. When finalized,
material adjustments to goodwill may result.
15
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 is deemed a critical accounting policy
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 that policy. Accounting for this critical
area 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 policy since
December 31, 2006. Further description of our critical accounting
policy can be found in our Annual Report on Form 10-K for the year
ended December 31, 2006.
RESULTS OF OPERATIONS
Three months ended March 31, 2007 and 2006. Net income for the quarter
ended March 31, 2007, was $1.2 million, compared to net income of $1.3
million for the quarter ended March 31, 2006, representing a decrease
of $153,000, or 11.62%. Diluted earnings per share decreased 12.73% to
$0.48 during the first quarter of 2007 from $0.55 in the same period
of 2006. The Company's annualized return on average assets and average
stockholders' equity for the three-month period ended March 31, 2007
were 0.67% and 8.74%, compared to 0.77% and 11.40%, respectively, for
the same period in 2006, decreases of 12.99% and 23.33%, respectively.
The principal contributing factor to our decrease in net income in the
current year first quarter from the prior year was an increase in the
provision for loan losses. While net interest income increased,
primarily due to a higher level of average earning assets, this
increase was offset by an increase in noninterest expenses,
specifically general and administrative expenses.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NET INTEREST INCOME
Fully tax equivalent (FTE) net interest income for the three-month
period ended March 31, 2007 was $6.8 million, an increase of $164,000,
or 2.48%, from $6.6 million for the three-month period ended March 31,
2006.
FTE interest income for the current year first quarter was $12.7
million, an increase of $1.4 million, or 12.59%, from $11.3 million in
the prior year first 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 70 basis points to 7.88% in the
first quarter of 2007 compared to 7.18% in the prior year first
quarter. The 70 basis point increase in yield resulted from increases
in market interest rates. In addition, FTE interest income also
increased due to an increase in average earning assets, particularly
loans. The average balance of loans increased approximately $32
million, or 6.25%, from prior year first quarter primarily due to the
acquisition of Unison Bancorp, Inc. and its subsidiary in February
2007. Average earning asset volume increased from the first quarter of
2006 to the current period by $16.9 million, or 2.64%.
Interest expense for the current year first quarter was $6.0 million,
an increase of $1.3 million, or 26.72%, from $4.7 million in the prior
year first 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 all of
our deposit products as well as short- and long-term borrowings. The
rate paid on total average interest-bearing liabilities increased 82
basis points to 4.36% during the three month period ending March 31,
2007 compared to 3.54% during the same period in 2006. In addition,
average interest-bearing liabilities increased $15.1 million or 2.78%
to $557.0 million during the first quarter of 2007 compared to $541.9
million during the prior year period. The increase in average
interest-bearing liabilities was primarily the result of the
acquisition of Unison Bancorp, Inc. in February 2007.
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.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AVERAGE BALANCES, YIELDS AND RATES
Three Months Ended March 31,
--------------------------------------------------------------
2007 2006
------------------------------ -----------------------------
Aver- Aver-
age age
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- --------- -------- -------- -------- --------
(Dollars in thousands)
ASSETS
Federal funds sold........................ $ 7,978 $ 99 5.01% $ 6,705 $ 82 5.00%
Investment securities - taxable........... 87,580 1,016 4.71 100,824 1,041 4.19
Investment securities - non-taxable (1)... 360 6 6.87 636 11 7.17
Mortgage loans held for sale.............. 14,877 230 6.28 17,909 281 6.37
Loans, net of unearned discount and fees.. 546,071 11,407 8.47 513,922 9,916 7.82
-------- ------- -------- -------
Total earning assets................... 656,866 12,758 7.88 639,996 11,331 7.18
-------- ------- -------- -------
Cash and due from banks - non-interest
bearing................................ 16,176 18,656
Allowance for possible loan losses........ (6,440) (6,623)
Premises and equipment, net............... 18,673 18,574
Other assets.............................. 18,289 18,925
-------- --------
Total assets........................... $703,564 $689,528
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits-interest bearing:
Interest-bearing demand accounts.......... $ 25,484 $ 80 1.27% $ 24,748 $ 23 0.37%
Savings and money market deposits......... 143,757 1,312 3.70 160,600 960 2.42
Time deposits............................. 290,955 3,344 4.66 248,499 2,487 4.06
-------- ------- -------- -------
Total interest-bearing deposits......... 460,196 4,736 4.17 433,847 3,470 3.24
-------- ------- -------- -------
Short-term borrowings..................... 30,491 339 4.51 30,682 288 3.80
Long-term debt............................ 66,297 915 5.60 77,389 969 5.08
-------- ------- -------- -------
Total interest-bearing liabilities..... 556,984 5,990 4.36 541,918 4,727 3.54
-------- ------- -------- -------
Non-interest bearing deposits............. 87,665 92,937
Other liabilities......................... 4,883 7,792
Stockholders' equity...................... 54,032 46,881
-------- --------
Total liabilities and stockholders'
equity $703,564 $689,528
======== ========
Net interest income/spread................ $ 6,768 3.52% $ 6,604 3.64%
======= ==== ======= ====
Net interest margin....................... 4.18% 4.18%
==== ====
- ----------
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%. For
the quarters ending March 31, 2007 and 2006, the tax equivalency adjustment
amounted to $2,000 and $4,000 respectively.
18
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
THREE MONTHS ENDED MARCH 31,
2007 COMPARED TO 2006
----------------------------
CHANGE CHANGE
DUE TO DUE TO TOTAL
RATE VOLUME CHANGE
------ ------ ------
(Dollars in thousands)
Federal funds sold and other short-term investments... $ -- $ 17 $ 17
Investment securities - taxable....................... 130 (153) (23)
Investment securities - non-taxable (1)............... -- (5) (5)
Mortgage loans held for sale.......................... (4) (47) (51)
Loans, net of unearned discount....................... 820 671 1,491
------ ----- ------
Total interest income.............................. 946 483 1,429
------ ----- ------
Interest-bearing demand accounts...................... 55 2 57
Savings and money market deposits..................... 506 (154) 352
Time deposits......................................... 369 488 857
Short-term borrowings................................. 53 (2) 51
Long-term debt........................................ 99 (153) (54)
------ ----- ------
Total interest expense............................. 1,082 181 1,263
------ ----- ------
Net interest income................................... $ (136) $ 302 $ 166
====== ===== ======
- ----------
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%.
19
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 first quarter of 2007 was
$400,000, compared to $75,000 for the same period of 2006. The
increase in provision for loans losses recorded during the three-month
period ended March 31, 2007 was a result of several credits which
management is aggressively pursuing collection. The Company's credit
administration function performs monthly analyses on the loan
portfolio to assess and report on risk levels, delinquencies, an
internal ranking system and overall credit exposure. Management and
the Board of Directors reviews the allowance for loan losses monthly,
considering such factors as current and projected economic conditions,
loan growth, the composition of the loan portfolio, loan trends and
classifications, and other factors. The Company makes provisions for
loan losses in amounts that management deems necessary to maintain the
allowance for loan losses at an appropriate level.
NON-INTEREST INCOME
THREE MONTHS ENDED
MARCH 31,
------------------
2007 2006
------ ------
(In thousands)
Loans held for sale fee income... $1,102 $1,136
NSF charges and service fees..... 328 285
Other service charges............ 326 298
Other income..................... 241 313
------ ------
Total non-interest income..... $1,997 $2,032
====== ======
Non-interest income decreased $35,000, or 1.72%, to $2.0 million
during the three-month period ended March 31, 2007, from $2.0 million
during the three-month period ended March 31, 2006. This decrease is
primarily attributable to a decrease in other income of $72,000 or
23.00%. The decline in other income is partially due to a decrease in
the first quarter dividend from the Federal Home Loan Bank of Topeka.
The decrease in the dividend amount is a result of the Federal Home
Loan Bank stock redeemed during the second quarter of 2006. The
decline is also the result of a one time receipt of income to cover
expenses previously recorded.
NON-INTEREST EXPENSE
THREE MONTHS ENDED
MARCH 31,
------------------
2007 2006
------ ------
(In thousands)
Salaries and employee benefits... $3,898 $4,036
Occupancy........................ 769 759
General and administrative....... 1,917 1,651
------ ------
Total non-interest expense.... $6,584 $6,446
====== ======
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Non-interest expense increased $138,000, or 2.14%, to $6.6 million
during the three-month period ended March 31, 2007, from $6.4 million
during the prior year period. Salaries and employee benefits decreased
$138,000 or 3.42%. However, this was more than offset by a 16.11%, or
$266,000, increase in general and administrative costs. These costs
increased primarily due to the additional marketing efforts for our
new Lenexa location and consulting fees related to our mortgage
operations restructuring.
FINANCIAL CONDITION
Total assets for the Company at March 31, 2007, were $739.9 million,
an increase of $47.7 million, or 6.89%, compared to $692.2 million at
December 31, 2006. Deposits and stockholders' equity at March 31,
2007, were $580.9 million and $55.4 million, respectively, compared
with $535.9 million and $53.8 million, respectively, at December 31,
2006, increases of $45.0 million or 8.40%, and $1.6 million or 2.97%,
respectively.
Loans at March 31, 2007 totaled $559.0 million, reflecting an increase
of $30.5 million, or 5.77%, compared to December 31, 2006. The
increase in the loan portfolio during the first quarter is primarily
the result of the acquisition of Unison. The loan to deposit ratio at
March 31, 2007 was 96.23% compared to 98.63% at December 31, 2006.
Available-for-sale securities at March 31, 2007 totaled $89.0 million,
reflecting a slight increase from $87.2 million at December 31, 2006.
Mortgage loans held for sale at March 31, 2007 totaled $6.4 million, a
decrease of $15.4 million, or 70.52%, compared to $21.8 million at
December 31, 2006. 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 March 31, 2007, approximately
$69,074,000 was available.
Non-performing assets consist primarily of loans past due 90 days or
more and nonaccrual loans and foreclosed real estate. The following
table sets forth our non-performing assets as of the dates indicated:
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NON-PERFORMING ASSETS
AS OF
------------------------------------
MARCH 31, MARCH 31, DECEMBER 31,
2007 2006 2006
--------- --------- ------------
(Dollars in thousands)
COMMERCIAL AND ALL OTHER LOANS:
Past due 90 days or more $ 523 $ 2 $ 802
Nonaccrual 101 265 381
COMMERCIAL REAL ESTATE LOANS:
Past due 90 days or more 4,951 -- 4,951
Nonaccrual 514 -- --
CONSTRUCTION LOANS:
Past due 90 days or more 324 -- --
Nonaccrual 136 143 136
LEASE FINANCING:
Past due 90 days or more -- -- 186
Nonaccrual 348 6 --
RESIDENTIAL REAL ESTATE LOANS:
Past due 90 days or more 101 -- --
Nonaccrual 304 965 410
CONSUMER LOANS:
Past due 90 days or more 11 14 13
Nonaccrual -- 6 47
HOME EQUITY LOANS:
Past due 90 days or more -- 35 --
Nonaccrual -- 8 --
DEBT SECURITIES AND OTHER ASSETS (EXCLUDE OTHER
REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS)
Past due 90 days or more -- -- --
Nonaccrual -- -- --
------ ------- ------
Total non-performing loans 7,313 1,444 6,926
------ ------- ------
FORECLOSED ASSETS HELD FOR SALE 1,287 306 717
------ ------- ------
Total non-performing assets $8,600 $ 1,750 $7,643
====== ======= ======
Total nonperforming loans to total loans 1.31% 0.27% 1.31%
Total nonperforming loans to total assets 0.99% 0.20% 1.00%
Allowance for loan losses to nonperforming loans 92.42% 450.92% 88.16%
Nonperforming assets to loans and foreclosed
assets held for sale 1.53% 0.33% 1.44%
As of March 31, 2007, non-performing loans equaled 1.31% of total loans,
representing a slight increase in non-performing loans from December 31,
2006. The overall credit exposure in the Company's total loan portfolio
increased slightly as several large commercial real estate relationships
still remain 90 days or more past due and a few relationships became 90
days or more past due during the quarter. 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. However, due to factors noted above, as
of March 31, 2007, our ratio of allowance for loan losses to non-performing
loans was 92.42%.
The following table sets forth information regarding changes in our
allowance for loan and valuation losses for the periods indicated.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY OF LOAN LOSS EXPERIENCE AND RELATED INFORMATION
AS OF AND FOR THE
------------------------------------------
THREE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31,
2007 2006 2006
------------ ------------ ------------
(Dollars in thousands)
BALANCE AT BEGINNING OF PERIOD $ 6,106 $ 6,704 $ 6,704
LOANS CHARGED OFF
Commercial loans 50 105 1,417
Commercial real estate loans -- -- --
Construction loans 25 -- 100
Lease financing -- 98 134
Residential real estate loans 49 109 318
Consumer loans 5 16 83
Home equity loans -- -- 8
-------- -------- --------
Total loans charged-off 129 328 2,060
-------- -------- --------
RECOVERIES
Commercial loans 18 25 117
Commercial real estate loans -- -- --
Construction loans -- -- --
Lease financing 3 30 32
Residential real estate loans -- -- 47
Consumer loans 2 6 11
Home equity loans -- -- --
-------- -------- --------
Total recoveries 23 61 207
-------- -------- --------
NET LOANS CHARGED OFF 106 267 1,853
ALLOWANCE FOR LOAN LOSS ATTRIBUTED TO ACQUISITION 359 -- --
PROVISION FOR LOAN LOSSES 400 75 1,255
-------- -------- --------
BALANCE AT END OF PERIOD $ 6,759 $ 6,512 $ 6,106
======== ======== ========
LOANS OUTSTANDING
Average $546,071 $513,922 $525,471
End of period 559,047 529,004 528,515
RATIO OF ALLOWANCE FOR LOAN LOSSES TO LOANS OUTSTANDING
Average 1.24% 1.27% 1.16%
End of period 1.21% 1.23% 1.16%
RATIO OF NET CHARGE-OFFS (RECOVERIES) TO
Average loans 0.02% 0.21% 0.35%
End of period loans 0.02% 0.20% 0.35%
The allowance for loan losses as a percent of total loans increased to
1.21% as of March 31, 2007, compared to 1.16% as of December 31, 2006.
23
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 73.47% and
73.40% of our total deposits at March 31, 2007, and December 31, 2006,
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 March 31, 2007, our total stockholders' equity was $55.4 million and our
equity to asset ratio was 7.49%. At March 31, 2007, our Tier 1 capital
ratio was 9.63% compared to 10.29% at December 31, 2006, while our total
risk-based capital ratio was 11.51% compared to 12.47% at December 31,
2006. As of March 31, 2007, we had capital in excess of the requirements
for a "well-capitalized" institution.
24
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 March 31, 2007 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 12.12% 2.12%
Base Rate Scenario -- --
200 basis point decline (20.98%) (8.00)%
The above table indicates that, at March 31, 2007, 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
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 March 31, 2007, 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.
26
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Item 307 of Regulation S-K promulgated under the
Securities Act of 1933, as amended, and within 90 days of the date of this
Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief
Financial Officer of the Company (the "Certifying Officers") have conducted
evaluations of the Company's disclosure controls and procedures. As defined
under Sections 13a-14(c) and 15d-14(c) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the term "disclosure controls and
procedures" means controls and other procedures of an issuer that are
designed to ensure that information required to be disclosed by the issuer
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
the Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by an issuer in the reports that
it files or submits under the Exchange Act is accumulated and communicated
to the issuer's management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding
required disclosure. The Certifying Officers have reviewed the Company's
disclosure controls and procedures and have concluded that those disclosure
controls and procedures are effective as of the date of this Quarterly
Report on Form 10-Q. In compliance with Section 302 of the Sarbanes-Oxley
Act of 2002, (18 U.S.C. 1350), each of the Certifying Officers executed an
Officer's Certification included in this Quarterly Report on 10-Q.
As of the date of this Quarterly Report on Form 10-Q, there have not been
any significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
27
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
None
ITEM 6. EXHIBITS
EXHIBITS
11. Computation of Earnings Per Share. Please see p. 11.
15. Letter regarding Unaudited Interim Financial Information
31.1 Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a)
31.2 Certification of the Treasurer pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of the Chief Executive Officer and Treasurer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLUE VALLEY BAN CORP.
Date: May 15, 2007 By: /s/ Robert D. Regnier
------------------------------------
Robert D. Regnier, President and
Chief Executive Officer and Director
(Principal Executive Officer)
Date: May 15, 2007 By: /s/ Mark A. Fortino
------------------------------------
Mark A. Fortino, Chief Financial
Officer
(Principal Financial [and
Accounting] Officer)
29