BLUE VALLEY BAN CORP - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

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
- ------------------- -----------------------------------------

Guarantee with respect to the American Stock Exchange
Trust Preferred Securities,
$8.00 par value, of BVBC
Capital Trust I

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer.
Yes [ ] No [X]

As of June 30, 2003 the registrant had 2,253,736 shares of Common Stock
($1.00 par value) outstanding, of which 1,202,853 shares were held by
non-affiliates. The aggregate market value of the common shares of the
registrant held by non-affiliates, computed based on the June 30, 2003 closing
price of the stock, was approximately $33.7 million.

BLUE VALLEY BAN CORP
INDEX

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Independent Accountants' Report.....................................................................3

Consolidated Balance Sheets - June 30, 2003 (unaudited) and December 31, 2002.......................4

Consolidated Statements of Income (unaudited) -
three months and six months ended June 30, 2003 and 2002..........................................6

Consolidated Statements of Stockholders' Equity (unaudited) -
six months ended June 30, 2003 and 2002 ..........................................................7

Consolidated Statements of Cash Flows (unaudited) -
six months ended June 30, 2003 and 2002...........................................................8

Notes to Consolidated Financial Statements (unaudited) -
six months ended June 30, 2003 and 2002...........................................................9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................................................12

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................23

ITEM 4. CONTROLS AND PROCEDURES.......................................................................24

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.............................................................................25

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.....................................................25

ITEM 3. DEFAULTS UPON SENIOR SECURITIES...............................................................25

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................25

ITEM 5. OTHER INFORMATION.............................................................................25

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..............................................................26

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INDEPENDENT ACCOUNTANTS' REPORT

Board of Directors
Blue Valley Ban Corp
Overland Park, Kansas 66225

We have reviewed the accompanying consolidated balance sheet of Blue Valley Ban
Corp as of June 30, 2003, and the related consolidated statements of income for
the three-month and six-month periods ended June 30, 2003 and 2002 and the
consolidated statements of stockholders' equity and cash flows for the six-month
periods ended June 30, 2003 and 2002. These financial statements are the
responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. 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 auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.

Based on our reviews, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.

We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2002 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 14, 2003 we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 2002 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
July 25, 2003

3

BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND DECEMBER 31, 2002
(dollars in thousands, except share data)

ASSETS

See Accompanying Notes to Consolidated Financial Statements
and Independent Accountant's Report

4

BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND DECEMBER 31, 2002
(dollars in thousands, except share data)

LIABILITIES AND STOCKHOLDERS' EQUITY

See Accompanying Notes to Consolidated Financial Statements
and Independent Accountant's Report

5

BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(dollars in thousands, except share data)

See Accompanying Notes to Consolidated Financial Statements
and Independent Accountant's Report

6

BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(dollars in thousands, except share data)

See Accompanying Notes to Consolidated Financial Statements
and Independent Accountant's Report

7

BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(dollars in thousands, except share data)

See Accompanying Notes to Consolidated Financial Statements
and Independent Accountant's Report

8

BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)

NOTE 1: BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the Company's consolidated financial position as of June 30, 2003, and
the consolidated results of its operations, stockholders' equity and
cash flows for the periods ended June 30, 2003 and 2002, and are of a
normal recurring nature.

Certain information and note disclosures normally included in the
company's annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
have been omitted. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's December 31, 2002 Form 10-K filed with
the Securities and Exchange Commission.

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 its review accompanies the
consolidated financial statements included in Item 1 of Part I.

NOTE 2: EARNINGS PER SHARE

Basic earnings per share is computed based on the weighted average
number of shares outstanding during each year. Diluted earnings per
share is computed using the weighted average common shares and all
potential dilutive common shares outstanding during the period.

The computation of per share earnings for the six-months ended June 30,
2003 and 2002 is as follows:

See Independent Accountants' Report

9

BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)

NOTE 3: LONG-TERM DEBT

Long-term debt at June 30, 2003 and December 31, 2002, consisted of the
following components:

(A) Due in August 2009, payable in monthly installments of $23,175, plus
interest at 7.5%; collateralized by land, building and assignment of
future rents.

(B) Borrowing under $8 million revolving line of credit; interest only at
the Fed Funds Rate + 1.68% due quarterly until December 2003, when the
outstanding principal balance is due; collateralized by common stock of
the Company's subsidiary bank.

(C) Due in December 2012, payable in quarterly installments of principal
plus interest at the Fed Funds Rate + 1.68%; collateralized by common
stock of the Company's subsidiary bank.

(D) Due in 2007, 2008, 2010, 2011 and 2013; collateralized by various
assets including mortgage-backed loans. The interest rates on the
advances range from 1.55% to 5.682%. Federal Home Loan Bank advance
availability is determined quarterly and at June 30, 2003,
approximately $88,137,000 was available.

Aggregate annual maturities of long-term debt at June 30, 2003 are as
follows:

See Independent Accountants' Report

10

BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)

NOTE 4: ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company applies Accounting Principles Board No. 25 and related
Interpretations in accounting for its stock option plan and no
compensation cost has been recognized. Pro forma compensation costs for
the Company's plan are determined based on the fair value at the option
grant dates using the minimum value method under Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-based Compensation."
During the quarter, the Company issued no stock options; consequently,
reported and pro forma net income were identical.

NOTE 5: TRUST PREFERRED SECURITIES

On April 10th, 2003, BVBC Capital Trust II ("the Trust"), a Delaware
business trust formed by the Company, completed the sale of $7,500,000 of
trust preferred securities. The Trust is a 100% owned finance subsidiary
of the Company. The Trust also issued $232,000 of common securities to
the Company and used the total proceeds of $7,732,000 from the offering
to purchase $7,732,000 in principal amount of variable rate (LIBOR plus
3.25%) junior subordinated debentures of the Company due April 24, 2033.
The offering was a private placement that the Company used to reduce
existing debt as well as fund additional growth. Securities issued by the
Trust are subordinate to the $11,500,000 issued by BVBC Capital Trust I
on July 21, 2000.

See Independent Accountants' Report

11

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, 2002. Further
description of our critical accounting policies can be found in our
Annual Report on Form 10-K for the year ended December 31, 2002.

RESULTS OF OPERATIONS

Three months ended June 30, 2003 and 2002. Net income for the quarter
ended June 30, 2003, was $1.6 million, compared to net income of $1.2
million for the quarter ended June 30, 2002, representing an increase of
$446,000, or 37.76%. Diluted earnings per share increased 33.96% to
$0.71 during the second quarter of 2003 from $0.53 in the same period of
2002. The Company's annualized return on average assets and average
stockholders' equity for the three-month period ended June 30, 2003 were
1.07% and 17.59%, compared to 0.90% and 16.43%, respectively, for the
same period in 2002, increases of 18.88% and 7.06%, respectively.

Six months ended June 30, 2003 and 2002. Net income for the six months
ended June 30, 2003 was $3.4 million, compared to net income of $2.3
million for the six-month period ended June 30,

12

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

2002, representing an increase of $1.1 million, or 45.36%. Diluted
earnings per share increased 40.95% to $1.48 during the six months
ended June 30, 2003 from $1.05 in the same period of 2002. The
Company's annualized return on average assets and average stockholders'
equity for the six-month period ended June 30, 2003 were 1.15% and
18.86%, compared to 0.91% and 16.05%, respectively, for the same period
in 2002, increases of 26.37% and 17.50%, respectively.

The principal contributing factors to our increase in net income from
the three and six months ended June 30, 2002 to the current year were
an increase in non-interest income, specifically loans held for sale
fee income, and an increase in net interest income, partially offset by
an increase in non-interest expense. The current low interest rate
environment resulted in continued strong demand for residential
mortgage loan originations as well as a decline in funding rates. The
Company continues to capitalize on the mortgage resources put into
place during 2001 and 2002.

NET INTEREST INCOME

Fully tax equivalent (FTE) net interest income for the three-month
period ended June 30, 2003 was $4.5 million, an increase of $590,000 or
15.21%, from $3.9 million for the three-month period ended June 30,
2002.

FTE interest income for the current year second quarter was $7.9
million, an increase of $394,000, or 5.25%, from $7.5 million in the
prior year second quarter. This increase was primarily a result of an
overall increase in average earning assets. Average earning asset
volume increased from the second quarter of 2002 to the current period
by $83.2 million, or 17.10%. Partially offsetting the increase in
average earning assets was a decline in yield on interest-earning
assets. The yield on average earning assets declined 63 basis points to
5.55% in the second quarter of 2003, compared to 6.18% in the prior
year second quarter. The 63 basis point decrease in yield resulted
primarily from decreases in market interest rates during 2002 and the
impact of the low interest rates on new and repriced assets during 2002
and 2003.

Interest expense for the current year second quarter was $3.4 million,
a decrease of $196,000, or 5.42%, from $3.6 million in the prior year
second quarter. The decrease is attributable to a decrease in the rates
paid on average interest-bearing liabilities during the second quarter
of 2003. The primary cause for this decline was the overall decline in
market interest rates and the impact of the low interest rates on new
and repriced liabilities during 2002 and 2003. The rate paid on total
average interest-bearing liabilities decreased to 2.80% during the
quarter ended June 30, 2003 compared to 3.35% during the quarter ended
June 30, 2002, a decrease of 55 basis points. Average interest-bearing
deposits increased slightly by $2.3 million, or 0.61% from the prior
year and other interest-bearing liabilities increased by $54.5 million
or 84.0% from the prior year, mainly in the form of FHLB borrowings,
guaranteed preferred beneficial interest in Company's subordinated
debt, Federal Funds purchased, securities sold under agreements to
repurchase and note payable. The increase in interest-bearing liability
volume partially offset the decrease in rate.

FTE net interest income for the six-month period ended June 30, 2003
was $9.0 million, an increase of $1.2 million or 15.58%, from $7.8
million for the six-month period ended June 30, 2002.

FTE interest income for the six months ended June 30, 2003 was $15.6
million, a slight increase of $400,000, or 2.63%, from $15.2 million
for the six months ended June 30, 2002. This increase was

13

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

primarily a result of an overall increase in average earning assets.
Average earning asset volume increased from June 30, 2002 to the
current period by $76.2 million, or 15.83%. Partially offsetting the
increase in average earning assets was a decline in yield on
interest-earning assets. The yield on average earning assets declined
72 basis points to 5.65% for the first six months of 2003, compared to
6.37% for the first six months of 2002. The 72 basis point decrease in
yield resulted primarily from decreases in market interest rates during
2002 and the impact of the low interest rates on new and repriced
assets during 2002 and 2003.

Interest expense for the six-month period ended June 30, 2003 was $6.6
million, a decrease of $818,000, or 11.07%, from $7.4 million in the
same period of the prior year. The decrease is attributable to a
decrease in the rates paid on average interest-bearing liabilities
during the first six months of 2003. The primary cause for this decline
was the overall decline in market interest rates and the impact of low
interest rates on new and repriced liabilities during 2002 and 2003.
The rate paid on total average interest-bearing liabilities decreased
to 2.79% during the six-month period ended June 30, 2003 compared to
3.53% during the same period in 2002, a decrease of 74 basis points.
Average interest-bearing deposits increased slightly by $592,000, or
0.16% from the prior year and other interest-bearing liabilities
increased by $52.9 million or 77.21% from the prior year, mainly in the
form of FHLB borrowings, guaranteed preferred beneficial interest in
Company's subordinated debt, Federal Funds purchased, securities sold
under agreements to repurchase and notes payable. The increase in
interest-bearing liability volume partially offset the decrease in
rate.

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.

14

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

AVERAGE BALANCES, YIELDS AND RATES

- ----------
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%.

15

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:

o changes in volume, reflecting changes in volume multiplied by
the prior period rate; and

o changes in rate, reflecting changes in rate multiplied by the
prior period volume.

CHANGES IN INTEREST INCOME AND
EXPENSE VOLUME AND RATE VARIANCES

- -----------

(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%.

16

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

PROVISION FOR LOAN LOSSES

The provision for loan losses for the second quarter of 2003 was
$600,000, compared to $470,000 for the same period of 2002. For the
six-months ended June 30, 2003 and 2002, the provision was $1.2 and $1.1
million, respectively. We make provisions for loan losses in amounts
that management deems necessary to maintain the allowance for loan
losses at an appropriate level. The allowance for loan losses is
reviewed 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.

NON-INTEREST INCOME

Non-interest income increased to $6.6 million, or 68.04%, during the
three-month period ended June 30, 2003, from $3.9 million during the
three-month period ended June 30, 2002. Non-interest income for the
six-months ended June 30, 2003 was $12.3 million, an increase of $4.8
million, or 63.98%, from $7.5 million for the six-months ended June 30,
2002. These increases are attributable primarily to increases in loans
held for sale fee income, though significant increases were also
realized in NSF charges and service fees. Loans held for sale fee income
increased $2.6 million, or 80.31%, and $4.7 million, or 75.23%, for the
three-month and six-month periods ended June 30, 2003, respectively.
During 2002, we experienced significant growth in our loans held for
sale income due to the expansion of our mortgage operations concurrent
with a relatively low interest rate environment. Mortgage originations
and refinancing, and the resultant revenue, have continued to flourish
in the low interest rate environment which has persisted through the
second quarter of 2003.

NON-INTEREST EXPENSE

17

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Non-interest expense increased to $7.9 million, or 44.52%, during the
three-month period ended June 30, 2003 and to $14.7 million, or 40.02%,
during the six-month period ended June 30, 2003, from $5.4 million and
$10.5 million in the prior year periods, respectively. These increases
are attributable primarily to an increase in salaries and employee
benefits expense which increased $1.7 million, or 43.94%, during the
second quarter of 2003 and $3.0 million, or 42.45%, during the six-month
period ended June 30, 2003, compared to the prior year periods. Salaries
and employee benefits expense increased due to increased volume-based
incentive compensation in our mortgage production departments as well as
additional staff hired to facilitate our growth. We had 296 full-time
equivalent employees at June 30, 2003 compared to 227 at June 30, 2002.
Many areas of the Company added employees to manage growth and
expansion.

FINANCIAL CONDITION

Total assets for the Company at June 30, 2003, were $628.1 million, an
increase of $22.9 million, or 3.78%, compared to $605.2 million at
December 31, 2002. Deposits and stockholders' equity at June 30, 2003,
were $470.4 million and $38.3 million, respectively, compared with
$423.8 million and $34.3 million, respectively, at December 31, 2002,
increases of $46.6 million, or 10.99%, and $4.0 million, or 11.64%,
respectively.

Loans at June 30, 2003 totaled $414.8 million, reflecting an increase of
$34.7 million, or 9.14%, compared to December 31, 2002. The loan to
deposit ratio at June 30, 2003 was 88.12% compared to 89.69% at December
31, 2002.

Mortgage loans held for sale at June 30, 2003 totaled $101.1 million, a
decrease of $18.2 million, or 15.28% compared to December 31, 2002. The
Company's principal funding source for mortgage loans held for sale is
deposits and advances from the Federal Home Loan Bank. Advance
availability with the Federal Home Loan Bank is determined quarterly and
at June 30, 2003, approximately $88,137,000 million was available.

18

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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:

NON-PERFORMING ASSETS

As of June 30, 2003, non-performing loans equaled 1.67% of total loans,
representing a substantial increase in non-performing loans from
December 31, 2002. This increase was primarily due to several commercial
credit relationships which became past due over 90 days during the first
half of 2003. The Company had already reserved for the estimated
potential loss from these credit relationships when they were identified
as impaired. The level of loans charged-off decreased during the second
quarter of 2003, as evidenced by the decrease in our ratio of net
charge-offs to average loans, to 0.24% for the period ending June 30,
2003 compared to 0.36% for the period ending December 31, 2002. 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
Company maintains its allowance for loan

19

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

losses in excess of its non-performing loans. As of June 30, 2003, our
ratio of allowance for loan losses to non-performing loans was 115.00%.

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

20

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The allowance for loan losses as a percent of total loans increased
slightly to 1.90% as of June 30, 2003, compared to 1.82% at December 31,
2002. As of June 30, 2003, net charge-offs equaled 0.12% of average
total loans on an annualized basis.

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 58.60% and 57.80% of our total
assets at June 30, 2003, and December 31, 2002, respectively. Management
has established internal guidelines to measure liquid assets as well as
relevant ratios concerning asset levels and purchased funds. These
indicators are reported to the board of directors monthly, and at June
30, 2003, the Company was within the established guidelines.

At June 30, 2003, our total stockholders' equity was $38.3 million and
our equity to asset ratio was 6.10%. At June 30, 2003, our Tier 1
capital ratio was 9.15% compared to 8.82% at December 31, 2002, while
our total risk-based capital ratio was 10.21% compared to 10.13% at
December 31, 2002. As of June 30, 2003, we had capital in excess of the
requirements for a "well-capitalized" institution.

21

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a continued 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 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 the 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 Bank of Blue
Valley's current sensitivity to instantaneous and permanent changes in
interest rates. The system simulates the Bank's asset and liability
base and projects future net interest income results under several
interest rate assumptions. This allows management to view how changes
in interest rates will affect the spread between the yield received on
assets and the cost of deposits and borrowed funds.

The asset/liability modeling service is also used to analyze the net
economic value of equity at risk under instantaneous shifts in interest
rates. The "net economic value of equity at risk" is defined as the
market value of assets less the market value of liabilities plus/minus
the market value of any off-balance sheet positions. By effectively
looking at the present value of all future cash flows on or off the
balance sheet, the net economic value of equity modeling takes a
longer-term view of interest rate risk.

We strive to maintain a position such that current changes in interest
rates will not affect net interest income or the economic value of
equity by more than 5%, per 50 basis points. The following table sets
forth the estimated percentage change in the Bank of Blue Valley's net
interest income over the next twelve month period and net economic
value of equity at risk at June 30, 2003 based on the indicated
instantaneous and permanent changes in interest rates.

22

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The above table indicates that, at June 30, 2003, 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 table also indicates that, at June 30, 2003, in the event of a
sudden increase or decrease in prevailing market rates, the current net
economic value of our equity would decrease. Given our current
asset/liability position, a 25, 50 or 100 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.

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ITEM 4. CONTROLS AND PROCEDURES

In accordance with Item 307 of Regulation S-K promulgated under the
Securities Act of 1933, as amended, and within 90 days of the date of
this Quarterly Report on Form 10-Q, the Chief Executive Officer and
Chief Financial Officer of the Company (the "Certifying Officers") have
conducted evaluations of the Company's disclosure controls and
procedures. As defined under Sections 13a-14(c) and 15d-14(c) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
term "disclosure controls and procedures" means controls and other
procedures of an issuer that are designed to ensure that information
required to be disclosed by the issuer in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules
and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the
issuer's management, including its principal executive officer or
officers and principal financial officer or officers, or persons
performing similar functions, as appropriate to allow timely decisions
regarding required disclosure. The Certifying Officers have reviewed the
Company's disclosure controls and procedures and have concluded that
those disclosure controls and procedures are effective as of the date of
this Quarterly Report on Form 10-Q. In compliance with Section 302 of
the Sarbanes-Oxley Act of 2002, (18 U.S.C. 1350), each of the Certifying
Officers executed an Officer's Certification included in this Quarterly
Report on 10-Q.

As of the date of this Quarterly Report on Form 10-Q, there have not
been any significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent
to the date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

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PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 14, 2003, the Company held its Annual Meeting of Stockholders.
There were 2,235,736 shares outstanding and entitled to vote at the
Annual Meeting, of which 1,650,345 shares were represented in person or
by proxy. The following items were submitted at the Annual Meeting for
consideration by the stockholders:

1. Election of Directors

Robert D. Regnier and Thomas A. McDonnell were elected at the
Annual Meeting to serve a three year term or until their successor
is duly elected and qualified. The voting results for both were as
follows:

Shares Voted For: 1,650,345
Shares Voted Against 0
Shares Abstained 0

The directors of the Company whose terms of office extended beyond
the date of the Annual Meeting include:

Don H. Alexander
Wayne A. Henry, Jr.
C. Ted McCarter

2. The Company's 1998 Equity Incentive Plan amendments were approved
The voting results were as follows:

Shares Voted For: 1,613,885
Shares Voted Against 20,000
Shares Abstained 16,460

ITEM 5. OTHER INFORMATION

Not applicable

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(E) EXHIBITS

11. Computation of Earnings Per Share. Please see p. 9.

15. Letter regarding Unaudited Interim Financial Information

31.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to section 302 of
the Sarbanes-Oxley Act of 2002

31.2 Certification of Treasurer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002

32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002

32.2 Certification of Treasurer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002

(F) REPORTS ON FORM 8-K

On May 15, 2003, Blue Valley filed a report on Form 8-K covering
the press release for the Company's first quarter 2003 earnings.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

BLUE VALLEY BAN CORP

Date: August 13, 2003 By: /s/ Robert D. Regnier
----------------------------
Robert D. Regnier, President
and Chief Executive Officer

Date: August 13, 2003 By: /s/ Mark A. Fortino
----------------------------
Mark A. Fortino, Treasurer

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