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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 SEPTEMBER 30, 2004
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 checkmark whether the registrant is an accelerated filer.
Yes [ ] No [X]
As of September 30, 2004, the registrant had 2,313,061 shares of Common
Stock ($1.00 par value) outstanding.
BLUE VALLEY BAN CORP
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm........................................... 3
Consolidated Balance Sheets - September 30, 2004 (unaudited) and December 31, 2003................ 4
Consolidated Statements of Income (unaudited) -
three months and nine months ended September 30, 2004 and 2003.................................. 6
Consolidated Statements of Stockholders' Equity (unaudited) -
nine months ended September 30, 2004 and 2003 .................................................. 7
Consolidated Statements of Cash Flows (unaudited) -
nine months ended September 30, 2004 and 2003................................................... 8
Notes to Consolidated Financial Statements (unaudited) -
nine months ended September 30, 2004 and 2003................................................... 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................................. 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................... 24
ITEM 4. CONTROLS AND PROCEDURES...................................................................... 26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................................ 27
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.................................. 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.............................................................. 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................... 27
ITEM 5. OTHER INFORMATION............................................................................ 27
ITEM 6. EXHIBITS .................................................................................... 27
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
We have reviewed the accompanying consolidated balance sheet of Blue Valley Ban
Corp as of September 30, 2004, and the related consolidated statements of income
for the three-month and nine-month periods ended September 30, 2004 and 2003 and
the consolidated statements of stockholders' equity and cash flows for the
nine-month periods ended September 30, 2004 and 2003. 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
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 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, 2003 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 13, 2004 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, 2003 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
October 28, 2004
3
BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(dollars in thousands, except share data)
ASSETS
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- ---------------
(Unaudited)
Cash and due from banks $ 31,020 $ 21,317
Federal funds sold 27,500 29,400
--------------- ---------------
Cash and cash equivalents 58,520 50,717
Available-for-sale securities 74,605 106,036
Mortgage loans held for sale 27,673 18,297
Loans, net of allowance for loan losses of $7,605
and $7,051 in 2004 and 2003, respectively 470,155 417,569
Premises and equipment 20,083 18,250
Foreclosed assets held for sale, net 2,459 416
Interest receivable 2,052 1,923
Deferred income taxes 2,239 1,302
Prepaid expenses and other assets 3,170 3,593
Federal Home Loan Bank stock, Federal Reserve Bank stock
and other securities 7,922 7,842
Core deposit intangible asset, at amortized cost 1,014 1,128
--------------- ---------------
Total assets $ 669,892 $ 627,073
=============== ===============
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
4
BLUE VALLEY BAN CORP
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(Unaudited)
LIABILITIES
Deposits
Demand $ 83,561 $ 74,717
Savings, NOW and money market 228,828 190,631
Time 218,309 205,147
------------- ------------
Total deposits 530,698 470,495
Other interest-bearing liabilities 24,058 23,447
Short-term debt 1,000 -
Long-term debt 66,694 88,294
Interest payable and other liabilities 5,414 4,639
------------- ------------
Total liabilities 627,864 586,875
------------- ------------
STOCKHOLDERS' EQUITY
Capital stock
Common stock, par value $1 per share;
authorized 15,000,000 shares; issued and outstanding
2004 - 2,313,061 shares; 2003 - 2,279,161 shares 2,313 2,279
Additional paid-in capital 7,777 7,404
Retained earnings 32,268 30,344
Unearned compensation (289) (399)
Accumulated other comprehensive income
Unrealized appreciation (depreciation) on available-for-sale
securities, net of income taxes (credit) of $(27) in
2004 and $380 in 2003 (41) 570
------------- ------------
Total stockholders' equity 42,028 40,198
------------- ------------
Total liabilities and stockholders' equity $ 669,892 $ 627,073
============= ============
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
5
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(dollars in thousands, except share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
INTEREST INCOME
Interest and fees on loans $ 7,345 $ 7,640 $ 21,059 $ 21,972
Federal funds sold 48 6 140 19
Available-for-sale securities 624 445 1,805 1,550
------------- ------------- ------------- -------------
Total interest income 8,017 8,091 23,004 23,541
------------- ------------- ------------- -------------
INTEREST EXPENSE
Interest-bearing demand deposits 43 41 115 131
Savings and money market deposit accounts 775 591 2,138 1,561
Other time deposits 1,930 1,747 5,240 5,214
Federal funds purchased and other
interest-bearing liabilities 41 50 106 166
Short-term debt - 96 - 256
Long-term debt 964 1,014 2,951 2,786
------------- ------------- ------------- -------------
Total interest expense 3,753 3,539 10,550 10,114
------------- ------------- ------------- -------------
NET INTEREST INCOME 4,264 4,552 12,454 13,427
PROVISION FOR LOAN LOSSES 400 150 1,050 1,350
------------- ------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,864 4,402 11,404 12,077
------------- ------------- ------------- -------------
NONINTEREST INCOME
Loans held for sale fee income 2,106 5,974 7,992 16,979
Service fees 629 557 1,843 1,631
Realized gain on available-for-sale securities 391 - 524 -
Other income 143 106 425 331
------------- ------------- ------------- -------------
Total noninterest income 3,269 6,637 10,784 18,941
------------- ------------- ------------- -------------
NONINTEREST EXPENSE
Salaries and employee benefits 3,836 6,092 12,240 16,169
Net occupancy expense 903 833 2,503 2,296
Other operating expense 1,688 1,788 4,758 4,918
------------- ------------- ------------- -------------
Total noninterest expense 6,427 8,713 19,501 23,383
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 706 2,326 2,687 7,635
PROVISION FOR INCOME TAXES 173 831 763 2,738
------------- ------------- ------------- -------------
NET INCOME $ 533 $ 1,495 $ 1,924 $ 4,897
============= ============= ============= =============
BASIC EARNINGS PER SHARE $ 0.23 $ 0.66 $ 0.84 $ 2.19
============= ============= ============= =============
DILUTED EARNINGS PER SHARE $ 0.23 $ 0.64 $ 0.82 $ 2.12
============= ============= ============= =============
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
6
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(dollars in thousands, except share data)
ACCUMULATED
ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED UNEARNED COMPREHENSIVE
INCOME STOCK CAPITAL EARNINGS COMPENSATION INCOME TOTAL
------------- -------- ---------- -------- ------------ ------------- --------
BALANCE, DECEMBER 31, 2002 $ 2,223 $ 6,284 $ 25,052 $ -- $ 785 $ 34,344
Issuance of 31,875 shares
of common stock -- 32 602 -- -- -- 634
Net income 4,897 -- -- 4,897 -- -- 4,897
Change in unrealized
appreciation on
available-for-sale
securities, net of
income tax credit of
$(164) (246) -- -- -- -- (246) (246)
------------- -------- ---------- -------- ------------ ------------- --------
$ 4,651
=============
BALANCE, SEPTEMBER 30, 2003 $ 2,255 $ 6,886 $ 29,949 $ -- $ 539 $ 39,629
======== ========== ======== ============ ============= ========
$ 768
=============
BALANCE, DECEMBER 31, 2003 $ 2,279 $ 7,404 $ 30,344 $ (399) $ 570 $ 40,198
Issuance of 33,900 shares
of common stock -- 34 373 -- -- -- 407
Net income 1,924 -- -- 1,924 -- -- 1,924
Restricted stock earned and
forfeited -- -- -- -- 110 -- 110
Change in unrealized
appreciation on
available-for-sale
securities, net of
income tax credit of
$(407) (611) -- -- -- -- (611) (611)
------------- -------- ---------- -------- ----------- ------------- --------
$ 1,313
=============
BALANCE, SEPTEMBER 30, 2004 $ 2,313 $ 7,777 $ 32,268 $ (289) $ (41) $ 42,028
======== ========== ======== ============ ============= ========
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
------------- -------------
RECLASSIFICATION DISCLOSURE
Unrealized depreciation on available-for-sale securities, net of income tax
credit of $(198), and $(164) for the periods ended September 30,
2004 and September 30, 2003, respectively $ (297) $ (246)
Less: reclassification adjustments for appreciation included in net
income, net of income taxes of $210 and $0 for the periods ended
September 30, 2004 and September 30, 2003, respectively 314 -
------------- -------------
Change in unrealized appreciation on available-for-sale securities, net of
income tax credit of $(407) and $(164) for the periods ended September
30, 2004 and September 30, 2004, respectively $ (611) $ (246)
============= =============
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
7
BLUE VALLEY BAN CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(dollars in thousands, except share data)
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,924 $ 4,897
Adjustments to reconcile net income to net cash flow from
operating activities:
Depreciation and amortization 1,365 1,139
Amortization (accretion) of premiums and discounts on
securities (19) 34
Provision for loan losses 1,050 1,350
Net realized gain on available-for-sale securities (524) -
Net loss on sale of foreclosed assets 102 39
Net loss (gain) on sale of premises and equipment 5 (18)
Restricted stock earned and forfeited 110 -
Originations of loans held for sale (688,991) (1,385,560)
Proceeds from the sale of loans held for sale 679,616 1,442,697
Changes in
Interest receivable (129) 220
Prepaid expenses and other assets (384) (348)
Interest payable and other liabilities 775 1,341
------------------ ------------------
Net cash provided by (used in) operating activities (5,100) 65,791
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net originations of loans (59,228) (34,995)
Proceeds from sales of loan participations 3,053 -
Purchase of premises and equipment (2,812) (7,977)
Proceeds from the sale of premises and equipment - 18
Proceeds from the sale of foreclosed assets 393 610
Proceeds from sales of available-for-sale securities 21,271 -
Proceeds from maturities of available-for-sale securities 41,659 72,487
Purchases of available-for-sale securities (31,974) (75,527)
Proceeds from the sale or maturities of Federal Home Loan Bank
stock, Federal Reserve Bank stock, and other securities 95 -
Purchases of Federal Home Loan Bank stock, Federal Reserve Bank
stock, and other securities (175) (2,250)
------------------ ------------------
Net cash used in investing activities (27,718) (47,634)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, money market,
NOW and savings accounts 47,041 8,065
Net increase in time deposits 13,162 33,118
Repayments of long-term debt (21,600) (4,525)
Proceeds from long-term debt - 15,325
Net proceeds from guaranteed preferred beneficial interest in
Company's subordinated debt - 7,500
Net proceeds (payments) on short-term debt 1,000 (35,000)
Proceeds from sale of common stock 407 634
Net increase (decrease) in other borrowings 611 (14,864)
------------------ ------------------
Net cash provided by financing activities 40,621 10,253
------------------ ------------------
INCREASE IN CASH AND CASH EQUIVALENTS 7,803 28,410
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 50,717 27,755
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 58,520 $ 56,165
================== ==================
See Accompanying Notes to Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm.
8
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(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 September 30, 2004,
and the consolidated results of its operations, changes in stockholders'
equity and cash flows for the periods ended September 30, 2004 and 2003,
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, 2003 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 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 period ended September 30, 2004, the Company issued no stock
options; consequently, reported and pro forma net income were identical.
During the period ended September 30, 2004, the Company applied the
provisions of Financial Accounting Standards Board Interpretation 46
(Revised), Consolidation of Variable Interest Entities, to its trust
preferred securities. The primary impact of this change was to report
the Company's subordinated debt to the trust on the face of the
accompanying balance sheet rather than the minority interest in the
trust, as previously presented. This change has been made for all
periods presented. This change did not have a material impact on the
Company's total assets, liabilities, stockholders' equity or results of
operations.
The report of BKD, LLP on 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.
See Accompanying Notes to Consolidated Financial Statements and Report of
Independent Registered Public Accounting Firm.
9
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
The computation of per share earnings for the three and nine-months ended
September 30, 2004 and 2003 is as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(amounts in thousands, except (amounts in thousands, except
share and per share data) share and per share data)
Net income, as reported $ 533 $ 1,495 $ 1,924 $ 4,897
Add: Total stock-based employee compensation
recognized in net income, net of income taxes of
$10 and $33 for the three- and nine-month
periods ended September 30, 2004, respectively 21 - 63 -
Less: Total stock-based compensation cost
determined under the fair value based method, net of
income tax credit of $(10) and $(33) for the three-
and nine-month periods ended September 30, 2004,
respectively (21) - (63) -
--------------- --------------- --------------- ---------------
Pro forma net income $ 533 $ 1,495 $ 1,924 $ 4,897
=============== =============== =============== ===============
Average common shares outstanding 2,309,341 2,254,139 2,298,286 2,238,536
Average common share stock options outstanding 55,441 79,381 59,331 74,467
--------------- --------------- --------------- ---------------
Average diluted common shares 2,364,782 2,333,520 2,357,617 2,313,003
=============== =============== =============== ===============
Basic earnings per share $ 0.23 $ 0.66 $ 0.84 $ 2.19
=============== =============== =============== ===============
Diluted earnings per share $ 0.23 $ 0.64 $ 0.82 $ 2.12
=============== =============== =============== ===============
See Accompanying Notes to Consolidated Financial Statements and Report of
Independent Registered Public Accounting Firm.
10
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
NOTE 3: SHORT-TERM DEBT
Short-term debt at September 30, 2004 and December 31, 2003, consisted of
the following components:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(Unaudited)
(in thousands)
Note Payable - other (a) $ 1,000 $ -
------------- ------------
Total Short-term debt $ 1,000 $ -
============= ============
(a) Revolving line of credit collateralized by common stock of the
Company's subsidiary bank. Interest accrues at the Federal Funds
Rate plus 1.68%.
NOTE 4: LONG-TERM DEBT
Long-term debt at September 30, 2004 and December 31, 2003, consisted of
the following components:
SEPTEMBER 30, DECEMBER 31,
2004 2003
---------------- ----------------
(Unaudited)
(in thousands)
Note Payable - other (A) $ - $ 1,281
Note Payable - bank (B) 4,606 4,925
Federal Home Loan Bank advances (C) 42,500 62,500
Trust Preferred Securities - BVBC Capital Trust I (D) 11,856 11,856
Trust Preferred Securities - BVBC Capital Trust II (E) 7,732 7,732
---------------- ----------------
Total long-term debt $ 66,694 $ 88,294
=============== ================
(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. This note was paid off during the first quarter of
2004.
(B) Due in December 2012, payable in quarterly installments of principal
plus interest at the Federal Funds Rate plus 1.68%; collateralized
by common stock of the Company's subsidiary bank. The interest rate
on this note has been fixed by the use of a swap
See Accompanying Notes to Consolidated Financial Statements and Report of
Independent Registered Public Accounting Firm.
11
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
agreement (see Note 5).
(C) Due in 2008, 2010, 2011 and 2013; collateralized by various assets
including mortgage-backed loans. The interest rates on the advances
range from 1.84% to 5.682%.
(D) Due in 2030; interest only at 10.375% due quarterly; fully and
unconditionally guaranteed by the Company on a subordinated basis to
the extent that the funds are held by the Trust.
(E) Due in 2033; interest only at LIBOR + 3.25% due quarterly; fully and
unconditionally guaranteed by the Company on a subordinated basis to
the extent that the funds are held by the Trust. Subordinated to the
trust preferred securities (D) due in 2030.
Aggregate annual maturities of long-term debt at September 30, 2004 are as
follows:
(in thousands)
October 1 to December 31, 2004 $ 106
2005 450
2006 475
2007 500
2008 10,530
Thereafter 54,633
----------------
$ 66,694
================
NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS
As a strategy to reduce the exposure to the risk of changes in future
cash flows due to interest rate fluctuations, the Company entered into
an interest rate swap agreement for a portion of its floating rate debt
(see Note 4). The agreement provides for the Company to receive interest
from the counterparty at the note's variable rate and to pay interest to
the counterparty at a fixed rate of 5.45% on the notional amount over
the term of the note. Under the agreement, the Company pays or receives
the net interest amount quarterly, with the quarterly settlements
included in interest expense.
Management has designated the interest rate swap agreement as a cash
flow hedging instrument. The hedge was fully effective through September
30, 2004. Under the cash flow hedging method, the effective portion of
the gain or loss related to the derivative is recognized as a component
of other comprehensive income. The ineffective portion, if any, is
recognized in current earnings.
See Accompanying Notes to Consolidated Financial Statements and Report of
Independent Registered Public Accounting Firm.
12
BLUE VALLEY BAN CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
NOTE 6: MORTGAGE LOANS HELD FOR SALE CHARGE AND SUBSEQUENT EVENTS
In the third quarter of 2004, the Company recorded a reduction in its
Loans Held for Sale Income of $350,000 and also recorded an offsetting
Other Liability to account for the anticipated refund of fee income on
residential mortgage loans underwritten with documentation altered by a
former employee of the Company. Because the affected loans were sold to
investors, it is probable that the Company will either repurchase these
loans and refund the $350,000 of fee income that was earned on these
loans when they were sold to investors or indemnify the investor.
Through the date of this report, the Company had repurchased
approximately $9 million of these loans into the Company's existing
residential mortgage loan portfolio. The anticipated repurchase of the
remaining $5 million of affected loans is expected to be made in the
fourth quarter of 2004 with liquidity currently available and is not
expected to have a significant impact on the Company's overall liquidity
position. Although the exact amount is not currently determinable, the
Company will record an appropriate charge to the provision for loan
losses upon the repurchase of these mortgage loans. Almost all of the
affected mortgage loans are currently paying as agreed, and therefore
the Company expects minimal credit losses from these loans. The Company
expects the anticipated repurchase to have an immaterial impact on its
earnings in the fourth quarter of 2004.
Management of the Company, pursuant to an operational risk assessment of
the situation, has put procedures in place to prevent such documentation
issues in the future.
On October 14th, the Company became a co-defendant in a class action
lawsuit. The plaintiffs are eighteen former mortgage loan originators
claiming that the Company did not compensate them appropriately for
overtime in accordance with United States Department of Labor rules. The
Company believes that these claims are without merit and intends to
vigorously defend against them. In addition, the Company is exploring
whether any financial implications are covered by the Company's
insurance policies. At this time, the Company has no estimate of the
financial implications of this suit.
13
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, 2003. Further
description of our critical accounting policies can be found in our
Annual Report on Form 10-K for the year ended December 31, 2003.
RESULTS OF OPERATIONS
Three months ended September 30, 2004 and 2003. Net income for the
quarter ended September 30, 2004, was $533,000, compared to net income
of $1.5 million for the quarter ended September 30, 2003, representing a
decrease of $962,000, or 64.35%. Diluted earnings per share decreased
64.07% to $0.23 during the third quarter of 2003 from $0.64 in the same
period of 2003. The Company's annualized return on average assets and
average stockholders' equity for the three-month period ended September
30, 2004 were 0.32% and 5.16%, compared to 0.89% and 15.31%,
respectively, for the same period in 2003, decreases of 64.05% and
66.30%, respectively.
The principal contributing factors to our decrease in net income in the
current year third quarter from the prior year were a decrease in
non-interest income resulting from a decline in loans held
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
for sale fee income and a decrease in net interest income resulting from
lower levels of earnings assets as well as an increase in the average
rate paid on total interest-bearing liabilities. The strong demand for
residential mortgage loan originations, particularly refinancing,
experienced by the Company since 2001 decelerated as mortgage interest
rates rose during the second half of 2003. The effects of lower mortgage
origination volume continued into the third quarter of 2004 and had an
adverse impact on our net income.
Nine months ended September 30, 2004 and 2003. Net income for the nine
months ended September 30, 2004 was $1.9 million, compared to net income
of $4.9 million for the nine-month period ended September 30, 2003,
representing a decrease of $3.0 million, or 60.72%. Diluted earnings per
share decreased 61.33% to $0.82 during the nine months ended September
30, 2004 from $2.12 in the same period of 2003. The Company's annualized
returns on average assets and average stockholders' equity for the
nine-month period ended September 30, 2004 were 0.40% and 6.27%,
compared to 1.05% and 17.62%, respectively, for the same period in 2003,
decreases of 61.91% and 64.42%, respectively.
The principal contributing factors to our decrease in net income from
the nine months ended September 30, 2003 to the current year were a
decrease in non-interest income, specifically loans held for sale fee
income, and a decrease in net interest income resulting from a change in
the mix of earning assets.
NET INTEREST INCOME
Fully tax equivalent (FTE) net interest income for the three-month
period ended September 30, 2004 was $4.3 million, a decrease of $312,000
or 6.75%, from $4.6 million for the three-month period ended September
30, 2003.
FTE interest income for the current year third quarter was $8.1 million,
a decrease of $99,000, or 1.22%, from $8.2 million in the prior year
third quarter. This decrease was primarily a result of an overall
decrease in average earning assets. Average earning asset volume
decreased from the third quarter of 2003 to the current period by $25.8
million, or 4.08%. Partially offsetting the decrease in average earning
assets was an increase in yield on interest-earning assets. The yield on
average earning assets increased 15 basis points to 5.28% in the third
quarter of 2004, compared to 5.13% in the prior year third quarter. The
15 basis point increase in yield resulted primarily from increases in
market interest rates during the third quarter of 2004.
Interest expense for the current year third quarter was $3.8 million, an
increase of $214,000, or 6.04%, from $3.5 million in the prior year
third quarter. This increase was primarily a result of an increase in
the rate paid on average interest-bearing liabilities resulting from
promotional rates offered on our time deposits. The rate paid on total
average interest-bearing liabilities increased 17 basis points to 2.80%
during the three-month period ended September 30, 2004 compared to 2.63%
during the same period in 2003. Partially offsetting the effect of this
increase in rate was a decline in the balance of average
interest-bearing liabilities. Average interest-bearing liabilities
decreased $3.0 million or 0.57% to $530.9 million during the third
quarter of 2004 compared to $533.9 million during the prior year period.
This decrease was primarily the result of lower short- and long-term
debt average balances which were partially offset by an increase in
interest-bearing deposit average balances.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FTE net interest income for the nine-month period ended September 30,
2004 was $12.6 million, a decrease of $1.0 million or 7.51%, from $13.7
million for the nine-month period ended September 30, 2003.
FTE interest income for the nine months ended September 30, 2004 was
$23.2 million, a decrease of $589,000, or 2.48%, from $23.8 million for
the nine months ended September 30, 2003. This decrease primarily
resulted from a change in the mix of earning assets. The yield on
average earning assets declined 18 basis points to 5.28% for the first
nine months of 2004, compared to 5.46% for the first nine months of
2003. The 18 basis point decrease in yield resulted primarily from
decreases in market interest rates during 2003 and the impact of the low
interest rates on new and repriced assets during 2003 and 2004.
Partially offsetting the decrease in yield was an increase in average
earning asset volume. Average earning asset volume increased from
September 30, 2003 to the current period by $4.5 million, or 0.76%.
Interest expense for the nine-month period ended September 30, 2004 was
$10.5 million, an increase of $436,000, or 4.31%, from $10.1 million in
the same period of the prior year. The increase is attributable to an
increase in average interest-bearing liabilities. Average
interest-bearing deposits increased by $41.2 million, or 11.29% from the
prior year while other interest-bearing liabilities, comprised of
short-term borrowings and long-term debt, decreased by $21.5 million or
16.43%. The rate paid on total average interest-bearing liabilities
increased 1 basis point to 2.74% during the nine-month period ended
September 30, 2004 compared to 2.73% during the same period in 2003.
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.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AVERAGE BALANCES, YIELDS AND RATES
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------
2004 2003
------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- --------- ------- ----------- --------- -------
ASSETS
Federal funds sold........................ $ 18,946 $ 140 0.99% $ 2,696 $ 19 0.94%
Investment securities - taxable........... 73,826 1,459 2.64 51,262 1,102 2.87
Investment securities - non-taxable (1)... 10,112 525 6.94 13,246 680 6.86
Mortgage loans held for sale.............. 32,385 1,252 5.16 107,101 3,765 4.70
Loans, net of unearned discount and fees.. 451,698 19,807 5.86 408,194 18,206 5.96
--------- --------- ----------- ---------
Total earning assets.................... 586,967 23,183 5.28 582,499 23,772 5.46
--------- --------- ----------- ---------
Cash and due from banks - non-interest
bearing................................... 21,467 19,050
Allowance for possible loan losses........ (7,367) (7,732)
Premises and equipment, net............... 19,489 15,920
Other assets.............................. 17,346 11,599
--------- -----------
Total assets............................ $ 637,902 $ 621,336
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits-interest bearing:
Interest-bearing demand accounts.......... $ 27,663 $ 115 0.56% $ 26,847 $ 131 0.65%
Savings and money market deposits......... 181,201 2,138 1.58 145,288 1,561 1.44
Time deposits............................. 197,158 5,240 3.55 192,695 5,214 3.62
--------- --------- ----------- ---------
Total interest-bearing deposits......... 406,022 7,493 2.47 364,830 6,906 2.53
--------- --------- ----------- ---------
Short-term borrowings..................... 25,443 106 0.56 51,207 422 1.10
Long-term debt ........................... 83,778 2,951 4.71 79,472 2,786 4.69
--------- --------- ----------- ---------
Total interest-bearing liabilities ..... 515,243 10,550 2.74 495,509 10,114 2.73
--------- --------- ----------- ---------
Non-interest bearing deposits............. 76,662 83,642
Other liabilities ........................ 4,981 5,013
Stockholders' equity...................... 41,016 37,172
--------- -----------
Total liabilities and stockholders'
equity ................................ $ 637,902 $ 621,336
========= ===========
Net interest income/spread ............... $ 12,633 2.54% $ 13,658 2.73%
========= ==== ========= ====
Net interest margin....................... 2.87% 3.13%
- -----------------
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%. For
the nine months ending September 30, 2004 and 2003, the tax equivalency
adjustment amounted to $179,000 and $231,000 respectively.
17
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 volume, reflecting changes in volume multiplied by the
prior period rate; and
- changes in rate, reflecting changes in rate multiplied by the prior
period volume.
CHANGES IN INTEREST INCOME AND
EXPENSE VOLUME AND RATE VARIANCES
NINE MONTHS ENDED SEPTEMBER 30,
2004 COMPARED TO 2003
-----------------------------------
CHANGE CHANGE
DUE TO DUE TO TOTAL
RATE VOLUME CHANGE
------- -------- --------
(DOLLARS IN THOUSANDS)
Federal funds sold................................................ $ 1 $ 120 $ 121
Investment securities - taxable................................... (91) 448 357
Investment securities - non-taxable (1)........................... 8 (163) (155)
Mortgage loans held for sale...................................... 372 (2,885) (2,513)
Loans, net of unearned discount .................................. (327) 1,928 1,601
------- -------- --------
Total interest income.................................. (37) (552) (589)
------- -------- --------
Interest-bearing demand accounts.................................. (19) 3 (16)
Savings and money market deposits................................. 152 425 577
Time deposits..................................................... (121) 147 26
Short-term borrowings............................................. (209) (107) (316)
Long-term debt.................................................... 12 153 165
------- -------- --------
Total interest expense................................. (185) 621 436
------- -------- --------
Net interest income............................................... $ 148 $ (1,173) $ (1,025)
======= ======== ========
- ---------------
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PROVISION FOR LOAN LOSSES
The provision for loan losses for the third quarter of 2004 was
$400,000, compared to $150,000 for the same period of 2003. For the
nine-months ended September 30, 2004 and 2003, the provision was $1.1
million and $1.4 million, respectively. The increase in the provision
for loan losses recorded in the three-month period ended September 30,
2004 compared to the same period in the prior year was the result of
growth in our loan portfolio. The decrease in the provision for loan
losses recorded in the nine-month period ended September 30, 2004
compared to the same period in the prior year was the result of
improvements in the overall credit exposure in the loan portfolio. The
Company's credit administration function performs monthly analyses on
the loan portfolio to assess and report on risk levels, delinquencies,
an internal ranking system and overall credit exposure. Management and
the Board of Directors reviews the allowance for loan losses monthly,
considering such factors as current and projected economic conditions,
loan growth, the composition of the loan portfolio, loan trends and
classifications, and other factors. We make provisions for loan losses
in amounts that management deems necessary to maintain the allowance for
loan losses at an appropriate level.
NON-INTEREST INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2004 2003 2004 2003
------ ------ ------- --------
(IN THOUSANDS)
Loans held for sale fee income................... $2,106 $5,974 $ 7,992 $ 16,979
NSF charges and service fees..................... 334 333 1,005 943
Other service charges............................ 295 224 838 688
Net realized gain on investment securities....... 391 - 524 -
Other income .................................... 143 106 425 331
------ ------ ------- --------
Total non-interest income.................. $3,269 $6,637 $10,784 $ 18,941
====== ====== ======= ========
Non-interest income decreased $3.4 million, or 50.75%, to $3.3 million
during the three-month period ended September 30, 2004, from $6.6
million during the three-month period ended September 30, 2003.
Non-interest income for the nine-months ended September 30, 2004 was
$10.8 million, a decrease of $8.2 million, or 43.07%, from $18.9 million
for the nine-months ended September 30, 2003. These decreases are
attributable primarily to decreases in loans held for sale fee income.
Loans held for sale fee income decreased $3.9 million, or 64.75%, and
$9.0 million, or 52.93%, for the three-month and nine-month periods
ended September 30, 2004, respectively. During 2002 and the first half
of 2003, we experienced significant growth in our loans held for sale
fee income due to the expansion of our National and Local mortgage
divisions concurrent with a relatively low interest rate environment.
The low interest rate environment resulted in a surge of mortgage
refinancing activity. However, during the second half of 2003 and early
in the first half of 2004, mortgage interest rates increased causing a
decline in the volume of mortgage origination activity, particularly
refinancing volume. In addition, as discussed in Note 6 to the
Consolidated Financial Statements, the Company recorded a $350,000
reduction in its Loans Held for Sale Fee Income to account for the
anticipated refund of fee income on residential mortgage loans
underwritten with documentation altered by a former employee of the
Company.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
During 2004, we took advantage of opportunities to mitigate the risk of
longer-term rate volatility in our available-for-sale investment
portfolio and sold approximately $20.7 million of available-for-sale
investment securities and realized $524,000 in net gains on those sales.
Included in this amount are $391,000 of gains realized during the third
quarter of 2004 from sales of $14.7 million of available-for-sale
securities.
NON-INTEREST EXPENSE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- ------- -------
(IN THOUSANDS)
Salaries and employee benefits............ $ 3,836 $ 6,092 $ 12,240 $16,169
Occupancy................................. 903 833 2,503 2,296
FDIC and other insurance expense.......... 59 59 180 178
General and administrative ............... 1,629 1,729 4,578 4,740
------- ------- -------- -------
Total non-interest expense.......... $ 6,427 $ 8,713 $ 19,501 $23,383
------- ------- -------- -------
Non-interest expense decreased to $6.4 million, or 26.24%, during the
three-month period ended September 30, 2004 and to $19.5 million, or
16.61%, during the nine-month period ended September 30, 2004, from $8.7
million and $23.4 million in the prior year periods, respectively. These
decreases are attributable primarily to a decrease in salaries and
employee benefits expense which decreased $2.3 million, or 37.04%,
during the third quarter of 2004 and $3.9 million, or 24.30%, during the
nine-month period ended September 30, 2004, compared to the prior year
periods. Salaries and employee benefits expense decreased primarily due
to decreased volume-based incentive compensation in our mortgage
operations. We had 273 full-time equivalent employees at September 30,
2004 compared to 288 at September 30, 2003.
FINANCIAL CONDITION
Total assets for the Company at September 30, 2004, were $669.9 million,
an increase of $42.8 million, or 6.82%, compared to $627.1 million at
December 31, 2003. Deposits and stockholders' equity at September 30,
2004, were $530.7 million and $42.0 million, respectively, compared with
$470.5 million and $40.2 million, respectively, at December 31, 2003,
increases of $60.2 million, or 12.79%, and $1.8 million, or 4.55%,
respectively.
Loans at September 30, 2004 totaled $477.8 million, reflecting an
increase of $53.1 million, or 12.51%, compared to December 31, 2003. The
loan to deposit ratio at September 30, 2004 was 90.02% compared to
90.25% at December 31, 2003.
Mortgage loans held for sale at September 30, 2004 totaled $27.7
million, an increase of $9.4 million, or 51.24% compared to December 31,
2003. 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 September 30, 2004, approximately $36.2 million was available. The
Company's Federal Home Loan Bank advance availability fluctuates
depending on levels of available collateral, which includes mortgage
loans held for sale.
20
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, 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
---------------------------------------
SEPTEMBER 30, DECEMBER 31,
2004 2003 2003
--------- ------ ------------
(Dollars in thousands)
REAL ESTATE LOANS:
Past due 90 days or more $ -- $1,538 $ 337
Nonaccrual 476 -- 1,991
INSTALLMENT LOANS:
Past due 90 days or more -- 1 4
Nonaccrual -- -- --
CREDIT CARDS AND RELATED PLANS:
Past due 90 days or more -- 4 39
Nonaccrual -- -- --
COMMERCIAL (TIME AND DEMAND) AND ALL OTHER LOANS:
Past due 90 days or more 583 788 117
Nonaccrual 1,860 1,440 318
LEASE FINANCING RECEIVABLES:
Past due 90 days or more 1 27 --
Nonaccrual 310 141 249
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 3,230 3,939 3,055
FORECLOSED ASSETS HELD FOR SALE 2,459 652 416
------ ------ ------
Total non-performing assets $5,689 $4,591 $3,471
====== ====== ======
Total nonperforming loans to total loans 0.68% 0.95% 0.72%
Total nonperforming loans to total assets 0.48% 0.63% 0.50%
Allowance for loan losses to nonperforming loans 235.45% 192.87% 230.79%
Nonperforming assets to loans and foreclosed assets
held for sale 1.18% 1.11% 0.82%
As of September 30, 2004, non-performing loans equaled 0.68% of total
loans, reflecting a decrease in non-performing loans from December 31,
2003. The overall credit exposure in the Company's total loan portfolio
continued to improve; consequently, the Company recorded a lower
provision for loan losses during the nine month period ending September
30, 2004 compared to the nine month period ending September 30, 2003 The
level of loans charged-off decreased during the third quarter of 2004,
as evidenced by the decrease in our ratio of net charge-offs to average
loans, to 0.14% for the period ending September 30, 2004 compared to
0.30% for the period ending December 31, 2003. 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 losses in excess
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
of its non-performing loans. As of September 30, 2004, our ratio of
allowance for loan losses to non-performing loans was 235.45%. At
September 30, 2004, the $2.5 million balance of foreclosed assets held
for sale represents one property acquired during the third quarter of
2004. The following table sets forth information regarding changes in
our allowance for loan and valuation losses for the periods indicated.
SUMMARY OF LOAN LOSS EXPERIENCE
AND RELATED INFORMATION
AS OF AND FOR THE
---------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
---------------------- DECEMBER 31,
2004 2003 2003
-------- -------- --------
(Dollars in thousands)
BALANCE AT BEGINNING OF PERIOD $ 7,051 $ 6,914 $ 6,914
LOANS CHARGED-OFF
Commercial real estate -- 392 395
Residential real estate 18 -- --
Commercial 445 260 802
Personal 73 64 68
Home Equity -- 10 10
Construction -- 3 --
Leases 215 202 279
-------- -------- --------
Total loans charged-off 751 931 1,554
-------- -------- --------
RECOVERIES:
Commercial real estate 7 5 10
Residential real estate 48 2 --
Commercial 26 72 77
Personal 35 32 35
Home Equity -- -- --
Construction -- 3 --
Leases 139 150 219
-------- -------- --------
Total recoveries 255 264 341
-------- -------- --------
NET LOANS CHARGED-OFF 496 667 1,213
PROVISION FOR LOAN LOSSES 1,050 1,350 1,350
-------- -------- --------
BALANCE AT END OF PERIOD $ 7,605 $ 7,597 $ 7,051
======== ======== ========
LOANS OUTSTANDING:
Average $451,698 $408,194 $410,593
End of period 477,760 413,724 424,620
RATIO OF ALLOWANCE FOR LOAN LOSSES TO
LOANS OUTSTANDING:
Average 1.68% 1.86% 1.72%
End of period 1.59% 1.84% 1.66%
RATIO OF ANNUALIZED NET CHARGE-OFFS TO
Average loans 0.15% 0.21% 0.30%
End of period loans 0.14% 0.22% 0.29%
22
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 decreased to
1.59% as of September 30, 2004, compared to 1.66% at December 31, 2003. As
of September 30, 2004, net charge-offs equaled 0.14% 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 81.88% and
82.54% of our total deposits at September 30, 2004, and December 31, 2003,
respectively. Generally, the Company's funding strategy is to utilize
Federal Home Loan Bank 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. These
indicators are reported to the board of directors monthly, and at
September 30, 2004, the Bank was within the established guidelines.
At September 30, 2004, our total stockholders' equity was $42.0 million
and our equity to asset ratio was 6.27%. At September 30, 2004, our Tier 1
capital ratio was 9.45% compared to 10.04% at December 31, 2003, while our
total risk-based capital ratio was 11.66% compared to 12.41% at December
31, 2003. As of September 30, 2004, we had capital in excess of the
requirements for a "well-capitalized" institution.
SUBSEQUENT EVENTS
See Note 6 to the Consolidated Financial Statements.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a continuing part of our financial strategy, we attempt to manage the
impact of fluctuations in market interest rates on our net interest
income. This effort entails providing a reasonable balance between
interest rate risk, credit risk, liquidity risk and maintenance of yield.
Our funds management policy is established by our Bank Board of Directors
and monitored by our Asset/Liability Management Committee. Our funds
management policy sets standards within which we are expected to operate.
These standards include guidelines for exposure to interest rate
fluctuations, liquidity, loan limits as a percentage of funding sources,
exposure to correspondent banks and brokers, and reliance on non-core
deposits. Our funds management policy also establishes the reporting
requirements to our Bank Board of Directors. Our investment policy
complements our funds management policy by establishing criteria by which
we may purchase securities. These criteria include approved types of
securities, brokerage sources, terms of investment, quality standards, and
diversification.
We use an asset/liability modeling service to analyze the Company's
current sensitivity to instantaneous and permanent changes in interest
rates. The system simulates the Company's asset and liability base and
projects future net interest income results under several interest rate
assumptions. This allows management to view how changes in interest rates
will affect the spread between the yield received on assets and the cost
of deposits and borrowed funds.
The asset/liability modeling service is also used to analyze the net
economic value of equity at risk under instantaneous shifts in interest
rates. The "net economic value of equity at risk" is defined as the market
value of assets less the market value of liabilities plus/minus the market
value of any off-balance sheet positions. By effectively looking at the
present value of all future cash flows on or off the balance sheet, the
net economic value of equity modeling takes a longer-term view of interest
rate risk.
We strive to maintain a position such that current changes in interest
rates will not affect net interest income or the economic value of equity
by more than 5%, per 50 basis points. The following table sets forth the
estimated percentage change in the Bank of Blue Valley's net interest
income over the next twelve month period and net economic value of equity
at risk at September 30, 2004 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
- ------------------------- ---------------- --------------
300 basis point rise 23.96% 5.72%
200 basis point rise 16.11% 4.00%
100 basis point rise 8.27% 2.13%
Base Rate Scenario - -
25 basis point decline (4.18%) 0.00%
50 basis point decline (8.92%) (0.04%)
75 basis point decline (13.39%) (0.06%)
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The above table indicates that, at September 30, 2004, in the event of a
sudden and sustained increase in prevailing market rates, our net interest
income would be expected to increase as our assets would be expected to
reprice quicker than our liabilities, while a decrease in rates would
indicate just the opposite. Generally, in the decreasing rate scenarios,
not only would adjustable rate assets (loans) reprice to lower rates
faster than our liabilities, but our liabilities - long-term Federal Home
Loan Bank of Topeka (FHLB) advances and existing time deposits - would not
decrease in rate as much as market rates. In addition, fixed rate loans
might experience an increase in prepayments, further decreasing yields on
earning assets and causing net interest income to decrease. Another
consideration with a rising interest rate scenario is the impact on
mortgage loan refinancing, which would likely decline, leading to lower
loans held for sale fee income, though the impact is difficult to quantify
or project.
The above table also indicates that, at September 30, 2004, 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 25,
50 or 75 basis point decline in interest rates will result in a lower or
unchanged 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.
25
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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS
(F) EXHIBITS
11. Computation of Earnings Per Share. Please see p. 9.
15. Letter regarding Unaudited Interim Financial Information
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of the 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
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLUE VALLEY BAN CORP
Date: November 15, 2004 By: /s/ Robert D. Regnier
---------------------------------
Robert D. Regnier, President and
Chief Executive Officer
Date: November 15, 2004 By: /s/ Mark A. Fortino
---------------------------------
Mark A. Fortino, Treasurer
28