Annual Report 2008
Dear Friends,
Blue Valley Ban Corp (the Company) experienced a difficult year in 2008. In my
annual report letter last year I said that we were facing a challenging environment,
but no one predicted the level of distress to the financial industry that was
experienced during the third and fourth quarters of last year. In September, the
Company recorded a significant loan loss provision for the third quarter. This
proactive provision allowed us to charge off a significant number of the credits
we felt were impacted by the economic downturn. Additionally, the fourth quarter
was negatively impacted by a goodwill impairment charge of $4.8 million. This
charge was attributable to the continued volatility in the financial services industry
and its effect on the market prices of financial services stock, as well as weakened
economic conditions, decline in the credit quality of the Bank portfolio, and our
2008 operating loss. Absent this charge, the Company would have reported a
profit for the fourth quarter. For the full year, the Company reflected a net loss of
$10.3 million, or $4.20 per share.
The Company’s loan portfolio is being impacted by a fragile housing market
and the general impact of the global economic downturn. The Company has a
concentration in residential construction loans primarily in Johnson County and
a number of those loans have fallen into non-performing status. Real estate
development, commercial, and consumer loans have also been impacted by the
downturn. Additionally, the significant decline in interest rates has compressed the
Companies net-interest margin.
In spite of these losses, the Company ended the year at capital levels that exceeded
the last two years. The Company’s total capital to risk-weighted assets ratio
at December 31, 2008 was 13.82% as compared to 11.53% and 12.47%, as of
December 31, 2007 and 2006, respectively. The Company had total regulatory
capital of $103.3 million, which represents $43.5 million of capital in excess
of regulatory standards. These capital levels were enhanced by a preferred stock
investment by the US Treasury Department in December of $21.75 million and
by a successful rights offering with our shareholders in late December that raised
$5.2 million.
The first half of 2009 will be difficult as we work through the continuing impact
of the economic environment on our portfolio. This will be a year to improve
the quality of our loan portfolio, deepen our deposit base with our successful
“Performance Checking” product, and look for opportunities to improve our
net-interest margin and non-interest income.
Thank you for the support you provided to the Bank in 2008. We are focused on
improved performance in 2009.
Robert D. Regnier
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
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
(State or other jurisdiction of
incorporation or organization)
11935 Riley
Overland Park, Kansas
(Address of principal executive offices)
48-1070996
(I.R.S. Employer
Identification No.)
66225-6128
(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
Guarantee with respect to the Trust Preferred
Securities, $8.00 par value, of BVBC Capital
Trust I (None of which are currently outstanding)
Name of each exchange on which registered
None currently
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act Yes [ ] No [√ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes [√ ] No [ ]
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 [√] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [√]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check One):
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [√ ]
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Securities Act Yes [ ] No [√ ]
As of January 31, 2009 1,477,719 shares of the Registrant’s common stock were held by non-affiliates. The aggregate market value of
these common shares, computed based on the June 30, 2008 closing price of the stock, was approximately $45.8 million. As of January 31, 2009
the registrant had 2,760,105 shares of Common Stock ($1.00 par value) outstanding.
1. Part III – Proxy Statement for the 2009 Annual Meeting of Stockholders
DOCUMENTS INCORPORATED BY REFERENCE
BLUE VALLEY BAN CORP.
FORM 10-K INDEX
Page No.
PART I.
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II.
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III.
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships, Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV.
Item 15. Exhibits, Financial Statement Schedules
1
2
15
18
18
19
19
20
21
23
46
48
48
48
48
49
49
49
49
50
50
Item 1:
Business
The Company and Subsidiaries
Part I
As used in this Form 10-K, unless we specify otherwise, “we,” “us,” “our,” “Company,” and “Blue Valley”
refers to Blue Valley Ban Corp., a Kansas corporation.
Blue Valley Ban Corp. is a bank holding company organized in 1989. The Company's primary wholly-owned
subsidiary, Bank of Blue Valley (the "Bank"), was also organized in 1989 to provide banking services to closely-
held businesses and their owners, professionals and residents in Johnson County, Kansas, a high growth,
demographically attractive area within the Kansas City, Missouri - Kansas Metropolitan Statistical Area (the
"Kansas City MSA"). The focus of Blue Valley has been to take advantage of the current and anticipated growth in
our market area as well as to serve the needs of small and mid-sized commercial borrowers – customers that we
believe currently are underserved as a result of banking consolidation in the industry generally and within our
market specifically. In addition, Blue Valley has established a national presence by originating residential
mortgages nationwide through the Bank’s InternetMortgage.com website.
We have experienced significant internal growth since our inception. As of December 31, 2008, we had six
locations in Johnson County, Kansas, including our main office which includes a lobby banking center, and a
mortgage operations office in Overland Park, and full-service offices in Leawood, Lenexa, Olathe and Shawnee,
Kansas.
The lending activities are focused on commercial lending, and to a lesser extent, consumer lending, residential
mortgage origination services and leasing. The Company strives to identify, develop and maintain diversified lines
of business which provide acceptable risk-adjusted returns. Our primary lines of business consist of commercial
lending, commercial real estate lending, construction lending, lease financing, residential real estate lending,
consumer lending, and home equity loans.
The Company also seeks to develop lines of business which diversify our revenue sources, increase our non-
interest income and offer additional value-added services to our customers. We develop these new or existing lines
of business while monitoring related risk factors. In addition to fees generated in conjunction with lending
activities, we derive non-interest income by providing mortgage origination services, deposit and cash management
services, investment brokerage services and trust services.
In addition to the Bank, as of December 31, 2008, the Company had three wholly-owned subsidiaries: Blue
Valley Building Corp., which owns the buildings and real property that comprise our headquarters, mortgage
operations facility and the Leawood banking center; and BVBC Capital Trust II and BVBC Capital Trust III, which
were created to offer the Company’s trust preferred securities and to purchase our junior subordinated debentures.
We also have a 49% ownership in Homeland Title, LLC. Homeland Title, LLC was established in June 2005
and provides title and settlement services. This entity is no longer generating business.
Our principal executive offices are located at 11935 Riley, Overland Park, Kansas 66225-6128, and our
telephone number is (913) 338-1000.
Consolidated financial information, including a measure of profit and loss and total assets can be found in Part
IV of this report.
2
Our Market Area
We operate primarily as a community bank, serving the banking needs of small and medium-sized companies
and individuals in the Kansas City MSA. Specifically, our trade area consists of Johnson County, Kansas. We
believe that coupling our strategy of providing exceptional customer service and local decision making with
attractive market demographics has led to the continued growth of our total assets and deposits.
The income levels and growth rate of Johnson County, Kansas compare favorably to national averages.
Johnson County’s population growth rate ranks in the top 9% of counties nationally, and its per capita income ranks
in the top 1.4 % of counties nationally. Johnson County is also a significant banking market in the State of Kansas
and in the Kansas City MSA. According to available industry data, as of June 30, 2008, total deposits in Johnson
County, including those of banks, thrifts and credit unions, were approximately $14.5 billion, which represented
25.14% of total deposits in the state of Kansas and 36.38% of total deposits in the Kansas City MSA.
As our founders anticipated, the trade area surrounding our main banking facility in Overland Park, Kansas has
become one of the most highly developed retail areas in the Kansas City MSA. Our Olathe, Kansas facility is
located approximately 8 miles southwest of our main office and opened in 1994. The Shawnee, Kansas banking
facility is approximately 17 miles northwest of our headquarters location. We entered into the Shawnee market in
1999 and in the first quarter of 2001, construction of our freestanding banking facility in Shawnee was completed
and operations commenced in that facility. The Leawood, Kansas banking facility is approximately four miles
southeast of our headquarters location. We entered into the Leawood market in 2002 and in the second quarter of
2004, construction of our freestanding banking facility in Leawood was completed and operations commenced in
that facility. During 2003 we acquired an office building in Overland Park, Kansas approximately one mile
northwest of our headquarters location. At this location, we consolidated our mortgage operations, bank operations,
and opened a banking facility. The banking facility was subsequently closed and consolidated into the main bank in
November 2008. The Lenexa, Kansas banking facility is approximately seven miles northwest of our headquarters
location. The Lenexa facility was opened in February 2007 when we acquired Unison Bancorp, Inc., and its
subsidiary, Western National Bank. We made this acquisition to continue our expansion in Johnson County and to
establish our first presence in the Lenexa market.
Lending Activities
Overview. Our principal loan categories include commercial, commercial real estate, construction, leasing and
residential mortgages. We also offer a variety of consumer loans and home equity loans. Our primary source of
interest income is interest earned on our loan portfolio. As of December 31, 2008, our loans represented
approximately 81.21% of our total assets, our legal lending limit to any one borrower was $23.2 million, and our
largest single borrower as of that date had outstanding loans of $14.2 million.
We have been successful in expanding our loan portfolio because of the commitment of our staff and the
economic growth in our area of operation. Our staff has significant experience in lending and has been successful in
offering our products to both potential and existing customers. We believe that we have been successful in
maintaining our customers because of our staff’s attentiveness to their financial needs and the development of
professional relationships with our customers. We strive to become a strategic business partner with our customers,
not just a source of funds.
We conduct our lending activities pursuant to the loan policies adopted by our board of directors. These
policies currently require the approval of our loan committee of all commercial credits in excess of $1.5 million, all
real estate credits in excess of $2.5 million, and unsecured loans in excess of $300,000. Credits up to $1.5 million
on commercial loans, $2.5 million on real estate loans, and $300,000 on unsecured loans can be approved by the
Bank’s President and a combination of two senior loan management officers. Our management information systems
and loan review policies are designed to monitor lending sufficiently to ensure adherence to our loan policies. The
following table shows the composition of our loan portfolio at December 31, 2008.
3
LOAN PORTFOLIO
As of December 31, 2008
Percent
Amount
(In thousands)
Commercial ......................................................... $
Commercial real estate ........................................
Construction ........................................................
Lease financing....................................................
Residential real estate ..........................................
Consumer ............................................................
Home equity ........................................................
Total loans and leases .................................
Less allowance for loan losses.............................
Loans receivable, net ........................................... $
172,647
170,697
182,933
18,927
43,695
14,245
59,257
662,401
12,368
650,033
26.06 %
25.77
27.62
2.86
6.60
2.15
8.94
100.00 %
Commercial loans. As of December 31, 2008, approximately $172.6 million, or 26.06%, of our loan portfolio
represented commercial loans. The Bank has developed a strong reputation in providing and servicing small
business and commercial loans. We have expanded this portfolio through the addition of commercial lending staff,
their business development efforts, our reputation and the acquisition of Unison Bancorp, Inc. and its subsidiary,
Western National Bank, in 2007. Commercial loans have historically been a significant portion of our loan portfolio
and we expect to continue our emphasis on this loan category.
The Bank’s commercial lending activities historically have been directed to small and medium-sized companies
in or near Johnson County, Kansas, with annual sales generally between $100,000 and $20 million. The Bank’s
commercial customers are primarily firms engaged in manufacturing, service, retail, construction, distribution and
sales with significant operations in our market areas. The Bank’s commercial loans are primarily secured by real
estate, accounts receivable, inventory and equipment, and the Bank may seek to obtain personal guarantees for its
commercial loans. The Bank primarily underwrites its commercial loans on the basis of the borrowers’ cash flow
and ability to service the debt, as well as the value of any underlying collateral and the financial strength of any
guarantors.
Approximately $6.9 million, or 3.98%, of our commercial loans are Small Business Administration (SBA)
loans, of which $5.1 million is government guaranteed. The SBA guarantees the repayment in the event of a default
of a portion of the principal on these loans, plus accrued interest on the guaranteed portion of the loan. Under the
federal Small Business Act, the SBA may guarantee up to 85% of qualified loans of $150,000 or less and up to 75%
of qualified loans in excess of $150,000, up to a maximum guarantee of $2.0 million. We are an active SBA lender
in our market area and have been approved to participate in the SBA Certified Lender Program.
Commercial lending is subject to risks specific to the business of each borrower. In order to address these risks,
we seek to understand the business of each borrower, place appropriate value on any personal guarantee or collateral
pledged to secure the loan, and structure the loan amortization to maintain the value of any collateral during the term
of the loan.
Commercial real estate loans. The Bank also makes loans to provide permanent financing for retail and office
buildings, multi-family properties and churches. As of December 31, 2008, approximately $170.7 million, or
25.77%, of our loan portfolio represented commercial real estate loans. Our commercial real estate loans are
underwritten on the basis of the appraised value of the property, the cash flow of the underlying property, and the
financial strength of any guarantors.
Risks inherent in commercial real estate lending are related to the market value of the property taken as
collateral, the underlying cash flows and documentation. Commercial real estate lending involves more risk than
residential real estate lending because loan balances may be greater and repayment is dependent on the borrower’s
operations. We attempt to mitigate these risks by carefully assessing property values, investigating the source of
cash flow servicing the loan on the property and adhering to our lending and underwriting policies and procedures.
4
Construction loans. Our construction loans include loans to developers, home building contractors and other
companies and consumers for the construction of single-family homes, land development, and commercial
buildings, such as retail and office buildings and multi-family properties. As of December 31, 2008, approximately
$182.9 million, or 27.62%, of our loan portfolio represented real estate construction loans. The builder and
developer loan portfolio has been a consistent component of our loan portfolio over our history. The Bank’s
experience and reputation in this area have grown, thereby enabling the Bank to focus on relationships with a
smaller number of larger builders and increasing the total value of the Bank’s real estate construction portfolio.
Construction loans are made to qualified builders to build houses to be sold following construction, pre-sold houses
and model houses. These loans are generally underwritten based on several factors, including the experience and
current financial condition of the borrowing entity, amount of the loan to appraised value, and general conditions of
the housing market with respect to the subdivision and surrounding area, which the bank receives from a third party
reporting entity. Construction loans are also made to individuals for whom houses are being constructed by builders
with whom the Bank has an existing relationship. Such loans are made on the basis of the individual’s financial
condition, the loan to value ratio, the reputation of the builder, and whether the individual will be pre-qualified for
permanent financing.
Risks related to construction lending include assessment of the market for the finished product, reasonableness
of the construction budget, ability of the borrower to fund cost overruns, and the borrower’s ability to liquidate and
repay the loan at a point when the loan-to-value ratio is the greatest. We seek to manage these risks by, among other
things, ensuring that the collateral value of the property throughout the construction process does not fall below
acceptable levels, ensuring that funds disbursed are within parameters set by the original construction budget, and
properly documenting each construction draw.
Lease financing. Our lease portfolio includes capital leases that we have originated and leases that we have
acquired from brokers or third parties. As of December 31, 2008, our lease portfolio totaled $18.9 million, or 2.86%
of our total loan portfolio. We provide lease financing for a variety of equipment and machinery, including office
equipment, heavy equipment, telephone systems, tractor trailers and computers. Lease terms are generally from
three to five years. We have provided lease financing in the past and will continue to do so for our customers.
However, we do not expect to aggressively pursue lease financing unless the lessor maintains an additional banking
relationship with the Bank. As a result of a reduction in force in our leasing department during the year, we expect
the lease portfolio to decrease over time. Our leases are generally underwritten based upon several factors,
including the overall credit worthiness, experience and current financial condition of the lessee, the amount of the
financing to collateral value, and general conditions of the market.
The primary risks related to our lease portfolio are the value of the underlying collateral and specific risks
related to the business of each borrower. To address these risks, we attempt to understand the business of each
borrower, value the underlying collateral appropriately and structure the loan amortization to ensure that the value of
the collateral exceeds the lease balance during the term of the lease.
Residential real estate loans. Our residential real estate loan portfolio consists primarily of first and second
mortgage loans on residential properties. As of December 31, 2008, $43.7 million, or 6.60%, of our loan portfolio
represented residential mortgage loans. The terms of these loans typically include 3 to 5 year balloon payments
based on a 15 to 30 year amortization, and accrue interest at a fixed or variable rate. By offering these products, we
can offer credit to individuals who are self-employed or have significant income from partnerships or investments.
These individuals are often unable to satisfy the underwriting criteria permitting the sale of their mortgages into the
secondary market.
In addition, we also originate residential mortgage loans with the intention of selling these loans in the
secondary market. During 2008, we originated approximately $136.8 million of residential mortgage loans, and we
sold approximately $139.6 million in the secondary market. We originate conventional first mortgage loans through
our internet website as well as through referrals from real estate brokers, builders, developers, prior customers and
media advertising. We have offered customers the ability to apply for mortgage loans and to pre-qualify for
mortgage loans over the Internet since 1999. In 2001, we expanded our internet mortgage application capacity with
the acquisition of the internet domain name InternetMortgage.com and created a separate National Mortgage
division. The timing of this expansion allowed us to establish this division in a relatively low-rate environment, and
reap the benefits of a significant increase in mortgage originations and refinancing experienced from 2001 through
5
2003. While the volume of mortgage originations and refinancing has declined since 2004, we continue to take
advantage of the national presence established in previous years and originate residential mortgage loans through
our InternetMortgage.com website. The origination of a mortgage loan from the date of initial application through
closing normally takes 15 to 60 days. To reduce interest rate risk on mortgage loans sold in the secondary market,
we acquire forward commitments from investors.
Our mortgage loan credit review process is consistent with the standards set by traditional secondary market
sources. We review appraised value and debt service ratios, and we gather data during the underwriting process in
accordance with various laws and regulations governing real estate lending. Loans originated by the Bank are sold
with servicing released to increase current income and reduce the costs associated with retaining servicing rights.
Commitments are obtained from the purchasing investor on a loan-by-loan basis on a 30, 45 or 60-day delivery
commitment. Interest rates are committed to the borrower when a rate commitment is obtained from the investor.
Loans are funded by the Bank and purchased by the investor within 30 days following closing pursuant to
commitments obtained at the time of origination. We sell conventional conforming loans and all loans that are non-
conforming as to credit quality to secondary market investors for cash on a limited recourse basis. In our recent
experience, we have not been asked to repurchase significant amounts of loans. Consequently, foreclosure losses on
all sold loans are primarily the responsibility of the investor and not that of the Bank.
As with other loans to individuals, the risks related to residential mortgage loans include primarily the value of
the underlying property and the financial strength and employment stability of the borrower. We attempt to manage
these risks by performing a pre-funding underwriting that consists of the verification of employment and utilizes a
detailed checklist of loan qualification requirements, including the source and amount of down payments, bank
accounts, existing debt and overall credit.
Consumer loans. As of December 31, 2008, our consumer loans totaled $14.2 million, or 2.15% of our total
loan portfolio. A substantial part of this amount consisted of installment loans to individuals in our market area.
Installment lending offered directly by the Bank in our market area includes automobile loans, recreational vehicle
loans, home improvement loans, unsecured lines of credit and other loans to professionals, people employed in
education, industry and government, as well as retired individuals and others. A portion of the Bank’s consumer
loan portfolio consists of indirect automobile loans offered through automobile dealerships located primarily in our
trade area. As of December 31, 2008, approximately $4.5 million, or 31.6%, of the Bank’s consumer loan portfolio
represented indirect automobile loans. The Bank’s loans made to individuals through this program generally
represent loans to purchase new or late model automobiles. There are currently 14 dealerships participating in this
program. The Bank’s consumer and other loans are underwritten based on the borrower’s income, current debt, past
credit history, collateral, and the reputation of the originating dealership with respect to indirect automobile loans.
Consumer loans are subject to the same risks as other loans to individuals, including the financial strength and
employment stability of the borrower. In addition, some consumer loans are subject to the additional risk that the
loan is not secured by collateral. For some of the loans that are secured, the underlying collateral may be rapidly
depreciating and not provide an adequate source of repayment if we are required to repossess the collateral. The
Bank attempts to mitigate these risks by requiring a down payment and carefully verifying and documenting the
borrower’s credit quality, employment stability, monthly income, and with respect to indirect automobile loans,
understanding and documenting the value of the collateral and the reputation of the originating dealership.
Home equity loans. As of December 31, 2008, our home equity loans totaled $59.3 million, or 8.94% of our
total loan portfolio. Home equity loans are generally secured by second liens on residential real estate and are
underwritten in a similar manner as our consumer loans.
6
Investment Activities
The objectives of our investment policies are to:
•
•
•
secure the safety of principal;
provide adequate liquidity;
provide securities for use in pledging for public funds or repurchase agreements; and
• maximize after-tax income.
We invest primarily in obligations of agencies of the United States and bank-qualified obligations of state and
local political subdivisions. Although direct obligations of the United States and obligations guaranteed as to
principal and interest by the United States are permitted by our investment policy, we currently do not hold any in
our portfolio. In order to ensure the safety of principal, we do not invest in mortgage-backed securities or sub-prime
mortgages and we typically do not invest in corporate debt or other securities even though they are permitted by our
investment policy. In addition, we enter into federal funds transactions with our principal correspondent banks, and
depending on our liquidity position, act as a net seller or purchaser of these funds. The sale of federal funds is
effectively a short-term loan from us to another bank; while conversely, the purchase of federal funds is effectively a
short-term loan from another bank to us.
Deposit Services
The principal sources of funds for the Bank are core deposits from the local market areas surrounding the
Bank’s offices, including demand deposits, interest-bearing transaction accounts, money market accounts, savings
deposits and time deposits. Transaction accounts include interest-bearing and non-interest-bearing accounts, which
provide the Bank with a source of fee income and cross-marketing opportunities as well as a low-cost source of
funds. Since 2001, the Bank has realized a significant level of deposit growth from commercial checking accounts.
While these accounts do not earn interest, many of them receive an earnings credit on their average balance to offset
the cost of other services provided by the Bank. During 2007, we introduced performance checking accounts. This
interest-bearing demand product has proven to be an attractive product in our market area as it pays a higher rate
than most checking accounts as long as the customer meets the requirements of at least 12 signature based debit card
transactions and at least one direct deposit or ACH debit each statement cycle. The Bank realizes non-interest
income from the signature based debit card transactions that, when netted against the high rate paid to the customer,
results in a very attractive low cost of funds for the Bank. The Bank’s money market account is a daily access
account that bears a higher rate and allows for limited check-writing ability. This account pays a tiered rate of
interest. We believe money market accounts have also proven to be attractive products in our market area and
provide us with a more attractive source of funds than other alternatives such as Federal Home Loan Bank
borrowings, as it provides us with the potential to cross-sell additional services to these account holders.
Time deposits and savings accounts also provide a relatively stable customer base and source of funding.
Because of the nature and behavior of these deposit products, management reviews and analyzes our pricing strategy
in comparison not only to competitor rates, but also as compared to other alternative funding sources to determine
the most advantageous source. In pricing deposit rates, management also considers profitability, the matching of
term lengths with assets, the attractiveness to customers, and rates offered by our competitors. The Bank has joined
the Certificate of Deposit Account Registry Service (“CDARS”) which effectively lets depositors receive FDIC
insurance on amounts of certificate of deposits larger than FDIC insurance coverage, which is currently $250,000.
CDARS allows the Bank to break large deposits into smaller amounts and place them in a network of other CDARS
banks to ensure that full FDIC insurance coverage is gained on the entire deposit. It is not clear if the temporary
increase in FDIC insurance coverage during 2008 will remain at $250,000 after December 31, 2009 or return to
$100,000. Therefore, if the maturity date (of the certificate of deposit) is subsequent to December 31, 2009 the
funds are currently being placed in the CDARS program in amounts less than or equal to $100,000 to ensure full
FDIC coverage. The Bank’s Funds Management policy allows for acceptance of brokered deposits, up to certain
policy limits, which can be utilized to support the growth of the Bank. As of December 31, 2008, the Bank had
$133.0 million in brokered deposits, of which $41.0 million represented customer funds placed into the CDARS
program.
7
Investment Brokerage Services
In 1999, the Bank began offering investment brokerage services through an unrelated broker-dealer. These
services are currently offered at all of our locations. Four individuals responsible for providing these services are
joint employees of the Bank and the registered broker-dealer. Investment brokerage services provide a source of fee
income for the Bank. In 2008, the amount of our fee income generated from investment brokerage services was
$397,000.
Trust Services
The Bank began offering trust services in 1996. Until 1999, the Bank’s trust services were offered exclusively
through the employees of an unaffiliated trust company. The Bank hired a full-time officer in 1999 to develop the
Bank’s trust business and the trust department now has three full-time officers and two trust administrators. Trust
services are marketed to both existing Bank customers and new customers. We believe that the ability to offer trust
services as a part of our financial services to new customers of the Bank presents a significant cross-marketing
opportunity. The services currently offered by the Bank’s trust department include the administration of personal
trusts, investment management agency accounts, self-directed individual retirement accounts, qualified retirement
plans, corporate trust accounts and custodial and directed trust accounts. As of December 31, 2008, the Bank’s trust
department administered 228 accounts, with assets under administration of approximately $112.7 million. Trust
services provide the Bank with a source of fee income and additional deposits. In 2008, the amount of our fee
income from trust services was $437,000.
Competition
The Bank encounters competition primarily in seeking deposits and in obtaining loan customers. The level of
competition for deposits in our market area is high. Our principal competitors for deposits are other financial
institutions within a few miles of our locations including other banks, savings institutions and credit unions.
Competition among these institutions is based primarily on interest rates offered, the quality of service provided, and
the convenience of banking facilities. Additional competition for depositors’ funds comes from U.S. government
securities, private issuers of debt obligations and other providers of investment alternatives for depositors.
The Bank competes in our lending, investment brokerage and trust activities with other financial institutions,
such as banks and thrift institutions, credit unions, automobile financing companies, mortgage companies, securities
firms, investment companies and other finance companies. Many of our competitors are not subject to the same
extensive federal regulations that govern bank holding companies and federally-insured banks and state regulations
governing state-chartered banks. As a result, these non-bank competitors have some advantages over the Bank in
providing certain products and services. Many of the financial institutions with which we compete are larger and
possess greater financial resources, name recognition and market presence.
Trademarks
As of December 31, 2008 the Bank had the following registered trademarks:
Bank of Blue Valley
DEPOSIT I.T.
INTERNETMORTGAGE.COM
Employees
At December 31, 2008, the Bank had approximately 197 total employees, with 185 full-time employees. The
Company and its other subsidiaries did not have any employees. None of the Bank’s employees are subject to a
collective bargaining agreement. We consider the Bank’s relationship with its employees to be excellent.
8
Directors and Executive Officers of the Registrant
For each of our directors and our executive officers, we have set forth below their ages as of December 31,
2008, and their principal positions.
Name
Directors
Age
Positions
Robert D. Regnier ......................................... 60
Donald H. Alexander..................................... 70
Michael J. Brown........................................... 52
Thomas A. McDonnell .................................. 63
Anne D. St. Peter ........................................... 43
Robert D. Taylor............................................ 61
President, Chief Executive Officer and Chairman of the Board
of Directors of Blue Valley; President, Chief Executive
Officer and Chairman of the Board of Directors of the Bank
Director of Blue Valley and the Bank
Director of Blue Valley
Director of Blue Valley
Director of Blue Valley
Director of Blue Valley and Chairman of the Audit
Committee of Blue Valley
Additional Directors of the Bank
Harvey S. Bodker .......................................... 73
Richard L. Bond ............................................ 73
Suzanne E. Dotson......................................... 62
Charles H. Hunter .......................................... 66
Director of the Bank
Director of the Bank
Director of the Bank
Director of the Bank
Executive Officers who are not Directors
Mark A. Fortino............................................. 42
Bruce A. Easterly .......................................... 49
Sheila C. Stokes............................................. 47
Bonnie M. McConnaughy ............................. 49
Executive Vice President and Chief Financial Officer of the
Bank; Chief Financial Officer of Blue Valley
Executive Vice President – Chief Lending Officer of the Bank
Senior Vice President – Retail Division of the Bank
Senior Vice President – Operations of the Bank
Available Information
Our website address is http://www.bankbv.com. Information included or referred to on our website is not
incorporated by reference in or otherwise a part of this report. Financial information, including our annual reports
on Form 10-K, quarterly reports on Form 10-Q, and amendments to those reports can be obtained free of charge
from our website. These reports are available on our website as soon as reasonably practicable after they are
electronically filed with or furnished to the SEC. These reports are also available on the SEC’s website at
http://www.sec.gov.
Regulation and Supervision
Blue Valley and its subsidiaries are extensively regulated under both federal and state laws. Laws and
regulations to which Blue Valley and the Bank are subject govern, among other things, the scope of business,
investments, reserve levels, capital levels relative to operations, the nature and amount of collateral for loans, the
establishment of branches, mergers and consolidations and the payment of dividends. These laws and regulations
are intended primarily to protect depositors, not stockholders. Any change in applicable laws or regulations may
have a material effect on Blue Valley’s business and prospects, and legislative and policy changes may affect Blue
Valley’s operations. Blue Valley cannot predict the nature or the extent of the effects on its business and earnings
that fiscal or monetary policies, economic controls or new federal or state legislation may have in the future.
9
The following references to statutes and regulations affecting Blue Valley and the Bank are brief summaries
only and do not purport to be complete and are qualified in their entirety by reference to the statutes and regulations.
Applicable Legislation
The enactment of the legislation described below has significantly affected the banking industry generally and
will have an on-going effect on Blue Valley and its subsidiaries.
Emergency Economic Stabilization Act of 2008. The Emergency Economic Stabilization Act of 2008
(“EESA”) was signed into law on October 3, 2008. This legislation was principally designed to allow the U.S.
Treasury and other government agencies to take action to restore liquidity and stability to the U.S. financial system.
This legislation authorized the U.S. Treasury Department (the “Treasury”) through the Troubled Asset Relief
Program (the “TARP”) to purchase from financial institutions and their holding companies up to $700 billion in
mortgage loans and certain other financial assets, including debt and equity securities issued by financial institutions
and their holding companies. The Treasury allocated $250 billion to the TARP Capital Purchase Plan program (the
“CPP”). The CPP is designed to attract broad participation by healthy institutions, to stabilize the financial system,
and to increase lending for the benefit of the U.S. economy. As part of the CPP, the Treasury will purchase debt and
equity securities from participating institutions. Qualified participants may sell an equity interest to the Treasury up
to 3% of its risk-weighted assets. These equity instruments will constitute Tier 1 Capital for eligible institutions.
The Company’s Board of Directors approved the Company’s participation in the program and the Company entered
into a Securities Purchase Agreement – Standard Terms on December 5, 2008. Pursuant to the agreement, the
Company issued and sold to the Treasury 21,750 shares of Fixed Rate Cumulative Perpetual Preferred Stock, along
with a ten year warrant to purchase 111,083 shares of the Company’s common stock, for a total cash price of $21.75
million. Under the terms of the CPP, the Company is prohibited, without the consent of the Treasury, from
declaring or paying a common stock dividend in an amount greater than the amount of the last quarterly cash
dividend per share declared prior to October 14, 2008. Furthermore, as long as the preferred stock issued to the
Treasury is outstanding, dividend payments and repurchases or redemptions relating to certain equity securities are
prohibited until all accrued and unpaid dividends are paid on preferred stock, subject to certain limited exceptions.
For additional information, see the liquidity and capital resources section under Managements Discussion and
Analysis of Financial Condition and Results of Operation.
As part of the EESA, the FDIC’s insurance coverage for deposits has increased from $100,000 to $250,000 until
December 31, 2009. Further, the FDIC established the Temporary Liquidity Guarantee Program which is designed
to encourage confidence and liquidity in the banking system. The program has two primary components, one is the
Debt Guarantee Program which guarantees the newly issued senior unsecured debt of banks, thrifts, and certain
holding companies. The debt guarantee coverage limit is generally 125% of the eligible entity’s eligible debt as of
September 30, 2008. The nonrefundable fee is 75 basis points (annualized) for covered debt outstanding. The
Company and the Bank have opted to not participate in this part of the program. The second part of the program is
the Transaction Account Guarantee Program which will provide full coverage of non-interest bearing deposit
transaction accounts, regardless of the dollar amount. The Temporary Liquidity Guarantee Program is effective
through December 31, 2009. Financial Institutions participating in the Transaction Account Guarantee Program will
be assessed a fee of ten basis points (annualized) on the balance of each covered account in excess of $250,000. The
Bank has opted to participate in the Transaction Account Guarantee Program.
USA PATRIOT Act. The USA PATRIOT Act of 2001 was signed into law on October 26, 2001. This
legislation enhances the powers of domestic law enforcement organizations and makes numerous other changes
aimed at countering the international terrorist threat to the security of the United States. Title III of the legislation
most directly affects the financial services industry. It is intended to enhance the federal government’s ability to
fight money laundering by monitoring currency transactions and suspicious financial activities. The USA
PATRIOT Act has significant implications for depository institutions involved in the transfer of money. Under the
USA PATRIOT Act, a financial institution must establish due diligence policies, procedures, and controls
reasonably designed to detect and report money laundering through correspondent accounts and private banking
accounts. Financial institutions must follow regulations adopted by the Treasury Department to encourage financial
institutions, their regulatory authorities, and law enforcement authorities to share information about individuals,
entities, and organizations engaged in or suspected of engaging in terrorist acts or money laundering activities.
Financial institutions must follow regulations setting forth minimum standards regarding customer identification.
10
These regulations require financial institutions to implement reasonable procedures for verifying the identity of any
person seeking to open an account, maintain records of the information used to verify the person’s identity, and
consult lists of known or suspected terrorists and terrorist organizations provided to the financial institution by
government agencies. Every financial institution must establish anti-money laundering programs, including the
development of internal policies and procedures, designation of a compliance officer, employee training, and an
independent audit function.
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act was signed into law on November 12, 1999. This
major banking legislation expands the permissible activities of bank holding companies by permitting them to
engage in activities, or affiliate with entities that engage in activities, that are "financial in nature." Activities that
the Act expressly deems to be financial in nature include, among other things, securities and insurance underwriting
and agency, investment management and merchant banking. The Federal Reserve and the Treasury Department, in
cooperation with one another, determine what additional activities are “financial in nature.” With certain exceptions,
the Gramm-Leach-Bliley Act similarly expands the authorized activities of subsidiaries of national banks. The
provisions of the Gramm-Leach-Bliley Act authorizing the expanded powers became effective March 11, 2000.
Bank holding companies that intend to engage in activities that are “financial in nature” must elect to become
“financial holding companies.” Financial holding company status is only available to a bank holding company if all
of its affiliated depository institutions are “well capitalized” and “well managed,” based on applicable banking
regulations, and have a Community Reinvestment Act rating of at least “a satisfactory record of meeting community
credit needs.” Financial holding companies and banks may continue to engage in activities that are financial in
nature only if they continue to satisfy the well capitalized and well managed requirements. Bank holding companies
that do not elect to be financial holding companies or that do not qualify for financial holding company status may
engage only in non-banking activities deemed “closely related to banking” prior to adoption of the Gramm-Leach-
Bliley Act. Blue Valley voluntarily terminated its status as a financial holding company in June 2008 as the
Company was no longer engaged in activities pursuant to the Bank Holding Company act.
The Act also calls for "functional regulation" of financial services businesses in which functionally regulated
subsidiaries of bank holding companies will continue to be regulated by the regulator that ordinarily has supervised
their activities. As a result, state insurance regulators will continue to oversee the activities of insurance companies
and agencies, and the Securities and Exchange Commission will continue to regulate the activities of broker-dealers
and investment advisers, even where the companies or agencies are affiliated with a bank holding company. Federal
Reserve authority to examine and adopt rules regarding functionally regulated subsidiaries is limited.
The Gramm-Leach-Bliley Act imposed an “affirmative and continuing” obligation on all financial service
providers (not just banks and their affiliates) to safeguard consumer privacy and requires federal and state regulators,
including the Federal Reserve and the FDIC (Federal Deposit Insurance Corporation), to establish standards to
implement this privacy obligation. With certain exceptions, the Act prohibits banks from disclosing to non-affiliated
parties any non-public personal information about customers unless the bank has provided the customer with certain
information and the customer has had the opportunity to prohibit the bank from sharing the information with non-
affiliates. The new privacy obligations became effective July 1, 2001.
The Gramm-Leach-Bliley Act has been and may continue to be the subject of extensive rule making by federal
banking regulators and others.
Bank Holding Company Regulation
Blue Valley is a registered bank holding company subject to periodic examination by the Federal Reserve and
required to file periodic reports of its operations and such additional information as the Federal Reserve may require.
Investments and Activities. A bank holding company must obtain approval from the Federal Reserve before:
• Acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding
company if, after the acquisition, it would own or control more than 5% of the shares of the bank or bank
holding company (unless it already owns or controls the majority of the shares);
11
• Acquiring all or substantially all of the assets of another bank or bank holding company; or
• Merging or consolidating with another bank holding company.
The Federal Reserve will not approve any acquisition, merger or consolidation that would have a substantially
anticompetitive result unless the anticompetitive effects of the proposed transaction are clearly outweighed by a
greater public interest in meeting the convenience and needs of the community to be served. The Federal Reserve
also considers capital adequacy and other financial and managerial factors in reviewing acquisitions or mergers.
With certain exceptions, a bank holding company is also prohibited from:
• Acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any
company that is not a bank or bank holding company; and
• Engaging, directly or indirectly, in any business other than that of banking, managing and controlling banks or
furnishing services to banks and their subsidiaries.
Bank holding companies may, however, engage in businesses found by the Federal Reserve to be “financial in
nature,” as described above. Finally, subject to certain exceptions, the Bank Holding Company Act and the Change
in Bank Control Act, and the Federal Reserve’s implementing regulations, require Federal Reserve approval prior to
any acquisition of “control” of a bank holding company, such as Blue Valley. In general, a person or company is
presumed to have acquired control if it acquires 10% of the outstanding shares of a bank or bank holding company
and is conclusively determined to have acquired control if it acquires 25% or more of the outstanding shares of a
bank or bank holding company.
Source of Strength. The Federal Reserve expects Blue Valley to act as a source of financial strength and
support for the Bank and to take measures to preserve and protect the Bank in situations where additional
investments in the Bank may not otherwise be warranted. The Federal Reserve may require a bank holding
company to terminate any activity or relinquish control of a non-bank subsidiary (other than a non-bank subsidiary
of a bank) upon the Federal Reserve’s determination that the activity or control constitutes a serious risk to the
financial soundness or stability of any subsidiary depository institution of the bank holding company. Further,
federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of
any bank or non-bank subsidiary if the agency determines that divestiture may aid the depository institution’s
financial condition. As of December 31, 2008, Blue Valley Building Corp., BVBC Capital Trust II, BVBC Capital
Trust III, and Homeland Title, LLC are Blue Valley’s only active direct subsidiaries that are not banks. The
Company has a 49% ownership in Homeland Title, LLC and this entity is no longer generating business.
Capital Requirements. The Federal Reserve uses capital adequacy guidelines in its examination and regulation
of bank holding companies and banks. If the capital falls below minimum guideline levels, a bank holding
company, among other things, may be denied approval to acquire or establish additional banks or non-bank
businesses. The Federal Reserve’s capital guidelines establish a risk-based requirement expressed as a percentage of
total risk-weighted assets and a leverage requirement expressed as a percentage of total average assets. The risk-
based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least
one-half must be Tier 1 capital (which consists principally of stockholders’ equity). The leverage requirement
consists of a minimum ratio of Tier 1 capital to total average assets of 4%.
The risk-based and leverage standards presently used by the Federal Reserve are minimum requirements, and
higher capital levels may be required if warranted by the particular circumstances or risk profiles of individual
banking organizations. Further, any banking organization experiencing or anticipating significant growth would be
expected to maintain capital ratios, including tangible capital positions, which is Tier 1 capital less all intangible
assets, well above the minimum levels.
Dividends. The Federal Reserve has issued a policy statement concerning the payment of cash dividends by
bank holding companies. The policy statement provides that a bank holding company experiencing earnings
weaknesses should not pay cash dividends exceeding its net income or which could only be funded in ways that
weakened the bank holding company’s financial health, such as by borrowing. Also, the Federal Reserve possesses
12
enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that
represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is
the ability to proscribe the payment of dividends by banks and bank holding companies. As a result of an agreement
with the Federal Reserve Bank and the Office of the State Banking Commissioner of Kansas, prior regulatory
approval is currently required prior to the payment of any dividends by the Company or Bank.
Under the terms of the CPP, for so long as any preferred stock issued under the CPP remains outstanding, Blue
Valley is prohibited from declaring or paying a common stock dividend in an amount greater than the amount of the
last quarterly cash dividend per share declared prior to October 14, 2008 without the Treasury’s consent.
Furthermore, as long as the preferred stock issued to the Treasury is outstanding, dividend payments and
repurchases or redemptions relating to certain equity securities are prohibited until all accrued and unpaid dividends
are paid on preferred stock, subject to certain limited exceptions. For additional information, see the liquidity and
capital resources section under Managements Discussion and Analysis of Financial Condition and Results of
Operation.
Bank Regulations
The Bank operates under a Kansas state bank charter and is subject to regulation by the Office of the State Bank
Commissioner and the Federal Reserve Bank. The Office of the State Bank Commissioner and the Federal Reserve
Bank regulate or monitor all areas of the Bank’s operations, including capital requirements, issuance of stock,
declaration of dividends, interest rates, deposits, record keeping, establishment of branches, acquisitions, mergers,
loans, investments, borrowing, security devices and procedures and employee responsibility and conduct. The
Office of the State Bank Commissioner places limitations on activities of the Bank including the issuance of capital
notes or debentures and the holding of real estate and personal property and requires the Bank to maintain a certain
ratio of reserves against deposits. The Office of the State Bank Commissioner requires the Bank to file a report
annually showing receipts and disbursements of the Bank, in addition to any periodic report requested.
Deposit Insurance. The FDIC, through its Deposit Insurance Fund, insures the Bank’s deposit accounts to a
maximum of $100,000 for each insured depositor, with the exception of self-directed retirement accounts which are
insured to a maximum of $250,000. In October 2008, as part of the Emergency Economic Stabilization Act, the
FDIC’s insurance coverage for deposits temporarily increased from $100,000 to $250,000 until December 31, 2009.
The FDIC bases deposit insurance premiums on the perceived risk each bank presents to its Deposit Insurance Fund.
In addition to deposit insurance premiums, institutions also pay an assessment based on insured deposits to service
debt issued by the Financing Corporation, a federal agency established to finance the recapitalization of the former
Federal Savings and Loan Insurance Corporation. The FDIC may terminate the deposit insurance of any insured
depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in
unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The
FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of
insurance if the institution has no tangible capital. Management is not aware of any activity or condition that could
result in termination of the deposit insurance of the Bank.
Capital Requirements. The FDIC has established the following minimum capital standards for state-chartered,
insured non-member banks, such as the Bank: (1) a leverage requirement consisting of a minimum ratio of Tier 1
capital to total average assets of 4%; and (2) a risk-based capital requirement consisting of a minimum ratio of total
capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. These capital
requirements are minimum requirements, and higher capital levels may be required if warranted by the particular
circumstances or risk profiles of individual institutions.
The federal banking regulators also have broad power to take “prompt corrective action” to resolve the
problems of undercapitalized institutions. The extent of the regulators’ powers depends upon whether the institution
in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or
“critically undercapitalized.” Under the prompt corrective action rules, an institution is:
13
•
•
•
•
•
“Well capitalized” if the institution has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based
capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and the institution is not subject to an
order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a
specific capital level for any capital measure;
“Adequately capitalized” if the institution has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-
based capital ratio of 4% or greater, and a leverage ratio of 4% or greater;
“Undercapitalized” if the institution has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-
based capital ratio that is less than 4%, or a leverage ratio that is less than 4%;
“Significantly undercapitalized” if the institution has a total risk-based capital ratio that is less than 6%, a
Tier 1 risk-based capital ratio that is less than 3%, or a leverage ratio that is less than 3%; and
“Critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or
less than 2%.
The federal banking regulators must take prompt corrective action with respect to capital deficient institutions.
Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include:
• Placing limits on asset growth and restrictions on activities, including the establishing of new branches;
• Requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired;
• Restricting transactions with affiliates;
• Restricting the interest rate the institution may pay on deposits;
• Requiring that senior executive officers or directors be dismissed;
• Requiring the institution to divest subsidiaries;
• Prohibiting the payment of principal or interest on subordinated debt; and
• Appointing a receiver for the institution.
Companies controlling an undercapitalized institution are also required to guarantee the subsidiary institution’s
compliance with the capital restoration plan subject to an aggregate limitation of the lesser of 5% of the institution's
assets at the time it received notice that it was undercapitalized or the amount of the capital deficiency when the
institution first failed to meet the plan. The Federal Deposit Insurance Act generally requires the appointment of a
conservator or receiver within 90 days after an institution becomes critically undercapitalized.
As of December 31, 2008, the Bank had capital in excess of the requirements for a “well capitalized”
institution.
Federal Deposit Insurance Corporation Improvement Act. The Bank, having over $500 million in total assets,
is subject to requirements of Section 112 of the Federal Deposit Insurance Corporation Act (FDICIA 112). The
primary purpose of FDICIA 112 is to provide a framework for early risk identification in financial management
through an effective system of internal controls.
Insider Transactions. The Bank is subject to restrictions on extensions of credit to executive officers, directors,
principal stockholders or any related interest of these persons. Extensions of credit must be made on substantially the
same terms, including interest rates and collateral as the terms available for third parties and must not involve more
than the normal risk of repayment or present other unfavorable features. The Bank is also subject to lending limits and
restrictions on overdrafts to these persons.
14
Community Reinvestment Act Requirements. The Community Reinvestment Act (CRA) of 1977 requires that, in
connection with examinations of financial institutions within their jurisdiction, the federal banking regulators must
evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low
and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are
also considered in evaluating mergers, acquisitions and applications to open a branch or facility. In its most recent
CRA examination dated June 2, 2008, the Bank received a rating of “Satisfactory.”
State Bank Activities. With limited exceptions, FDIC-insured state banks, like the Bank, may not make or retain
equity investments of a rate or in an amount that are not permissible for national banks and also may not engage as a
principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets,
and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would
not pose a significant risk to the deposit insurance fund of which the bank is a member.
Regulations Governing Extensions of Credit. The Bank is subject to restrictions on extensions of credit to Blue
Valley and on investments in Blue Valley’s securities and using those securities as collateral for loans. These
regulations and restrictions may limit Blue Valley’s ability to obtain funds from the Bank for its cash needs, including
funds for acquisitions and for payment of dividends, interest and operating expenses. Further, the Bank Holding
Company Act and Federal Reserve regulations prohibit a bank holding company and its subsidiaries from engaging in
various tie-in arrangements in connection with extensions of credit, leases or sales of property or furnishing of services.
Reserve Requirements. The Federal Reserve requires all depository institutions to maintain reserves against their
transaction accounts. Reserves of 3% must be maintained against net transaction accounts of $10.3 million to $44.4
million plus 10% must be maintained against that portion of net transaction accounts in excess $44.4 million (subject to
adjustment by the Federal Reserve). The balances maintained to meet the reserve requirements imposed by the Federal
Reserve may be used to satisfy liquidity requirements.
Other Regulations
Interest and various other charges collected or contracted for by the Bank are subject to state usury laws and
other federal laws concerning interest rates. The Bank’s loan operations are also subject to federal laws applicable
to credit transactions. The Federal Truth in Lending Act governs disclosures of credit terms to consumer borrowers.
The Home Mortgage Disclosure Act of 1975 requires financial institutions to provide information to enable the
public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the
housing needs of the community it serves. The Equal Credit Opportunity Act prohibits discrimination on the basis
of race, creed or other prohibited factors in extending credit. The Fair and Accurate Credit Transactions Act of 2003
governs the use and provision of information to credit reporting agencies. This act also requires financial
institutions to establish reasonable procedures of identifying identity theft. The Fair Debt Collection Act governs
the manner in which consumer debts may be collected by collection agencies. The various federal agencies charged
with the responsibility of implementing these federal laws have adopted various rules and regulations. The deposit
operations of the Bank are also subject to the Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records, and the Electronic Funds Transfer Act, and Regulation E issued by the Federal
Reserve to implement that Act, which govern automatic deposits to and withdrawals from the use of ATMs and
other electronic banking services.
Item
1A:
Risk Factors
Current levels of market volatility.
The capital and credit markets have been experiencing significant volatility and disruption over the last year.
In certain cases, this volatility has resulted in downward pressure on stock prices and credit availability for certain
issuers without regard to those issuers’ underlying financial strength. If current levels of market volatility and
disruption continue or worsen, there can be no assurance that we will not experience an adverse effect on our ability
to access capital, if needed or desired, and on our business, financial condition and results of operation.
15
Our loan portfolio is concentrated in real estate lending, which has made and will make our loan portfolio more
susceptible to credit losses in the current real estate market.
The new home real estate market in our market area has declined during 2008. Our loan portfolio has a
concentration in real estate construction and land development loans and in commercial real estate loans, most of
which are located in our market area. We have a heightened exposure to credit losses that may arise from this
concentration as a result of the downturn in the real estate market and general economy. Our non-performing assets
and allowance for loan losses increased substantially during 2008 as a result. If the current economic environment
continues for a prolonged period of time or deteriorates further, collateral values may further decline and may result
in increased credit losses in these loans.
Our future ability to raise capital may be limited.
Our ability to raise capital in the current economic and regulatory environment may be limited. During fiscal year
2008, we completed a rights offering in which we sold $5.2 million worth of our common stock to certain existing
shareholders at a price of $18 per share. In addition to the rights offering, we participated in the U.S. Treasury’s
CPP program in fiscal year 2008. Through that program, Treasury purchased 21,750 shares of the Company’s Fixed
Rate Cumulative Perpetual Preferred Stock, Series A. This raised $21.75 million in additional capital. While at this
time management does not anticipate the need to raise additional capital, should it become necessary, opportunities
to do so will not be as readily identifiable, and will likely be on less favorable terms than those available in 2008.
Our operations may be adversely affected if we are unable to maintain and increase our deposit base and secure
adequate funding.
We fund our banking and lending activities primarily through demand, savings and time deposits and, to a
lesser extent, lines of credit, sale/repurchase facilities from various financial institutions, and Federal Home Loan
Bank borrowings. The success of our business depends in part on our ability to maintain and increase our deposit
base and our ability to maintain access to other funding sources. Our inability to obtain funding on favorable terms,
on a timely basis, or at all, would adversely affect our operations and financial condition.
The loss of our key personnel could adversely affect our operations.
We are a relatively small organization and depend on the services of all of our employees. Our growth and
development to date has depended in a large part on a few key employees who have primary responsibility for
maintaining personal relationships with our largest customers. The unexpected loss of services of one or more of
these key employees could have a material adverse effect on our operations. Our key employees are Robert D.
Regnier, Mark A. Fortino, Bruce A. Easterly, Sheila C. Stokes, and Bonnie M. McConnaughy. Each of these
persons is an officer of the Bank. We do not have written employment or non-compete agreements with any of
these key employees; however, if employment was terminated, Mr. Fortino, Mr. Easterly, Ms. Stokes, and Ms.
McConnaughy would all lose three years of Blue Valley Ban Corp. Restricted Stock Awards as well as amounts
awarded in their Long-Term Retention Bonus Pools. Mr. Regnier would lose amounts awarded in his Long-Term
Retention Bonus Pool. We carry a $1 million “key person” life insurance policy on the life of Mr. Regnier.
Changes in interest rates may adversely affect our earnings and cost of funds.
Changes in interest rates affect our operating performance and financial condition in diverse ways. A
substantial part of our profitability depends on the difference between the rates we receive on loans and investments
and the rates we pay for deposits and other sources of funds. Our net interest spread will depend on many factors
that are partly or entirely outside our control, including competition, federal monetary and fiscal policies, and
economic conditions generally. Historically, net interest spreads for many financial institutions have widened and
narrowed in response to these and other factors, which are often collectively referred to as “interest rate risk.” We
try to minimize our exposure to interest rate risk, but are unable to eliminate it.
16
Because our business is concentrated in the Kansas City MSA, a downturn in the economy of the Kansas City MSA
may adversely affect our business.
Our success is dependent to a significant extent upon the general economic conditions in the Kansas City MSA,
including Johnson County, Kansas, and, in particular, the conditions for the small and medium-sized businesses that
are the focus of our customer base. Adverse changes in economic conditions in the Kansas City MSA, including
Johnson County, Kansas, would impair our ability to collect loans, reduce our growth rate and have a negative effect
on our overall financial condition. Adverse changes in the Kansas City MSA have already occurred and a continued
downturn in the general economic conditions in the Kansas City MSA will continue to have an adverse effect on our
overall financial condition.
The continued slowdown in real estate sales and a decrease in residential real estate values within our market areas
have and may continue to affect our financial condition.
Non-performing assets and our provision for loan losses have increased during 2008 as a result of the downturn
in economic conditions in the real estate market, continued decline in home sales, and decline in median home
prices and newly constructed homes. The housing industry in the Midwest experienced a downturn during the last
quarter of 2007 and continuing in 2008 reflecting, in part, decreased availability of mortgage financing for
residential home buyers, reduced demand for new home construction resulting in over-supply of housing inventory
and increased foreclosure rates. If these market conditions continue, or deteriorate further, or if these market
conditions and slowing economy negatively impact the commercial non-residential real estate market, our results of
operations will continue to be adversely impacted because a significant portion of our loans are secured by real
estate in our market areas.
If our allowance for loan losses is insufficient to absorb losses in our loan portfolio, it will adversely affect our
financial condition and results of operations.
Some borrowers may not repay loans that we make to them. This risk is inherent in the banking business. Like
all financial institutions, the Company maintains an allowance for loan losses to absorb probable loan losses in our
loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations,
specific credit risks, loan loss experience, current loan portfolio credit quality, economic and regulatory conditions
and unidentified losses inherent in the current loan portfolio. However, we cannot predict loan losses with certainty,
and we cannot assure you that our allowance will be sufficient to cover our future loan losses. Loan losses in excess
of our reserves would have an adverse effect on our financial condition and results of operations. The loan loss
provision related to real estate construction loans has increased during the second half of 2008. This increase is a
result of the industry wide decline in the real estate market and general economy. If the recent trend is prolonged
and losses continue to increase, our results of operations would continue to be negatively impacted by higher loan
losses.
In addition, various regulatory agencies, as an integral part of the examination process, periodically review our
loan portfolio. These agencies may require us to add to the allowance for loan losses based on their judgments and
interpretations of information available to them at the time of their examinations. If these agencies require us to
increase our allowance for loan losses, our earnings will be adversely affected in the period in which the increase
occurs.
We may incur significant costs if we foreclose on environmentally contaminated real estate.
If we foreclose on a defaulted real estate loan to recover our investment, we may be subject to environmental
liabilities in connection with the underlying real property. It is also possible that hazardous substances or wastes
may be discovered on these properties during our ownership or after they are sold to a third party. If they are
discovered on a property that we have acquired through foreclosure or otherwise, we may be required to remove
those substances and clean up the property. We may have to pay for the entire cost of any removal and clean-up
without the contribution of any other third parties. We may also be liable to tenants and other users of neighboring
properties. These costs or liabilities may exceed the fair value of the property. In addition, we may find it difficult
or impossible to sell the property prior to or following any environmental clean-up.
17
If we are not able to compete effectively in the highly competitive banking industry, our business will be adversely
affected.
Our business is extremely competitive. Many of our competitors are, or are affiliates of, enterprises that have
greater resources, name recognition and market presence than we do. Some of our competitors are not regulated as
extensively as we are and, therefore, may have greater flexibility in competing for business. Some of these
competitors are subject to similar regulation but have the advantages of established customer bases, higher lending
limits, extensive branch networks, numerous ATMs, and more ability to absorb the costs of maintaining technology
or other factors.
Blue Valley and the Bank are subject to extensive governmental regulation.
Blue Valley and the Bank are subject to extensive governmental regulation. Blue Valley, as a bank holding
company, is regulated primarily by the Federal Reserve Bank. The Bank is a commercial bank chartered by the State
of Kansas and regulated by the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the
State Banking Commissioner of Kansas (OSBC). These federal and state bank regulators have the ability, should the
situation require, to place significant regulatory and operational restrictions upon us and the Bank. Any such
restrictions imposed by federal and state bank regulators could affect the profitability of Blue Valley and the Bank.
Blue Valley and the Bank entered into an agreement in August 2008 with the Federal Reserve and the OSBC
imposing certain limitations and requirements on the Bank and Blue Valley.
Confidential customer information transmitted through the Bank’s online banking service is vulnerable to security
breaches and computer viruses, which could expose the Bank to litigation and adversely affect its reputation and
ability to generate deposits.
The Bank provides its clients with the ability to bank online. The secure transmission of confidential
information over the Internet is a critical element of online banking. The Bank’s network could be vulnerable to
unauthorized access, computer viruses, phishing schemes and other security problems. The Bank may be required to
spend significant capital and other resources to protect against the threat of security breaches and computer viruses,
or to alleviate problems caused by security breaches or viruses. To the extent that the Bank’s activities or the
activities of its clients involve the storage and transmission of confidential information, security breaches and
viruses could expose the Bank to claims, litigation and other possible liabilities. Any inability to prevent security
breaches or computer viruses could also cause existing clients to lose confidence in the Bank’s systems and could
adversely affect its reputation and its ability to generate deposits.
If we are unable to pay our Preferred Shares dividend, the holder of the Preferred Shares may have additional
rights.
Under the CPP, failure to pay the Preferred Shares dividend is not considered an event of default. However, a
failure to pay a total of six Preferred Share dividends, whether or not consecutive, gives the holder of the Preferred
Shares the right to elect two directors to the Company’s Board of Directors. That right would continue until the
Company pays all dividends in arrears.
Item
1B:
Unresolved Staff Comments
No items are reportable.
Item
2:
Properties
The Bank currently operates five full service banking centers, which includes our principal office located at 11935
Riley in Overland Park, Kansas, and operates one mortgage and operations center location. In January 2009, the
18
Company placed the 7900 College Boulevard location up for sale or lease. The portions of these premises not
occupied by the Bank are leased to third parties. The following table sets forth the locations of the banking and
mortgage centers, dates opened, mortgage indebtedness, and occupancy:
Location
Year Occupied
Mortgage Indebtedness
as of December 31,
2008
Occupancy
Overland Park Banking Center
11935 Riley
Overland Park, Kansas *
Olathe Banking Center
1235 E. Santa Fe
Olathe, Kansas **
Shawnee Banking Center
5520 Hedge Lane Terrace
Shawnee, Kansas **
Mortgage and Operations
Center
7900 College Boulevard
Overland Park, Kansas *
Leawood Banking Center
13401 Mission Road
Leawood, Kansas *
Lenexa Banking Center
9500 Lackman Road
Lenexa, Kansas **
1994
2001
2001
2003
2004
2007
* The building is owned by Blue Valley Building Corp.
** The building is owned by the Bank.
Item
3:
Legal Proceedings
$2.1 Million
80%
One sublease occupying 20%
None
None
$3.4 Million
None
None
100%
100%
100%
55%
Four subleases occupying 45%
100%
We are periodically involved in routine litigation incidental to our business. We are not a party to any pending
litigation that we believe is likely to have a material adverse effect on our consolidated financial condition, results of
operations or cash flows.
Item
4:
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our stockholders, through the solicitation of proxies or otherwise, during
the fourth quarter of the fiscal year covered by this report.
19
Part II
Item 5:
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Market for Common Stock
We are a reporting company under the Securities Exchange Act as a result of a trust preferred securities offering
we completed during July 2000. Shares of our common stock have traded on the Over-The-Counter Bulletin Board
(OTCBB) since July 2002 under the symbol “BVBC.” As of January 31, 2009, there were approximately 316
stockholders of record of our common stock. The following table sets forth the high and low prices of the
Company’s common stock since the first quarter of 2007 based on closing stock price quotations provided by
Yahoo.com. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
Fiscal Quarter
First
Second
Third
Fourth
Dividends
$
High
34.00
34.00
31.00
25.00
2008
$
$
Low
31.00
26.00
25.00
15.00
High
38.25
40.00
38.50
36.00
2007
$
Low
33.50
33.50
33.00
31.00
Our board of directors declared cash dividends on our common stock as follows:
Declaration Date
December 21, 2006
December 20, 2007
Amount Per Share
$0.30
$0.36
Record Date
December 29, 2006
December 31, 2007
Pay Date
January 29, 2007
January 31, 2008
The Company did not declare or pay a dividend in 2008.
Because our consolidated net income consists largely of the net income of the Bank, our ability to pay dividends
on our common stock is subject to our receipt of dividends from the Bank. The ability of the Bank to pay dividends
to us, and thus our ability to pay dividends to our stockholders, is regulated by federal banking laws. In addition, if
we elect to defer interest payments on our outstanding junior subordinated debentures, we will be prohibited from
paying dividends on our common stock during such deferral. As a result of an agreement with the Federal Reserve
Bank and the OSBC (for more information see Overview section in Management’s Discussion and Analysis of
Financial Condition and Results of Operations), prior regulatory approval is currently required prior to the payment
of any dividends by the Company or the Bank. After that agreement is terminated, our Board of Directors
anticipates the ability to declare future dividends, subject to limitations imposed by regulatory capital guidelines and
approval, as permitted by the Company’s profitability and liquidity. The date for termination of that agreement is
not known. In addition, the Company is subject to dividend limitations as part of the Capital Purchase Plan. As
long as any preferred stock issued under the CPP remains outstanding, the Company is prohibited, without the
consent of the Treasury, from declaring or paying a common stock dividend. However, due to our lack of earnings
and regulatory constraints the Company did not pay a cash dividend to our common stockholders in the fiscal year
ended 2008, nor do we know when we will resume paying cash dividends.
20
Item 6: Selected Financial Data
The following table presents our consolidated financial data as of and for the five years ended December 31,
2008, and should be read in conjunction with the consolidated financial statements and notes thereto and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each of which is
included elsewhere in this Form 10-K. The selected statements of financial condition and statements of income
data, insofar as they relate to the five years in the five-year period ended December 31, 2008, have been derived
from our audited consolidated financial statements.
As of and for the
Year Ended December 31,
2008
2007
2006
(In thousands, except share and per share data)
2005
Selected Statement of Income Data
Interest income:
Interest and fees on loans ............................................................ $
Federal funds sold and other short-term investments .................
Available-for-sale securities .......................................................
Total interest income .............................................................
$
41,245
378
3,375
44,998
Interest expense:
Interest-bearing demand deposits ...............................................
Savings and money market deposit accounts .............................
Other time deposits .....................................................................
Funds borrowed ..........................................................................
Total interest expense ............................................................
Net interest income ................................................................
Provision for loan losses ..................................................................
Net interest income after provision for loan
1,394
2,402
12,139
5,756
21,691
23,307
17,025
losses ................................................................................
6,282
Non-interest income:
Loans held for sale fee income....................................................
Service fees..................................................................................
Realized gains on available-for-sale securities ...........................
Gain on settlement of litigation ...................................................
Other income ..............................................................................
Total non-interest income .....................................................
Non-interest expense:
Salaries and employee benefits ..................................................
Net occupancy expense ...............................................................
Goodwill impairment...................................................................
Other operating expense .............................................................
Total non-interest expense .....................................................
Income before income taxes .......................................................
Provision for income taxes.....................................................
Net income ............................................................................. $
Per Share Data
Basic earnings ............................................................................. $
Diluted earnings ..........................................................................
Dividends.....................................................................................
Book value basic (at end of period) ...........................................
Weighted average common shares outstanding:
2,136
3,299
702
1,000
1,275
8,412
12,500
3,144
4,821
8,304
28,769
(14,075)
(3,824)
(10,251)
(4.20)
(4.20)
0.00
19.97
$
$
$
$
$
47,194
557
4,466
52,217
656
6,362
13,134
5,430
25,582
26,635
2,855
23,780
3,160
2,830
105
–
1,105
7,200
13,570
3,200
–
7,447
24,217
6,763
2,275
4,488
1.86
1.84
0.36
24.34
44,537
256
4,039
48,832
97
4,356
11,254
5,255
20,962
27,870
1,255
26,615
5,046
2,491
–
–
1,344
8,881
14,737
3,059
–
6,578
24,374
11,122
4,199
6,923
2.93
2.88
0.30
22.45
$
$
$
37,492
580
2,317
40,389
94
3,861
9,171
4,867
17,993
22,396
230
22,166
7,408
2,166
–
–
1,727
11,301
15,986
3,307
–
6,841
26,134
7,333
2,764
4,569
1.95
1.91
0.25
19.42
2004
29,245
157
2,301
31,703
169
2,932
7,297
4,115
14,513
17,190
1,965
15,225
10,358
2,441
524
–
617
13,940
16,670
3,433
–
6,467
26,570
2,595
665
1,930
0.84
0.82
0.20
17.78
$
$
$
Basic ....................................................................................
Diluted .................................................................................
2,438,809
2,438,809
2,410,621
2,438,203
2,365,932
2,407,802
2,348,805
2,388,531
2,302,564
2,360,061
Dividend payout ratio
0.00%
19.35%
10.23%
12.82 %
23.80 %
21
As of and for the
Year Ended December 31,
2008
2007
2006
2005
2004
(In thousands)
Selected Financial Condition Data
(at end of period):
Total available-for-sale securities .................................................... $
Total mortgage loans held for sale....................................................
Total loans.........................................................................................
Total assets .......................................................................................
Total deposits ..................................................................................
Funds borrowed ................................................................................
Total stockholders’ equity.................................................................
Trust assets under administration .....................................................
68,681
8,157
662,401
815,700
600,868
135,129
76,439
112,688
$
76,653
10,978
596,646
736,213
536,370
134,942
58,934
104,167
$
87,009
21,805
528,515
692,219
535,864
96,577
53,820
104,445
$
99,987
13,906
503,143
689,589
529,341
104,394
46,255
93,988
$
66,350
44,144
507,170
672,717
522,646
102,469
41,384
118,074
Selected Financial Ratios and Other Data:
Performance Ratios:
Net interest margin (1) ..........................................................
Non-interest income to average assets ..................................
Non-interest expense to average assets .................................
Net overhead ratio (2) ...........................................................
Efficiency ratio (3) ................................................................
Return on average assets (4) .................................................
Return on average equity (5) .................................................
3.19%
1.07
3.67
2.59
90.70
(1.31)
(17.53)
3.95%
0.99
3.34
2.35
71.57
0.62
7.88
4.34%
1.29
3.54
2.25
66.32
1.00
13.81
3.50%
1.63
3.77
2.14
77.56
0.66
10.44
2.91%
2.16
4.11
1.96
85.35
0.30
4.69
Asset Quality Ratios:
Non-performing loans to total loans .....................................
Allowance for possible loan losses to:
Total loans ........................................................................
Non-performing loans ......................................................
Net charge-offs to average total loans ..................................
Non-performing loans to total assets ....................................
Balance Sheet Ratios:
Loans to deposits ...................................................................
Average interest-earning assets to average
6.54%
4.22%
1.31%
0.87%
0.86%
1.87
28.54
2.16
5.31
1.51
35.65
0.06
3.42
1.16
88.16
0.35
1.00
1.33
153.27
0.17
0.63
1.45
168.60
0.36
0.65
110.24%
111.24%
98.63%
95.05%
97.04%
interest-bearing liabilities ................................................
115.18
117.84
119.12
116.78
114.38
Capital Ratios:
Total equity to total assets .....................................................
Total capital to risk-weighted assets ratio ............................
Tier 1 capital to risk-weighted assets ratio ...........................
Tier 1 capital to average assets ratio .....................................
Average equity to average assets ratio ................................
9.37%
13.82
12.57
11.50
7.66
8.01%
11.53
10.28
9.86
7.85
7.77%
12.47
11.33
10.29
7.27
6.71%
12.04
10.25
8.86
6.31
6.15%
11.15
9.00
8.45
6.37
(1)
(2)
(3)
(4)
(5)
Net interest income, on a full tax-equivalent basis, divided by average interest-earning assets.
Non-interest expense less non-interest income divided by average total assets.
Non-interest expense divided by the sum of net interest income plus non-interest income.
Net income divided by average total assets.
Net income divided by average common equity.
22
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following presents management’s discussion and analysis of our financial condition and results of
operations as of the dates and for the periods indicated. You should read this discussion in conjunction with our
“Selected Consolidated Financial Data,” our consolidated financial statements and the accompanying notes, and the
other financial data contained elsewhere in this report.
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 "anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend,"
"may," "plan," "potential," "predict," "project," "should," "will," or the negative of these terms or other comparable
terminology. 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; inability to maintain or
increase deposit base and secure adequate funding; a deterioration of general economic conditions or the demand for
housing in the Company's market areas; continued deterioration in the demand for mortgage financing; legislative or
regulatory changes; continued 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; potential
unfavorable results of litigation to which the Company may become a party, 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. We operate in a very competitive
and rapidly changing environment. New risks emerge from time to time, and it is not possible for us to predict all
risk factors. Nor can we address the impact of all factors on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those contained in any forward-looking
statements.
Critical Accounting Policies
Please refer to Note 1 of our consolidated financial statements where we present a listing and discussion of our
most significant accounting policies. After a review of these policies, we determined that accounting for the
allowance for loan losses is deemed a critical accounting policy because of the valuation techniques used, and the
sensitivity of certain financial statement amounts to the methods, as well as the assumptions and estimates,
underlying that policy. Accounting for this critical area requires the most subjective and complex judgments that
could be subject to revision as new information becomes available.
As presented in Note 1 and Note 3 to the consolidated financial statements, the allowance for loan losses
represents management’s estimate of probable credit losses inherent in the loan portfolio as of the balance sheet
date. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as
more information becomes available. The adequacy of the allowance is analyzed monthly based on internal loan
reviews and qualitative measurements of our loan portfolio. Management assesses the adequacy of the allowance
for loan losses based upon a number of factors including, among others:
•
•
•
•
analytical reviews of loan loss experience in relationship to outstanding loans and commitments;
problem and non-performing loans and other loans presenting credit concerns;
trends in loan growth, portfolio composition and quality;
appraisals of the value of collateral; and
• management’s judgment with respect to current economic conditions and their impact on the existing loan
portfolio.
23
The Bank computes its allowance by assigning specific reserves to impaired loans, plus a general reserve based
on loss factors applied to the rest of the loan portfolio. The specific reserve on impaired loans is computed as the
amount of the loan in excess of the present value of the estimated future cash flows discounted at the loan’s effective
interest rate, or based on the loan’s observable market value or the fair value of the collateral if the loan is collateral
dependent. The general reserve loss factors are determined based on such items as management's evaluation of risk
in the portfolio, local economic conditions, and historical loss experience. The Bank has further refined its risk
grading system by developing associated reserve factors for each risk grade.
Overview
The Company had a challenging year in 2008 due to the continued decline in interest rates and the industry
wide decline in the real estate market and the general economy. The prime lending rate continued to decline
throughout 2008 and dropped a total of 400 basis points. The drop in market rates along with the industry wide
decline in the real estate market and general economy has resulted in lower interest income on loans during 2008.
This lower interest income was partly offset by growth experienced in our loan portfolio of 11.02%. The
deterioration of the real estate market and general economy, along with the growth in our loan portfolio, has resulted
in an increase in our provision for loan losses as compared to the prior year. The deterioration of the real estate
market, as well as the Company operating with a smaller mortgage department as a result of restructuring and
reduction in staff, has resulted in lower mortgage origination activity as compared with prior years and declining fee
income on loans held for sale. Despite a decline in the economy, our deposits have increased 12.02% during 2008,
primarily due to an increase in our time deposits and interest-bearing demand deposits. This was a result of several
time deposit promotions during the year and an increase in activity in the CDARS program. Both have allowed us
to cross sell other products to new and existing customers. The increase in deposits was also a result of an increase
in deposit balances in our performance checking product which was introduced in 2007 of $36.2 million, or
220.36%. In December 2008, we participated in the U.S. Treasury Capital Purchase Plan which was designed to
attract broad participation by institutions, to stabilize the financial system, and to increase lending for the benefit of
the U.S. economy. Pursuant to the plan, we issued and sold to the U.S. Department of the Treasury 21,750 shares of
Fixed Rate Cumulative Perpetual Preferred Stock, along with a ten year warrant to purchase 111,083 shares of the
Company’s common stock, for a total cash price of $21.75 million. Our lending activity increased during the fourth
quarter of 2008, with an increase of $19.6 million, or 3.04%, in loans for the fourth quarter. We expect 2009 to be a
year of rebuilding for the Company as we look to continue to expand our loan and deposit portfolios, increase our
mortgage origination volume, and stabilize our net interest margin.
The Company and the Bank entered into an agreement in August 2008 with the Federal Reserve and the OSBC
imposing certain limitations and requirements on the Bank and Company. This agreement was a result of the
examination conducted by the regulators in June 2008, and related primarily to the Bank’s real estate construction
loan portfolio. As a result of the agreement, prior approval by the regulators will be required prior to payment of
any dividends from the Company or the Bank and prior to making or entering into an agreement to make a
severance payment to any officer, director, or employee. In addition, the agreement required management to
formalize plans regarding asset quality and credit risk management, capital, earnings, and liquidity management.
Substantial compliance has been achieved with most provisions of the agreement and most concerns detailed in the
previous examination have been addressed.
The Company experienced a net loss for 2008 of $10.3 million, a $14.8 million, or 328.41% decrease from the
$4.5 million net income earned in 2007. Excluding the goodwill impairment, the Company experienced a net loss,
of $5.4 million, a $9.9 million, or 220.99% decrease from the prior year. Loss per share on a diluted basis was $4.20
for the year ended December 31, 2008, a decrease of 328.26% compared to diluted earnings per share of $1.84 for
the previous year. The Company’s returns on average assets and average stockholders' equity for 2008 were
negative 1.31% and negative 17.53% compared to .62% and 7.88%, respectively, for 2007.
Net interest income for 2008 was $23.3 million compared to $26.6 million earned during 2007. The decrease of
$3.3 million, or 12.49%, was primarily due to a decrease in market rates. The Federal Reserve lowered the Federal
Funds Rate 400 basis points during 2008, and the interest rates on our variable rate assets were reduced accordingly.
The decrease in interest income was also a result of the reversal of $1.2 million in interest on loans placed on non-
accrual during 2008. The increase in loans placed on non-accrual was a result of a decline in the credit quality of
24
our real estate and construction portfolios. This decrease in interest income was partially offset by a decrease in
interest expense. As market rates have declined, the rates paid on deposits have also declined. The current credit
environment has made it difficult to anticipate the future of the Company’s net interest margin. If interest rates
remain at the current levels or continue to decline, the Company anticipates a negative impact to net interest income
as a result of the repricing of assets and liabilities. The magnitude of this impact will be dependent upon the Federal
Reserve’s policy decisions and market movements.
The provision for loan losses in 2008 was $17.0 million compared to $2.9 million in 2007, and $1.2 million in
2006. The increase in the provision in 2008 was a result of management’s decision to charge down approximately
$13.9 million in non performing loans primarily related to the decline in the credit quality of the Bank’s real estate
and construction portfolios, one deteriorating commercial credit relationship and an uncollected overdraft with one
commercial relationship. In the analyses, management also recognized the impact of the continued industry wide
decline in the real estate market and general economy. The increase in the provision was also a result of an increase
in non-performing loans. For the five years ended December 31, 2008, our average year-end ratio of non-
performing loans to total loans was 2.76%. As of December 31, 2008, our ratio of non-performing loans to total
loans was 6.54%.
Non-interest income increased 16.83% to $8.4 million in 2008 from $7.2 million in 2007. The increase in non-
interest income was a result of gains realized from the sale of available-for-sale securities of $702,000 during 2008
to provide funding for loan growth and to restructure the investment portfolio to provide additional protection in the
rate sensitive environment. In addition, the increase in non-interest income was the result of $1.0 million realized as
a result of a legal judgment. This was partially offset by a decrease in loans held for sale fee income. The industry
wide decline in the real estate market, as well as the Company operating with a smaller mortgage department as a
result of restructuring, resulted in a continued decline in the volume of residential mortgage loans originated during
2008 as compared to 2007. This resulted in lower origination fees during 2008 than during 2007 for our Company.
Non-interest expense increased 18.80% to $28.8 million in 2008 from $24.2 million in 2007. The increase in
non-interest expense was primarily a result of the goodwill impairment recognized of $4.8 million during the fourth
quarter of 2008. Management reviewed goodwill for impairment and based upon guidelines contained in FASB
Statement No. 142, Goodwill and Other Intangible Assets, the Company recognized a goodwill impairment charge.
The goodwill impairment charge was a result of the continued volatility throughout the financial services industry
and the effect such volatility has had on market prices of financial services stocks, weakened economic conditions,
decline in the credit quality of the real estate and construction portfolio, and the operating loss recorded by the
Company in 2008. Excluding the goodwill impairment charge, non-interest expense decreased $269,000, or 1.11%,
due to a decrease in salaries and employee benefits as a result of a restructuring of and reduction in staff during
2008.
Total assets at December 31, 2008, were $815.7 million, an increase of $79.5 million, or 10.80%, from $736.2
million at December 31, 2007. Deposits and stockholders' equity at December 31, 2008 were $600.9 million and
$76.4 million, compared with $536.4 million and $58.9 million at December 31, 2007, increases of $64.5 million, or
12.02%, and $17.5 million, or 29.70%, respectively.
Loans at December 31, 2008 totaled $662.4 million, an increase of $65.8 million, or 11.02%, compared to
December 31, 2007. The loan to deposit ratio at December 31, 2008 was 110.24% compared to 111.24% at
December 31, 2007. Our funding philosophy for loans not held for sale is to primarily increase deposits from retail
and commercial deposit sources and secondarily use other borrowing sources as necessary to fund loans within the
limits of the Bank's capital base.
Net Interest Income
A primary component of our net income is our net interest income. Net interest income is determined by the
spread between the fully tax equivalent (FTE) yields we earn on our interest-earning assets and the rates we pay on
our interest-bearing liabilities, as well as the relative amounts of such assets and liabilities. FTE net interest margin
25
is determined by dividing FTE net interest income by average interest-earning assets. The following discussion
should be read along with analysis of the “Average Balances, Yields and Rates” table on page 27.
Years ended December 31, 2008 and 2007. FTE net interest income for 2008 decreased to $23.3 million from
$26.6 million in 2007, a $3.3 million, or 12.51%, decrease.
FTE interest income for 2008 was $45.0 million, a decrease of $7.2 million, or 13.83%, from $52.2 million in
2007. This decrease was primarily a result of an overall decrease in yields on average earning assets. The overall
yield on average earning assets decreased by 159 basis points to 6.16% for 2008 compared to 7.75% in 2007. This
significant decrease in yield resulted from the decrease in market interest rates as the Federal Reserve has lowered
the Federal Funds Rate 400 basis points during 2008. The decrease was also a result of an increase in non-accrual
loans and the reversal of $1.2 million in interest on loans placed on non-accrual during 2008. The decline in yield
would have been 143 basis points had the Company not reversed the interest on these non-accrual loans. The
decrease in interest income was partly offset by an increase in average earning assets, which increased $55.9
million, or 8.29% during 2008. The increase in average earning asset balance was a result of an increase in average
balance of loans by approximately $68.4 million, or 12.15%, from the prior year attributed to internal loan growth.
The increase was partially offset by a decrease in available-for-sale securities by $20.7 million, or 22.83%. The
decrease was a result of the sale of $23.0 million in available-for-sale securities during 2008 to provide funding for
additional loan growth and to restructure the investment portfolio to provide additional protection in the rate
sensitive environment.
Interest expense for 2008 was $21.7 million, a decrease of $3.9 million, or 15.21%, from $25.6 million in 2007.
The decrease resulted from a decrease in the rate paid on average interest-bearing liabilities resulting from the
impact of lower market interest rates on savings and money market deposits, time deposits, and short- and long-
term debt. The rate paid on our total average interest-bearing liabilities decreased to 3.42% in 2008 compared to
4.47% in 2007, a decrease of 105 basis points. Total average interest bearing liabilities increased $61.8 million, or
10.80%, during 2008 primarily due to increases in interest-bearing demand accounts, time deposits and long-term
debt. The increase in average time deposits was a result of several time deposit promotions during the year and an
increase in activity by our customers in the CDARS program. Average interest-bearing deposits increased as a
result of an increase in the balances of our performance checking product which was introduced during 2007. The
increase in long-term debt was a result of an increase in advances with Federal Home Loan Bank to provide
additional funding for loan growth and the Company advancing funds on its operating line of credit to provide
additional capital for the Bank. This operating line of credit was paid off on December 5, 2008, with proceeds from
the CPP.
Years ended December 31, 2007 and 2006. FTE net interest income for 2007 decreased to $26.6 million from
$27.9 million in 2006, a $1.2 million, or 4.45%, decrease.
FTE interest income for 2007 was $52.2 million, an increase of $3.4 million, or 6.92%, from $48.8 million in
2006, primarily as a result of an increase in the balances on average earning assets. The yield on average earning
assets increased 14 basis points to 7.75% in 2007 compared to 7.61% in 2006. Average interest earning assets
increased $32.0 million, or 4.99%, during 2007. Due to the increase in earning asset volume, loan interest and fee
income increased to $47.2 million in 2007 from $44.5 million in 2006, a $2.7 million, or 5.97%, increase. Interest
income on investment securities increased $420,000, or 10.36%, in 2007 compared to the prior year due to higher
yields earned on the securities. Interest income earned on federal funds sold increased $301,000 or 117.58% in 2007
compared to the prior year due primarily to higher balances on those earning assets.
Interest expense for 2007 was $25.6 million, up $4.6 million, or 22.04%, from $21.0 million in 2006. The
increase resulted from increases in the balances and overall rate paid on our average interest-bearing liabilities. The
rate paid on our total average interest bearing liabilities increased to 4.47% in 2007 compared to 3.89% in 2006, an
increase of 58 basis points. This increase resulted from increases in rates paid on interest-bearing demand accounts,
money market deposits, time deposits, short- and long-term debt. Total average interest bearing liabilities increased
$33.0 million, or 6.13%, during 2007 primarily due to increases in money market deposits, time deposits and long-
term debt.
26
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 interest income
from interest-earning assets and interest expense on interest-bearing liabilities and the resultant rates or costs. Ratio,
yield and rate information are based on average daily balances where available; otherwise, average monthly
balances have been used. Non-accrual loans are included in the calculation of average balances for loans for the
periods indicated.
AVERAGE BALANCES, YIELDS AND RATES
2008
Year Ended December 31,
2007
2006
Average
Balance
Interest
Average
Yield/
Rate
Average
Balance
Interest
Average
Yield/
Rate
Average
Balance
Interest
Average
Yield/
Rate
Assets
Federal funds sold and other short-term investments
Available-for-sale securities – taxable .......................
Available-for-sale securities – non-taxable (1) ..........
Mortgage loans held for sale ......................................
Loans, net of unearned discount and fees (2)............
Total earning assets ..............................................
Cash and due from banks – non-interest bearing ......
Allowance for possible loan losses ...........................
Premises and equipment, net .....................................
Other assets................................................................
Total assets
Liabilities and Stockholders’ Equity
Deposits-interest bearing:
Interest-bearing demand accounts
Savings and money market deposits ..........................
Time deposits.............................................................
Total interest-bearing deposits ..............................
Short-term debt...........................................................
Long-term debt .........................................................
Total interest-bearing liabilities ...........................
Non-interest bearing deposits....................................
Other liabilities ..........................................................
Stockholders’ equity...................................................
Total liabilities and stockholders’ equity
FTE net interest income/spread .................................
FTE net interest margin..............................................
$
$
$
$
22,478 $
69,741
141
6,157
631,673
730,190
20,611
(10,060)
18,337
25,704
784,782
52,776 $
137,295
286,404
476,475
46,008
111,490
633,973
86,811
3,852
60,146
784,782
1,394
2,402
12,139
15,935
943
4,813
21,691
$
23,310
378
3,369
9
340
40,905
45,001
1.68% $
4.83
6.38
5.52
6.48
6.16
(In thousands)
557
4,452
21
609
46,585
52,224
656
6,362
13,134
20,152
1,319
4,111
25,582
10,902 $
90,246
312
9,589
563,224
674,273
17,728
(6,962)
19,072
20,895
725,006
30,719 $
163,099
269,673
463,491
33,610
75,087
572,188
91,151
4,745
56,922
725,006
$
26,642
5.11% $
4.93
6.66
6.35
8.27
7.75
$
2.14% $
3.90
4.87
4.35
3.93
5.48
4.47
$
3.28%
3.95%
256
4,013
40
1,145
43,392
48,846
5.01 %
4.31
7.03
6.34
8.26
7.61
97
4,356
11,254
15,707
1,365
3,890
20,962
0.39 %
2.95
4.29
3.61
4.26
5.36
3.89
5,100 $
93,043
565
18,067
525,471
642,246
18,545
(6,556)
18,300
16,444
688,979
24,979 $
147,403
262,199
434,581
32,047
72,530
539,158
93,916
5,770
50,135
688,979
$
27,884
3.72 %
4.34 %
$
2.64% $
1.75
4.24
3.34
2.05
4.32
3.42
$
2.74%
3.19%
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%. For the three years ended December 31, 2008, 2007 and 2006,
the tax equivalency adjustment amounted to $3,000, $7,000, and $14,000, respectively.
(2)
Includes average balances and income from loans on non-accrual status
27
Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes. The following table
presents the dollar amount of changes in interest income and interest expense for major components of interest-
earning assets and interest-bearing liabilities. It distinguishes between the increase or decrease related to changes
in balances and changes in interest rates. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to:
• changes in rate, reflecting changes in rate multiplied by the prior period volume; and
• changes in volume, reflecting changes in volume multiplied by the current period rate.
CHANGES IN INTEREST INCOME AND EXPENSE VOLUME AND RATE
VARIANCES
Year Ended December 31,
(In thousands)
2008 Compared to 2007
Change
Due to
Volume
Change
Due to
Rate
Total
Change
2007 Compared to 2006
Change
Due to
Volume
Change
Due to
Rate
$
(374)
$
195
$
(179)
$
5
$
296
$
Total
Change
301
Federal funds sold
Available-for-sale securities
– taxable
Available-for-sale securities
– non-taxable (1)
Mortgage loans held for sale
Loans, net of unearned
discount and fees
Total interest income
Interest-bearing demand
accounts
Savings and money market
deposits
Time deposits
Short-term debt
Long-term debt
Total interest expense
Net interest income
$
(93)
(1)
(79)
(10,112)
(10,659)
155
(3,509)
(1,707)
(630)
(870)
(6,561)
(4,098)
$
(990)
(11)
(190)
4,432
3,436
583
(451)
712
254
1,572
2,670
766
$
(1,083)
(12)
(269)
(5,680)
(7,223)
738
(3,960)
(995)
(376)
702
(3,891)
(3,332)
577
(2)
2
70
652
436
1,394
1,516
(107)
81
3,320
(2,668)
$
$
(138)
(17)
(538)
3,123
2,726
123
612
364
61
140
1,300
1,426
$
439
(19)
(536)
3,193
3,378
559
2,006
1,880
(46)
221
4,620
(1,242)
(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%.
Provision for Loan Losses
We make provisions for loan losses in amounts management deems necessary to maintain the allowance for
loan losses at an appropriate level. During the year ended December 31, 2008, we provided $17.0 million for loan
losses, as compared to $2.9 million for the year ended December 31, 2007, an increase of $14.1 million, or 496.32%.
During 2008, our provision for loan losses increased due to a decline in the credit quality of the Bank’s real estate
and construction portfolios, one deteriorating commercial credit relationship and an uncollected deposit overdraft
with one commercial relationship. Management also recognized the impact of the industry wide decline in the real
estate market and general economy. Management assessed the loan portfolio, specifically the non performing loans,
on a credit by credit basis and charged down a total of $13.9 million in non performing loans in 2008 to account for
these impaired loans. Of the $13.9 million charged down, 47% related to the real estate and construction market and
the remaining amount related primarily to commercial loans (in particular the one deteriorating commercial credit
relationship and the uncollected commercial deposit overdraft). Accordingly, in 2008 the Bank made a provision of
$17.0 million. Management believes they have aggressively addressed the decline in the credit quality of its loan
portfolio with the provision taken in 2008. If the recent trend is more prolonged then management anticipates and
losses continue to increase, we could experience higher than anticipated loan losses in the future. Total impaired
28
loans increased 184.84% to $57.8 million at December 31, 2008, with a related reserve of $5.2 million, from $20.3
million at December 31, 2007, with a related reserve of $2.6 million. Net charge-offs increased to $13.6 million in
2008 from $339,000 in 2007 as a result of the write downs discussed above.
During 2007, our provision for loan losses increased due to the industry wide decline in the real estate market
and the internal growth within the loan portfolio. During the year ended December 31, 2007, we provided $2.9
million for loan losses, as compared to $1.2 million for the year ended December 31, 2006, an increase of $1.7
million, or 127.49%.
The allowance for loan losses as a percentage of loans was 1.87% at December 31, 2008, compared to 1.51% in
2007 and 1.16% in 2006. The increase in this percentage from December 31, 2007 was primarily due to an increase
in the provision for loan losses as a result of the decline in the credit quality of the real estate and construction
portfolios due to the industry wide decline in the real estate market and general economy and charge offs taken
during the year.
Overall, we increased the total balance of the allowance for loan losses in 2008 based upon an analysis of
several factors, including an analysis of impaired loans, the general reserve factor analysis referred to in our Critical
Accounting Policies, changes in the loan mix, and charge offs that occurred during the year. The Company’s credit
administration function performs monthly analyses on the loan portfolio to assess and report on risk levels,
delinquencies, internal ranking system and overall credit exposure. Management and the Bank’s Board of Directors
review the allowance for loan losses monthly, considering such factors as current and projected economic
conditions, loan growth, the composition of the loan portfolio, local trends and classifications and other factors. The
Company makes provisions for loan losses in amounts that management deems necessary to maintain the loan losses
at an appropriate level. The allowance for loan losses represents our best estimate of probable losses that have been
incurred as of the respective balance sheet dates.
Non-interest Income
The following table describes the items of our non-interest income for the periods indicated:
NON-INTEREST INCOME
Loans held for sale fee income...................................
NSF charges and service fees ....................................
Other service charges .................................................
Realized gains on available-for-sale securities...........
Gain on settlement of litigation..................................
Other income .............................................................
Total non-interest income..................................
$
$
2008
$
Year Ended December 31,
2007
(In thousands)
3,160
1,418
1,412
105
–
1,105
7,200
$
$
$
2,136
1,641
1,658
702
1,000
1,275
8,412
2006
5,046
1,244
1,247
–
–
1,344
8,881
Non-interest income increased to $8.4 million, or 16.83%, during 2008, from $7.2 million during 2007. The
increase was primarily attributable to the $1.0 million realized as a result of legal settlement. See Note 18 in the
Consolidated Financial Statements. In addition, the increase was a result of gains realized on the sale of available-
for-sale securities of $702,000 during the first and second quarter of 2008. The securities were sold to provide
additional funding for our loan growth and to restructure the investment portfolio to provide additional protection in
the rate sensitive environment. Other increases in non-interest income include an increase in NSF charges and
service fees by $223,000, or 15.73%, from 2008 to 2007. The increase was a result of an increase in the number of
transactional accounts, as well as an increase in account service charges on commercial accounts due to a decrease
in the earnings credit rate they receive on their accounts. The earnings credit rate has decreased along with the drop
in market rates. Other service charge income, which includes trust services income, investment brokerage income,
merchant bankcard processing and debit card processing income, increased by $246,000, or 17.42% from 2007 to
29
2008. The increase was a result of income generated from signature based debit card transactions associated with
our performance checking product and partly due to an increase in activity with our merchant bank card services.
Other income increased $170,000, or 15.38% from 2007 to 2008 as a result of proceeds received on a previously
leased asset and gains realized on the sale of other real estate owned during 2008. The increase in non-interest
income was partially offset by a decrease in loans held for sale fee income of $1.0 million, or 32.41%. We
experienced a decline in our loans held for sale fee income resulting from a decline in residential mortgage
origination volume due to the industry wide decline in the real estate market, as well as the Company operating with
a smaller mortgage department than in previous years due to restructuring and reduction in staff. The volume of
closed residential mortgages fell to $136.8 million in 2008 from $185.8 million and $336.3 million in 2007 and
2006, respectively. Sustainability of the level of our loans held for sale fee income is primarily dependent upon the
economy and interest rate environment, and secondarily dependent on our ability to develop new products and
alternative delivery channels. Future growth of other non-interest income categories is dependent upon new product
development, and growth in our customer base.
Non-interest income decreased to $7.2 million, or 18.93%, during 2007, from $8.9 million during 2006. This
decrease is attributable to a decrease in loans held for sale fee income of $1.9 million. We experienced a decline in
our loans held for sale fee income resulting from a decline in residential mortgage origination volume due to the
industry wide decline in the real estate market. The volume of closed residential mortgages fell to $185.8 million in
2007 from $336.3 million and $675.6 million in 2006 and 2005, respectively. Sustainability of the level of our loans
held for sale fee income is primarily dependent upon the interest rate environment, and secondarily dependent on
our ability to develop new products and alternative delivery channels. NSF charges and service fees increased by
$174,000, or 13.99%, from 2006 to 2007. This increase is primarily attributed to an increase in the number of
transactional accounts. The fees assessed and collected on these accounts are based on the customer’s activity.
Other service charge income, which includes trust services income, investment brokerage income, merchant
bankcard processing and debit card processing income, increased by $165,000, or 13.23%, from 2006 to 2007. This
increase is attributed to income generated from signature based debit card transactions associated with our new
performance checking product and partly due to the increased activity within our investment brokerage department.
In 2007, we realized $105,000 of net gains on the sale of available-for-sale securities. We sold some of the bonds in
our available-for-sale investment portfolio to provide additional funding for our loan growth.
Non-interest Expense
The following table describes the items of our non-interest expense for the periods indicated.
NON-INTEREST EXPENSE
Year Ended December 31,
2007
2008
2006
Salaries and employee benefits .......................
Net occupancy expense ...................................
Goodwill impairment ......................................
Other operating expense..................................
Total non-interest expenses.....................
$
$
12,500
3,144
4,821
8,304
28,769
$
(In thousands)
13,570
3,200
–
7,447
24,217
$
$ 14,737
3,059
–
6,578
$ 24,374
Non-interest expense increased 18.80% to $28.8 million during 2008, compared to $24.2 million in the prior
year primarily due to the goodwill impairment charge of $4.8 million recognized during the fourth quarter of 2008.
The Company assesses at least annually its goodwill impairment. Based on guidelines contained in FASB Statement
No. 142, Goodwill and Other Intangible Assets, the Company recognized a goodwill impairment charge of $4.8
million. Management believes this impairment was attributable to the continued volatility throughout the financial
services industry and the effect such volatility has had on market prices of financial services stocks, weakened
economic conditions, decline in the credit quality of the real estate and construction portfolio, and the operating loss
recorded by the Company in 2008.
30
Non-interest expense, excluding goodwill impairment charge, decreased $269,000, or 1.11% from 2007 to
2008. The decrease in non-interest expense, excluding goodwill impairment, was primarily attributed to a decrease
in salaries and employee benefits. Our salaries and employee benefits expense decreased $1.1 million, or 7.89%, to
$12.5 million in 2008 from $13.6 million in 2007, mainly due to a decline in compensation costs as a result of our
restructure and reduction in staff during 2008. We had 185 full-time employees at December 31, 2008 compared to
214 full-time employees at December 31, 2007. In addition, the decrease in salaries and employee benefits was a
result of the Company not accruing for a profit sharing contribution for 2008 as the Company did not meet
expectations to provide for a contribution for the 2008 plan year. Net occupancy expense had a slight decrease of
$56,000, or 1.75% from 2007 to 2008. These decreases were partially offset by an increase in other operating
expenses by $857,000, or 11.51% primarily a result of an increase in expenses related to foreclosed assets held for
sale. Expenses related to foreclosed assets held for sale include, insurance, appraisals, utilities, real estate property
taxes, legal, repairs and maintenance, and associated loss on sale.
Non-interest expense decreased 0.64% to $24.2 million during 2007, compared to $24.4 million in the prior
year primarily due to a decrease in salaries and employee benefits. Our salaries and employee benefits expense
decreased 7.92% to $13.6 million in 2007 from $14.7 million in 2006, mainly due to a decline in compensation costs
in our mortgage division. During 2007 we continued to restructure and reduce our mortgage division staffing due to
our decline in mortgage origination volume and the decline in the real estate market. We had 214 full-time
employees at December 31, 2007 compared to 224 at December 31, 2006. Occupancy expenses increased $141,000,
or 4.61%, due to increased depreciation and maintenance expenses primarily related to the addition of our Lenexa
banking center in 2007 as a result of the acquisition of Unison Bancorp, Inc. and its subsidiary, Western National
Bank. General and administrative expenses increased $869,000, or 13.21%, primarily due to consulting services
related to the mortgage operations restructuring, as well as expenses related to the purchase of Unison Bancorp, Inc.
and its subsidiary and marketing efforts focused on our new location in Lenexa.
Income Taxes
Our income tax benefit during 2008 was $3.8 million, compared to our income tax expense of $2.3 million
during 2007, and $4.2 million during 2006. The decrease in 2008 reflects our net loss for the 2008 fiscal year. Our
consolidated effective income tax rates of 27%, 34% and 38% for the three years ended December 31, 2008, 2007,
and 2006, respectively, varies from the statutory rate principally due to the effects of state income taxes and the
effect of the write off of goodwill in 2008.
Financial Condition
Total assets for the Company at December 31, 2008 were $815.7 million, an increase of $79.5 million, or
10.80%, compared to $736.2 million at December 31, 2007. Deposits were $600.9 million compared with $536.4
million at December 31, 2007, an increase of $64.5 million, or 12.02%. Stockholders’ equity was $76.4 million at
December 31, 2008 compared with $58.9 million at December 31, 2007, an increase of $17.5 million, or 29.70%.
Investment securities. The primary objectives of our investment portfolio are to secure the safety of principal,
to provide adequate liquidity and to provide securities for use in pledging for public funds or repurchase agreements.
Income is a secondary consideration. As a result, we generally do not invest in mortgage-backed securities and
other higher yielding investments. As of December 31, 2008, all of the securities in our investment portfolio were
classified as available-for-sale in order to provide us with an additional source of liquidity when necessary and as
pledging requirements permitted.
Total investment securities at December 31, 2008 were $68.7 million, reflecting a decrease of $8.0 million, or
10.40%, compared to $76.7 million at December 31, 2007. The decrease was a result of the sale of $23.0 million in
available-for-sale securities during 2008 to provide funding for additional loan growth and to restructure the
investment portfolio to provide additional protection in the rate sensitive environment.
31
The following table presents the composition of our available-for-sale investment portfolio by major category at
the dates indicated.
INVESTMENT SECURITIES PORTFOLIO COMPOSITION
U.S. government sponsored agency securities ............ $
State and political subdivisions ...................................
Equity and other ..........................................................
Total.................................................................... $
2008
At December 31,
2007
(In thousands)
68,092 $
-
589
68,681 $
75,953 $
210
490
76,653 $
2006
86,165
360
484
87,009
The following table sets forth the maturities, carrying value, and average yields for securities in our investment
portfolio at December 31, 2008. Yields are presented on a tax equivalent basis. Expected maturities will differ from
contractual maturities due to unscheduled repayments.
MATURITY OF INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES
One Year or Less
One to Five Years
Five to Ten Years
More Than Ten
Years
Total Investment
Securities
Carrying
Value
Average
Yield
Carrying
Value
Average
Yield
Carrying
Value
Average
Yield
(In thousands)
Carrying
Value
Average
Yield
Carrying
Value
Average
Yield
Available-For-Sale
U.S. government
sponsored agency .........
Equity and other securities
with no defined maturity.
$
15,043
4.20
%
$ 49,974
4.30
% $
3,075
6.03
%
$
Total available-for-sale $
15,043
-
-
-
4.20 % $ 49,974
-
4.30 % $
-
3,075
-
6.03 % $
-
-
-
-
%
$
68,092
4.36
%
-
- % $
589
68,681
4.00
4.35 %
Loans Held for Sale. Mortgage loans held for sale at December 31, 2008 totaled $8.2 million, a decrease of
$2.8 million, or 25.70%, compared to $11.0 million at December 31, 2007. The decline in loans held for sale was
primarily a result of lower origination volume as a result of the industry wide decline in the real estate market, as
well as the Company operating with a smaller mortgage department as a result of restructuring and reduction in
staff. The Company’s principal funding source for mortgage loans held for sale is short-term and long-term
advances from the Federal Home Loan Bank. Advance availability with the FHLBank fluctuates depending on
levels of available collateral and is determined daily with regards to mortgage loans held for sale and quarterly with
regards to overall availability and at December 31, 2008, approximately $14.3 million was available.
Loans. Our loan portfolio is a key source of income, and since our inception, has been a principal component of
our revenue growth. Our loan portfolio reflects an emphasis on commercial and commercial real estate,
construction, lease financing, residential real estate, consumer and home equity lending. We emphasize commercial
lending to professionals, businesses and their owners. Commercial loans and loans secured by commercial real
estate accounted for 51.83%, 48.57% and 44.99% of our total loans at December 31, 2008, 2007 and 2006,
respectively.
Loans were $662.4 million at December 31, 2008, an increase of $65.8 million, or 11.02%, compared to
December 31, 2007. Loans were $596.6 million at December 31, 2007, an increase of $68.1 million, or 12.89%,
compared to December 31, 2006. The loan to deposit ratio decreased to 110.24%, compared to 111.24% at
December 31, 2007, and 98.63% at December 31, 2006.
We experienced increases in most loan categories during 2008. The growth in these categories was primarily a
result of the efforts of our lending staff. The decrease in our construction loan portfolio was a result of the write
downs on non-performing loans taken during 2008, which is discussed further under the Provision for Loan Loss
section, the slow down in new real estate construction as a result of a decline in the real estate market, and the
Company’s efforts to decrease its concentration in the real estate construction portfolio. The Company targets
32
consumer lending lines of business in an effort to broadly diversify risk across multiple lines of business. The
following table sets forth the composition of our loan portfolio by loan type as of the dates indicated. The amounts
in the following table are shown net of discounts and other deductions.
2008
2007
As of December 31,
2006
2005
2004
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
(In thousands)
Commercial ................... $ 172,647
170,697
Commercial real estate..
182,933
Construction ..................
18,927
Lease financing .............
43,695
Residential real estate ...
14,245
Consumer ......................
59,257
Home equity ..................
26.06 % $
25.77
27.62
2.86
6.60
2.15
8.94
139,120
150,655
188,229
19,724
37,511
22,934
38,473
23.32 % $ 110,849
126,952
25.25
171,709
31.55
18,512
3.30
34,988
6.29
33,097
3.84
32,408
6.45
20.97 % $ 112,452
114,562
24.02
139,662
32.49
18,238
3.50
39,371
6.63
45,221
6.26
33,637
6.13
22.35 % $
22.77
27.76
3.62
7.83
8.99
6.68
117,604
126,205
130,631
21,203
30,886
48,950
31,691
23.19 %
24.88
25.76
4.18
6.09
9.65
6.25
662,401
100.00 %
596,646
100.00 %
528,515
100.00 %
503,143
100.00 %
507,170
100.00 %
Loans, net ...................... $ 650,033
$
587,664
12,368
8,982
6,106
$ 522,409
6,704
7,333
$ 496,439
$
499,837
Total loans and
leases ....................
Less allowance for loan
losses.........................
Collateral and Concentration. Management monitors concentrations of loans to individuals or businesses
involved in a single industry over 25% of Tier 1 Capital. At December 31, 2008, 2007 and 2006, substantially all of
our loans were collateralized with real estate, inventory, accounts receivable and/or other assets or were guaranteed
by the Small Business Administration. Loans to individuals and businesses in the construction industry totaled
$182.9 million, or 27.62%, of total loans, as of December 31, 2008. Of the $182.9 million, approximately $77.2
million were for new single family housing construction and $33.6 million were for land subdivisions, which
represents a concentration exceeding 5% of total loans. The builder and developer loan portfolio has been a
consistent component of our loan portfolio over our history. The Bank does not have any other concentrations of
loans to individuals or businesses involved in a single industry exceeding 5% of total loans. The Bank’s lending
limit under federal law to any one borrower was $23.2 million at December 31, 2008. The Bank’s largest single
borrower, net of participations, at December 31, 2008 had outstanding loans of $14.2 million.
The following table presents the aggregate maturities of loans in each major category of our loan portfolio as of
December 31, 2008, excluding the allowance for loan and valuation losses. Additionally, the table presents the
dollar amount of all loans due more than one year after December 31, 2008 which have predetermined interest rates
(fixed) or adjustable interest rates (variable). Actual maturities may differ from the contractual maturities shown
below as a result of renewals and prepayments or the timing of loan sales.
MATURITIES AND SENSITIVITIES OF LOANS TO
CHANGES IN INTEREST RATES
As of December 31, 2008
More than One Year
Less than
one year
One to
five years
Over five
years
Total
Fixed
Variable
Commercial .................................
Commercial Real Estate..............
Construction ................................
$
$
104,733
40,431
135,928
$
56,298
123,638
43,495
(In thousands)
11,616
6,628
3,510
$
172,647
170,697
182,933
$
$
32,410
101,658
24,069
35,504
28,608
22,936
33
Non-performing Assets
Non-performing assets consist primarily of loans past due 90 days or more, non-accrual loans and foreclosed
real estate. The following table sets forth our non-performing assets as of the dates indicated:
NON-PERFORMING ASSETS
2008
2007
As of December 31,
2006
2005
2004
(In thousands)
$
$
802
381
Commercial and all other loans:
Past due 90 days or more ....................................... $
Non-accrual............................................................
Commercial real estate loans:
Past due 90 days or more .......................................
Non-accrual............................................................
Construction loans:
Past due 90 days or more .......................................
Non-accrual............................................................
Lease financing:
Past due 90 days or more .......................................
Non-accrual............................................................
Residential real estate loans:
Past due 90 days or more .......................................
Non-accrual............................................................
Consumer loans:
Past due 90 days or more .......................................
Non-accrual............................................................
Home equity loans:
Past due 90 days or more .......................................
Non-accrual............................................................
Debt securities and other assets (excluding other real
estate owned and other repossessed assets):
Past due 90 days or more .......................................
Non-accrual............................................................
Total non-performing loans .............................
Foreclosed assets held for sale ....................................
-
-
43,332
4,783
Total non-performing assets ............................ $ 48,115
$
-
2,143
-
1,951
680
60
-
512
-
32,110
10,699
10,115
-
475
-
6,129
-
36
-
488
11
1,084
1,194
189
13
-
637
-
-
-
25,194
2,523
$ 27,717
$
4,951
-
-
136
186
-
-
410
13
47
-
-
781
769
598
-
585
452
5
119
$
2,008
543
-
158
-
-
1
80
-
1,016
153
1,315
49
-
-
-
17
-
-
75
-
-
4,350
2,645
6,995
$
Total non-performing loans to total loans ....................
Total non-performing loans to total assets ...................
Allowance for loan losses to non-performing loans.....
Non-performing assets to loans and foreclosed assets
held for sale ...........................................................
6.54 %
5.31
28.54
4.22 %
3.42
35.65
0.87 %
0.63
153.27
0.86 %
0.65
168.60
7.21
4.63
1.44
1.01
1.37
-
-
4,374
711
$ 5,085
-
-
6,926
717
7,643
1.31 %
1.00
88.16
Non-performing assets. Non-performing assets increased to $48.1 million at December 31, 2008 from $27.7
million at December 31, 2007. The increase was due to the addition of $11.3 million non-performing loans in the
construction portfolio, $4.7 million in residential real estate loans, $1.4 million in commercial and other loans and
$1.4 million in commercial real estate loans. Fifteen borrowing relationships make up approximately $36.9 million,
or 85%, of the non-performing loans, for which management is aggressively pursuing collection. The increase in
non-performing assets was a result of the industry wide decline in the real estate and construction market and the
general economy. If this trend continues, it could result in an increase in non-performing assets and foreclosed
assets held for sale. 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.
For the five years ended December 31, 2008, our average year-end ratio of non-performing loans to total loans
was 2.76%. As of December 31, 2008, our ratio of non-performing loans to total loans was 6.54%, which was
above our historical averages primarily due to the decline in the real estate market and its impact on our real estate
and construction loan portfolio and the overall decline in the general economy. As of December 31, 2008, our ratio
of allowance for loan losses to non-performing loans was 28.54%, compared to 35.65% at December 31, 2007. The
34
Bank continues to aggressively manage defaults in the loan portfolio. Management intends to continue to
vigorously pursue collection of all charged-off loans.
The following table sets forth the amount of gross interest income that would have been recorded had the non-
accrual loans in the Non-Performing Asset table on page 34 been current and accruing during the period and the
amount of interest income on the non performing loans included in net income for the year ended December 31,
2008.
Year Ended
December 31, 2008
(In thousands)
Gross interest income (since date of
non-accrual) if the loans had been
current and accruing interest
Interest income reversed at time loan
1,526
$
placed on non-accrual
Cash interest received during the period
1,164
927
Impaired Loans. A loan is considered impaired when it is probable that we will not receive all amounts due
according to the contractual terms of the loan. This includes loans that are delinquent 90 days or more, non-accrual
loans, and certain other loans identified by management. Accrual of interest is discontinued, and interest accrued
and unpaid is removed, at the time the loans are delinquent 90 days or when management believes that full
collection of principal and interest under the original loan contract is unlikely to occur. Interest is recognized for
non-accrual loans only upon receipt, and only after all principal amounts are current according to the terms of the
contract.
Impaired loans totaled $57.8 million at December 31, 2008, $20.3 million at December 31, 2007, and $2.9
million at December 31, 2006, with related allowances for loan losses of $5.2 million, $2.6 million, and $447,000,
respectively.
Total interest income of $5.4 million, $1.3 million and $728,000 was recognized on average impaired loans of
$36.7 million, $17.3 million and $12.1 million for 2008, 2007 and 2006, respectively. Included in this total is cash
basis interest income of $927,000, $49,000 and $53,000 recognized on non-accrual impaired loans during 2008,
2007 and 2006, respectively.
Allowance For Loan Losses. The allowance for loan losses is increased by provisions charged to expense and
reduced by loans charged-off, net of recoveries. The adequacy of the allowance is analyzed monthly based on
internal loan reviews and quality measurements of our loan portfolio. The Bank computes its allowance by
assigning specific reserves to impaired loans, and then applies general reserves, based on loss factors, to the
remainder of the loan portfolio. The loss factors are determined based on such items as management's evaluation of
risk in the portfolio, current and projected local and national economic conditions, loan growth, loan trends and
classifications and historical loss experience. Specific allowances are accrued on specific loans evaluated for
impairment for which the basis of each loan, including accrued interest, exceeds the discounted amount of expected
future collections of interest and principal or, alternatively, the fair value of the loan collateral.
35
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
Balance at beginning of period.............
Loans charged-off:
Commercial loans ...........................
Commercial real estate loans ..........
Construction loans ..........................
Lease financing...............................
Residential real estate loans ............
Consumer loans ..............................
Home equity loans .........................
Total loans charged-off...............
Recoveries:
Commercial loans ...........................
Commercial real estate loans ..........
Construction loans ..........................
Lease financing ...............................
Residential real estate loans ............
Consumer loans ..............................
Home equity loans ..........................
Total recoveries....................................
Net loans charged-off ...........................
Allowance of acquired company ..........
Provision for loan losses ......................
Balance at end of period.......................
Loans outstanding: ...............................
Average.......................................
End of period ..............................
Ratio of allowance for loan losses to
loans outstanding: ...........................
Average.......................................
End of period ..............................
Ratio of net charge-offs to:...................
Average loans .............................
End of period loans .....................
Year Ended December 31,
2006
2005
2004
2008
2007
(In thousands)
6,704
$
8,982
6,106
$
$
6,603
262
6,022
372
424
112
127
13,922
223
-
24
29
1
6
-
283
13,639
-
17,025
$ 12,368
$ 631,673
662,401
$
$
215
-
244
139
49
16
-
663
294
1
-
9
6
14
-
324
339
360
2,855
8,982
563,224
596,646
$
7,333
$
7,051
949
-
-
86
-
77
16
1,128
154
3
-
76
1
35
-
269
859
-
230
1,665
-
-
220
18
80
-
1,983
41
7
-
166
48
38
-
300
1,683
-
1,965
1,417
-
100
134
318
83
8
2,060
117
-
-
32
47
11
-
207
1,853
-
1,255
$
$
6,106
$
6,704
$
7,333
525,471
528,515
$ 516,643
503,143
$ 463,833
507,170
1.96 %
1.87
2.16
2.06
1.59 %
1.51
0.06
0.06
1.16 %
1.16
0.35
0.35
1.30 %
1.33
1.58 %
1.45
0.17
0.17
0.36
0.33
36
The following table shows our allocation of the allowance for loan losses by specific category at the end of each
of the periods shown. Management attempts to allocate specific portions of the allowance for loan losses based on
specifically identifiable problem loans. However, the allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
2008
2007
As of December 31,
2006
(In thousands)
2005
2004
Amount
% of Total
Allowance
Amount
% of Total
Allowance
Amount
% of Total
Allowance
Amount
% of Total
Allowance
Commercial
Commercial real estate
Construction
Lease financing
Residential real estate
Consumer
Home equity
Total
$
$
3,040
2,507
4,695
449
1,201
67
409
12,368
24.58 % $
20.27
37.96
3.63
9.71
.54
3.31
100.00 % $
1,790
1,597
4,188
664
377
119
247
8,982
19.93 % $
17.78
46.63
7.39
4.20
1.32
2.75
100.00 % $
1,386
1,674
1,920
355
402
172
197
6,106
22.70 % $
27.42
31.44
5.81
6.58
2.82
3.23
100.00 % $
1,863
1,441
1,776
582
536
294
212
6,704
Amount % of Total
Allowance
41.13 %
19.53
20.11
7.95
2.85
5.51
2.92
100.00 %
3,016
1,432
1,475
583
209
404
214
7,333
27.79 % $
21.49
26.51
8.68
7.99
4.38
3.16
100.00 % $
Deposits. Deposits are the primary funding source for the Company. Deposits grew by $64.5 million, or
12.02%, to $600.9 million for the year ended December 31, 2008, compared to $536.4 million for the year ended
December 31, 2007. The primary source of deposit growth in 2008 was in time deposits, which increased by $84.4
million. The increase in time deposits was a result of several time deposit promotions during the year and an
increase in activity by our customers in the CDARS program, both of which have provided us an opportunity to
cross sell other products to new and existing customers. The increase was also a result of an increase in interest-
bearing demand balances by $36.7 million, of which $36.2 million was a result of our performance checking
product. The performance checking product has been attractive to our market as it pays a higher rate of interest to
the customer on balances up to $25,000 as long as the customer has 12 signature based debit card transactions and at
least one ACH or direct deposit each statement cycle. The Bank realizes non-interest income from the signature
based debit card transactions that when netted against the high rate paid to the customer, results in a very attractive
low cost of funds for the Bank. The growth in time deposits and interest-bearing demand deposits was offset by a
decrease in our demand, savings and money market account which was attributable to the competitive nature of the
products. We have traditionally offered market-competitive rates on our deposit products and believe they provide
us with a more attractive source of funds than other alternatives such as Federal Home Loan Bank borrowings, due
to our ability to cross-sell additional services to these account holders. However, we continue to analyze alternative
strategies to grow our deposits including opening additional banking centers in markets management considers
underserved, offering new products, and obtaining brokered deposits as allowed by our Funds Management policy
and as deemed prudent by management and our board of directors.
The following table sets forth the balances for each major category of our deposit accounts and the weighted-
average interest rates paid for interest-bearing deposits for the periods indicated:
37
DEPOSITS
2008
Year Ended December 31,
2007
(In thousands)
2006
Percent
of
Weighted
Average
Balance
Deposits Rate
Balance
Percent Weighted
Average
Rate
of
Deposits
Balance
Percent Weighted
Average
Rate
Deposits
Of
Demand..............................$ 86,020 14.32 %
Savings ..............................
1.34
Interest-bearing demand .... 72,699 12.10
Money Market ................... 99,282 16.52
––
Money Management ..........
Time Deposits.................... 334,837 55.72
8,030
––
Total deposits ...........$ 600,868 100.00 %
–– % $
0.44
2.64
1.83
––
4.24
87,927
8,384
35,983
153,619
––
250,457
$ 536,370
16.39 %
1.57
6.71
28.64
––
46.69
100.00 %
0.49
2.14
4.09
––
4.87
–– % $ 94,823
8,874
26,427
23,071
97,697
284,972
$ 535,864
17.69 %
1.66
4.93
4.31
18.23
53.18
100.00 %
–– %
0.49
0.39
1.13
3.61
3.97
The following table sets forth the amount of our time deposits that are $100,000 and greater by time remaining
until maturity as of December 31, 2008:
AMOUNTS AND MATURITIES OF
TIME DEPOSITS OF $100,000 OR MORE
Three months or less............................................................................................ $
Over three months through six months................................................................
Over six months through twelve months .............................................................
Over twelve months.............................................................................................
Total ............................................................................................................ $
30,557
16,218
21,264
31,108
99,147
3.89 %
3.96
3.61
4.10
4.08 %
As of December 31, 2008
Amount
(In thousands)
Weighted Average
Rate Paid
Liquidity and Capital Resources
Liquidity. 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
62.06% of our total deposits at December 31, 2008, and 72.36% and 73.40% of total deposits at December 31, 2007
and 2006, respectively. Although classified as brokered deposits for regulatory purposes, funds placed through the
CDARS program are Bank customer relationships that management views as core deposits. If CDARS deposits
under $100,000 placed in the CDARS program are added back, our core deposit ratio would be 68.18% at December
31, 2008, and 73.97% and 74.96% at December 31, 2007 and 2006, respectively. Generally, the Company's funding
strategy is to fund loan growth with core deposits and utilize alternative sources of funds such as
advances/borrowings from the Federal Home Loan Bank of Topeka (“FHLBank”), as well as the brokered CD
market to provide for additional liquidity needs and take advantage of opportunities for lower costs. The Bank is a
member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks
governed and regulated by the Federal Housing Finance Board. The Federal Home Loan Banks provide a central
credit facility for member institutions. The Bank, as a member of the FHLBank of Topeka, is required to acquire
and hold shares of capital stock in the FHLBank of Topeka in an amount of 0.2% of our total assets as of December
38
31 of the preceding calendar year to meet the asset based stock requirement and 5.00% of our total outstanding
FHLBank advances to meet the activity-based stock requirement. The Bank is currently in compliance with this
requirement, with a $5.6 million investment in stock of the FHLBank of Topeka as of December 31, 2008. The
Bank had $82.5 million and $52.5 million in outstanding long-term advances from the FHLBank of Topeka at
December 31, 2008 and 2007, respectively. FHLB borrowings are also used to fund originations of mortgage loans
held for sale. Advance availability with the FHLBank fluctuates depending on levels of available collateral and is
determined daily with regards to mortgage loans held for sale and quarterly with regards to overall availability, and
at December 31, 2008, approximately $14.3 million was available.
In addition, the Company uses other forms of short-term debt for cash management and liquidity management
purposes on a limited basis. These forms of borrowings include federal funds purchased and revolving lines of credit
(see Note 9 of the Consolidated Financial Statements). On September 30, 2008, the Bank established a line of credit
with the Federal Reserve Bank of Kansas City. The availability on the line of credit fluctuates depending on the
level of available collateral, which includes commercial and commercial real estate loans. Availability on the line of
credit at December 31, 2008 was $54.7 million. The Company also uses the brokered market as a source of
liquidity. As of December 31, 2008, the Bank had approximately $133.0 million in brokered deposits. The increase
in brokered deposits during 2008 was to assist in maintaining a higher than normal level of liquidity during a volatile
depositor market. In addition, the Bank is a member of the Certificate of Deposit Account Registry Service
(“CDARS”) which effectively allows depositors to receive FDIC insurance on amounts larger than the FDIC
insurance limit, which is currently $250,000. CDARS allows the Bank to break large deposits into smaller amounts
and place them in a network of other CDARS banks to ensure that full FDIC insurance coverage is gained on the
entire deposit. It is not clear if the temporary increase in FDIC insurance coverage in 2008 will remain at $250,000
after December 31, 2009 or return to $100,000. Therefore, if the maturity date of the certificate of deposit is
subsequent to December 31, 2009 the funds are currently being placed in the CDARS program in amounts less than
or equal to $100,000 to ensure full FDIC coverage. Of the $133.0 million in brokered deposits, $41.0 million
represented customer funds placed into the CDARS program. CDARS has enabled us to maintain our customer
relationships as well as provide funding for the Company to maintain its liquidity position.
As a result of an agreement with the Federal Reserve Bank and the Office of the State Banking Commissioner
of Kansas, prior regulatory approval is currently required prior to the payment of any dividends by the Bank. In
prior years, the Company has relied on dividends from the Bank to assist in making debt service and dividends
payments. The Company has also agreed at the request of the Federal Reserve Bank, not as part of the initial
agreement, to defer interest payments and not pay dividends on trust preferred securities or any of its equity
securities without prior regulatory approval in an effort to preserve capital. As a result, in March the Company
notified Wilmington Trust Company, trustee, that the Company is deferring the payment of interest related to trust
preferred securities of BVBC Capital Trust III due on March 31, 2009 and the payment of interest related to trust
preferred securities of BVBC Capital Trust II due on April 24, 2009. There are other ancillary expenses related to
legal and accounting fees which could be impaired without the ability of the Bank to dividend up to the Company.
The Company's Asset-Liability Management Committee utilizes a variety of liquidity monitoring tools,
including an asset/liability modeling software, 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.
The following table sets forth a summary of our short-term debt during and as of the end of each period
indicated.
39
SHORT-TERM DEBT
Amount
outstanding
at
period end
Average
amount
outstanding
during the
period (1)
(In thousands)
Maximum
Outstanding
At any
Month end
Weighted
average
interest rate
during the
period
Weighted
Average
interest rate
at period
end
At or for the year ended December 31, 2008:
Federal Home Loan Bank borrowings ........
Federal Funds purchased .............................
JP Morgan Chase operating line of credit ...
Federal Reserve Bank line of credit ...........
Repurchase agreements and other interest bearing
liabilities........................................................
Total .......................................................
At or for the year ended December 31, 2007:
Federal Home Loan Bank borrowings ........
Federal Funds purchased .............................
Repurchase agreements and other interest bearing
liabilities........................................................
Total .......................................................
At or for the year ended December 31, 2006:
Federal Home Loan Bank borrowings ........
Federal Funds purchased .............................
Repurchase agreements and other interest bearing
liabilities........................................................
Total .......................................................
$
$
$
$
$
$
–
–
–
–
27,545
27,545
25,000
–
29,036
54,036
–
–
29,558
29,558
$
$
$
$
$
$
$
$
$
1,730
5
10,385
4
33,884
46,008
2,701
–
30,909
33,610
6,668
152
25,227
32,047
4,000
–
15,000
–
41,708
25,000
–
37,569
31,500
–
36,783
3.16 %
1.97
4.94
1.40
1.11
2.05
5.10 %
–
3.83
3.93
5.13 %
5.09
4.02
4.26
– %
–
–
.31
.31
4.67 %
–
2.89
3.71
– %
–
4.12
4.11
___________
(1) Calculations are based on daily averages where available and monthly averages otherwise.
Capital Resources. At December 31, 2008, our total stockholders’ equity was $76.4 million, and our equity to
asset ratio was 9.37%. At December 31, 2007, our total stockholders’ equity was $58.9 million, and our equity to
asset ratio was 8.01%.
The Federal Reserve Board’s risk-based guidelines establish a risk-adjusted ratio, relating capital to different
categories of assets and off-balance sheet exposures, such as loan commitments and standby letters of credit. These
guidelines place a strong emphasis on tangible stockholder’s equity as the core element of the capital base, with
appropriate recognition of other components of capital. At December 31, 2008, our Tier 1 capital ratio was 12.57%,
while our total risk-based capital ratio was 13.82%, both of which exceed the capital minimums established in the
risk-based capital requirements.
40
Our risk-based capital ratios at December 31, 2008, 2007 and 2006 are presented below.
RISK-BASED CAPITAL
$
$
$
Tier 1 capital
Stockholders’ equity .................................
Intangible assets........................................
Unrealized (appreciation) depreciation
on available-for-sale securities and
derivative instruments............................
Trust preferred securities (1) ....................
Total Tier 1 capital
Tier 2 capital
Qualifying allowance for loan losses........
Trust preferred securities(1) .....................
Total Tier 2 capital .............................
Total risk-based capital ......................
Risk weighted assets..................................
Ratios at end of period
Total capital to risk-weighted assets ratio.
Tier 1 capital to average assets ratio
(leverage ratio).......................................
Tier 1 capital to risk-weighted assets
ratio ........................................................
Minimum guidelines
Total capital to risk-weighted assets ratio.
Tier 1 capital to average assets ratio
(leverage ratio).......................................
Tier 1 capital to risk-weighted assets
ratio ........................................................
2008
December 31,
2007
(In thousands)
2006
76,439 $
(826)
58,934 $
(5,942)
(657)
19,000
93,956
9,381
-
9,381
103,337 $
(600)
19,000
71,392
8,683
-
8,683
80,075 $
53,820
(671)
95
17,972
71,216
6,106
1,028
7,134
78,350
747,504 $
694,318
628,521
13.82 %
11.53 %
12.47 %
11.50
%
9.86
%
10.29
%
12.57
%
10.28
%
11.33
%
8.00 %
4.00
%
4.00
%
8.00 %
4.00
%
4.00
%
8.00 %
4.00
%
4.00
%
(1) Federal Reserve guidelines for calculation of Tier 1 capital limits the amount of cumulative trust preferred
securities which can be included in Tier 1 capital to 25% of total Tier 1 capital (Tier 1 capital before reduction
of intangibles). Approximately $19.0 million, $19.0 million and $18.0 million of the $19.0 million in trust
preferred securities have been included as Tier 1 capital as of December 31, 2008, 2007 and 2006, respectively.
The remaining balance of the trust preferred securities have been included as Tier 2 capital.
The majority of the increase in capital during 2008 was a result of the Company’s participation in the U.S.
Treasury’s Capital Purchase Plan. On December 5, 2008, the Company issued and sold to the United States
Department of Treasury (the “Treasury”) 21,750 shares of Fixed Rate Cumulative Perpetual Preferred Stock (the
“Preferred Shares”), along with a ten year warrant to purchase 111,083 shares of the Company’s common stock for
$29.37 per share, for a total cash price of $21.75 million (the “Transaction”). The Transaction occurred pursuant to,
and is governed by the U.S. Treasury’s Capital Purchase Plan, (the “CPP”), which is designed to attract broad
participation by institutions, to stabilize the financial system, and to increase lending for the benefit of the U.S.
economy. In connection with the transaction, we entered into a letter agreement with the Treasury which includes, a
Securities Purchase Agreement-Standard Terms. The Preferred Shares carry a 5% per year cumulative preferred
dividend rate, payable quarterly. The dividend rate increases to 9% after five years. Dividends compound if they
41
accrue and are not paid. During the first three years after the transaction, the Company may not redeem the
Preferred Shares except in conjunction with a qualified equity offering meeting certain requirements. During the
time that the Preferred Shares are outstanding, a number of restrictions apply to the Company, including, among
others:
•
•
•
•
•
The Preferred Shares have a senior rank. The Company is not free to issue other preferred stock that is senior
to the Preferred Shares.
Until the third anniversary of the sale of the Preferred Shares, unless the Preferred Shares have been
redeemed in whole or the Treasury has transferred all of the shares to a non-affiliated third party, the
Company may not declare or pay a common stock dividend in an amount greater than the amount of the last
quarterly cash dividend per share declared prior to October 14, 2008, or repurchase common stock or other
equity shares (subject to certain limited exceptions) without the Treasury’s approval.
If the Company were to pay a cash dividend in the future, which would only occur with the consent of the
Treasury, any such dividend would have to be discontinued if a Preferred Share dividend were missed.
Thereafter, dividends on common stock could be resumed only if all Preferred Share dividends in arrears
were paid. Similar restrictions apply to the Company’s ability to repurchase common stock if Preferred Share
dividends are missed.
Failure to pay the Preferred Share dividend is not an event of default. However, a failure to pay a total of six
Preferred Share dividends, whether or not consecutive, gives the holders of the Preferred Shares the right to
elect two directors to the Company’s Board of Directors. That right would continue until the Company pays
all dividends in arrears.
In conformity with requirements of the SPA and Section 111(b) of the Emergency Economic Stabilization
Act of 2008 (the “EESA”), the Company and its subsidiary, Bank of Blue Valley, and each of its Senior
Executive Officers agreed to limit certain compensation, bonus, incentive and other benefits plans,
arrangements, and policies with respect to the Senior Executive Officers during the period that the Treasury
owns any debt or equity securities acquired in connection with the Transaction. The applicable Senior
Executive Officers have entered into letter agreements with the Company consenting to the foregoing and
have executed a waiver voluntarily waiving any claim against the Treasury or the Company for any changes
to such Senior Executive Officer’s compensation or benefits that are required to comply with Section 111(b)
of EESA.
The Warrant is exercisable immediately and expires in ten years. The Warrant has anti-dilution protections and
certain other protections for the holder, as well as potential registration rights upon written request from the
Treasury. If requested by the Treasury, the Warrant (and the underlying common stock) may need to be listed on a
national securities exchange. The Treasury has agreed not to exercise voting rights with respect to common shares it
may acquire upon exercise of the Warrant. The number of common shares covered by the Warrant may be reduced
by up to one-half if the Company completes an equity offering meeting certain requirements by December 31, 2009.
If the Preferred Shares are redeemed in whole, the Company has the right to purchase any common shares held by
the Treasury at their fair market value at that time.
In addition to participation in the CPP, the Company had a common stock rights offering to holders of record of
its common stock as of the close of business on November 10, 2008, of non-transferable subscription rights to
purchase up to 334,000 shares of its common stock at a cash subscription price of $18.00 per share. The Company
received gross cash proceeds of approximately $5.2 million in the rights offering with 288,943 shares of common
stock being issued. The proceeds, less expenses incurred in the rights offering, were invested in the Bank to provide
additional capital for the Bank.
42
Contractual Obligations
Our known contractual obligations outstanding as of December 31, 2008 are presented below.
Payments due by Period
(In thousands)
Time Deposit Obligations
Short-term Debt Obligations
Long-term Debt Obligations
Total Obligations
Total
$ 334,837
Less than 1
year
$ 205,542
1-3 years
$ 109,066
-
-
-
107,584
569
8,730
3-5 years
$ 15,694
-
36,365
More than 5
years
$
4,535
-
61,920
$ 442,421
$ 206,111 $ 117,796
$
52,059
$
66,455
Inflation
The consolidated financial statements and related data presented in this report have been prepared in accordance
with accounting principles generally accepted in the United States of America, which require the measurement of
financial position and operating results in terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of our
assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our
performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as inflation. Additional discussion of the impact of interest rate changes is
included in Item 7A: Qualitative and Quantitative Disclosure About Market Risk. In addition, we disclose the
estimated fair value of our financial instruments in accordance with Statement of Financial Accounting Standards
No. 107 and Statement of Financial Accounting Standards No. 157. See Note 20 to the consolidated financial
statements included in this report.
Off-Balance Sheet Arrangements
The Company enters into off-balance sheet arrangements in the ordinary course of business. Our off-balance
sheet arrangements generally are limited to commitments to extend credit, mortgage loans in the process of
origination and forward commitments to sell those mortgage loans, letters of credit and lines of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the agreement. They generally have fixed expiration dates or other termination clauses and
may require a payment of a fee. The commitments extend over varying periods of time with the majority being
disbursed within a one-year period. Since a portion of the commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on
management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable,
inventory, property, plant and equipment, commercial real estate and residential real estate. At December 31, 2008,
the Company had outstanding commitments to originate loans aggregating approximately $19,230,000.
Mortgage loans in the process of origination represent amounts that the Company plans to fund within a normal
period of 60 to 90 days and which are intended for sale to investors in the secondary market. Forward commitments
to sell mortgage loans are obligations to deliver loans at a specified price on or before a specified future date. The
Bank acquires such commitments to reduce market risk on mortgage loans in the process of origination and
mortgage loans held for sale. Total mortgage loans in the process of origination amounted to $4,423,000 and
mortgage loans held for sale amounted to $8,157,000 at December 31, 2008. As a result, we had combined forward
commitments to sell mortgage loans totaling approximately $12,580,000. Mortgage loans in the process of
origination represent commitments to originate loans at both fixed and variable rates.
43
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company had
total outstanding letters of credit amounting to $9,605,000 at December 31, 2008.
Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without
being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s
creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts
receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
Management uses the same credit policies in granting lines of credit as it does for on-balance sheet instruments. At
December 31, 2008 unused lines of credit borrowings aggregated approximately $161,233,000.
Recent and Future Accounting Requirements
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an
interpretation of SFAS No. 109 (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.
The Company adopted FIN 48 as of January 1, 2007, and the adoption had no significant impact on the Company’s
consolidated financial statements. The Company and subsidiaries file income tax returns in the U.S. Federal
jurisdiction and the state jurisdictions of Kansas and Missouri. With few exceptions, the Company is no longer
subject to U.S Federal or state income tax examinations by tax authorities for years before 2005.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements, which provides
guidance for using fair value to measure assets and liabilities. The statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair
value measurements. FASB Statement No. 157 applies under other accounting pronouncements that require or
permit fair value measurements and does not require any new fair value measurements. This statement is effective
for financial statements issued for fiscal years beginning after November 15, 2007. The Company adopted FASB
Statement No. 157 as of January 1, 2008, and the adoption had no significant impact on the Company’s consolidated
financial statements.
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities-Including an Amendment to FASB Statement No. 115. This standard permits an entity to
choose to measure many financial instruments and certain other items at fair value. Most of the provisions in
Statement 159 are elective; however, the amendment to FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. Some
requirements apply differently to entities that do not report net income. The FASB's stated objective in issuing this
standard is as follows: "to improve financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions."
The fair value option established by FASB Statement No. 159 permits all entities to choose to measure eligible
items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for
which the fair value option has been elected in earnings (or another performance indicator if the business entity does
not report earnings) at each subsequent reporting date. The fair value option: (a) may be applied instrument by
instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is
irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of
instruments. FASB Statement No. 159 is effective as of the beginning of an entity’s first fiscal year that begins
after November 15, 2007. The Company did not elect to adopt FASB Statement No. 159 for any financial
instruments.
44
In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations, which replaced
Statement No. 141. FASB Statement No. 141R retains the fundamental requirements of FASB Statement No. 141,
but revises certain principles, including the definition of a business combination, the recognition and measurement
of assets acquired and liabilities assumed in a business combination, the accounting for goodwill, and financial
statement disclosure. This statement is effective for annual periods beginning after December 15, 2008. There is
currently no impact from the adoption of the FASB Statement No. 141R on the Company’s consolidated financial
statements.
Subsequent Events
Non-performing assets
As of February 28, 2009, there are approximately $8.8 million in loans that are not identified on the non-
performing assets table on page 34 which have either become 90 days past due and placed on non-accrual since
December 31, 2008 or the Company has received additional information which indicates the Company may not
receive contractual principal and interest on the loan and thus the loan has been placed on non-accrual status. Of the
$8.8 million in loans placed on non accrual since December 31, 2008, three borrowing relationships represented
88.63% of the balance. Offsetting the increase, the Bank received a payoff in 2009 on $4.1 million on loans
classified as non-performing at December 31, 2008 loans and realized a $500,000 recovery on amounts previously
charged-off, plus interest and other expenses.
Trust Preferred Securities
Under agreement with the Federal Reserve Bank, the Company has restrictions related to the payment of
interest and or principal on the Company’s outstanding trust preferred securities. On March 11, 2009, the Company
notified Wilmington Trust Company, the trustee, that the Company is exercising its right to defer the payment of
interest on all of its outstanding trust preferred securities. Under the governing documents of BVBC Capital Trust
III, the next quarterly payment is due on March 31, 2009. The Company has the right to declare such a deferral.
for up to 20 consecutive quarterly periods and deferral may only be declared as long as the Company is not then in
default under the provisions of the Amended and Restated Trust Agreement. During the deferral period, interest on
the indebtedness continues to accrue and the unpaid interest is compounded. However, during the deferral period,
the Company must also accrue additional interest that is equal to the three month LIBOR rate plus 1.60%. On
March 19, 2009, the Company notified Wilmington Trust Company, the trustee, that the Company is exercising its
right to defer the payment of interest on the trust preferred securities under the governing documents of BVBC
Capital Trust II. The next quarterly payment is due on April 24, 2009. The Company has the right to declare a
deferral period for up to 20 consecutive quarterly periods. During the deferral period, no interest payments are due.
However, during the deferral period interest continues to accrue on the debt and the interest accrues at the same
interest rate that was in effect prior to the declaration of the deferral period. All accrued interest and compounded
interest must be paid at the end of the deferral period. For both BVBC Capital Trust II and BVBC Capital Trust III,
as long as the deferral period continues, the Company is prohibited from: (i) declaring or paying any dividend on
any of its capital stock, which would include both its common stock and the outstanding preferred stock issued to
the Treasury, or (ii) making any payment on any debt security that is ranked pair passu with the debt securities
issued by the respective trusts. Because the Preferred Shares issued under the CPP are subordinate to the trust
preferred securities, the Company will be restricted from paying dividends on these Preferred Shares until such time
as all trust preferred dividends have been brought current.
45
Item 7A:
Qualitative and Quantitative Disclosure 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 system 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 system 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's net interest income over the next twelve month period and net economic value of
equity at risk at December 31, 2008 based on the indicated instantaneous and permanent changes in interest rates.
Changes in Interest Rates
200 basis point rise
Base Rate Scenario
200 basis point decline
Net Interest
Income
Net Economic
Value of
(next 12 months) Equity at Risk
7.11 %
-
2.61 %
(3.78 %)
-
(4.34) %
The above table indicates that, at December 31, 2008, in the event of a sudden and sustained increase or
decrease in prevailing market rates, our net interest income would be expected to increase. This is due to an
increase in higher rate time deposits which reprice over the next 12 months, combined with a near zero gap
position, provides the Company with greater control over the cost of its funding base and enables it to expand its net
interest margin in an increasing or decreasing rate environment. The above table indicates a greater expansion of the
net interest margin in a decreasing rate environment verses an increasing rate environment, and that is due to the
floors the Bank has placed on its loans over the last several years and the higher rate time deposits which reprice
over the next 12 months. The floors on the loans would limit the decline in yield earned on the loan portfolio in a
declining rate environment while the cost of funding would decrease resulting in a greater net interest margin.
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 December 31, 2008, in the event of a sudden increase or decrease in
prevailing market rates, the economic value of our equity would decrease. Given our current asset/liability position,
a 200 basis point decline in interest rates will result in a lower economic value of our equity as the change in
46
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 FHLBank. 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. Given our current asset/liability position, a 200 basis point increase in interest rates will result in a
lower economic value of our equity due to the estimated loss of liabilities and assets in this interest rate scenario.
Currently, under an increasing rate environment, the Company’s estimated market value of loans could decrease due
to fixed rate loans and investments with rates lower than market rates. These assets have likelihood to remain until
maturity in this rate environment. However, the estimated market value decrease in fixed rate loans and investment
securities if offset by time deposits unable to reprice to higher rates immediately and fixed-rate callable advances
from FHLBank. The likelihood of advances being called in a rising rate environment increases resulting in
advances being repriced prior to maturity.
The following table summarizes the anticipated maturities or repricing of our interest-earning assets and
interest-bearing liabilities as of December 31, 2008, based on the information and assumptions set forth below.
INTEREST-RATE SENSITIVITY ANALYSIS
0-90 Days
91-365 Days
Expected Maturity or Repricing Date
(In thousands)
1 to 2 years
2 to 5 years
1 year
Thereafter
Total
7.18 %
Interest-Earning Assets:
Fixed Rate Loans ........................... $ 29,815
Average Interest Rate ................
Variable Rate Loans....................... 360,717
Average Interest Rate ................
Fixed Rate Investments..................
Average Interest Rate ................
Variable Rate Investments.............
Average Interest Rate ................
Interest Bearing Deposits
Average Interest Rate…………
Federal Funds Sold ........................
Average Interest Rate ................
4.24 %
589
4.0 %
343
0.05 %
20,000
17,025
0.29 %
5.27 %
Total interest-earning assets... $ 428,489
$
Interest-Bearing Liabilities:
Interest-bearing demand ................ $ 72,699
Average Interest Rate ................
Savings and money market............ 107,312
Average Interest Rate ................
Time deposits................................. 100,691
Average Interest Rate ................
Funds borrowed .............................
Average Interest Rate ................
67,273
2.86 %
0.81 %
3.71 %
3.08 %
$
-
-
-
-
104,856
3.31 %
47,929
3.52 %
$
52,579
$
82,394
$
6.73 %
4,177
6.52 %
1,026
4.38 %
-
-
-
-
-
-
57,782
$
$
6.89 %
364,894
5.28 %
18,051
4.25 %
589
4.0 %
343
0.05 %
20,000
0.29 %
486,271
72,699
2.86 %
107,312
0.81 %
205,547
3.51 %
115,202
3.26 %
$
$
50,098
7.37 %
2,761
6.02 %
9,125
4.01 %
-
-
-
-
-
-
61,984
-
-
-
-
94,759
4.04 %
5,599
4.20 %
$
129,929
$
7.13 %
24,111
5.86 %
37,841
4.36 %
-
-
-
-
-
-
191,881
$
$
-
-
-
-
29,996
4.08 %
11,996
3.96 %
$
$
16,371
$ 278,792
6.72 %
-
- %
3,075
6.03 %
-
-
-
-
-
-
19,446
7.08 %
391,766
5.32 %
68,092
4.36 %
589
4.0 %
343
0.05 %
20,000
0.29 %
$ 759,582
-
-
-
-
4,535
3.55 %
2,332
5.19 %
$
72,699
2.86 %
107,312
0.81 %
334,837
3.71 %
135,129
3.40 %
Total interest-bearing
liabilities.................................
$
347,975
$
152,785
$
500,760
$
100,358
$
41,992
$
6,867
$ 649,977
Cumulative:
Rate sensitive assets (RSA)....... $ 428,489
347,975
Rate sensitive liabilities (RSL)
80,514
GAP (GAP = RSA – RSL)
RSA/RSL ....................................... 123.14 %
RSA/Total assets............................
RSL/Total assets ............................
GAP/Total assets............................
GAP/RSA.......................................
52.53
42.66
9.87
18.79
$
$
486 271
500,760
(14,489)
486,271
500,760
(14,489)
$
$
548,255
601,118
(52,863)
97.11 %
59.61
61.39
(1.78)
(2.98)
97.11 %
59.61
61.39
(1.78)
(2.98)
91.21 %
67.21
73.69
(6.48)
(9.64)
$
740,136
643,110
97,026
115.09 %
90.74
78.84
11.89
13.11
759,582
649,977
109,605
116.86 %
93.12
79.68
13.44
14.43
$
759,582
649,977
109,605
Certain assumptions are contained in the above table which affect the presentation. Although certain assets and
liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in
market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes
47
in market interest rates, while interest rates on other types of assets and liabilities lag behind changes in market
interest rates.
Disclosures about fair values of financial instruments, which reflect changes in market prices and rates, can be
found in Note 20 to the consolidated financial statements included in this report.
Item 8:
Financial Statements and Supplementary Data
See index to Blue Valley Ban Corp. financial statements on page F-1.
Item 9:
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
No items are reportable.
Item 9A:
Controls and Procedures
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as
of December 31, 2008. Based upon the evaluation, management concluded that the Company’s disclosure controls
and procedures are effective to ensure that all material information requiring disclosure in this annual report was
made known to them in a timely manner.
Management is responsible for establishing and maintaining adequate internal control over financial reporting
for the Company. During the year, the Company made no significant changes in internal controls over financial
reporting or in other factors that could materially affect the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting:
Management is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, we
conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework
in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our
management concluded that our internal control over financial reporting was effective as of December 31, 2008.
This annual report does not include an attestation report of the Company’s registered public accounting firm
regarding internal control over financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report to this annual report.
Item 9B:
Other Information
No items are reportable.
48
Item
10:
Directors, Executive Officers and Corporate Governance
Part III
Information regarding the Company’s directors and executive officers is included in the Company’s Proxy
Statement for the 2009 Annual Meeting of Stockholders and is hereby incorporated by reference.
Information regarding the Bank’s directors and executive officers is included in Part I of this Form 10-K under
the caption “Directors and Executive Officers of the Registrant.”
The Company has adopted a code of conduct that applies to our principal executive, financial, and accounting
officers. A copy of our code of conduct can be obtained free of charge by contacting us directly at:
Investor Relations
11935 Riley
Overland Park, KS 66213
913.338.1000
Email: ir@bankbv.com
We intend to disclose any amendments to, or waivers from, any provision of our code of conduct that applies to
our chief executive officer, chief financial officer, or chief accounting officer by posting such information to our
website located at www.BankBV.com.
Item
11:
Executive Compensation
This information is included in the Company’s Proxy Statement for the 2009 Annual Meeting of Stockholders
and is hereby incorporated by reference.
Item 12:
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
This information is included in the Company’s Proxy Statement for the 2009 Annual Meeting of Stockholders
and is hereby incorporated by reference.
Item
13:
Certain Relationships, Related Transactions, and Director Independence
The Bank periodically makes loans to our executive officers and directors, the members of their immediate
families and companies with which they are affiliated. As of December 31, 2008, the Bank had aggregate loans
outstanding to such persons of approximately $28.7 million, which represented 37.54% of our stockholders’ equity
of $76.4 million on that date. These loans:
• were made in the ordinary course of business;
• were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons; and
•
did not involve more than the normal risk of collectibility or present other unfavorable features.
49
Information regarding Director Independence is included in the Company’s Proxy Statement for the 2009
Annual Meeting of Stockholders and is hereby incorporated by reference.
Item 14:
Principal Accounting Fees and Services
This information is included in the Company’s Proxy Statement for the 2009 Annual Meeting of Stockholders
and is hereby incorporated by reference.
Item 15:
Exhibits, Financial Statement Schedules
Part IV
(a)
(b)
(c)
The financial statements and financial statement schedules listed in the accompanying index to
consolidated financial statements and financial statement schedules are filed as part of this Form 10-K.
The exhibits listed in the accompanying exhibit index are filed as part of this Form 10-K.
None
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Date: March 30, 2009
By: /s/ Robert D. Regnier
Robert D. Regnier, President,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons on behalf of the registrant and in the capacities listed on the dates indicated
Date: March 30, 2009
By: /s/ Robert D. Regnier
Robert D. Regnier, President,
Chief Executive Officer and Director
(Principal Executive Officer)
Date: March 30, 2009
By: /s/ Mark A. Fortino
Mark A. Fortino, Chief Financial Officer
(Principal Financial [and Accounting] Officer)
Date: March 30, 2009
Date: March 30, 2009
Date: March 30, 2009
Date: March 30, 2009
Date: March 30, 2009
By: /s/ Donald H. Alexander
Donald H. Alexander, Director
By: /s/ Michael J. Brown
Michael J. Brown, Director
By: /s/ Thomas A. McDonnell
Thomas A. McDonnell, Director
By: /s/ Anne D. St. Peter
Anne D. St. Peter, Director
By: /s/ Robert D. Taylor
Robert D. Taylor, Director
51
Exhibits
2.1
2.2
2.3
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
Agreement and Plan of Merger between Unison Bancorp, Inc., BVBC Acquisition I, Inc. and Blue
Valley Ban Corp., dated as of November 2, 2006.*****
Acquisition Agreement and Plan of Merger among Northland National Bank, Blue Valley Ban
Corp. and Western National Bank, dated as of March 2, 2007.*****
Purchase and Assumption Agreement among Northland National Bank, Bank of Blue Valley and
Blue Valley Ban Corp., dated as of March 2, 2007.*****
Amended and Restated Articles of Incorporation of Blue Valley Ban Corp. *
Bylaws, as amended, of Blue Valley Ban Corp. *
Certificate of Designations dated December 3, 2008.******
1998 Equity Incentive Plan. *
1994 Stock Option Plan. *
Form of Agreement as to Expenses and Liabilities. *
Form of Indenture dated April 10, 2003, between Blue Valley Ban Corp. and Wilmington Trust
Company **
Amended and Restated Declaration of Trust dated April 10, 2003 **
Guarantee Agreement dated April 10, 2003 **
Fee Agreement dated April 10, 2003 **
Specimen of Floating Rate Junior Subordinated Debt Security **
Form of Indenture dated as of July 29, 2005 between Blue Valley Ban Corp. and Wilmington
Trust Company***
4.10
Amended and Restated Declaration of Trust dated July 29, 2005***
4.11
Guarantee Agreement dated July 29, 2005***
4.12 Warrant to purchase Common Stock dated December 5, 2008.******
10.1
Promissory Note of Blue Valley Building dated July 15, 1994. *
10.2 Mortgage, Assignment of Leases and Rents and Security Agreement between Blue Valley
Building and Businessmen's Assurance Company of America, dated July 15, 1994. *
10.3
Assignment of Leases and Rents between Blue Valley Building and Businessmen's Assurance
Company of America dated July 15, 1994. *
10.4
Line of Credit Note with JP Morgan Chase dated June 15, 2005 ****
10.5
Term Note with JP Morgan Chase dated June 15, 2005 ****
52
10.6
10.7
10.8
Agreement and Plan of Merger between Unison Bancorp, Inc., BVBC Acquisition I, Inc. and Blue
Valley Ban Corp., dated as of November 2, 2006 (included in Exhibit 2).*****
Acquisition Agreement and Plan of Merger among Northland National Bank, Blue Valley Ban
Corp. and Western National Bank, dated as of March 2, 2007 (included in Exhibit 2).*****
Purchase and Assumption Agreement among Northland National Bank, Bank of Blue Valley and
Blue Valley Ban Corp., dated as of March 2, 2007 (included in Exhibit 2).*****
10.9 Waiver Letter and Proposed Term Sheet with JP Morgan Chase dated October 15, 2008.*******
10.10 Letter Agreement dated December 5, 2008, including Securities Purchase Agreement – Standard
Terms, incorporated by reference herein, between Blue Valley Ban Corp. and the United States
Department of Treasury.******
10.11 Amendment and Waiver by and among Bank of Blue Valley, Blue Valley Ban Corp. and its
Senior Executive Officers.******
11.1
Statement regarding computation of per share earnings. Please see p. F-12.
21.1
Subsidiaries of Blue Valley Ban Corp.
23.3
Consent of BKD, LLP.
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
32.1
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*
**
Filed with the SEC on April 10, 2000 as an Exhibit to Blue Valley's Registration Statement on
Form S-1, Amendment No. 1, File No. 333-34328. Exhibit incorporated herein by reference.
Filed with the SEC on March 19, 2004 as an Exhibit to Blue Valley’s Annual Report on Form 10-
K. Exhibit incorporated herein by reference.
***
Filed with the SEC on July 29, 2005 as an Exhibit to Blue Valley’s Current Report on Form 8-K.
Exhibit incorporated herein by reference.
****
Filed with the SEC on March 24, 2005 as an Exhibit to Blue Valley’s Annual Report on Form 10-
K. Exhibit incorporated herein by reference.
***** Filed with the SEC on March 28, 2007 as an Exhibit to Blue Valley’s Annual Report on Form 10-
K. Exhibit incorporated herein by reference.
****** Filed with the SEC on December 8, 2008 as an Exhibit to Blue Valley’s Current Report on Form
8-K. Exhibit incorporated herein by reference.
******* Filed with the SEC on October 17, 2008 as an Exhibit to Blue Valley’s Quarterly Report on Form
10-Q. Exhibit incorporated herein by reference.
53
BLUE VALLEY BAN CORP.
DECEMBER 31, 2008, 2007 AND 2006
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ..........................
F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets...................................................................................................................................
Statements of Income ........................................................................................................................
Statements of Stockholders’ Equity...................................................................................................
Statements of Cash Flows .................................................................................................................
Notes to Financial Statements ...........................................................................................................
F-3
F-5
F-6
F-7
F-9
F-1
Report of Independent Registered Public Accounting Firm
Audit Committee,
Board of Directors and Stockholders
Blue Valley Ban Corp.
Overland Park, Kansas
We have audited the accompanying consolidated balance sheets of Blue Valley Ban Corp. (the “Company”) as of
December 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity and cash flows for
each of the three years in the period ended December 31, 2008. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. Our audits also included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Blue Valley Ban Corp. as of December 31, 2008 and 2007, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 20, in 2008 the Company changed its method of accounting for fair value measurements in
accordance with Statement of Financial Accounting Standards No. 157.
Kansas City, Missouri
March 30, 2009
/s/ BKD, LLP
F-2
BLUE VALLEY BAN CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
(In thousands, except share data)
ASSETS
Cash and due from banks
Interest bearing deposits in other financial institutions
Federal funds sold
Cash and cash equivalents
Available-for-sale securities
Mortgage loans held for sale
2008
2007
$ 24,630
343
20,000
44,973
68,681
8,157
$ 17,827
312
–
18,139
76,653
10,978
Loans, net of allowance for loan losses of $12,368 and $8,982 in 2008 and
650,033
587,664
2007, respectively
Premises and equipment, net
Foreclosed assets held for sale, net
Interest receivable
Deferred income taxes
Income taxes receivable
Prepaid expenses and other assets
Federal Home Loan Bank stock, Federal Reserve Bank stock, and
other securities
Goodwill
Core deposit intangible asset, at amortized cost
17,883
4,783
3,273
3,265
3,623
2,315
7,888
–
826
18,778
2,523
4,621
2,083
1,571
7,261
4,821
1,121
Total assets
$ 815,700
$ 736,213
See Notes to Consolidated Financial Statements
F-3
BLUE VALLEY BAN CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits
Demand
Savings, NOW and money market
Time
Total deposits
Other interest-bearing liabilities
Short-term debt
Long-term debt
Interest payable and other liabilities
2008
2007
$ 86,020
180,011
334,837
600,868
27,545
–
107,584
3,264
$ 87,927
197,986
250,457
536,370
29,036
25,000
80,906
5,967
Total liabilities
739,261
677,279
STOCKHOLDERS’ EQUITY
Capital stock
Preferred stock, $1 par value, $1,000 liquidation preference
Authorized 15,000,000 shares; issued and outstanding
2008 – 21,750 shares; 2007 – 0 shares
Common stock, par value $1 per share;
Authorized 15,000,000 shares; issued and outstanding
2008 – 2,760,105 shares; 2007 – 2,439,655 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of income tax of
$434 in 2008 and $394 in 2007
Total stockholders’ equity
22
–
2,760
37,666
35,340
651
76,439
2,440
10,312
45,592
590
58,934
Total liabilities and stockholders’ equity
$ 815,700
$ 736,213
See Notes to Consolidated Financial Statements
F-4
BLUE VALLEY BAN CORP.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except per share data)
INTEREST INCOME
Interest and fees on loans
Federal funds sold and other short-term investments
Available-for-sale securities
Total interest income
$
INTEREST EXPENSE
Interest-bearing demand deposits
Savings and money market deposit accounts
Other time deposits
Federal funds purchased and other interest-bearing liabilities
Short-term debt
Long-term debt, net
Total interest expense
NET INTEREST INCOME
PROVISION FOR LOAN LOSSES
2008
2007
2006
$
41,245
378
3,375
44,998
1,394
2,402
12,139
375
568
4,813
21,691
23,307
17,025
47,194
557
4,466
52,217
656
6,362
13,134
1,181
138
4,111
25,582
26,635
2,855
$
44,537
256
4,039
48,832
97
4,356
11,254
1,023
342
3,890
20,962
27,870
1,255
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES
6,282
23,780
26,615
NON-INTEREST INCOME
Loans held for sale fee income
Service fees
Realized gains on available-for-sale securities
Gain on settlement of litigation
Other income
Total non-interest income
NON-INTEREST EXPENSE
Salaries and employee benefits
Net occupancy expense
Goodwill impairment
Other operating expense
Total non-interest expense
INCOME BEFORE INCOME TAXES
PROVISION (BENEFIT) FOR INCOME TAXES
2,136
3,299
702
1,000
1,275
8,412
12,500
3,144
4,821
8,304
28,769
(14,075)
(3,824)
3,160
2,830
105
–
1,105
7,200
13,570
3,200
–
7,447
24,217
6,763
2,275
5,046
2,491
–
–
1,344
8,881
14,737
3,059
–
6,578
24,374
11,122
4,199
NET INCOME (LOSS)
$
(10,251)
$
4,488
$
6,923
BASIC EARNINGS PER SHARE
DILUTED EARNINGS PER SHARE
DIVIDENDS PER SHARE
$
$
$
(4.20)
(4.20)
$
$
0.00
$
1.86
1.84
0.36
$
$
$
2.93
2.88
0.30
See Notes to Consolidated Financial Statements
F-5
BLUE VALLEY BAN CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)
Comprehensive
Income
Preferred
Stock
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Unearned
Compensation
Accumulated
Other
Comprehensive
Income (Loss)
Total
BALANCE, DECEMBER 31, 2005
$
–
$ 2,382
$ 9,212
$ 35,782
$
(648)
$ (473)
$46,255
Issuance of 27,444 shares of common stock
Dividends on common stock ($0.30 per
share)
Net income
Restricted stock earned, net of forfeitures
Reclassification of unearned compensation
in accordance with adoption of SFAS No.
123R
Change in derivative financial instrument,
net of income taxes of $51
Change in unrealized depreciation on
available-for-sale securities, net of
income taxes of $177
6,923
76
265
$ 7,264
27
512
(723)
6,923
485
539
(723)
6,923
485
(648)
648
–
76
76
265
265
BALANCE, DECEMBER 31, 2006
$
–
$ 2,409
$ 9,561
$41,982
$
–
$ (132)
$53,820
Issuance of 10,182 shares of restricted
stock, net of forfeitures
Issuance of 15,425 shares of common stock
through stock options exercised
Issuance of 4,558 shares of common stock
for the employee stock purchase plan
Dividends on common stock ($0.36 per
share)
Net income
Change in derivative financial instrument,
net of income taxes (credit) of $(47)
Change in unrealized appreciation on
available-for-sale securities, net of
income taxes of $528
4,488
(70)
792
$ 5,210
10
16
5
292
327
132
(878)
4,488
302
343
137
(878)
4,488
(70)
792
(70)
792
BALANCE, DECEMBER 31, 2007
$
–
$ 2,440
$ 10,312
$45,592
$
–
$ 590
$58,934
Issuance of 21,750 shares of preferred stock
Issuance of stock warrants to purchase
111,083 shares of common stock
Issuance of 288,943 shares of common
stock through rights offering
Issuance of 12,820 shares of restricted
stock, net of forfeitures
Issuance of 15,100 shares of common stock
through stock options exercised
Issuance of 3,587 shares of common stock
for the employee stock purchase plan
Net income
Accretion of discount on preferred shares
Change in derivative financial instrument,
net of income taxes (credit) of $(4)
Change in unrealized appreciation on
available-for-sale securities, net of
income taxes of $44
(10,251)
(6)
67
$(10,190)
22
21,639
89
289
4,912
13
15
3
296
305
112
(10,251)
1
(1)
21,661
89
5,201
309
320
115
(10,251)
–
(6)
67
(6)
67
BALANCE, DECEMBER 31, 2008
$
22
$ 2,760
$37,666
$35,340
$
–
$ 651
$76,439
See Notes to Consolidated Financial Statements
F-6
BLUE VALLEY BAN CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands)
2008
2007
2006
$
(10,251)
$
4,488
$
6,923
1,552
(26)
17,025
─
4,821
(1,223)
(188)
(702)
46
─
309
10
(136,798)
139,619
200
(1,000)
1,348
(3,591)
(1,835)
9,316
(86,958)
1,514
(364)
16
3,744
23,702
33,210
(48,100)
(439)
─
─
─
─
(73,675)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash flow
From operating activities:
Depreciation and amortization
Accretion of discounts on available-for-sale securities
Provision for loan losses
Provision for other real estate
Goodwill Impairment
Deferred income taxes
Stock dividend on FHLB securities
Gain on sale of available-for-sale securities
Net (gain) loss on sale of foreclosed assets
Loss on sale of premises and equipment
Restricted stock earned and forfeited
Compensation expense related to the employee stock purchase plan
Originations of loans held for sale
Proceeds from the sale of loans held for sale
Proceeds from settlement of litigation
Gain on settlement of litigation
Changes in:
Interest receivable
Prepaid expenses and other assets
Interest payable and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Net originations of loans
Proceeds from sales of loan participations
Purchase of premises and equipment
Proceeds from sale of premises and equipment
Proceeds from the sale of foreclosed assets, net of expenses
Proceeds from sales of available-for-sale securities
Proceeds from maturities of available-for-sale securities
Purchases of available-for-sale securities
Purchases of Federal Home Loan Bank stock, Federal Reserve Bank stock,
and other securities
Proceeds from the redemption of Federal Home Loan Bank stock, Federal
Reserve Bank stock, and other securities
Sale of Western National Bank charter and other assets
Purchase of Unison Bancorp, Inc. and subsidiary, net of cash received
Proceeds from other investing activities
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in demand deposits, money market, NOW and
savings accounts
Net increase (decrease) in time deposits
Net (decrease) increase in federal funds purchased and other interest-bearing
liabilities
Net (payments of) proceeds from short-term debt
Repayments of long-term debt
Proceeds from long-term debt
Proceeds from sale of preferred stock and warrants through the Capital
Purchase Plan
Proceeds from sale of common stock through rights offering
Dividends paid on common stock
Net proceeds the sale of additional stock through ESPP plan and stock
options exercised
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
CASH AND CASH EQUIVALENTS, END OF YEAR
See Notes to Consolidated Financial Statements
$
F-7
(19,882)
84,380
(1,491)
(25,000)
(13,322)
40,000
21,750
5,201
(878)
435
91,193
26,834
18,139
44,973
$
1,606
(30)
2,855
5
─
(1,134)
(264)
(105)
97
─
316
17
(185,809)
196,636
─
─
(232)
248
(172)
18,522
(55,168)
13,235
(649)
─
1,133
6,105
55,250
(47,970)
(314)
686
392
(6,255)
123
(33,432)
7,042
(37,777)
(1,426)
25,000
(1,763)
15,000
─
─
(723)
466
5,819
(9,091)
27,230
18,139
1,471
(92)
1,255
40
─
260
(275)
─
(12)
6
485
19
(336,254)
328,355
─
─
(828)
3,455
(3,987)
821
(28,689)
500
(671)
─
930
─
36,310
(22,995)
─
2,319
─
─
─
(12,296)
(28,794)
35,317
3,270
─
(21,087)
10,000
─
─
(596)
538
(1,352)
(12,827)
40,057
27,230
$
BLUE VALLEY BAN CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW
DECEMBER 31, 2008, 2007 AND 2006
SUPPLEMENTAL CASH FLOWS INFORMATION
Loans transferred to foreclosed assets held for sale
Restricted stock issued
Cash dividends declared on common stock
Interest paid
Income taxes paid (net of refunds)
Assets acquired and liabilities assumed (see Note 22)
$
$
$
$
$
$
6,050
13
─
21,382
1,667
─
$
$
$
$
$
$
3,023
10
878
25,175
561
33,668
$
$
$
$
$
$
964
─
723
20,587
4,035
─
See Notes to Consolidated Financial Statements
F-8
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company is a holding company for Bank of Blue Valley (the “Bank”), Blue Valley Building Corp., BVBC
Capital Trust II and BVBC Capital Trust III through 100% ownership of each. In addition, the Company owns 49%
of Homeland Title, LLC.
The Bank is primarily engaged in providing a full range of banking and mortgage services to individual and
corporate customers in southern Johnson County, Kansas. The Bank also originates residential mortgages locally
and nationwide through its InternetMortgage.com website. The Bank is subject to competition from other financial
institutions and also to regulation by certain federal and state agencies that perform periodic examinations.
Blue Valley Building Corp. is primarily engaged in leasing real property at its facilities in Overland Park and
Leawood, Kansas.
BVBC Capital Trust II and III are Delaware business trusts created in 2003 and 2005, respectively, to offer trust
preferred securities and to purchase the Company’s junior subordinated debentures. The Trusts have terms of 30
years, but may dissolve earlier as provided in their trust agreements.
Homeland Title, LLC was a company providing title and settlement services and is no longer generating
business.
Operating Segment
The Company provides community banking services through its subsidiary bank, including such products and
services as loans; time deposits, checking and savings accounts; mortgage originations; trust services; and
investment services. These activities are reported as a single operating segment.
Principles of Consolidation
The consolidated financial statements include the accounts of Blue Valley Ban Corp. and its 100% owned
subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change include the determination of the
allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction
of loans. In connection with the determination of the allowance for loan losses and the valuation of foreclosed
assets held for sale, management obtains independent appraisals for significant properties.
Management believes that the allowance for loan losses and the valuation of foreclosed assets held for sale are
adequate. While management uses available information to recognize losses on loans and foreclosed assets held for
sale, changes in economic conditions may necessitate revision of these estimates in future years. In addition,
various regulatory agencies, as an integral part of their examination process, periodically review the Company’s
F-9
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
allowance for loan losses and valuation of foreclosed assets held for sale. Such agencies may require the Company
to recognize additional losses based on their judgments of information available to them at the time of their
examination.
Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less to be cash
equivalents. At December 31, 2008, cash equivalents consisted of federal funds sold.
The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The
reserve required at December 31, 2008 was $670,000.
Investment in Securities
Available-for-sale securities, which include any security for which the Company has no immediate plan to sell,
but which may be sold in the future, are carried at fair value. Realized gains and losses, based on amortized cost of
the specific security, are included in other income. Unrealized gains and losses are recorded, net of related income
tax effects, in accumulated other comprehensive income. Premiums and discounts are amortized and accreted,
respectively, to interest income using a method which approximates the level-yield method over the period to
maturity. Interest on investments in debt securities is included in income when earned.
Other Investments
The Company, as a member of the Federal Home Loan Bank (FHLB), Federal Reserve Bank (FRB) and
Bankers Bank of Kansas (BBOK) systems, is required to maintain an investment in capital stock of FHLB, FRB and
BBOK. The required investment in the stock is based on predetermined formula. No ready market exists for the
stocks, and the stocks have no quoted market value. Such stocks are recorded at cost.
The Company uses the equity method of accounting for Homeland Title, LLC. As such, the Company’s
investment in Homeland Title, LLC is included in Other Assets and its share of Homeland Title, LLC’s net income
is included in Other Income.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or fair value, determined using an aggregate basis.
Write-downs to fair value are recognized as a charge to earnings at the time the decline in value occurs. Forward
commitments to sell mortgage loans are acquired to reduce market risk on mortgage loans in the process of
origination and mortgage loans held for sale. Amounts paid to investors to obtain forward commitments, if any, are
deferred until such time as the related loans are sold. The fair values of the forward commitments are not
recognized in the financial statements if their terms match those of the underlying mortgage. Gains and losses
resulting from sales of mortgage loans are recognized when the respective loans are sold to investors. Gains and
losses are determined by the difference between the selling price and the carrying amount of the loans sold, net of
discounts collected or paid, commitment fees paid and considering a normal servicing rate. Fees received from
borrowers to guarantee the funding of mortgage loans held for sale are recognized as income or expense when the
loans are sold or when it becomes evident that the commitment will not be used.
F-10
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-offs
are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, and
any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest
income is reported using the interest method and includes amortization of net deferred loan fees over the loan term.
Generally, loans are placed on non-accrual status at ninety days past due and interest is considered a loss, unless the
loan is well-secured and in the process of collection. When interest accrual is discontinued, all unpaid accrued
interest is reversed against interest income. The interest on these loans is generally accounted for on a cost recovery
basis, meaning interest is not recognized until the full past due balance has been collected. Loans may be returned
to accrual status when all the principal and interest amounts contractually due are brought current and future
payments are reasonably assured.
Allowance for Loan Losses
The allowance is management's estimate of probable losses which have occurred as of the balance sheet date
based on management's evaluation of risk in the loan portfolio. The allowance for loan losses is increased by
provisions charged to expense and reduced by loans charged off when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The adequacy of the allowance is evaluated on a monthly basis by management based on management’s
periodic review of the collectibility of the loans in consideration of historical experience, the nature and volume of
the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of underlying
collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that
are susceptible to significant revision as more information becomes available. The Bank computes its allowance by
assigning specific reserves to impaired loans, and then applies general reserve factors to the rest of the loan
portfolio. A loan is considered impaired when, based on current information and events, it is probable that the
Company will be unable to collect the scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length
of delay, the reason for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to
the principal and interest owed.
Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows
discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if
the loan is collateral dependent.
Premises and Equipment
Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using
the straight-line method over the estimated useful lives of the assets. Leasehold improvements are capitalized and
depreciated using the straight-line method over the terms of the respective lease or the estimated useful lives of the
improvements, whichever is shorter.
F-11
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Foreclosed Assets Held for Sale
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value
less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of carrying amount or fair value less
cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in non-
interest expenses.
Goodwill
Goodwill is assessed at least annually for impairment. If the implied fair value of goodwill is lower than its
carrying amount an impairment of goodwill is indicated and goodwill is written down to its implied fair value in the
period it is identified. Subsequent increases in goodwill value are not recognized in the financial statements. As of
December 31, 2008, based upon guidelines contained in FASB Statement No. 142, Goodwill and Other Intangible
Assets, it was determined that the fair value of the Company’s goodwill was lower than its carrying amount.
Accordingly, the Company recognized a goodwill impairment charge of $4.8 million. Management believes this
impairment was primarily attributable to the continued volatility throughout the financial services industry and the
effect such volatility has had on market prices of financial services stocks, weakened economic conditions, decline
in the credit quality of the real estate and construction portfolio, and the operating loss recorded by the Company in
2008.
Core Deposit Intangible Assets
Intangible assets are being amortized on the straight-line basis over periods ranging from seven to 15 years.
Such assets are periodically evaluated as to the recoverability of their carrying value.
Fee Income
Loan origination fees, net of direct origination costs, are recognized as income using the level-yield method
over the term of the loans.
Income Taxes
Deferred tax assets and liabilities are recognized for the tax effects of differences between the financial
statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if
it is more likely than not that a deferred tax asset will not be realized. The Company files consolidated income tax
returns with its subsidiaries.
Accumulated Other Comprehensive Income (Loss)
Included in accumulated other comprehensive income (loss) at December 31, 2008 was $651,000, net of income
tax, related to unrealized gain or loss on available-for-sale securities. Included in accumulated other comprehensive
income (loss) at December 31, 2007 was $584,000, net of income tax, related to unrealized gain or loss on available-
for-sale securities and $6,000, net of income tax, related to unrealized gain or loss on interest rate swap.
F-12
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Reclassification
Certain reclassifications have been made to the 2007 and 2006 financial statements to conform to the 2008
financial statement presentation. These reclassifications had no effect on net income.
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 year. The computation of per share earnings is as follows:
2008
2007
(In thousands, except share and per share data)
2006
Net income
$
(10,251)
$
4,488
$
6,923
Average common shares outstanding
Average common share stock options outstanding and
restricted stock (1)
Average diluted common shares (1)
2,438,809
2,410,621
2,365,932
–
2,438,809
27,582
2,438,203
41,870
2,407,802
Basic earnings per share
Diluted earnings per share
$ (4.20)
$ (4.20)
$ 1.86
$ 1.84
$ 2.93
$ 2.88
(1) No shares of stock options, restricted stock or warrants were included in the computation of diluted
earnings per share for any period there was a loss.
Warrants to purchase 111,083 shares of common stock at an exercise price of $29.37 per share were outstanding
at December 31, 2008, but were not included in the computation of diluted earnings per share because the warrant’s
exercise price was greater than the average market price of the common shares, thus making the warrants anti-
dilutive.
Income available for common stockholders will be reduced by dividends declared in the period on preferred
stock (whether or not they are paid) and the accretion on the warrants. This will effect future earnings per share.
Accounting for Stock-Based Compensation
Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004). As a result of
adopting SFAS No. 123R on January 1, 2006, the Company did not record any additional compensation expense, as
no stock options had been granted in recent years and options granted were fully vested prior to adoption. However,
on January 1, 2006, the Company reclassified $648,000 of unearned compensation related to previously recognized
compensation for restricted share awards that had not been vested as of that date to additional paid-in capital as these
awards represent equity awards as defined in SFAS No. 123R.
F-13
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Recent and Future Accounting Requirements
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an
interpretation of SFAS No. 109 (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.
The Company adopted FIN 48 as of January 1, 2007, and the adoption had no significant impact on the Company’s
consolidated financial statements. The Company and subsidiaries file income tax returns in the U.S. Federal
jurisdiction and the state jurisdictions of Kansas and Missouri. With few exceptions, the Company is no longer
subject to U.S Federal or state income tax examinations by tax authorities for years before 2005.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements, which provides guidance
for using fair value to measure assets and liabilities. The statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands disclosures about fair value
measurements. FASB Statement No. 157 applies under other accounting pronouncements that require or permit fair
value measurements and does not require any new fair value measurements. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007. The Company adopted FASB Statement No.
157 as of January 1, 2008, and the adoption had no significant impact on the Company’s consolidated financial
statements.
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities-Including an Amendment to FASB Statement No. 115. This standard permits an entity to
choose to measure many financial instruments and certain other items at fair value. Most of the provisions in
Statement 159 are elective; however, the amendment to FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. Some
requirements apply differently to entities that do not report net income. The FASB's stated objective in issuing this
standard is as follows: "to improve financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions."
The fair value option established by FASB Statement No. 159 permits all entities to choose to measure eligible items
at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which
the fair value option has been elected in earnings (or another performance indicator if the business entity does not
report earnings) at each subsequent reporting date. The fair value option: (a) may be applied instrument by
instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is
irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of
instruments. FASB Statement No. 159 is effective as of the beginning of the entity’s first fiscal year that begins
after November 15, 2007. The Company did not elect to adopt FASB Statement 159 for any financial instruments.
In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations, which replaced
Statement No. 141. FASB Statement No. 141R retains the fundamental requirements of FASB Statement No. 141,
but revises certain principles, including the definition of a business combination, the recognition and measurement
of assets acquired and liabilities assumed in a business combination, the accounting for goodwill, and financial
statement disclosure. This statement is effective for annual periods beginning after December 15, 2008. There is
currently no impact from the adoption of FASB Statement No. 141R on the Company’s consolidated financial
statements.
F-14
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 2: AVAILABLE-FOR-SALE SECURITIES
The amortized cost and estimated fair value of available-for-sale securities are as follows:
December 31, 2008
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Estimated
Fair Value
U.S. Government sponsored agencies
State and political subdivisions
Equity and other securities
U.S. Government sponsored agencies
State and political subdivisions
Equity and other
(In thousands)
$
$ 66,996
–
600
$ 1,096
–
–
–
–
(11)
$ 68,092
–
589
$ 67,596
$ 1,096
$
(11)
$ 68,681
Amortized
Cost
December 31, 2007
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
(In thousands)
$
$ 74,969
210
500
$ 985
–
–
(1)
–
(10)
$ 75,953
210
490
$ 75,679
$ 985
$
(11)
$ 76,653
The amortized cost and estimated fair value of available-for-sale securities at December 31, 2008, by
contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or prepayment penalties.
Due in one year or less
Due after one through five years
Due after five years
Total
Equity and other securities
Amortized
Cost
(In thousands)
$ 14,999
48,997
3,000
66,996
600
$ 67,596
Estimated
Fair Value
$ 15,043
49,974
3,075
68,092
589
$ 68,681
The book value and estimated fair value of securities pledged as collateral to secure public deposits amounted to
$5,998,000 and $6,139,000 at December 31, 2008 and $10,998,000 and $11,152,000 at December 31, 2007.
The Company enters into sales of securities under agreements to repurchase. The amounts deposited under
these agreements represent short-term debt and are reflected as a liability in the consolidated balance sheets. The
securities underlying the agreements are book-entry securities. During the period, securities held in safekeeping
were pledged to the depositors under a written custodial agreement that explicitly recognizes the depositors’ interest
in the securities. At December 31, 2008, or at any month end during the period, no material amount of agreements
F-15
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 2: AVAILABLE-FOR-SALE SECURITIES (Continued)
to repurchase securities sold was outstanding with any individual entity. Information on sales of securities under
agreements to repurchase is as follows:
Balance as of December 31
Carrying value of securities pledged to secure agreements to repurchases
at December 31
Average balance during the year of securities sold under agreements to repurchase
Maximum amount outstanding at any month-end during the year
2008
2007
(In thousands)
$25,160
$27,956
$47,685
$32,925
$40,119
$47,657
$29,873
$35,472
Gross gains of $702,000, $105,000, and $0 were realized in 2008, 2007 and 2006, respectively, and no gross
losses were realized in 2008, 2007 and 2006, respectively, from sales of available-for-sale securities.
Certain investments in debt and marketable equity securities are reported in the financial statements at an
amount less than their historical cost. Total value of these investments at December 31, 2008 and 2007, was
$589,000 and $2,989,000, which is approximately 0.86% and 3.90% of the Company’s available-for-sale investment
portfolio. These declines in fair value resulted primarily from increases in market interest rates. Based on
evaluation of available information and evidence, particularly recent volatility in market yields on debt securities,
management believes the declines in fair value for these securities are temporary. Should the impairment of any of
these become other than temporary, the cost basis of the investment will be reduced and the resulting loss
recognized in net income in the period in which the other-than-temporary impairment is identified.
Unrealized losses and fair value, aggregated by investment type and length of time that individual securities
have been in a continuous unrealized loss position are as follows:
Description of
Securities
Less than 12 Months
12 Months or More
Total Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
December 31, 2008
(In thousands)
U.S. Government sponsored
agencies
$
State and political subdivisions
Equity and other securities
Total temporarily impaired
$
–
–
–
– $
–
–
$
–
–
589
– $
–
11
– $
–
589
securities
$
–
$
– $
589
$
11 $
589 $
–
–
11
11
F-16
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 2: AVAILABLE-FOR-SALE SECURITIES (Continued)
Description of
Securities
Less than 12 Months
12 Months or More
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Total Total
Unrealized
Losses
Fair Value
December 31, 2007
(In thousands)
U.S. Government sponsored
agencies
$
State and political subdivisions
Equity and other securities
Total temporarily impaired
$
–
–
–
– $
–
–
$
2,499
–
490
1 $
–
10
2,499 $
–
490
securities
$
–
$
– $
2,989
$
11 $
2,989 $
1
–
10
11
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at December 31, 2008 and 2007 include the following:
Commercial loans
Commercial real estate loans
Construction loans
Lease financing
Residential real estate loans
Consumer loans
Home equity loans
Total loans
Less: Allowance for loan losses
2008
2007
(In thousands)
$ 172,647
170,697
182,933
18,927
43,695
14,245
59,257
662,401
12,368
$ 139,120
150,655
188,229
19,724
37,511
22,934
38,473
596,646
8,982
Net loans
$ 650,033
$ 587,664
Activity in the allowance for loan losses was as follows:
Balance, beginning of year
Provision charged to expense
Allowance of acquired company
Losses charged off, net of recoveries
of $283,000, $324,000 and $207,000
for 2008, 2007 and 2006, respectively
2008
$ 8,982
17,025
–
2007
(In thousands)
$ 6,106
2,855
360
2006
$ 6,704
1,255
–
(13,639)
(339)
(1,853)
Balance, end of year
$ 12,368
$ 8,982
$ 6,106
F-17
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Information pertaining to impaired and non-accrual loans is summarized as follows:
Impaired loans with a valuation allowance
Impaired loans with no valuation allowance
Average impaired loans
Allowance related to impaired loans
Interest income recognized (cash basis) on impaired loans
Interest income recognized on impaired loans
Total non-accrual loans
Total loans past due 90 days or more and still accruing
Total troubled debt restructurings
2008
2007
(In thousands)
44,170
13,607
36,670
5,238
927
5,438
43,332
–
1,754
20,284
–
17,334
2,564
49
1,310
11,960
13,234
–
NOTE 4: PREMISES AND EQUIPMENT
Major classifications of these assets are as follows:
Land
Building and improvements
Furniture and equipment
Land improvements, net
Less accumulated depreciation
Total premises and equipment
NOTE 5: GOODWILL
2008
2007
(In thousands)
$ 4,869
15,701
7,473
285
28,328
10,445
$ 4,885
15,626
7,183
285
27,979
9,201
$ 17,883
$ 18,778
The changes in the carrying amount of goodwill for the years ended December 31, 2008 and 2007 were:
Balance as of January 1
Goodwill acquired during the year
Impairment loss
Balance as of December 31
2008
2007
(In thousands)
$ 4,821
–
(4,821)
–
$
$
290
4,531
–
$ 4,821
Goodwill is assessed at least annually for impairment, and any impairment is recognized in the period it is
identified. As of December 31, 2008, based upon the guidelines contained in FASB Statement No. 142, Goodwill
and Other Intangible Assets, the Company recognized a goodwill impairment charge of $4.8 million. Management
believes this impairment is primarily attributable to the weakened economic conditions, operating loss recorded by
the Company in 2008, as well as lower valuations for banking institutions industry wide. The method for estimating
F-18
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 5: GOODWILL (Continued)
the value of the Company included reviewing comparable sales transactions for peer institutions and applying a
comparable multiple to the tangible common equity component to determine what another institution would pay for
this Company.
NOTE 6: CORE DEPOSIT INTANGIBLE ASSETS
The carrying basis and accumulated amortization of recognized intangible assets at December 31, 2008 and
2007 were:
2008 2007
Gross
Carrying
Amount
Accumulated
Amortization
(In thousands)
Gross
Carrying
Amount
Accumulated
Amortization
Core Deposit Intangible
$ 3,286
$ (2,460)
$ 3,286
$ (2,165)
Amortization expense for the years ended December 31, 2008 and 2007 was $295,000 and $260,000,
respectively. Estimated amortization expense for each of the following five years is:
2009
2010
2011
2012
2013
(In thousands)
$
219
143
143
143
143
NOTE 7: INTEREST-BEARING DEPOSITS
Interest-bearing time deposits in denominations of $100,000 or more were $99,147,000 on December 31, 2008
and $116,759,000 on December 31, 2007. The Company acquires brokered deposits in the normal course of
business. At December 31, 2008 and 2007, brokered deposits of $133,047,000 and $31,471,000, respectively, were
included in the Company’s time deposit balance. Of the $133.0 million in brokered deposits, $41.0 million
represented customer funds placed into the CDARS program. The Bank is a member of the Certificate of Deposit
Account Registry Service (“CDARS”) which effectively allows depositors to receive FDIC insurance on amounts
larger than the FDIC insurance limit, which is currently $250,000. CDARS allows the Bank to break large deposits
into smaller amounts and place them in a network of other CDARS banks to ensure that full FDIC insurance
coverage is gained on the entire deposit. Although classified as brokered deposits for regulatory purposes, funds
placed through the CDARS program are Bank customer relationships that management views as core funding.
F-19
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 7: INTEREST-BEARING DEPOSITS (Continued)
At December 31, 2008, the scheduled maturities of time deposits are as follows:
2009
2010
2011
2012
2013
2014 and thereafter
(In thousands)
$ 205,542
94,759
14,307
5,014
10,680
4,535
$ 334,837
NOTE 8: OPERATING LEASES
Blue Valley Building Corp. leases office space to others under noncancellable operating leases expiring in
various years through 2012. Minimum future rent receivable under noncancellable operating leases at December 31,
2008 was as follows:
2009
2010
2011
2012
(In thousands)
341
132
97
73
$
643
Effective May 31, 2008, the Company no longer leases space from others under operating leases.
Consolidated rental and operating lease expenses were $34,000, $35,000, and $0 in 2008, 2007 and 2006,
respectively. The Company had no leased space from others during 2006.
NOTE 9: SHORT TERM DEBT
Short-term debt at December 31, 2008 and 2007 consisted of the following components:
Federal Home Loan Bank advance (A)
Federal Reserve Bank of Kansas City line of credit (B)
JP Morgan Chase operating line of credit (C)
2008
2007
$
(In thousands)
−
−
−
$ 25,000
−
−
Total short-term debt
$
–
$ 25,000
F-20
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 9: SHORT TERM DEBT (Continued)
(A)
Payable on demand; collateralized by various assets including mortgage-backed loans. The
variable interest rate was .65% on December 31, 2008 and 4.67% on December 31, 2007.
(B) Payable on demand; collateralized by various assets, including commercial and commercial real
estate loans. The line of credit bears a variable interest rate of Federal Funds rate plus 25 basis
points and at December 31, 2008 approximately $54.7 million was available.
(C)
The $15 million line of credit was paid off and closed on December 5, 2008. The line of credit
was collateralized by stock in the Company’s subsidiary bank. The line of credit had a variable
interest rate of LIBOR plus a rate between 1.63% and 2.50%, depending on the Company’s
consolidated non-performing asset ratio.
NOTE 10: LONG TERM DEBT
Long-term debt at December 31, 2008 and 2007 consisted of the following components:
Note payable – Ban Corp (A)
Note payable – Blue Valley Building Corp. (B)
Federal Home Loan Bank advances (C)
Subordinated Debentures – BVBC Capital Trust II (D)
Subordinated Debentures – BVBC Capital Trust III (E)
Total long-term debt
2008
2007
$
$
(In thousands)
−
5,496
82,500
7,732
11,856
2,781
6,037
52,500
7,732
11,856
$ 107,584
$ 80,906
(A)
(B)
(C)
(D)
This note was paid off on December 5, 2008. Previously, this note had a maturity date of
December 2012, payable in quarterly installments of principal plus interest at the Federal Funds
Rate plus 1.63%; collateralized by common stock of the Company’s subsidiary bank. The
interest rate on this note was fixed at 5.45% by the use of a swap agreement until the swap
agreement was terminated in October 2008. (See Note 11).
Two notes due in 2017; payable in monthly installments totaling $70,084 including interest at
5.19%; collateralized by land, buildings, and assignment of future rents. This debt is guaranteed
by the Company.
Due in 2011, 2012, 2013, 2015, 2016, and 2018; collateralized by various assets including
mortgage-backed loans. The interest rates on the advances range from 2.62% to 5.03%. Federal
Home Loan Bank advance availability is determined quarterly and at December 31, 2008,
approximately $14,315,000 was available.
Due in 2033; interest only at three month LIBOR + 3.25% (6.44% at December 31, 2008) due
quarterly; fully and unconditionally guaranteed by the Company on a subordinated basis to the
extent that the funds are held by the Trust. The Company may prepay the subordinated
debentures beginning in 2008, in whole or in part, at their face value plus accrued interest. (See
Note 25).
F-21
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 10: LONG TERM DEBT (Continued)
(E)
Due in 2035; interest only at three month LIBOR + 1.60% (5.36% at December 31, 2008) due
quarterly; fully and unconditionally guaranteed by the Company on a subordinated basis to the
extent that the funds are held by the Trust. Subordinated to the trust preferred securities (D) due
in 2033. The Company may prepay the subordinated debentures beginning in 2010, in whole or
in part, at their face value plus accrued interest. (See Note 25).
Aggregate annual maturities of long-term debt at December 31, 2008 are as follows:
2009
2010
2011
2012
2013
Thereafter
$
(In thousands)
569
599
8,131
15,665
20,700
61,920
$ 107,584
NOTE 11: 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 10). The
agreement provided for the Company to receive interest from the counterparty at an amount which offsets the note’s
variable rate and to pay interest to the counterparty at a fixed rate of 5.45% on the notional amount over the term of
the note. Under the agreement, the Company paid or received the net interest amount quarterly, with the quarterly
settlements included in interest expense. Management had designated the interest rate swap agreement as a cash
flow hedging instrument. During the fourth quarter, the cash flow hedge was terminated and the floating rate debt
being hedged was paid off.
The Company recognized $35,000 of expense associated with terminating the interest rate swap with the
counterparty.
NOTE 12: INCOME TAXES
The provision for income taxes consists of the following:
Taxes currently (refundable) payable
Deferred income taxes
2008
$ (2,601)
(1,223)
2007
(In thousands)
$ 3,409
(1,134)
$ (3,824)
$ 2,275
2006
$ 3,939
260
$ 4,199
F-22
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 12: INCOME TAXES (Continued)
A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is
shown below:
Computed at the statutory rate (34%)
Increase (decrease) resulting from:
Goodwill impairment
Tax-exempt interest
State income taxes
Other
2008
2007
(In thousands)
$ (4,785)
$ 2,299
1,541
(20)
(99)
(461)
–
(28)
200
(196)
2006
$ 3,793
–
(32)
251
187
Actual tax provision
$ (3,824)
$ 2,275
$ 4,199
The tax effects of temporary differences related to deferred taxes shown on the December 31, 2008 and 2007
consolidated balance sheets are as follows:
Deferred tax assets:
Allowance for loan losses
Deferred compensation
Offering costs
Non-accrual loan interest
Net Operating Loss carried from Unison Bancorp
Inc. and subsidiary acquisition
Other
Deferred tax liabilities:
Accumulated depreciation
FHLBank stock basis
Accumulated appreciation on available-for-
sale securities
Prepaid intangibles
Core Deposit Intangible related to Unison
Bancorp Inc. and subsidiary acquisition
Other
2008
(In thousands)
2007
$ 3,279
$ 4,545
136
171
221 231
96
52
77
178
5,253
77
129
3,939
(428)
(534)
(465)
(464)
(434)
(190)
(394)
(168)
(255)
(147)
(1,988)
(304)
(61)
(1,856)
Net deferred tax asset
$ 3,265
$ 2,083
NOTE 13: REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the
Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative
measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.
F-23
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 13: REGULATORY MATTERS (Continued)
The capital amounts and classification are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank
to maintain minimum amounts and ratios (set forth in the table below). Management believes, as of December 31,
2008, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2008, the most recent notification from the regulators categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the
Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table.
There are no conditions or events since that notification that management believes have changed the Bank’s
category.
The Company and the Bank’s actual capital amounts and ratios are also presented in the table.
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
(In thousands)
To Be Well Capitalized
Under Prompt
Corrective
Action Provisions
Amount
Ratio
$103,337
$ 89,553
13.82%
12.22%
$59,800
$58,607
8.00%
8.00%
N/A
$73,259
10.00%
$ 93,956
$ 80,356
12.57%
10.97%
$29,900
$29,304
4.00%
4.00%
N/A
$43,956
6.00%
$ 93,956
$ 80,356
11.50%
10.00%
$32,693
$32,128
4.00%
4.00%
N/A
$40,161
5.00%
As of December 31, 2008:
Total Capital
(to Risk Weighted Assets)
Consolidated
Bank Only
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated
Bank Only
Tier 1 Capital
(to Average Assets)
Consolidated
Bank Only
F-24
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 13: REGULATORY MATTERS (Continued)
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
(In thousands)
To Be Well Capitalized
Under Prompt
Corrective
Action Provisions
Amount
Ratio
$80,075
$73,947
11.53%
10.89%
$55,545
$54,329
8.00%
8.00%
N/A
$67,911
10.00%
$71,392
$65,452
10.28%
9.64%
$27,773
$27,165
4.00%
4.00%
N/A
$40,747
6.00%
$71,392
$65,452
9.86%
9.23%
$28,953
$28,360
4.00%
4.00%
N/A
$35,450
5.00%
As of December 31, 2007:
Total Capital
(to Risk Weighted Assets)
Consolidated
Bank Only
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated
Bank Only
Tier 1 Capital
(to Average Assets)
Consolidated
Bank Only
The Bank is subject to certain restrictions on the amounts of dividends that it may declare without prior
regulatory approval. At December 31, 2008, any dividend declaration would require regulatory approval.
Preferred Stock and Warrants
On December 5, 2008, the Company issued and sold to the United States Department of Treasury (the
“Treasury”) 21,750 shares of Fixed Rate Cumulative Perpetual Preferred Stock (the “Preferred Shares”), along with
a ten year warrant to purchase 111,083 shares of the Company’s common stock for $29.37 per share, for a total cash
price of $21.75 million (the “Transaction”). The Preferred Shares have a liquidation preference of $1,000 per share.
The Transaction occurred pursuant to, and is governed by the U.S. Treasury’s Capital Purchase Plan, (the “CPP”),
which is designed to attract broad participation by institutions, to stabilize the financial system, and to increase
lending for the benefit of the U.S. economy. In connection with the transaction, the Company entered into a letter
agreement with the Treasury which includes, a Securities Purchase Agreement-Standard Terms. The Preferred
Shares carry a 5% per year cumulative preferred dividend rate, payable quarterly. The dividend rate increases to 9%
after five years. Dividends compound if they accrue and are not paid. During the first three years after the
transaction, the Company may not redeem the Preferred Shares except in conjunction with a qualified equity
offering meeting certain requirements. During the time that the Preferred Shares are outstanding, a number of
restrictions apply to the Company, including, among others:
•
The Preferred Shares have a senior rank. The Company is not free to issue other preferred stock that is senior
to the Preferred Shares.
F-25
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 13: REGULATORY MATTERS (Continued)
•
•
•
•
Until the third anniversary of the sale of the Preferred Shares, unless the Preferred Shares have been
redeemed in whole or the Treasury has transferred all of the shares to a non-affiliated third party, the
Company may not declare or pay a common stock dividend in an amount greater than the amount of the last
quarterly cash dividend per share declared prior to October 14, 2008, or repurchase common stock or other
equity shares (subject to certain limited exceptions) without the Treasury’s approval.
If the Company were to pay a cash dividend in the future, which would only occur with the consent of the
Treasury, any such dividend would have to be discontinued if a Preferred Share dividend were missed.
Thereafter, dividends on common stock could be resumed only if all Preferred Share dividends in arrears
were paid. Similar restrictions apply to the Company’s ability to repurchase common stock if Preferred Share
dividends are missed.
Failure to pay the Preferred Share dividend is not an event of default. However, a failure to pay a total of six
Preferred Share dividends, whether or not consecutive, gives the holders of the Preferred Shares the right to
elect two directors to the Company’s Board of Directors. That right would continue until the Company pays
all dividends in arrears.
In conformity with requirements of the SPA and Section 111(b) of the Emergency Economic Stabilization
Act of 2008 (the “EESA”), the Company and its subsidiary, Bank of Blue Valley, and each of its Senior
Executive Officers agreed to limit certain compensation, bonus, incentive and other benefits plans,
arrangements, and policies with respect to the Senior Executive Officers during the period that the Treasury
owns any debt or equity securities acquired in connection with the Transaction. The applicable Senior
Executive Officers have entered into letter agreements with the Company consenting to the foregoing and
have executed a waiver voluntarily waiving any claim against the Treasury or the Company for any changes
to such Senior Executive Officer’s compensation or benefits that are required to comply with Section 111(b)
of EESA.
The Company’s preferred stock qualifies as Tier 1 capital in accordance with regulatory capital requirements.
The Warrant is exercisable immediately and expires in ten years. The Warrant has anti-dilution protections and
certain other protections for the holder, as well as potential registration rights upon written request from the
Treasury. If requested by the Treasury, the Warrant (and the underlying common stock) may need to be listed on a
national securities exchange. The Treasury has agreed not to exercise voting rights with respect to common shares it
may acquire upon exercise of the Warrant. The number of common shares covered by the Warrant may be reduced
by up to one-half if the Company completes an equity offering meeting certain requirements by December 31, 2009.
If the Preferred Shares are redeemed in whole, the Company has the right to purchase any common shares held by
the Treasury at their fair market value at that time.
F-26
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 14: TRANSACTIONS WITH RELATED PARTIES
At December 31, 2008 and 2007, the Company had loans outstanding to executive officers, directors and to
companies in which the Bank’s executive officers or directors were principal owners, in the amounts of $28,609,000
and $20,288,000, respectively. Related party transactions for 2008 and 2007 were as follows:
Balance, beginning of year
New loans
Repayments and reclassifications
Balance, end of year
2008
2007
(In thousands)
$ 20,288
21,350
(12,946)
$ 28,692
$ 10,773
19,035
(9,520)
$ 20,288
In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary
course of business and were made on substantially the same terms (including interest rates and collateral) as those
prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans
did not involve more than the normal risk of collectibility or present other unfavorable features.
NOTE 15: PROFIT SHARING AND 401(K) PLANS
The Company’s profit sharing and 401(k) plans cover substantially all employees. Contributions to the profit
sharing plan are determined annually by the Board of Directors, and participant interests are vested over a five-year
period. The Company’s 401(k) plan permits participants to make contributions by salary reduction, based on which
the Company matches a ratable portion. The Company’s matching contributions to the 401(k) plan are vested
immediately. Combined Company contributions charged to expense for 2008, 2007 and 2006 were $312,000,
$782,000 and $743,000, respectively.
NOTE 16: EQUITY INCENTIVE COMPENSATION
The Company has an Equity Incentive Plan (the “Plan”) which allows the Company to issue equity incentive
compensation awards to its employees and directors in the forms of stock options, restricted shares or deferred share
units.
Under the fixed option provisions of the Plan, the Company may grant options for shares of common stock that
vest two years from the date of grant to its employees. At December 31, 2008, the Company had 211,611 shares
available to be granted (options granted prior to 1998 were subject to an earlier plan with similar terms). The
exercise price of each option is intended to equal the fair value of the Company’s stock on the date of grant, and
maximum terms are 10 years.
During 2008, 2007 and 2006, the Company granted no stock options, but did grant 15,100, 13,600 and zero
shares of restricted common stock, respectively. Recipients of the restricted stock grant who are employees vest in
the stock after three years from the date of the grant. Recipients of the restricted stock grant who are directors vest
in the stock after one year from the date of the grant. The non vested shares were 21,100, 18,000, and 12,050 as of
December 31, 2008, 2007 and 2006, respectively. The cost basis of the restricted shares granted, equal to the fair
value of the Company’s stock on the date of grant, will be amortized to compensation expense ratably over the
applicable vesting period. The amount of unrecognized compensation costs was $268,700, $230,200, and $162,800
as of December 31, 2008, 2007, and 2006, respectively. During 2008, 2007 and 2006, 700, 2,025 and 2,400 shares
of restricted stock were forfeited, respectively.
F-27
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 16: EQUITY INCENTIVE COMPENSATION (Continued)
A summary of the status of option shares under the plan at December 31, 2008, 2007 and 2006, and changes
during the years then ended, is presented below:
2008
2007
2006
Weighted
Average
Exercise
Price
$ 19.73
17.56
–
Shares
66,325
(15,100)
–
Weighted
Average
Exercise
Price
$ 19.11
15.42
25.00
Shares
84,300
(15,425)
(2,550)
Weighted
Average
Exercise
Price
$ 18.38
16.12
–
Shares
111,400
(27,100)
–
Outstanding, beginning of year
Exercised
Forfeited
Outstanding, end of year
51,225
$ 20.38
66,325
$ 19.73
84,300
$ 19.11
Intrinsic value of shares
exercised
$ 162,826
$ 306,410
$ 389,935
Options exercisable, end of year
51,225
$ 20.38
66,325
$ 19.73
84,300
$ 19.11
The weighted-average remaining contractual life of option shares at December 31, 2008 was 2.94 years.
Exercise prices ranged from $14.375 to $25.00. Information about options outstanding and exercisable as of
December 31, 2008 is set forth in the following table.
Exercise
Prices
$ 14.375
16.50
19.50
25.00
Options Outstanding and Exercisable
Number Outstanding and
Exercisable at 12/31/08
Weighted Average
Remaining Contractual Life
Weighted Average
Exercise Price
3,900
10,050
20,000
17,275
51,225
1 year
2 years
3 years
4 years
$ 14.375
16.50
19.50
25.00
NOTE 17: EMPLOYEE STOCK PURCHASE PLAN
The 2004 Blue Valley Ban Corp. employee stock purchase plan (“ESPP”) provides the right to subscribe to
100,000 shares of common stock to substantially all employees of the Company and subsidiaries, except those who
are 5% or greater shareholders of the Company. The purchase price for shares under the plan is determined by the
Company’s Board of Directors (or a designated Committee thereof) and was set to 85% of the market price on either
the grant date or the offering date, whichever is lower, for the plan year beginning in February 2004. Expense
associated with the plan recognized in 2008, 2007 and 2006 was approximately $10,000, $17,000 and $19,000,
respectively. Information about employee stock purchase plan activity as of December 31, 2008, 2007 and 2006 is
set forth in the following table.
Plan year ending January
2008
2007
2006
Employee Stock Purchase Plan Activity
Shares purchased
3,587
4,558
4,073
Purchase Price
$27.20
$25.50
$19.55
F-28
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 18: GAIN ON SETTLEMENT OF LITIGATION
The Company’s subsidiary, Bank of Blue Valley (“Bank”), entered into a settlement agreement with an
individual, based on a successful summary judgment obtained in the Circuit Court of Jackson County, Missouri, for
fraudulent misrepresentation by the individual. The settlement was for $1.0 million, of which $200,000 was
received in cash, with the remaining $800,000 payable by August 30, 2010 with the option to extend the payable
date through August 30, 2012. The $800,000 is considered fair value and was recognized as a gain contingency in
accordance with SFAS No. 5, “Accounting for Contingencies,” as most recently interpreted by EITF 01-10,
Accounting for the Impact of the Terrorists Attacks of September 11, 2001. The consensus in EITF 01-10 requires
the recognition of a recovery when realization of the recovery is deemed probable. As the contingent portion of the
settlement is collateralized by real property legally owned by the individual, management has deemed the ultimate
recovery of the settlement as probable. Therefore, an $800,000 miscellaneous receivable was also recorded. The
receivable is interest-bearing, with an interest rate, commensurate with the risk associated. The Company estimates
the time frame for receipt of the $800,000 is between two and four years.
NOTE 19: OTHER INCOME/EXPENSE
Other income consists of the following:
Rental income
Other income
Total
Other operating expenses consist of the following:
Data processing
Professional fees
Foreclosure expenses
Advertising
Loan processing fees
Other expense
2008
$
433
842
2007
(In thousands)
481
$
624
2006
$
459
885
$
1,275
$
1,105
$
1,344
2008
$
1,178
1,096
914
717
446
3,953
2007
(In thousands)
1,077
$
1,271
339
998
484
3,278
2006
$
889
631
162
1,080
904
2,912
Total
$
8,304
$
7,447
$
6,578
F-29
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 20: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. FAS 157 has been applied prospectively as of the beginning of
the year.
FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. FAS 157 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair
value:
Level 1
Quoted prices in active markets for identical assets or liabilities
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable market data for
substantially the full term of the assets or liabilities.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the
fair value of the assets or liabilities.
Following is a description of the valuation methodologies used for instruments measured at fair value on a
recurring basis and recognized in the Company’s condensed consolidated balance sheet, as well as the general
classification of such instruments pursuant to the valuation hierarchy.
Available-for-Sale Securities
Where quoted market prices are available in an active market, securities are classified within Level 1 of the
valuation hierarchy. Level 1 securities includes exchange traded equities. If quoted market prices are not available,
then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or
discounted cash flows. Level 2 securities include U.S. Government sponsored agencies and certain municipal
securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3
of the hierarchy and include other less liquid securities.
The following table presents the fair value measurements of assets and liabilities recognized in the Company’s
condensed consolidated balance sheet and the level within the FAS 157 fair value hierarchy in which the fair value
measurements fall at December 31, 2008:
Fair Value Measurements Using
Quoted Prices
in Active
Markets for
Identical Assts
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Fair Value
(In thousands)
Available-for-Sale Securities
$ 68,681
$ 589
$ 68,092
Following is a description of the valuation methodologies used for instruments measured at fair value on a non-
recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such
instruments pursuant to the valuation hierarchy.
F-30
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 20: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
Impaired Loans
Loan impairment is reported when scheduled payments under contractual terms are deemed uncollectible.
Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate, or the
fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated
to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause
the allowance for loan losses to require increase, such increase is reported as component of the provision for loan
losses. Loan losses are charged against the allowance when Management believes the uncollectability of a loan is
confirmed. This valuation would be considered Level 3, consisting of appraisals of underlying collateral and
discounted cash flow analysis.
The following table presents the fair value measurements of assets and liabilities measured at fair value on a
non-recurring basis and recognized in the accompanying condensed consolidated balance sheet and the level within
the FAS 157 fair value hierarchy in which the fair value measurements fall at December 31, 2008:
The following table summarizes the changes to impaired loans, net of reserves, during 2008 due to certain
impaired collateral dependent loans being partially charged off and reevaluated.
Fair Value Measurements Using
Quoted Prices
in Active
Markets for
Identical Assts
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
Fair Value
(In thousands)
Impaired Loans, net of reserves
$ 52,539
$ –
$
–
$ 52,539
The following methods and assumptions were used to estimate the fair value of all other financial instruments
recognized in the accompanying consolidated balance sheets at amounts other than fair value.
Cash and Cash Equivalents
For these short-term instruments, the carrying amount approximates fair value.
Mortgage Loans Held for Sale
For homogeneous categories of loans, such as mortgage loans held for sale, fair value is estimated using the
quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.
F-31
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 20: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
Loans
The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with
similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest
approximates its fair value.
Federal Home Loan Bank Stock, Federal Reserve Bank Stock, and other securities
The carrying amounts for these securities approximate their fair value.
Deposits
The fair value of demand deposits, savings accounts, NOW accounts and certain money market deposits is the
amount payable on demand at the reporting date (i.e., their carrying amount). The fair value of fixed maturity time
deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of
similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.
Securities Sold Under Agreement to Repurchase and Other Interest-Bearing Liabilities
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Short-Term and Long-Term Debt
Rates currently available to the Company for debt with similar terms and remaining maturities are used to
estimate fair value of existing debt.
Commitments to Extend Credit, Letters of Credit and Lines of Credit
The fair value of commitments is estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.
For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and
the committed rates. The fair value of letters of credit and lines of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at
the reporting date.
F-32
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 20: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
The following table presents estimated fair values of the Company’s financial instruments in accordance with
FAS 107 not previously disclosed at December 31, 2008 and 2007.
Financial assets:
2008
Carrying
Amount
Fair
Value
2007
Carrying
Amount
Fair
Value
(In thousands)
Cash and cash equivalents
Available-for-sale securities
Mortgage loans held for sale
Interest receivable
Loans, net of allowance for loan losses
$
44,973
68,681
8,157
3,273
650,033
$
44,973
68,681
8,157
3,273
651,868
$
18,139
76,653
10,978
4,621
587,664
$
18,139
76,653
10,978
4,621
590,500
Federal Home Loan Bank stock, Federal
Reserve Bank stock, and other securities
7,888
7,888
7,261
7,261
Financial liabilities:
Deposits
Securities Sold Under Agreement to
Repurchase and Other Interest-Bearing
Liabilities
Short-term debt
Long-term debt
Interest payable
Unrecognized financial instruments
(net of amortization):
Commitments to extend credit
Letters of credit
Lines of credit
Forward commitments
600,868
611,538
536,370
537,412
27,545
–
107,584
2,768
27,545
–
116,987
2,768
29,036
25,000
80,906
2,459
29,036
25,000
81,963
2,459
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
F-33
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 21: COMMITMENTS, CREDIT RISKS AND CURRENT ECONOMIC CONDITIONS
The Company extends credit for commercial real estate mortgages, residential mortgages, working capital
financing and consumer loans to businesses and residents principally in southern Johnson County. The Bank also
purchases indirect leases from various leasing companies throughout Kansas and Missouri.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other termination
clauses and may require a payment of a fee. Since a portion of the commitments may expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s
creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts
receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. At
December 31, 2008 and 2007, the Company had outstanding commitments to originate loans aggregating
approximately $19,230,000 and $31,074,000, respectively. The commitments extend over varying periods of time
with the majority being disbursed within a one-year period.
Mortgage loans in the process of origination represent amounts that the Company plans to fund within a normal
period of 60 to 90 days and which are intended for sale to investors in the secondary market. Forward commitments
to sell mortgage loans are obligations to deliver loans at a specified price on or before a specified future date. The
Bank acquires such commitments to reduce market risk on mortgage loans in the process of origination and
mortgage loans held for sale.
Total mortgage loans in the process of origination amounted to $4,423,000 and $3,048,000 and mortgage loans
held for sale amounted to $8,157,000 and $10,978,000 at December 31, 2008 and 2007, respectively. Related
forward commitments to sell mortgage loans amounted to approximately $12,580,000 and $14,027,000 at December
31, 2008 and 2007, respectively. Mortgage loans in the process of origination represent commitments to originate
loans at both fixed and variable rates.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company had
total outstanding letters of credit amounting to $9,605,000 and $9,280,000 at December 31, 2008 and 2007,
respectively.
Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without
being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s
creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts
receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
Management uses the same credit policies in granting lines of credit as it does for on-balance sheet instruments. At
December 31, 2008 and 2007, unused lines of credit borrowings aggregated approximately $161,223,000 and
$202,380,000, respectively.
The current economic environment presents financial institutions with unprecedented circumstances and challenges
which in some cases have resulted in large declines in the fair values of investments and other assets, constraints on
liquidity and significant credit quality problems, including severe volatility in the valuation of real estate and other
collateral supporting loans. The financial statements have been prepared using values and information currently
available to the Company.
F-34
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 21: COMMITMENTS, CREDIT RISKS AND CURRENT ECONOMIC CONDITIONS (Continued)
Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial
statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan
losses, capital that could negatively impact the Company’s ability to meet regulatory capital requirements and
maintain sufficient liquidity.
NOTE 22: BUSINESS ACQUISITION
On February 16, 2007, the Company acquired 100% of the outstanding common stock of Unison Bancorp, Inc.
(“Unison”) and its subsidiary, Western National Bank of Lenexa, Kansas (“Western”) for $10,180,000 in cash and
merged Unison into the Company. On March 29, 2007, the Company sold Western to Northland National Bank,
Kansas City, Missouri, and simultaneously the Company’s subsidiary, Bank of Blue Valley, purchased the assets
and assumed the liabilities of Western, with the exception of the bank charter and some miscellaneous assets and
received $392,000 cash as a net result. As a result of the acquisition, the Company has had the opportunity to
continue its expansion in Johnson County. The results of Western from February 16, 2007 through March 29, 2007
have been included in the consolidated financial statements.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the
date of acquisition.
Cash and cash equivalents
Available-for-sale securities
Loans
Premises and equipment
Core deposits intangible
Western National Bank charter - intangible
Goodwill
Other assets
Total assets
Deposits
Other interest-bearing liabilities
Long-term debt
Other liabilities
Total liabilities assumed
$
(In thousands)
4,134
1,594
29,200
1,508
1,000
325
4,531
1,660
43,952
31,241
903
650
874
33,668
Net assets acquired
$
10,284
The Company acquired identifiable intangibles which consisted of the core deposit base of $1,000,000, which
has a useful life of approximately seven years and is being amortized using the straight-line method and the bank
charter, which was subsequently sold to Northland National Bank on March 29, 2007. Since the transaction was
structured as a stock acquisition the tax bases of the assets and liabilities carried over from the acquiree. As a result,
the $1,000,000 core deposit intangible and $4,531,000 of goodwill were not considered deductible for income tax
purposes.
F-35
for loan losses
Noninterest income
Realized gains on available-for-sale
securities
Noninterest expense
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 23: LEGAL CONTINGENCIES
Various legal claims also arise from time to time in the normal course of business which, in the opinion of
management, will have no material effect on the Company’s consolidated financial statements.
NOTE 24: SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following table presents the unaudited results of operations for the past two years by quarter. See
discussion on earnings per share in "Note 1: Nature of Operations and Summary of Significant Accounting
Policies" in the Company's Consolidated Financial Statements.
2008
2007
Fourth
Second
Third
Quarter Quarter Quarter
First
Quarter
Fourth
Quarter
Third
Second
Quarter Quarter
First
Quarter
(In thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
$ 10,770 $ 11,121 $ 11,466
5,235
5,452
5,302
6,231
5,669
5,468
1,625 12,090 2,410
$ 11,641
5,702
5,939
900
$ 12,713 $ 13,143 $ 13,605
6,561
6,734
6,297
7,044
6,409
6,416
-
590
1,865
$ 12,756
5,990
6,766
400
Net interest income after provision
$ 3,843 $ (6,421)
1,512 2,576
$ 3,821
$ 5,039
1,934 1,688
$ 4,551
1,531
$ 5,819
$ 7,044
1,761 1,806
$ 6,366
1,997
-
10,650
224
5,982 5,927
-
478
6,210
105
5,474
-
5,848
-
6,311
-
6,584
Income before income taxes
Income taxes (1)
(5,295)
(9,827)
(600) (3,617)
52
28
995
365
713
2,539
1,732
35 646 979
1,779
615
Net income (loss)
$ (4,695) $ (6,210)
$ 24
$ 630
$ 678 $ 1,086
$ 1,560
$ 1,164
Net Income (loss) per Share Data
Basic
Diluted
Balance Sheet
Total assets
Total loans, net
Stockholders' equity
$ (1.92) $ (2.55) $ 0.01
$ 0.26
$ 0.28
$ 0.45
$ 0.65
$ 0.48
$ (1.92) $ (2.55) $ 0.01
$ 0.26
$ 0.28
$ 0.44
$ 0.64
$ 0.48
$ 815,700 $ 788,261 $ 805,123
650,033 631,090 628,067
53,701 59,623
76,439
$ 768,085
613,304
60,062
$ 736,213
587,664
58,934
$ 730,449
554,161
58,788
$ 738,187
547,405
56,887
$ 739,864
552,288
55,419
(1) Income taxes were adjusted in the 4th Quarter of 2007 to correct the effective rate taken during the previous
quarters during that period.
The above unaudited financial information reflects all adjustments that are, in the opinion of management,
necessary to present a fair statement of the results of operations for the interim periods presented.
NOTE 25: SUBSEQUENT EVENTS
On February 27, 2009, the Federal Deposit Insurance Corporation (FDIC) adopted an interim rule imposing a
20 basis point special assessment on the deposits of insured financial institutions as of June 30, 2009, to be collected
on September 30, 2009. The interim rule also permits the Board to impose additional emergency special
assessments after June 30, 2009, of up to 10 basis points. The interim rule is available for comment for 30 days
from the above date, at which time a final ruling will be made.
F-36
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 25: SUBSEQUENT EVENTS (Continued)
Under agreement with the Federal Reserve Bank, the Company has restrictions related to the payment of
interest and or principal on the Company’s outstanding trust preferred securities. On March 11, 2009, the Company
notified Wilmington Trust Company, the trustee, that the Company is exercising its right to defer the payment of
interest on all of its outstanding trust preferred securities. Under the governing documents of BVBC Capital Trust
III, the next quarterly payment is due on March 31, 2009. The Company has the right to declare such a deferral.
for up to 20 consecutive quarterly periods and deferral may only be declared as long as the Company is not then in
default under the provisions of the Amended and Restated Trust Agreement. During the deferral period, interest on
the indebtedness continues to accrue and the unpaid interest is compounded. However, during the deferral period,
the Company must also accrue additional interest that is equal to the three month LIBOR rate plus 1.60%. On
March 19, 2009, the Company notified Wilmington Trust Company, the trustee, that the Company is exercising its
right to defer the payment of interest on the trust preferred securities under the governing documents of BVBC
Capital Trust II. The next quarterly payment is due on April 24, 2009. The Company has the right to declare a
deferral period for up to 20 consecutive quarterly periods. During the deferral period, no interest payments are due.
However, during the deferral period interest continues to accrue on the debt and the interest accrues at the same
interest rate that was in effect prior to the declaration of the deferral period. All accrued interest and compounded
interest must be paid at the end of the deferral period. For both BVBC Capital Trust II and BVBC Capital Trust III,
as long as the deferral period continues, the Company is prohibited from: (i) declaring or paying any dividend on
any of its capital stock, which would include both its common stock and the outstanding preferred stock issued to
the Treasury, or (ii) making any payment on any debt security that is ranked pair passu with the debt securities
issued by the respective trusts. Because the Preferred Shares issued under the CPP are subordinate to the trust
preferred securities, the Company will be restricted from paying dividends on these Preferred Shares until such time
as all trust preferred dividends have been brought current.
F-37
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 26: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Condensed Balance Sheets
December 31, 2008 and 2007
ASSETS
Cash and cash equivalents
Investments in subsidiaries:
Bank of Blue Valley
Blue Valley Building Corp.
BVBC Capital Trust II
BVBC Capital Trust III
Other assets
Total Assets
LIABILITIES
Long-term debt
Subordinated debentures
Other liabilities
Total Liabilities
STOCKHOLDERS’ EQUITY
Preferred Stock
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of income tax of $434 and $394
at 2008 and 2007, respectively
Total Stockholders’ Equity
2008
2007
(In thousands)
$
4,480
$
1,261
81,838
8,751
232
356
525
71,988
8,437
232
356
374
$ 96,182
$ 82,648
$
-
19,588
155
19,743
$
2,781
19,588
1,345
23,714
22
2,760
37,666
35,340
651
76,439
-
2,440
10,312
45,592
590
58,934
Total Liabilities and Stockholders’ Equity
$ 96,182
$ 82,648
F-38
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 26: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
(Continued)
Condensed Statements of Income
Years Ended December 31, 2008, 2007 and 2006
Income
Dividends from subsidiaries
Other income
Expenses
Income (loss) before income taxes and equity in
undistributed net income of subsidiaries
Credit for income taxes
Income (loss) before equity in undistributed net income of
subsidiaries
Equity in undistributed (distributions in excess of) net
income of subsidiaries
2008
$
654
-
654
2,541
(1,887)
(1,117)
(770)
(9,481)
2007
(In thousands)
$ 12,495
15
12,510
2,174
10,336
(818)
11,154
(6,666)
$
2006
2,104
65
2,169
2,252
(83)
(729)
646
6,277
Net income (loss)
$ (10,251)
$
4,488
$
6,923
F-39
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
NOTE 26: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
(Continued)
Condensed Statements of Cash Flows
Years Ended December 31, 2008, 2007 and 2006
2008
2007
(In thousands)
2006
$ (10,251)
$
4,488
$
6,923
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Items not requiring (providing) cash:
Deferred income taxes
Equity in undistributed (distributions in excess of)
net income of subsidiaries
Restricted stock earned
Changes in:
Other assets
Other liabilities
46
9,481
309
(207)
(308)
(42)
6,666
316
255
52
Net cash provided by (used in) operating
activities
(930)
11,735
CASH FLOW FROM INVESTING ACTIVITIES
Capital contributed to subsidiary
Purchase of Unison Bancorp, Inc. and subsidiary
Proceeds from sale of assets and liabilities of Western
National Bank
Sale of Western National Bank charter
Net cash used in investing activities
(19,578)
–
–
–
(19,578)
(5,764)
(10,284)
5,834
325
(9,889)
(1,250)
–
(2,982)
(6,277)
485
5,866
(3,399)
616
–
–
–
–
–
(600)
–
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt
Proceeds from short-term debt
Dividends paid on common stock
Proceeds from sale of preferred stock
Proceeds from sale of common stock through the
rights offering
Proceeds from sale of common stock through ESPP
and stock options exercised
Net cash provided by (used in) financing
activities
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS,
END OF YEAR
F-40
(17,781)
15,000
(878)
21,750
5,201
(723)
(596)
435
466
538
23,727
(1,507)
(658)
3,219
1,261
339
922
(42)
964
$
4,480
$
1,261
$
922
ShAReholdeR InfoRmAtIon
Corporate Office:
11935 Riley, PO Box 26128, Overland Park, KS 66225-6128
913.338.1000
913.661.0324 (fax)
Banking Center Locations:
11935 Riley, Overland Park, KS 66213
1235 E Santa Fe, Olathe, KS 66061
5520 Hedge Lane Terrace, Shawnee, KS 66226
13401 Mission Road, Leawood, KS 66209
9500 Lackman, Lenexa, KS 66219
Mortgage and Operations Center:
7900 College Boulevard, Overland Park, KS 66210
HelpLine:
913.338.HELP (4357)
Internet Websites:
www.BankBV.com
www.InternetMortgage.com
Annual Meeting of Shareholders:
The annual meeting will be held on May 13, 2009 at 5:30 p.m.
at the College Mortgage and Operations Center, Community
Room, 7900 College Boulevard, Overland Park, KS 66210.
Investor Inquiries:
To request additional copies of our Annual Report filed with
the SEC or to inquire about other shareholder issues, visit our
Investor Relations webpage at www.BankBV.com or contact
Mark A. Fortino, Chief Financial Officer, at our corporate office.
Stock Quotation Symbol:
Shares of Blue Valley Ban Corp common stock are currently
traded on the Over-The-Counter (OTC) Bulletin Board under
the symbol BVBC.
Transfer Agent and Registrar:
Computershare Trust Company, N.A.
350 Indiana Street, Suite 800, Golden, CO 80401
Auditors:
BKD, LLP
Twelve Wyandotte Plaza
120 West 12th Street, Kansas City, MO 64105-1936
Corporate Counsel:
Husch Blackwell Sanders, LLP
4801 Main Street, Suite 1000, Kansas City, MO 64112-2502
Stinson, Morrision & Hecker, LLP
1201 Walnut, Suite 2900, Kansas City, MO 64106-2150
Market Maker:
Stifel, Nicolaus & Company Inc.
One Financial Plaza, 501 N Broadway
St. Louis, MO 63102
Local trading desk: 913.345.4200