Blue Valley Ban Corp.
Annual Report 2012

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2012 ANNUAL REPORT p r o a c t i v e . s t r o n g . c o m m i t t e d . Dear Shareholders: 2012 will be viewed as a pivotal year for the company. Over the past 5 years, the “Gr eat Recession” has exacted a significant toll on nearly all of us and its impact on the customers of Bank of Blue Valley has been reflected in our operating performance. In 2012, our operating performance resulted in a modest pr ofit for the year. Our pr ogress over the last 5 years to r each this pivotal outcome has been achieved because of a consistent focus on being Proactive, staying Strong, and remaining steadfastly Committed. proactive Robe Rt D. Regnie R President & Ceo The deteriorating economy resulted in a significant increase in our Classified and Past Due loans in 2008 and 2009. Our consistent proactive approach to addressing these credit issues is reflected in our numbers and has had a significant impact on the improvement in the quality of our balance sheet as well as our earnings and capital position. The balance of our classified loans has declined by over 75% from December 31, 2008 to December 31, 2012. Total loans past due over 30 days have declined by over 70% during that period. Non-Accrual Loans were reduced by nearly 90%. During this same period we have proactively increased our reserves from 28% of Non-Accrual Loans to 187%. We continue to proactively manage our O ther Real Estate Owned portfolio and have made significant progress in that area. It is no coincidence that the results from improvements in our balance sheet positively correlate with an improvement in our earnings. Although we are not satisfied with the current level of earnings, net of the costs incurred in the remediation of classified assets, we were able to generate a profit of $117,000 for the year ending December 31, 2012 while significantly improving the quality of our balance sheet and improving our overall capital position. improvement in the quality of our balance sheet over the past 5 years TOTAL CLASSIFIED LOANS TOTAL PAST DUE LOANS TOTAL NON-ACCRUAL LOANS TOTAL RESERVES/ NON-ACCRUAL LOANS DOWN BY OVER 75% DOWN BY OVER 70% DOWN BY NEARLY 90% INCREASED TO 187% strong We have always maintained a strong capital position, but over the past five years we have improved our Bank’s capital position . Our Total Capital to Risk Weighted Assets has improved from 12.22% at December 31, 2008 to 13.33% at December 31, 2012. The result is that the Bank’s excess capital position over what is considered to be Well Capitalized has grown from $16.3 million at December 31, 2008 to $18.1 million at December 31, 2012. The Bank’s excess capital position over what is considered to be Adequately Capitalized has remained at approximately $30.0 million over this same time period. We believe this puts us in a strong position to capitalize on opportunities to invest in our future. excess capital 13.15% 12.98% 13.33% 12.67% 12.22% 10% well capitalized 12.31.2008 12.31.2009 12.31.2010 12.31.2011 12.31.2012 committed The commitment to our employees, our customers and our community has never wavered over the past five years. Throughout the financial combined united way & charity golf tournament funds raised crises we continued to provide benefits to our employees that many other companies reduced or eliminated. Retention of quality emplo yees is a key component to providing superior customer service, to which the $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $ 2012 2011 2010 2009 2008 Company has always remained committed. The result of this and other such policies has been a very low level of turnover in our officer staff. Our customers continued to benefit from a high level of service, including our very competitive banking hours. We are open 91.5 hours a week to serve our customers. Finally, the commitment of our Company, its Board of Directors, management and employees to our community has never been stronger. We continue to support numerous civic, cultural and charitable causes in our community by participation and sponsorship including, our annual United Way campaign and our annual Charity Golf Tournament. These two events alone raised nearly $400,000 over the past 5 years. Thank you for your continued support. We look forward to continued progress in 2013 and beyond. Robert D. Regnier President & CEO committed committed BLUE VALLEY BAN CORP. Accountants’ Reports and Consolidated Financial Statements December 31, 2012, 2011 and 2010 BLUE VALLEY BAN CORP. DECEMBER 31, 2012, 2011 AND 2010 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Page INDEPENDENT AUDITOR’S REPORT ............................................................................................ F-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM .......................... F-3 CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets ................................................................................................................................... Statements of Operations ................................................................................................................... Statements of Comprehensive Income (Loss) ................................................................................... Statements of Stockholders’ Equity................................................................................................... Statements of Cash Flows ................................................................................................................. Notes to Financial Statements ........................................................................................................... F-4 F-6 F-7 F-8 F-9 F-11 F-1 Independent Auditor’s Report Audit Committee, Board of Directors and Stockholders Blue Valley Ban Corp. Overland Park, Kansas We have audited the accompanying consolidated financial statements of Blue Valley Ban Corp. and its sub- sidiaries, which comprise the consolidated balance sheets as of December 31, 2012, and the related consoli- dated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, includ- ing the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opin- ion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Audit Committee, Board of Directors and Stockholders Blue Valley Ban Corp. Page 2 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material re- spects, the financial position of Blue Valley Ban Corp. and its subsidiaries as of December 31, 2012, and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Kansas City, Missouri March 6, 2013 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 sheet of Blue Valley Ban Corp. as of December 31, 2011, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2011. The Company’s management is responsible for these consolidated financial statements. 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, 2011, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Kansas City, Missouri March 6, 2013 BLUE VALLEY BAN CORP. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2012 AND 2011 (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, fair value $ 2012 33,353 67,724 – 101,077 77,845 7,621 $ 2011 23,480 76,419 – 99,899 61,790 5,686 Loans, net of allowance for loan losses of $9,057 and $13,189 in 2012 and 2011, respectively 406,614 425,654 Premises and equipment, net Foreclosed assets held for sale, net Interest receivable Deferred income taxes Prepaid expenses and other assets Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities Core deposit intangible asset, at amortized cost 15,448 31,936 1,529 1,121 6,095 7,540 179 15,897 29,246 1,573 911 6,106 7,369 321 Total assets $ 657,005 $ 654,452 See Notes to Consolidated Financial Statements F-4 BLUE VALLEY BAN CORP. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2012 AND 2011 (In thousands, except share data) LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES Deposits Demand Savings, NOW and money market Time Total deposits Other interest-bearing liabilities Long-term debt Interest payable and other liabilities Total liabilities STOCKHOLDERS’ EQUITY Capital stock Preferred stock, $1 par value, $1,000 liquidation preference Authorized 15,000,000 shares; issued and outstanding 2012 – 21,750 shares; 2011 – 21,750 shares Common stock, par value $1 per share; Authorized 15,000,000 shares; issued and outstanding 2012 – 2,934,123 shares; 2011 – 2,879,158 shares Additional paid-in capital Accumulated deficit Accumulated other comprehensive income, net of income tax of $29 in 2012 and $89 in 2011 Total stockholders’ equity 2012 2011 $ 113,698 235,632 135,136 484,466 21,668 101,111 9,945 617,190 $ 100,842 222,984 166,587 490,413 15,372 100,434 7,778 613,997 22 22 2,934 38,746 (1,930) 43 39,815 2,879 38,511 (1,091) 134 40,455 Total liabilities and stockholders’ equity $ 657,005 $ 654,452 See Notes to Consolidated Financial Statements F-5 BLUE VALLEY BAN CORP. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 (In thousands, except per share data) INTEREST AND DIVIDEND INCOME Interest and fees on loans Federal funds sold and other short-term investments Available-for-sale securities Dividends on Federal Home Loan Bank and Federal Reserve Bank stock Total interest and dividend income INTEREST EXPENSE Interest-bearing demand deposits Savings and money market deposit accounts Other time deposits Federal funds purchased and other interest-bearing liabilities Long-term debt, net Total interest expense NET INTEREST INCOME PROVISION FOR LOAN LOSSES $ 2012 2011 2010 $ $ 22,853 193 1,097 240 24,383 700 291 2,487 44 3,670 7,192 17,191 1,200 25,277 151 1,202 225 26,855 1,611 346 3,755 41 3,502 9,255 17,600 3,300 28,011 245 1,825 222 30,303 2,343 438 7,746 45 3,791 14,363 15,940 3,095 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,991 14,300 12,845 NON-INTEREST INCOME Loans held for sale fee income NSF charges and service fees Other service charges Realized gains on available-for-sale securities Other income Total non-interest income NON-INTEREST EXPENSE Salaries and employee benefits Net occupancy expense Foreclosed assets expense Other operating expense Total non-interest expense INCOME (LOSS) BEFORE INCOME TAXES PROVISION (BENEFIT) FOR INCOME TAXES Provision (benefit) for income taxes Valuation allowance for deferred tax asset Total provision (benefit) for income taxes NET INCOME (LOSS) DIVIDENDS AND ACCRETION ON PREFERRED STOCK NET LOSS AVAILABLE TO COMMON SHAREHOLDERS BASIC LOSS PER SHARE DILUTED LOSS PER SHARE See Notes to Consolidated Financial Statements $ $ $ F-6 2,447 980 2,472 – 1,535 7,434 10,587 2,568 2,647 7,506 23,308 117 50 (200) (150) 267 1,106 2,120 944 2,276 – 984 6,324 10,955 2,599 5,219 7,851 26,624 (6,000) (2,777) 12,600 9,823 (15,823) 1,106 3,506 1,062 2,021 885 1,145 8,619 11,753 2,756 2,708 8,550 25,767 (4,303) (1,561) – (1,561) (2,742) 1,105 (839) $ (16,929) $ (3,847) (0.29) (0.29) $ $ (6.03) (6.03) $ $ (1.38) (1.38) BLUE VALLEY BAN CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 (In thousands) NET INCOME (LOSS) OTHER COMPREHENSIVE INCOME (LOSS) Change in unrealized appreciatio n on av ailable-for-sale securities, net of income taxes (credit) of $(60) in 2012, $69 in 2011 and $305 in 2010 Less: re classification adjustment for realized gains (losses) in cluded in net loss, net of income tax credit of $354 in 2010 Comprehensive income (loss) 2012 2011 2010 $ 267 $ (15,823) $ (2,742) (91) – 176 104 – (15,719) 458 (531) (2,815) See Notes to Consolidated Financial Statements F-7 BLUE VALLEY BAN CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 (In thousands, except share data) Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other (Accumulated Comprehensive Income (Loss) Deficit) Total BALANCE, DECEMBER 31, 2009 $ 22 $ 2,818 $ 37,975 $19,685 $ 103 $60,603 Issuance of 29,640 shares of restricted stock, net of forfeitures of 7,454 Issuance of 3,645 shares of common stock for the employee stock purchase plan Net loss Accretion of discount on preferred shares Dividend on preferred shares Change in unrealized appreciation on available-for-sale securities, net of income taxes (credit) of $(49) 22 3 406 32 18 (2,742) (18) (1,087) 428 35 (2,742) – (1,087) (73) (73) BALANCE, DECEMBER 31, 2010 $ 22 $ 2,843 $38,431 $15,838 $ 30 $ 57,164 Issuance of 40,666 shares of restricted stock, net of forfeitures of 7,437 Issuance of 2,628 shares of common stock for the employee stock purchase plan Net loss Accretion of discount on preferred shares Dividend on preferred shares Change in unrealized appreciation on available-for-sale securities, net of income taxes of $69 33 3 44 18 18 (15,823) (18) (1,088) 77 21 (15,823) – (1,088) 104 104 BALANCE, DECEMBER 31, 2011 $ 22 $ 2,879 $38,511 $(1,091) $ 134 $40,455 Issuance of 55,155 shares of restricted stock, net of forfeitures of 6,698 Issuance of 6,508 shares of common stock for the employee stock purchase plan Net income Accretion of discount on preferred shares Dividend on preferred shares Change in unrealized appreciation on available-for-sale securities, net of income taxes (credit) of $(60) 48 7 197 20 18 267 (18) (1,088) 245 27 267 – (1,088) (91) (91) BALANCE, DECEMBER 31, 2012 $ 22 $ 2,934 $38,746 $(1,930) $ 43 $ 39,815 See Notes to Consolidated Financial Statements F-8 BLUE VALLEY BAN CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 (In thousands) OPERATING ACTIVITIES Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization Accretion, net of am ortization of premiums and discounts on available- for-sale securities Provision for loan losses Provision for losses on foreclosed assets held for sale Deferred income taxes Stock dividends on FHLBank (FHLB) stock Increase in value of bank owned life insurance Net realized gains on available-for-sale securities Net gain on sale of foreclosed assets 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 Realized (gain) loss on loans held for sale fair value adjustment Changes in: Interest receivable Net fair value of loan related commitments Income taxes receivable Prepaid expenses and other assets Interest payable and other liabilities Net cash provided by operating activities INVESTING ACTIVITIES Net change in loans Proceeds from sale of loan participations Purchase of premises and equipment Proceeds from the sale of foreclosed assets, net of expenses Purchases of available-for-sale securities Proceeds from maturities of available-for-sale securities Proceeds from sale of available-for-sale securities Purchases of bank owned life insurance Purchases of FHLB and Federal Reserve Bank stock and other securities Proceeds from the redemption of FHLB stock, Federal Reserve Bank stock, and other securities Net cash provided by (used in) investing activities FINANCING ACTIVITIES Net increase in demand deposits, money market, NOW and savings accounts Net decrease in time deposits Net increase (decrease) in federal funds purchased and other interest-bearing liabilities Repayments of long-term debt Proceeds from long-term debt Prepayment penalty on modification of FHLB advances Net proceeds from the sale of stock through Employee Stock Purchase Plan Net cash provided by (used in) financing activities 2012 2011 2010 $ 267 $ (15,823) $ (2,742) 1,686 (14) 1,200 867 (150) (124) (170) ─ (337) 245 3 (83,477) 81,540 2 44 (92) ─ 270 1,077 2,837 5,666 2,675 (417) 6,281 (107,192) 91,000 ─ ─ 1,661 (62) 3,300 3,159 9,823 (106) ─ ─ (555) 77 4 (66,014) 68,668 (178) 210 257 ─ (172) 490 4,739 28,561 2,854 (499) 5,638 (64,915) 67,000 ─ (4,000) (79) (100) 31 (2,035) 25,504 (31,451) 6,296 ─ ─ ─ 27 376 ─ 34,539 4,444 (55,249) (3,376) ─ ─ ─ 21 (54,160) 1,298 (73) 3,095 734 (1,561) (104) ─ (885) (168) 428 3 (135,930) 136,487 33 520 (128) 2,746 981 116 4,850 42,909 32 (226) 9,077 (134,932) 115,000 29,885 ─ ─ ─ 61,745 23,979 (72,871) 2,628 (42,500) 42,500 (2,569) 35 (48,798) Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year CASH AND CASH EQUIVALENTS, END OF YEAR 1,178 99,899 101,077 $ (14,882) 114,781 99,899 $ 17,797 96,984 114,781 $ See Notes to Consolidated Financial Statements F-9 BLUE VALLEY BAN CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 (In thousands) SUPPLEMENTAL CASH FLOWS INFORMATION Cash paid during the year for: Interest Income taxes, net of refunds Noncash investing and financing activities: Transfer of loans to foreclosed property, net of specific allowance Restricted stock issued Preferred dividends accrued but not paid Sale and financing of foreclosed assets 2012 2011 2010 $ $ 6,254 ─ $ $ 8,717 1 $ $ 14,372 (2,750) $ $ $ 10,518 48 1,088 $ 1,018 $ $ $ $ 17,354 33 1,088 268 $ $ $ $ 10,352 22 1,087 819 See Notes to Consolidated Financial Statements F-10 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations The Company is a hol ding company for Bank of Blue Valley (the “Bank”), BVBC Capital Trust II and B VBC Capital Trust III through 100% ownership of each. In addition, the Company owned 49% of Homeland Title, LLC until it closed its operations in March 2009. The Bank is primarily engaged in providing a full range of banking and mortgage services to individual and corporate customers in Johnson County, Kansas. The Bank also orig inates residential mortgages locally and nationwide through its In ternetMortgage.com website. Th e Bank is su bject to competition from other financial institutions. Th e Bank is also subject to regulation by certain federal and state ag encies and undergoes periodic examination by those regulatory authorities. BVBC Capital Trust II and III are Delaware b usiness trusts created in 2003 and 2005, re spectively, 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. Operating Segment The Company provides community banking services through its su bsidiary bank, including such products and services as loans; tim e deposits, chec king and savi ngs accounts; mortgage originations; trust s ervices; 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 m ake estimates and a ssumptions 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 re venues and ex penses during the reporting period. Act ual results could differ from those estimates. Material estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses, valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, valuation of deferred tax assets and fair values of financial instruments. 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. F-11 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Management believes that the allowance for loan losses, valuation of foreclosed assets held for sale, and valuation of deferred tax assets are adeq uate. While management uses avai lable information to recognize losses on l oans, foreclosed assets held for sale and deferred tax assets, changes in economic conditions may necessitate revision of these estimates in future years. In addition, various regulatory agencies, as an integral part of th eir examination process, periodically review the Company’s allowance for loan losses, valuation of foreclosed assets held for sale and deferred tax assets. S uch 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 and Cash Equivalents The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. Pursuant to legislation enacted in 2010, the FDIC fully insured all noninterest-bearing transaction accounts beginning December 31, 2010 through December 31, 2012 at all FDIC-insured institutions. Upon expiration of this legislation on December 31, 2012, the FDIC insurance limit on noninterest-bearing transaction accounts at all FDIC- insured institutions was restored to the $250,000 FDIC insurance limit previously made effective July 21, 2011. The Company’s interest-bearing cash account s exceeded federally insured limits by a pproximately $495,000 at December 31, 2012. Prior to June, 2012, the Bank was required to maintain reserve funds in cash a nd/or on deposit with the Federal Reserve Bank. The Bank had no required reserve at December 31, 2012, and had a clearing balance requirement of $15,000,000 at December 31, 2011. The deposit balance held at the Federal Reserve Bank on December 31, 2012 was $66,979,000. Investment in Securities Available-for-sale securities, which include any security for wh ich the Company has no immediate plan to sell, but which may be sold in the future, are carried at fair val ue. Unrealized gain s and losses are excluded from earnings and are report ed, net of rel ated income tax effects , in accumulated other comprehensive income. Purc hase premiums and discounts are amortized and accreted, respectively, to interest income using a method which approximates the level-yield method over the terms of the securities. Realized gains and losses, based on amortized cost of the specific security, are recorded on trade date and included in non-interest income. Interest on investments in debt securities is included in income when earned. For debt securities with fair value below amortized cost and the Company does not intend to sell the debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost b asis, the Company recognizes the credit component of an other-than-temporary impairment of the de bt security in earnings and the remaining portion in other comprehensive income. The credit loss com ponent recognized in earni ngs is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections. The Company did not have any securities with other-than-temporary impairment at December 31, 2012. F-12 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) For equity securities, when the Company has decided to sell an impaired available-for-sale security and the entity does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other-than-temporary even if a decision to sell has not been made. Mortgage Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are carried at fair value in the aggregate. Net unrealized gains a nd losses, if an y, are recognized t hrough a val uation allowance by charges t o non-interest income. Gai ns and l osses, net of discounts collected or paid, commitment fees pai d and considering a no rmal servicing rate are recognized in non-interest income upon sale of the loan. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balance adjusted for unearned i ncome, charge-offs, the allowance for loa n losses, and any deferred fees or costs on originated loans and unamortized premiums or di scounts on purchased loans. For loans recorded at amortized cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, as well as premiums and discounts, are deferred and amortized over the respective term of the loan. Generally, the accrual of interest on loa ns is discontinued at the tim e the loan is 90 days past due a nd interest is considered a lo ss, unless the loan is well-secu red and in the process of collection. P ast due st atus is based o n contractual term of the loa ns. Loa ns are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans placed on non-accrual or charged off is reversed against interest income. The in terest on these loans is ge nerally accounted for on a cash- basis or a cost recovery method, until conditions qualify the loan’s return to accrual status. Loans may be returned to accrual status when all the princi pal and i nterest amounts contractually due a re brought current and future payments are reasonably assured. F-13 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan Losses The allowance for loan losses 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. Lo an losses are charge d against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for l oan losses is ev aluated on a m onthly basis by management and is 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 requ ires estimates that are susceptible to significant revision as more information becomes available. The Company computes its allowance by assigning specific reserves to impaired loans, and then applies general reserve factors to the rest of the loan portfolio. Th e general reserve covers non-impaired loans and is b ased on historical charge off experience, expected loss given default derived from the Company’s internal risk rating process and current and projected economic conditions and factors. Other adjustments may be made to the allowance for pools of loans after an assessment of internal and external influences on credit quality that are not fully reflected in the historical loss or risk rating data. A loan is considered impaired when, based on current information and events, it is p robable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the c ontractual terms of the loan agreement. Fact ors 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 pay ment shortfalls generally are not classified as im paired. 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. Im pairment is measured on a loan-by-loan basis by either the pres ent 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. Lea sehold 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. The estimated useful lives for each major depreciable classification of premises and equipment are as follows: Buildings and improvements Furniture and equipment 35-40 years 3-10 years F-14 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 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 v alue 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 reported as other income and foreclosed assets expense. FHLBank Stock, Federal Reserve Bank Stock and Other Securities FHLBank and Federal Reserve Bank stock are required investments for institutions that are members of the Federal Home Loan Bank and Federal Reserve systems. The required investment in the stock is based on a predetermined formula, carried at cost and evaluated for impairment. Derivatives Derivatives are recognized as assets and liabilities in the consolidated balance sheet and measured at fair value. Derivative Loan Commitments Mortgage loan commitments that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance (ASC 815, Derivatives and Hedging). Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded in other income. The Company estimates the fair value using a val uation model which considers differences between quoted prices for lo ans with similar characteristics in the secondary market and the committed rates. Forward Loan Sale Commitments The Company carefully evaluate s all lo an sales agreements to determine whether they meet the definition of a derivative under the derivatives and hedging accounting guidance (ASC 815), as facts and circumstances may differ significantly. If agreements qualify, to protect against the price risk inherent in derivative loan commitments, the Company uses best efforts forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of th e derivative loan commitments. Ac cordingly, forward loan commitments are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in th eir fair values recorded in other income. Th e Company estimates the fair v alue of its forward loan commitments using a methodology similar to that used for derivative loan commitments. Core Deposit Intangible Assets Intangible assets are being amortized on the straight-line basis over seven years. Such assets a re 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. F-15 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been s urrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. Transfers between Fair Value Hierarchy Levels Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs) and Level 3 (significant unobservable inputs) are recognized on the period end date. Income Taxes The Company accounts for incom e taxes i n accordance with income tax acc ounting guidance (ASC 740, Income Taxes). The i ncome tax accounting guida nce results in two com ponents of in come tax expense: current a nd deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The C ompany determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is b ased on the tax effects of the differences between the book and tax b ases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation al lowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The valuation allowance at December 31, 2012 was $12,436,000. Due to the Company’s losses recorded over the previous four years, the Com pany assessed t he deferred tax asset during 2011 and recognized a $12,600,000 valuation allowance on the deferred tax asset based on historical and current information available relating to uncertainty of th e Company’s ability to recognize the deferred tax as set in futu re near term periods. A s the Co mpany recognizes profits in the future, portions of this allowance may be recognizable in future years. Deferred tax assets are recogn ized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also in clude resolution of th e related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is in itially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a tax ing authority that has full knowledge of all relev ant information. Th e determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. The Company recognizes interest and penalties on income taxes as a co mponent of income tax expense. The Company files con solidated income tax returns with its su bsidiaries. Th e Company is g enerally not subject to federal, state and local examination by tax authorities for years prior to 2009. F-16 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Comprehensive Income (Loss) Comprehensive income (loss) consists of net income (loss) and accumulated other comprehensive income (loss), net of applicable income taxes. Accu mulated other comprehensive income (loss) includes unrealized appreciation (depreciation) on available-for-sale securities. Net unrealized gain or loss on available-for-sale securities, net of income taxes, included in accumulated other comprehensive income was $4 3,000 and $134,000, respectively, at December 31, 2012 and 2011. Reclassification Certain reclassifications have been made to the 2011 and 2010 financial statements to conform to the 2012 financial statement presentation. These reclassifications had no effect on net income (loss). Earnings (Loss) Per Share Basic earnings (loss) per share represents income available to common stockholders divided by the weighted average number of shares outstanding during each period. Diluted earnings (loss) per s hare reflects additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as an y adjustment to income that would result from the assum ed issuance. The computation of per share earnings is as follows: 2012 2011 2010 (In thousands, except share and per share data) Net Income (loss) Dividends and accretion on preferred stock Net loss available to common shareholders $ $ 267 $ (1,106) (839) $ (15,823) $ (1,106) (16,929) $ (2,742) (1,105) (3,847) Average common shares outstanding Average common share stock options outstanding and restricted stock (B) 2,855,566 2,806,299 2,773,039 11,997 21,589 15,115 Average diluted common shares (B) 2,867,563 2,827,888 2,788,154 Basic loss per share Diluted loss per share (A) ($0.29) ($0.29) ($6.03) ($6.03) ($1.38) ($1.38) (A) (B) 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, 2012, 2011 and 2010, 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. Stock options to purchase 0, 10,575, and 24,375 shares of common stock were outstanding at December 31, 2012, 2011 and 2010 respectively, but were not included in the computation of diluted earnings per share because the option’s exercise price was greater than the average market price of the common shares, thus making the options 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. F-17 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 2: AVAILABLE-FOR-SALE SECURITIES The amortized cost and estimated fair value, together with gross unrealized gains and losses, of available-for-sale securities are as follows: (In thousands) U.S. Government sponsored agencies Municipal securities Equity and other securities (In thousands) U.S. Government sponsored agencies Equity and other securities Amortized Cost $ 63,123 14,051 600 December 31, 2012 Gross Unrealized Gains $ 68 176 23 Gross Unrealized Losses $ (43) (153) – Fair Value $ 63,148 14,074 623 $ 77,774 $ 267 $ (196) $ 77,845 December 31, 2011 Amortized Cost $ 60,967 600 Gross Unrealized Gains $ 228 19 $ 61,567 $ 247 Gross Unrealized Losses $ $ (24) – (24) Fair Value $ 61,171 619 $ 61,790 The amortized cost and estimated fair v alue of av ailable-for-sale securities at Dece mber 31, 2012, 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. (In thousands) Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Total Equity and other securities Amortized Cost $ $ 0 0 410 76,764 77,174 600 77,774 Fair Value $ $ 0 0 407 76,815 77,222 623 77,845 The amortized cost and estimated fair value of securities pledged as collateral to secure public deposits amounted to $5,000,000 and $4,997,080 at December 31, 2012 and $5,000,000 and $5,013,000 at December 31, 2011. Gross gains of $0, $0, and $885,000 were realized in 2012, 2011 and 2010, respectively, and no gross losses were realized in 2012, 2011 and 2010, respectively, from sales of available-for-sale securities. F-18 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 2: AVAILABLE-FOR-SALE SECURITIES (Continued) Certain investments in debt and marketable equity securities are reporte d in the financial statements at an am ount less than thei r historical cos t. To tal fair value of these investments at Decem ber 31, 2012 a nd 2011, was $33,985,000 and $19,973,000, which is approximately 43.7% and 32.3%, respectively, of the Company’s available- for-sale investment portfolio. These declines in fair value resulted primarily from recent increases in market interest rates. Based on evaluation of availabl e information and evidence, particularly recent volatility in market yields on debt securities, management believes the declines in fair value for these securities are temporary. 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 (In thousands) U.S. Government sponsored agencies Municipal securities Total temporarily impaired Less than 12 Months December 31, 2012 12 Months or More Fair Value Unrealized Losses Fair Value Unrealized Losses Total Fair Value Total Unrealized Losses $ 27,832 6,153 $ 43 $ 153 $ – – – $ – 27,832 $ 6,153 43 153 securities $ 33,985 $ 196 $ – $ – $ 33,985 $ 196 Description of Securities (In thousands) U.S. Government sponsored agencies Total temporarily impaired Less than 12 Months December 31, 2011 12 Months or More Fair Value Unrealized Losses Fair Value Unrealized Losses Total Fair Value Total Unrealized Losses $ 19,973 $ 24 $ – $ – $ 19,973 $ 24 24 securities $ 19,973 $ 24 $ – $ – $ 19,973 $ The unrealized losses on the Company’s investments in direct obligations of U.S. government sponsored agencies and municipal securities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of t heir amortized cost bases, which may be maturity, the Company did not consider those investments to be other-than-temporarily impaired at December 31, 2012 or 2011. F-19 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 2: AVAILABLE-FOR-SALE SECURITIES (Continued) The Company enters into sales of securities under agreements to repurchase. The am ounts deposited under these agreements represent short-term debt and are reflected as a liab ility in the consolidated balance sheets. The securities underlying the agreements are book-entry securities. During the period, securities held in safek eeping were pledged to the depositors under a written custodial agreement that explicitly recognizes the depositors’ interest in the securities. At December 31, 2012, or at any month end during the period, no material amount of agreements to repurchase securities sold was outstanding with any individual entity. Information on sales of securities under agreements to repurchase is as follows: (In thousands) Balance as of December 31 Carrying value of securities pledged to secure agreements to repurchase 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 2012 2011 $21,668 $14,413 $37,059 $18,663 $22,071 $24,131 $16,405 $18,633 NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES Classes of loans at December 31, 2012 and 2011 include the following: (In thousands) Commercial loans Commercial real estate loans Construction loans Home equity loans Residential real estate loans Lease financing Consumer loans Total loans Less: Allowance for loan losses 2012 2011 $ 115,520 143,198 46,515 49,529 43,584 10,054 7,271 415,671 9,057 $ 130,398 154,109 48,438 59,750 37,882 2,268 5,998 438,843 13,189 Net loans $ 406,614 $ 425,654 F-20 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) The following tables present the activity in the allowance for loan losses for the years ended December 31, 2012, 2011 and 2010: (In thousands) Allowance for loan losses: Balance, beginning of year Provision charged to expense Losses charged off Recoveries Balance, end of year Commercial Commercial Real Estate Construction Home Equity Residential Real Estate Lease Financing Consumer Total For the Year Ended December 31, 2012 $ 2,987 $ 3,772 $ 2,721 $ 1,338 $ 2,312 $ 30 $ 29 $ 13,189 961 (2,030) 179 2,097 $ 2,029 (2,239) 20 3,582 $ (777) (882) 481 1,543 $ $ (345) (417) 58 634 $ (677) (540) 43 1,138 $ 25 (9) - 46 (16) – 4 17 $ 1,200 (6,117) 785 9,057 $ Allowance for loan losses: Balance, beginning of year Provision charged to expense Losses charged off Recoveries Balance, end of year Commercial Commercial Real Estate Construction Home Equity Residential Real Estate Lease Financing Consumer Total For the Year Ended December 31, 2011 $ 3,339 $ 3,974 $ 4,579 $ 1,262 $ 1,488 $ 38 $ 51 (31) $ 14,731 (52) (582) 282 2,987 $ 925 (1,218) 91 3,772 $ 434 (2,352) 60 2,721 $ 753 (725) 48 $ 1,338 $ 1,304 (637) 157 2,312 $ (33) – 25 30 $ 3,300 (5,514) 672 13,189 $ – 9 29 Allowance for loan losses: Balance, beginning of year Provision charged to expense Losses charged off Recoveries Balance, end of year Commercial Commercial Real Estate Construction Home Equity Residential Real Estate Lease Financing Consumer Total For the Year Ended December 31, 2010 $ 3,630 $ 7,253 $ 5,929 $ 1,061 $ 1,737 $ 238 $ 152 $ 20,000 683 (1,364) 390 3,339 $ (465) (2,985) 171 3,974 $ 2,189 (3,662) 123 4,579 $ 571 (387) 17 $ 1,262 $ 400 (660) 11 1,488 $ (171) (43) 14 38 $ (112) (7) 18 51 3,095 (9,108) 744 14,731 $ F-21 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment methods as of December 31, 2012 and 2011: Commercial Commercial Real Estate Construction December 31, 2012 Home Equity Residential Real Estate Lease Financing Consumer Total $ $ 550 $ 1,812 $ 564 $ 143 $ 331 $ – $ – $ 3,400 1,547 2,097 1,770 3,582 $ 979 1,543 $ $ 491 634 $ 807 1,138 $ 46 46 $ 17 17 5,657 9,057 $ (In thousands) Allowance for loan losses: Individually evaluated for impairment Collectively evaluated for impairment Total Loans: Individually evaluated for impairment $ 15,092 $ 9,437 $ 12,548 $ 1,315 $ 4,135 $ – $ – $ 42,527 Collectively evaluated for impairment Total 100,428 $ 115,520 133,761 $ 143,198 33,967 46,515 $ 48,214 49,529 $ 39,449 43,584 $ 10,054 10,054 $ 7,271 7,271 $ 373,144 $ 415,671 Commercial Commercial Real Estate Construction December 31, 2011 Home Equity Residential Real Estate Lease Financing Consumer Total Allowance for loan losses: Individually evaluated for impairment $ 1,825 $ 3,055 $ 1,462 $ 565 $ 1,727 $ 26 $ – $ 8,660 Collectively evaluated for impairment Total Loans: Individually evaluated for 1,162 2,987 $ 717 3,772 $ 1,259 2,721 $ 773 1,338 $ 585 2,312 $ $ 4 30 $ 29 29 4,529 13,189 $ impairment $ 24,625 $ 18,099 $ 16,535 $ 3,836 $ 6,981 $ 648 $ 2 $ 70,726 Collectively evaluated for impairment Total 105,773 $ 130,398 136,010 $ 154,109 31,903 48,438 $ 55,914 59,750 $ 30,901 37,882 $ 1,620 2,268 $ 5,996 5,998 $ 368,117 $ 438,843 F-22 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) The following table presents the credit risk profile of the Company’s loan portfolio based on the rating category and payment activity as of December 31, 2012 and 2011. These categories are defined as follows: Pass – loans that exhibit acceptable financial performance, cash flow, leverage and the probability of default is considered low. Classified – l oans are i nadequately protected by the current paym ent capacity of the obligor or by the collateral pledged. Th ese loans are ch aracterized by the distinct probability that the Company will su stain some loss or incur additional expenses if the deficiencies are not corrected. (In thousands) Commercial Commercial real estate Construction Home equity Residential real estate Lease financing Consumer Total Pass $ 112,679 136,397 35,589 49,299 41,228 10,054 7,271 $ 392,517 2012 Classified 2,841 6,801 10,926 230 2,356 – – 23,154 $ $ Total $ 115,520 143,198 46,515 49,529 43,584 10,054 7,271 $ 415,671 Pass $ 118,396 144,693 33,792 56,779 32,002 1,960 5,998 $ 393,620 2011 Classified 12,002 $ 9,416 14,646 2,971 5,880 308 – 45,223 $ Total $ 130,398 154,109 48,438 59,750 37,882 2,268 5,998 $ 438,843 The following tables prese nt the Com pany’s loan portfolio aging analy sis, including loans on non-accrual, as of December 31, 2012 and 2011: December 31, 2012 (In thousands) Commercial Commercial real estate Construction Home equity Residential real estate Lease financing Consumer Total Commercial Commercial real estate Construction Home equity Residential real estate Lease financing Consumer Total Total Loans Receivable $ 115,520 143,198 46,515 49,529 43,584 10,054 7,271 $ 415,671 Total Loans > 90 Days & Accruing – $ – – – – – – – $ Total Loans Receivable $ 130,398 154,109 48,438 59,750 37,882 2,268 5,998 $ 438,843 Total Loans > 90 Days & Accruing – $ – – – – – – – $ $ 30-59 Days Past Due 110 – – – 766 – – 876 $ $ 60-89 Days Past Due – – – 605 – – 605 $ $ Greater than 90 Days Past Due 365 – 910 – 569 – – 1,844 $ Total Past Due $ Current – 910 475 $ 115,045 143,198 45,605 49,529 41,644 10,054 7,271 3,325 $ 412,346 1,940 – – $ December 31, 2011 Total Past Due $ Current 1,831 $ 128,567 153,966 45,281 57,585 35,120 2,146 5,998 10,180 $ 428,663 143 3,157 2,165 2,762 122 – $ $ 30-59 Days Past Due 703 – 1,376 – 678 104 – 2,861 $ $ 60-89 Days Past Due 200 – – 2,165 717 – – 3,082 $ $ Greater than 90 Days Past Due 928 143 1,781 – 1,367 18 – 4,237 $ F-23 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is p robable the Company will b e unable to collect the scheduled payments of principal and interest du e from the borrower in accordance with t he contractual terms of the loan agreement. I mpaired loans include non-performing loans, but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. Th ese concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The following tables present impaired loans for the years ended December 31, 2012, 2011 and 2010: December 31, 2012 Recorded Balance Unpaid Principal Balance Specific Allowance (In thousands) Loans without a specific valuation allowance: Commercial $ Commercial real estate $ 877 521 $ 916 521 Construction Home equity 1,684 1,684 – – Residential real estate 1,201 1,336 Lease financing Consumer 233 – 233 – – – – – – – – 1,798 1,699 287 847 169 – Average Investment in Impaired Loans Interest Income Recognized $ 694 $ 106 Loans with a specific valuation allowance: Commercial $ 643 $ 657 $ 241 $ 2,240 $ Commercial real estate Construction Home equity 1,537 10,016 175 1,567 10,016 176 1,000 490 81 Residential real estate 3,332 3,376 1,262 Lease financing Consumer Total impaired loans: – – – – – – 2,741 10,915 1,919 3,016 100 – Commercial $ 1,520 $ 1,573 $ 241 $ 2,934 $ Commercial real estate Construction Home equity 2,058 11,700 175 2,088 11,700 176 1,000 490 81 Residential real estate 4,533 4,712 1,262 Lease financing Consumer 233 – 233 – – – 4,539 12,614 2,206 3,863 269 – Total $ 20,219 $ 20,482 $ 3,074 $ 26,425 $ 1,034 F-24 71 40 4 57 16 – 42 49 466 – 183 – – 148 120 506 4 240 16 – BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) December 31, 2011 Recorded Balance Unpaid Principal Balance Specific Allowance Average Investment in Impaired Loans Interest Income Recognized (In thousands) Loans without a specific valuation allowance: Commercial $ Commercial real estate Construction Home equity Residential real estate Lease financing Consumer Loans with a specific valuation allowance $ 16 482 101 468 904 – – $ 32 514 101 500 1,014 – – – – – – – – – $ 223 $ 1,781 1,427 532 1,140 25 28 Commercial $ 3,709 $ 3,850 $ 1,281 $ 4,298 $ Commercial real estate Construction Home equity Residential real estate Lease financing Consumer Total impaired loans: 4,819 14,313 2,208 3,838 307 – 5,357 14,776 2,242 4,416 307 – 2,257 1,353 296 6,793 18,080 940 1,389 3,791 25 – 324 – Commercial $ 3,725 $ 3,882 $ 1,281 $ 4,521 $ Commercial real estate Construction Home equity Residential real estate Lease financing Consumer 5,301 14,414 2,676 4,742 307 – 5,871 14,877 2,742 5,430 307 – 2,257 1,353 296 1,389 25 – 8,574 19,507 1,472 4,931 349 28 56 109 – 3 17 67 1 171 107 454 3 149 21 – 227 216 454 6 166 88 1 Total $ 31,165 $ 33,109 $ 6,601 $ 39,382 $ 1,158 F-25 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) December 31, 2010 Recorded Balance Unpaid Principal Balance Specific Allowance Average Investment in Impaired Loans Interest Income Recognized (In thousands) Loans without a specific valuation allowance: Commercial $ 220 $ 315 $ Commercial real estate Construction Home equity 4,080 3,203 585 4,700 3,203 587 Residential real estate 1,279 1,924 Lease financing Consumer 140 52 256 54 – – – – – – – $ 627 $ 3,891 3,384 102 1,391 254 50 Loans with a specific valuation allowance Commercial $ 5,541 $ 5,585 $ 1,133 $ 2,834 $ Commercial real estate Construction Home equity 8,022 22,318 626 8,092 22,430 648 Residential real estate 4,618 5,480 Lease financing Consumer Total: 402 – 402 – 1,110 3,039 299 577 3 – 10,760 23,662 411 6,150 302 12 Commercial $ 5,761 $ 5,900 $ 1,133 $ 3,461 $ Commercial real estate Construction Home equity Residential real estate Lease financing Consumer 12,102 25,521 1,211 5,897 542 52 12,792 25,633 1,235 7,404 658 54 1,110 3,039 299 577 3 – 14,651 27,046 513 7,541 556 62 24 37 – – – 2 3 7 – 20 – – – – 31 37 20 – – 2 3 Total $ 51,086 $ 53,676 $ 6,161 $ 53,830 $ 93 The following table pre sents the Company’s non-accrual loans, also i ncluded in impaired loans, at December 31, 2012 and 2011: (In thousands) Commercial Commercial real estate Construction Home equity Residential real estate Lease financing Consumer 2012 2011 $ 1,131 1,537 910 1,084 175 – – $ 4,837 $ 2,029 1,340 3,058 2,676 2,204 18 – $ 11,325 F-26 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) Included in certain loan categories in the impaired loans are loans designated as t roubled debt restructurings and classified as impaired. At Decem ber 31, 2012, the Company had $1,044,000 of commercial loans, $2,058,000 of commercial real estate lo ans, $10,790,000 of construction loans, $3,450,000 of residential real estate lo ans and $233,000 of lease financing loans that were modified in troubled debt restructurings and classified as impaired. As a result of adopting the amendments in ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, in 2011, the Company reassessed all restructurings for identification as troubled debt restructurings. The Company identified four loans restructured during 2011 fiscal year not originally classified as troubled debt restructurings totaling $1,066,000; however, these loans were properly classified as non-accrual impaired loans at the time of restructure and thus the allowance for loan losses was measured using the impairment measurement guidance. Accordingly, there was no change in the valuation of these loans. During the years ended December 31, 2012 and December 31, 2011, the Company modified loans in troubled debt restructuring transactions and classifi ed the loans as im paired. The modi fication of term s for the troubled debt restructuring transactions included renewals of existing loans to borrowers experiencing financial difficulties at below market rates, modification to interest-only terms or extension of the amortization period. The following table presents loans restructured and class ified as troubled de bt restructurings by class during the years ended December 31, 2012 and 2011: December 31, 2012 December 31, 2011 (In thousands) Commercial Commercial real estate Construction Home equity Residential real estate Lease financing Consumer Total Number of Loans 1 – – – 1 – – 2 $ Pre- Modification Outstanding Recorded Balance 85 – – – 371 – – 456 $ $ Post- Modification Outstanding Recorded Balance 85 – – – 371 – – 456 $ $ Pre- Modification Outstanding Recorded Balance 1,417 3,498 3,724 – – – – 8,639 $ Number of Loans 6 5 3 – – – – 14 $ Post- Modification Outstanding Recorded Balance 1,408 3,498 3,724 – – – – 8,630 $ The following table presents troubled debt restructurings modified within the past 12 months included above that are 90 days past due or are non-accrual as of December 31, 2012: (In thousands) Commercial Commercial real estate Construction Home equity Residential real estate Lease financing Consumer December 31, 2012 Number of Loans Recorded Balance 1 – – – – – – 1 $ $ 79 – – – – – – 79 As of December 31, 2012, the C ompany had no commitments outstanding t o borrowers with loans identified as troubled debt restructurings. F-27 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 4: PREMISES AND EQUIPMENT Major classifications of premises and equipment, stated at cost, are as follows: (In thousands) Land Buildings and improvements Furniture and equipment Less accumulated depreciation Total premises and equipment NOTE 5: FORECLOSED ASSETS HELD FOR SALE Activity in the allowance for losses on foreclosed assets was as follows: (In thousands) Balance, beginning of year Provision charged to expense Charge offs, net of recoveries Balance, end of year Expenses applicable to foreclosed assets at December 31 include the following: (In thousands) Net gains on sale of foreclosed assets Provision for losses Operating expenses, net of rental income 2012 2011 $ 5,154 15,984 8,382 29,520 14,072 $ 5,154 15,898 8,110 29,162 13,265 $ 15,448 $ 15,897 2012 2011 2010 $ 2,985 $ 481 3,159 867 (655) (668) $ 3,184 $ 2,985 $ 166 734 (419) $ 481 2012 2011 2010 $ (349) 867 1,361 $ 1,879 $ (555) $ (168) 734 3,159 1,656 1,921 $ 2,222 $ 4,525 F-28 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 6: CORE DEPOSIT INTANGIBLE ASSETS The carrying basis and accumulated amortization of recognized intangible assets at December 31, 2012 and 2011 were: (In thousands) Core Deposit Intangible 2012 2011 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization $ 1,000 $ (821) $ 1,000 $ (679) Amortization expense for the years ended Decem ber 31, 2012, 2011 and 2010 was $143,000, $143,000 and $219,000, respectively. Estimated amortization expense for the remainder of the amortization period is: (In thousands) 2013 2014 NOTE 7: DERIVATIVE INSTRUMENTS $ 143 36 The Company has commitments outstanding to extend credit on residential mortgages that have not closed prior to the end of the period. A s the Company enters into commitments to originate these loans, it also enters into commitments to sell th e loans in the secondary market on a best-efforts basis. T he Company acquires such commitments to reduce interest rate risk on mortgage loans in the process of origination and mortgage loans held for sale. Th ese commitments to originate or sell loans on a best efforts basis are c onsidered derivative instruments under ASC 815. These statements requi re the Company to recognize all derivative instruments in the balance sheet and to m easure those inst ruments at fa ir value. As a resu lt of m easuring the fair valu e of t he commitments to originate loans, the Company recorded a decrease in other assets of $8,000, a decrease in other liabilities of $1,000 and a decrease in other income of $7,000 for the year ended December 31, 2012. For the year ended December 31, 2011, the Company recorded an increase in other assets of $7,000, a decrease in other liabilities of $8,000 and an increase in other income of $15,000. Additionally, the Company has commitments to sell loans that have closed prior to the end of the p eriod on a best efforts basis. Du e to the mark to market adjustment on commitments to sell lo ans held for sale th e Company recorded an increase in other assets of $84,000 and an increase in other income of $84,000 for the year end ed December 31, 2012. For the year ended December 31, 2011, t he Company recorded a decrease in other assets of $272,000 and a decrease in other income of $272,000. At December 31, 2012 and 2011, total mortgage loans in the process of origination amounted to $1,577,000 and $1,410,000, respectively. At Decem ber 31, 2012 and 2011, related fo rward commitments to sell mortgage loans amounted to approximately $7,621,000 and $7,096,000, respectively. The balance of derivative instruments related to commitments to originate and sell loans at December 31, 2012 and 2011, is disclosed in Note 20, Disclosures about Fair Value of Assets and Liabilities. F-29 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 8: INTEREST-BEARING DEPOSITS Interest-bearing time deposits in denominations of $100,000 or more were $66,840,000 on December 31, 2012 and $86,351,000 on December 31, 2011. The Company acquires brokered deposits in the normal course of business. At December 31, 2012 and 2011, brokered deposits of $27,236,000 and $34,544,000, respectively, were included in the Company’s time deposit balance. Of the $27,236,000 in brokered deposits, $17,106,000 represented customer funds placed into the Certificate of Deposit Account Registry Service (“CDARS”). The Bank is a member of the CDARS service which effectively allows depositors to receive FDIC insurance on amounts greater 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 institutions to ensure that full FDIC insurance coverage is gained on the entire deposit. Although classified as brokered deposits for regulatory pur poses, funds placed through the CDARS program are Bank customer relationships that management views as core funding. At December 31, 2012, the scheduled maturities of time deposits are as follows: (In thousands) 2013 2014 2015 2016 2017 Thereafter $ 81,516 18,481 18,529 10,345 4,920 1,345 $ 135,136 NOTE 9: OPERATING LEASES Blue Valley Building Corp. l eases office space to others under noncancellable operating leases expiring in various years through 2015. Minimum future rent receivable under noncancellable operating leases at December 31, 2012 was as follows: (In thousands) 2013 2014 2015 $ $ 344 96 8 448 Consolidated rental and operating lease expenses incurre d for space the Company leases from others were $0, $11,000 and $14,000 in 2012, 2011 and 2010, res pectively. The Company term inated the lease for space re nted from others on September 30, 2011. F-30 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 10: SHORT TERM DEBT The Company has a line of credit with the Federal Home Loan Bank of Topeka (FHLB) which is collateralized by various assets including mortgage-backed loans and available-for-sale securities. At December 31, 2012 and 2011, there was no outstanding balance on the line of credit. The variable interest rate was 0.23% on December 31, 2012 and 0.26% on December 31, 2011. At December 31, 2012 approximately $2,467,000 was available. Advances are made at the discretion of the Federal Home Loan Bank of Topeka. The Company also has a line of cre dit with the Federal Reserve Bank of Kansas City wh ich is co llateralized by various assets, including commercial and commercial real estate loans. At December 31, 2012 and 2011, there was no outstanding balance on the line of credit. The line of credit has a variable interest rate of federal funds rate plus 75 basis points and at December 31, 2 012 approximately $37,510,000 was avai lable. Adva nces are made at the discretion of the Federal Reserve Bank of Kansas City. NOTE 11: LONG TERM DEBT Long-term debt at December 31, 2012 and 2011 consisted of the following components: (In thousands) FHLBank advances (A) Less: Deferred prepayment penalty on modification of FHLB advances Net FHLBank advances Subordinated Debentures – BVBC Capital Trust II (B) Subordinated Debentures – BVBC Capital Trust III (C) 2012 2011 $ 82,500 $ 82,500 (977) 81,523 7,732 11,856 (1,654) 80,846 7,732 11,856 Total long-term debt $ 101,111 $ 100,434 (A) (B) (C) Due in 2013, 2014, 2015, 2016 and 2018; collateralized by various assets including mortgage-backed loans and available-for-sale securities totaling $159,011,000 at December 31, 2012. Advances, at interest rates from 0.37% to 4.26% are subject to restr ictions or penalties in the event of prepay ment. FHLB advance availability is determined quarterly and at December 31, 2012, approximately $2,467,000 was available. Advances are made at the discretion of the FHLBank Topeka. In the third quarter of 2010, the Company repaid $42,500,000 of FHLB advances by rolling the net present value of the r epaid advances into the funding cost of $42,500,000 of new advances. A $2,569,000 modification fee was associated with the pa y-off of the original FHLB advances which is amortized as an adjustment of interest exp ense over the rem aining term of the ne w FHLB advances using the straight line method. Th e unamortized modification fee at December 31, 2 012 was approxim ately $977,000. This transaction reduced the effective interest rate, as well as modified the maturity date on these borrowings. Due in 2033 ; interest only at three month LIBOR + 3.25% (3.56% at December 31, 2012 and 3.68% at December 31, 2011) due quarterly; fully and unconditionally guaranteed by the Company on a subordinated basis to the extent that the funds are held by the Trust. BVBC Capital Trust II issued and sold $7,500,000 in Capital Securities to third parties and $232,000 of Co mmon Securities to the Company. As of 2008, the Company may prepay the subordinated debentures, in whole or in part , at th eir face v alue plus accrued interest. Due in 2035 ; interest only at three month LIBOR + 1.60% (1.91% at December 31, 2012 and 2.18% at December 31, 2011) due quarterly; fully and unconditionally guaranteed by the Company on a subordinated basis to the extent that the funds are held by the Trust. BVBC Capital Trust III issued and sold $11,500,000 in Preferred Securities to th ird parties and $356,000 in Com mon Securities to the Company. Subordinated to the trust pr eferred securities (B) due in 2033 . As of 2010, the Compan y may prepay the subordinated debentures, in whole or in part, at their face value plus accrued interest. F-31 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 11: LONG TERM DEBT (Continued) At the request of the Federal Reserve Bank of Kansas City, quarterly payments are being deferred on the Company’s outstanding trust preferred securities. Under the governing documents of the BVBC Capital Trust II and III, the quarterly payments since April 24, 2009 for BVBC Capital Trust II and March 31, 2009 for BVBC Capital Trust III were deferred. 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. For BVBC Capital Trust III, the Company must also accrue additional interest that is equal to the three month LIBOR rate plus 1.60% during 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 United States Department of T reasury (the “Treasury”), or (ii) making any payment on any debt security that is ranked pari passu with the debt securities issued by the respective trusts. Bec ause the Preferred Shares issued under the U.S. Treasury’s Capital Purchase Plan (the “CPP”) are sub ordinate to the tru st preferred securities, the Co mpany will b e restricted fro m paying dividends on these Preferred Shares until such time as all trust preferred dividends have been brought current. See Note 13, Regulatory Matters for additional information. Aggregate annual maturities of long-term debt at December 31, 2012 are as follows: (In thousands) 2013 2014 2015 2016 2017 Thereafter Less: Deferred prepayment penalty on modification of FHLB advances NOTE 12: INCOME TAXES The provision for income taxes consists of the following: $ 20,000 7,500 20,000 10,000 - 44,588 102,088 (977) $ 101,111 (In thousands) Taxes currently (refundable) payable Deferred income taxes 2012 2011 2010 $ – (150) $ – 9,823 $ – (1,561) $ (150) $ 9,823 $ (1,561) F-32 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 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: (In thousands) Computed at the statutory rate (34%) Increase (decrease) resulting from: Tax-exempt interest State income taxes Changes in the deferred tax asset valuation allowance Other 2012 2011 2010 $ 40 $ (2,040) $ (1,463) (87) 77 (200) 20 (50) (20) 12,600 (667) (5) 124 – (217) Actual tax provision $ (150) $ 9,823 $ (1,561) The tax effects of t emporary differences related to deferred taxes shown on the December 31, 2012 and 2011 consolidated balance sheets are as follows: (In thousands) Deferred tax assets: Allowance for loan losses Net Operating Loss from Blue Valley Ban Corp. and subsidiary Deferred compensation Offering costs Non-accrual loan interest Other real estate owned reserve Other Deferred tax liabilities: Accumulated depreciation FHLB stock basis Accumulated appreciation on available-for-sale securities Prepaid intangibles Core Deposit Intangible related to Unison Bancorp Inc. and subsidiary acquisition Other Net deferred tax asset before valuation allowance Valuation allowance: Beginning balance (Increase) decrease during the period Ending balance Net deferred tax asset 2012 2011 $ 3,351 $ 4,880 9,153 80 180 46 1,178 639 14,627 (253) (557) (29) (177) (45) (9) (1,070) 13,557 (12,600) 164 (12,436) 1,121 $ 7,733 123 190 59 1,215 516 14,716 (321) (511) (89) (185) (90) (9) (1,205) 13,511 – (12,600) (12,600) 911 $ The Company has unused Federal net operating loss carryforwards of $23,911,000, which expire starting in 2029. The Company has unused Kansas Privilege Tax net operating loss carryforwards of $34,107,000 which expire between 2018 and 2022. F-33 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 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 in itiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a d irect material effect on the Company’s consolidated 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. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Company’s regulators could require adjustments to regulatory capital not reflected in these consolidated financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and rat ios (set forth in the table below) of total and Ti er I capi tal (as defi ned in the regulations) to risk-weighted assets (as defined) and of Tier I capital to average assets (as defined). As of December 31, 2012 and 2011, the Company and the Bank met all capital adequacy requirements to which they are subject. As of December 31, 2012, the Bank had capital in e xcess of regulatory requirements for a well-capitalized institution. To b e 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 December 31, 2012 that management believes have changed the Bank’s position. F-34 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 13: REGULATORY MATTERS (Continued) The Company and the Bank’s actual capital amounts and ratios are also presented in the table. (In thousands) December 31, 2012: 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 (In thousands) December 31, 2011: 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 Actual Amount Ratio For Capital Adequacy Purposes Amount Ratio To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio $ 65,441 $ 72,542 12.01% 13.33% $ 43,588 $ 43,539 8.00% 8.00% N/A $ 54,424 10.00% $ 52,851 $ 65,702 9.70% 12.07% $ 21,794 $ 21,769 4.00% 4.00% N/A $ 32,654 6.00% $ 52,851 $ 65,702 8.10% 10.08% $ 26,084 $ 26,060 4.00% 4.00% N/A $ 32,574 5.00% Actual Amount Ratio For Capital Adequacy Purposes Amount Ratio To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio $ 65,917 $ 70,736 12.08% 12.98% $ 43,640 $ 43,587 8.00% 8.00% N/A $ 54,484 10.00% $ 53,455 $ 63,838 9.80% 11.72% $ 21,820 $ 21,794 4.00% 4.00% N/A $ 32,691 6.00% $ 53,455 $ 63,838 8.04% 9.61% $ 26,609 $ 26,571 4.00% 4.00% N/A $ 33,214 5.00% The Company and Bank are subject to certain restrictions on the amounts of dividends that it may declare without prior regulatory approval. At December 31, 2012, any dividend declaration would require regulatory approval. F-35 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 13: REGULATORY MATTERS (Continued) 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 tota l cash price of $21,750,000 (the “Transaction”). The Pr eferred Shares have a l iquidation 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 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. In connection with the transaction, the Company entered into a letter agreement with the T reasury which includes a Sec urities Purchase Agreement-Standard Terms (the “SPA”). The Preferred Shares carry a 5% per year cumulative preferred dividend rate, payable quarterly. The dividend rate increases to 9% after five years. Divide nds compound if t hey accrue a nd are not paid. During the first three yea rs after the transaction, the Com pany may not re deem the Pre ferred Shares except in conjunction with a qu alified equity offering meeting certain requirements. Du ring the time that the Prefe rred Shares are outstanding, a num ber 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 th e Preferred Shares, unless the Preferred Shares have been redeemed in whole or th e Treasury has transferred all of the shares to a n on-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, 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 d ividends in arrear s 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 t he SPA and Section 111(b) of the Emergency Economic Stabilization Act of 2008 (the “EESA”), the Company and its sub sidiary, Bank of Blue Valley, and each of its sen ior executive officers agreed to lim it 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. Th e applicable senior executive officers have entered into letter agreements with the Company consenting to the foregoing and have executed a waiver voluntarily waiving a ny claim against the Treas ury or t he 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. F-36 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 13: REGULATORY MATTERS (Continued) The Warrant is exercisable immediately and e xpires in ten years. T he Warrant has anti-dilution protections and certain other protections for the holder, as w ell as p otential 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. If the Prefe rred Shares are redeemed in whole, the C ompany has the right to purchase any common shares held by the Treasury at their fair market value at that time. The Board of Directors of Blue Valley Ban Corp. and its wholly owned subsidiary, Bank of Blue Valley, entered into a written agreement with the Federal Reserve Bank of Kansas City as o f November 4, 2009. This agreement was a result of a regulatory examination that was completed in May 2009, and relates primarily to the Bank’s asset quality. Under the terms of the agr eement, the Company and the Bank agree d, among other things, to submit an enhanced written plan to strengthen credit risk management practices and improve the Bank’s position on the past due loans, classified l oans, and other real estate owne d; review and revise its allowance for loan and lease los s methodology and maintain an adequate allowance for loan loss; m aintain sufficient capital at th e Company and Bank level; and improve the Bank’s earnings and overall condition. The Company and Bank have also agreed not to increase or guarantee any debt, purchase or redeem any shares of stock or declare or pay any dividends without prior written approval from the Federal Reserve Bank. As a r esult of the improved financial condition of the Company and the Bank, satisfactory risk management processes and senior management oversight, and full compliance with all actionable provisions of the Agreement, the Federal Reserve Bank of Kansas City terminated the Agreement effective January 11, 2013. In order to maintain the financial soundness of the Company and the Bank, among other things, the Company and the Bank will continue to work on improvement of asset quality, maintaining an adequate allowance for loan losses, maintaining adequate capital, improving earnings, and not declaring or paying any dividends or increasing or guaranteeing any debt without prior written approval from the Federal Reserve Bank and the OSBC. At the request of the Federal Reserve Bank of Kansas City, the Company notified the Treasury of its in tention to defer the quarterly dividend payments on the Preferred Shares due to the Treasury since May 15, 2009. As part of the Capital Purchase Plan, the Company entered into a letter agreement with the T reasury on December 5, 2008, which includes a Securities Purchase Agreement-Standard Terms. As part of the agreement, dividends compound if they accrue and are not paid. Failure by the Company 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 Com pany pays all divide nds in a rrears. As of December 31, 2012, the C ompany has de ferred fifteen dividend payments. At this time, the Treasury has not elected any directors to serve on the Company’s Board of Directors; however, in November 2010 the Treasury assigned an observer to attend the Company’s board meetings. The Company has accrued for the dividends and interest a nd has every intention to bring the obligation current as soon as permitted. As of December 31, 2012, the Company had accrued $4,483,000 for t he dividends and interest on outstanding Preferred Shares. On December 18, 2012 the U.S. Treasury Department Office of Public Affairs issued a press release that stated that the Treasury will co ntinue to conduct periodic, individual auctions of its Cap ital Purchase Program preferred stock and subordinated debt positions (the “CPP Securities”). According to the press release, th e next auctions will include another 53 of the 218 remaining institutions in this program beginning as early as late January, 2013. The Company was listed among the 53 named. However, to date, no notification has been received by the Company that its securities are being included in the next individual or pooled auction. F-37 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 14: TRANSACTIONS WITH RELATED PARTIES At December 31, 2012 a nd 2011, the C ompany had loans outstanding to e xecutive officers, directors and to companies in which the Company’s and Bank’s executive officers or directors were principal owners, in the amount of $13,632,000 and $12,967,000, respectively. Annual activity consisted of the following: (In thousands) Balance, beginning of year New loans and advances Repayments and reclassifications Balance, end of year 2012 $ 12,967 4,060 (3,395) $ 13,632 2011 $ 20,549 7,191 (14,773) $ 12,967 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 s ubstantially the same terms (including interest rates an d collateral) as th ose prevailing at th e time for comparable transactions with other persons. Further, in management’s opinion, when originated these loans did not involve more than the normal risk of collectability or present other unfavorable features. Deposits from executive officers and directors held by the Com pany at December 31, 2012, and 2011 totaled $5,119,000 and $4,514,000, respectively. NOTE 15: PROFIT SHARING AND 401(K) PLANS The Company’s profit sharing and 401(k) plans cover substantially all employees. C ontributions 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 did not make a con tribution to t he profit sharing plan during 2012, 2011 and 2010. The Company’s 401(k) plan permits participants to make contributions by salary reduction, based on which the Company matches 100% of the first 3% of the employee’s contribution plus 50% of the next 2% of compensation contributed by the employee. The C ompany’s matching contributions to the 401(k) plan are vested immediately. The Company’s matching contributions charged to expense for 2012, 2011 and 2010 were $234,000, $255,000 and $282,000, respectively. NOTE 16: EQUITY INCENTIVE COMPENSATION The Company has an Eq uity Incentive Plan (the “Plan”) which allows th e 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 gra nt to its e mployees. At December 31, 2012, the C ompany had 102,184 s hares available to be g ranted (options granted prior to 1998 were subject to an earlier plan with similar terms). Th e 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. F-38 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 16: EQUITY INCENTIVE COMPENSATION (Continued) During 2012, 2011 and 2010, the Company granted no stock options, but did grant 55,155, 40,666 and 29,640 shares of restricted common stock, respectively. Restricted stock grants to the President of the Company vest immediately at such time when the United States Department of Treasury no longer holds any equity securities of the Company acquired through the TARP Capital Purchase Program. Other 2012 recipients of the restricted stock grant who are employees vested immediately. 2011 and 2010 recipients of the restricted stock grant who are employees fully vest in the stock after three years from the date of the grant. Recipients of the restricted stock grant who are directors vested immediately in 2012, 2011 and 2010. The non-vested shares were 30,730, 40,529, and 49,308 as o f December 31, 2012, 2011 and 2010, respectively. The cost basis of the restricted shares granted which is equal t o 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. Expenses associated with restricted stock grants were $272,000, $300,000, and 608,000 for 2012, 2011 and 2010, respectively. The am ount of unre cognized compensation costs was $97,000, $127,000, and $264,000 as of December 31, 2012, 2011, and 2010, respectively. During 2012, 2011 and 2010, 0, 7,437 and 7,454 shares of restricted stock were forfeited, respectively. A summary of the status of option shares under the plan at December 31, 2012, 2011 and 2010, and changes during the years then ended, is presented below: 2012 2011 2010 Weighted Average Exercise Price $ 25.00 – 25.00 $ 0.00 Shares 10,575 – 10,575 0 Outstanding, beginning of year Exercised Forfeited Outstanding, end of year Intrinsic value of shares exercised $ Options exercisable, end of year – 0 Weighted Average Exercise Shares Price Shares 24,375 – 13,800 10,575 $ 22.07 – 19.82 $ 25.00 33,875 – 9,500 24,375 $ – $ – Weighted Average Exercise Price $ 20.51 – 16.50 $ 22.07 $ 0.00 10,575 $ 25.00 24,375 $ 22.07 There were no options outstanding and exercisable as of December 31, 2012. 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 2012, 2011 and 2 010 was approximately $3,000, $4,000 and $3,000, respectively. Information about employee stock purchase plan activity as of December 31, 2012, 2011 and 2010 is set forth in the following table. Plan year ending January 2012 2011 2010 Employee Stock Purchase Plan Activity Shares purchased 6,508 2,628 3,465 Purchase Price $ 3.49 $ 6.80 $ 8.71 F-39 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 18: OTHER INCOME/EXPENSE Other income consists of the following: (In thousands) Rental income Realized gain on foreclosed assets Other income Total 2012 2011 2010 $ 556 521 458 $ 1,535 $ $ 378 578 28 984 $ 264 434 447 $ 1,145 Other operating expenses consist of the following: (In thousands) FDIC assessments Professional fees Data processing ATM and network fees Loan processing fees Other expense 2012 2011 2010 $ 1,324 1,383 1,104 745 194 2,756 $ 1,509 1,237 1,110 758 283 2,954 $ 2,076 1,520 1,278 743 308 2,625 Total $ 7,506 $ 7,851 $ 8,550 NOTE 19: FAIR VALUE OPTION The Company elected to adopt The Fair Value Option for Financial Assets and Financial Liabilities – including an Amendment of FASB Statement No. 115, which was subsequently incorporated into FASB Accounting Standards Codification in Topic 825, for mortgage loans held for sale originated after April 1, 2009. This standard permits an entity to choose to measure many financial instruments and certain other items at fair v alue. An entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each reporting date. In accordance with Topic 825, the Company has elected to measure loans held for sale at fair value. Loans held for sale is made up entirely of mortgage loans held for immediate sale in the secondary m arket with servicing release. These loans are sold prior to origination at a contracted price to an outside investor on a best efforts basis and remain on the Company’s balance sheet for a short period of time (typically 30 to 60 days). It is management’s opinion given the short-term nature of these loans, that fair value provides a reasonable measure of the econom ic value of these assets. In addition, carrying such loans at fair value eliminates some measure of volatility created by the timing of sales proceeds from outside investors, which typically occur in the month following origination. The differences between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale were gains of $32,000 at Dece mber 31, 2012 and $34,000 at December 31 December 31, 2010. Losses from fair value changes included in loans held for sale fee inc ome were $2,000 and $33,000 for the years ende d December 31, 2012 and 2010, res pectively, and inc ome from fair value cha nges included in loans held for sale fee income was $178,000 for the year ended December 31, 2011. Interest income on loans held for sale is included in interest and fees on loan in the Company’s consolidated statement of operations. See Note 20 for additional disclosures regarding fair value of mortgage loans held for sale. , 2011 and a loss of $144,000 at F-40 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 20: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES Fair value is the price that would be received to sell an as set or paid to transfer a liability in an orderly transaction between market participants at the m easurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value: Level 1 Level 2 Level 3 Quoted prices in active markets for identical assets or liabilities Observable inputs other than Level 1 prices, such as quoted prices for similar assets o r liabilities; quoted prices in m arkets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Recurring Measurements The following table presents the fair v alue measurements of assets an d liabilities recognized in the Company’s condensed consolidated balance sheet and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2012 and 2011: (In thousands) December 31, 2012: Assets: Available-for-sale securities: U.S. Government sponsored agencies State and political subdivision securities Equity and other securities Mortgage loans held for sale Commitments to originate loans Forward sales commitments Total assets Liabilities: Commitments to originate loans Forward sales commitments Total liabilities December 31, 2011: Assets: Available-for-sale securities: U.S. Government sponsored agencies Equity and other securities Mortgage loans held for sale Commitments to originate loans Forward sales commitments Total assets Liabilities: Commitments to originate loans Forward sales commitments Total liabilities Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Unobservable Inputs (Level 3) Fair Value – – 623 – – – 623 – – – – 619 – – – 619 – – – $ $ $ $ $ $ $ $ 63,148 14,074 – 7,621 – – 84,843 – – – 61,171 – 5,686 – – 66,857 – – – $ $ $ $ $ $ $ $ – – – – – 184 184 – 1 1 – – – 8 100 108 1 – 1 $ $ $ $ $ $ $ $ 63,148 14,074 623 7,621 – 184 85,650 – 1 1 61,171 619 5,686 8 100 67,584 1 – 1 $ $ $ $ $ $ $ $ F-41 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 20: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued) Following is a description of the valuation methodologies and inputs used for assets and liabilities measured at fair value on a recurring basis and recognized in the Company’s consolidated balance sheets, as well as the ge neral classification of such assets and liabilities pursuant to the valuation hierarchy. Available-for-Sale Securities Where quoted market prices are av ailable in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Mortgage Loans Held for Sale Mortgage loans held for sale are valued using market prices for loans with si milar characteristics. Th is measurement is classified as Level 2 within the hierarchy. Commitments to Originate Loans and Forward Sales Commitments The fair v alue of commitments to originate loans and the fair value of forward sales commitments are estim ated using a valuation model which considers differences between quoted prices for loans with similar characteristics in the secondary market and the committed rates. The valuation model includes assumptions which adjust the price for the likelihood that the commitment will u ltimately result in a clo sed loan. Th ese measurements are sig nificant unobservable inputs and are classified as Level 3 within the hierarchy. Level 3 Reconciliation The following table is a recon ciliation of the b eginning and ending balances of recurring fair value measurements recognized in the Company’s consolidated balance sheets using significant unobservable (Level 3) inputs: (In thousands) Balance as of December 31, 2011 Total realized and unrealized gains (losses): Included in net income (loss) Balance as of December 31, 2012 Balance as of December 31, 2010 Total realized and unrealized gains (losses): Included in net income (loss) Commitments to Originate Loans Forward Sales Commitments $ 7 $ 100 $ $ (7) 83 – $ 183 (8) $ 372 15 (272) Balance as of December 31, 2011 $ 7 $ 100 F-42 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 20: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued) Realized and unrealized gains and losses for items reflected in the table above are included in other income in the consolidated statement of operations. Nonrecurring Measurements The following table presents the fair value measurements at December 31, 2012 and 2011 of assets and liabilities measured at fair value on a non-recurring basis during the respective year: Fair Value Measurements Using (In thousands) December 31, 2012: Impaired loans, net of reserves Foreclosed assets held for sale, net December 31, 2011: Impaired loans, net of reserves Foreclosed assets held for sale, net Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Fair Value $ $ $ $ 5,480 17,894 23,374 21,139 12,826 33,965 $ $ $ $ – – – – – – $ $ $ $ – – – – – – Unobservable Inputs (Level 3) $ $ 5,480 17,894 23,374 $ $ 21,139 12,826 33,965 The following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheet, a s well as the general classification of such assets pursuant to the valuation hierarchy. Fo r assets cl assified within Level 3 of th e fair value hierarchy, the process used to develop the reported fair value is described below. Impaired Loans (Collateral Dependent) Loans for which it is probable that the Company will no t collect all principal and interest due according to the contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral dependent loans. If the impaired loan is identified as c ollateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method. Foreclosed Assets Held for Sale Foreclosed assets held for sale are carried at the fair val ue less costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed and the assets are recorded at the lower of carrying amount or fair value less cost to sell. F-43 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 20: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued) Unobservable (Level 3) Inputs The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements. Fair Value at 12/31/12 Valuation Technique Unobservable Inputs Commitments to Originate $ – Market comparable Loans Forward Sales Commitments Collateral-dependent impaired loans Foreclosed assets held for Sale, net prices $ $ $ 183 Market comparable prices 5,480 Market comparable properties 17,894 Market comparable properties Quoted prices for similar loans Estimated Customer Fallout Rate Quoted prices for similar loans Quoted prices for similar loans Comparability adjustments (%) Range (Weighted Average) NA 2.75%-3.375% (3.17%) 9.00%-80.00% (18.00%) Not available Sensitivity of Significant Unobservable Inputs The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement. Commitments to Originate Loans The significant unobservable inputs used in the fair value measurement of the Company’s commitments to originate loans are the discount rate and estim ated customer fallout rate. Sig nificant increases (decreases) in any of t hose inputs in isolation would result in a sig nificantly lower (higher) fair va lue measurement. Gene rally, changes in either of those inputs will not affect the other input. Forward Sales Commitments The significant unobservable input used in the fair value measurement of the Company’s forward sales commitment is the discount rate. Significant increases (decreases) in this input would result in a significantly lower (higher) fair value measurement. F-44 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 20: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued) Fair Value of Financial Instruments The following table presents estimated fair values of the Company’s financial instruments not previously disclosed at December 31, 2012 and 2011. (In thousands) Financial assets: Cash and cash equivalents (Level 1) Loans, net of allowance for loan losses (Level 3) Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities (Level 3) Interest receivable (Level 3) Financial liabilities: Deposits (Level 3) Securities sold under agreement to repurchase and other interest-bearing liabilities (Level 3) Long-term debt (Level 3) Interest payable (Level 3) Unrecognized financial instruments (net of amortization): Commitments to extend credit (Level 3) Letters of credit (Level 3) Lines of credit (Level 3) 2012 2011 Carrying Amount Fair Value Carrying Amount Fair Value $ 101,077 406,614 $ 101,077 408,041 $ 99,899 425,654 $ 99,899 428,698 7,540 1,529 7,540 1,529 7,369 1,573 7,369 1,573 484,466 487,059 490,413 492,688 21,668 101,111 4,166 21,668 95,216 4,166 15,372 100,434 3,228 15,372 94,411 3,228 – – – – – – – – – – – – 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. Loans The fair value of loans is esti mated by discounting the future cash flows using the market rates at wh ich similar loans would be made to borrowers with similar credit ratings and for the sa me remaining maturities. Lo ans with similar characteristics were a ggregated for purposes of the calculations. The car rying 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 Deposits include demand deposits, savings accounts, NOW accounts and certain m oney market deposits. T he carrying amount of these deposits approximates fair value. Th e fair value of fix ed maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of si milar remaining maturities. The carrying amount of accrued interest payable approximates its fair value. F-45 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 20: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued) 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. Long-Term Debt Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. Fair value of long-term debt is based on quoted market prices or dealer prices for the identical liability when traded as an asset in an active market. If a quoted market price is not available, an expected present value technique is used to estimate fair value. Commitments to Extend Credit, Letters of Credit and Lines of Credit The fair value of commitments to originate loans 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 fi xed rate loan commitments, fair value also considers the difference between current levels of interest rates an d the committed rates. The fair v alue of letters o f credit and lines of credit are based on fe es currently charged for similar ag reements or on the estimated cost to terminate or otherwise settle th e obligations with the counterparties at the reporting date. F-46 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 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 B ank 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. C ommitments generally have fixed expiration dates or ot her 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. Eac h customer’s creditworthiness is evaluated on a case-by-case basis. T he amount of c ollateral obtained, if deem ed necessary, is based on management’s credit evaluation of the counterparty. Collateral held va ries, but may include accounts receivable , inventory, property, plant and equipment, commercial real estate and resi dential real estate. At December 31, 2012 and 2011, the Company had outstanding commitments to originate loans aggregating approximately $28,268,000 and $22,744,000, respectively. Th e commitments extend over varying periods of time with the majority being disbursed within a one-year period. Mortgage loans in the process of o rigination represent amounts that the Company plans to fund within a norm al period of 60 to 90 days and which are intended for sale to investors in the secondary market. Total mortgage loans in the process of origination amounted to $1,577,000 and $1,410,000 at December 31, 2012 and 2011, respectively. Mortgage loans in the process of origination represent commitments to originate loans at bo th fixed and variable rates. M ortgage loans held for sale amounted to $7,621,000 and $5,686,000 at December 31, 2012 and 2011, respectively. Forward commitments to sell mortgage loans are obligations to sell loans at a specified price on or before a specified future date. These commitments are acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale since the Company is exposed to interest rate risk during the period between issuing a loan commitment and the sale of the loan into the secondary market. Related forward commitments to sell mortgage loans amounted to approximately $7,621,000 and $7,096,000 at December 31, 2012 and 2011, respectively. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Fin ancial standby letters of cre dit are prim arily 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 $889,000 and $853,000 at D ecember 31, 2012 and 2011, respectively, with terms ranging from one year to three years with the majority expiring in one year. Lines of credit are agreements to lend to a cu stomer 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 re quirements. Each cust omer’s creditworthiness is evaluated on a ca se-by-case basis. T he amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of t he counterparty. C ollateral 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-bala nce sheet instruments. At December 31, 2012, the Company had unused lines of credit to borrowers aggregating approximately $146,913,000 for commercial, commercial real estate and construction lines and $33,570,000 for open-end consumer lines of credit. At December 31, 2011, the Company had unused lines of credit to borrowers aggregating approximately $141,238,000 for commercial, commercial real estate and construction lines and $38,446,000 for open-end consumer lines of credit. F-47 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 21: COMMITMENTS, CREDIT RISKS AND CURRENT ECONOMIC CONDITIONS (Continued) The Bank is subject to possible future repurchase and indemnification demands for future losses realized by investors for alleged breaches of representations and warranties on mortgage loans previously sold to investors. The financial services industry has been materially and adversely impacted by a prolonged period of negative economic conditions, including but not limited to high levels of unemployment, declines in asset v alues, as well as delinquencies and defaults on loans. These defaults on loans include possible “strategic defaults” which are characterized by borrowers that appear to have the financial means to meet the debt service requirements of their loans, however, elect not to do so because the value of the assets securing their debts may have declined below the amount of the debt or in c onsideration of statutory restrictions which impede a lender’s ability to exercise prudent collection efforts or foreclose in an efficient manner. For three years ending December 31, 2012, the Company has repurchased 1 loan from an i nvestor totaling $458,000 for which no losses have been recognized. Additionally, during the three years e nding December 31, 2012, the Company has recognized indemnification losses totaling approximately $255,000 for loans previously sold to investors. The financial statements have been prepared using values and information currently available to the Company; however, there can be no assurance that the impact of these conditions will cease or reverse to mitigate possible risk of future potential losses by the Bank. The current protracted economic decline continues to present financial institutions with circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair values of investments and other assets, con straints on liquidity and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. The fi nancial statements have bee n prepared using values and information currently available to the Company. 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 v alues, the allowance for loan losses and capital that could negatively impact the Company’s and Bank’s ability to meet regulatory capital requirements and maintain sufficient liquidity. Furth ermore, the Company’s and Bank’s regulators could require material adjustments to asset values or the allowance for loan losses for regulatory capital purposes that could affect the Company’s and Bank’s measurement of regulatory capital and compliance with the capital adequacy guidelines under the regulatory framework for prompt corrective action. NOTE 22: LEGAL CONTINGENCIES Various legal claims also arise from time to time in the normal course of b usiness which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements. F-48 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 23: 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: Nat ure of Operations and Summary of Significant Accounting Policies" in the Company's Consolidated Financial Statements. 2012 2011 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 Net interest income after provision for loan losses Non-interest income Non-interest expense Income (loss) before income taxes Provision (benefit) for income taxes Net income (loss) Dividends on preferred shares Net income (loss) available to common shareholders Net Income (loss) per Share Data $ 6,002 $ 6,097 $ 6,060 $ 6,224 1,970 4,254 450 1,737 4,360 650 1,849 4,211 100 1,636 4,366 - $ 6,736 2,098 4,638 600 $ 6,837 $ 6,631 $ 6,651 2,540 4,111 - 2,410 4,221 2,000 2,207 4,630 700 4,366 1,981 6,188 3,710 2,165 5,524 4,111 1,678 5,866 3,804 1,610 5,730 4,038 1,758 6,882 3,930 1,717 7,672 2,221 1,445 5,882 4,111 1,404 6,188 159 (147) 306 290 351 (1) 352 272 (77) (1) (76) 272 (316) (1) (315) 272 (1,086) (2,025) (2,216) (69) 10,136 (11,222) (2,025) (2,147) 272 290 290 - (673) (244) (429) 272 $ 16 $ 80 $ (348) $ (587) $ (11,512) $ (2,297) $ (2,419) $ (701) Basic Diluted $ $ 0.01 $ 0.01 $ 0.03 $ (0.12) $ (0.21) 0.03 $ (0.12) $ (0.21) $ $ (4.10) $ (0.82) $ (0.86) $ (0.25) (4.10) $ (0.82) $ (0.86) $ (0.25) Balance Sheet Total assets Total loans, net Stockholders' equity $657,005 $662,917 $656,457 $671,946 406,614 421,243 419,928 427,094 39,815 39,573 39,440 39,833 $654,452 425,654 40,455 $677,511 $691,580 $693,776 442,496 443,878 462,009 51,912 54,310 56,368 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. F-49 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 24: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) Condensed Balance Sheets December 31, 2012 and 2011 (In thousands) ASSETS Cash and cash equivalents Investments in subsidiaries: Bank of Blue Valley BVBC Capital Trust II BVBC Capital Trust III Other assets Total Assets LIABILITIES Subordinated debentures Other liabilities Total Liabilities STOCKHOLDERS’ EQUITY 2012 2011 $ 646 $ 743 65,924 232 356 18 64,282 232 356 55 $ 67,176 $ 65,668 $ 19,588 7,773 27,361 $ 19,588 5,625 25,213 Preferred Stock Common stock Additional paid-in capital Retained earnings (Accumulated deficit) Accumulated other comprehensive income, net of income tax of $29 and $89 as of December 31, 2012 and 2011, respectively Total Stockholders’ Equity 22 2,934 38,746 (1,930) 43 39,815 22 2,879 38,511 (1,091) 134 40,455 Total Liabilities and Stockholders’ Equity $ 67,176 $ 65,668 F-50 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 24: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (Continued) Condensed Statements of Operations Years Ended December 31, 2012, 2011 and 2010 (In thousands) Income Dividends from subsidiaries Other income 2012 2011 2010 $ – 20 20 $ – 19 19 $ – 20 20 Expenses 1,486 1,291 1,496 Loss before income taxes and equity in undistributed net loss of subsidiaries Income tax (benefit) Valuation allowance on deferred tax asset Loss before equity in undistributed net loss of subsidiaries Equity in undistributed net loss of subsidiaries (1,466) (494) 494 (1,466) 1,733 (1,272) (1,142) 2,169 (2,299) (13,524) (1,476) (531) – (945) (1,797) Net income (loss) $ 267 $ (15,823) $ (2,742) Condensed Statements of Comprehensive Income (Loss) Years Ended December 31, 2012, 2011 and 2010 (In thousands) Net income (loss) Other comprehensive income (loss) 2012 2011 2010 $ 267 $ (15,823) $ (2,742) Change in un realized appreciation on available-for-sale securities, net of income taxe s (credit) of $(60) in 2012, $69 in 2011 and $(49) in 2010 Comprehensive income (loss) $ (91) 176 $ 104 (15,719) $ (73) (2,815) F-51 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, 2011 AND 2010 NOTE 24: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (Continued) Condensed Statements of Cash Flows Years Ended December 31, 2012, 2011 and 2010 (In thousands) OPERATING ACTIVITIES Net Income (loss) Items not requiring (providing) cash: Deferred income taxes Equity in undistributed net loss (income) of subsidiaries Restricted stock earned Changes in: Other assets Other liabilities Net cash used in operating activities INVESTING ACTIVITIES Capital contributed to subsidiary Net cash used in investing activities FINANCING ACTIVITIES Proceeds from sale of common stock through Employee Stock Purchase Plan (ESPP) Net cash provided by financing activities DECREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR 2012 2011 2010 $ 267 $ (15,823) $ (2,742) 0 (1,733) 245 37 1,060 (124) – – 27 27 (97) 743 1,197 13,524 77 (38) 943 (120) – – 21 21 (99) 842 (417) 1,797 428 – 842 (92) – – 35 35 (57) 899 $ 646 $ 743 $ 842 F-52 blue valley ban corp. STOCKHOLDER INFORMATION 2012 corporate office 11935 Riley PO Box 26128 stock quotation symbol Shares of Blue Valley Ban Corp. com- mon stock are currently quoted on the Overland Park, KS 66225-6128 OTCQB under the symbol BVBC. 913.338.1000 l 913.234.7145 (fax) operations center 7900 College Boulevard Overland Park, KS 66210 helpline 913.338.HELP (4357) internet websites • www.BankBV.com • www.InternetMortgage.com transfer agent and registrar American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 auditors BKD, LLP 1201 Walnut Street, Suite 1700 Kansas City, MO 64106-2246 corporate counsel annual meeting of stockholders Husch Blackwell LLP The annual meeting will be held on 4801 Main Street, Suite 1000 May 15, 2013 at 5:30 p.m. at the Kansas City, MO 64112-2502 Leawood Banking Center, 13401 Mission Road, Leawood, KS 66219. Stinson Morrison Hecker LLP investor inquiries To request additional copies of our 1201 Walnut Street, Suite 2900 Kansas City, MO 64106-2150 Annual Report to inquire about other market maker stockholder issues, visit our Investor Relations webpage at www.BankBV. com or contact Mark A. Fortino, Chief Financial Officer, at our corporate office. Stifel, Nicolaus & Company, Incorporated One Financial Plaza 501 N Broadway, 9th Floor St. Louis, MO 63102-2102 Local trading desk: 913.345.4200 OVERLAND PARK l 11935 RILEY l OVERLAND PARK, KS 66213 OLATHE l 1235 E. SANTA FE l OLATHE, KS 66061 SHAWNEE l 5520 HEDGE LANE TERRACE l SHAWNEE, KS 66226 LEAWOOD l 13401 MISSION ROAD l LEAWOOD, KS 66209 LENEXA l 9500 LACKMAN ROAD l LENEXA, KS 66219 WWW.BANKBV.COM l 913.338.1000

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