Blue Valley Ban Corp.
Annual Report 2017

Plain-text annual report

BUILDING SOMETHING STRONGER. 2 0 1 7 A N N U A L R E P O R T LETTER TO STOCKHOLDERS 2017 marked the sixth consecutive year of increase in our stock price quoted on the OTCQX. The stock traded at a low of $4.10 in 2011 and ended 2017 at $11.75. Although our stock is thinly traded, and therefore the quoted price not always indicative of the current market value, this increase is positively correlated with the improvement in earnings over the same time period. We continue to work diligently to enhance stockholder value utilizing the foundation we laid 28 years ago. The keys to our financial success over the past year were well executed strategies around the basic building blocks of being a good community bank; growth in loans and deposits through building relationships. The result was a significant increase in net interest income and overall profitability. While the enactment of the Tax Cuts and Jobs Act (Tax Reform) resulted in a one-time, non-cash charge reducing our reported net income for 2017, Tax Reform will result in improved earnings going forward as a result of a lower U.S. Corporate tax rate. Excluding the impact of the one-time non-cash Tax Reform Act charge, we increased earnings by 166% in 2017 as compared with the prior year. Notable achievements during 2017 included: STOCK PRICE QUOTED ON OTCQX $11.75 $9.50 $8.00 $6.50 $6.00 2013 2013 2014 2014 2015 2016 2017 S R A L L O D 12 10 8 6 4 Stock price quoted on OTCQX $11.75 9% 11% 15% NET LOAN GROWTH NET DEPOSIT GROWTH NET INTEREST INCOME (NEARLY $3 million) Stellar loan quality with a ratio of .22% of nonperforming loans (as of 12/31) Achieved a net recovery ratio of 0.05% of average loans meaning we recovered more from loans previously charged off than we charged off in 2017 Achieved a strong net interest margin of 3.59% on earning assets (as of 12/31) Through a responsible growth strategy, we grew revenue, managed risks, reduced expenses and continued to reinvest in our associates and our community. Operational excellence was a strategic focus in 2017 and we reduced total non-interest expense by $1.3 million or nearly 6.2%. It’s important to note that we did this while growing the business. While we are pleased with the growth we have achieved over the last five years, the operational efficiencies we have gained, and the resulting increase in returns for our stockholders, we have more work to do and more opportunities in front of us. One of those opportunities is within our Wealth Management Division. In 2017 we received regulatory approval for the formation of Blue Valley Wealth Advisors Inc., a Registered Investment Advisory firm that is now a part of our wealth management offerings which already included Trust and Brokerage services as well as Private Banking services. As we grow assets under management non-interest income will be enhanced. We see this as a logical compliment to the services our customers expect from a full service community bank. Blue Valley Wealth Advisors will enable us to offer goals- based wealth management services that will serve our clients well going forward. Through prudent strategic growth of our commercial lending, retail and digital banking, and wealth management services, and further improvement of our operational efficiencies, we believe we can continue to build value for the benefit of our stockholders. Thank you for your continued support. BLUE VALLEY BAN CORP. DECEMBER 31, 2017, 2016 AND 2015 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Page INDEPENDENT AUDITOR’S REPORT AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM............................................................................................................................ F-2 CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets ................................................................................................................................... Statements of Income ........................................................................................................................ 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 subsidiaries, which comprise the consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2017, 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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, including 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 opinion 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 respects, the financial position of Blue Valley Ban Corp. and its subsidiaries as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2017, in accordance with accounting principles generally accepted in the United States of America. Kansas City, Missouri March 29, 2018 BLUE VALLEY BAN CORP. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2017 AND 2016 (In thousands, except share data) ASSETS Cash and due from banks Interest bearing deposits in other financial institutions Cash and cash equivalents Available-for-sale securities $ 2017 9,394 4,150 13,544 103,130 $ 2016 17,766 8,272 26,038 107,760 Loans, net of allowance for loan losses of $5,535 and $6,164 in 2017 and 2016, respectively 529,265 487,518 Premises and equipment, net Bank-owned real estate held for sale, net Foreclosed assets held for sale, net Interest receivable Deferred income taxes Prepaid expenses and other assets FHLBank stock, Federal Reserve Bank stock, and other securities 12,322 5,915 2,252 1,888 7,755 7,531 3,888 12,046 5,915 5,883 1,785 14,304 7,939 5,244 Total assets $ 687,490 $ 674,432 See Notes to Consolidated Financial Statements F-4 BLUE VALLEY BAN CORP. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2017 AND 2016 (In thousands, except share data) LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES Deposits Demand Savings, NOW and money market Time Total deposits Short term debt Long term debt Interest payable and other liabilities Total liabilities STOCKHOLDERS’ EQUITY Capital stock 2017 2016 $ 152,052 315,553 101,240 568,845 37,202 32,802 2,392 641,241 $ 150,274 280,628 81,575 512,477 63,142 53,333 2,045 630,997 Series B Preferred stock, $1 par value, convertible to common stock; pari passu with common stock upon liquidation; Authorized 1,000,000 shares; issued and outstanding 2017 and 2016 – 471,979 shares Common stock, par value $1 per share; Authorized 15,000,000 shares; issued and outstanding 2017 – 5,677,865 shares; 2016 – 5,644,553 shares Additional paid-in capital Retained earnings Accumulated other comprehensive loss, net of income tax (credit) of $(1,091) in 2017 and $(2,254) in 2016 Total stockholders’ equity 472 472 5,678 32,108 10,941 (2,950) 46,249 5,644 30,858 9,842 (3,381) 43,435 Total liabilities and stockholders’ equity $ 687,490 $ 674,432 See Notes to Consolidated Financial Statements F-5 BLUE VALLEY BAN CORP. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 (In thousands, except per share data) INTEREST AND DIVIDEND INCOME Interest and fees on loans Available-for-sale securities Dividends on FHLBank and Federal Reserve Bank stock Federal funds sold and other short-term investments Total interest and dividend income 2017 2016 2015 $ 23,665 2,103 146 115 26,029 $ 20,949 1,938 202 185 23,274 $ 20,418 1,880 231 89 22,618 INTEREST EXPENSE Interest-bearing demand deposits Savings and money market deposit accounts Time deposits Federal funds purchased and short term debt Long term debt, net Total interest expense NET INTEREST INCOME PROVISION FOR LOAN LOSSES NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES NON-INTEREST INCOME NSF charges and service fees Trust services Investment brokerage services Other service charges Realized gains (losses) 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 BEFORE INCOME TAXES PROVISION FOR INCOME TAXES NET INCOME DIVIDENDS AND ACCRETION ON PREFERRED STOCK NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS BASIC EARNINGS (LOSS) PER COMMON SHARE DILUTED EARNINGS (LOSS) PER COMMON SHARE See Notes to Consolidated Financial Statements $ $ $ F-6 258 503 976 53 1,662 3,452 22,577 (900) 239 401 609 33 2,307 3,589 19,685 1,925 246 341 868 25 2,470 3,950 18,668 1,450 23,477 17,760 17,218 904 585 456 1,421 - 1,303 4,669 10,860 2,671 2,247 5,782 21,560 6,586 6,012 574 – 574 0.11 0.11 1,008 725 405 1,437 1,879 2,059 7,513 10,734 2,720 3,021 6,413 22,888 2,385 819 1,566 – 1,033 640 518 1,447 (78) 2,931 6,491 11,205 2,699 2,522 6,342 22,768 941 276 665 1,333 $ 1,566 $ 0.29 $ 0.29 $ $ $ (668) (0.14) (0.14) BLUE VALLEY BAN CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 (In thousands) NET INCOME OTHER COMPREHENSIVE INCOME (LOSS) Change in unrealized appreciation (depreciation) on available-for-sale securities, net of income taxes (credit) of $631 in 2017, $(1,455) in 2016 and $312 in 2015 Less: reclassification adjustment for realized (gains) losses included in net income (loss), net of income taxes of $0 in 2017, $(752) in 2016, and $31 in 2015 Comprehensive income (loss) 2017 2016 2015 $ 574 $ 1,566 $ 665 956 (2,204) 472 $ – 1,530 $ (1,127) (1,765) $ 47 1,184 See Notes to Consolidated Financial Statements F-7 BLUE VALLEY BAN CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 (In thousands, except share data) Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total BALANCE, DECEMBER 31, 2014 $ 22 $ 4,649 $45,328 $ 9,030 $ (569) $ 58,460 Redemption of 21,750 shares of Series A preferred stock Issuance of 471,979 shares of Series B preferred stock Issuance of 48,153 shares of restricted stock, net of forfeitures of 1,405 Issuance of 4,726 shares of common stock for the employee stock purchase plan Issuance of 670,878 shares of common stock Net income Repurchase of warrants Dividend on preferred shares Other comprehensive income (22) 472 (21,728) 2,832 308 25 3,896 (4) 47 4 671 (21,750) 3,304 355 29 4,567 665 (4) (1,419) 519 665 (1,419) 519 BALANCE, DECEMBER 31, 2015 $ 472 $ 5,371 $30,657 $ 8,276 $ (50) $ 44,726 Issuance of 270,431 shares of restricted stock, net of forfeitures of 2,199 Issuance of 4,968 shares of common stock for the employee stock purchase plan Net income Other comprehensive income 268 5 175 26 1,566 (3,331) 443 31 1,566 (3,331) BALANCE, DECEMBER 31, 2016 $ 472 $ 5,644 $ 30,858 $ 9,842 $ (3,381) $ 43,435 Issuance of 50,815 shares of restricted stock, net of forfeitures of 21,057 Issuance of 3,554 shares of common stock for the employee stock purchase plan Stock-based compensation expense Net income Other comprehensive income Reclassify stranded tax effects due to 2017 tax law changes 30 4 495 25 730 574 525 956 (525) 525 29 730 574 956 - BALANCE, DECEMBER 31, 2017 $ 472 $ 5,678 $ 32,108 $ 10,941 $ (2,950) $ 46,249 See Notes to Consolidated Financial Statements F-8  2017 2016 2015 $ 574 $ 1,566 $ 665 1,378 1,607 1,911 689 1,925 1,419 730 (cid:2) (84) (172) (1,879) (cid:2) 165 443 4 (cid:2) 320 1,450 1,854 196 (cid:2) (113) (172) 78 19 (39) 355 4 (cid:2) BLUE VALLEY BAN CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 (In thousands) OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Amortization, net of (accretion) 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 Income tax expense from revaluation of deferred tax assets and liabilities Stock dividends on FHLBank stock Increase in value of bank owned life insurance Net realized (gains) losses on available-for-sale securities Net loss on disposal of premises and equipment Net (gain) loss on sale of foreclosed assets Restricted stock earned net of forfeitures Compensation expense related to the Employee Stock Purchase Plan Stock-based compensation expense 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 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 Purchase of priority lien on foreclosed assets held for sale Purchases of available-for-sale securities Proceeds from maturities of available-for-sale securities Proceeds from sale of available-for-sale securities Purchases of FHLBank and Federal Reserve Bank stock and other securities Proceeds from the redemption of FHLBank stock, Federal Reserve Bank stock, and other securities Net cash 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 Proceeds from acquisition of bank deposits Repayments of long-term debt Proceeds from long-term debt Repayments of short-term debt Proceeds from short-term debt Proceeds from sale of additional stock Net proceeds from the sale of stock through Employee Stock Purchase Plan Dividends paid on Series A Preferred Stock Repurchase of warrants Redemption of Series A Preferred Stock Net cash provided by (used in) financing activities 747 (900) 1,483 2,446 3,595 (28) (173) (cid:2) (cid:2) 103 525 3 730 (cid:2) (cid:2) (cid:2) (103) (cid:2) 578 215 11,173 (71,723) 31,287 (1,152) 1,635 (cid:2) (cid:2) 5,477 (cid:2) (1,376) 2,760 (33,092) 36,703 19,665 (4,672) (cid:2) (21,032) (cid:2) (150,815) 129,547 (cid:2) 29 (cid:2) (cid:2) (cid:2) 9,425 Decrease in cash and cash equivalents Cash and cash equivalents, beginning of year CASH AND CASH EQUIVALENTS, END OF YEAR (12,494) 26,038 13,544 $ $ See Notes to Consolidated Financial Statements F-9 (2,367) 4,633 (8) (58) 57 186 295 9,151 (46,750) 45,060 20 (124) (54) (53) (1,250) 3,377 (116,971) 69,827 (1,132) 3,840 (cid:2) (116,526) (cid:2) 95,964 (1,974) (50,217) 21,162 (2,327) 5,399 (160) (122,006) 81,770 40,516 (cid:2) 1,618 (65,354) 49,956 (20,721) (1,871) (cid:2) (20,254) (cid:2) (16,032) 45,299 (cid:2) 31 (cid:2) (cid:2) (cid:2) 36,408 (19,795) 45,833 26,038 798 (25,065) 4,400 (19,088) 4,966 29,172 (15,246) 15,500 (cid:2) (cid:2) 7,871 29 (7,346) (4) (21,750) (1,496) (23,184) 69,017 45,833 $ BLUE VALLEY BAN CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 (In thousands) SUPPLEMENTAL CASH FLOWS INFORMATION Cash paid during the year for: Interest Income taxes, net of refunds Noncash investing and financing activities: Reclassification of premises and equipment to bank-owned real estate held for sale, net Transfer of loans to foreclosed property, net of specific allowance Unvested restricted stock issued Sale and financing of foreclosed assets Adoption of ASU 2018-02 – reclassification of stranded tax effects due to 2017 tax law change 2017 2016 2015 $ $ $ $ $ $ $ 3,288 102 (cid:2) (cid:2) (cid:2) 411 525 $ $ $ $ $ $ $ 3,686 (cid:2) (cid:2) 1,682 222 20 (cid:2) $ $ $ $ $ $ $ 4,857 80 5,892 159 (cid:2) (cid:2) (cid:2) See Notes to Consolidated Financial Statements F-10 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations The Company is a holding company for Bank of Blue Valley (the “Bank”), BVBC Capital Trust II and BVBC Capital Trust III, through 100% ownership of each. The Bank is primarily engaged in providing a full range of banking services to consumer and commercial customers in Johnson County, Kansas. The Bank is subject to competition from other financial institutions. The Bank is also subject to regulation by certain federal and state agencies and undergoes periodic examination by those regulatory authorities. BVBC Capital Trust II and III are Delaware business trusts created in 2003 and 2005, respectively, to offer trust preferred securities and to purchase the Company’s junior subordinated debentures. The Trusts have terms of 30 years, but may dissolve earlier as provided in their trust agreements. Operating Segment The Company provides community banking services through its subsidiary bank, including such products and services as loans; time deposits, checking and savings accounts, mortgage originations, trust services, and investment services. These activities are reported as a single operating segment. Principles of Consolidation The consolidated financial statements include the accounts of Blue Valley Ban Corp. and its 100% owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses, 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. Management believes that the allowance for loan losses, valuation of foreclosed assets held for sale, and valuation of deferred tax assets are adequate. While management uses available information to recognize losses on loans, 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 their examination process, periodically review the Company’s allowance for loan losses, valuation of foreclosed assets held for sale and deferred tax assets. Such agencies may require the Company to recognize additional losses based on their judgments of information available to them at the time of their examination. F-11 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Evaluation of Subsequent Events Subsequent events have been evaluated through March 29, 2018, of the Independent Auditor’s Report, which is the date the financial statements were available to be issued. Effect of New Financial Accounting Standards In December 2013, the FASB issued ASU No. 2013-12, Definition of a Public Business Entity. The standard defined a public business entity for U.S. GAAP financial reporting purposes and amended the Master Glossary. The Company has evaluated the standard and has determined it is a public business entity. In August, 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provided guidance applicable to contracts with customers so that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For financial institutions, significant changes are not expected because most financial instruments are not in the scope of the update. ASU 2015-14 defers the implementation for ASU 2014-09 to be effective for annual periods beginning after December 15, 2017. The Company adopted the provisions of ASU 2014-09 beginning January 1, 2018. The adoption of ASU 2014-09 did not have a significant effect on the Company’s financial position, results of operations, or its financial statement disclosures. In January, 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities). The guidance is intended to improve the recognition and measurement of financial instruments for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. ASU 2016-01 requires equity investments (other than equity method or consolidation) to be measured at fair value with changes in fair value recognized in net income, eliminated available-for-sale classification (changes in fair value reported in other comprehensive income) for equity securities with readily determinable fair values, and eliminated the cost method for equity securities without readily determinable fair values. Entities will be permitted to elect to record equity securities without readily determinable fair values at cost, less impairment, with changes in the basis reported in current earnings. ASU 2016-01 eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities, eliminates the requirement for non-public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is to be required to be disclosed for financial instruments measured at amortized cost on the balance sheet, and requires a reporting organization to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from the change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The new guidance is effective for public business entities for fiscal years beginning after December 15, 2017. The Company adopted the provisions of ASU 2016-01 beginning January 1, 2018. The adoption of ASU 2016-01 did not have a significant effect on the Company’s financial position, results of operations, or its financial statement disclosures. F-12 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Effect of New Financial Accounting Standards (Continued) In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard requires a lessee to recognize a right-of-use asset and liability on the balance sheet for leases with lease terms greater than 12 months. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact that the standard will have on our consolidated financial statements. Our preliminary finding is that the new pronouncement will not have a significant impact on our consolidated financial statements as the projected minimum lease payments under existing leases subject to the new pronouncement is immaterial to the financial condition of the Company. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The guidance removes the existing “probable” and “incurred” loss recognition threshold and requires an entity to estimate lifetime expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts, including estimates for prepayments. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU does not prescribe a specific method to estimate credit losses. ASU 2016-13 is effective for public business entities that are not SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 (i.e., January 1, 2021, for calendar year entities). We are currently evaluating the impact that the standard will have on our consolidated financial statements, and are currently evaluating various loss estimation methodologies. In February 2018, FASB issued ASU 2018-02 “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” which permits entities to reclassify tax effects stranded in accumulated other comprehensive income (loss) (AOCI) as a result of the Tax Cuts and Jobs Act (the “Tax Act”). ASU 2018-02 is effective for interim and annual periods beginning after December 15, 2018; however, early adoption is permitted. The Company adopted the provisions of ASU 2018-02 which resulted in a reclassification from AOCI to retained earnings in the amount of $525,000, which is reflected in the 2017 consolidated financial statements. The adoption of ASU 2018-02 during 2017 allows the Company to align the tax effects included in accumulated other comprehensive income (loss) with the revised federal tax rates included in the Tax Act. F-13 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Cash and Cash Equivalents The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. The Company’s cash accounts exceeded the $250,000 FDIC insurance limits by approximately $1.4 million at December 31, 2017. The Bank had no required reserve with the Federal Reserve Bank at December 31, 2017. The Bank’s deposit balance held at the Federal Reserve Bank on December 31, 2017 was $3,732,000. Investment in Securities Available-for-sale securities, which include any security for which the Company has no immediate plan to sell, but which may be sold in the future, are carried at fair value. Unrealized gains and losses are excluded from earnings and are reported, net of related income tax effects, in accumulated other comprehensive income. Purchase 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 the 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, for which the Company does not intend to sell the debt security, and for which it is more likely than not the Company will not have to sell the security before recovery of its cost basis, the Company recognizes the credit component of an other-than-temporary impairment of the debt security in earnings and the remaining portion in other comprehensive income. The credit loss component recognized in earnings 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, 2017. 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. 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. F-14 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding principal balance adjusted for unearned income, charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts 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 loans is discontinued, and interest is considered a loss, at the time the loan is 90 days past due, unless the loan is well-secured and in the process of collection. Past due status is based on contractual term of the loans. Loans 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 when loans are placed on non-accrual or charged off, which reduces interest income. The interest on these loans is generally 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 principal and interest amounts contractually due are brought current and future payments are reasonably assured. 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. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries of amounts previously charged off, if any, are credited to the allowance. The allowance for loan losses is evaluated on a monthly basis by management and is based on management’s periodic review of the collectability of the loans in consideration of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The Company computes its allowance by assigning specific reserves to impaired loans, and then applies general reserve factors to the rest of the loan portfolio. The general reserve covers non-impaired loans and is based 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. F-15 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan Losses (Continued) A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of delay, the reason for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of collateral securing the loan if the loan is collateral dependent. Premises and Equipment Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are capitalized and depreciated using the straight-line method over the terms of the respective lease or the estimated useful lives of the improvements, whichever is shorter. 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 Bank-Owned Real Estate Held for Sale Bank-owned real estate held for sale includes real estate owned by the Bank which is held for and actively marketed for sale. No depreciation expense is recorded on bank-owned real estate held for sale during the period it is held for sale; rather, it is recorded at fair value less estimated costs to sell. During 2015, the Bank consolidated the location of employees from an office building, which had been marketed for sale, to the Bank’s main office in Overland Park, Kansas. The cost and accumulated depreciation of the office building was previously recorded in premises and equipment and, pursuant to the consolidation of Bank employees to the Bank’s main office, was reclassified to bank-owned real estate held for sale. Foreclosed Assets Held for Sale Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs 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 costs to sell. Revenue and expenses from operations and changes in the valuation allowance are reported as other income and foreclosed assets expense. F-16 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Derivatives Derivatives are recognized as assets and liabilities in the consolidated balance sheets 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 valuation model which considers differences between quoted prices for loans with similar characteristics in the secondary market and the committed rates. Forward Loan Sale Commitments The Company carefully evaluates all loan 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 on forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Accordingly, forward loan commitments 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 of its forward loan commitments using a methodology similar to that used for derivative loan commitments. 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. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. 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. F-17 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and 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 Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases 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 (“DTAs”) are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a DTA will not be realized. Tax positions are recognized 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 include resolution of the related appeals or litigation processes, if any. A tax position that meets the more likely than not recognition threshold is initially 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 taxing authority that has full knowledge of all relevant information. The 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 component of income tax expense. The Company files consolidated income tax returns with its subsidiaries. The Company is generally not subject to federal, state and local examination by tax authorities for years prior to 2014. Comprehensive Income (Loss) Comprehensive income (loss) consists of net income (loss) and accumulated other comprehensive income (loss), net of applicable income taxes. Accumulated 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 (loss) was $(2,950,000) and $(3,381,000), respectively, at December 31, 2017 and 2016. F-18 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 share reflects additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The computation of per share earnings is as follows: 2017 2016 2015 (In thousands, except share and per share data) Net Income Dividends and accretion on preferred stock Net income (loss) available to common stockholders $ 574 $ 1,566 $ – – $ 574 $ 1,566 $ 665 (1,333) (668) Average common shares outstanding Average common share stock options outstanding and restricted stock 5,432,082 5,383,621 4,932,847 688 507 705 Average diluted common shares 5,432,770 5,384,128 4,933,552 Basic income (loss) per share Diluted income (loss) per share (A) $0.11 $0.11 $0.29 $0.29 $(0.14) $(0.14) (A) Diluted earnings per share above excludes conversion of the Company’s Series B Preferred Stock, which is subject to conversion limitations as described in Note 11. Income available for common stockholders is reduced by dividends declared on preferred stock (whether or not they the warrants. are paid) they are declared, as well as the accretion on the period in which in F-19 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 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 State and political subdivision securities U.S. Government sponsored agencies mortgage-backed securities U.S. Small Business Administration loan pool certificates Equity and other securities (In thousands) U.S. Government sponsored agencies State and political subdivision securities U.S. Government sponsored agencies mortgage-backed securities U.S. Small Business Administration loan pool certificates Equity and other securities December 31, 2017 Gross Gross Unrealized Unrealized Losses Gains Fair Value $ – – – – $ (2,363) (487) (1,124) (76) 20 $ 20 (11) $ (4,061) $ 52,084 13,486 31,800 3,151 2,609 $ 103,130 December 31, 2016 Gross Gross Unrealized Unrealized Losses Gains Fair Value $ – – – – – $ – $ (3,249) (644) (1,628) (103) (11) $ (5,635) $ 56,586 13,348 31,634 3,603 2,589 $ 107,760 Amortized Cost $ 54,447 13,973 32,924 3,227 2,600 $ 107,171 Amortized Cost $ 59,835 13,992 33,262 3,706 2,600 $ 113,395 The amortized cost and estimated fair value of available-for-sale securities at December 31, 2017, 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 U.S. Government sponsored agencies mortgage-backed securities U.S. Small Business Administration loan pool certificates Equity securities Amortized Cost $ $ – 8,050 62,370 – 70,420 32,924 3,227 600 107,171 Fair Value $ $ – 7,821 59,770 – 67,591 31,800 3,151 588 103,130 The amortized cost and estimated fair value of securities pledged as collateral to secure public deposits were $6,303,000 and $6,045,000, respectively, at December 31, 2017 and $6,183,000 and $6,022,000, respectively, at December 31, 2016. There were no gross gains or gross losses realized in 2017 from sales of available-for-sale securities. Gross gains of $1.9 million and gross losses of $5,000 were realized in 2016 from sales of available-for-sale securities. Gross gains of $80,000 and gross losses of $158,000 were realized in 2015 from sales of available-for-sale securities. F-20 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 2: AVAILABLE-FOR-SALE SECURITIES (Continued) Certain investments in debt and marketable equity securities are reported in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2017 and 2016, was $101,110,000 and $105,760,000, respectively, which is approximately 98.1% and 98.1%, respectively, of the Company’s available-for-sale investment portfolio. These declines in fair value resulted primarily from increases in market interest rates from the date of the acquisition of the securities. Based on evaluation of available information and evidence, particularly recent volatility in market yields on debt securities, management believes the declines in fair value for these securities are temporary. 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 Fair Value Unrealized Losses Fair Value Unrealized Losses Less than 12 Months December 31, 2017 12 Months or More Total Fair Value Total Unrealized Losses (In thousands) U.S. Government sponsored agencies State and political subdivision securities U.S. Government sponsored agencies mortgage-backed securities U.S. Small Business Administration loan pool certificates Equity securities Total temporarily impaired securities $ – $ – $ 52,084 $ 2,363 $ 52,084 $ 2,363 – – – – – – – – 13,486 31,800 3,151 589 487 1,124 76 11 13,486 31,800 3,151 589 487 1,124 76 11 $ – $ – $ 101,110 $ 4,061 $ 101,110 $ 4,061 Description of Securities Fair Value Unrealized Losses Fair Value Unrealized Losses Less than 12 Months December 31, 2016 12 Months or More $ 56,586 $ 3,249 $ – $ 13,348 31,634 3,603 589 644 1,628 103 11 – – – – – – – – – Total Fair Value Total Unrealized Losses $ 56,586 $ 3,249 13,348 31,634 3,603 589 644 1,628 103 11 (In thousands) U.S. Government sponsored agencies State and political subdivision securities U.S. Government sponsored agencies mortgage-backed securities U.S. Small Business Administration loan pool certificates Equity and other securities Total temporarily impaired securities $ 105,760 $ 5,635 $ – $ – $ 105,760 $ 5,635 F-21 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 2: AVAILABLE-FOR-SALE SECURITIES (Continued) The unrealized losses on the Company’s investments in obligations of U.S. Government sponsored agencies, state and political subdivision securities and U.S. Small Business Administration loan pool certificates were caused by changes in market interest rates from various dates of purchase. 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 their amortized cost bases, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at December 31, 2017 or 2016. Amounts Reclassified out of Accumulated Other Comprehensive Income (Loss) Amounts reclassified from accumulated other comprehensive income (loss) and the affected line items in the consolidated statements of operations during the years ended December 31, 2017 and 2016 were as follows: Amounts Reclassified From Accumulated Other Comprehensive Income (Loss) Year Ended December 31, 2017 December 31, 2016 Affected line item in the Consolidated Statements of Operations (In thousands) Realized gains (losses) on available-for- sale securities Income taxes Total reclassifications out of accumulated other comprehensive income $ $ – – – $ 1,879 Realized gains on available-for-sale securities (Total reclassified amount before tax) (752) Benefit for income taxes $ 1,127 NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES Classes of loans at December 31, 2017 and 2016 include the following: (In thousands) Commercial loans Commercial real estate loans Construction loans Home equity loans Residential real estate loans Consumer loans Lease financing Total loans Less: Allowance for loan losses 2017 2016 $ 149,540 227,167 68,406 25,970 37,529 13,200 12,988 534,800 5,535 $ 163,765 193,449 48,542 29,691 39,921 11,039 7,275 493,682 6,164 Net loans $ 529,265 $ 487,518 F-22 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 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, 2017, 2016 and 2015: (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 Consumer Lease Financing Total For the Year Ended December 31, 2017 $ 3,311 $ 1,561 $ (1,076) (20) 145 2,360 $ $ 119 – 20 1,700 $ 441 104 – 31 576 $ 313 $ 372 $ 123 $ 43 $ 6,164 22 (25) 14 324 $ (157) (26) 132 321 $ $ (52) – – 71 $ 140 – – 183 $ (900) (71) 342 5,535 (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 Consumer Lease Financing Total For the Year Ended December 31, 2016 $ 2,004 $ 1,279 $ 563 $ 339 $ 442 $ 80 $ 2,979 (2,296) 624 3,311 $ $ 268 – 14 1,561 (1,237) – 1,115 441 $ $ (53) – 27 313 $ (94) – 24 372 $ 43 – – 123 $ 24 19 – – 43 $ 4,731 1,925 (2,296) 1,804 6,164 $ (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 Consumer Lease Financing Total For the Year Ended December 31, 2015 $ 2,537 $ 1,577 $ 1,032 $ 465 $ 698 $ 62 $ 3,750 (4,354) 71 2,004 $ $ (421) – 123 1,279 (1,448) – 979 563 $ $ (137) – 11 339 $ (321) – 65 442 $ 18 – – 80 $ 15 9 – – 24 $ 6,386 1,450 (4,354) 1,249 4,731 $ F-23 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 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, 2017 and 2016: Commercial Commercial Real Estate Construction December 31, 2017 Home Equity Residential Real Estate Consumer Lease Financing Total (In thousands) Allowance losses: Individually evaluated for loan for impairment Collectively evaluated for impairment Total $ $ 289 2,071 2,360 $ $ 12 1,688 1,700 Loans: Individually evaluated for impairment Collectively evaluated for impairment Total $ 12,394 $ 1,802 137,146 $ 149,540 225,365 $ 227,167 $ $ $ $ 36 540 576 44 $ $ $ 116 208 324 170 68,362 68,406 25,800 $ 25,970 $ $ $ $ 19 302 321 350 37,179 37,529 $ $ $ $ 28 $ 155 183 $ – 71 71 $ $ 500 5,035 5,535 28 $ – $ 14,788 13,172 13,200 $ 12,988 12,988 520,012 $ 534,800 Commercial Commercial Real Estate Construction December 31, 2016 Home Equity Residential Real Estate Consumer Lease Financing Total (In thousands) Allowance losses: Individually evaluated for loan for impairment Collectively evaluated for impairment Total $ $ 230 3,081 3,311 $ $ 12 1,549 1,561 Loans: Individually evaluated for impairment Collectively evaluated for impairment Total $ 9,567 $ 1,885 154,198 $ 163,765 191,564 $ 193,449 $ $ $ $ 45 396 441 54 $ $ $ 37 276 313 428 48,488 48,542 29,263 $ 29,691 $ $ $ $ 3 369 372 530 39,391 39,921 $ $ $ $ – $ 123 123 $ – 43 43 $ $ 327 5,837 6,164 – $ – $ 12,464 11,039 11,039 $ 7,275 7,275 481,218 $ 493,682 F-24 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 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, 2017 and 2016. 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 – loans are inadequately protected by the current payment capacity of the obligor or by the collateral pledged. These loans are characterized by the distinct probability that the Company will sustain some loss or incur additional expenses if the deficiencies are not corrected. (In thousands) Commercial Commercial real estate Construction Home equity Residential real estate Consumer Lease financing Total Pass $ 147,033 227,167 68,362 25,800 37,179 13,171 12,988 $ 531,700 2017 Classified 2,508 – 44 170 350 28 – 3,100 $ $ Total $ 149,540 227,167 68,406 25,970 37,529 13,200 12,988 $ 534,800 Pass $ 160,842 193,449 48,488 29,263 39,391 11,039 7,275 $ 489,747 2016 Classified 2,923 $ – 54 428 530 – – 3,935 $ Total $ 163,765 193,449 48,542 29,691 39,921 11,039 7,275 $ 493,682 The following tables present the Company’s loan portfolio aging analysis, including loans on non-accrual, as of December 31, 2017 and 2016: December 31, 2017 (In thousands) Commercial Commercial real estate Construction Home equity Residential real estate Consumer Lease financing Total (In thousands) Commercial Commercial real estate Construction Home equity Residential real estate Consumer Lease financing Total $ 30-59 Days Past Due – – – – – – – – $ $ 60-89 Days Past Due – – – – – – – – $ $ Greater than 90 Days Past Due 160 – – 68 96 28 – 352 $ Total Past Due $ Current 160 $ 149,380 227,167 68,406 25,902 37,433 13,172 12,988 352 $ 534,448 – – 68 96 28 – Total Loans Receivable $ 149,540 227,167 68,406 25,970 37,529 13,200 12,988 $ 534,800 Total Loans Receivable $ 163,765 193,449 48,542 29,691 39,921 11,039 7,275 $ 493,682 Total Loans > 90 Days & Accruing – $ – – – – – – – $ Total Loans > 90 Days & Accruing – $ – – – – – – – $ $ $ December 31, 2016 Total Past Due $ Current 17 $ 163,748 193,449 48,542 29,388 39,437 11,039 7,275 804 $ 492,878 – – 303 484 – – $ 30-59 Days Past Due – – – 228 401 – – 629 $ $ 60-89 Days Past Due 17 – – – – – – 17 $ $ Greater than 90 Days Past Due – – – 75 83 – – 158 $ F-25 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 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 probable the Company will be unable to collect the scheduled payments of principal and interest due from the borrower in accordance with the contractual terms of the loan agreement. Impaired loans include non-performing loans, but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These 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, 2017, 2016 and 2015: December 31, 2017 Recorded Balance Unpaid Principal Balance Specific Allowance Average Investment in Impaired Loans Interest Income Recognized (In thousands) Loans without a specific valuation allowance: Commercial $ 612 $ 598 $ Commercial real estate Construction Home equity Residential real estate Consumer Lease financing Loans with a specific valuation allowance: 35 – 23 312 – – 35 – 31 336 – – Commercial $ 105 $ 106 $ Commercial real estate Construction Home equity Residential real estate Consumer Lease financing Total impaired loans: – – 146 84 28 – – – 150 100 29 – Commercial $ 717 $ 704 $ Commercial real estate Construction Home equity Residential real estate Consumer Lease financing 35 – 169 396 28 – 35 – 181 436 29 – – – – – – – – 50 – – 116 55 28 – 50 – – 116 55 28 – $ 256 $ 41 – 39 260 – – $ 101 $ – – 59 90 14 – $ 357 $ 41 – 98 350 14 – Total $ 1,345 $ 1,385 $ 249 $ 860 $ 10 3 – – 18 – – 4 – – – – – – 14 3 – – 18 – – 35 F-26 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) December 31, 2016 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 Consumer Lease financing Loans with a specific valuation allowance: 82 45 – 74 442 – – $ 100 $ 45 – 84 585 – – Commercial $ 63 $ 63 $ Commercial real estate Construction Home equity Residential real estate Consumer Lease financing Total impaired loans: – – 29 42 – – – – 29 48 – – Commercial $ 145 $ 163 $ Commercial real estate Construction Home equity Residential real estate Consumer Lease financing 45 – 103 484 – – 45 – 113 633 – – – – – – – – – 54 – – 27 2 – – 54 – – 27 2 – – $ $ 490 49 599 207 494 – – $ 1,467 $ – 3,485 14 54 – – $ 1,957 $ 49 4,084 221 548 – – 5 – – – 16 – – – – – – – – – 5 – – – 16 – – 21 Total $ 777 $ 954 $ 83 $ 6,859 $ F-27 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) December 31, 2015 Recorded Balance Unpaid Principal Balance Specific Allowance Average Investment in Impaired Loans Interest Income Recognized (In thousands) Loans without a specific valuation allowance: Commercial $ 1,065 $ 1,065 $ Commercial real estate Construction Home equity Residential real estate Consumer Lease financing Loans with a specific valuation allowance: 52 728 76 472 – – 52 728 84 647 – – – – – – – – – $ $ 492 531 1,121 241 424 – 57 Commercial $ 2,372 $ 2,372 $ 259 $ 5,033 $ Commercial real estate Construction Home equity Residential real estate Consumer Lease financing Total impaired loans: – 1,795 – 63 – – – 1,801 – 63 – – – 70 – – – – 371 1,868 4 15 – – Commercial $ 3,437 $ 3,437 $ 259 $ 5,525 $ Commercial real estate Construction Home equity Residential real estate Consumer Lease financing 52 2,523 76 535 – – 52 2,529 84 710 – – – 70 – – – – 902 2,989 245 439 – 57 3 20 39 2 159 – – 5 – 92 – – – – 8 20 131 2 159 – – Total $ 6,623 $ 6,812 $ 329 $ 10,157 $ 320 The following table presents the Company’s non-accrual loans, also included in impaired loans, at December 31, 2017 and 2016: (In thousands) Commercial Commercial real estate Construction Home equity Residential real estate Consumer Lease financing 2017 584 – – 169 396 28 – 1,177 $ $ 2016 17 – – 484 103 – – 604 $ $ F-28 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) Included in certain loan categories in the impaired loans are loans designated as troubled debt restructurings and classified as impaired. At December 31, 2017, the Company had $133,000 of commercial loans and $35,000 of commercial real estate loans that were modified in troubled debt restructurings and classified as impaired. The Company evaluates and classifies loans in accordance with ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, as amended. During the year ended December 31, 2017, the Company modified one loan in a troubled debt restructuring transaction and classified the loan as impaired. The modification terms for the troubled debt restructuring transaction presented in the table below included renewal of an existing loan to a borrower experiencing financial difficulties with an adjustment to the interest rate and extension of the amortization period. During the years ended December 31, 2016 and 2015, the Company modified no loans in troubled debt restructuring transactions. The following table presents loans restructured and classified as troubled debt restructurings by class during the years ended December 31, 2017, 2016 and 2015. December 31, 2017 Pre- Modification Outstanding Recorded Balance 63 $ Post- Modification Outstanding Recorded Balance 63 $ December 31, 2016 Pre- Modification Outstanding Recorded Balance – $ Post- Modification Outstanding Recorded Balance – $ December 31, 2015 Pre- Modification Outstanding Recorded Balance – $ Post- Modification Outstanding Recorded Balance – $ Number of Loans – Number of Loans – Number of Loans 1 – – – – – – 1 $ – – – – – – 63 $ – – – – – – 63 – – – – – – – $ – – – – – – – $ – – – – – – – – – – – – – – $ – – – – – – – $ – – – – – – – (In thousands) Commercial Commercial real estate Construction Home equity Residential real estate Lease financing Consumer Total As of December 31, 2017, the Company had no commitments outstanding to borrowers with loans identified as troubled debt restructurings. F-29 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 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 Major classifications of foreclosed assets held for sale, net are as follows: (In thousands) Construction/land development Residential real estate Commercial business assets Foreclosed assets held for sale, net 2017 2016 $ 3,954 14,380 6,438 24,772 12,450 $ 3,954 13,475 6,200 23,629 11,583 $ 12,322 $ 12,046 2017 2016 $ $ 2,252 – – 2,252 $ $ 4,751 182 950 5,883 As of December 31, 2017 and 2016, the Company had residential real estate loans in the process of foreclosure of $182,000 and $104,000. 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 2017 2016 2015 $ 2,957 1,483 (2,045) $ 2,395 $ 3,014 1,419 (1,476) $ 2,957 $ 4,233 1,854 (3,073) $ 3,014 Income and expenses applicable to foreclosed assets at December 31 include the following: (In thousands) Net (gains) losses on sale of foreclosed assets Provision for losses Operating expenses, net of rental income 2017 2016 2015 $ 103 1,483 507 $ 2,093 $ 165 1,419 1,347 $ 2,931 $ (39) 1,854 658 $ 2,473 F-30 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 6: INTEREST-BEARING DEPOSITS Interest-bearing time deposits in denominations in excess of $250,000 were $6,167,000 on December 31, 2017 and $9,015,000 on December 31, 2016. The Company acquires brokered deposits in the normal course of business. At December 31, 2017 and 2016, brokered deposits of $98,120,000 and $50,850,000, respectively, were included in the Company’s time deposit balance. All of the $98,120,000 in brokered deposits at December 31, 2017 represented customer funds placed through the Promontory Interfinancial Network LLC (“Promontory’) in the Certificate of Deposit Account Registry Service (“CDARS”) or Insured Cash Sweep service (“ICS”). The Bank is a member of Promontory which allows depositors to receive FDIC insurance in amounts of $250,000 per depositor, per FDIC insured bank, per ownership category. Promontory allows the Bank to place amounts exceeding the standard insurance limits per FDIC insured bank with other members of Promontory. Promontory allows FDIC insured member banks to break large deposits in to smaller amounts and place them with other Promontory member banks in the CDARS or ICS programs to ensure full FDIC insurance coverage is attained. Although classified as brokered deposits for regulatory purposes, funds placed through Promontory are Bank customer relationships which management views as core funding. At December 31, 2017, the scheduled maturities of time deposits are as follows: (In thousands) 2018 2019 2020 2021 2022 Thereafter $ 79,528 13,047 5,076 1,738 1,351 500 $ 101,240 NOTE 7: OPERATING LEASES The Company leases office space to others under noncancellable operating leases expiring in various years through 2022. Minimum future rent receivable under noncancellable operating leases at December 31, 2017 was as follows: (In thousands) 2018 2019 2020 2021 2022 Thereafter $ 800 749 771 524 30 - $ 2,874 F-31 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 8: SHORT TERM DEBT The Company has a line of credit with the FHLBank of Topeka (FHLB) which is collateralized by various assets. At December 31, 2017, the Company had drawn a balance of $8,000,000 and at December 31, 2016, the Company had drawn a balance of $29,267,000. The variable interest rate was 1.47% on December 31, 2017 and 0.72% on December 31, 2016. FHLBank advance availability is determined quarterly and at December 31, 2017 approximately $91,850,000 was available. Advances are secured by loans totaling $146,812,000 as of December 31, 2017. The Company also has a line of credit with the Federal Reserve Bank of Kansas City which is collateralized by various assets, including commercial and commercial real estate loans. At December 31, 2017 and 2016, 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, 2017 approximately $31,462,000 was available. Advances are made subject to the discretion of the Federal Reserve Bank of Kansas City. The Company has unsecured Federal Funds Purchased (“FFP”) lines of credit with commercial banks. At December 31, 2017, the Company had FFP lines of credit of $15,000,000 and $5,000,000 with no outstanding balances. The variable interest rate for the $17,000,000 FFP line was 1.64% and 1.63% for the $5,000,000 FFP line of credit on December 31, 2017. The Company enters into sales of securities under agreements to repurchase. The amounts deposited under these agreements represent short-term debt and are reflected as a liability in the consolidated balance sheets. As of December 31, 2017 and 2016, all of the Company’s sales of securities under agreements to repurchase had overnight The securities underlying the agreements are book-entry securities issued by U.S. contractual maturities. Government sponsored agencies, held in safekeeping with a third party custodian and pledged to the depositors under a written custodial agreement that explicitly recognizes the depositors’ interest in the securities. At December 31, 2017, 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 2017 2016 $29,202 $46,040 $31,538 $35,509 $33,875 $47,563 $31,865 $42,178 F-32 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 9: LONG TERM DEBT Long-term debt at December 31, 2017 and 2016 consisted of the following components: (In thousands) FHLBank advances (A) Less: Deferred prepayment penalty on modification of FHLBank advances Net FHLBank advances Bank stock loan (B) Subordinated Debentures – BVBC Capital Trust II (C) Subordinated Debentures – BVBC Capital Trust III (D) Total long-term debt 2017 2016 $ – – – 13,214 7,732 11,856 $ 20,000 (500) 19,500 14,245 7,732 11,856 $ 32,802 $ 53,333 (A) Collateralized by various assets including mortgage-backed loans and available-for-sale securities totaling $146,812,000 at December 31, 2017. FHLBank advance availability is determined quarterly and at December 31, 2017, approximately $91,850,000 was available. Advances are made at the discretion of the FHLBank Topeka. In the fourth quarter of 2013, the Company repaid FHLBank advances totaling $40.0 million by rolling the net present value of the repaid advances into the funding cost of $40.0 million of new advances. A modification fee of $3.9 million was associated with the pay-off of the original FHLBank advances which is amortized as an adjustment of interest expense over the remaining term of the new FHLBank advances using the straight line method. In the fourth quarter of 2016, the Company repaid $20.0 million of FHLBank advances and recognized an expense of approximately $750,000 for the unamortized modification fee on the advances paid off. The remaining unamortized modification fee at December 31, 2016 was approximately $500,000. These transactions reduced the effective interest rate, as well as modified the maturity date on these borrowings. The balance of the FHLBank advances was paid in full during 2017 in quarterly payments of $5.0 million and the remaining modification fee of $500,000 was recognized as expense during the year. Payable in quarterly installments of principal plus interest, floating at the lender's prime rate plus 1.00% (5.25% at December 31, 2017 and 4.75% at December 31, 2016), based on a 12-year amortization, with a balloon payment of unpaid principal due in August, 2020, collateralized by the stock of the Company's subsidiary bank. Due in 2033; interest-only at three-month LIBOR + 3.25% (4.63% at December 31, 2017 and 4.14% at December 31, 2016) 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 Common Securities to the Company. As of 2008, the Company may prepay the subordinated debentures, in whole or in part, at their face value plus accrued interest. Due in 2035; interest-only at three-month LIBOR + 1.60% (3.29% at December 31, 2017 and 2.60% at December 31, 2016) 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 third parties and $356,000 in Common Securities to the Company. Subordinated to the trust preferred securities (B) due in 2033. As of 2010, the Company may prepay the subordinated debentures, in whole or in part, at their face value plus accrued interest. (B) (C) (D) F-33 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 9: LONG TERM DEBT (Continued) Aggregate annual maturities of long-term debt at December 31, 2017 are as follows: (In thousands) 2018 2019 2020 2021 2022 Thereafter $ 1,064 1,122 1,181 1,247 1,314 26,874 32,802 NOTE 10: INCOME TAXES The provision for income taxes consists of the following: (In thousands) Taxes currently (refundable) payable Income tax expense from revaluation of deferred tax assets and liabilities Deferred income taxes 2017 2016 2015 $ (29) 3,595 $ - 89 $ 16 - 2,446 $ 6,012 $ 730 819 260 276 $ 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 Deferred tax adjustment related to reduction of statutory federal income tax rate Other Actual tax provision 2017 2016 2015 $ 2,239 $ 811 $ 320 (42) 272 3,595 (52) (85) (33) – 126 (209) 52 – 113 $ 6,012 $ 819 $ 276 F-34 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 10: INCOME TAXES (Continued) The tax effects of temporary differences related to deferred taxes shown on the December 31, 2017 and 2016 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 Accumulated depreciation on available-for-sale securities Deferred compensation Offering costs Non-accrual loan interest Other real estate owned reserve Other Deferred tax liabilities: Accumulated depreciation FHLB stock basis Prepaid intangibles Other Net deferred tax asset 2017 2016 $ 1,345 $ 2,281 3,813 1,091 146 80 – 583 852 7,910 (39) (10) (88) (18) (155) 7,755 $ 7,894 2,254 8 139 58 1,173 998 14,805 (121) (80) (279) (21) (501) 14,304 $ The Company has unused Federal net operating loss carryforwards of $15,108,000, which expire starting in 2030. The Company has unused Kansas Privilege Tax net operating loss carryforwards of $19,403,000 which expire between 2019 and 2025. On December 22, 2017 the Tax Act was enacted, which, among other changes, reduced the federal corporate income tax rate from 35% to 21% effective January 1, 2018 and changed or limited certain tax deductions. As a result of the Tax Act, the Bank’s deferred tax assets and liabilities were revalued and resulted in a one-time income tax expense of approximately $3.6 million during the fourth quarter of 2017. The Bank assessed the tax law changes as a result of the Tax Act and believes that the assumptions and judgments utilized in determining the final and provisional amounts recorded in the consolidated financial statements as of December 31, 2017 are appropriate. The Bank may adjust its initial assumptions and judgments based on future tax law changes or accounting guidance, if any, or other adjustments related to the Bank’s filing of its 2017 federal and state income tax returns during 2018. However, the Bank believes that any future adjustments to the provisional amounts included in the income tax expense of $3.6 million that was recognized as a result of the Tax act will not be material. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions. F-35 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 11: PREFERRED STOCK In August, 2015, the Company redeemed its $21.75 million of Series A Fixed Rate Cumulative Preferred Stock (the “Series A”). As part of the transaction, the Company also repaid associated accumulated dividends and interest on the Series A. The transaction included issuance of approximately $4.7 million of Common Stock and approximately $3.3 million of Series B Convertible Preferred Stock (“Series B”) as well as term loan funding provided by a third party lender and existing liquidity. Each share of Series B is convertible into one share of Common Stock (i) at the option of the holder or upon the written request of the Company, subject to a limitation that the holder and their affiliates will not own or control more than 9.9% of the outstanding Common Stock of the Company, or any other class of voting shares of the Company upon such conversion, or (ii) automatically upon the transfer of any shares of Series B to a non-affiliate of the holder in a permissible transfer (as defined in the Certificate of Designations governing the Series B). NOTE 12: REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, 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 Bank’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 Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk- weighted assets (as defined) common equity Tier 1 capital (as defined in the regulations) to total risk-weighted assets and of Tier I capital to average assets (as defined). As of December 31, 2017 and 2016, the Bank met all capital adequacy requirements to which it was subject. As of December 31, 2017, the Bank had capital in excess of regulatory requirements for a well-capitalized institution. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk- based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since December 31, 2017 that management believes have changed the Bank’s position. F-36 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 12: REGULATORY MATTERS (Continued) The Bank’s actual capital amounts and ratios are also presented in the following table: Actual Amount Ratio For Capital Adequacy Purposes Amount Ratio To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio (In thousands) December 31, 2017: Common Equity Tier 1 Capital (to Risk Weighted Assets) Bank Only $ 73,236 11.49% $ 28,682 4.50% $ 41,430 6.50% Total Capital (to Risk Weighted Assets) Bank Only Tier 1 Capital (to Risk Weighted Assets) Bank Only Tier 1 Capital (to Average Assets) Bank Only (In thousands) December 31, 2016: Common Equity Tier 1 Capital (to Risk Weighted Assets) $ 78,771 12.36% $ 50,991 8.00% $ 63,738 10.00% $ 73,236 11.49% $ 38,243 6.00% $ 50,991 8.00% $ 73,236 10.56% $ 25,495 4.00% $ 31,869 5.00% Actual Amount Ratio For Capital Adequacy Purposes Amount Ratio To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Bank Only $ 67,063 11.19% $ 26,981 4.50% $ 38,972 6.50% Total Capital (to Risk Weighted Assets) Bank Only Tier 1 Capital (to Risk Weighted Assets) Bank Only Tier 1 Capital (to Average Assets) Bank Only $ 73,227 12.21% $ 47,966 8.00% $ 59,958 10.00% $ 67,063 11.19% $ 35,975 6.00% $ 47,966 8.00% $ 67,063 10.14% $ 23,983 4.00% $ 29,979 5.00% Effective January 1, 2015, the Bank became subject to new capital regulations (“Basel III Capital Rules”), adopted by the Federal Reserve, which establish a new comprehensive capital framework for U.S. banks and are phased in over a multi-year schedule. The above minimum capital requirements exclude the capital conservation buffer implemented by the Basel III Capital Rules. The Bank is required maintain the capital conservation buffer in excess of its capital adequacy limitations for common equity tier 1 capital, total capital and tier 1 capital to avoid certain limitations on distributions, including dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer is phased-in to 2.50% of risk-weighted assets by 2019. As of December 31, 2017 and 2016, the capital conservation buffer was 1.25% and 0.625%, respectively. The Bank’s net unrealized gain or loss on available-for-sale securities is excluded from the computations of regulatory capital above. F-37 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 13: TRANSACTIONS WITH RELATED PARTIES At December 31, 2017 and 2016, the Company had loans outstanding to executive officers, directors and to companies in which the Company’s and Bank’s executive officers or directors were principal owners in the amount of $25,955,000 and $27,195,000, respectively. Annual activity consisted of the following: (In thousands) Balance, beginning of year New loans and advances Repayments and reclassifications Balance, end of year 2017 2016 $ 27,195 19,160 (20,400) $ 25,955 $ 30,961 30,425 (34,191) $ 27,195 These loans and other extensions of credit were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, 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 Company at December 31, 2017, and 2016 totaled $9,834,000 and $8,671,000, respectively. NOTE 14: PROFIT SHARING AND 401(K) PLANS The Company’s profit sharing and 401(k) plans cover substantially all employees. Contributions to the profit sharing plan are determined annually by the Board of Directors, and participant interests are vested over a five-year period. The Company did not make a contribution to the profit sharing plan during 2017, 2016 and 2015. 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 Company’s matching contributions to the 401(k) plan are vested immediately. The Company’s matching contributions charged to expense for 2017, 2016 and 2015 were $255,000, $276,000 and $284,000, respectively. F-38 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 15: EQUITY INCENTIVE COMPENSATION The Company has an Equity Incentive Plan (the “Plan”) which allows the Company to issue equity incentive compensation awards to its employees and directors in the forms of stock options, restricted shares or deferred share units. At December 31, 2017, the Company had 475,492 shares available to be granted. Summary of shares authorized, granted, and forfeited during 2017, 2016, and 2015 is presented below. 2017 2016 2015 Shares available to be granted, beginning of the year Authorized Granted Forfeited 5,250 500,000 (50,815) 21,057 273,482 – (270,431) 2,199 20,230 300,000 (48,153) 1,405 Shares available to be granted, end of the year 475,492 5,250 273,482 Restricted shares granted to officers and directors in 2017 and 2015 vested immediately. 222,000 of the shares granted in 2016 vest over the subsequent three years, subject to the Company meeting financial performance goals. Total non-vested shares as of December 31, 2017, 2016 and 2015 were 204,000, 222,000, and 0, respectively. The cost basis of the restricted shares granted to officers which is equal to the fair value of the Company’s stock on the date of grant, is amortized to compensation expense ratably over the applicable vesting period. The cost basis of restricted shares granted to directors which is equal to the fair value of the Company’s stock on the date of grant, is amortized to other operating expense ratably over the applicable vesting period. Expenses associated with restricted stock grants were $1,258,000, $465,000, and $365,000 for 2017, 2016 and 2015, respectively. The amount of unrecognized compensation costs was $1,360,000, $2,220,000, and $0 as of December 31, 2017, 2016, and 2015, respectively. During 2017, 2016 and 2015, the Company granted no stock options and there were no options outstanding and exercisable as of December 31, 2017, 2016, or 2015. NOTE 16: 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 stockholders of the Company. At December 31, 2017, the Company had 43,753 shares available to be purchased. Summary of shares for the ESPP as of December 31, 2017, 2016, and 2015 is presented below. 2017 2016 2015 Shares available to be purchased, beginning of the year 47,307 52,275 Purchased (3,554) (4,968) 57,001 (4,726) Shares available to be purchased, end of the year 43,753 47,307 52,275 F-39 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 16: EMPLOYEE STOCK PURCHASE PLAN (Continued) Information about employee stock purchase plan activity as of December 31, 2017, 2016 and 2015 is set forth in the following table. 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. Expense associated with the plan recognized in 2017, 2016 and 2015 was approximately $4,000, $5,000, and $4,000, respectively. Plan year ending January 31, 2017 2016 2015 Employee Stock Purchase Plan Activity Shares purchased 3,554 4,968 4,726 Purchase Price $ 6.80 $ 5.31 $ 5.31 NOTE 17: OTHER INCOME/EXPENSE Other income consists of the following: (In thousands) Rental income Realized gain on foreclosed assets Loans held for sale fee income Other income 2017 2016 2015 $ 814 154 – 335 $ 787 89 95 1,088 $ 792 44 879 1,216 Total $ 1,303 $ 2,059 $ 2,931 2016 other income includes approximately $764,000 of income collected on loans previously charged off. 2015 other income includes the realization of approximately $658,000 of income from the settlement of collection litigation. Other operating expenses consist of the following: (In thousands) Data processing FDIC assessments ATM and network fees Professional fees Other expense 2017 2016 2015 $ 877 423 547 649 3,286 $ 1,006 445 559 684 3,719 $ 1,078 545 589 975 3,155 Total $ 5,782 $ 6,413 $ 6,342 As discussed in Note 9, the Company recognized an expense (included in other expense above) of approximately $750,000 for the unamortized modification fee on the advances paid off during 2016. F-40 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 18: 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 value. 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 composed entirely of mortgage loans held for immediate sale in the secondary market with servicing released. 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 economic 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 was $0 at December 31, 2017 and 2016, compared to losses of $8,000 at December 31, 2015. No gains or losses from fair value changes included in loans held for sale fee income were realized for the year ended December 31, 2017, gains from fair value changes were $8,000 for the year ended December 31, 2016 and losses from fair value changes were $21,000 for the year ended December 31, 2015. Interest income on loans held for sale is included in interest and fees on loans in the Company’s consolidated statement of operations. See Note 19 for additional disclosures regarding fair value of mortgage loans held for sale. NOTE 19: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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 or liabilities; quoted prices in markets 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. F-41 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 19: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued) Recurring Measurements The following table presents the fair value measurements of assets and liabilities recognized in the Company’s consolidated balance sheet and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2017 and 2016: 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 (In thousands) December 31, 2017: Assets: Available-for-sale securities: U.S. Government sponsored agencies State and political subdivision securities U.S. Government sponsored agencies mortgage-backed securities U.S. Small Business Administration loan pool certificates Other securities Equity 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, 2016: Assets: Available-for-sale securities: U.S. Government sponsored agencies State and political subdivision securities U.S. Government sponsored agencies mortgage-backed securities U.S. Small Business Administration loan pool certificates Other securities Equity 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 – – $ 52,084 13,486 31,800 – – 589 – – – 32,389 – – – – – 31,634 – – 589 – – – 32,223 – – – – 3,151 2,020 – – – – 70,741 – – – 56,586 13,348 – 3,603 2,000 – – – – 75,537 – – – $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ – – – – – – – – – – – – – – – – – – – – – – – – – – $ $ $ $ $ $ $ $ 52,084 13,486 31,800 3,151 2,020 589 – – – 103,130 – – – 56,586 13,348 31,634 3,603 2,000 589 – – – 107,760 – – – $ $ $ $ $ $ $ $ F-42 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 19: 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 general classification of such assets and liabilities pursuant to the valuation hierarchy. Available-for-Sale Securities Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. 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. Commitments to Originate Loans and Forward Sales Commitments The fair value of commitments to originate loans and the fair value of forward sales commitments are estimated 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 ultimately result in a closed loan. These measurements are significant unobservable inputs and are classified as Level 3 within the hierarchy. Nonrecurring Measurements The following table presents the fair value measurements at December 31, 2017 and 2016 of assets and liabilities measured at fair value on a non-recurring basis during the respective year: (In thousands) December 31, 2017: Impaired loans, net of reserves Foreclosed assets held for sale, net December 31, 2016: Impaired loans, net of reserves Foreclosed assets held for sale, net Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Fair Value $ $ $ $ 799 1,942 2,741 322 1,299 1,621 $ $ $ $ – – – – – – $ $ $ $ – – – – – – Unobservable Inputs (Level 3) $ $ $ $ 799 1,942 2,741 322 1,299 1,621 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, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. F-43 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 19: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued) Impaired Loans (Collateral Dependent) Loans for which it is probable that the Company will not 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 collateral 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 value 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-44 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 19: 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. Forward Sales Commitments Collateral-dependent impaired loans Foreclosed assets held for sale, net Forward Sales Commitments Collateral-dependent impaired loans Foreclosed assets held for sale, net Fair Value at 12/31/17 Valuation Technique Unobservable Inputs – Market comparable Quoted prices for similar loans prices 799 Market comparable Comparability adjustments (%) properties 1,942 Market comparable properties Comparability adjustments (%) Fair Value at 12/31/16 Valuation Technique Unobservable Inputs – Market comparable Quoted prices for similar loans prices 322 Market comparable Comparability adjustments (%) properties 1,299 Market comparable properties Comparability adjustments (%) $ $ $ $ $ $ Range (Weighted Average) – (–) 15.00%-100.00% (19.00%) Not available Range (Weighted Average) – (–) 15.00%-100.00% (21.00%) 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 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 estimated customer fallout rate. Significant increases (decreases) in either of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, 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-45 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 19: 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, 2017 and 2016. (In thousands) Financial assets: Cash and cash equivalents (Level 1) Loans, net of allowance for loan losses (Level 3) FHLBank stock, Federal Reserve Bank stock, and other securities (Level 3) Interest receivable (Level 3) Financial liabilities: Deposits (Level 3) Short term debt (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) 2017 2016 Carrying Amount Fair Value Carrying Amount Fair Value $ 13,544 529,265 $ 13,544 527,022 $ 26,038 487,518 $ 26,038 481,599 3,888 1,888 568,845 37,202 32,802 400 – – – 3,888 1,888 569,326 37,202 29,897 400 – – – 5,244 1,785 512,477 63,142 53,333 238 – – – 5,244 1,785 512,903 63,142 52,840 238 – – – 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 estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value. FHLBank 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 money market deposits. The carrying amount of these deposits approximates fair value. The fair value of fixed maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value. F-46 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 19: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued) Short Term Debt 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 fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. F-47 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 20: COMMITMENTS, CREDIT RISKS AND CURRENT ECONOMIC CONDITIONS The Company extends credit for commercial real estate mortgages, residential mortgages, working capital financing and consumer loans to businesses and residents principally in southern Johnson County. The Bank also purchases indirect leases from various leasing companies throughout Kansas and Missouri. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require a payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. The collateral securing these agreements varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. At December 31, 2017 and 2016, the Company had outstanding commitments to originate loans aggregating approximately $1,080,000 and $3,800,000, respectively. The commitments extend over varying periods of time with the majority being disbursed within a one-year period. The strategic decision was made for the Company to discontinue originating and selling residential mortgage loans to the secondary mortgage market by the Bank beginning in 2016. Mortgage loans in the process of origination represented amounts that the Company plans to fund within a normal period of 60 to 90 days and which were intended for sale to investors in the secondary market. Total mortgage loans in the process of origination amounted to $0 at December 31, 2017 and 2016. Mortgage loans held for sale amounted to $0 at December 31, 2017 and 2016. Forward commitments to sell mortgage loans were obligations to sell loans at a specified price on or before a specified future date. These commitments were acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale since the Company was 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 $0 at December 31, 2017 and 2016. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company had total outstanding letters of credit amounting to $247,000 and $655,000 at December 31, 2017 and 2016, 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 customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. The collateral securing these agreements varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance sheet instruments. At December 31, 2017, the Company had unused lines of credit to borrowers aggregating approximately $171,638,000 for commercial, commercial real estate and construction lines and $36,415,000 for open-end consumer lines of credit. At December 31, 2016, the Company had unused lines of credit to borrowers aggregating approximately $179,229,000 for commercial, commercial real estate and construction lines and $33,866,000 for open-end consumer lines of credit. F-48 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 20: COMMITMENTS, CREDIT RISKS AND CURRENT ECONOMIC CONDITIONS (Continued) The current economic environment 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, constraints on liquidity and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. The financial statements have been prepared using values and information currently available to the Company. Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses and capital that could negatively impact the Company’s and Bank’s ability to meet regulatory capital requirements and maintain sufficient liquidity. Furthermore, 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 21: LEGAL CONTINGENCIES The Company and/or its subsidiaries have various unrelated legal proceedings, most of which involve loan foreclosure activity pending, which, in the aggregate, are not expected to have a material adverse effect on the financial position of the Company and its subsidiaries. F-49 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 22: SELECTED QUARTERLY FINANCIAL DATA (Unaudited) The following table presents the unaudited results of operations for the past two years by quarter. See discussion on earnings per share in "Note 1: Nature of Operations and Summary of Significant Accounting Policies" in the Company's Consolidated Financial Statements. 2017 2016 Fourth Third Quarter Quarter Second Quarter First Quarter Fourth Quarter Third Quarter Second 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 $ 6,760 $ 6,650 $ 6,473 $ 6,146 833 5,313 – 873 5,887 (400) 889 5,761 (500) 857 5,616 – 6,287 1,241 5,933 1,595 4,183 (2,588) – 6,261 1,130 5,600 1,791 654 1,137 – 5,616 1,147 4,994 1,769 646 1,123 – 5,313 1,151 5,033 1,431 529 902 – $ 6,075 861 5,214 950 4,264 2,679 6,742 201 67 134 – $ 5,787 $ 5,708 $ 5,704 928 4,776 475 896 4,891 – 904 4,804 500 4,891 1,617 5,712 796 234 562 – 4,304 1,905 5,260 949 369 580 – 4,301 1,312 5,174 439 149 290 – $ (2,588) $ 1,137 $ 1,123 $ 902 $ 134 $ 562 $ 580 $ 290 Basic Diluted $ (0.48) $ $ (0.48) $ 0.21 $ 0.21 $ 0.20 $ 0.17 0.20 $ 0.17 $ $ 0.02 $ 0.02 $ 0.10 $ 0.10 $ 0.11 $ 0.06 0.11 $ 0.06 Balance Sheet Total assets Total loans, net Stockholders' equity $687,490 $698,425 $693,448 $682,905 497,815 529,265 45,383 46,249 519,052 47,726 525,100 49,135 $674,432 487,518 43,435 $693,449 $645,363 $649,027 442,505 441,345 454,593 45,736 47,146 47,366 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-50 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 23: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) Condensed Balance Sheets December 31, 2017 and 2016 (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 Long-term debt Subordinated debentures Other liabilities Total Liabilities STOCKHOLDERS’ EQUITY Preferred stock Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive loss, net of income tax (credit) of $(1,091) in 2017 and $(2,254) in 2016 Total Stockholders’ Equity 2017 2016 $ 1,869 $ 2,590 $ $ 73,485 232 356 3,308 79,250 13,214 19,588 199 33,001 472 5,678 32,108 10,941 (2,950) 46,249 $ $ 70,104 232 356 4,168 77,450 14,245 19,588 182 34,015 472 5,644 30,858 9,842 (3,381) 43,435 Total Liabilities and Stockholders’ Equity $ 79,250 $ 77,450 F-51 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 23: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (Continued) Condensed Statements of Operations Years Ended December 31, 2017, 2016 and 2015 (In thousands) Income Dividends from subsidiaries Other income Expenses Income before income taxes and equity in undistributed net income (loss) of subsidiaries Income tax expense (benefit) Income before equity in undistributed net income (loss) of subsidiaries Equity in undistributed net income (loss) of subsidiaries 2017 2016 2015 $ 1,676 22 1,698 2,686 (988) 863 (1,851) 2,425 $ 2,242 18 2,260 1,732 528 (583) 1,111 455 $ 6,944 16 6,960 1,517 5,443 (510) 5,953 (5,288) Net income $ 574 $ 1,566 $ 665 Condensed Statements of Comprehensive Income (Loss) Years Ended December 31, 2017, 2016 and 2015 (In thousands) Net income Other comprehensive income (loss) 2017 2016 2015 $ 574 $ 1,566 $ 665 Change in unrealized appreciation (depreciation) on available- for-sale securities, net of income taxes (credit) of $631 in 2017, $(1,455) in 2016, and $312 in 2015 Less: reclassification adjustment for realized gains included in net income (loss), net of income taxes of $0 in 2017, $(752) in 2016, and $31 in 2015 Comprehensive income (loss) $ 956 – 1,530 (2,204) (1,127) (1,765) $ $ 472 47 1,185 F-52 BLUE VALLEY BAN CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016 AND 2015 NOTE 23: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (Continued) Condensed Statements of Cash Flows Years Ended December 31, 2017, 2016 and 2015 2017 2016 2015 $ 574 863 $ 1,566 $ 665 (1,469) (569) (2,425) 575 (50) 730 (455) 443 – – 5,288 355 – – (3) 18 282 – (1,032) – 29 – – (1,003) (721) 330 10 425 – (1,008) – 31 – – (977) (552) (37) (8,152) (2,450) 15,500 (247) 7,871 29 (4) (21,750) 1,399 (1,051) 2,590 3,142 4,193 $ 1,869 $ 2,590 $ 3,142 (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 Forfeiture of unvested restricted common stock Stock-based compensation expense Changes in: Other assets Other liabilities Net cash provided by (used in) operating activities FINANCING ACTIVITIES Proceeds from long-term debt Repayments of long-term debt Proceeds from sale of additional stock Proceeds from sale of common stock through Employee Stock Purchase Plan (ESPP) Repurchase of TARP Warrant Redemption of Series A Preferred Stock Net cash provided by (used in) financing activities INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR F-53 This page intentionally left blank This page intentionally left blank This page intentionally left blank STOCKHOLDER INFORMATION CORPORATE OFFICE 11935 Riley St. Overland Park, KS 66213 913.338.1000 913.234.7145 (fax) HELPLINE 913.338.1000 WEBSITE www.bankbv.com ANNUAL MEETING OF STOCKHOLDERS The annual meeting will be held on May 16, 2018 at 5:30 p.m. at the Corporate Office, 11935 Riley St., Overland Park, KS 66213. INVESTOR INQUIRIES To request additional copies of our Annual Report or to inquire about other stockholder issues, visit our Investor Relations webpage at www.bankbv.com/about or contact Mark A. Fortino, Chief Financial Officer, at our corporate office. STOCK QUOTATION SYMBOL Shares of Blue Valley Ban Corp. common stock are currently quoted on the OTCQX under the symbol BVBC. TRANSFER AGENT AND REGISTRAR American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 www.astfinancial.com Stockholder Services: 800.937.5449 AUDITORS BKD, LLP 1201 Walnut Street, Suite 1700 Kansas City, MO 64106-2246 CORPORATE COUNSEL Husch Blackwell LLP 4801 Main Street, Suite 1000 Kansas City, MO 64112-2502 Stinson Leonard Street LLP 1201 Walnut Street, Suite 2900 Kansas City, MO 64106-2150 MARKET MAKER 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 11935 Riley St. | Overland Park, KS 66213 OLATHE 1235 E. Santa Fe Rd. | Olathe, KS 66061 SHAWNEE 5520 Hedge Lane Terr. | Shawnee, KS 66226 LEAWOOD 13401 Mission Rd. | Leawood, KS 66209 LENEXA 9500 Lackman Rd. | Lenexa, KS 66219 WWW.BANKBV.COM 913.338.1000 SURCHARGE FREE ATM NETWORK VISIT WWW.MONEYPASS.COM TO FIND A LOCATION MEMBER FDIC 

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