UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-15933

BLUE VALLEY BAN CORP.

(Exact name of registrant as specified in its charter)

Kansas		48-1070996
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
11935 Riley
Overland Park, Kansas		66225-6128
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (913) 338-1000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Guarantee with respect to the Trust Preferred		None currently
Securities, $8.00 par value, of BVBC Capital
Trust I (None of which are currently outstanding)

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

     Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act            Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes þ No o

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

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes o No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

     Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Securities Act            Yes o No þ

     As of January 31, 2010 1,725,556 shares of the Registrant’s common stock were held by non-affiliates. The aggregate market value of these common shares, computed based on the June 30, 2009 closing price of the stock, was approximately $14.1 million. As of January 31, 2010 the registrant had 2,817,650 shares of Common Stock ($1.00 par value) outstanding.

     1. Part III – Proxy Statement for the 2010 Annual Meeting of Stockholders

 

 

BLUE VALLEY BAN CORP.

FORM 10-K INDEX

		Page No.
PART I.
Item 1. Business			2
Item 1A. Risk Factors			17
Item 1B. Unresolved Staff Comments			21
Item 2. Properties			21
Item 3. Legal Proceedings			22
Item 4. Submission of Matters to a Vote of Security Holders			22
PART II.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			23
Item 6. Selected Financial Data			24
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			51
Item 8. Financial Statements and Supplementary Data			53
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			53
Item 9A. Controls and Procedures			54
Item 9B. Other Information			54
PART III.
Item 10. Directors, Executive Officers and Corporate Governance			55
Item 11. Executive Compensation			55
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			55
Item 13. Certain Relationships, Related Transactions, and Director Independence			55
Item 14. Principal Accountant Fees and Services			56
PART IV.
Item 15. Exhibits, Financial Statement Schedules			56
EX-21.1
EX-23.3
EX-31.1
EX-31.2
EX-32.1
EX-99.1
EX-99.2

Part I

Item 1:		Business

The Company and Subsidiaries

     As used in this Form 10-K, unless we specify otherwise, “we,” “us,” “our,” “Company,” and “Blue Valley” refers to Blue Valley Ban Corp., a Kansas corporation.

     Blue Valley Ban Corp. is a bank holding company organized in 1989. The Company’s primary wholly-owned subsidiary, Bank of Blue Valley (the “Bank”), was also organized in 1989 to provide banking services to closely-held businesses and their owners, professionals and residents in Johnson County, Kansas, a demographically attractive area within the Kansas City, Missouri — Kansas Metropolitan Statistical Area (the “Kansas City MSA”). The focus of the Company has been to take advantage of the anticipated growth in the market area as well as to serve the needs of small and mid-sized commercial borrowers — customers that we believe currently are underserved as a result of banking consolidation in the industry generally and within our market specifically.

     We have experienced significant internal growth since our inception. As of December 31, 2009, we had six locations in Johnson County, Kansas, including our main office which includes a lobby banking center, a mortgage and operations office in Overland Park, and full-service offices in Leawood, Lenexa, Olathe and Shawnee, Kansas.

     Our lending activities are focused on commercial, commercial real estate and construction lending. However, the Company strives to identify, develop and maintain diversified lines of business which provide acceptable risk-adjusted returns. The Company also provides home equity, residential real estate, lease financing, and consumer lending.

     The Company also seeks to develop lines of business which diversify our revenue sources, increase our non-interest income and offer additional value-added services to our customers. We develop these new or existing lines of business while monitoring related risk factors. In addition to fees generated in conjunction with lending activities, we derive non-interest income by providing mortgage origination services, deposit and cash management services, investment brokerage services and trust services.

     In addition to the Bank, as of December 31, 2009, the Company had two wholly-owned subsidiaries: BVBC Capital Trust II and BVBC Capital Trust III, which were created to offer the Company’s trust preferred securities and to purchase our junior subordinated debentures. At December 31, 2008, the Company owned 100% of Blue Valley Building Corp., which owns the buildings and real property that comprise our headquarters, mortgage and operations facility and the Leawood banking center. As of March 31, 2009, the Company contributed 100% of the outstanding shares of Blue Valley Building Corp. to the Bank.

     The Company had a 49% ownership in Homeland Title, LLC through March 2009, at which time the Company terminated its ownership interest in Homeland Title, LLC. Homeland Title, LLC was established in June 2005 and provided title and settlement services. This entity is no longer in operation.

     Our principal executive offices are located at 11935 Riley, Overland Park, Kansas 66225-6128, and our telephone number is (913) 338-1000.

     Consolidated financial information, including a measure of profit and loss and total assets can be found in Part IV of this report.

Our Market Area

     We operate primarily as a community bank, serving the banking needs of small and medium-sized companies and individuals in the Kansas City MSA. Specifically, our trade area consists of Johnson County, Kansas. We believe that coupling our strategy of providing exceptional customer service and local decision making with attractive market demographics makes us competitive in the Kansas City MSA.

     The income levels and growth rate of Johnson County, Kansas compare favorably to national averages. Johnson County’s population growth rate ranks in the top 8.78% of counties nationally, and its per capita income ranks in the top 1.23% of counties nationally. Johnson County is also a significant banking market in the State of Kansas and in the Kansas City MSA. According to available industry data, as of June 30, 2009, total deposits in Johnson County, including those of banks, thrifts and credit unions, were approximately $15.0 billion, which represented 25.93% of total deposits in the state of Kansas and 36.76% of total deposits in the Kansas City MSA.

     As our founders anticipated, the trade area surrounding our main banking facility in Overland Park, Kansas has become one of the most highly developed retail areas in the Kansas City MSA. Our Olathe, Kansas facility is located approximately eight miles southwest of our main office and opened in 1994. The Shawnee, Kansas banking facility is approximately 17 miles northwest of our headquarters location. We entered into the Shawnee market in 1999 and in the first quarter of 2001, construction of our freestanding banking facility in Shawnee was completed and operations commenced in that facility. The Leawood, Kansas banking facility is approximately four miles southeast of our headquarters location. We entered into the Leawood market in 2002 and in the second quarter of 2004, construction of our freestanding banking facility in Leawood was completed and operations commenced in that facility. During 2003 we acquired an office building in Overland Park, Kansas approximately one mile northwest of our headquarters location. At this location, we consolidated our mortgage operations, bank operations, and opened a banking facility. The banking facility was subsequently closed and consolidated into the main bank in November 2008. The Lenexa, Kansas banking facility is approximately seven miles northwest of our headquarters location. The Lenexa facility was opened in February 2007 when we acquired Unison Bancorp, Inc., and its subsidiary, Western National Bank. We made this acquisition to continue our expansion in Johnson County and to establish our first presence in the Lenexa market.

Lending Activities

     Overview. Our principal loan categories include commercial, commercial real estate, and construction loans. We also offer a variety of home equity, residential real estate, lease financing and consumer loans. Our primary source of interest income is interest earned on our loan portfolio. As of December 31, 2009, our loans represented approximately 71.59% of our total assets, our legal lending limit to any one borrower was $24.8 million, and our largest single borrower as of that date had outstanding loans of $14.6 million.

     The ability of financial institutions, including us, to originate loans has been substantially reduced or restricted under current economic conditions. However, we have been successful in maintaining our loan portfolio because of the commitment of our staff. Our staff has significant experience in lending and has been successful in offering our products to both potential and existing customers. We believe that we have been successful in maintaining our customers because of our staff’s attentiveness to the financial needs of our customers and the development of professional relationships with our customers. We strive to become a strategic business partner with our customers, not just a source of funds.

     The Bank conducts its lending activities pursuant to the loan policies adopted by its Board of Directors. These policies currently require the approval of our loan committee of all commercial credits in excess of $1.5 million, all real estate credits in excess of $2.5 million, and unsecured loans in excess of $300,000. The Bank’s policies delegate lending authority up to these amounts to an internal loan discount committee comprised of the Bank’s President and two senior loan management officers. Our management information systems and lending administration policies and procedures are designed to monitor lending activities sufficiently to mitigate the risk of noncompliance with the loan policies. The following table shows the composition of our loan portfolio at December 31, 2009.

LOAN PORTFOLIO

		As of December 31, 2009
		Amount				Percent
		(In thousands)
Commercial		$	142,528				25.72	%
Commercial real estate			167,581				30.24
Construction			113,077				20.41
Home equity			66,586				12.02
Residential real estate			45,014				8.12
Lease financing			11,259				2.03
Consumer			8,066				1.46
Total loans and leases			554,111				100.00	%
Less allowance for loan losses			20,000
Loans receivable, net		$	534,111

     Commercial loans. As of December 31, 2009, approximately $142.5 million, or 25.72%, of our loan portfolio represented commercial loans. The Bank has developed a strong reputation in providing and servicing small business and commercial loans. We have expanded this portfolio over the years through the addition of commercial lending staff, their business development efforts, our reputation and the acquisition of Unison Bancorp, Inc. and its subsidiary, Western National Bank, in 2007. Commercial loans have historically been a significant portion of our loan portfolio and we expect to continue our emphasis on this loan category.

     The Bank’s commercial lending activities traditionally have been directed to small and medium-sized companies in or near Johnson County, Kansas, with annual sales generally between $100,000 and $20 million. The Bank’s commercial customers are largely firms engaged in manufacturing, service, retail, construction, distribution and sales with significant operations in our market areas. The Bank’s commercial loans are generally secured by real estate, accounts receivable, inventory and equipment, and the Bank may seek to obtain personal guarantees for its commercial loans. The Bank underwrites its commercial loans on the basis of the borrowers’ cash flow and ability to service the debt, as well as the value of any underlying collateral and the financial strength of any guarantors.

     Approximately $5.6 million, or 3.91%, of our commercial loans are Small Business Administration (SBA) loans, of which $4.0 million of these loans are government guaranteed. The SBA guarantees the repayment in the event of a default of a portion of the principal on these loans, plus accrued interest on the guaranteed portion of the loan. Under the Federal Small Business Act, the SBA may guarantee up to 85% of qualified loans of $150,000 or less and up to 75% of qualified loans in excess of $150,000, up to a maximum loan amount of $2.0 million to any one borrower. We are an active SBA lender in our market area and have been approved to participate in the SBA Certified Lender Program.

     Commercial lending is subject to risks specific to the business of each borrower. In order to address these risks, we seek to understand the business of each borrower, place appropriate value on any personal guarantee or collateral pledged to secure the loan, and structure the loan amortization to maintain the value of any collateral during the term of the loan.

     Commercial real estate loans. The Bank also makes loans to provide permanent financing for retail and office buildings, hotels and churches. As of December 31, 2009, approximately $167.6 million, or 30.24%, of our loan portfolio represented commercial real estate loans. Our commercial real estate loans are underwritten on the basis of the appraised value of the property, the cash flow of the underlying property, and the financial strength of any guarantors.

     Risks inherent in commercial real estate lending are related to the market value of the property taken as collateral, the underlying cash flows and documentation. Commercial real estate lending involves more risk than residential real estate lending because loan balances may be greater and repayment is dependent on the borrower’s

operations. We attempt to mitigate these risks by carefully assessing property values, investigating the source of cash flow servicing the loan on the property and adhering to our lending and underwriting policies and procedures.

     Construction loans. Our construction loans include loans to developers, home building contractors and other companies and consumers for the construction of single-family and multi-family properties, land development, and commercial buildings, such as retail and office buildings. As of December 31, 2009, approximately $113.1 million, or 20.41%, of our loan portfolio represented real estate construction loans. The builder and developer loan portfolio has been a consistent component of our loan portfolio over our history. The Bank’s experience and reputation in this area have grown, thereby enabling the Bank to focus on relationships with a smaller number of larger builders and increasing the total value of the Bank’s real estate construction portfolio. Construction loans are made to qualified builders to build houses to be sold following construction, pre-sold houses and model houses. These loans are generally underwritten based on several factors, including the experience and current financial condition of the borrowing entity, amount of the loan to appraised value, and general conditions of the housing market with respect to the subdivision and surrounding area, which the bank receives from a third party reporting entity. Construction loans are also made to individuals for whom houses are being constructed by builders with whom the Bank has an existing relationship. Such loans are made on the basis of the individual’s financial condition, the loan to value ratio, the reputation of the builder, and whether the individual will be pre-qualified for permanent financing. During 2009, the Bank experienced a decline in construction loans originated, specifically in residential real estate construction and land development, as a result of the continued decline in the real estate industry and the continued slow down in new housing construction.

     Risks related to construction lending include assessment of the market for the finished product, reasonableness of the construction budget, ability of the borrower to fund cost overruns, and the borrower’s ability to liquidate and repay the loan at a point when the loan-to-value ratio is the greatest. We seek to manage these risks by, among other things, ensuring that the collateral value of the property throughout the construction process does not fall below acceptable levels, ensuring that funds disbursed are within parameters set by the original construction budget, and properly documenting each construction draw.

     Home equity loans. As of December 31, 2009, our home equity loans totaled $66.6 million, or 12.02%, of our total loan portfolio. Home equity loans are generally secured by second liens on residential real estate. Home equity loans are subject to the same risks as other loans to individuals, including the financial strength and employment stability of the borrower. The Bank attempts to mitigate these risks by carefully verifying and documenting the borrower’s credit quality, employment stability, monthly income, and understanding and documenting the value of the collateral.

     Residential real estate loans. Our residential real estate loan portfolio consists primarily of first and second mortgage loans on residential properties. As of December 31, 2009, $45.0 million, or 8.12%, of our loan portfolio represented residential mortgage loans. The terms of these loans typically include 3 to 7 year balloon payments based on a 15 to 30 year amortization, and accrue interest at a fixed or variable rate. By offering these products, we can offer credit to individuals who are self-employed or have significant income from partnerships or investments. These individuals are often unable to satisfy the underwriting criteria permitting the sale of their mortgages into the secondary market.

     In addition, we also originate residential mortgage loans with the intention of selling these loans in the secondary market. During 2009, we originated approximately $196.4 million of residential mortgage loans, and we sold approximately $195.7 million in the secondary market. We originate conventional first mortgage loans through referrals from real estate brokers, builders, developers, prior customers and media advertising, as well as through our internet website. We have offered customers the ability to apply for mortgage loans and to pre-qualify for mortgage loans over the Internet since 1999. In 2001, we expanded our internet mortgage application capacity with the acquisition of the internet domain name InternetMortgage.com and created a separate National Mortgage division. The timing of this expansion allowed us to establish this division in a relatively low-rate environment, and reap the benefits of a significant increase in mortgage originations and refinancing experienced from 2001 through 2003. While the volume of mortgage originations and refinancing has declined since 2004, we continue to take advantage of the national presence established in previous years and originate residential mortgage loans through our InternetMortgage.com website. The origination of a mortgage loan from the date of initial application through

closing normally takes 15 to 60 days. To reduce interest rate risk on mortgage loans sold in the secondary market, we acquire forward commitments from investors.

     Our mortgage loan credit review process is consistent with the standards set by traditional secondary market sources. The lender reviews the appraised value, debt service ratios, and gathers data during the underwriting process in accordance with various laws and regulations governing real estate lending. Loans originated by the Bank are sold with servicing released to increase current income and reduce the costs associated with retaining servicing rights. Commitments are obtained from the purchasing investor on a loan-by-loan basis on a 30, 45 or 60-day delivery commitment. Interest rates are committed to the borrower when a rate commitment is obtained from the investor. Loans are funded by the Bank and purchased by the investor within 30 days following closing pursuant to commitments obtained at the time of origination. We sell conventional conforming loans and all loans that are non-conforming as to credit quality to secondary market investors for cash on a limited recourse basis. In our recent experience, we have not been asked to repurchase significant amounts of loans. Consequently, foreclosure losses on all sold loans are primarily the responsibility of the investor and not that of the Bank.

     As with other loans to individuals, the risks related to residential mortgage loans primarily include the value of the underlying property and the financial strength and employment stability of the borrower. We attempt to manage these risks by performing a pre-funding underwriting that consists of the verification of employment and utilizes a detailed checklist of loan qualification requirements, including the source and amount of down payments, bank accounts, existing debt and overall credit.

     Lease financing. Our lease portfolio includes capital leases that we have originated and leases that we have acquired from brokers or third parties. As of December 31, 2009, our lease portfolio totaled $11.3 million, or 2.03%, of our total loan portfolio. We provide lease financing for a variety of equipment and machinery, including office equipment, heavy equipment, telephone systems, tractor trailers and computers. Lease terms are generally from three to five years. We have provided lease financing in the past and will continue to do so for our customers. However, we do not expect to aggressively pursue lease financing unless the lessor maintains an ongoing relationship with the Bank through participation in other Bank product offerings. As a result of a reduction in force in our leasing department during 2008, we expect the lease portfolio to continue to decrease over time. Our leases are generally underwritten based upon several factors, including the overall credit worthiness, experience and current financial condition of the lessee, the amount of the financing to collateral value, and general conditions of the market.

     The primary risks related to our lease portfolio are the value of the underlying collateral and specific risks related to the business of each borrower. To address these risks, we attempt to understand the business of each borrower, value the underlying collateral appropriately and structure the loan amortization to ensure that the value of the collateral exceeds the lease balance during the term of the lease.

     Consumer loans. As of December 31, 2009, our consumer loans totaled $8.1 million, or 1.46% of our total loan portfolio. A substantial part of this amount consisted of installment loans to individuals in our market area. Installment lending offered directly by the Bank in our market area includes automobile loans, recreational vehicle loans, home improvement loans, unsecured lines of credit and other loans to professionals, people employed in education, industry and government, as well as retired individuals and others. A portion of the Bank’s consumer loan portfolio consists of indirect automobile loans offered through automobile dealerships located primarily in our trade area. As of December 31, 2009, approximately $1.6 million, or 19.99%, of the Bank’s consumer loan portfolio represented indirect automobile loans. The Bank’s loans made to individuals through this program generally represent loans to purchase new or late model automobiles. There are currently 17 dealerships participating in this program. The Bank’s consumer and other loans are underwritten based on the borrower’s income, current debt, past credit history, collateral, and the reputation of the originating dealership with respect to indirect automobile loans.

     Consumer loans are subject to the same risks as other loans to individuals, including the financial strength and employment stability of the borrower. In addition, some consumer loans are subject to the additional risk that the loan is not secured by collateral. For some of the loans that are secured, the underlying collateral may be rapidly depreciating and may not provide an adequate source of repayment if we are required to repossess the collateral. The Bank attempts to mitigate these risks by requiring a down payment and carefully verifying and documenting the

borrower’s credit quality, employment stability, monthly income, and with respect to indirect automobile loans, understanding and documenting the value of the collateral and the reputation of the originating dealership.

Investment Activities

     The objectives of our investment policies are to:

•

secure the safety of principal;

•

provide adequate liquidity;

•

provide securities for use in pledging for public funds or repurchase agreements; and

•

maximize after-tax income.

     We invest primarily in obligations of agencies of the United States and bank-qualified obligations of state and local political subdivisions. Although direct obligations of the United States and obligations guaranteed as to principal and interest by the United States are permitted by our investment policy, we currently do not hold any in our portfolio. In order to ensure the safety of principal, we do not invest in mortgage-backed securities or sub-prime mortgages and we typically do not invest in corporate debt or other securities even though they are permitted by our investment policy. In addition, we enter into federal funds transactions with our principal correspondent banks, and depending on our liquidity position, act as a net seller or purchaser of these funds. The sale of federal funds is effectively a short-term loan from us to another bank; while conversely, the purchase of federal funds is effectively a short-term loan from another bank to us.

Deposit Services

     The principal sources of funds for the Bank are core deposits from the local market areas surrounding the Bank’s offices, including demand deposits, interest-bearing transaction accounts, money market accounts, savings deposits and time deposits. Transaction accounts include interest-bearing and non-interest-bearing accounts, which provide the Bank with a source of fee income and cross-marketing opportunities as well as a low-cost source of funds. Since 2001, the Bank has realized deposit growth from commercial checking accounts. While these accounts do not earn interest, many of them receive an earnings credit on their average balance to offset the cost of other services provided by the Bank. During 2007, the Bank introduced the performance checking product. This interest-bearing demand product has proven to be an attractive product in our market area as it pays a higher rate than most checking accounts as long as the customer meets the requirements of at least 12 signature based debit card transactions and at least one direct deposit or ACH debit each statement cycle. The Bank realizes non-interest income from the signature based debit card transactions that, when netted against the high rate paid to the customer, results in a very attractive cost of funds for the Bank. The Bank also offers a money market account which is a daily access account that bears a higher rate and allows for limited check-writing ability. This account pays a tiered rate of interest. We believe money market accounts are an additional source of funds for the Bank and provide us with the potential to cross-sell additional services to these account holders.

     Time deposits and savings accounts also provide a relatively stable customer base and source of funding. Because of the nature and behavior of these deposit products, management reviews and analyzes our pricing strategy in comparison not only to competitor rates, but also as compared to other alternative funding sources to determine the most advantageous source. In pricing deposit rates, management also considers profitability, the matching of term lengths with assets, the attractiveness to customers, and rates offered by our competitors. The Bank has joined the Certificate of Deposit Account Registry Service (“CDARS”) which effectively lets depositors receive Federal Deposit Insurance Corporation (FDIC) insurance on amounts of certificate of deposits larger than FDIC insurance coverage, which is currently $250,000 through December 31, 2013. CDARS allows the Bank to break large deposits into smaller amounts and place them in a network of other CDARS banks to ensure that full FDIC insurance coverage is gained on the entire deposit. The Bank’s Funds Management policy allows for acceptance of brokered deposits, up to certain policy limits, which can be utilized to support the growth of the Bank. As of December 31, 2009, the Bank had $76.9 million in brokered deposits, of which $31.2 million represented customer funds placed into the CDARS program.

Investment Brokerage Services

     In 1999, the Bank began offering investment brokerage services through an unrelated broker-dealer. These services are currently offered at all of our locations. Three individuals responsible for providing these services are joint employees of the Bank and the registered broker-dealer. Investment brokerage services provide a source of fee income for the Bank. In 2009, the amount of our fee income generated from investment brokerage services was $337,000.

Trust Services

     The Bank began offering trust services in 1996. Until 1999, the Bank’s trust services were offered exclusively through the employees of an unaffiliated trust company. The Bank hired a full-time officer in 1999 to develop the Bank’s trust business and the trust department now has three full-time officers. Trust services are marketed to both existing Bank customers and new customers. We believe that the ability to offer trust services as a part of our financial services to customers of the Bank presents a significant cross-marketing opportunity. The services currently offered by the Bank’s trust department include the administration of personal trusts, investment management agency accounts, self-directed individual retirement accounts, qualified retirement plans, corporate trust accounts and custodial trust accounts. As of December 31, 2009, the Bank’s trust department administered 222 accounts, with assets under administration of approximately $121.4 million. Trust services provide the Bank with a source of fee income and additional deposits. In 2009, the amount of our fee income from trust services was $432,000.

Competition

     The Bank encounters competition primarily in seeking deposits and in obtaining loan customers. The level of competition for deposits in our market area is high. Our principal competitors for deposits are other financial institutions within a few miles of our locations including other banks, savings institutions and credit unions. Competition among these institutions is based primarily on interest rates offered, the quality of service provided, and the convenience of banking facilities. Additional competition for depositors’ funds comes from U.S. government securities, private issuers of debt obligations and other providers of investment alternatives for depositors.

     The Bank competes in our lending, investment brokerage and trust activities with other financial institutions, such as banks and thrift institutions, credit unions, automobile financing companies, mortgage companies, securities firms, investment companies and other finance companies. Many of our competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally-insured banks and state regulations governing state-chartered banks. As a result, these non-bank competitors have some advantages over the Bank in providing certain products and services. Many of the financial institutions with which we compete are larger and possess greater financial resources, name recognition and market presence.

Trademarks

     As of December 31, 2009 the Bank had the following registered trademarks:

 

Bank of Blue Valley
DEPOSIT I.T.
INTERNETMORTGAGE.COM

     At December 31, 2009, the Bank had approximately 202 total employees, with 171 full-time employees. The Company and its other subsidiaries did not have any employees. None of the Bank’s employees are subject to a collective bargaining agreement. We consider the Bank’s relationship with its employees to be excellent.

     For each of our directors and our executive officers, we have set forth below their ages as of December 31, 2009, and their principal positions.

Name		Age		Positions
Directors
Robert D. Regnier		61		President, Chief Executive Officer and Chairman of the Board of Directors of Blue Valley; President, Chief Executive Officer and Chairman of the Board of Directors of the Bank
Donald H. Alexander		71		Director of Blue Valley and the Bank
Michael J. Brown		53		Director of Blue Valley
Anne D. St. Peter		44		Director of Blue Valley
Robert D. Taylor		62		Director of Blue Valley and Chairman of the Audit Committee of Blue Valley
Additional Directors of the Bank
Harvey S. Bodker		74		Director of the Bank
Richard L. Bond		74		Director of the Bank
Suzanne E. Dotson		63		Director of the Bank
Charles H. Hunter		67		Director of the Bank
Executive Officers who are not Directors
Mark A. Fortino		43		Executive Vice President and Chief Financial Officer of the Bank; Chief Financial Officer of Blue Valley
Bruce A. Easterly		50		Executive Vice President — Chief Lending Officer of the Bank
Bonnie M. McConnaughy		50		Senior Vice President — Operations of the Bank

Available Information

     Our website address is http://www.bankbv.com. Information included or referred to on our website is not incorporated by reference in or otherwise a part of this report. Financial information, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, and amendments to those reports can be obtained free of charge from our website. These reports are available on our website as soon as reasonably practicable after they are electronically filed with or furnished to the Securities Exchange Commission (SEC). These reports are also available on the SEC’s website at http://www.sec.gov.

Regulation and Supervision

     Blue Valley and its subsidiaries are extensively regulated under both federal and state laws. Laws and regulations to which Blue Valley and the Bank are subject govern, among other things, the scope of business, investments, reserve levels, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers and consolidations and the payment of dividends. These laws and regulations are intended primarily to protect depositors, not stockholders. Any change in applicable laws or regulations may have a material effect on Blue Valley’s business and prospects, and legislative and policy changes may affect Blue Valley’s operations. Blue Valley cannot predict the nature or the extent of the effects on its business and earnings that fiscal or monetary policies, economic controls or new federal or state legislation may have in the future.

     The following references to statutes and regulations affecting Blue Valley and the Bank are brief summaries only and do not purport to be complete and are qualified in their entirety by reference to the statutes and regulations.

Applicable Legislation

     The enactment of the legislation described below has significantly affected the banking industry generally and will have an on-going effect on Blue Valley and its subsidiaries.

     Emergency Economic Stabilization Act of 2008. The Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law on October 3, 2008. This legislation was principally designed to allow the U.S. Treasury Department (the “Treasury”) and other government agencies to take action to restore liquidity and stability to the U.S. financial system. This legislation authorized the Treasury through the Troubled Asset Relief Program (the “TARP”) to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans and certain other financial assets, including debt and equity securities issued by financial institutions and their holding companies. The Treasury allocated $250 billion to the TARP Capital Purchase Plan program (the “CPP”). The CPP is designed to attract broad participation by healthy institutions, to stabilize the financial system, and to increase lending for the benefit of the U.S. economy. As part of the CPP, the Treasury purchased debt and equity securities from participating institutions. Qualified participants may sell an equity interest to the Treasury up to 3% of its risk-weighted assets. These equity instruments constitute Tier 1 Capital for eligible institutions. The Company’s Board of Directors approved the Company’s participation in the program, and the Company entered into a Securities Purchase Agreement — Standard Terms on December 5, 2008. Pursuant to the agreement, the Company issued and sold to the Treasury 21,750 shares of Fixed Rate Cumulative Perpetual Preferred Stock, along with a ten year warrant to purchase 111,083 shares of the Company’s common stock, for a total cash price of $21.75 million. Under the terms of the CPP, the Company is prohibited, without the consent of the Treasury, from declaring or paying a common stock dividend in an amount greater than the amount of the last quarterly cash dividend per share declared prior to October 14, 2008. Furthermore, as long as the preferred stock issued to the Treasury is outstanding, dividend payments and repurchases or redemptions relating to certain equity securities are prohibited until all accrued and unpaid dividends are paid on preferred stock, subject to certain limited exceptions. For additional information, see the liquidity and capital resources section under Managements Discussion and Analysis of Financial Condition and Results of Operation.

     As part of the EESA, the FDIC’s insurance coverage for deposits increased to $250,000 effective through December 31, 2013. Further, the FDIC established the Temporary Liquidity Guarantee Program which is designed to encourage confidence and liquidity in the banking system. The program has two primary components, the Debt Guarantee Program and Transaction Account Guarantee Program. Eligible entities generally are participants unless they exercise an opt-out right in a timely manner.

     Under the Debt Guarantee Program, the FDIC guarantees certain senior unsecured debt of eligible banks, thrifts and certain holding companies issued on or after October 14, 2009 through June 30, 2009. The debt guarantee coverage limit is generally 125% of an eligible entity’s eligible debt as of September 30, 2008, with a nonrefundable fee of 75 basis points (annualized) for covered debt outstanding. The guarantee was originally effective through the earlier of the maturity date or on June 30, 2012. Under a four month extension of the program approved May 2009, participating entities that issued debt on or before April 1, 2009 were permitted to participate in the extended program without application to the FDIC and participating entities that had not issued such debt before April 1, 2009 could upon approval from the FDIC. As a result, all such participating entities were permitted to issue FDIC-guaranteed debt until October 31, 2009, which would be guaranteed through the earlier of mandatory conversion date, maturity date, or December 31, 2012. The FDIC has also established a limited six-month emergency facility. Under this facility, participating entities can apply to issue FDIC guaranteed senior unsecured debt during the period October 31, 2009 through April 30, 2010 to be guaranteed through December 31, 2012. For approved applicants, fees of at least 300 basis points would be assigned on case-by-case basis. The Company and the Bank opted to not participate in the Debit Guarantee Program.

     The Transaction Account Guarantee Program provides full coverage of non-interest bearing transaction accounts at participating insured depository institutions, regardless of the dollar amount. The Transaction Account Guarantee Program originally was effective through December 31, 2009. This program was extended through June 30, 2010 if opted by the participating entity. Financial institutions participating in the Transaction Account Guarantee Program were assessed a fee of ten basis points (annualized) on the balance of each covered account in excess of $250,000 through December 31, 2009 and fees of 15 to 25 basis points (annualized) on the balance of each

covered account in excess of $250,000 through June 30, 2010 depending on the risk category assigned to the institution. The Bank has opted to continue its participation in the Transaction Account Guarantee Program.

     USA PATRIOT Act. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act) was signed into law on October 26, 2001. This legislation enhances the powers of domestic law enforcement organizations and makes numerous other changes aimed at countering the international terrorist threat to the security of the United States. Title III of the legislation most directly affects the financial services industry. It is intended to enhance the federal government’s ability to fight money laundering by monitoring currency transactions and suspicious financial activities. The USA PATRIOT Act has significant implications for depository institutions involved in the transfer of money. Under the USA PATRIOT Act, a financial institution must establish due diligence policies, procedures, and controls reasonably designed to detect and report money laundering through correspondent accounts and private banking accounts. Financial institutions must follow regulations adopted by the Treasury to encourage financial institutions, their regulatory authorities, and law enforcement authorities to share information about individuals, entities, and organizations engaged in or suspected of engaging in terrorist acts or money laundering activities. Financial institutions must follow regulations setting forth minimum standards regarding customer identification. These regulations require financial institutions to implement reasonable procedures for verifying the identity of any person seeking to open an account, maintain records of the information used to verify the person’s identity, and consult lists of known or suspected terrorists and terrorist organizations provided to the financial institution by government agencies. Every financial institution must establish anti-money laundering programs, including the development of internal policies and procedures, designation of a compliance officer, employee training, and an independent audit function.

     Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act was signed into law on November 12, 1999. This major banking legislation expands the permissible activities of bank holding companies by permitting them to engage in activities, or affiliate with entities that engage in activities, that are “financial in nature.” Activities that the Act expressly deems to be financial in nature include, among other things, securities and insurance underwriting and agency, investment management and merchant banking. The Federal Reserve and the U.S. Treasury Department, in cooperation with one another, determine what additional activities are “financial in nature.” With certain exceptions, the Gramm-Leach-Bliley Act similarly expands the authorized activities of subsidiaries of national banks. The provisions of the Gramm-Leach-Bliley Act authorizing the expanded powers became effective March 11, 2000.

     Bank holding companies that intend to engage in activities that are “financial in nature” must elect to become “financial holding companies.” Financial holding company status is only available to a bank holding company if all of its affiliated depository institutions are “well capitalized” and “well managed,” based on applicable banking regulations, and have a Community Reinvestment Act rating of at least “a satisfactory record of meeting community credit needs.” Financial holding companies and banks may continue to engage in activities that are financial in nature only if they continue to satisfy the well capitalized and well managed requirements. Bank holding companies that do not elect to be financial holding companies or that do not qualify for financial holding company status may engage only in non-banking activities deemed “closely related to banking” prior to adoption of the Gramm-Leach-Bliley Act. Blue Valley voluntarily terminated its status as a financial holding company in June 2008 as the Company was no longer engaged in activities pursuant to the Bank Holding Company Act.

     The Act also calls for “functional regulation” of financial services businesses in which functionally regulated subsidiaries of bank holding companies will continue to be regulated by the regulator that ordinarily has supervised their activities. As a result, state insurance regulators will continue to oversee the activities of insurance companies and agencies, and the Securities and Exchange Commission will continue to regulate the activities of broker-dealers and investment advisers, even where the companies or agencies are affiliated with a bank holding company. Federal Reserve authority to examine and adopt rules regarding functionally regulated subsidiaries is limited.

     The Gramm-Leach-Bliley Act imposed an “affirmative and continuing” obligation on all financial service providers (not just banks and their affiliates) to safeguard consumer privacy and requires federal and state regulators, including the Federal Reserve and the FDIC, to establish standards to implement this privacy obligation. With certain exceptions, the Act prohibits banks from disclosing to non-affiliated parties any non-public personal information about customers unless the bank has provided the customer with certain information and the customer

has had the opportunity to prohibit the bank from sharing the information with non-affiliates. The new privacy obligations became effective July 1, 2001.

     The Gramm-Leach-Bliley Act has been and may continue to be the subject of extensive rule making by federal banking regulators and others.

     Sarbanes-Oxley Act. The Sarbanes-Oxley Act, signed into law in 2001, addresses issues related to corporate governance of publicly traded companies. Sarbanes-Oxley Act requires, among other items, certification of the quality of financial reporting by the Chief Executive Officer and Chief Financial Officer, enhanced and timely disclosure of financial reporting and it strengthens the rules regarding auditor and audit committee independence. Certain provisions of the Sarbanes-Oxley Act were effective immediately and others became effective or are in process of becoming effective through Securities and Exchange Commission rules. The Company was subject to all provisions during 2009 with the exception of the auditor’s attestation on internal control over financial reporting. The Company will be subject to this provision in 2010, unless the effective date is further extended. The Company anticipates continued future expenditures in order to comply with the provisions of the Sarbanes-Oxley Act.

Bank Holding Company Regulation

     Blue Valley is a registered bank holding company subject to periodic examination by the Federal Reserve and required to file periodic reports of its operations and such additional information as the Federal Reserve may require.

     Investments and Activities. A bank holding company must obtain approval from the Federal Reserve before:

•

Acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after the acquisition, it would own or control more than 5% of the shares of the bank or bank holding company (unless it already owns or controls the majority of the shares);

•

Acquiring all or substantially all of the assets of another bank or bank holding company; or

•

Merging or consolidating with another bank holding company.

     The Federal Reserve will not approve any acquisition, merger or consolidation that would have a substantially anticompetitive result unless the anticompetitive effects of the proposed transaction are clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The Federal Reserve also considers capital adequacy and other financial and managerial factors in reviewing acquisitions or mergers.

     With certain exceptions, a bank holding company is also prohibited from:

•

Acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company; and

•

Engaging, directly or indirectly, in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries.

     Bank holding companies may, however, engage in businesses found by the Federal Reserve to be “financial in nature,” as described above. Finally, subject to certain exceptions, the Bank Holding Company Act, the Change in Bank Control Act, and the Federal Reserve’s implementing regulations, require Federal Reserve approval prior to any acquisition of “control” of a bank holding company, such as Blue Valley. In general, a person or company is presumed to have acquired control if it acquires 10% of the outstanding shares of a bank or bank holding company and is conclusively determined to have acquired control if it acquires 25% or more of the outstanding shares of a bank or bank holding company.

     Source of Strength. The Federal Reserve expects Blue Valley to act as a source of financial strength and support for the Bank and to take measures to preserve and protect the Bank in situations where additional investments in the Bank may not otherwise be warranted. The Federal Reserve may require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary (other than a non-bank subsidiary

of a bank) upon the Federal Reserve’s determination that the activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or non-bank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition. As of December 31, 2009, BVBC Capital Trust II and BVBC Capital Trust III are Blue Valley’s only active direct subsidiaries that are not banks.

     Capital Requirements. The Federal Reserve uses capital adequacy guidelines in its examination and regulation of bank holding companies and banks. If the capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses. The Federal Reserve’s capital guidelines establish a risk-based requirement expressed as a percentage of total risk-weighted assets and a leverage requirement expressed as a percentage of total average assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital (which consists principally of stockholders’ equity with adjustments for disallowed deferred tax assets). The leverage requirement consists of a minimum ratio of Tier 1 capital to total average assets of 4%.

     The risk-based and leverage standards presently used by the Federal Reserve are minimum requirements, and higher capital levels may be required if warranted by the particular circumstances or risk profiles of individual banking organizations. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions, which is Tier 1 capital less all intangible assets, well above the minimum levels.

     Dividends. The Federal Reserve has issued a policy statement concerning the payment of cash dividends by bank holding companies. The policy statement provides that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which could only be funded in ways that weakened the bank holding company’s financial health, such as by borrowing. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. As a result of an agreement with the Federal Reserve Bank and the Office of the State Banking Commissioner of Kansas, prior regulatory approval is currently required prior to the payment of any dividends by the Company or Bank.

Under the terms of the Capital Purchase Plan, for so long as any preferred stock issued under the CPP remains outstanding, the Company is prohibited from declaring or paying a common stock dividend in an amount greater than the amount of the last quarterly cash dividend per share declared prior to October 14, 2008 without the Treasury’s consent. Furthermore, as long as the preferred stock issued to the Treasury is outstanding, dividend payments and repurchases or redemptions relating to certain equity securities are prohibited until all accrued and unpaid dividends are paid on preferred stock, subject to certain limited exceptions. At the request of the Federal Reserve Bank of Kansas City, the Company notified the Treasury of its intention to defer the quarterly payment on the preferred shares due to the Treasury on May 15, 2009, August 15, 2009, November 15, 2009 and February 15, 2010. Failure to pay the Preferred Share dividend is not an event of default. However, a failure to pay a total of six Preferred Share dividends, whether or not consecutive, gives the holders of the Preferred Shares the right to elect two directors to the Company’s Board of Directors. That right would continue until the Company pays all dividends in arrears. The Company has accrued for the dividends and has every intention to bring the obligation current as soon as permitted. For additional information, see the liquidity and capital resources section under Management’s Discussion and Analysis of Financial Condition and Results of Operation.

Bank Regulations

     The Bank operates under a Kansas state bank charter and is subject to regulation by the Office of the State Bank Commissioner and the Federal Reserve Bank. The Office of the State Bank Commissioner and the Federal Reserve Bank regulate or monitor all areas of the Bank’s operations, including capital requirements, issuance of stock, declaration of dividends, interest rates, deposits, record keeping, establishment of branches, acquisitions, mergers, loans, investments, borrowing, information technology and employee responsibility and conduct. The Office of the State Bank Commissioner places limitations on activities of the Bank, including the issuance of capital notes or

debentures and the holding of real estate and personal property, and requires the Bank to maintain a certain ratio of reserves against deposits. The Office of the State Bank Commissioner requires the Bank to file a report annually, in addition to any periodic report requested.

     The Board of Directors of Blue Valley Ban Corp. and its wholly owned subsidiary, Bank of Blue Valley, entered into a written agreement with the Federal Reserve Bank of Kansas City as of November 4, 2009. This agreement was a result of an examination that was completed by the regulators in May 2009, and relates primarily to the Bank’s asset quality. Under the terms of the agreement, the Company and the Bank agreed, among other things, to submit an enhanced written plan to strengthen credit risk management practices and improve the Bank’s position on past due loans, classified loans, and other real estate owned; review and revise its allowance for loan and lease loss methodology and maintain an adequate allowance for loan loss; maintain sufficient capital at the Company and Bank level; and improve the Bank’s earnings and overall condition. The Company and Bank have also agreed not to increase or guarantee any debt, purchase or redeem any shares of stock, or declare or pay any dividends without prior written approval from the Federal Reserve Bank. Progress on these items has been made since the completion of the examination and management and the Board is committed to resolving all of the items addressed by the regulators in the agreement. The Board of Directors believes the enhanced procedures contemplated by the agreement will be beneficial to the Bank’s future operations and success.

     Deposit Insurance. The FDIC, through its Deposit Insurance Fund, insures the Bank’s deposit accounts up to the applicable limits of the FDIC. In October 2008, as part of the Emergency Economic Stabilization Act, the FDIC’s insurance coverage for deposits temporarily increased from $100,000 to $250,000 through December 31, 2013. The FDIC bases deposit insurance premiums on each FDIC-insured institution based on the perceived risk each bank presents to its Deposit Insurance Fund. Each institution is assigned to one of the four risk categories based on its capital, supervisory ratings and other factors. Under the FDIC’s risk-based assessment rules effective April 1, 2009, assessment rates range from 7 to 24 basis points for Risk Category I, 17 to 43 basis points for Risk Category II, 27 to 58 basis points for Risk Category III, and 40 to 77.5 basis points for Risk Category IV. Rates increase three basis points effective January 1, 2011. In addition to deposit insurance premiums, institutions also pay an assessment based on insured deposits to service debt issued by the Financing Corporation (FICO assessment), a federal agency established to finance the recapitalization of the former Federal Savings and Loan Insurance Corporation. For the fourth quarter of fiscal year 2009, the annual rate for this assessment was 1.02 basis points for each $100 in domestic deposits. FICO assessment rate is adjusted quarterly to reflect changes in the assessment bases of the fund and the rate adjusted to 1.06 basis points for the first quarter 2010. The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management is not aware of any activity or condition that could result in termination of the deposit insurance of the Bank.

     The FDIC adopted the final rule on May 22, 2009 to impose a special assessment to rebuild the Deposit Insurance Fund and help maintain the public confidence in the banking system. The FDIC imposed a five basis point special assessment on each FDIC-insured depository institution’s assets less its Tier I capital as of June 30, 2009 (not to exceed 10 basis points of the institution’s assessment base for second quarter 2009), which was collected on September 30, 2009. The Bank recorded an expense of $364,000 for this special assessment as of June 30, 2009.

     Capital Requirements. The FDIC has established the following minimum capital standards for state-chartered, insured non-member banks, such as the Bank: (1) a leverage requirement consisting of a minimum ratio of Tier 1 capital to total average assets of 4%; and (2) a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. These capital requirements are minimum requirements, and higher capital levels may be required if warranted by the particular circumstances or risk profiles of individual institutions.

     Tier 1 capital generally consists of equity capital and non cumulative perpetual preferred stock, adjusted for such items as net unrealized gains (losses) on available-for-sale securities, disallowed deferred tax assets and disallowed servicing assets. Total risk-based capital consists of Tier 1 capital (as defined above) plus allowance and

loan losses up to a maximum of 1.25% of risk-weighted assets and certain permanent and maturing capital instruments that do not qualify as Tier 1 capital.

     The federal banking regulators also have broad power to take “prompt corrective action” to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends upon whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Under the prompt corrective action rules, an institution is:

•

“Well capitalized” if the institution has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and the institution is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure;

•

“Adequately capitalized” if the institution has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater, and a leverage ratio of 4% or greater;

•

“Undercapitalized” if the institution has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4%, or a leverage ratio that is less than 4%;

•

“Significantly undercapitalized” if the institution has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3%, or a leverage ratio that is less than 3%; and

•

“Critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%.

     The federal banking regulators must take prompt corrective action with respect to capital deficient institutions. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include:

•

Placing limits on asset growth and restrictions on activities, including the establishment of new branches;

•

Requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired;

•

Restricting transactions with affiliates;

•

Restricting the interest rate the institution may pay on deposits;

•

Requiring that senior executive officers or directors be dismissed;

•

Requiring the institution to divest subsidiaries;

•

Prohibiting the payment of principal or interest on subordinated debt; and

•

Appointing a receiver for the institution.

     Companies controlling an undercapitalized institution are also required to guarantee the subsidiary institution’s compliance with the capital restoration plan subject to an aggregate limitation of the lesser of 5% of the institution’s assets at the time it received notice that it was undercapitalized or the amount of the capital deficiency when the institution first failed to meet the plan. The Federal Deposit Insurance Act generally requires the appointment of a conservator or receiver within 90 days after an institution becomes critically undercapitalized.

     As of December 31, 2009, the Bank had capital in excess of the regulatory requirements for a “well capitalized” institution.

     Federal Deposit Insurance Corporation Improvement Act. The Bank, having over $500 million in total assets, is subject to requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA 112). The primary purpose of FDICIA 112 is to provide a framework for early risk identification in financial management through an effective system of internal controls. Annual reporting requirements under FDICIA are as

follows: (1) annual audited financial statements; (2) Management report stating management’s responsibility for preparing the institution’s annual financial statements, establishing and maintaining an adequate internal control structure and procedures for financial reporting and for complying with laws and regulations, and assessment by management of the institution’s compliance with such laws and regulations; and (3) For insured depository institutions with consolidated total assets over $1.0 billion or more, the independent public accountant who audits the institution’s financial statement’s shall examine, attest to, and report separately on the assertion of management concerning the effectiveness of the institution’s internal control structure and procedures for financial reporting.

     Insider Transactions. The Bank is subject to restrictions on extensions of credit to executive officers, directors, principal stockholders or any related interest of these persons. Extensions of credit must be made on substantially the same terms, including interest rates and collateral as the terms available for third parties and must not involve more than the normal risk of repayment or present other unfavorable features. The Bank is also subject to lending limits and restrictions on overdrafts to these persons.

     Community Reinvestment Act Requirements. The Community Reinvestment Act (CRA) of 1977 requires that, in connection with examinations of financial institutions within their jurisdiction, the federal banking regulators must evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. In its most recent CRA examination dated June 2, 2008, the Bank received a rating of “Satisfactory.”

     State Bank Activities. With limited exceptions, FDIC-insured state banks, like the Bank, may not make or retain equity investments of a rate or in an amount that are not permissible for national banks and also may not engage as a principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member.

     Regulations Governing Extensions of Credit. The Bank is subject to restrictions on extensions of credit to Blue Valley and on investments in Blue Valley’s securities and using those securities as collateral for loans. These regulations and restrictions may limit Blue Valley’s ability to obtain funds from the Bank for its cash needs, including funds for acquisitions and for payment of dividends, interest and operating expenses. Further, the Bank Holding Company Act and Federal Reserve regulations prohibit a bank holding company and its subsidiaries from engaging in various tie-in arrangements in connection with extensions of credit, leases or sales of property or furnishing of services.

     Reserve Requirements. The Federal Reserve requires all depository institutions to maintain reserves against their transaction accounts. For net transaction accounts in 2010, the first $10.7 million, up from $10.3 million in 2009, is exempt from reserve requirements. A three percent reserve ratio will be assessed on net transaction accounts over $10.7 million up to and including $55.2 million, up from $44.4 million in 2009. A ten percent reserve ratio is assessed on net transaction accounts in excess of $55.2 million (subject to adjustment by the Federal Reserve). The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements.

     Other Regulations

     Interest and various other charges collected or contracted for by the Bank are subject to state usury laws and other federal laws concerning interest rates. The Bank’s loan operations are also subject to federal laws applicable to credit transactions. The Federal Truth in Lending Act governs disclosures of credit terms to consumer borrowers. The Home Mortgage Disclosure Act of 1975 requires financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves. The Equal Credit Opportunity Act prohibits discrimination on the basis of race, creed or other prohibited factors in extending credit. The Fair and Accurate Credit Transactions Act of 2003 governs the use and provision of information to credit reporting agencies. This act also requires financial institutions to establish reasonable procedures of identifying identity theft. The Fair Debt Collection Act governs the manner in which consumer debts may be collected by collection agencies. The various federal agencies charged with the responsibility of implementing these federal laws have adopted various rules and regulations. The deposit operations of the Bank are also subject to the Right to Financial Privacy Act, which imposes a duty to maintain

confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records, the Electronic Funds Transfer Act, and Regulation E issued by the Federal Reserve to implement that Act, which govern automatic deposits to and withdrawals from the use of ATMs and other electronic banking services.

Item 1A:		Risk Factors

     Making or continuing an investment in securities issued by Blue Valley Ban Corp. involves certain risk that you should carefully consider. The risks and uncertainties described below are not the only risks that may have a material adverse effect on the Company and they are not necessarily presented in order of significance. Additional risks and uncertainties also could adversely affect its business and financial results. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected and the market price of the Blue Valley Ban Corp. stock could decline. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause the Company’s actual results to differ from those expressed in any forward-looking statements.

Difficult market conditions have adversely affected the Company’s industry and may continue to affect the industry.

     We are particularly exposed to downturns in the U.S. real estate market. Dramatic declines over the past two years in the housing market, with falling home prices, increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities, major commercial and investment banks, and regional financial institutions such as our Company. Many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions, as a result of the concern regarding the stability of the financial markets and the strength of counterparties. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry, and could further negatively affect the Company’s financial results.

Our loan portfolio is concentrated in real estate lending, which has made and will make our loan portfolio more susceptible to credit losses in the current real estate market.

     In 2008 and continuing into 2009, the new home real estate market in our geographic market area declined. Our loan portfolio has a concentration in real estate construction, land development loans, and commercial real estate loans, most of which are located in our market area. We have a heightened exposure to credit losses that may arise from this concentration as a result of the downturn in the real estate market and general economy. As a result, our non-performing assets and allowance for loan losses increased substantially during 2008 and 2009. If the current economic environment continues for a prolonged period of time or deteriorates further, collateral values may further decline and may result in increased credit losses in these loans and additional loan foreclosures.

Current levels of market volatility.

     The capital and credit markets have been experiencing significant volatility and disruption over the last two years. In certain cases, this volatility has resulted in downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of market volatility and disruption continue or worsen, there can be no assurance that we will not experience an adverse effect on our ability to access capital, if needed or desired, and on our business, financial condition and results of operation.

Our future ability to raise capital may be limited.

     Our ability to raise capital in the current economic and regulatory environment may be limited. During fiscal year 2008, we completed a rights offering in which we sold $5.2 million worth of our common stock to certain existing stockholders at a price of $18 per share. In addition to the rights offering in 2008, we participated in the

U.S. Treasury’s CPP program. Through that program, Treasury purchased 21,750 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A. This raised $21.75 million in additional capital. Should it become necessary to raise capital, opportunities to do so will not be as readily identifiable, and will likely be on less favorable terms than those available in 2008.

Blue Valley and the Bank are subject to extensive governmental regulation.

     Blue Valley and the Bank are subject to extensive governmental regulation. Blue Valley, as a bank holding company, is regulated primarily by the Federal Reserve Bank. The Bank is a commercial bank chartered by the State of Kansas and regulated by the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the State Banking Commissioner of Kansas (OSBC). These federal and state bank regulators have the ability, to place significant regulatory and operational restrictions upon Blue Valley and the Bank. Any such restrictions imposed by federal and state bank regulators could affect the profitability of Blue Valley and the Bank. Blue Valley and the Bank entered into an agreement in November 2009 with the Federal Reserve Bank of Kansas City. This agreement was a result of an examination that was completed by the regulators in May 2009, and relates primarily to asset quality. Under the terms of the agreement, the Company and the Bank agreed, among other things, to submit an enhanced written plan to strengthen credit risk management practice and improve the Bank’s position on past due loans, classified loans, and other real estate owned; review and revise its allowance for loan and lease loss methodology and maintain an adequate allowance for loan loss; maintain sufficient capital at the Company and Bank level; and improve the Bank’s earnings and overall condition. The Company and Bank have also agreed not to increase or guarantee any debt, purchase or redeem any shares or stock, or declare or pay any dividends without prior written approval from the Federal Reserve Bank. The Company and the Bank have made progress on these items since completion of the examination and the Boards are committed to resolving all of the items address by the regulators in the agreement. If the Company and Bank are not able to comply with the agreement, they could be subject to further regulatory enforcement action.

If we are unable to pay our Preferred Shares dividend, the holder of the Preferred Shares may have additional rights.

     Under the Capital Purchase Plan, failure to pay the Preferred Shares dividend is not considered an event of default. However, a failure to pay a total of six Preferred Share dividends, whether or not consecutive, gives the holder of the Preferred Shares the right to elect two directors to the Company’s Board of Directors. That right would continue until the Company pays all dividends in arrears. The Company has deferred Preferred Share dividends due on May 15, 2009, August 15, 2009, November 15, 2009 and February 15, 2010. The Company has accrued for these dividends. At this time, the Company does not know when it will resume paying dividends.

Our operations may be adversely affected if we are unable to maintain and increase our deposit base and secure adequate funding.

     We fund our banking and lending activities primarily through demand, savings and time deposits and, to a lesser extent, lines of credit, sale/repurchase facilities from various financial institutions, and Federal Home Loan Bank borrowings. The success of our business depends in part on our ability to maintain and increase our deposit base and our ability to maintain access to other funding sources. Our inability to obtain funding on favorable terms, on a timely basis, or at all, would adversely affect our operations and financial condition.

Changes in interest rates may adversely affect our earnings and cost of funds.

     Changes in interest rates affect our operating performance and financial condition in diverse ways. A substantial part of our profitability depends on the difference between the rates we receive on loans and investments and the rates we pay for deposits and other sources of funds. Our net interest spread will depend on many factors that are partly or entirely outside our control, including competition, federal monetary and fiscal policies, and economic conditions generally. Historically, net interest spreads for many financial institutions have widened and narrowed in response to these and other factors, which are often collectively referred to as “interest rate risk.” We try to minimize our exposure to interest rate risk, but are unable to eliminate it.

Because our business is concentrated in the Kansas City MSA, a downturn in the economy of the Kansas City MSA may adversely affect our business.

     Our success is dependent to a significant extent upon the general economic conditions in the Kansas City MSA, including Johnson County, Kansas, and, in particular, the conditions for the small and medium-sized businesses that are the focus of our customer base. Further adverse changes in economic conditions in the Kansas City MSA, including Johnson County, Kansas, would impair our ability to collect loans, reduce our growth rate and have a negative effect on our overall financial condition. Adverse changes in the Kansas City MSA have already occurred and a continued downturn in the general economic conditions in the Kansas City MSA will continue to have an adverse effect on our overall financial condition.

The continued slowdown in real estate sales and a decrease in residential real estate values within our market areas have and may continue to affect our financial condition.

     Non-performing assets and our provision for loan losses and other real estate owned have increased as a result of the downturn in economic conditions in the real estate market, continued slow down in home sales, and decline in median home prices and newly constructed homes. The housing industry in the Midwest experienced a downturn during the last quarter of 2007 and continuing in 2009 reflecting, in part, decreased availability of mortgage financing for residential home buyers, reduced demand for new home construction resulting in over-supply of housing inventory and increased foreclosure rates. If these market conditions continue, or deteriorate further, or if these market conditions and slowing economy continue to negatively impact the commercial non-residential real estate market, our results of operations will continue to be adversely impacted because a significant portion of our loans are secured by real estate in our market areas.

If our allowance for loan losses is insufficient to absorb losses in our loan portfolio, it will adversely affect our financial condition and results of operations.

     Some borrowers may not repay loans that we make to them. This risk is inherent in the banking business. Like all financial institutions, the Company maintains an allowance for loan losses to absorb probable loan losses in our loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio credit quality, economic and regulatory conditions and unidentified losses inherent in the current loan portfolio. However, we cannot predict loan losses with certainty, and we cannot assure you that our allowance for loan losses will be sufficient to cover our future loan losses. Loan losses in excess of our reserves would have an adverse effect on our financial condition and results of operations. The loan loss provision related to loans secured by real estate has increased. This increase is a result of the continued industry wide decline in the real estate market and general economy. If the trend is prolonged and losses continue to increase, our results of operations would continue to be negatively impacted by higher loan losses.

     In addition, various regulatory agencies, as an integral part of the examination process, periodically review our loan portfolio. These agencies may require us to add to the allowance for loan losses based on their judgments and interpretations of information available to them at the time of their examinations. If these agencies require us to increase our allowance for loan losses, our earnings will be adversely affected in the period in which the increase occurs.

We may incur significant costs if we foreclose on environmentally contaminated real estate.

     If we foreclose on a defaulted real estate loan to recover our investment, we may be subject to environmental liabilities in connection with the underlying real property. It is also possible that hazardous substances or wastes may be discovered on these properties during our ownership or after they are sold to a third party. If they are discovered on a property that we have acquired through foreclosure or otherwise, we may be required to remove those substances and clean up the property. We may have to pay for the entire cost of any removal and clean-up without the contribution of any other third parties. We may also be liable to tenants and other users of neighboring properties. These costs or liabilities may exceed the fair value of the property. In addition, we may find it difficult or impossible to sell the property prior to or following any environmental clean-up.

The loss of our key personnel could adversely affect our operations.

     We are a relatively small organization and depend on the services of all of our employees. Our growth and development to date has depended in a large part on a few key employees who have primary responsibility for maintaining personal relationships with our largest customers. The unexpected loss of services of one or more of these key employees could have a material adverse effect on our operations. Our key employees are Robert D. Regnier, Mark A. Fortino, Bruce A. Easterly, and Bonnie M. McConnaughy. Each of these persons is an officer of the Bank. We do not have written employment or non-compete agreements with any of these key employees; however, if employment was terminated, Mr. Fortino, Mr. Easterly, and Ms. McConnaughy would all lose unvested shares of Blue Valley Ban Corp. restricted stock awarded over the past three years as well as amounts awarded in their Long-Term Retention Bonus Pools. Mr. Regnier would lose unvested shares of Blue Valley Ban Corp. restricted stock awarded in 2009 as well as amounts awarded in his Long-Term Retention Bonus Pool. We carry a $1 million “key person” life insurance policy on the life of Mr. Regnier.

If we are not able to compete effectively in the highly competitive banking industry, our business will be adversely affected.

     Our business is extremely competitive. Many of our competitors are, or are affiliates of, enterprises that have greater resources, name recognition and market presence than we do. Some of our competitors are not regulated as extensively as we are and, therefore, may have greater flexibility in competing for business. Some of these competitors are subject to similar regulation but have the advantages of established customer bases, higher lending limits, extensive branch networks, numerous ATMs, and more ability to absorb the costs of maintaining technology or other factors.

Continued losses could erode our capital levels.

     Our capital level at December 31, 2009 was above the “well” capitalized level under regulatory definitions. However, continued losses could cause our capital level to fall to a level that is below the “well” capitalized level under regulatory definitions. Failure to maintain well capitalized status could result in adverse regulatory actions against us, as well as jeopardize our ability to acquire needed funding through sources such as brokered deposits, Federal Home Loan advances, or unsecured Federal funds credit lines, and could damage our reputation in our deposit markets, possibly resulting in deposit declines that could decrease our liquidity. Additional significant increases in our allowance for loan losses, significant write-downs of assets, or other operating losses would decrease our capital levels further.

Confidential customer information transmitted through the Bank’s online banking service is vulnerable to security breaches and computer viruses, which could expose the Bank to litigation and adversely affect its reputation and ability to generate deposits.

     The Bank provides its clients with the ability to bank online. The secure transmission of confidential information over the Internet is a critical element of online banking. The Bank’s network could be vulnerable to unauthorized access, computer viruses, phishing schemes and other security problems. The Bank may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that the Bank’s activities or the activities of its clients involve the storage and transmission of confidential information, security breaches and viruses could expose the Bank to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing clients to lose confidence in the Bank’s systems and could adversely affect its reputation and its ability to generate deposits.

Recent legislative and regulatory initiatives to address these difficult market and economic conditions my not stabilize the U.S. financial system.

     On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA) was signed into law. The EESA authorizes the U.S. Treasury Department through the Troubled Asset Relief Program (TARP) to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans and certain other financial assets, including debt and equity securities used by financial institutions and their holding companies. The

Treasury allocated $250 billion to the TARP Capital Purchase Plan Program. The program was designed to attract broad participation by healthy institutions, to stabilize the financial system and to increase lending for the benefit of the U.S. economy. As part of the Capital Purchase Plan, the U.S. Treasury purchased debit and equity securities from participating institutions. The Company became a participant in the Capital Purchase Program in December 2008.

     The EESA followed, and has been followed, by numerous actions by the Federal Reserve, Congress, U.S. Treasury, the Securities Exchange Commission and others to address the liquidity and credit crisis. These measures include, but are not limited to, the homeowner liquidity relief program which encourages loan restructuring and modification, action against short selling practices and the Temporary Liquidity Guarantee Program. There can be no assurance as to the actual impact these initiatives may have on the financial markets. The failure of these initiatives to help stabilize the financial markets and if the economy continues or worsens, our business, financial condition, results of operations, and market price of our common stock could be adversely impacted.

Item 1B:		Unresolved Staff Comments

     No items are reportable.

Item 2:		Properties

The Bank currently operates five full service banking centers, which includes our principal office located at 11935 Riley in Overland Park, Kansas, and operates one mortgage and operations center location. In January 2009, the Company placed the 7900 College Boulevard location up for sale or lease. The portions of these premises not occupied by the Bank are leased to third parties. The following table sets forth the locations of the banking and mortgage centers, dates opened, mortgage indebtedness, and occupancy:

				Mortgage Indebtedness
				as of December 31,
Location		Year Occupied		2009		Occupancy
Overland Park Banking Center 11935 Riley						80%
Overland Park, Kansas *		1994		None		One sublease occupying 20%
Olathe Banking Center 1235 E. Santa Fe Olathe, Kansas **		2001		None		100%
Shawnee Banking Center 5520 Hedge Lane Terrace Shawnee, Kansas **		2001		None		100%
Mortgage and Operations Center 7900 College Boulevard Overland Park, Kansas *		2003		None		100%
Leawood Banking Center 13401 Mission Road						55%
Leawood, Kansas *		2004		None		Four subleases occupying 45%
Lenexa Banking Center 9500 Lackman Road Lenexa, Kansas **		2007		None		100%

Item 3:		Legal Proceedings

     We are periodically involved in routine litigation incidental to our business. We are not a party to any pending litigation that we believe is likely to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

Item 4:		Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of our stockholders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report.

Item 5:		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

     We are a reporting company under the Securities Exchange Act of 1934, as amended, as a result of a trust preferred securities offering we completed during July 2000. Shares of our common stock have traded on the Over-The-Counter Bulletin Board (OTCBB) since July 2002 under the symbol “BVBC.” As of January 31, 2010, there were approximately 314 stockholders of record of our common stock. The following table sets forth the high and low bid prices of the Company’s common stock since the first quarter of 2008 based on closing stock price quotations provided by Yahoo.com. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

		2009								2008
		High				Low				High				Low
Fiscal Quarter
First		$	25.00			$	10.05			$	34.00			$	31.00
Second			12.00				7.50				34.00				26.00
Third			10.50				7.45				31.00				25.00
Fourth			10.50				9.30				25.00				15.00

Dividends

     Our board of directors declared cash dividends on our common stock as follows:

Declaration Date		Amount Per Share		Record Date		Pay Date
December 20, 2007		$0.36		December 31, 2007		January 31, 2008

     The Company did not declare or pay a dividend in 2009.

     The Company’s consolidated net income consists largely of the net income of the Bank, therefore, our ability to pay dividends on our common stock is subject to the receipt of dividends from the Bank. The ability of the Bank to pay dividends to us, and thus our ability to pay dividends to our stockholders, is regulated by federal banking laws. In addition, as we elect to defer interest payments on our outstanding junior subordinated debentures and dividends on our Preferred Shares, we are prohibited from paying dividends on our common stock during such deferral. As a result of an agreement with the Federal Reserve Bank (for more information see Regulatory Matters section in Management’s Discussion and Analysis of Financial Condition and Results of Operations), prior regulatory approval is currently required prior to the payment of any dividends by the Company or the Bank. After that agreement is terminated, our Board of Directors anticipates the ability to declare future dividends, subject to limitations imposed by regulatory capital guidelines and approval, as permitted by the Company’s profitability and liquidity. The date for termination of that agreement is not known. In addition, the Company is subject to dividend limitations as part of the Capital Purchase Plan. As long as any preferred stock issued under the CPP remains outstanding, the Company is prohibited, without the consent of the Treasury, from declaring or paying a common stock dividend. However, due to our lack of earnings and regulatory constraints the Company did not pay a cash dividend to our common stockholders in the fiscal years ended 2008 or 2009, nor do we know when we will resume paying cash dividends.

Item 6:		Selected Financial Data

     The following table presents our consolidated financial data as of and for the five years ended December 31, 2009, and should be read in conjunction with the consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each of which is included elsewhere in this Form 10-K. The selected statements of financial condition and statements of income data, insofar as they relate to the five years in the five-year period ended December 31, 2009, have been derived from our audited consolidated financial statements.

		As of and for the
		Year Ended December 31,
		2009				2008				2007				2006				2005
		(In thousands, except share and per share data)
Selected Statement of Income Data
Interest income:
Interest and fees on loans		$	33,996			$	41,245			$	47,194			$	44,537			$	37,492
Federal funds sold and other short-term investments			144				378				557				256				580
Available-for-sale securities			1,943				3,375				4,466				4,039				2,317
Total interest income			36,083				44,998				52,217				48,832				40,389
Interest expense:
Interest-bearing demand deposits			2,589				1,394				656				97				94
Savings and money market deposit accounts			490				2,402				6,362				4,356				3,861
Other time deposits			10,742				12,139				13,134				11,254				9,171
Funds borrowed			4,166				5,756				5,430				5,255				4,867
Total interest expense			17,987				21,691				25,582				20,962				17,993
Net interest income			18,096				23,307				26,635				27,870				22,396
Provision for loan losses			21,635				17,025				2,855				1,255				230
Net interest income (loss) after provision for loan losses			(3,539	)			6,282				23,780				26,615				22,166
Non-interest income:
Loans held for sale fee income			2,785				2,136				3,160				5,046				7,408
Service fees			3,250				3,299				2,830				2,491				2,166
Realized gains on available-for-sale securities			346				702				105				—				—
Gain on settlement of litigation			—				1,000				—				—				—
Other income			1,875				1,275				1,105				1,344				1,727
Total non-interest income			8,256				8,412				7,200				8,881				11,301
Non-interest expense:
Salaries and employee benefits			12,272				12,500				13,570				14,737				15,986
Net occupancy expense			2,811				3,144				3,200				3,059				3,307
Goodwill impairment			—				4,821				—				—				—
Other operating expense			12,758				8,304				7,447				6,578				6,841
Total non-interest expense			27,841				28,769				24,217				24,374				26,134
Income (loss) before income taxes			(23,124	)			(14,075	)			6,763				11,122				7,333
Provision (benefit) for income taxes			(8,514	)			(3,824	)			2,275				4,199				2,764
Net income (loss)		$	(14,610	)		$	(10,251	)		$	4,488			$	6,923			$	4,569
Per Share Data
Basic earnings		$	(5.68	)		$	(4.20	)		$	1.86			$	2.93			$	1.95
Diluted earnings			(5.68	)			(4.20	)			1.84				2.88				1.91
Dividends			0.00				0.00				0.36				0.30				0.25
Book value basic (at end of period)			14.09				19.97				24.34				22.45				19.42
Weighted average common shares outstanding:
Basic			2,754,419				2,438,809				2,410,621				2,365,932				2,348,805
Diluted			2,762,603				2,460,045				2,438,203				2,407,802				2,388,531
Dividend payout ratio			0.00	%			0.00	%			19.35	%			10.23	%			12.82	%

		As of and for the
		Year Ended December 31,
		2009				2008				2007				2006				2005
		(In thousands)
Selected Financial Condition Data (at end of period):
Total available-for-sale securities		$	72,757			$	68,681			$	76,653			$	87,009			$	99,987
Total mortgage loans held for sale			8,752				8,157				10,978				21,805				13,906
Total loans			554,111				662,401				596,646				528,515				503,143
Total assets			773,967				815,700				736,213				692,219				689,589
Total deposits			590,110				600,868				536,370				535,864				529,341
Funds borrowed			118,208				135,129				134,942				96,577				104,394
Total stockholders’ equity			60,603				76,439				58,934				53,820				46,255
Trust assets under administration			121,418				112,688				104,167				104,445				93,988
Selected Financial Ratios and Other Data:
Performance Ratios:
Net interest margin (1)			2.42	%			3.19	%			3.95	%			4.34	%			3.50	%
Non-interest income to average assets			1.01				1.07				0.99				1.29				1.63
Non-interest expense to average assets			3.42				3.67				3.34				3.54				3.77
Net overhead ratio (2)			2.40				2.59				2.35				2.25				2.14
Efficiency ratio (3)			105.65				90.70				71.57				66.32				77.56
Return on average assets (4)			(1.79	)			(1.31	)			0.62				1.00				0.66
Return on average equity (5)			(33.07	)			(17.53	)			7.88				13.81				10.44
Asset Quality Ratios:
Non-performing loans to total loans			6.30	%			6.54	%			4.22	%			1.31	%			0.87	%
Allowance for possible loan losses to:
Total loans			3.61				1.87				1.51				1.16				1.33
Non-performing loans			57.33				28.54				35.65				88.16				153.27
Net charge-offs to average total loans			2.30				2.16				0.06				0.35				0.17
Non-performing loans to total assets			4.51				5.31				3.42				1.00				0.63
Balance Sheet Ratios:
Loans to deposits			93.90	%			110.24	%			111.24	%			98.63	%			95.05	%
Average interest-earning assets to average
interest-bearing liabilities			114.05				115.18				117.84				119.12				116.78
Capital Ratios:
Total equity to total assets			7.83	%			9.37	%			8.01	%			7.77	%			6.71	%
Total capital to risk-weighted assets ratio			12.54				13.82				11.53				12.47				12.04
Tier 1 capital to risk-weighted assets ratio			11.26				12.57				10.28				11.33				10.25
Tier 1 capital to average assets ratio			9.07				11.50				9.86				10.29				8.86
Average equity to average assets ratio			8.47				7.66				7.85				7.27				6.31

Item 7:		Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following presents management’s discussion and analysis of our financial condition and results of operations as of the dates and for the periods indicated. You should read this discussion in conjunction with our “Selected Consolidated Financial Data,” our consolidated financial statements and the accompanying notes, and the other financial data contained elsewhere in this report.

     This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of those safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, can generally be identified by use of the words “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” or the negative of these terms or other comparable terminology. The Company is unable to predict the actual results of its future plans or strategies with certainty. Factors which could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, fluctuations in market rates of interest and loan and deposit pricing; inability to maintain or increase deposit base and secure adequate funding; a continued deterioration of general economic conditions or the demand for housing in the Company’s market areas; deterioration in the demand for mortgage financing; legislative or regulatory changes; regulatory action; continued adverse developments in the Company’s loan or investment portfolio; any inability to obtain funding on favorable terms; the Company’s non-payment on TARP funds or Trust Preferred Securities; the loss of key personnel; significant increases in competition; potential unfavorable results of litigation to which the Company may become a party, and the possible dilutive effect of potential acquisitions or expansions. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time, and it is not possible for us to predict all risk factors. Nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Critical Accounting Policies

     Please refer to Note 1 of our consolidated financial statements where we present a listing and discussion of our most significant accounting policies. After a review of these policies, we determined that accounting for the allowance for loan losses and income taxes are deemed critical accounting policies because of the valuation techniques used, and the sensitivity of certain financial statement amounts to the methods, as well as the assumptions and estimates, underlying these policies. Accounting for these critical areas requires the most subjective and complex judgments that could be subject to revision as new information becomes available.

     As presented in Note 1 and Note 3 to the consolidated financial statements, the allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio as of the balance sheet date. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The adequacy of the allowance is analyzed monthly based on internal loan reviews and qualitative measurements of our loan portfolio. Management assesses the adequacy of the allowance for loan losses based upon a number of factors including, among others:

	•		analytical reviews of loan loss experience in relationship to outstanding loans and commitments;
	•		problem and non-performing loans and other loans presenting credit concerns;
	•		trends in loan growth, portfolio composition and quality;
	•		appraisals of the value of collateral; and
	•		management’s judgment with respect to current economic conditions and their impact on the existing loan portfolio.

     The Bank computes its allowance by assigning specific reserves to impaired loans, plus a general reserve based on loss factors applied to the rest of the loan portfolio. The specific reserve on impaired loans is computed as the amount of the loan in excess of the present value of the estimated future cash flows discounted at the loan’s effective interest rate, or based on the loan’s observable market value or the fair value of the collateral if the loan is collateral dependent. The general reserve loss factors are determined based on such items as management’s evaluation of risk in the portfolio, local economic conditions, and historical loss experience. The Bank has further refined its risk grading system by developing associated reserve factors for each risk grade.

As discussed in Notes 1 and 12 of the consolidated financial statements, the Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). 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. Deferred income taxes represent the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. 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 tax assets 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 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 the management’s judgment. Deferred tax assets 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 deferred tax asset will not be realized. The Company regularly monitors taxing authorities for changes in laws and regulations and their interpretations of the judicial system.

Overview

     2009 was another challenging year for the financial services industry as the general economy continued to decline along with the continued industry wide decline in the real estate market. The Company experienced a net loss for 2009 due to a $21.6 million provision for loan losses recorded as a result of the Bank further refining the allowance for loan loss methodology to better reflect the inherent losses in the loan portfolio and a result of the weakened economic conditions. The net interest margin continued to narrow as the prime lending rate declined approximately 400 basis points during 2008, with 175 of the 400 basis point decline occurring in the fourth quarter of 2008. As market interest rates have declined, the interest rates on our variable rate assets have been reduced accordingly. In addition, new loans are being originated at lower rates commensurate with the decline in market rates. As a result of the decline in the general economic conditions, the Company has also experienced a decline in total loans due to lower loan origination volume and an increase in loan foreclosures which has resulted in lower interest income on loans. The increase in loan foreclosures has resulted in additional other operating expenses. Interest income on loans has also decreased as a result of a higher average balance of loans placed on non-accrual due to the decline in the general economic conditions. Despite a decline in the economy, we have maintained our deposit base, and excluding brokered time deposits of $76.9 million and $133.0 million in 2009 and 2008 respectively, we were able to increase our core deposits by 9.71%. This was the result of time deposit promotions during the year as well as new customer relationships established as a result of increased interest in our performance checking product. Both have allowed us the opportunity to cross sell products to new and existing customers.

     The Company experienced a net loss for 2009 of $14.6 million, a $4.3 million, or 42.52% increase from the $10.3 million net loss in 2008. Loss per share on a diluted basis was $5.68 for the year ended December 31, 2009, an increase of 35.24% compared to diluted loss per share of $4.20 for the previous year. The Company’s returns on average assets and average stockholders’ equity for 2009 were negative 1.79% and negative 33.07% compared to negative 1.31% and negative 17.53%, respectively, for 2008.

     Net interest income for 2009 was $18.1 million compared to $23.3 million earned during 2008. The decrease of $5.2 million, or 22.36%, was primarily due to a decrease in market rates earned on average earning assets and a change in asset mix, specifically higher average federal funds sold and other short-term investment balances with lower yields. While the federal funds rate has remained unchanged during 2009, the Federal Reserve lowered the federal funds rate 400 basis points during 2008 and the interest on our variable rate assets were reduced accordingly.

Contributing to the decrease in net interest income was an increase in the average balance of non-accrual loans, as compared to the same period in the prior year, due to the decline in the credit quality of the loan portfolio. The decrease in interest income was partly offset by a decrease in interest expense. As market rates have declined, the rate paid on deposits have also declined. The current credit environment has made it difficult to anticipate the future of the Company’s net interest margin. If interest rates remain at current levels or continue to decline, the Company anticipates a negative impact to net interest income as a result of the repricing of assets and liabilities. The magnitude of this impact will be dependent on the Federal Reserve’s policy decisions and market movements.

     The provision for loan losses in 2009 was $21.6 million compared to $17.0 million in 2008, and $2.9 million in 2007. The increase in the provision was a result of the continued decline in the general economic conditions during 2009. As a result, management further refined its allowance for loan losses methodology in the first quarter of 2009 to reflect the weakened economic conditions. Management assessed the loan portfolio, specifically the non-performing loans, on a credit by credit basis to assess reserve requirements. In addition, management refined the general reserves on performing loans to better reflect the impact of the weakened economic condition on the reserve requirement. Management charged down approximately $15.1 million in non-performing loans primarily related to the decline in the credit quality of the Bank’s real estate and construction portfolios and several commercial credit relationships. For the five years ended December 31, 2009, our average year-end ratio of non-performing loans to total loans was 3.85%. Our ratio of non-performing loans to total loans was 6.30% and 6.54% as of December 31, 2009 and 2008, respectively.

     Non-interest income decreased 1.85% to $8.3 million in 2009 from $8.4 million in 2008. The decrease in non-interest income was primarily a result of $1.0 million realized in 2008 as a result of a legal judgment. See Note 18 of the consolidated financial statements. Also, contributing to the decline in non-interest income was a decrease of $356,000 in realized gains on available-for-sale securities as a result of the Company selling $11.0 million in available-for-sale securities during first half of 2009 compared to $23.0 million in securities sold during the same period of 2008, as well as the market providing for slightly higher gains in 2008 as compared to 2009. The decline in non-interest income was partly offset by an increase in loans held for sale fee income by $649,000, or 30.38%. The increase was primarily attributed to an increase in loans held for sale fee income due to an increase in mortgage loans held for sale originations and refinancing experienced as a result of a decrease in market rates on mortgage loans during 2009. Other non-interest income increased $600,000, or 47.06%, as a result of gains realized on the sale of foreclosed assets held for sale and rental income received on foreclosed assets held for sale. Other non-interest income also increased as a result of the Company recording the net fair value of certain mortgage loan-related commitments which resulted in other income of $236,000.

     Non-interest expense decreased 3.23% to $27.8 million in 2009 from $28.8 million in 2008. The decrease in non-interest expense was primarily a result of the goodwill impairment recognized of $4.8 million during the fourth quarter of 2008. Other operating expenses increased $4.5 million, or 53.64%, as a result of an increase in expenses related to foreclosed assets held for sale due to an increase in the number of properties foreclosed on and held for sale. Expenses related to foreclosed assets held for sale include insurance, appraisals, utilities, real estate property taxes, legal, repairs and maintenance, and associated loss on sale. The Company also recorded a $1.4 million provision for other real estate as a result of the continued decline in the real estate market and real estate values. Other operating expenses also increased as a result of the increase in the FDIC insurance premium rates effective April 1, 2009 and the FDIC imposing a five basis point special assessment on each FDIC-insured depository institution’s assets less Tier 1 capital as of June 30, 2009, in order to rebuild the Deposit Insurance Fund and help maintain public confidence in the banking system. The expense paid by the Company for the special assessment was $364,000.

     Total assets at December 31, 2009, were $774.0 million, a decrease of $41.7 million, or 5.12%, from $815.7 million at December 31, 2008. Deposits and stockholders’ equity at December 31, 2009 were $590.1 million and $60.6 million, compared with $600.9 million and $76.4 million at December 31, 2008, decreases of $10.8 million, or 1.79%, and $15.8 million, or 20.72%, respectively.

     Loans at December 31, 2009 totaled $554.1 million, a decrease of $108.3 million, or 16.35%, compared to December 31, 2008. The loan to deposit ratio at December 31, 2009 was 93.90% compared to 110.24% at December 31, 2008. Our funding philosophy for loans not held for sale is to primarily increase deposits from retail

and commercial deposit sources and secondarily use other borrowing sources as necessary to fund loans within the limits of the Bank’s capital base.

Net Interest Income

     A primary component of our net income is our net interest income. Net interest income is determined by the spread between the fully tax equivalent (FTE) yields we earn on our interest-earning assets and the rates we pay on our interest-bearing liabilities, as well as the relative amounts of such assets and liabilities. FTE net interest margin is determined by dividing FTE net interest income by average interest-earning assets. The following discussion should be read along with analysis of the “Average Balances, Yields and Rates” table on page 31.

     Years ended December 31, 2009 and 2008. FTE net interest income for 2009 decreased to $18.1 million from $23.3 million in 2008, a $5.2 million, or 22.37%, decrease.

     FTE interest income for 2009 was $36.1 million, a decrease of $8.9 million, or 19.82%, from $45.0 million in 2008. This decrease was primarily a result of an overall decrease in yields on average earning assets and a change in asset mix, specifically higher average federal funds sold and other short-term investment balances with lower yields. The overall yield on average earning assets decreased 133 basis points to 4.83% compared to 6.16% in 2008. This significant decrease resulted from the decrease in market interest rates as the Federal Reserve lowered the federal fund rate by 400 basis points in 2008, 175 of the 400 basis point decline occurred during the fourth quarter of 2008. Another factor contributing to the decrease was an increase in the average balance of non-accrual loans as compared to the same period in the prior year, due to a decline in the credit quality of the loan portfolio. The Company has experienced a decrease in the average balance of loans by $23.6 million, or 3.74%, as a result of several larger loan payoffs, an increase in loan foreclosures, and lower loan origination volume due to the current economic environment which has resulted in lower interest income on loans. Average available federal funds sold and other short-term investments increased $45.8 million, or 203.90%. The increase in average federal funds sold and other short-term investments was a result of a decline in the average balance of loans and a decrease in average available-for-sale securities of $9.4 million, or 13.51%, as $69.8 million in available-for-sale securities matured or were called as a result of the rate environment during the year. In addition, the Company sold $11.0 million in available-for-sale securities during the first quarter of 2009 to restructure the investment portfolio to better position the Company in the current rate environment. As our higher yielding available-for-sale securities are called or matured the securities available for investing have lower yields due to the current rate environment, thus resulting in lower interest income.

     Interest expense for 2009 was $18.0 million, a decrease of $3.7 million, or 17.08%, from $21.7 million in 2008. The decrease resulted from a decrease in the rate paid on average interest-bearing liabilities resulting from the impact of the lower market interest rates on savings and money market deposits, time deposits, short-term debt and long-term debt. The rate paid on total average interest-bearing liabilities decreased to 2.75% for the year ended December 31, 2009, compared to 3.42% in 2008, a decrease of 67 basis points. Total average interest-bearing liabilities increased $20.7 million, or 3.27%, to $654.7 million at December 31, 2009, compared to $634.0 million at December 31, 2008. The increase was attributed to increases in time deposits, which increased $51.0 million, or 17.79%. Average time deposits increased as a result of the time deposit promotions during the fourth quarter of 2008 and first and third quarters of 2009. The increase in average interest-bearing liabilities was partially offset by a decrease in average short-term debt by $22.7 million, or 49.44%. This decrease was primarily the result of the Company paying off its operating line of credit of $15.0 million in December 2008 and an overall decrease in repurchase agreement balances as customers have moved funds into the CDARS program. Average interest-bearing liabilities were also offset by a decrease in average long-term debt by $7.4 million as a result of the Company paying off $3.5 million in FHLB advances in October 2008, $2.3 million related to Blue Valley Ban Corp.’s term note in December 2008 and $5.3 million related to Blue Valley Building Corp. debt in June 2009.

     Years ended December 31, 2008 and 2007. FTE net interest income for 2008 decreased to $23.3 million from $26.6 million in 2007, a $3.3 million, or 12.51%, decrease.

     FTE interest income for 2008 was $45.0 million, a decrease of $7.2 million, or 13.83%, from $52.2 million in 2007. This decrease was primarily a result of an overall decrease in yields on average earning assets. The overall

yield on average earning assets decreased by 159 basis points to 6.16% for 2008 compared to 7.75% in 2007. This significant decrease in yield resulted from the decrease in market interest rates as the Federal Reserve has lowered the federal funds rate 400 basis points during 2008. The decrease was also a result of an increase in non-accrual loans and the reversal of $1.2 million in interest on loans placed on non-accrual during 2008. The decline in yield would have been 143 basis points had the Company not reversed the interest on these non-accrual loans. The decrease in interest income was partly offset by an increase in average earning assets, which increased $55.9 million, or 8.29% during 2008. The increase in average earning asset balance was a result of an increase in average balance of loans by approximately $68.4 million, or 12.15%, from the prior year attributed to internal loan growth. The increase was partially offset by a decrease in available-for-sale securities by $20.7 million, or 22.83%. The decrease was a result of the sale of $23.0 million in available-for-sale securities during 2008 to provide funding for additional loan growth and to restructure the investment portfolio to provide additional protection in the rate sensitive environment.

     Interest expense for 2008 was $21.7 million, a decrease of $3.9 million, or 15.21%, from $25.6 million in 2007. The decrease resulted from a decrease in the rate paid on average interest-bearing liabilities resulting from the impact of lower market interest rates on savings and money market deposits, time deposits, and short- and long- term debt. The rate paid on our total average interest-bearing liabilities decreased to 3.42% in 2008 compared to 4.47% in 2007, a decrease of 105 basis points. Total average interest bearing liabilities increased $61.8 million, or 10.80%, during 2008 primarily due to increases in interest-bearing demand accounts, time deposits and long-term debt. The increase in average time deposits was a result of several time deposit promotions during the year and an increase in activity by our customers in the CDARS program. Average interest-bearing deposits increased as a result of an increase in the balances of our performance checking product which was introduced during 2007. The increase in long-term debt was a result of an increase in advances with Federal Home Loan Bank to provide additional funding for loan growth and the Company advancing funds on its operating line of credit to provide additional capital for the Bank. This operating line of credit was paid off on December 5, 2008, with proceeds from the Capital Purchase Plan.

     Average Balance Sheets. The following table sets forth for the periods and as of the dates indicated, information regarding our average balances of assets and liabilities as well as the dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities and the resultant rates or costs. Ratio, yield and rate information are based on average daily balances where available; otherwise, average monthly balances have been used. Non-accrual loans are included in the calculation of average balances for loans for the periods indicated.

AVERAGE BALANCES, YIELDS AND RATES

		Year Ended December 31,
		2009												2008												2007
										Average												Average												Average
		Average								Yield/				Average								Yield/				Average								Yield/
		Balance				Interest				Rate				Balance				Interest				Rate				Balance				Interest				Rate
		(In thousands)
Assets
Federal funds sold and other short-term investments		$	68,310			$	144				0.21	%		$	22,478			$	378				1.68	%		$	10,902			$	557				5.11	%
Available-for-sale securities — taxable			60,441				1,943				3.21				69,741				3,369				4.83				90,246				4,452				4.93
Available-for-sale securities — non-taxable (1)			—				—				—				141				9				6.38				312				21				6.66
Mortgage loans held for sale			9,875				477				4.83				6,157				340				5.52				9,589				609				6.35
Loans, net of unearned discount and fees (2)			608,080				33,519				5.51				631,673				40,905				6.48				563,224				46,585				8.27
Total earning assets			746,706				36,083				4.83				730,190				45,001				6.16				674,273				52,224				7.75
Cash and due from banks — non-interest bearing			36,257												20,611												17,728
Allowance for loan losses			(19,647	)											(10,060	)											(6,962	)
Premises and equipment, net			18,270												18,337												19,072
Other assets			33,381												25,704												20,895
Total assets		$	814,967											$	784,782											$	725,006
Liabilities and Stockholders’ Equity
Deposits-interest bearing:
Interest-bearing demand accounts		$	96,315			$	2,589				2.69	%		$	52,776			$	1,394				2.64	%		$	30,719			$	656				2.14	%
Savings and money market deposits			93,672				490				0.52				137,295				2,402				1.75				163,099				6,362				3.90
Time deposits			337,363				10,742				3.18				286,404				12,139				4.24				269,673				13,134				4.87
Total interest-bearing deposits			527,350				13,821				2.62				476,475				15,935				3.34				463,491				20,152				4.35
Short-term debt			23,261				58				0.25				46,008				943				2.05				33,610				1,319				3.93
Long-term debt			104,096				4,108				3.95				111,490				4,813				4.32				75,087				4,111				5.48
Total interest-bearing liabilities			654,707				17,987				2.75				633,973				21,691				3.42				572,188				25,582				4.47
Non-interest bearing deposits			86,744												86,811												91,151
Other liabilities			4,478												3,852												4,745
Stockholders’ equity			69,038												60,146												56,922
Total liabilities and stockholders’ equity		$	814,967											$	784,782											$	725,006
FTE net interest income/spread						$	18,096				2.08	%						$	23,310				2.74	%						$	26,642				3.28	%
FTE net interest margin											2.42	%											3.19	%											3.95	%

     Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes. The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the increase or decrease related to changes in balances and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to:

•		changes in rate, reflecting changes in rate multiplied by the prior period volume; and
•		changes in volume, reflecting changes in volume multiplied by the current period rate.

CHANGES IN INTEREST INCOME AND EXPENSE VOLUME AND RATE VARIANCES

		Year Ended December 31,
		(In thousands)
		2009 Compared to 2008												2008 Compared to 2007
		Change				Change								Change				Change
		Due to				Due to				Total				Due to				Due to				Total
		Rate				Volume				Change				Rate				Volume				Change
Federal funds sold and other short-term investments		$	(255	)		$	21			$	(234	)		$	(374	)		$	195			$	(179	)
Available-for-sale securities — taxable			(1,128	)			(298	)			(1,426	)			(93	)			(990	)			(1,083	)
Available-for-sale securities — non-taxable (1)			—				(9	)			(9	)			(1	)			(11	)			(12	)
Mortgage loans held for sale			(8	)			145				137				(79	)			(190	)			(269	)
Loans, net of unearned discount and fees			(6,088	)			(1,298	)			(7,386	)			(10,112	)			4,432				(5,680	)
Total interest income			(7,479	)			(1,439	)			(8,918	)			(10,659	)			3,436				(7,223	)
Interest-bearing demand accounts			26				1,169				1,195				155				583				738
Savings and money market deposits			(1,686	)			(226	)			(1,912	)			(3,509	)			(451	)			(3,960	)
Time deposits			(1,963	)			566				(1,397	)			(1,707	)			712				(995	)
Short-term debt			(828	)			(57	)			(885	)			(630	)			254				(376	)
Long-term debt			(411	)			(294	)			(705	)			(870	)			1,572				702
Total interest expense			(4,862	)			1,158				(3,704	)			(6,561	)			2,670				(3,891	)
Net interest income		$	(2,617	)		$	(2,597	)		$	(5,214	)		$	(4,098	)		$	766			$	(3,332	)

Provision for Loan Losses

     The Company makes provisions for loan losses in amounts management deems necessary to maintain the allowance for loan losses at an appropriate level. The allowance for loan losses is based upon the analysis of several factors, including general economic conditions, analysis of impaired loans, general reserve factors, changes in loan mix, and current and historical charge-offs by loan type. Historical charge off information currently utilized is based on three year weighted average of net charge offs by loan type with more weight given to more current data due to the current economic environment. The Company’s credit administration function performs monthly analyses on the loan portfolio to assess and report on risk levels, delinquencies, internal ranking system and overall credit exposure. Management and the Bank’s Board of Directors review the allowance for loan losses monthly, considering such factors as current and projected economic conditions, loan growth, the composition of the loan portfolio, loan trends and classifications, and other factors. The allowance for loan losses represents our best estimate of probable losses that have been incurred as of the respective balance sheet dates.

     During the year ended December 31, 2009, we provided $21.6 million for loan losses, as compared to $17.0 million for the year ended December 31, 2008, an increase of $4.6 million, or 27.08%. The significant provision for loan losses recorded during 2009 was a result of refining the Bank’s allowance for loan loss methodology to better reflect the inherent losses in our loan portfolio and a result of worsening economic conditions in the economy in which we operate. A portion of the provision relates to specific loans in our current portfolio, specifically in the commercial real estate, land development and real estate construction loans, and an increase in the general reserves on our performing loans to reflect the impact of the weakened economic conditions. The provision for loan losses attributed to refining the Bank’s allowance for loan loss methodology and increasing the general reserves was approximately $9.2 million. Economic conditions monitored include but are not limited to: Johnson County, KS unemployment rate; Johnson County, KS consumer confidence; foreclosure rates; vacancy property rates; stock market performance; inflation; and interest rates. Management assessed the loan portfolio, specifically the non-performing loans, on a credit by credit basis, to assess the reserve requirement and charged down a total of $15.1 million in non-performing loans during 2009. Of the $15.1 million charged down, 61% related to the real estate and construction market and 31% primarily to commercial loans (primarily two larger deteriorating commercial credits). Management believes they have identified the significant non-performing loans and will continue to aggressively pursue collection of these loans. If the trend is more prolonged than management anticipates and losses continue to increase we could experience higher than anticipated loan losses in the future. Total impaired loans decreased 39.45% to $35.0 million at December 31, 2009, with a related reserve of $6.6 million, from $57.8 million at December 31, 2008, with a related reserve of $5.2 million. Net charge-offs of $14.0 million in 2009 were comparable to net charge-offs of $13.6 million in 2008.

     During 2008, our provision for loan losses increased due to a decline in the credit quality of the Bank’s real estate and construction portfolios, one deteriorating commercial credit relationship and an uncollected deposit overdraft with one commercial relationship. Management also recognized the impact of the industry wide decline in the real estate market and general economy. Management assessed the loan portfolio, specifically the non-performing loans, on a credit by credit basis and charged down a total of $13.9 million in non-performing loans in 2008. Of the $13.9 million charged down, 47% related to real estate and construction market and the remaining related to commercial loans (in particular one deteriorating commercial credit relationship and an uncollected commercial deposit overdraft). During the year ended December 31, 2008, we provided $17.0 million for loan losses, as compared to $2.9 million for the year ended December 31, 2007, an increase of $14.1 million, or 496.32%.

     The allowance for loan losses as a percentage of loans was 3.61% at December 31, 2009, compared to 1.87% in 2008 and 1.51% in 2007. The increase in this percentage from December 31, 2008 was primarily due to an increase in the provision for loan losses as a result of the decline in the credit quality of the real estate and construction portfolios due to the industry wide decline in the real estate market and general economy and charge offs taken during the year.

Non-interest Income

     The following table describes the items of our non-interest income for the periods indicated:

NON-INTEREST INCOME

		Year Ended December 31,
		2009				2008				2007
		(In thousands)
Loans held for sale fee income		$	2,785			$	2,136			$	3,160
NSF charges and service fees			1,472				1,641				1,418
Other service charges			1,778				1,658				1,412
Realized gains on available-for-sale securities			346				702				105
Gain on settlement of litigation			—				1,000				—
Other income			1,875				1,275				1,105
Total non-interest income		$	8,256			$	8,412			$	7,200

     Non-interest income declined slightly from the prior year to $8.3 million for 2009 compared with $8.4 million for 2008, a decrease of 1.85%. In 2008, the Company realized $1.0 million as a result of legal judgement (see Note

18 in the Consolidated Financial Statements for additional information). Excluding the $1.0 million legal judgment recorded in 2008, the Company experienced an increase in non-interest income in 2009 of $844,000, or 11.39%, as compared to 2008. Loans held for sale fee income increased $649,000, or 30.38%, as compared to 2008. This increase was attributed to an increase in mortgage loans held for sale originations and refinancing experienced as a result of historically low mortgage rates offered on loans during 2009. The volume of closed residential mortgage loans increased to $196.4 million in 2009, from $136.8 million in 2008 and $185.8 million in 2007. This increase was offset by the adoption of the fair value option for financial assets and financial liabilities for mortgage loans held for sale, which resulted in a net realized loss on mortgage loans held for sale of $111,000 recorded in loans held for sale fee income during 2009. Sustainability of the level of our loans held for sale fee income is primarily dependent upon the economy and interest rate environment, and secondarily dependent on our ability to develop new products and alternative delivery channels.

     Other changes reflected in non-interest income include a decrease in NSF charges and service fees by $169,000, or 10.30%. The decrease was due to fewer overdraft items by our customers and a decrease in account service charges on commercial accounts as a result of a slight increase in the earnings credit rate they receive on their accounts. Other service charge income, which includes income from trust services, investment brokerage, merchant bankcard processing and debit card processing, increased by $120,000, or 7.24%. This increase was a result of income generated from signature based debit card transactions associated with our performance checking product. The number of performance checking accounts increased by approximately 1,700 accounts, or 34.71%, during 2009. The increase in other service charge income was partially offset by a decrease in fee income generated from our investment brokerage services due to the volatility in the market. Realized gains on available-for-sale securities decreased $356,000, or 50.71%, as compared to 2008 as a result of the Company selling $11.0 million in available-for-sale securities in 2009 compared to $23.0 million in securities sold during 2008, as well as the market providing slightly higher gains in 2008 as compared to 2009. The securities were sold during the first quarter of 2009 to restructure the investment portfolio for the current rate environment. Other income increased $600,000, or 47.06%, as compared to 2008. The increase was the result of gains realized on the sale of foreclosed assets held for sale and rental income received on foreclosed assets held for sale. In addition, the increase in other income was a result of the Company recording the net fair value of certain mortgage loan-related commitments which resulted in an increase in other income of $236,000. Future growth of other non-interest income categories is dependent on new product development and growth in our customer base.

     Non-interest income increased to $8.4 million, or 16.83%, during 2008, from $7.2 million during 2007. The increase was primarily attributable to the $1.0 million realized as a result of legal settlement. See Note 18 in the Consolidated Financial Statements. In addition, the increase was a result of gains realized on the sale of available-for-sale securities of $702,000 during the first and second quarter of 2008. The securities were sold to provide additional funding for our loan growth and to restructure the investment portfolio to provide additional protection in the rate sensitive environment. Other increases in non-interest income include an increase in NSF charges and service fees by $223,000, or 15.73%, from 2008 to 2007. The increase was a result of an increase in the number of transactional accounts, as well as an increase in account service charges on commercial accounts due to a decrease in the earnings credit rate they receive on their accounts. The earnings credit rate has decreased along with the drop in market rates. Other service charge income, which includes trust services income, investment brokerage income, merchant bankcard processing and debit card processing income, increased by $246,000, or 17.42% from 2007 to 2008. The increase was a result of income generated from signature based debit card transactions associated with our performance checking product and partly due to an increase in activity with our merchant bank card services. Other income increased $170,000, or 15.38% from 2007 to 2008 as a result of proceeds received on a previously leased asset and gains realized on the sale of other real estate owned during 2008. The increase in non-interest income was partially offset by a decrease in loans held for sale fee income of $1.0 million, or 32.41%. We experienced a decline in our loans held for sale fee income resulting from a decline in residential mortgage origination volume due to the industry wide decline in the real estate market, as well as the Company operating with a smaller mortgage department than in previous years due to restructuring and reduction in staff. The volume of closed residential mortgages fell to $136.8 million in 2008 from $185.8 million and $336.3 million in 2007 and 2006, respectively.

Non-interest Expense

     The following table describes the items of our non-interest expense for the periods indicated.

NON-INTEREST EXPENSE

		Year Ended December 31,
		2009				2008				2007
		(In thousands)
Salaries and employee benefits		$	12,272			$	12,500			$	13,570
Net occupancy expense			2,811				3,144				3,200
Goodwill impairment			—				4,821				—
Other operating expense			12,758				8,304				7,447
Total non-interest expenses		$	27,841			$	28,769			$	24,217

     Non-interest expense decreased 3.23% to $27.8 million during 2009, compared to $28.8 million in the prior year primarily due to the goodwill impairment charge of $4.8 million recognized during the fourth quarter of 2008. Non-interest expense, excluding the goodwill impairment charge, increased $3.9 million, or 16.26% from 2008 to 2009. The increase in non-interest expense, excluding the goodwill impairment, was primarily attributed to an increase in other operating expenses of $4.5 million, or 53.64%. Other operating expenses have increased as a result of an increase in expenses related to foreclosed assets held for sale due to an increase in the number of properties foreclosed on and held for sale. Expenses related to foreclosed assets held for sale include insurance, appraisals, utilities, real estate property taxes, legal, repairs and maintenance, and associated loss on sale. The Company also recorded a $1.4 million provision for other real estate as a result of the continued decline in the real estate market and real estate values. In addition, the increase was the result of an increase in the FDIC insurance premium rates effective April 1, 2009 and the FDIC special assessment imposed on each FDIC-insured depository institution in order to rebuild the Deposit Insurance Fund and help maintain public confidence in the banking system. The expense paid by the Company for the special assessment was $364,000.

     Other factors contributing to the change in non-interest expense include a decrease in salaries and employee benefits of $228,000, or 1.82%. The decrease was a result of the restructuring and reduction in force during 2008, offset by slightly higher commissions paid in 2009 on mortgage loans originated and sold in the secondary market as a result of increased volume. Net occupancy expense decreased $333,000, or 10.59%, as a result of the termination of a small loan production office lease in May 2008, lower repairs and maintenance expenses, and lower fixed asset purchases during 2009.

     Non-interest expense increased 18.80% to $28.8 million during 2008, compared to $24.2 million in 2007 primarily due to the goodwill impairment charge of $4.8 million recognized during the fourth quarter of 2008. The Company assesses at least annually its goodwill impairment. Based on guidelines contained in Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, which was subsequently incorporated into FASB Accounting Standards Codification in Topic 350, the Company recognized a goodwill impairment charge of $4.8 million. Management believes this impairment was attributable to the continued volatility throughout the financial services industry and the effect such volatility has had on market prices of financial services stocks, weakened economic conditions, decline in the credit quality of the real estate and construction portfolio, and the operating loss recorded by the Company in 2008.

     Non-interest expense, excluding goodwill impairment charge, decreased $269,000, or 1.11% from 2007 to 2008. The decrease in non-interest expense, excluding goodwill impairment, was primarily attributed to a decrease in salaries and employee benefits. Our salaries and employee benefits expense decreased $1.1 million, or 7.89%, to $12.5 million in 2008 from $13.6 million in 2007, mainly due to a decline in compensation costs as a result of our restructuring and reduction in staff during 2008. We had 185 full-time employees at December 31, 2008 compared to 214 full-time employees at December 31, 2007. In addition, the decrease in salaries and employee benefits was a result of the Company not accruing for a profit sharing contribution for 2008 as the Company did not meet expectations to provide for a contribution for the 2008 plan year. Net occupancy expense had a slight decrease of $56,000, or 1.75% from 2007 to 2008. These decreases were partially offset by an increase in other operating expenses by $857,000, or 11.51% primarily a result of an increase in expenses related to foreclosed assets held for

sale. Expenses related to foreclosed assets held for sale include, insurance, appraisals, utilities, real estate property taxes, legal, repairs and maintenance, and associated loss on sale.

Income Taxes

     Our income tax benefit during 2009 was $8.5 million, compared to our income tax benefit of $3.8 million during 2008, and income tax expense of $2.3 million during 2007. The increase in benefit in 2009 reflects our net loss for the 2009 fiscal year. Our consolidated effective income tax rates of 37%, 27% and 34% for the three years ended December 31, 2009, 2008, and 2007, respectively, varies from the statutory rate principally due to the effects of state income taxes and the effect of the write off of goodwill in 2008.

Financial Condition

     Total assets for the Company at December 31, 2009 were $774.0 million, a decrease of $41.7 million, or 5.12%, compared to $815.7 million at December 31, 2008. Deposits were $590.1 million compared with $600.9 million at December 31, 2008, a decrease of $10.8 million, or 1.79%. Stockholders’ equity was $60.6 million at December 31, 2009 compared with $76.4 million at December 31, 2008, a decrease of $15.8 million, or 20.72%.

     Investment securities. The primary objectives of our investment portfolio are to secure the safety of principal, to provide adequate liquidity and to provide securities for use in pledging for public funds or repurchase agreements. Income is a secondary consideration. As a result, we generally do not invest in mortgage-backed securities and other higher yielding investments. As of December 31, 2009, all of the securities in our investment portfolio were classified as available-for-sale in order to provide us with an additional source of liquidity when necessary and as pledging requirements permit.

     Total investment securities at December 31, 2009 were $72.8 million, an increase of $4.1 million, or 5.93%, compared to $68.7 million at December 31, 2008. The increase was a result of the purchase of $85.7 million in available-for-sale securities to replace the $69.8 million of available-for-sale securities that were called or matured during 2009 as well as the sale of $11.0 million in available-for-sale securities during 2009 to restructure the investment portfolio for the current rate environment.

     The following table presents the composition of our available-for-sale investment portfolio by major category at the dates indicated.

INVESTMENT SECURITIES PORTFOLIO COMPOSITION

		At December 31,
		2009				2008				2007
		(In thousands)
U.S. government sponsored agency securities		$	72,163			$	68,092			$	75,953
State and political subdivisions			—				—				210
Equity and other securities			594				589				490
Total		$	72,757			$	68,681			$	76,653

     The following table sets forth the maturities, carrying value, and average yields for securities in our investment portfolio at December 31, 2009. Yields are presented on a tax equivalent basis. Expected maturities could differ from contractual maturities due to unscheduled repayments.

																										More Than Ten								Total Investment
		One Year or Less								One to Five Years								Five to Ten Years								Years								Securities
		Carrying				Average				Carrying				Average				Carrying				Average				Carrying				Average				Carrying				Average
		Value				Yield				Value				Yield				Value				Yield				Value				Yield				Value				Yield
		(In thousands)
Available-For-Sale
U.S. government sponsored agency		$	—				—	%		$	67,272				2.46	%		$	—				—	%		$	4,891				3.00	%		$	72,163				2.50	%
Equity and other securities with no defined maturity			—				—				—				—				—				—				—				—				594				3.86
Total available-for-sale		$	—				—	%		$	67,272				2.46	%		$	—				—	%		$	4,891				3.00	%		$	72,757				2.51	%

     Loans Held for Sale. Mortgage loans held for sale at December 31, 2009 totaled $8.8 million, an increase of $595,000, or 7.29%, compared to $8.2 million at December 31, 2008. As of April 1, 2009, the Company elected to carry loans held for sale at fair value. The volume of loans held for sale originated during 2009 increased due to historically low mortgage rates. The Company’s principal funding source for mortgage loans held for sale are our core deposits. Another source of funding available for the Bank are short-term and long-term advances from the Federal Home Loan Bank. Advance availability fluctuates depending on levels of available collateral and is determined daily with regards to mortgage loans held for sale and quarterly with regards to overall availability and at December 31, 2009, approximately $8.8 million was available.

     Loans. Our loan portfolio is a key source of income, and since our inception, has been a principal component of our revenue growth. Our loan portfolio reflects an emphasis on commercial, commercial real estate, and construction lending. We also offer home equity, residential real estate, lease financing, and consumer loans. We emphasize commercial lending to professionals, businesses and their owners. Commercial loans and loans secured by commercial real estate accounted for 55.96%, 51.83% and 48.57% of our total loans at December 31, 2009, 2008 and 2007, respectively.

     Loans were $554.1 million at December 31, 2009, a decrease of $108.3 million, or 16.35%, compared to December 31, 2008. Loans were $662.4 million at December 31, 2008, an increase of $65.8 million, or 11.02%, compared to December 31, 2007. The Bank experienced decreases in most loan categories during 2009. The decrease was attributable to several larger loans paying off, the foreclosure of approximately $32.2 million of other real estate properties and personal property during 2009, lower loan originations due to the current economic conditions and charge downs on non-performing loans which is discussed further under the Provision for Loan Losses section.

     The loan to deposit ratio decreased to 93.90%, compared to 110.24% at December 31, 2008, and 111.24% at December 31, 2007.

     The following table sets forth the composition of the Company’s loan portfolio by loan type as of the dates indicated. The amounts in the following table are shown net of discounts and other deductions.

		As of December 31,
		2009								2008								2007								2006								2005
		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
		(In thousands)
Commercial		$	142,528				25.72	%		$	172,647				26.06	%		$	139,120				23.32	%		$	110,849				20.97	%		$	112,452				22.35	%
Commercial real estate			167,581				30.24				170,697				25.77				150,655				25.25				126,952				24.02				114,562				22.77
Construction			113,077				20.41				182,933				27.62				188,229				31.55				171,709				32.49				139,662				27.76
Home equity			66,586				12.02				59,257				8.94				38,473				6.45				32,408				6.13				33,637				6.68
Residential real estate			45,014				8.12				43,695				6.60				37,511				6.29				34,988				6.63				39,371				7.83
Lease financing			11,259				2.03				18,927				2.86				19,724				3.30				18,512				3.50				18,238				3.62
Consumer			8,066				1.46				14,245				2.15				22,934				3.84				33,097				6.26				45,221				8.99
Total loans and leases			554,111				100.00	%			662,401				100.00	%			596,646				100.00	%			528,515				100.00	%			503,143				100.00	%
Less allowance for loan losses			20,000								12,368								8,982								6,106								6,704
Loans, net		$	534,111							$	650,033							$	587,664							$	522,409							$	496,439