Attached files
file | filename |
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EX-99.2 - EX-99.2 - BLUE VALLEY BAN CORP | c63636exv99w2.htm |
EX-32.1 - EX-32.1 - BLUE VALLEY BAN CORP | c63636exv32w1.htm |
EX-21.1 - EX-21.1 - BLUE VALLEY BAN CORP | c63636exv21w1.htm |
EX-31.1 - EX-31.1 - BLUE VALLEY BAN CORP | c63636exv31w1.htm |
EX-99.1 - EX-99.1 - BLUE VALLEY BAN CORP | c63636exv99w1.htm |
EX-31.2 - EX-31.2 - BLUE VALLEY BAN CORP | c63636exv31w2.htm |
EX-23.3 - EX-23.3 - BLUE VALLEY BAN CORP | c63636exv23w3.htm |
Table of Contents
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 |
For the fiscal year ended December 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________________ to __________________
Commission file number: 001-15933
BLUE VALLEY BAN CORP.
(Exact name of registrant as specified in its charter)
Kansas | 48-1070996 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
11935 Riley | ||
Overland Park, Kansas | 66225-6128 | |
(Address of principal executive offices) | (Zip Code) |
Registrants 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 registrants 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 | Smaller reporting companyþ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Securities Act Yes o No þ
As of January 31, 2011 1,732,859 shares of the Registrants common stock were held by
non-affiliates. The aggregate market value of these common shares, computed based on the June 30,
2010 closing price of the stock, was approximately $12.1 million. As of January 31, 2011 the
registrant had 2,843,301 shares of Common Stock ($1.00 par value) outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Part III Proxy Statement for the 2011 Annual Meeting of Stockholders
BLUE VALLEY BAN CORP.
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1
Table of Contents
Part I
Item 1: Business
The Company and Subsidiaries
As used in this Form 10-K, unless we specify otherwise, we, us, our, and Company
refers to Blue Valley Ban Corp., a Kansas corporation.
Blue Valley Ban Corp. is a bank holding company organized in 1989. The Companys 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. These are customers 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, 2010,
we had six locations in Johnson County, Kansas, including our main office that includes a lobby
banking center, an operations office in Overland Park, and full-service offices in Leawood, Lenexa,
Olathe and Shawnee, Kansas. The Bank also operates a mortgage loan production office in Gladstone,
Missouri.
Our lending activities are focused on commercial, commercial real estate, construction, and
residential real estate lending. However, the Company strives to identify, develop and maintain
diversified lines of business which provide acceptable risk-adjusted returns. The Bank also
provides home equity, lease financing, and consumer lending.
We seek 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, 2010, the Company had two wholly-owned
subsidiaries: BVBC Capital Trust II and BVBC Capital Trust III, which were created to offer the
Companys 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, 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.
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Table of Contents
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, Wyandotte County, KS and Jackson County, MO. 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 Countys population growth rate ranks in the top 8.85% of counties nationally,
and its per capita income ranks in the top 1.34% 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, 2010, total deposits in Johnson County, including those of
banks, thrifts and credit unions, were approximately $14.6 billion, which represented 24.31% of
total deposits in the state of Kansas and 34.53% 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. During 2010, our
mortgage operations were consolidated into the main bank and the office building is listed for
lease or possible sale. The Lenexa, Kansas banking facility is approximately seven miles northwest
of our headquarters location. The Lenexa facility was opened in February 2007 when we acquired
Unison Bancorp, Inc., and its subsidiary, Western National Bank. We made this acquisition to
continue our expansion in Johnson County and to establish our first presence in the Lenexa market.
Lending Activities
Overview. Our principal loan categories include commercial, commercial real estate,
construction, and residential real estate loans. We also offer a variety of home equity, equipment
financing and consumer loans. Our primary source of interest income is interest earned on our loan
portfolio. As of December 31, 2010, our loans represented approximately 68.10% of our total
assets, our legal lending limit to any one borrower was $23.0 million, and our largest single
borrower as of that date had outstanding loans of $13.8 million.
The ability of financial institutions, including us, to originate loans has been substantially
reduced due to current economic conditions. However, we continue to look for lending opportunities
within our community. 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 because of our staffs attentiveness to our customers financial needs and the
development of professional relationships with our customers. We strive to become a strategic
business partner, 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 all
unsecured loans in excess of $300,000. The Banks policies delegate lending authority up to these
amounts to an internal loan discount committee comprised of the Banks 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, 2010.
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Table of Contents
LOAN PORTFOLIO
As of December 31, 2010 | ||||||||
Amount | Percent | |||||||
(In thousands) | ||||||||
Commercial |
$ | 144,181 | 29.28 | % | ||||
Commercial real estate |
169,253 | 34.37 | ||||||
Construction |
64,641 | 13.13 | ||||||
Home equity |
64,289 | 13.05 | ||||||
Residential real estate |
36,903 | 7.49 | ||||||
Lease financing |
5,530 | 1.12 | ||||||
Consumer |
7,657 | 1.56 | ||||||
Total loans and leases |
492,454 | 100.00 | % | |||||
Less allowance for loan losses |
14,731 | |||||||
Loans, net of allowance for loan losses |
$ | 477,723 | ||||||
Commercial loans. As of December 31, 2010, approximately $144.2 million, or 29.28%, of our
loan portfolio represented commercial loans. The Bank has developed a strong reputation in
providing and servicing small business and commercial loans. The commercial portfolio is the
result of the efforts of seasoned 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 Banks 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 Banks commercial customers are largely firms engaged in
manufacturing, service, retail, construction, and distribution with significant operations in our
market areas. The Banks commercial loans are generally secured by accounts receivable, inventory,
equipment, and real estate, and the Bank generally seeks 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 $6.1 million, or 4.25%, of our commercial loans are Small Business
Administration (SBA) loans, of which $4.7 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 $5.0 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, 2010, approximately $169.3
million, or 34.37%, 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, fewer alternative users for the property, and repayment is dependent on the borrowers
operations. We attempt to mitigate these risks by carefully assessing
4
Table of Contents
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, 2010, approximately $64.6 million, or 13.13%, 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 Banks experience and reputation
in this area have grown, thereby enabling the Bank to focus on relationships with a smaller number
of larger builders. 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 generally has an existing relationship. Such loans are
made on the basis of the individuals 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 and continuing in 2010, 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 borrowers 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, 2010, our home equity loans totaled $64.3 million, or
13.05%, 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 borrowers 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, 2010, $36.9
million, or 7.49%, 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 originate residential mortgage loans with the intention of selling these loans
in the secondary market. During 2010, we originated approximately $135.9 million of residential
mortgage loans, and we sold approximately $136.5 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 expanded our mortgage division.
The timing of this expansion allowed us to expand 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 prior to loan
closing.
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Table of Contents
Our mortgage loan credit review process is consistent with the standards set by traditional
secondary market sources. The lender reviews the appraised value, credit report, 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 maximize per loan profits while minimizing the risks and 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 generally
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 30-45 days following closing pursuant to
commitments obtained from the Investor. We sell conventional FHA, VA, USDA conforming and jumbo
loans that are available to the Bank via the various 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 and we did not repurchase any in 2010. 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, 2010, our lease
portfolio totaled $5.5 million, or 1.12%, 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 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 on 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, 2010, our consumer loans totaled $7.7 million, or 1.56% 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 Banks consumer loan portfolio
consists of indirect automobile loans offered through automobile dealerships located primarily in
our trade area. As of December 31, 2010, approximately $587,000, or 7.67%, of the Banks consumer
loan portfolio represented indirect automobile loans. The Banks loans made to individuals through
this program generally represent loans to purchase new or late model automobiles. The Banks
consumer and other loans are underwritten based on the borrowers 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 unsecured. For 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 borrowers 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.
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Table of Contents
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 Banks 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, cross-marketing opportunities and 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 qualification 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 tiered rate of interest and allows for
limited check-writing ability. We believe transaction and money market accounts to be a stable
source of funding 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. Due to 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 is a member of 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. 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 Banks 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, 2010, the Bank had $45.9 million in brokered deposits,
of which $29.0 million represented customer funds placed into the CDARS program.
7
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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
2010, the amount of our fee income generated from investment brokerage services was $415,000.
Trust Services
The Bank began offering trust services in 1996. Until 1999, the Banks 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 Banks 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 Banks 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, 2010,
the Banks trust department administered 250 accounts, with assets under administration of
approximately $125.7 million. Trust services provide the Bank with a source of fee income and
additional deposits. In 2010, the amount of our fee income from trust services was $447,000.
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, 2010 the Bank had the following registered trademarks:
Bank of Blue Valley
DEPOSIT I.T.
INTERNETMORTGAGE.COM
DEPOSIT I.T.
INTERNETMORTGAGE.COM
Employees
At December 31, 2010, the Bank had approximately 199 total employees, with 167 full-time
employees. The Company and its other subsidiaries do not have any employees. None of the Banks
employees are subject to a collective bargaining agreement. We consider the Banks relationship
with its employees to be excellent.
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Directors and Executive Officers of the Registrant
For each of our directors and our executive officers, we have set forth below their ages as of
December 31, 2010, and their principal positions.
Name | Age | Positions | ||||
Directors |
||||||
Robert D. Regnier
|
62 | President, Chief Executive Officer and Chairman of the Board of Directors of Blue Valley Ban Corp.; President, Chief Executive Officer and Chairman of the Board of Directors of the Bank | ||||
Donald H. Alexander
|
72 | Director of Blue Valley Ban Corp. and the Bank | ||||
Michael J. Brown
|
54 | Director of Blue Valley Ban Corp. | ||||
Robert D. Taylor
|
63 | Director of Blue Valley Ban Corp. and Chairman of the Audit Committee of Blue Valley Ban Corp. | ||||
Additional Directors of the Bank |
||||||
Harvey S. Bodker
|
75 | Director of the Bank | ||||
Richard L. Bond
|
75 | Director of the Bank | ||||
Suzanne E. Dotson
|
64 | Director of the Bank | ||||
Charles H. Hunter
|
68 | Director of the Bank | ||||
Executive Officers who are not Directors |
||||||
Mark A. Fortino
|
44 | Executive Vice President and Chief Financial Officer of the Bank; Chief Financial Officer of Blue Valley Ban Corp. | ||||
Bruce A. Easterly
|
51 | Executive Vice President Chief Lending Officer of the Bank | ||||
Bonnie M. McConnaughy
|
51 | Senior Vice President Deposit Operations and e-Business Solutions 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
SECs website at http://www.sec.gov.
Regulation and Supervision
The Company and its subsidiaries are extensively regulated under both federal and state laws.
Laws and regulations to which the Company 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 the
Companys business and prospects, and legislative and policy changes may affect the Companys
operations. The Company 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.
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The following references to statutes and regulations affecting the Company and the Bank are
brief summaries only and do not purport to be complete and are qualified in their entirety by
reference to the actual statutes and regulations.
Applicable Legislation
The enactment of the legislation described below has affected the banking industry generally
and will have an on-going effect on Blue Valley Ban Corp. and its subsidiaries.
Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Wall Street Reform
and Consumer Protection Act (the Dodd-Frank Act) was signed into law on July 21, 2010. The
Dodd-Frank Act resulted in sweeping changes in the regulation of financial institutions aimed at
strengthening the sound operation of the financial services sector. The Dodd-Frank Act provides
for the following, among other provisions:
| Establishes a new oversight regulator, the Financial Stability Oversight Council, to monitor the financial system for systemic risk and to determine which entities pose significant risk, as well as monitor financial regulatory proposals and standards. | ||
| Centralize responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, with broad powers to enforce consumer protection laws and ensure that markets for consumer financial products and services are fair, transparent and competitive. | ||
| Amends Sarbanes-Oxley Act 404(b) to make permanent the temporary exemption for smaller reporting companies (filers with less than $75 million in market cap Blue Valley Ban Corp. is a smaller reporting company) to comply with the independent auditor attestation requirement on the companys evaluation of the effectiveness of internal controls over financial reporting. | ||
| Changes the assessment base for FDIC insurance assessments from the amount of total domestic deposits to average consolidated total assets less average tangible equity (Tier 1 Capital) and sets a target size for the Deposit Insurance Fund. | ||
| Permanently increases the FDIC deposit insurance per depositor from $100,000 to $250,000 and provides unlimited deposit coverage for non-interest bearing transaction accounts at all insured depository institutions until December 31, 2012. | ||
| Repeals the federal prohibitions on the payment of interest on demand deposits, thus permitting depository institutions to pay interest on business transactions and other accounts. | ||
| Requires the Federal Reserve to issue rules to limit the amount of any debit card interchange fee that an issuer may receive or charge with respect to electronic debit card transactions to be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. Cards issued by banks with less than $10 billion in assets are to be exempt from this requirement, thus Blue Valley Ban Corp. would be exempt from this requirement. | ||
| Implements corporate governance revisions for public companies, including proxy access requirements for stockholders and stockholder non-binding vote on executive compensation and golden parachute payments. | ||
| Restricts the ability of banks to apply trust preferred securities toward regulatory capital requirements. However, Tier 1 Capital treatment for trust preferred securities issued before May 19, 2010 is grandfathered for bank holding companies with less than $15 billion in total assets. Blue Valley Ban Corp.s trust preferred issuances would be grandfathered under this provision. | ||
| Mortgage reform and anti-predatory lending provision places new regulations on mortgage originators to ensure a borrowers ability to repay and imposes new disclosure requirements and appraisal reforms. |
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The specific impact of the Dodd-Frank Act on our current activities and our financial
performance will depend on the manner in which the relevant agencies develop and implement required
rules and the reaction of market participants to these regulatory developments. Many provisions of
the Dodd-Frank Act are subject to rulemaking and will take effect over several years, thus making
it difficult to assess the overall financial impact on us, our customers or the financial industry.
The American Recovery and Reinvestment Act of 2009. The American Recovery and Reinvestment
Act of 2009 (the ARRA) was signed into law on February 19, 2009. The ARRA includes a wide
variety of programs intended to create jobs and promote investment and consumer spending during the
recession. In addition, the ARRA imposes certain executive compensation and corporate expenditure
limits on all Troubled Asset Relief Program (the TARP) participants for the duration of the
period that the U.S. Treasury Department holds any equity or debt position in the company under the
Capital Purchase Plan Program. The ARRA requires the following:
| Bonus, incentive compensation, and retention payments made to the Senior Executive Officers and the next 20 most highly compensated employees are subject to recovery or clawback by the Company if the payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria; | ||
| Prohibits paying any golden parachute payment to any Senior Executive Officer or any of the next five most-highly compensated employees, generally meaning any payment in the nature of compensation to (or for the benefit of) an executive officer made in connection with an applicable severance from employment other than compensation earned for services rendered or accrued benefits; | ||
| Prohibits paying or accruing any bonus, retention award or incentive compensation to the most highly compensated employee, except for awards of long-term restricted stock that have a value equal to no greater than one-third of such executives annual compensation and do not fully vest during the restricted period; and | ||
| Review of bonuses, retention awards, and other compensation paid to the Senior Executive Officers and the next 20 most-highly compensated employees to determine whether any such payments were inconsistent with the purposes of the TARP or otherwise against public interest. |
The ARRA also sets forth additional corporate governance obligations for TARP recipients.
These additional obligations include: (i) semi-annual meetings of the Compensation Committee of the
Board of Directors (comprised entirely of independent directors) to discuss and evaluate employee
compensation plans in light of an assessment of any risk posed from such compensation plans; (ii)
company-wide policies regarding excessive or luxury expenditures; (iii) non-binding stockholder say
on pay proposals to be included in proxy materials; and (iv) written certifications by the chief
executive officer and chief financial officer with respect to compliance with the compensation
requirements of the ARRA. The ARRA amends the Emergency Economic Stabilization Act to require a
financial institutions chief executive officer and chief financial officer to annually certify
that the financial institution is in compliance with the compensation requirements of the ARRA.
Emergency Economic Stabilization Act of 2008. The Emergency Economic Stabilization Act of
2008 (the 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 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 CPP, the Treasury purchased debt and equity securities from participating institutions.
Qualified participants could 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
Companys Board of Directors approved the Companys 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
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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
Companys 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 established the Temporary Liquidity Guarantee Program which was
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 guaranteed certain senior unsecured debt of
eligible banks, thrifts and certain holding companies issued on or after October 14, 2008 through
June 30, 2009. The debt guarantee coverage limit was generally 125% of an eligible entitys
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 could 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 Debt 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 December 31, 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 December 31, 2010 depending on the risk category
assigned to the institution. The Bank opted to continue its participation in the Transaction
Account Guarantee Program. As a result of the Dodd-Frank Act, unlimited deposit coverage for
non-interest bearing accounts will be provided at all insured depository institutions starting
January 1, 2011 until December 31, 2012.
USA PATRIOT Act. The Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (the 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 governments 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 persons identity, and consult lists
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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 Gramm-Leach-Bliley 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. The Company 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 Gramm-Leach-Bliley 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 Gramm-Leach-Bliley 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.
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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 auditors attestation on internal control over financial reporting.
Under the Dodd-Frank Act, the Company is now exempt from the auditors attestation on internal
control over financial reporting. The Company anticipates continued future expenditures in order
to comply with the provisions of the Sarbanes-Oxley Act.
Bank Holding Company Regulation
The Company 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 Reserves implementing
regulations, require Federal Reserve approval prior to any acquisition of control of a bank
holding company, such as Blue Valley Ban Corp. 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 the Company 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 Reserves
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 institutions
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financial condition. As of December 31, 2010, BVBC Capital Trust II and
BVBC Capital Trust III are the Companys 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 Reserves 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 companys 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 Treasurys 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 since May 15, 2009.
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 Companys Board of Directors. That right
would continue until the Company pays all dividends in arrears. The dividend payment due August
15, 2010 was the sixth dividend payment deferred by the Company. At this time, the Treasury has
not elected a director to serve on the Companys Board of Directors; however, they have assigned an
observer to attend the Companys board meetings. The Company has accrued $2.0 million 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 Managements
Discussion and Analysis of Financial Condition and Results of Operation.
Bank Regulations
The Bank operates under a Kansas state bank charter and is subject to regulation by the Office
of the State Bank Commissioner and the Federal Reserve Bank. The Office of the State Bank
Commissioner and the Federal Reserve Bank regulate or monitor all areas of the Banks 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
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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 the Company and the Bank 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 Banks
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 Banks 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
Banks 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. The Company and the Bank has complied with
all terms of the written agreement.
Deposit Insurance. The FDIC, through its Deposit Insurance Fund, insures the Banks deposit
accounts up to the applicable limits of the FDIC. The 2010 Dodd-Frank Wall Street Reform and
Consumer Protection Act permanently raises the current standard maximum deposit insurance amount to
$250,000. 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 FDICs 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. 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 institutions assets less its Tier I capital as
of June 30, 2009 (not to exceed 10 basis points of the institutions assessment base for second
quarter 2009), which was collected on September 30, 2009. The Bank paid $364,000 for this special
assessment as of June 30, 2009.
In October 2010, the FDIC adopted a new deposit insurance fund restoration plan to ensure the
fund reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. Under the new
restoration plan, the FDIC will forgo the uniform three-basis point increase in initial assessment
rates scheduled to take place on January 1, 2011. At least semi-annually, the FDIC will update
its loss and income projections for the deposit insurance fund, and, if needed, will increase or
decrease assessment rates, following notice-and commend rulemaking if required. In February 2011,
the initial assessment rates along with the assessment base were adjusted effective April 1, 2011.
This change effectively lowered the assessment rate ranges for each risk category.
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 2010, the annual rate for this assessment was
1.04 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 1.02 basis points
for the first quarter 2011. 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.
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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. Although the Company is subject to a written agreement, the written agreement does not contain any prompt corrective action directives 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%. | ||
| 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. |
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Companies controlling an undercapitalized institution are also required to guarantee the
subsidiary institutions compliance with the capital restoration plan subject to an aggregate
limitation of the lesser of 5% of the institutions 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, 2010, 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 managements responsibility for preparing the
institutions 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 institutions 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 institutions financial
statements shall examine, attest to, and report separately on the assertion of management
concerning the effectiveness of the institutions 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 July 26, 2010, 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 the Company and on investments in the Companys securities and using those securities
as collateral for loans. These regulations and restrictions may limit the Companys 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 2011, the first $10.7
million, unchanged from its level in 2010, 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
$58.8 million, up from $55.2 million in 2010. A ten percent reserve ratio is assessed on net
transaction accounts in excess of $58.8 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.
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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 Banks 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
An investment in securities issued by the Company is subject to risks inherent to our
business. Before making an investment decision, you should carefully consider the risks and
uncertainties described below together with all the other information included or incorporated by
reference. 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 could also adversely affect its business and
financial results. If any one or a combination of these risks occurs, our business, financial
condition or results of operations could be adversely affected and the market price of the
Companys 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 Companys
actual results to differ from those expressed in any forward-looking statements.
Difficult market conditions have adversely affected the Companys 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 real estate
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 Companys 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 through 2010, 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 remained high during 2009 and 2010. If the current
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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. Treasurys CPP program.
Through that program, Treasury purchased 21,750 shares of the Companys 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.
The Company and the Bank are subject to extensive governmental regulation.
The Company and the Bank are subject to extensive governmental regulation. The Company, 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 the Company and the Bank. Any such restrictions imposed by federal and state
bank regulators could affect the profitability of the Company and the Bank. The Company and the
Bank entered into a written 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 Banks 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 Banks 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 complied with all terms of the written agreement. If the Company and Bank are not able to
continue 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 Companys Board of Directors. That right would continue until the Company
pays all dividends in arrears. The Company has deferred quarterly Preferred Share dividends since
May 15, 2009. The dividend payment due on August 15, 2010 was the sixth dividend payment deferred
by the Company. At this time, the Treasury has not elected any directors to serve on the Companys
board; however, they have assigned an observer to attend the Companys board meetings. The Company
has accrued for these dividends and has every intention to bring the obligation current as soon as
possible.
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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 effected 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 2010 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
managements 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
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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, the
Company has change in control agreements in place with Mr. Fortino, Mr. Easterly and Ms.
McConnaughy. If their employment were 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 and 2010 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, 2010 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.
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Confidential customer information transmitted through the Banks 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 Banks
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 Banks 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 Banks 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 may 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 debt 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.
The recent repeal of federal prohibitions on payment of interest on demand deposits could
increase our interest expense.
The federal prohibitions on the ability of financial institutions to pay interest on demand
deposit accounts were repealed as part of the Dodd-Frank Act. As a result, beginning on July 21,
2011, financial institutions can commence offering interest on demand deposits (business
transaction and other accounts) to compete for customers. We do not know what interest rates other
institutions may offer. Our interest expense could increase and our net interest margin could
decrease if we have to offer high rates of interest than we currently offer on other products to
attract additional customers or maintain our current customers.
Our business could be adversely affected by unfavorable actions from rating agencies.
Ratings assigned by bank rating agencies to the Company and its subsidiaries may impact the
decision of certain customers, in particular, institutions to do business with us. A rating
downgrade or a negative rating could adversely affect our deposits and our business relationships.
Our business could be adversely affected by recent legislation.
On July 21, 2010 The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into
law. Some of the provisions may have consequences of increasing our expenses, decreasing our
revenues, and changing the activities in which we choose to engage. The specific impact of the
Dodd-Frank Act on our current activities
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and our financial performance will depend on the manner in
which relevant agencies develop and implement the required rules.
We are subject to various legal claims and litigation.
We are periodically involved in routine litigation incidental to our business. Regardless of
whether these claims and legal actions are founded or unfounded, if such legal actions are not
resolved in a manner favorable to us, they may result in significant financial liability and/or
adversely affect the Companys reputation. Any financial liability or reputational damage could
have a material adverse impact on our business, financial condition and results of operations.
Even if these claims and legal actions do not result in a financial liability, defending these
claims and actions result in increased legal and professional services costs, which adds to our
non-interest expense and negatively impacts our operating results.
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 an operations center location and
rents space in Gladstone, Missouri for one loan production office. In January 2009, the Company
placed the 7900 College Boulevard location up for lease or possible sale. 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 operations centers, dates opened, mortgage indebtedness, and
occupancy:
Mortgage | ||||||
Indebtedness | ||||||
as of December 31, | ||||||
Location | Year Occupied | 2010 | Occupancy | |||
Overland Park Banking Center 11935 Riley Overland Park, Kansas * |
1994 | None | 100% | |||
Olathe Banking Center 1235 E. Santa Fe Olathe, Kansas ** |
2001 | None | 100% | |||
Shawnee Banking Center 5520 Hedge Lane Terrace Shawnee, Kansas ** |
2001 | None | 100% | |||
Operations Center 7900 College Boulevard Overland Park, Kansas * |
2003 | None | 100% | |||
Leawood Banking Center 13401 Mission Road Leawood, Kansas * |
2004 | None | 66%, Four subleases occupy the remaining 34% |
|||
Lenexa Banking Center 9500 Lackman Road Lenexa, Kansas ** |
2007 | None | 100% |
* | The building is owned by Blue Valley Building Corp. | |
** | The building is owned by the Bank. |
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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: (Removed and Reserved)
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Part II
Item 5: Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Market for Common Stock
We are a reporting company under the Securities Exchange Act 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, 2011, there were approximately 422 stockholders of record of our common stock.
The following table sets forth the high and low bid prices of the Companys common stock since the
first quarter of 2009 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.
2010 | 2009 | |||||||||||||||
Fiscal Quarter | High | Low | High | Low | ||||||||||||
First |
$ | 10.25 | $ | 8.50 | $ | 25.00 | $ | 10.05 | ||||||||
Second |
9.75 | 7.00 | 12.00 | 7.50 | ||||||||||||
Third |
9.40 | 6.50 | 10.50 | 7.45 | ||||||||||||
Fourth |
8.00 | 5.50 | 10.50 | 9.30 |
Dividends
The Company did not declare a common stock dividend in 2008, 2009 or 2010.
The Companys consolidated net income consists largely of the operations 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 Managements 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 Companys 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. The Company did not pay a cash dividend to our common
stockholders in the fiscal years ended 2008, 2009 or 2010, and we do not know when we will be able
to resume paying cash dividends.
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Item 6: Selected Financial Data
The following table presents our consolidated financial data as of and for the five years
ended December 31, 2010, and should be read in conjunction with the consolidated financial
statements and notes thereto and Managements 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, 2010, have been derived from our audited
consolidated financial statements.
As of and for the | ||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(In thousands, except share and per share data) | ||||||||||||||||||||
Selected Statement of Income Data |
||||||||||||||||||||
Interest and dividend income: |
||||||||||||||||||||
Interest and fees on loans |
$ | 28,011 | $ | 33,996 | $ | 41,245 | $ | 47,194 | $ | 44,537 | ||||||||||
Federal funds sold and other short-term investments |
245 | 144 | 378 | 557 | 256 | |||||||||||||||
Available-for-sale securities |
1,825 | 1,943 | 3,375 | 4,466 | 4,039 | |||||||||||||||
Dividends on Federal Home Loan Bank and Federal
Reserve Bank Stock |
222 | 211 | 265 | 323 | 317 | |||||||||||||||
Total interest and dividend income |
30,303 | 36,294 | 45,263 | 52,540 | 49,149 | |||||||||||||||
Interest expense: |
||||||||||||||||||||
Interest-bearing demand deposits |
2,343 | 2,589 | 1,394 | 656 | 97 | |||||||||||||||
Savings and money market deposit accounts |
438 | 490 | 2,402 | 6,362 | 4,356 | |||||||||||||||
Other time deposits |
7,746 | 10,742 | 12,139 | 13,134 | 11,254 | |||||||||||||||
Funds borrowed |
3,836 | 4,166 | 5,756 | 5,430 | 5,255 | |||||||||||||||
Total interest expense |
14,363 | 17,987 | 21,691 | 25,582 | 20,962 | |||||||||||||||
Net interest income |
15,940 | 18,307 | 23,572 | 26,958 | 28,187 | |||||||||||||||
Provision for loan losses |
3,095 | 21,635 | 17,025 | 2,855 | 1,255 | |||||||||||||||
Net interest income (loss) after provision for
loan losses |
12,845 | (3,328 | ) | 6,547 | 24,103 | 26,932 | ||||||||||||||
Non-interest income: |
||||||||||||||||||||
Loans held for sale fee income |
3,506 | 2,785 | 2,136 | 3,160 | 5,046 | |||||||||||||||
Service fees |
3,083 | 3,250 | 3,299 | 2,830 | 2,491 | |||||||||||||||
Realized gains on available-for-sale securities |
885 | 346 | 702 | 105 | | |||||||||||||||
Gain on settlement of litigation |
| | 1,000 | | | |||||||||||||||
Other income |
1,145 | 1,664 | 1,010 | 782 | 1,027 | |||||||||||||||
Total non-interest income |
8,619 | 8,045 | 8,147 | 6,877 | 8,564 | |||||||||||||||
Non-interest expense: |
||||||||||||||||||||
Salaries and employee benefits |
11,753 | 12,272 | 12,500 | 13,570 | 14,737 | |||||||||||||||
Net occupancy expense |
2,756 | 2,811 | 3,144 | 3,200 | 3,059 | |||||||||||||||
Goodwill impairment |
| | 4,821 | | | |||||||||||||||
Other operating expense |
11,258 | 12,758 | 8,304 | 7,447 | 6,578 | |||||||||||||||
Total non-interest expense |
25,767 | 27,841 | 28,769 | 24,217 | 24,374 | |||||||||||||||
Income (loss) before income taxes |
(4,303 | ) | (23,124 | ) | (14,075 | ) | 6,763 | 11,122 | ||||||||||||
Provision (benefit) for income taxes |
(1,561 | ) | (8,514 | ) | (3,824 | ) | 2,275 | 4,199 | ||||||||||||
Net income (loss) |
$ | (2,742 | ) | $ | (14,610 | ) | $ | (10,251 | ) | $ | 4,488 | $ | 6,923 | |||||||
Per Share Data |
||||||||||||||||||||
Basic earnings |
$ | (1.38 | ) | $ | (5.68 | ) | $ | (4.20 | ) | $ | 1.86 | $ | 2.93 | |||||||
Diluted earnings |
(1.38 | ) | (5.68 | ) | (4.20 | ) | 1.84 | 2.88 | ||||||||||||
Dividends |
0.00 | 0.00 | 0.00 | 0.36 | 0.30 | |||||||||||||||
Book value basic (at end of period) |
12.66 | 14.09 | 19.97 | 24.34 | 22.45 | |||||||||||||||
Weighted average common shares outstanding: |
||||||||||||||||||||
Basic |
2,773,039 | 2,754,419 | 2,438,809 | 2,410,621 | 2,365,932 | |||||||||||||||
Diluted |
2,788,154 | 2,762,603 | 2,460,045 | 2,438,203 | 2,407,802 | |||||||||||||||
Dividend payout ratio |
0.00 | % | 0.00 | % | 0.00 | % | 19.35 | % | 10.23 | % |
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As of and for the | ||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Selected Financial Condition Data
(at end of period): |
||||||||||||||||||||
Total available-for-sale securities |
$ | 63,640 | $ | 72,757 | $ | 68,681 | $ | 76,653 | $ | 87,009 | ||||||||||
Total mortgage loans held for sale |
8,162 | 8,752 | 8,157 | 10,978 | 21,805 | |||||||||||||||
Total loans |
492,454 | 554,111 | 662,401 | 596,646 | 528,515 | |||||||||||||||
Total assets |
723,101 | 773,967 | 815,700 | 736,213 | 692,219 | |||||||||||||||
Total deposits |
541,218 | 590,110 | 600,868 | 536,370 | 535,864 | |||||||||||||||
Funds borrowed |
118,505 | 118,208 | 135,129 | 134,942 | 96,577 | |||||||||||||||
Total stockholders equity |
57,164 | 60,603 | 76,439 | 58,934 | 53,820 | |||||||||||||||
Trust assets under administration |
125,702 | 105,071 | 112,688 | 104,167 | 104,445 | |||||||||||||||
Selected Financial Ratios and Other Data: |
||||||||||||||||||||
Performance Ratios: |
||||||||||||||||||||
Net interest margin (1) |
2.23 | % | 2.43 | % | 3.20 | % | 3.92 | % | 4.35 | % | ||||||||||
Non-interest income to average assets |
1.09 | 0.99 | 1.04 | 0.95 | 1.24 | |||||||||||||||
Non-interest expense to average assets |
3.26 | 3.42 | 3.67 | 3.34 | 3.54 | |||||||||||||||
Net overhead ratio (2) |
2.14 | 2.40 | 2.59 | 2.35 | 2.25 | |||||||||||||||
Efficiency ratio (3) |
104.92 | 105.65 | 90.70 | 71.57 | 66.32 | |||||||||||||||
Return on average assets (4) |
(0.35 | ) | (1.79 | ) | (1.31 | ) | 0.62 | 1.00 | ||||||||||||
Return on average equity (5) |
(10.25 | ) | (33.07 | ) | (17.53 | ) | 7.88 | 13.81 | ||||||||||||
Asset Quality Ratios: |
||||||||||||||||||||
Non-performing loans to total loans |
6.16 | % | 6.30 | % | 6.54 | % | 4.22 | % | 1.31 | % | ||||||||||
Allowance for possible loan losses to: |
||||||||||||||||||||
Total loans |
2.99 | 3.61 | 1.87 | 1.51 | 1.16 | |||||||||||||||
Non-performing loans |
48.53 | 57.33 | 28.54 | 35.65 | 88.16 | |||||||||||||||
Net charge-offs to average total loans |
1.61 | 2.30 | 2.16 | 0.06 | 0.35 | |||||||||||||||
Non-performing loans to total assets |
4.20 | 4.51 | 5.31 | 3.42 | 1.00 | |||||||||||||||
Balance Sheet Ratios: |
||||||||||||||||||||
Loans to deposits |
90.99 | % | 93.90 | % | 110.24 | % | 111.24 | % | 98.63 | % | ||||||||||
Average interest-earning assets to average |
||||||||||||||||||||
interest-bearing liabilities |
113.18 | 115.08 | 116.25 | 118.92 | 120.31 | |||||||||||||||
Capital Ratios: |
||||||||||||||||||||
Total equity to total assets |
7.91 | % | 7.83 | % | 9.37 | % | 8.01 | % | 7.77 | % | ||||||||||
Total capital to risk-weighted assets ratio |
12.66 | 12.54 | 13.82 | 11.53 | 12.47 | |||||||||||||||
Tier 1 capital to risk-weighted assets ratio |
11.39 | 11.26 | 12.57 | 10.28 | 11.33 | |||||||||||||||
Tier 1 capital to average assets ratio |
9.04 | 9.07 | 11.50 | 9.86 | 10.29 | |||||||||||||||
Average equity to average assets ratio |
7.48 | 8.47 | 7.66 | 7.85 | 7.27 |
(1) | Net interest income, on a full tax-equivalent basis, divided by average interest-earning assets. | |
(2) | Non-interest expense less non-interest income divided by average total assets. | |
(3) | Non-interest expense divided by the sum of net interest income plus non-interest income. | |
(4) | Net income divided by average total assets. | |
(5) | Net income divided by average common equity. |
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Table of Contents
Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations
The following presents managements 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 Companys market areas; deterioration in the demand for
mortgage financing; legislative or regulatory changes; regulatory action; continued adverse
developments in the Companys loan or investment portfolio; any inability to obtain funding on
favorable terms; the Companys non-payment on TARP funds or Trust Preferred Securities; the loss of
key personnel; significant increases in competition; potential unfavorable actions from rating
agencies; 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 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 managements 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 for loan losses 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 | ||
| managements judgment with respect to current economic conditions and their impact on the existing loan portfolio. |
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The Bank computes its allowance for loan losses 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 loans effective interest rate, or based
on the loans 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 managements
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 managements 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
While the Company continued to face challenges during 2010, it was able to show improvement in
many areas of operation. The Company improved its net results for 2010 by 81.23%, with a net loss
of $2.7 million as compared to 2009s net loss of $14.6 million. The Company has experienced
improvements in asset quality, specifically with non-performing loans. The Companys non
performing loans have declined 12.99% from 2009 and loans past due greater than 30 days have
declined $14.5 million, an improvement of 90.87%, as management has aggressively managed defaults
within the loan portfolio. Non-interest expense has declined 7.45% from 2009 as a result of lower
expenses related to foreclosed assets held for sale. The Company continues to actively market and
manage these properties and continues to work to reduce the balance of foreclosed assets held for
sale. The Company has also experienced an increase in non-interest income for 2010 as compared by
2009 by 7.13% as a result of increased mortgage loans held for sale fee income, increased debit
card interchange income, as well as gains realized on sale of available for sale securities. While
the Company has experienced a decline in net interest income by 12.93% for 2010 as compared to
2009, the net interest income recorded in each quarter of 2010 increased. The Company continues to
keep the cost of funds low and works to improve asset quality and originate new loans.
The Company experienced a net loss for 2010 of $2.7 million, an $11.9 million or 81.23%,
improvement from the $14.6 million net loss in 2009. Loss per share on a diluted basis was $1.38
for the year ended December 31, 2010, an improvement of 75.70% compared to diluted loss per share
of $5.68 for the previous year. The Companys returns on average assets and average stockholders
equity for 2010 were negative 0.35% and negative 10.25% compared to negative 1.79% and negative
33.07%, respectively, for 2009.
Net interest income for 2010 was $15.9 million compared to $18.3 million earned during 2009.
The decrease of $2.4 million, or 12.93%, was a result of a change in asset mix, specifically higher
average federal funds sold and other short-term investment balances with lower yields. Lower
average outstanding loan balances also contributed to the decline in interest income. Average
outstanding loan balances for the year ended December 31, 2010, as compared to the prior year,
declined $90.1 million, or 14.81%, as a result of several large loan payoffs, loan foreclosures of
$10.4 million, and lower loan origination volume as a result of the current economic environment.
The decline in interest income was partly offset by lower interest expense. Interest expense has
declined $3.6 million, or 20.15%, from the prior year. The decline in interest expense was a
result of a decrease in rates paid on
30
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deposits. As market rates have declined, the rates on deposits have also declined. In 2010 the Company had funds from various certificate of deposit
promotions mature, and as those higher rate certificates matured they were renewed at lower market
rates. In addition, the Company entered into a restructuring transaction during the third quarter
of 2010 of $42.5 million of its Federal Home Loan Bank advances. This transaction reduced the
effective interest rate, as well as modified the maturity date on the borrowings.
The provision for loan losses in 2010 was $3.1 million compared to $21.6 million in 2009. The
Company has experienced a reduction in non-performing loans by $4.5 million, or 12.99%, and a
decline in net loan charge offs by $5.6 million, or 40.27%, since December 31, 2009 and based on
analysis of the loan portfolio, a provision of $3.1 million was made during 2010. The significant
provision for loan losses recorded during 2009 was a result of refining the Companys allowance for
loan loss methodology to better reflect the inherent losses in the loan portfolio and to increase
general reserves on our performing loans to reflect the impact of the weakened economic conditions.
Non-interest income increased 7.13% to $8.6 million in 2010 compared to $8.0 million in 2009.
The improvement in non-interest income was a result of an increase of $721,000, or 25.89%, in loans
held for sale fee income. This increase was primarily due to more favorable terms in the secondary
market, resulting in higher held-for-sale fee income. Contributing to the increase in non-interest
income were $885,000 in realized gains on available-for-sale securities, an increase of $539,000,
or 155.78%, as compared to the same period in 2009. The Company sold $29.0 million in
available-for-sale securities during 2010 compared to $11.0 million in securities sold during 2009.
Securities were sold in 2010 to reduce the long-term maturity risk within the investment
portfolio. The increase in non-interest income was partly offset by a decrease in service fee
income, specifically non-sufficient funds (NSF) charges and service fees, by $167,000, or 5.14%.
The decline in NSF charges and services fees was a result of fewer overdraft items by our customers
and a decrease in account service charges on commercial accounts as a result of a change in account
service charges on these accounts. Other service charges income, which includes income from trust
services, investment brokerage, merchant bankcard processing and debit card processing, increased
by $243,000, or 13.67%, as compared to 2009. The increase was primarily attributed to income
generated from signature based debit card transactions associated with our performance checking
product and increased activity in our investment brokerage and trust services. Other non-interest
income decreased $519,000, or 31.19%. This decrease was due to lower gains realized on the sale of
foreclosed assets held for sale by $296,000, or 40.60%. Other non-interest income also decreased
due to the effect of recording the net fair value of certain mortgage loan-related commitments.
The net fair value of mortgage loan-related commitments recorded for 2010 was a gain of $127,000
compared to a gain of $236,000 in 2009, a decline of $109,000, or 46.19%. The fair value on these
commitments will fluctuate based on the market rates for mortgage loans.
Non-interest expense decreased 7.45% to $25.8 million in 2010 from $27.8 million in 2009. The
decrease in non-interest expense was attributed to a decrease in the provision for other real
estate required by the Company. The Company recorded a provision of $734,000 in 2010, compared to
a provision of $1.4 million, representing a decrease of $629,000, or 46.13%. Other operating
expenses also decreased due to lower expenses related to foreclosed assets held for sale, which
declined $525,000, or 21.02%, in 2010 as compared to 2009 as a result of a reduction in the number
of construction and rehab rental properties 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. Also contributing to the decrease in non-interest
expense was a decline in salaries and employee benefits by $519,000, or 4.23%, as a result of lower
salaries expense due to staff restructuring in the third quarter of 2009 and lower commissions paid
during the period on mortgage loans originated and sold in the secondary market as a result of
decreased origination volume and a change in the commission structure for each loan
originated and sold. These decreases in non-interest expense were partly offset by higher
professional fees paid as a result of legal fees related to loan workouts, routine litigation and
foreclosed assets held for sale.
Total assets at December 31, 2010, were $723.1 million, a decrease of $50.9 million, or 6.57%,
from $774.0 million at December 31, 2009. Deposits and stockholders equity at December 31, 2010
were $541.2 million and $57.2 million, compared with $590.1 million and $60.6 million at December
31, 2009, decreases of $48.9 million, or 8.29%, and $3.4 million, or 5.67%, respectively.
Loans at December 31, 2010 totaled $492.5 million, a decrease of $61.6 million, or 11.13%,
compared to December 31, 2009. The loan to deposit ratio at December 31, 2010 was 90.99% compared
to 93.90% at December
31
Table of Contents
31, 2009. 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 Banks 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 33.
Years ended December 31, 2010 and 2009. FTE net interest income for 2010 decreased to $15.9
million from $18.3 million in 2009, a $2.4 million, or 12.93%, decrease.
FTE interest income for 2010 was $30.3 million, a decrease of $6.0 million, or 16.51%, from
$36.3 million in 2009. This decrease was a result of an overall decline 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 59 basis points to 4.23% compared to 4.82% in 2009. Another factor contributing to lower
interest income was a decrease in the average outstanding balance of loans. The average
outstanding balance of loans has decreased by $90.1 million, or 14.81%, as a result of several
larger loan payoffs, 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 $32.6 million, or 47.75%. The
increase in average federal funds sold and other short-term investments was a result of a decline
in the average balance of loans. The average balance of available-for-sale securities increased
$23.6 million, or 39.03%, as a result of the Company investing excess funds from loan collections
into available-for-sale securities during the first half of 2010. As higher yielding securities of
$115.0 million were called or matured during the year, they were invested at lower yields due to
the current rate environment and the securities available for investing thus resulting in a decline
in interest income by $118,000, or 6.07%.
Interest expense for 2010 was $14.4 million, a decrease of $3.6 million, or 20.15%, from $18.0
million in 2009. The decline in interest expense resulted from a decrease in the rate paid on
average interest-bearing liabilities resulting from the impact of the lower market interest rates
on interest bearing demand accounts, time deposits and long-term debt. The rate paid on total
average interest-bearing liabilities decreased to 2.27% for the year ended December 31, 2010,
compared to 2.75% in 2009, a decrease of 48 basis points. Total average interest-bearing
liabilities decreased $22.0 million, or 3.37%, to $632.7 million at December 31, 2010, compared to
$654.7 million at December 31, 2009. Average time deposits decreased $34.2 million, or 10.15%, as
a result of the Company not renewing $30.9 million in brokered deposits as they matured. The
Company is generating increased interest in performance checking product and time deposit
promotions to replace our brokered funds with core deposits. In addition, as higher rate time
deposits mature they were renewed at lower market rates. Average savings and money market deposits
decreased $8.9 million, or 9.53%, as customers have moved their funds into interest-bearing demand
accounts, specifically performance checking product as the product offers a more attractive rate.
Average other interest-bearing liabilities decreased $4.8 million, or 20.57%, due to an overall
decrease in repurchase agreement balances as customers have moved their funds into the Certificate
of Deposit Account Registry Service (CDARS) program. These decreases were offset by an increase
in average interest-bearing demand deposits of $29.4 million, or 30.48%, as a result of growth
experienced in balances of our performance checking product as it offers a higher market rate.
While the balances in interest bearing demand deposit have increased 20.57%, the interest expense
associated with these accounts have declined $246,000, or 9.50%, as a result of lowering the
interest rate paid on the accounts in response to a decline in rates paid in the market. Interest
expense for long-term debt is lower as a result of the Companys restructuring transaction of $42.5
million of its $82.5 million of Federal Home Loan Bank advances during the third quarter of 2010,
thus lowering overall interest expense on these borrowings. In addition, the average balance of
long-term debt decreased $3.5 million as a result of the Company paying off $5.3 million related to
Blue Valley Building Corp. debt in June 2009.
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Table of Contents
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 $36.3 million, a decrease of $9.0 million, or 19.82%, from
$45.3 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 132 basis points to 4.82% compared to 6.14% 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 were called or matured the securities available for investing had
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.
33
Table of Contents
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, | ||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
Average | Average | Average Yield/ | Average Yield/ | |||||||||||||||||||||||||||||||||
Average Balance | Interest | Yield/ Rate | Balance | Interest | Rate | Average Balance | Interest | Rate | ||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||
Federal funds sold and other short-term investments |
$ | 100,929 | $ | 245 | 0.24 | % | $ | 68,310 | $ | 144 | 0.21 | % | $ | 22,478 | $ | 378 | 1.68 | % | ||||||||||||||||||
Available-for-sale securities taxable |
84,070 | 1,825 | 2.17 | 60,441 | 1,943 | 3.21 | 69,741 | 3,369 | 4.83 | |||||||||||||||||||||||||||
Available-for-sale securities non-taxable (1) |
| | | | | | 141 | 9 | 6.38 | |||||||||||||||||||||||||||
Mortgage loans held for sale |
6,761 | 302 | 4.47 | 9,875 | 477 | 4.83 | 6,157 | 340 | 5.52 | |||||||||||||||||||||||||||
Loans, net of unearned discount and fees (2) |
518,010 | 27,709 | 5.35 | 608,080 | 33,519 | 5.51 | 631,673 | 40,905 | 6.48 | |||||||||||||||||||||||||||
Federal Home Loan and Federal Reserve Bank Stock |
6,275 | 222 | 3.54 | 6,742 | 211 | 3.13 | 6,798 | 265 | 3.90 | |||||||||||||||||||||||||||
Total earning assets |
716,045 | 30,303 | 4.23 | 753,448 | 36,294 | 4.82 | 736,988 | 45,266 | 6.14 | |||||||||||||||||||||||||||
Cash and due from banks non-interest bearing |
37,565 | 36,257 | 20,611 | |||||||||||||||||||||||||||||||||
Allowance for loan losses |
(17,991 | ) | (19,647 | ) | (10,060 | ) | ||||||||||||||||||||||||||||||
Premises and equipment, net |
16,601 | 18,270 | 18,337 | |||||||||||||||||||||||||||||||||
Other assets |
38,007 | 26,639 | 18,906 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 790,227 | $ | 814,967 | $ | 784,782 | ||||||||||||||||||||||||||||||
Liabilities and Stockholders Equity
|
||||||||||||||||||||||||||||||||||||
Deposits-interest bearing: |
||||||||||||||||||||||||||||||||||||
Interest-bearing demand accounts |
$ | 125,672 | $ | 2,343 | 1.86 | % | $ | 96,315 | $ | 2,589 | 2.69 | % | $ | 52,776 | $ | 1,394 | 2.64 | % | ||||||||||||||||||
Savings and money market deposits |
84,745 | 438 | 0.52 | 93,672 | 490 | 0.52 | 137,295 | 2,402 | 1.75 | |||||||||||||||||||||||||||
Time deposits |
303,130 | 7,746 | 2.56 | 337,363 | 10,742 | 3.18 | 286,404 | 12,139 | 4.24 | |||||||||||||||||||||||||||
Total interest-bearing deposits |
513,547 | 10,527 | 2.05 | 527,350 | 13,821 | 2.62 | 476,475 | 15,935 | 3.34 | |||||||||||||||||||||||||||
Other interest-bearing liabilities |
18,477 | 45 | 0.24 | 23,261 | 58 | 0.25 | 46,008 | 943 | 2.05 | |||||||||||||||||||||||||||
Long-term debt |
100,644 | 3,791 | 3.77 | 104,096 | 4,108 | 3.95 | 111,490 | 4,813 | 4.32 | |||||||||||||||||||||||||||
Total interest-bearing liabilities |
632,668 | 14,363 | 2.27 | 654,707 | 17,987 | 2.75 | 633,973 | 21,691 | 3.42 | |||||||||||||||||||||||||||
Non-interest bearing deposits |
91,863 | 86,744 | 86,811 | |||||||||||||||||||||||||||||||||
Other liabilities |
6,577 | 4,478 | 3,852 | |||||||||||||||||||||||||||||||||
Stockholders equity |
59,119 | 69,038 | 60,146 | |||||||||||||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 790,227 | $ | 814,967 | $ | 784,782 | ||||||||||||||||||||||||||||||
FTE net interest income/spread |
$ | 15,940 | 1.96 | % | $ | 18,037 | 2.07 | % | $ | 23,575 | 2.72 | % | ||||||||||||||||||||||||
FTE net interest margin |
2.23 | % | 2.43 | % | 3.20 | % | ||||||||||||||||||||||||||||||
(1) | Presented on a fully tax-equivalent basis assuming a tax rate of 34%. For the three years ended December 31, 2010, 2009 and 2008, the tax equivalency adjustment amounted to $0, $0, and $3,000, respectively. | |
(2) | Includes average balances and income from loans on non-accrual status. |
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Table of Contents
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) | |||||||||||||||||||||||||
2010 Compared to 2009 | 2009 Compared to 2008 | ||||||||||||||||||||||||
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 |
$ | 21 | $ | 80 | $ | 101 | $ | (255 | ) | $ | 21 | $ | (234 | ) | |||||||||||
Available-for-sale
securities taxable |
(631 | ) | 513 | (118 | ) | (1,128 | ) | (298 | ) | (1,426 | ) | ||||||||||||||
Available-for-sale
securities
non-taxable (1) |
| | | | (9 | ) | (9 | ) | |||||||||||||||||
Mortgage loans held for
sale |
(36 | ) | (139 | ) | (175 | ) | (8 | ) | 145 | 137 | |||||||||||||||
Loans, net of unearned
discount and fees |
(987 | ) | (4,823 | ) | (5,810 | ) | (6,088 | ) | (1,298 | ) | (7,386 | ) | |||||||||||||
Federal Home Loan and
Federal Reserve Bank
Stock |
28 | (17 | ) | 11 | (52 | ) | (2 | ) | (54 | ) | |||||||||||||||
Total interest income |
(1,605 | ) | (4,386 | ) | (5,991 | ) | (7,531 | ) | (1,441 | ) | (8,972 | ) | |||||||||||||
Interest-bearing demand
accounts |
(794 | ) | 548 | (246 | ) | 26 | 1,169 | 1,195 | |||||||||||||||||
Savings and money market
deposits |
(3 | ) | (49 | ) | (52 | ) | (1,686 | ) | (226 | ) | (1,912 | ) | |||||||||||||
Time deposits |
(2,115 | ) | (881 | ) | (2,996 | ) | (1,963 | ) | 566 | (1,397 | ) | ||||||||||||||
Other interest-bearing
liabilities |
(2 | ) | (11 | ) | (13 | ) | (828 | ) | (57 | ) | (885 | ) | |||||||||||||
Long-term debt |
(185 | ) | (132 | ) | (317 | ) | (411 | ) | (294 | ) | (705 | ) | |||||||||||||
Total interest expense |
(3,099 | ) | (525 | ) | (3,624 | ) | (4,862 | ) | 1,158 | (3,704 | ) | ||||||||||||||
Net interest income |
$ | 1,494 | $ | (3,861 | ) | $ | (2,367 | ) | $ | (2,669 | ) | $ | (2,599 | ) | $ | (5,268 | ) | ||||||||
(1) | Presented on a fully tax-equivalent basis assuming a tax rate of 34%. |
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 Companys 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 Banks 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. Economic
conditions monitored include but are not limited to: Johnson County, KS unemployment rate; consumer
confidence; foreclosure rates; vacant property rates;
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stock market performance; inflation; and interest rates. 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, 2010, we provided $3.1 million for loan losses, as compared
to $21.6 million for the year ended December 31, 2009, a decrease of $18.5 million, or 85.69%. In
2010, the Company experienced a reduction in non-performing loans by $4.5 million, or 12.99%, a
decline in net loan charge offs by $5.6 million, or 40.27%, and a reduction in past due loans
greater than 30 days by $14.5 million, or 90.87%, and based on the analysis of the loan portfolio
during the year, a $3.1 million provision for loan losses was deemed necessary. The significant
provision for loan losses recorded in 2009 was a result of refining the Companys allowance for
loan loss methodology to better reflect the inherent losses in the loan portfolio and to increase
the general reserves on our performing loans to reflect the weakened economic conditions.
Management believes they have identified the significant non-performing loans and will continue to
aggressively pursue collection of these loans. If the adverse real estate and construction
industry and general economy conditions are more prolonged than management anticipates and losses
increase, we could experience higher than anticipated loan losses in the future.
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 Banks 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 related 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 Banks allowance for loan loss
methodology and increasing the general reserves was approximately $9.2 million. 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). 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.
The allowance for loan losses as a percentage of loans was 2.99% at December 31, 2010,
compared to 3.61% in 2009 and 1.87% in 2008. The decrease in this percentage from December 31,
2009 was primarily due to the decline in non-performing loans, net loan charge-offs, past due loans
and lower outstanding balance of loans at the end of 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, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Loans held for sale fee income |
$ | 3,506 | $ | 2,785 | $ | 2,136 | ||||||
NSF charges and service fees |
1,062 | 1,472 | 1,641 | |||||||||
Other service charges |
2,021 | 1,778 | 1,658 | |||||||||
Realized gains on available-for-sale securities |
885 | 346 | 702 | |||||||||
Gain on settlement of litigation |
| | 1,000 | |||||||||
Other income |
1,145 | 1,664 | 1,010 | |||||||||
Total non-interest income |
$ | 8,619 | $ | 8,045 | $ | 8,147 | ||||||
Non-interest income increased from the prior year to $8.6 million for 2010 compared with $8.0
million for 2009, an increase of 7.13%. Loans held for sale fee income increased $721,000, or
25.89%, as compared to 2009.
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The volume of closed residential mortgage loans decreased in 2010 to $135.9 million, from $196.4
million in 2009 and $136.8 million in 2008; however, the Company was able to secure more favorable
terms for loans sold in the secondary market resulting in higher fee income realized. The increase
in loans held for sale fee income was also a result 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 $33,000 in 2010 compared to a loss of $111,000 recorded in loans
held for sale fee income during 2009. The fair value of mortgage loans held for sale will
fluctuate with changes in the market rates offered on mortgage loans. 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 $410,000, or 27.85%. 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 change in account
service charges on these accounts. Other service charge income, which includes income from trust
services, investment brokerage, merchant bankcard processing and debit card processing, increased
by $243,000, or 13.67%. This increase was a result of income generated from signature based debit
card transactions associated with our performance checking product. The Company has experienced
growth of 14.91% in the performance checking product balances during the year. The increase in
other service charge income was also attributed to an increase in fee income generated from our
investment brokerage and trust services due to increased market activity. Realized gains on
available-for-sale securities increased $539,000, or 155.78%, as compared to 2009 as a result of
the Company selling $29.0 million in available-for-sale securities in 2010 compared to $11.0
million in securities sold during 2009. Securities were sold during 2010 to reduce the long-term
maturity risk within the investment portfolio due to the current rate environment. Other income
decreased $519,000, or 31.19%, as compared to 2009. The decrease was due to fewer gains realized
on the sale of foreclosed assets held for sale by $296,000, or 40.60%. Other non-interest income
also decreased due to the effect of recording the net fair value of certain mortgage loan-related
commitments. The net fair value of mortgage loan-related commitments recorded for 2010 was a gain
of $127,000 compared to a gain of $236,000 in 2009, a decline of $109,000, or 46.19%. The fair
value on these commitments will fluctuate based on the market for mortgage loans. Future growth of
other non-interest income categories is dependent on new product development and growth in our
customer base.
Non-interest income for 2009 declined slightly from the prior year to $8.3 million, compared
with $8.4 million for 2008, a decrease of 1.85%. In 2008, the Company realized $1.0 million as a
result of a legal judgment. 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. 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.
Other changes reflected in non-interest income in 2009 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 $654,000, or 64.75%, as compared to 2008. The increase was the result of gains realized
on the sale of foreclosed assets held for
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Table of Contents
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.
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, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Salaries and employee benefits |
$ | 11,753 | $ | 12,272 | $ | 12,500 | ||||||
Net occupancy expense |
2,756 | 2,811 | 3,144 | |||||||||
Goodwill impairment |
| | 4,821 | |||||||||
Other operating expense |
11,258 | 12,758 | 8,304 | |||||||||
Total non-interest expenses |
$ | 25,767 | $ | 27,841 | $ | 28,769 | ||||||
Non-interest expense decreased 7.45% to $25.8 million during 2010, compared to $27.8
million in the prior year. The decrease in non-interest expense was attributed to a decrease in
other operating expenses of $1.5 million, or 11.76%. Other operating expenses have decreased as a
result of the Company recording a $734,000 provision for other real estate in 2010 compared to $1.4
million in 2009. The provision for other real estate was a result of the decline in real estate
values. In addition, expenses related to other real estate owned decreased $525,000, or 21.02%, as
a result of a reduction in the number of construction and rehab properties 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 decrease in other
operating expenses was partly offset by an increase in professional fees expense of $223,000, or
17.19%, as a result of the legal fees expense related loan workouts, routine litigation and
foreclosed assets held for sale.
Other factors contributing to the change in non-interest expense include a decrease in
salaries and employee benefits of $519,000, or 4.23%. The decrease was a result of staff
restructuring in the third quarter of 2009 and lower commissions paid in 2010 on mortgage loans
originated and sold in the secondary market as a result of decreased origination and refinancing
volume and a change in the commission structure for each loan originated and sold. Net occupancy
expense declined slightly by $55,000, or 1.96%, as a result of lower repairs and maintenance
expense.
Non-interest expense for 2009 decreased 3.23% to $27.8 million, compared to $28.8 million in
2008 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 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
continue 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.
Income Taxes
Our income tax benefit during 2010 was $1.6 million, compared to our income tax benefit of
$8.5 million during 2009, and income tax benefit of $3.8 million during 2008. The benefit in 2010
reflects our net loss for the
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Table of Contents
2010 fiscal year. Our consolidated effective income tax rates of
36%, 37% and 27% for the three years ended December 31, 2010, 2009, and 2008, 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, 2010 were $723.1 million, a decrease of $50.9
million, or 6.57%, compared to $774.0 million at December 31, 2009. Deposits were $541.2 million
compared with $590.1 million at December 31, 2009, a decrease of $48.9 million, or 8.29%.
Stockholders equity was $57.2 million at December 31, 2010 compared with $60.6 million at December
31, 2009, a decrease of $3.4 million, or 5.67%.
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, 2010, 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, 2010 were $63.6 million, a decrease of $9.1
million, or 12.53%, compared to $72.8 million at December 31, 2009. The Company purchased $134.9
million in available-for-sale securities to replace $115.0 million called or matured securities and
to invest excess liquidity in higher yielding investments. In addition, the Company sold $29.0
million in available-for-sale securities during 2010 to reduce long term maturity risk within the
investment portfolio due to 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, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
U.S. government sponsored agency securities |
$ | 63,039 | $ | 72,163 | $ | 68,092 | ||||||
Equity and other securities |
601 | 594 | 589 | |||||||||
Total |
$ | 63,640 | $ | 72,757 | $ | 68,681 | ||||||
The following table sets forth the maturities, carrying value, and average yields for
securities in our investment portfolio at December 31, 2010. Yields are presented on a tax
equivalent basis. Expected maturities could differ from contractual maturities due to unscheduled
repayments.
MATURITY OF INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES
Total Investment | ||||||||||||||||||||||||||||||||||||||||
One Year or Less | One to Five Years | Five to Ten Years | More Than Ten 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 |
$ | 3,016 | $ | 1.00 | % | $ | 60,023 | 1.53 | % | $ | | | % | $ | | | % | $ | 63,039 | 1.51 | % | |||||||||||||||||||
Equity and other securities
with no defined maturity |
| | | | | | | | 601 | 3.52 | ||||||||||||||||||||||||||||||
Total available-for-sale |
$ | 3,016 | 1.00 | % | $ | 60,023 | 1.53 | % | $ | | | % | $ | | | % | $ | 63,640 | 1.52 | % | ||||||||||||||||||||
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Table of Contents
Loans Held for Sale. Mortgage loans held for sale at December 31, 2010 totaled $8.2
million, a decrease of $590,000, or 6.74%, compared to $8.8 million at December 31, 2009. The
Company has elected to carry loans held for sale at fair value. The volume of loans held for sale
originated during 2010 slowed as a result of a slow down in mortgage originations and refinancing
due to the rate and economic environment. The Company did experience an increase in mortgage loans
held for sale origination and refinance activity during the second half of 2010 as a result of a
decline in mortgage rates during that period. The Companys principal funding source for mortgage
loans held for sale are our core deposits. Core deposits are demand deposits, interest-bearing
transaction accounts, savings deposits and time deposits less than $100,000 (excluding brokered
deposits).
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, construction and real estate lending. We also offer home equity, 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 63.65%,
55.96% and 51.83% of our total loans at December 31, 2010, 2009 and 2008, respectively.
Loans were $492.5 million at December 31, 2010, a decrease of $61.6 million, or 11.13%,
compared to December 31, 2009. Loans were $554.1 million at December 31, 2009, a decrease of
$108.3 million, or 16.35%, compared to December 31, 2008. The Bank experienced decreases in the
construction, residential real estate and lease categories during 2010. These decreases were
attributable to several larger loans paying off, the foreclosure of approximately $10.4 million of
foreclosed assets held for sale during 2010, and lower loan originations due to the current
economic conditions and a decline in new construction within our market area.
The loan to deposit ratio decreased to 90.99%, compared to 93.90% at December 31, 2009, and
110.24% at December 31, 2008.
The following table sets forth the composition of the Companys 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, | ||||||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||
Commercial |
$ | 144,181 | 29.28 | % | $ | 142,528 | 25.72 | % | $ | 172,647 | 26.06 | % | $ | 139,120 | 23.32 | % | $ | 110,849 | 20.97 | % | ||||||||||||||||||||
Commercial real estate |
169,253 | 34.37 | 167,581 | 30.24 | 170,697 | 25.77 | 150,655 | 25.25 | 126,952 | 24.02 | ||||||||||||||||||||||||||||||
Construction |
64,641 | 13.13 | 113,077 | 20.41 | 182,933 | 27.62 | 188,229 | 31.55 | 171,709 | 32.49 | ||||||||||||||||||||||||||||||
Home equity |
64,289 | 13.05 | 66,586 | 12.02 | 59,257 | 8.94 | 38,473 | 6.45 | 32,408 | 6.13 | ||||||||||||||||||||||||||||||
Residential real estate |
36,903 | 7.49 | 45,014 | 8.12 | 43,695 | 6.60 | 37,511 | 6.29 | 34,988 | 6.63 | ||||||||||||||||||||||||||||||
Lease financing |
5,530 | 1.12 | 11,259 | 2.03 | 18,927 | 2.86 | 19,724 | 3.30 | 18,512 | 3.50 | ||||||||||||||||||||||||||||||
Consumer |
7,657 | 1.56 | 8,066 | 1.46 | 14,245 | 2.15 | 22,934 | 3.84 | 33,097 | 6.26 | ||||||||||||||||||||||||||||||
Total loans and
leases |
492,454 | 100.00 | % | 554,111 | 100.00 | % | 662,401 | 100.00 | % | 596,646 | 100.00 | % | 528,515 | 100.00 | % | |||||||||||||||||||||||||
Less allowance for
loan losses |
14,731 | 20,000 | 12,368 | 8,982 | 6,106 | |||||||||||||||||||||||||||||||||||
Loans, net |
$ | 477,723 | $ | 534,111 | $ | 650,033 | $ | 587,664 | $ | 522,409 | ||||||||||||||||||||||||||||||
Collateral and Concentration. Management monitors concentrations of loans to individuals
or businesses involved in a single industry over 25% of Tier 1 Capital and concentrations in excess
of 10% of total loans. At December 31, 2010, 2009 and 2008, substantially all of our loans were
collateralized with real estate, inventory, accounts receivable and/or other assets or were
guaranteed by the Small Business Administration. Loans to individuals and businesses in the
construction industry totaled $64.6 million, or 13.13%, of total loans, as of December 31, 2010.
Of the $64.6 million, approximately $31.9 million were for new single and multi-family housing
construction and $29.5 million were for land subdivisions. The builder and developer loan
portfolio has been a consistent component of our loan portfolio over our history. However, new
loan origination volume in this industry has slowed as a result of the decline in the real estate
and construction industry. The Banks lending limit
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under federal law to any one borrower was $23.0 million at December 31, 2010. The Banks
largest single borrower, net of participations, at December 31, 2010 had outstanding loans of $13.8
million.
The following table presents the aggregate maturities of loans in each major category of our
loan portfolio as of December 31, 2010, excluding the allowance for loan and valuation losses.
Additionally, the table presents the dollar amount of all loans due more than one year after
December 31, 2010 which have predetermined interest rates (fixed) or adjustable interest rates
(variable). Actual maturities may differ from the contractual maturities shown below as a result
of renewals and prepayments or the timing of loan sales.
MATURITIES AND SENSITIVITIES OF LOANS TO
CHANGES IN INTEREST RATES
CHANGES IN INTEREST RATES
As of December 31, 2010 | ||||||||||||||||||||||||
More than One Year | ||||||||||||||||||||||||
Less than | One to | Over five | ||||||||||||||||||||||
one year | five years | years | Total | Fixed | Variable | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Commercial |
$ | 89,676 | $ | 43,507 | $ | 10,998 | $ | 144,181 | $ | 14,222 | $ | 40,283 | ||||||||||||
Commercial Real Estate |
42,812 | 116,848 | 9,593 | 169,253 | 95,728 | 30,713 | ||||||||||||||||||
Construction |
46,905 | 17,736 | | 64,641 | 3,273 | 14,463 |
Non-accrual loans included in the more than one year category for fixed rate loans were
$1.2 million and for variable rate loans were $399,000.
Non-performing Assets
Non-performing assets consist primarily of loans past due 90 days or more, non-accrual loans
and foreclosed real estate. Generally loans are placed on non-accrual status at 90 days past due
and interest accrued to date is considered a loss, unless the loan is well-secured and in the
process of collection. When interest accrual is discontinued, all unpaid accrued interest is
reversed against interest income. The interest on these loans is generally accounted for on a cost
recovery basis, meaning interest is not recognized until the past due balance has been collected.
Loans may be returned to accrual status when all principal and interest amounts contractually due
are brought current and future payments are reasonably assured.
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Table of Contents
The following table sets forth our non-performing assets as of the dates indicated:
NON-PERFORMING ASSETS
As of December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Commercial and all other loans: |
||||||||||||||||||||
Past due 90 days or more |
$ | | $ | | $ | | $ | 680 | $ | 802 | ||||||||||
Non-accrual |
2,896 | 1,327 | 2,143 | 60 | 381 | |||||||||||||||
Commercial real estate loans: |
||||||||||||||||||||
Past due 90 days or more |
| | | | 4,951 | |||||||||||||||
Non-accrual |
10,088 | 13,267 | 1,951 | 512 | | |||||||||||||||
Construction loans: |
||||||||||||||||||||
Past due 90 days or more |
| | | 10,699 | | |||||||||||||||
Non-accrual |
10,417 | 11,205 | 32,110 | 10,115 | 136 | |||||||||||||||
Home equity loans: |
||||||||||||||||||||
Past due 90 days or more |
| | | 637 | | |||||||||||||||
Non-accrual |
1,211 | 344 | 488 | | | |||||||||||||||
Residential real estate loans: |
||||||||||||||||||||
Past due 90 days or more |
| | | 1,194 | | |||||||||||||||
Non-accrual |
5,553 | 8,404 | 6,129 | 189 | 410 | |||||||||||||||
Lease financing: |
||||||||||||||||||||
Past due 90 days or more |
| | | 11 | 186 | |||||||||||||||
Non-accrual |
140 | 335 | 475 | 1,084 | | |||||||||||||||
Consumer loans: |
||||||||||||||||||||
Past due 90 days or more |
| | | 13 | 13 | |||||||||||||||
Non-accrual |
52 | 6 | 36 | | 47 | |||||||||||||||
Debt securities and other assets (excluding
other real estate owned and other repossessed
assets): |
||||||||||||||||||||
Past due 90 days or more |
| | | | | |||||||||||||||
Non-accrual |
| | | | | |||||||||||||||
Total non-performing loans |
30,357 | 34,888 | 43,332 | 25,194 | 6,926 | |||||||||||||||
Foreclosed assets held for sale |
20,144 | 19,434 | 4,783 | 2,523 | 717 | |||||||||||||||
Total non-performing assets |
$ | 50,501 | $ | 54,322 | $ | 48,115 | $ | 27,717 | $ | 7,643 | ||||||||||
Total non-performing loans to total loans |
6.16 | % | 6.30 | % | 6.54 | % | 4.22 | % | 1.31 | % | ||||||||||
Total non-performing loans to total assets |
4.20 | 4.51 | 5.31 | 3.42 | 1.00 | |||||||||||||||
Allowance for loan losses to non-performing loans |
48.53 | 57.33 | 28.54 | 35.65 | 88.16 | |||||||||||||||
Non-performing assets to loans and foreclosed
assets held for sale |
9.85 | 9.47 | 7.21 | 4.63 | 1.44 |
Non-performing assets. Non-performing assets decreased to $50.5 million at December 31, 2010
from $54.3 million at December 31, 2009, an improvement of 7.03%. The decrease was attributed to a
decline in non-performing commercial real estate loans by $3.2 million, non-performing residential
real estate loans by $2.9 million, and non-performing construction loans by $788,000 from December
31, 2009. These decreases were primarily the result of several larger loan payoffs and the
foreclosure on two single family builder portfolios and three other credit relationships. The
decrease was partly offset by an increase in non-performing commercial loans by $1.6 million and
non-performing home equity loans by $867,000. The increases were the result of the deterioration
of two commercial relationships and a result of industry decline in the real estate market and
general economy. If the real estate industry and general economy continue to decline, the Company
could experience an increase in non-performing loans and foreclosed assets held for sale. We
closely monitor non-performing credit relationships and our philosophy has been to value
non-performing loans at their estimated collectible value and aggressively manage these situations.
Foreclosed assets were $20.1 million as of December 31, 2010, compared to $19.4 million at
December 31, 2009. The Company has sold $9.1 million in foreclosed assets and transferred $10.4
million in loans to foreclosed assets during 2010. The Company is actively marketing these
properties and working to reduce the balance of foreclosed assets held for sale.
For the five years ended December 31, 2010, our average year-end ratio of non-performing loans
to total loans was 4.91%. As of December 31, 2010, our ratio of non-performing loans to total
loans was 6.16%, which was
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above our historical averages primarily due to the decline in the real estate market and its
impact on our real estate and construction loan portfolio and the overall decline in the general
economy. As of December 31, 2010, our ratio of allowance for loan losses to non-performing loans
was 48.53%, compared to 57.33% at December 31, 2009. This decrease was a result of the decline in
non-performing and past due loans over the prior year. The Bank continues to aggressively manage
defaults in the loan portfolio. Management intends to continue to vigorously pursue collection of
all charged-off loans.
The following table sets forth the amount of gross interest income that would have been
recorded had the non-accrual loans in the Non-Performing Asset table on page 41 been current and
accruing during the period and the amount of interest income on the non-performing loans included
in net income for the year ended December 31, 2010.
Year Ended | ||||
December 31, 2010 | ||||
(In thousands) | ||||
Gross interest income (since date
of non-accrual) if the loans had been
current and accruing interest |
$ | 1,742 | ||
Interest income reversed at time loan
placed on non-accrual |
235 | |||
Cash interest received during the period |
88 |
Impaired Loans. A loan is considered impaired when, based on current information and
events, it is probable that we will not receive all scheduled payments of principal and interest
due according to the contractual terms of the loan agreement. This includes loans that are
delinquent 90 days or more, non-accrual loans, and certain other loans identified by management.
Accrual of interest is discontinued, and interest accrued and unpaid is reversed against interest
income, at the time the loans are delinquent 90 days or when management believes that full
collection of principal and interest under the original loan contract is unlikely to occur.
Interest on non-accrual loans is generally accounted for on a cost recovery basis, meaning interest
is not recognized until the full past due principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
Impaired loans totaled $30.4 million at December 31, 2010, $35.0 million at December 31, 2009,
and $57.8 million at December 31, 2008, with related allowances for loan losses of $4.3 million,
$6.6 million, and $5.2 million, respectively.
Total interest income of $93,000, $497,000 and $5.4 million was recognized on average impaired
loans of $34.5 million, $41.7 million and $36.7 million for 2010, 2009 and 2008, respectively.
Included in this total is cash basis interest income of $88,000, $212,000 and $927,000 recognized
on non-accrual impaired loans during 2010, 2009 and 2008, respectively.
Allowance For Loan Losses. The allowance for loan losses is increased by provisions charged
to expense and reduced by loans charged-off, net of recoveries. The adequacy of the allowance is
analyzed monthly based on internal loan reviews and quality measurements of our loan portfolio.
The Bank computes its allowance by assigning specific reserves to impaired loans, and then applies
general reserves, based on loss factors, to the remainder of the loan portfolio. The loss factors
are determined based on such items as managements evaluation of risk in the portfolio, current and
projected local and national economic conditions, loan growth, loan trends and classifications and
historical loss experience. Specific allowances are accrued on specific loans evaluated for
impairment for which the basis of each loan, including accrued interest, exceeds the discounted
amount of expected future collections of interest and principal or, alternatively, the fair value
of the loan collateral.
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Table of Contents
The following table sets forth information regarding changes in our allowance for loan and
valuation losses for the periods indicated.
SUMMARY OF LOAN LOSS EXPERIENCE
AND RELATED INFORMATION
AND RELATED INFORMATION
As of and for the | ||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Balance at beginning of period |
$ | 20,000 | $ | 12,368 | $ | 8,982 | $ | 6,106 | $ | 6,704 | ||||||||||
Loans charged-off: |
||||||||||||||||||||
Commercial loans |
1,364 | 4,713 | 6,603 | 215 | 1,417 | |||||||||||||||
Commercial real estate loans |
2,985 | 374 | 262 | | | |||||||||||||||
Construction loans |
3,662 | 7,716 | 6,022 | 244 | 100 | |||||||||||||||
Home equity loans |
387 | 653 | 127 | | 8 | |||||||||||||||
Residential real estate loans |
660 | 1,480 | 424 | 49 | 318 | |||||||||||||||
Lease financing |
43 | 109 | 372 | 139 | 134 | |||||||||||||||
Consumer loans |
7 | 58 | 112 | 16 | 83 | |||||||||||||||
Total loans charged-off |
9,108 | 15,103 | 13,922 | 663 | 2,060 | |||||||||||||||
Recoveries: |
||||||||||||||||||||
Commercial loans |
390 | 259 | 223 | 294 | 117 | |||||||||||||||
Commercial real estate loans |
171 | 123 | | 1 | | |||||||||||||||
Construction loans |
123 | 592 | 24 | | | |||||||||||||||
Home equity loans |
17 | 31 | | | | |||||||||||||||
Residential real estate loans |
11 | 72 | 1 | 6 | 47 | |||||||||||||||
Lease financing |
14 | 21 | 29 | 9 | 32 | |||||||||||||||
Consumer loans |
18 | 2 | 6 | 14 | 11 | |||||||||||||||
Total recoveries |
744 | 1,100 | 283 | 324 | 207 | |||||||||||||||
Net loans charged-off |
8,364 | 14,003 | 13,639 | 339 | 1,853 | |||||||||||||||
Allowance of acquired company |
| | | 360 | | |||||||||||||||
Provision for loan losses |
3,095 | 21,635 | 17,025 | 2,855 | 1,255 | |||||||||||||||
Balance at end of period |
$ | 14,731 | $ | 20,000 | $ | 12,368 | $ | 8,982 | $ | 6,106 | ||||||||||
Loans outstanding: |
||||||||||||||||||||
Average |
$ | 518,010 | $ | 608,080 | $ | 631,673 | $ | 563,224 | $ | 525,471 | ||||||||||
End of period |
492,454 | 554,111 | 662,401 | 596,646 | 528,515 | |||||||||||||||
Ratio of allowance for loan
losses to loans outstanding: |
||||||||||||||||||||
Average |
2.84 | % | 3.29 | % | 1.96 | % | 1.59 | % | 1.16 | % | ||||||||||
End of period |
2.99 | 3.61 | 1.87 | 1.51 | 1.16 | |||||||||||||||
Ratio of net charge-offs to: |
||||||||||||||||||||
Average loans |
1.61 | 2.30 | 2.16 | 0.06 | 0.35 | |||||||||||||||
End of period loans |
1.70 | 2.53 | 2.06 | 0.06 | 0.35 |
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Table of Contents
The following table shows our allocation of the allowance for loan losses by specific
category at the end of each of the periods shown. Management attempts to allocate specific
portions of the allowance for loan losses based on specifically identifiable problem loans.
However, the allocation of the allowance to each category is not necessarily indicative of future
losses and does not restrict the use of the allowance to absorb losses in any category.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
As of December 31, | ||||||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||
Amount | % of Total Allowance |
Amount | % of Total Allowance |
Amount | % of Total Allowance |
Amount | % of Total Allowance |
Amount | % of Total Allowance |
|||||||||||||||||||||||||||||||
Commercial |
$ | 3,339 | 22.66 | % | $ | 3,630 | 18.15 | % | $ | 3,040 | 24.58 | % | $ | 1,790 | 19.93 | % | $ | 1,386 | 22.70 | % | ||||||||||||||||||||
Commercial real estate |
3,974 | 26.98 | 7,253 | 36.27 | 2,507 | 20.27 | 1,597 | 17.78 | 1,674 | 27.42 | ||||||||||||||||||||||||||||||
Construction |
4,579 | 31.08 | 5,929 | 29.65 | 4,695 | 37.96 | 4,188 | 46.63 | 1,920 | 31.44 | ||||||||||||||||||||||||||||||
Home equity |
1,262 | 8.57 | 1,061 | 5.30 | 409 | 3.31 | 247 | 2.75 | 197 | 3.23 | ||||||||||||||||||||||||||||||
Residential real estate |
1,488 | 10.10 | 1,737 | 8.68 | 1,201 | 9.71 | 377 | 4.20 | 402 | 6.58 | ||||||||||||||||||||||||||||||
Lease financing |
38 | 0.26 | 238 | 1.19 | 449 | 3.63 | 664 | 7.39 | 355 | 5.81 | ||||||||||||||||||||||||||||||
Consumer |
51 | 0.35 | 152 | 0.76 | 67 | 0.54 | 119 | 1.32 | 172 | 2.82 | ||||||||||||||||||||||||||||||
Total |
$ | 14,731 | 100.00 | % | $ | 20,000 | 100.00 | % | $ | 12,368 | 100.00 | % | $ | 8,982 | 100.00 | % | $ | 6,106 | 100.00 | % | ||||||||||||||||||||
Deposits. Deposits are the primary funding source for the Company. Deposits decreased
by $48.9 million, or 8.29%, to $541.2 million for the year ended December 31, 2010, compared to
$590.1 million for the year ended December 31, 2009. The decline in deposits was attributed to a
decrease in time deposits by $72.9 million, or 24.73%, as a result of $30.9 million in brokered
time deposits maturing and not renewed during 2010. In addition, the Company had $25.0 million in
public funds in the Certificate of Deposit Account Registry Service (CDARS) mature and not renew
in September 2010. As these funds go out for bid, the Company has the opportunity to make a bid
for the funds. In addition, during the third and fourth quarter of 2010 the Company had several
higher rate time deposit promotions mature. As the renewal rate for these time deposits was much
lower, many time deposits were not renewed. This decrease was offset by increases in demand
deposits of $9.8 million, or 10.77%, and savings, NOW and money market deposits of $14.2 million,
or 6.93%. The increase in savings, NOW and money market deposits was the result growth experienced
in our performance checking product. The performance checking product has been attractive to our
market as it pays a higher rate of interest to the customer on balances up to $25,000 as long as
the customer has 12 signature based debit card transactions and at least one ACH or direct deposit
each statement qualification 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 performance checking product has enabled us to
focus more on transaction based deposits that develop stronger customer relationships with the Bank
versus time deposits that are principally rate driven. We believe this will yield a lower cost
funding base over time and positively impact the value of our franchise. We have traditionally
offered market-competitive rates on our deposit products and believe they provide us with a more
attractive source of funds than other alternatives such as Federal Home Loan Bank borrowings, due
to our ability to cross-sell additional services to these account holders. In addition, we
continue to analyze alternative strategies to grow our deposits including opening additional
banking centers in markets management considers underserved, offering new products, and obtaining
brokered deposits as allowed by our Funds Management policy and as deemed prudent by management and
our Board of Directors.
45
Table of Contents
The following table sets forth the balances for each major category of our deposit accounts
and the weighted-average interest rates paid for interest-bearing deposits for the periods
indicated:
DEPOSITS
Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||
Percent | Weighted | Percent | Weighted | Percent | Weighted | |||||||||||||||||||||||||||||||
of | Average | of | Average | Of | Average | |||||||||||||||||||||||||||||||
Balance | Deposits | Rate | Balance | Deposits | Rate | Balance | Deposits | Rate | ||||||||||||||||||||||||||||
Demand |
$ | 100,975 | 18.65 | % | | % | $ | 91,158 | 15.45 | % | | % | $ | 86,020 | 14.32 | % | | % | ||||||||||||||||||
Savings |
11,040 | 2.04 | 0.24 | 8,947 | 1.52 | 0.25 | 8,030 | 1.34 | 0.44 | |||||||||||||||||||||||||||
Interest-bearing demand |
140,697 | 26.00 | 1.86 | 117,519 | 19.91 | 2.69 | 72,699 | 12.10 | 2.64 | |||||||||||||||||||||||||||
Money Market |
66,670 | 12.32 | 0.56 | 77,779 | 13.18 | 0.55 | 99,282 | 16.52 | 1.83 | |||||||||||||||||||||||||||
Time Deposits |
221,836 | 40.99 | 2.56 | 294,707 | 49.94 | 3.18 | 334,837 | 55.72 | 4.24 | |||||||||||||||||||||||||||
Total deposits |
$ | 541,218 | 100.00 | % | $ | 590,110 | 100.00 | % | $ | 600,868 | 100.00 | % | ||||||||||||||||||||||||
The following table sets forth the amount of our time deposits that are $100,000 and greater
by time remaining until maturity as of December 31, 2010:
AMOUNTS AND MATURITIES OF
TIME DEPOSITS OF $100,000 OR MORE
TIME DEPOSITS OF $100,000 OR MORE
As of December 31, 2010 | ||||||||
Weighted Average |
||||||||
Amount | Rate | |||||||
(In thousands) | ||||||||
Three months or less |
$ | 24,699 | 1.29 | % | ||||
Over three months through six months |
7,923 | 1.35 | ||||||
Over six months through twelve months |
27,249 | 2.01 | ||||||
Over twelve months |
44,221 | 2.41 | ||||||
Total |
$ | 104,092 | 1.96 | % | ||||
Liquidity and Capital Resources
Liquidity. Liquidity is measured by a financial institutions ability to raise funds through
deposits, borrowed funds, capital, or the sale of marketable assets, such as residential mortgage
loans or a portfolio of SBA loans. Other sources of liquidity, including cash flow from the
repayment of loans, are also considered in determining whether liquidity is satisfactory.
Liquidity is also achieved through growth of core deposits and liquid assets, and accessibility to
the money and capital markets. The funds are used to meet deposit withdrawals, maintain reserve
requirements, fund loans and operate the organization. Core deposits, defined as demand deposits,
interest-bearing transaction accounts, savings deposits and time deposits less than $100,000
(excluding brokered deposits), were 75.22% of our total deposits at December 31, 2010, and 69.76%
and 62.06% of total deposits at December 31, 2009 and 2008, respectively. Although classified as
brokered deposits for regulatory purposes, funds placed through the CDARS program are Bank customer
relationships that management views as core deposits. If CDARS deposits under $100,000 placed in
the CDARS program are added back, our core deposit ratio would be 77.63% at December 31, 2010, and
74.11% and 68.18% at December 31, 2009 and 2008, respectively. Generally, the Companys funding
strategy is to fund loan growth with core deposits and utilize alternative sources of funds such as
advances/borrowings from the Federal Home Loan Bank of Topeka (FHLBank), as well as the brokered
CD market to provide for additional liquidity needs, as necessary, and take advantage of
opportunities for lower costs.
46
Table of Contents
The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional
Federal Home Loan Banks governed and regulated by the Federal Housing Finance Board. The Federal
Home Loan Banks provide a central credit facility for member institutions. The Bank, as a member
of the FHLBank of Topeka, is required to acquire and hold shares of capital stock in the FHLBank of
Topeka in an amount of 0.2% of our total assets as of December 31 of the preceding calendar year to
meet the asset based stock requirement and 5.00% of our total outstanding FHLBank advances to meet
the activity-based stock requirement. The Bank is currently in compliance with this requirement,
with a $4.4 million investment in stock of the FHLBank of Topeka as of December 31, 2010. The Bank
had $82.5 million in outstanding long-term advances from the FHLBank of Topeka at December 31, 2010
and 2009. If needed, FHLBank borrowings are also used to fund originations of mortgage loans held
for sale. Advance availability with the FHLBank fluctuates depending on levels of available
collateral and is determined daily with regards to mortgage loans held for sale and quarterly with
regards to overall availability. Advances are made at the discretion of the FHLBank. At December
31, 2010, approximately $25.2 million was available but unused as the Bank was operating with cash
and cash equivalents of approximately $114.8 million.
In addition, the Company uses other forms of short-term debt for cash management and liquidity
management purposes on a limited basis. These forms of borrowings include federal funds purchased
and revolving lines of credit (see Note 10 of the Consolidated Financial Statements). The Bank has
a line of credit with the Federal Reserve Bank of Kansas City. The availability on the line of
credit fluctuates depending on the level of available collateral, which includes commercial and
commercial real estate loans. Availability on the line of credit at December 31, 2010 was $25.1
million. Advances are made at the discretion of the Federal Reserve Bank of Kansas City.
The Company also uses the brokered market as a source of liquidity. As of December 31, 2010,
the Bank had approximately $45.9 million in brokered deposits, as compared to $76.9 million at
December 31, 2009. The decrease in brokered deposits during 2010 was a result of brokered deposits
maturing and not renewed during 2010. The Company has worked on replacing brokered funds with core
deposits through time deposit promotions and generating increased interest in our performance
checking product. In addition, the Bank is a member of the Certificate of Deposit Account Registry
Service which effectively allows depositors to receive FDIC insurance on amounts larger than the
FDIC insurance limit, which is $250,000. CDARS allows the Bank to break large deposits into
smaller amounts and place them in a network of other CDARS banks to ensure that full FDIC insurance
coverage is gained on the entire deposit. Of the $45.9 million in brokered deposits, $29.0 million
represented customer funds placed into the CDARS program. CDARS has enabled us to maintain our
customer relationships as well as provide funding for the Company to maintain its liquidity
position.
As a result of an agreement with the Federal Reserve Bank and the Office of the State Banking
Commissioner of Kansas, prior regulatory approval is currently required prior to the payment of any
dividends by the Bank. In prior years, the Company has relied on dividends from the Bank to assist
in making debt service and dividend payments. The Company has also agreed at the request of the
Federal Reserve Bank, to defer interest payments and not pay dividends on trust preferred
securities or any of its equity securities without prior regulatory approval in an effort to
preserve capital. As a result, the Company has deferred the quarterly payment of interest related
to trust preferred securities of BVBC Capital Trust III since March 31, 2009 and the quarterly
payment of interest related to trust preferred securities of BVBC Capital Trust II since April 24,
2009. In addition, at the request of the Federal Reserve Bank of Kansas City, the Company notified
the Treasury of its intention to defer the quarterly dividend payment on the Preferred Shares due
to the Treasury since May 15, 2009. The dividend payment due August 15, 2010 was the sixth
dividend payment deferred by the Company. As part of the agreement with the Treasury, dividends
compound if they accrue and are not paid. Failure by the Company to pay the Preferred Share
dividend is not an event of default. However, a failure to pay a total of six Preferred Share
dividends, whether or not consecutive, gives the holders of the Preferred Shares the right to elect
two directors to the Companys Board of Directors. That right continues until the Company pays all
dividends in arrears. At this time, the Treasury has not elected any directors to serve on the
Companys Board of Directors; however, they have assigned an observer to attend the Companys board
meetings. The Company has accrued for the interest and the dividends and has every intention to
bring the obligation current as soon as possible. As of December 31, 2010, the Company has accrued
$3.6 million for dividends and interest on outstanding trust preferred securities and Preferred
Shares. There are other ancillary expenses related to legal and accounting fees which could be
incurred without the ability of the Bank
to make a dividend to the Company. The Company currently maintains cash balances sufficient
to cover such ancillary expenses for several years based on historical expense amounts.
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The following table sets forth a summary of our short-term debt during and as of the end of
each period indicated.
SHORT-TERM DEBT
Average | ||||||||||||||||||||
Amount | amount | Maximum | Weighted | |||||||||||||||||
outstanding | outstanding | Outstanding | Weighted | Average | ||||||||||||||||
at | during the | At any | average interest rate | interest rate | ||||||||||||||||
period end | period (1) | Month end | during the period | at period end | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
At or for the year ended December 31, 2010: |
||||||||||||||||||||
Federal Home Loan Bank borrowings |
$ | | $ | 3 | $ | | 0.26 | % | | % | ||||||||||
Federal Funds purchased |
| 2 | | 0.98 | | |||||||||||||||
Federal Reserve Bank line of credit |
| | | | | |||||||||||||||
Repurchase agreements and other interest bearing liabilities |
18,748 | 18,472 | 22,071 | 0.24 | 0.24 | |||||||||||||||
Total |
$ | 18,748 | $ | 18,477 | 0.24 | 0.24 | ||||||||||||||
At or for the year ended December 31, 2009: |
||||||||||||||||||||
Federal Home Loan Bank borrowings |
$ | | $ | 8 | $ | | 0.43 | % | | % | ||||||||||
Federal Funds purchased |
| 8 | | 1.20 | | |||||||||||||||
Federal Reserve Bank line of credit |
| 11 | | 0.50 | | |||||||||||||||
Repurchase agreements and other interest bearing liabilities |
16,120 | 23,235 | 25,955 | 0.25 | 0.24 | |||||||||||||||
Total |
$ | 16,120 | $ | 23,262 | 0.25 | 0.24 | ||||||||||||||
At or for the year ended December 31, 2008: |
||||||||||||||||||||
Federal Home Loan Bank borrowings |
$ | | $ | 1,730 | $ | 4,000 | 3.16 | % | | % | ||||||||||
Federal Funds purchased |
| 5 | | 1.97 | | |||||||||||||||
JP Morgan Chase operating line of credit |
| 10,385 | 15,000 | 4.94 | | |||||||||||||||
Federal Reserve Bank line of credit |
| 4 | | 1.40 | | |||||||||||||||
Repurchase agreements and other interest bearing liabilities |
27,545 | 33,884 | 41,708 | 1.11 | 0.31 | |||||||||||||||
Total |
$ | 27,545 | $ | 46,008 | 2.05 | 0.31 | ||||||||||||||
(1) | Calculations are based on daily averages where available and monthly averages otherwise. |
Capital Resources. At December 31, 2010, our total stockholders equity was $57.2
million, and our equity to asset ratio was 7.91%. At December 31, 2009, our total stockholders
equity was $60.6 million, and our equity to asset ratio was 7.83%.
The Federal Reserve Boards risk-based guidelines establish a risk-adjusted ratio, relating
capital to different categories of assets and off-balance sheet exposures, such as loan commitments
and standby letters of credit. These guidelines place a strong emphasis on tangible stockholders
equity as the core element of the capital base, with appropriate recognition of other components of
capital. At December 31, 2010, our Tier 1 capital ratio was 11.39%, while our total risk-based
capital ratio was 12.66%, both of which exceed the capital minimums established in the risk-based
capital requirements.
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Our risk-based capital ratios at December 31, 2010, 2009 and 2008 are presented below.
RISK-BASED CAPITAL
December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Tier 1 capital |
||||||||||||
Stockholders equity |
$ | 57,164 | $ | 60,603 | $ | 76,439 | ||||||
Intangible assets |
(464 | ) | (607 | ) | (826 | ) | ||||||
Unrealized (appreciation) depreciation on
available-for-sale securities and
derivative instruments |
(30 | ) | (106 | ) | (657 | ) | ||||||
Disallowed deferred tax asset |
(9,684 | ) | (8,435 | ) | | |||||||
Trust preferred securities (1) |
19,000 | 19,000 | 19,000 | |||||||||
Total Tier 1 capital |
65,986 | 70,455 | 93,956 | |||||||||
Tier 2 capital |
||||||||||||
Qualifying allowance for loan losses |
7,334 | 7,969 | 9,381 | |||||||||
Trust preferred securities (1) |
| | | |||||||||
Total Tier 2 capital |
7,334 | 7,969 | 9,381 | |||||||||
Total risk-based capital |
$ | 73,320 | $ | 78,424 | $ | 103,337 | ||||||
Risk weighted assets |
$ | 579,334 | $ | 625,475 | 747,504 | |||||||
Ratios at end of period |
||||||||||||
Total capital to risk-weighted assets ratio |
12.66 | % | 12.54 | % | 13.82 | % | ||||||
Tier 1 capital to average assets ratio
(leverage ratio) |
9.04 | % | 9.07 | % | 11.50 | % | ||||||
Tier 1 capital to risk-weighted assets
ratio |
11.39 | % | 11.26 | % | 12.57 | % | ||||||
Minimum guidelines |
||||||||||||
Total capital to risk-weighted assets ratio |
8.00 | % | 8.00 | % | 8.00 | % | ||||||
Tier 1 capital to average assets ratio
(leverage ratio) |
4.00 | % | 4.00 | % | 4.00 | % | ||||||
Tier 1 capital to risk-weighted assets
ratio |
4.00 | % | 4.00 | % | 4.00 | % |
(1) | Federal Reserve guidelines for calculation of Tier 1 capital limits the amount of cumulative trust preferred securities which can be included in Tier 1 capital to 25% of total Tier 1 capital (Tier 1 capital before reduction of intangibles). All of the trust preferred securities balance of $19.0 million have been included as Tier 1 capital as of December 31, 2010, 2009 and 2008. |
On December 5, 2008, the Company issued and sold to the United States Department of
Treasury 21,750 shares of Fixed Rate Cumulative Perpetual Preferred Stock, along with a ten year
warrant to purchase 111,083 shares of the Companys common stock for $29.37 per share, for a total
cash price of $21.75 million. The Transaction occurred pursuant to, and is governed by, the U.S.
Treasurys Capital Purchase Plan which was designed to attract broad participation by institutions,
to stabilize the financial system, and to increase lending for the benefit of the U.S. economy. In
connection with the transaction, the Company entered into a letter agreement with the Treasury
which includes a Securities Purchase Agreement-Standard Terms. The Preferred Shares carry a 5% per
year cumulative preferred dividend rate, payable quarterly. The dividend rate increases to 9%
after five years. Dividends compound if they accrue and are not paid. During the first three
years after the transaction, the Company may not redeem the Preferred Shares except in conjunction
with a qualified equity offering meeting certain requirements. During the time that the Preferred
Shares are outstanding, a number of restrictions apply to the Company, including, among others:
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| The Preferred Shares have a senior rank. The Company is not free to issue other preferred stock that is senior to the Preferred Shares. | |
| Until the third anniversary of the sale of the Preferred Shares, unless the Preferred Shares have been redeemed in whole or the Treasury has transferred all of the shares to a non-affiliated third party, the Company may not declare or pay a common stock dividend in an amount greater than the amount of the last quarterly cash dividend per share declared prior to October 14, 2008, or repurchase common stock or other equity shares (subject to certain limited exceptions) without the Treasurys approval. | |
| If the Company were to pay a cash dividend in the future, any such dividend would have to be discontinued if a Preferred Share dividend were missed. Thereafter, dividends on common stock could be resumed only if all Preferred Share dividends in arrears were paid. Similar restrictions apply to the Companys ability to repurchase common stock if Preferred Share dividends are missed. | |
| Failure to pay the Preferred Share dividend is not an event of default. However, a failure to pay a total of six Preferred Share dividends, whether or not consecutive, gives the holders of the Preferred Shares the right to elect two directors to the Companys Board of Directors. That right would continue until the Company pays all dividends in arrears. The dividend payment due on August 15, 2010 was the sixth dividend payment deferred by the Company. | |
| In conformity with requirements of the Securities Purchase Agreement-Standard Terms and Section 111(b) of the Emergency Economic Stabilization Act of 2008 (the EESA), the Company and its subsidiary, Bank of Blue Valley, and each of its senior executive officers agreed to limit certain compensation, bonus, incentive and other benefits plans, arrangements, and policies with respect to the senior executive officers during the period that the Treasury owns any debt or equity securities acquired in connection with the Transaction. The applicable senior executive officers have entered into letter agreements with the Company consenting to the foregoing and have executed a waiver voluntarily waiving any claim against the Treasury or the Company for any changes to such senior executive officers compensation or benefits that are required to comply with Section 111(b) of EESA. |
The Warrant is exercisable immediately and expires in ten years. The Warrant has
anti-dilution protections and certain other protections for the holder, as well as potential
registration rights upon written request from the Treasury. If requested by the Treasury, the
Warrant (and the underlying common stock) may need to be listed on a national securities exchange.
The Treasury has agreed not to exercise voting rights with respect to common shares it may acquire
upon exercise of the Warrant. The number of common shares covered by the Warrant could have been
reduced by up to one-half if the Company completed an equity offering meeting certain requirements
by December 31, 2009. If the Preferred Shares are redeemed in whole, the Company has the right to
purchase any common shares held by the Treasury at their fair market value at that time.
In addition to participation in the CPP, the Company had a common stock rights offering to
holders of record of its common stock as of the close of business on November 10, 2008, of
non-transferable subscription rights to purchase up to 334,000 shares of its common stock at a cash
subscription price of $18.00 per share. The Company received gross cash proceeds of approximately
$5.2 million in the rights offering with 288,943 shares of common stock being issued. The
proceeds, less expenses incurred in the rights offering, were invested in the Bank to provide
additional capital for the Bank.
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Contractual Obligations
Our known contractual obligations outstanding as of December 31, 2010 are presented below.
Payments due by Period | ||||||||||||||||||||||||
Less than | More than | |||||||||||||||||||||||
Total | Amortization | 1 year | 1-3 years | 3-5 years | 5 years | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Time deposit obligations |
$ | 221,836 | $ | | $ | 129,844 | $ | 61,724 | $ | 22,815 | $ | 7,453 | ||||||||||||
Long-term debt obligations |
102,088 | | | 20,000 | 27,500 | 54,588 | ||||||||||||||||||
Less: Deferred prepayment
penalty on modification of
Federal Home Loan Bank
advances |
(2,331 | ) | (2,331 | ) | | | | | ||||||||||||||||
Total obligations |
$ | 321,593 | $ | (2,331 | ) | $ | 129,844 | $ | 81,724 | $ | 50,315 | $ | 62,041 | |||||||||||
Inflation
The consolidated financial statements and related data presented in this report have been
prepared in accordance with accounting principles generally accepted in the United States of
America, which require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power of money over time
due to inflation. Unlike most industrial companies, substantially all of our assets and
liabilities are monetary in nature. As a result, interest rates have a more significant impact on
our performance than the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as inflation. Additional discussion of the
impact of interest rate changes is included in Item 7A: Qualitative and Quantitative Disclosure
About Market Risk. In addition, we disclose the estimated fair value of our financial instruments
in Note 21 to the consolidated financial statements included in this report.
Off-Balance Sheet Arrangements
The Company enters into off-balance sheet arrangements in the ordinary course of business. Our
off-balance sheet arrangements generally are limited to commitments to extend credit, mortgage
loans in the process of origination and forward commitments to sell those mortgage loans, letters
of credit and lines of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the agreement. They generally have fixed expiration dates
or other termination clauses and may require payment of a fee. The commitments extend over varying
periods of time with the majority being disbursed within a one-year period. Since a portion of the
commitments may expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customers creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on
managements credit evaluation of the counterparty. Collateral held varies, but may include
accounts receivable, inventory, property, plant and equipment, commercial real estate and
residential real estate. At December 31, 2010, the Company had outstanding commitments to originate
loans aggregating approximately $6.1 million.
Mortgage loans in the process of origination represent amounts that the Company plans to fund
within a normal period of 15 to 60 days and which are intended for sale to investors in the
secondary market. Forward commitments to sell mortgage loans are obligations to deliver loans at a
specified price on or before a specified future date. The Bank acquires such commitments to reduce
market risk on mortgage loans in the process of origination and mortgage loans held for sale.
Total mortgage loans in the process of origination amounted to $1.7 million and mortgage loans held
for sale amounted to $8.2 million at December 31, 2010. As a result, we had combined forward
commitments to sell mortgage loans totaling approximately $9.9 million. Mortgage loans in the
process of origination represent commitments to originate loans at both fixed and variable rates.
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Letters of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. The Company had total outstanding letters of credit
amounting to $6.9 million at December 31, 2010.
Lines of credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Lines of credit generally have fixed expiration dates.
Since a portion of the line may expire without being drawn upon, the total unused lines do not
necessarily represent future cash requirements. Each customers creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on
managements credit evaluation of the counterparty. Collateral held varies, but may include
accounts receivable, inventory, property, plant and equipment, commercial real estate and
residential real estate. Management uses the same credit policies in granting lines of credit as
it does for on-balance sheet instruments. At December 31, 2010 unused lines of credit borrowings
aggregated approximately $149.6 million.
Future Accounting Requirements
On July 21, 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-20, Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses. This ASU amends FASB Accounting Standards Codification (ASC) Topic
310, Receivables, to improve the disclosures that an entity provides about the credit quality of
its financing receivables and the related allowance for credit losses. As a result of these
amendments, an entity is required to disaggregate, by portfolio segment or class of financing
receivable, certain existing disclosures and provide certain new disclosures about its financing
receivables and related allowance for credit losses.
Existing disclosures are amended to require an entity to provide a rollforward schedule of the
allowance for credit losses from the beginning of the reporting period to the end of the reporting
period on a portfolio segment basis, with the ending balance further disaggregated on the basis of
the impairment method. For each disaggregated ending balance in the rollforward schedule, the
related recorded investment in financing receivables must be disclosed. The disclosure would
include the nonaccrual status of financing receivables by class of financing receivables, as well
as the impaired financing receivables by class of financing receivables.
The amendments in the ASU also require an entity to provide the following additional
disclosures about its financing receivables: (1) the credit quality indicators of financing
receivables at the end of the reporting period by class of financing receivables; (2) the aging of
past due financing receivables at the end of the reporting period by class of financing
receivables; (3) the nature and extent of troubled debt restructurings that occurred during the
period by class of financing receivables and their effect on the allowance for credit losses; (4)
the nature and extent of financing receivables modified as troubled debt restructurings within the
previous 12 months that defaulted during the reporting period by class of financing receivables and
their effect on the allowance for credit losses; and (5) significant purchases and sales of
financing receivables during the reporting period disaggregated by portfolio segment.
For public entities, the disclosures as of the end of a reporting period are effective for
interim and annual reporting periods ending on or after December 15, 2010. The disclosures about
activity that occurs during a reporting period are effective for interim and annual reporting
periods beginning on or after December 15, 2010. Management has adopted this update and included
the disclosures in the consolidated financial statements. The adoption of this update had no
adverse impact on the Companys consolidated financial statements.
On January 19, 2011, the FASB issued ASU 2011-01, Receivables (Topic 310) Deferral of the
Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The
amendments in this ASU temporarily delay the effective date of the disclosures about troubled debt
restructurings in ASU 2010-20 for public entities. The
effective date of the new disclosures about troubled debt restructurings for public entities
and the guidance for determining what constitutes a troubled debt restructuring is being
coordinated currently. The guidance is anticipated to be effective for interim and annual periods
ending after June 15, 2011. Management does not anticipate that this update will have a material
impact on the Companys consolidated financial statements.
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Regulatory Matters
The Board of Directors of the Company and the Bank, 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 Banks
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 Banks position on the 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
Banks 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. The Company and the Bank have complied with
all terms of the written agreement.
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Item 7A: | Qualitative and Quantitative Disclosure About Market Risk |
As a continuing part of our financial strategy, we attempt to manage the impact of
fluctuations in market interest rates on our net interest income. This effort entails providing a
reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of
yield. Our funds management policy is established by our Bank Board of Directors and monitored by
our Asset/Liability Management Committee. Our funds management policy sets standards within which
we are expected to operate. These standards include guidelines for exposure to interest rate
fluctuations, liquidity, loan limits as a percentage of funding sources, exposure to correspondent
banks and brokers, and reliance on non-core deposits. Our funds management policy also establishes
the reporting requirements to our Bank Board of Directors. Our investment policy complements our
funds management policy by establishing criteria by which we may purchase securities. These
criteria include approved types of securities, brokerage sources, terms of investment, quality
standards, and diversification. Our liquidity contingency funding plan is established by our Bank
Board of Directors and monitored by our Asset/Liability Management Committee. Our liquidity
contingency funding plan sets guidelines for the Company to monitor and control its liquidity
position as well as ensure appropriate contingency liquidity plans are actively in place and
consistent with the current and forecasted needs of the Company.
We use an asset/liability modeling system to analyze the Companys current sensitivity to
instantaneous and permanent changes in interest rates. The system simulates the Companys asset
and liability base and projects future net interest income results under several interest rate
assumptions. This allows management to view how changes in interest rates will affect the spread
between the yield received on assets and the cost of deposits and borrowed funds.
The asset/liability modeling system is also used to analyze the net economic value of equity
at risk under instantaneous shifts in interest rates. The net economic value of equity at risk
is defined as the market value of assets less the market value of liabilities plus/minus the market
value of any off-balance sheet positions. By effectively looking at the present value of all
future cash flows on or off the balance sheet, the net economic value of equity modeling takes a
longer-term view of interest rate risk.
We strive to maintain a position such that current changes in interest rates will not affect
net interest income or the economic value of equity by more than 5%, per 50 basis points. The
following table sets forth the estimated percentage change in the Banks net interest income over
the next twelve month period and net economic value of equity at risk at December 31, 2010 based on
the indicated instantaneous and permanent changes in interest rates.
Net Interest | Net Economic | |||||||
Income | Value of | |||||||
Changes in Interest Rates | (next 12 months) | Equity at Risk | ||||||
200 basis point rise |
9.13 | % | (4.62 | )% | ||||
100 basis point rise |
3.10 | % | (2.74 | )% | ||||
Base Rate Scenario |
| | ||||||
25 basis point decline |
(1.11 | )% | 0.50 | % |
The above table indicates that, at December 31, 2010, in the event of a sudden and
sustained increase in prevailing market rates, our net interest income would be expected to
increase. This is a result of an increase in our interest-bearing demand deposit balances,
specifically our performance checking accounts. The increase in interest-bearing demand deposit
balances provides the Company with greater control over the cost of its funding base and enables
the Company to expand its net interest margin in an increasing rate environment. The Bank has
placed floors on its loans over the last several years which would limit the decline in yield
earned on the loan portfolio in a declining rate environment. Another consideration in a rising
interest rate scenario is the impact of mortgage financing, which
would likely decline,
leading to lower loans held for sale fee income, though the impact is difficult to quantify or
project. In the decreasing rate scenarios, the adjustable rate assets (loans) reprice to lower
rates faster than our liabilities, but our liabilities long-term FHLB advances and existing time
deposits would not decrease in rate as much as market rates. In addition, fixed rate loans
might experience an increase in prepayments, further decreasing yields on earning assets and
causing net income to decrease.
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The above table also indicates that, at December 31, 2010, in the event of a sudden increase
in prevailing market rates, the economic value of our equity would decrease. Given our current
asset/liability position, a 100 and 200 basis point increase in interest rates will result in a
lower economic value of our equity as the change in estimated gain on liabilities exceeds the
change in estimated loss on assets in this interest rate scenario. Currently, under an increasing
rate environment, the Companys estimated market value of loans could decrease slightly due to
fixed rate loans and investments with rates lower than market rates. These assets have a
likelihood to remain until maturity in this rate environment. However, the estimated market value
decrease in fixed rate loans and investment securities would be offset by time deposits unable to
reprice to higher rates immediately and fixed-rate callable advances from FHLBank. The likelihood
of advances being called in a rising rate environment increases resulting in advances being
repriced prior to maturity. Given our current asset/liability position, a 25 basis point decline
in interest rates will result in a slight increase in the economic value of our equity as the
change in estimated gain on assets exceeds the change in estimated loss on liabilities in this
interest rate scenario. Currently, under a falling rate environment, the Companys estimated
market value of loans could increase as a result of fixed rate loans, net of possible prepayments.
However, the estimated market value increase in fixed rate loans is offset by time deposits unable
to reprice to lower rates immediately and fixed-rate callable advances from FHLBank. The
likelihood of advances being called in a decreasing rate environment is diminished resulting in the
advances existing until final maturity, which has the effect of lowering the economic value of
equity.
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The following table summarizes the anticipated maturities or repricing of our interest-earning
assets and interest-bearing liabilities as of December 31, 2010, based on the information and
assumptions set forth below.
INTEREST-RATE SENSITIVITY ANALYSIS
Expected Maturity or Repricing Date | ||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
0-90 Days | 91-365 Days | 1 year | 1 to 2 years | 2 to 5 years | Thereafter | Total | ||||||||||||||||||||||
Interest-Earning Assets: |
||||||||||||||||||||||||||||
Fixed Rate Loans |
$ | 54,007 | $ | 36,662 | $ | 90,669 | $ | 35,589 | $ | 82,778 | $ | 14,485 | $ | 223,521 | ||||||||||||||
Average Interest Rate |
5.66 | % | 6.76 | % | 6.10 | % | 7.11 | % | 6.27 | % | 6.18 | % | 6.33 | % | ||||||||||||||
Variable Rate Loans |
255,476 | 18,562 | 274,038 | 1,454 | 1,603 | | 277,095 | |||||||||||||||||||||
Average Interest Rate |
4.76 | % | 5.36 | % | 4.80 | % | 5.31 | % | 6.55 | % | | % | 4.82 | % | ||||||||||||||
Fixed Rate Investments |
| 3,016 | 3,016 | 33,028 | 26,995 | | 63,039 | |||||||||||||||||||||
Average Interest Rate |
| % | 1.00 | % | 1.00 | % | 1.32 | % | 1.79 | % | | % | 1.51 | % | ||||||||||||||
Variable Rate Investments |
601 | | 601 | | | | 601 | |||||||||||||||||||||
Average Interest Rate |
3.52 | % | | % | 3.52 | % | | % | | % | | % | 3.52 | % | ||||||||||||||
Interest Bearing Deposits |
67,526 | | 67,526 | | | | 67,526 | |||||||||||||||||||||
Average Interest Rate |
0.19 | % | | % | 0.19 | % | | % | | % | | % | 0.19 | % | ||||||||||||||
Funds borrowed |
10,000 | | 10,000 | | | | 10,000 | |||||||||||||||||||||
Average Interest Rate |
0.15 | % | | % | 0.15 | % | | % | | % | | % | 0.15 | % | ||||||||||||||
Total interest-earning assets |
$ | 387,610 | $ | 58,240 | $ | 445,850 | $ | 70,071 | $ | 111,376 | $ | 14,485 | $ | 641,782 | ||||||||||||||
Interest-Bearing Liabilities: |
||||||||||||||||||||||||||||
Interest-bearing demand |
$ | 140,741 | $ | | $ | 140,741 | $ | | $ | | $ | | $ | 140,741 | ||||||||||||||
Average Interest Rate |
1.81 | % | | % | 1.81 | % | | % | | % | | % | 1.81 | % | ||||||||||||||
Savings and money market |
77,666 | | 77,666 | | | | 77,666 | |||||||||||||||||||||
Average Interest Rate |
0.50 | % | | % | 0.50 | % | | % | | % | | % | 0.50 | % | ||||||||||||||
Time deposits |
56,471 | 73,390 | 129,861 | 41,905 | 42,626 | 7,444 | 221,836 | |||||||||||||||||||||
Average Interest Rate |
1.98 | % | 1.91 | % | 1.94 | % | 2.19 | % | 2.90 | % | 3.57 | % | 2.23 | % | ||||||||||||||
Funds borrowed |
82,372 | | 82,372 | | 36,133 | | 118,505 | |||||||||||||||||||||
Average Interest Rate |
2.12 | % | | % | 2.12 | % | | % | 3.44 | % | | % | 2.53 | % | ||||||||||||||
Total interest-bearing liabilities |
$ | 357,250 | $ | 73,390 | $ | 430,640 | $ | 41,905 | $ | 78,759 | $ | 7,444 | $ | 558,748 | ||||||||||||||
Cumulative: |
||||||||||||||||||||||||||||
Rate sensitive assets (RSA) |
$ | 387,610 | $ | 445,850 | $ | 445,850 | $ | 515,921 | $ | 627,297 | $ | 641,782 | $ | 641,782 | ||||||||||||||
Rate sensitive liabilities (RSL) |
357,250 | 430,640 | 430,640 | 472,545 | 551,304 | 558,748 | 558,748 | |||||||||||||||||||||
GAP (GAP = RSA RSL) |
30,360 | 15,210 | 15,210 | 43,376 | 75,993 | 83,034 | 83,034 | |||||||||||||||||||||
RSA/RSL |
108.50 | % | 103.53 | % | 103.53 | % | 109.18 | % | 113.78 | % | 114.86 | % | ||||||||||||||||
RSA/Total assets |
53.60 | 61.66 | 61.66 | 71.35 | 86.75 | 88.75 | ||||||||||||||||||||||
RSL/Total assets |
49.41 | 59.55 | 59.55 | 65.35 | 76.24 | 77.27 | ||||||||||||||||||||||
GAP/Total assets |
4.20 | 2.10 | 2.10 | 6.00 | 10.51 | 11.48 | ||||||||||||||||||||||
GAP/RSA |
7.83 | 3.41 | 3.41 | 8.41 | 12.11 | 12.94 |
Certain assumptions are contained in the above table which affect the presentation.
Although certain assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types of assets and liabilities lag behind changes in market interest
rates.
Disclosures about fair values of financial instruments, which reflect changes in market prices
and rates, can be found in Note 21 to the consolidated financial statements included in this
report.
Item 8: | Financial Statements and Supplementary Data |
See index to Blue Valley Ban Corp. financial statements on page F-1.
Item 9: | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
No items are reportable.
56
Table of Contents
Item 9A: | Controls and Procedures |
Management, including the Companys Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of the design and operation of the Companys
disclosure controls and procedures as of December 31, 2010. Based upon the evaluation, management
concluded that the Companys disclosure controls and procedures are effective to ensure that all
material information requiring disclosure in this annual report was made known to them in a timely
manner.
Management is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. During the year, the Company made no significant changes in
internal controls over financial reporting or in other factors that could materially affect the
Companys internal control over financial reporting.
Managements Report on Internal Control Over Financial Reporting:
Management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under
the supervision and with the participation of management, including the Companys Chief Executive
Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
our evaluation under the framework in Internal Control Integrated Framework, our management
concluded that our internal control over financial reporting was effective as of December 31, 2010.
This annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm pursuant to rules of the
Securities and Exchange Commission that permit the Company to provide only managements report to
this annual report.
Item 9B: | Other Information |
No items are reportable.
57
Table of Contents
Part III
Item 10: | Directors, Executive Officers and Corporate Governance |
Information regarding the Companys directors and executive officers is included in the
Companys Proxy Statement for the 2011 Annual Meeting of Stockholders and is hereby incorporated by
reference.
Information regarding the Banks directors and executive officers is included in Part I of
this Form 10-K under the caption Directors and Executive Officers of the Registrant.
The Company has adopted a code of conduct that applies to our principal executive, financial,
and accounting officers. A copy of our code of conduct can be obtained free of charge by
contacting us directly at:
Investor Relations
11935 Riley
Overland Park, KS 66213
913.338.1000
Email: ir@bankbv.com
11935 Riley
Overland Park, KS 66213
913.338.1000
Email: ir@bankbv.com
We intend to disclose any amendments to, or waivers from, any provision of our code of conduct
that applies to our chief executive officer, chief financial officer, or chief accounting officer
by posting such information to our website located at www.BankBV.com.
Item 11: | Executive Compensation |
This information is included in the Companys Proxy Statement for the 2011 Annual Meeting of
Stockholders and is hereby incorporated by reference.
Item 12: | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
This information is included in the Companys Proxy Statement for the 2011 Annual Meeting of
Stockholders and is hereby incorporated by reference.
Item 13: | Certain Relationships, Related Transactions, and Director Independence |
The Bank periodically makes loans to our executive officers and directors, the members of
their immediate families and companies with which they are affiliated. As of December 31, 2010,
the Bank had aggregate loans outstanding to such persons of approximately $20.5 million, which
represented 35.95% of our stockholders equity of $57.2 million on that date. These loans:
| were made in the ordinary course of business; | |
| were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to the Bank; | |
| did not involve more than the normal risk of collectibility or present other unfavorable features; and | |
| were being paid as agreed. |
58
Table of Contents
Information regarding Director Independence is included in the Companys Proxy Statement for
the 2011 Annual Meeting of Stockholders and is hereby incorporated by reference.
Item 14: | Principal Accounting Fees and Services |
This information is included in the Companys Proxy Statement for the 2011 Annual Meeting of
Stockholders and is hereby incorporated by reference.
Part IV
Item 15: | Exhibits, Financial Statement Schedules |
(a) | The financial statements and financial statement schedules listed in the accompanying index to consolidated financial statements and financial statement schedules are filed as part of this Form 10-K. | |
(b) | The exhibits listed in the accompanying exhibit index are filed as part of this Form 10-K. | |
(c) | None |
59
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: March 21, 2011 |
By: | /s/ Robert D. Regnier | ||
Robert D. Regnier, President, | ||||
Chief Executive Officer and Director | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the capacities listed on the
dates indicated
Date: March 21, 2011 |
By: | /s/ Robert D. Regnier | ||
Robert D. Regnier, President, | ||||
Chief Executive Officer and Director (Principal Executive Officer) |
Date: March 21, 2011 |
By: | /s/ Mark A. Fortino | ||
Mark A. Fortino, Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) |
Date: March 21, 2011 |
By: | /s/ Donald H. Alexander | ||
Donald H. Alexander, Director | ||||
Date: March 21, 2011 |
By: | /s/ Michael J. Brown | ||
Michael J. Brown, Director | ||||
Date: March 21, 2011 |
By: | /s/ Robert D. Taylor | ||
Robert D. Taylor, Director | ||||
60
Table of Contents
Exhibits
2.1
|
Agreement and Plan of Merger between Unison Bancorp, Inc., BVBC Acquisition I, Inc. and Blue Valley Ban Corp., dated as of November 2, 2006.***** | |
2.2
|
Acquisition Agreement and Plan of Merger among Northland National Bank, Blue Valley Ban Corp. and Western National Bank, dated as of March 2, 2007.***** | |
2.3
|
Purchase and Assumption Agreement among Northland National Bank, Bank of Blue Valley and Blue Valley Ban Corp., dated as of March 2, 2007.***** | |
3.1
|
Amended and Restated Articles of Incorporation of Blue Valley Ban Corp. * | |
3.2
|
Bylaws, as amended, of Blue Valley Ban Corp. * | |
3.3
|
Certificate of Designations dated December 3, 2008.****** | |
4.1
|
1998 Equity Incentive Plan. * | |
4.2
|
1994 Stock Option Plan. * | |
4.3
|
Agreement as to Expenses and Liabilities. * | |
4.4
|
Indenture dated April 10, 2003, between Blue Valley Ban Corp. and Wilmington Trust Company ** | |
4.5
|
Amended and Restated Declaration of Trust dated April 10, 2003 ** | |
4.6
|
Guarantee Agreement dated April 10, 2003 ** | |
4.7
|
Fee Agreement dated April 10, 2003 ** | |
4.8
|
Specimen of Floating Rate Junior Subordinated Debt Security ** | |
4.9
|
Junior Subordinated Indenture dated as of July 29, 2005 between Blue Valley Ban Corp. and Wilmington Trust Company*** | |
4.10
|
Amended and Restated Declaration of Trust dated July 29, 2005*** | |
4.11
|
Guarantee Agreement dated July 29, 2005*** | |
4.12
|
Warrant to purchase Common Stock dated December 5, 2008.****** | |
10.1
|
Promissory Note of Blue Valley Building dated July 15, 1994. * | |
10.2
|
Mortgage, Assignment of Leases and Rents and Security Agreement between Blue Valley Building and Businessmens Assurance Company of America, dated July 15, 1994. * | |
10.3
|
Assignment of Leases and Rents between Blue Valley Building and Businessmens Assurance Company of America dated July 15, 1994. * | |
10.4
|
Line of Credit Note with JP Morgan Chase dated June 15, 2005 **** | |
10.5
|
Term Note with JP Morgan Chase dated June 15, 2005 **** |
61
Table of Contents
Exhibits
10.6
|
Letter Agreement dated December 5, 2008, including Securities Purchase Agreement Standard Terms, incorporated by reference herein, between Blue Valley Ban Corp. and the United States Department of Treasury.****** | |
10.7
|
Amendment and Waiver by and among Bank of Blue Valley, Blue Valley Ban Corp. and its Senior Executive Officers.****** | |
11.1
|
Statement regarding computation of per share earnings. Please see p. F-12. | |
21.1
|
Subsidiaries of Blue Valley Ban Corp. | |
23.3
|
Consent of BKD, LLP. | |
31.1
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) | |
31.2
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) | |
32.1
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
99.1
|
Certification of the Principal Executive Officer pursuant to Section 111 of the Emergency Economic Stabilization Act of 2008. | |
99.2
|
Certification of the Principal Financial Officer pursuant to Section 111 of the Emergency Economic Stabilization Act of 2008. | |
*
|
Filed with the SEC on April 10, 2000 as an Exhibit to Blue Valley Ban Corp.s Registration Statement on Form S-1, Amendment No. 1, File No. 333-34328. Exhibit incorporated herein by reference. | |
**
|
Filed with the SEC on March 19, 2004 as an Exhibit to Blue Valley Ban Corp.s Annual Report on Form 10-K. Exhibit incorporated herein by reference. | |
***
|
Filed with the SEC on August 3, 2005 as an Exhibit to Blue Valley Ban Corp.s Current Report on Form 8-K. Exhibit incorporated herein by reference. | |
****
|
Filed with the SEC on March 27, 2006 as an Exhibit to Blue Valley Ban Corp.s Annual Report on Form 10-K. Exhibit incorporated herein by reference. | |
*****
|
Filed with the SEC on March 29, 2007 as an Exhibit to Blue Valley Ban Corp.s Annual Report on Form 10-K. Exhibit incorporated herein by reference. | |
******
|
Filed with the SEC on December 8, 2008 as an Exhibit to Blue Valley Ban Corp.s Current Report on Form 8-K. Exhibit incorporated herein by reference. |
62
BLUE VALLEY BAN CORP.
DECEMBER 31, 2010, 2009 AND 2008
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page | ||
F-2 | ||
CONSOLIDATED FINANCIAL STATEMENTS |
||
F-3 | ||
F-5 | ||
F-6 | ||
F-7 | ||
F-9 |
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
Audit Committee,
Board of Directors and Stockholders
Blue Valley Ban Corp.
Overland Park, Kansas
Board of Directors and Stockholders
Blue Valley Ban Corp.
Overland Park, Kansas
We have audited the accompanying consolidated balance sheets of Blue Valley Ban Corp. (the
Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations,
stockholders equity and cash flows for each of the three years in the period ended December 31,
2010. These consolidated financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing auditing procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. Our
audits also included examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Blue Valley Ban Corp. as of December 31, 2010 and
2009, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2010 in conformity with accounting principles generally accepted in the
United States of America.
/s/ BKD, LLP | ||||
Kansas City, Missouri
March 21, 2011
March 21, 2011
F-2
Table of Contents
BLUE VALLEY BAN CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
(In thousands, except share data)
(In thousands, except share data)
ASSETS
2010 | 2009 | |||||||
Cash and due from banks |
$ | 37,255 | $ | 32,126 | ||||
Interest bearing deposits in other financial institutions |
67,526 | 64,858 | ||||||
Federal funds sold |
10,000 | | ||||||
Cash and cash equivalents |
114,781 | 96,984 | ||||||
Available-for-sale securities |
63,640 | 72,757 | ||||||
Mortgage loans held for sale, fair value |
8,162 | 8,752 | ||||||
Loans, net of allowance for loan losses of $14,731 and
$20,000 in 2010 and 2009, respectively |
477,723 | 534,111 | ||||||
Premises and equipment, net |
16,239 | 16,930 | ||||||
Foreclosed assets held for sale, net |
20,144 | 19,435 | ||||||
Interest receivable |
1,783 | 2,303 | ||||||
Deferred income taxes |
10,976 | 9,480 | ||||||
Income taxes receivable |
| 2,746 | ||||||
Prepaid expenses and other assets |
2,026 | 2,803 | ||||||
Federal Home Loan Bank stock, Federal Reserve Bank stock, and
other securities |
7,163 | 7,059 | ||||||
Core deposit intangible asset, at amortized cost |
464 | 607 | ||||||
Total assets |
$ | 723,101 | $ | 773,967 | ||||
See Notes to Consolidated Financial Statements
F-3
Table of Contents
BLUE VALLEY BAN CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
(In thousands, except share data)
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS EQUITY
2010 | 2009 | |||||||
LIABILITIES |
||||||||
Deposits |
||||||||
Demand |
$ | 100,975 | $ | 91,158 | ||||
Savings, NOW and money market |
218,407 | 204,245 | ||||||
Time |
221,836 | 294,707 | ||||||
Total deposits |
541,218 | 590,110 | ||||||
Other interest-bearing liabilities |
18,748 | 16,120 | ||||||
Long-term debt |
99,757 | 102,088 | ||||||
Interest payable and other liabilities |
6,214 | 5,046 | ||||||
Total liabilities |
665,937 | 713,364 | ||||||
STOCKHOLDERS EQUITY |
||||||||
Capital stock |
||||||||
Preferred stock, $1 par value, $1,000 liquidation preference
Authorized 15,000,000 shares; issued and outstanding
2010 21,750 shares; 2009 21,750 shares |
22 | 22 | ||||||
Common stock, par value $1 per share;
Authorized 15,000,000 shares; issued and outstanding
2010 2,843,301 shares; 2009 2,817,650 shares |
2,843 | 2,818 | ||||||
Additional paid-in capital |
38,431 | 37,975 | ||||||
Retained earnings |
15,838 | 19,685 | ||||||
Accumulated other comprehensive income, net of income tax of
$20 in 2010 and $69 in 2009 |
30 | 103 | ||||||
Total stockholders equity |
57,164 | 60,603 | ||||||
Total liabilities and stockholders equity |
$ | 723,101 | $ | 773,967 | ||||
See Notes to Consolidated Financial Statements
F-4
Table of Contents
BLUE VALLEY BAN CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands, except per share data)
(In thousands, except per share data)
2010 | 2009 | 2008 | ||||||||||
INTEREST AND DIVIDEND INCOME |
||||||||||||
Interest and fees on loans |
$ | 28,011 | $ | 33,996 | $ | 41,245 | ||||||
Federal funds sold and other short-term investments |
245 | 144 | 378 | |||||||||
Available-for-sale securities |
1,825 | 1,943 | 3,375 | |||||||||
Dividends on Federal Home Loan Bank and
Federal Reserve Bank stock |
222 | 211 | 265 | |||||||||
Total interest income |
30,303 | 36,294 | 45,263 | |||||||||
INTEREST EXPENSE |
||||||||||||
Interest-bearing demand deposits |
2,343 | 2,589 | 1,394 | |||||||||
Savings and money market deposit accounts |
438 | 490 | 2,402 | |||||||||
Other time deposits |
7,746 | 10,742 | 12,139 | |||||||||
Federal funds purchased and other interest-bearing liabilities |
45 | 58 | 375 | |||||||||
Short-term debt |
| | 568 | |||||||||
Long-term debt, net |
3,791 | 4,108 | 4,813 | |||||||||
Total interest expense |
14,363 | 17,987 | 21,691 | |||||||||
NET INTEREST INCOME |
15,940 | 18,307 | 23,572 | |||||||||
PROVISION FOR LOAN LOSSES |
3,095 | 21,635 | 17,025 | |||||||||
NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES |
12,845 | (3,328 | ) | 6,547 | ||||||||
NON-INTEREST INCOME |
||||||||||||
Loans held for sale fee income |
3,506 | 2,785 | 2,136 | |||||||||
Service fees |
3,083 | 3,250 | 3,299 | |||||||||
Realized gains on available-for-sale securities |
885 | 346 | 702 | |||||||||
Gain on settlement of litigation |
| | 1,000 | |||||||||
Other income |
1,145 | 1,664 | 1,010 | |||||||||
Total non-interest income |
8,619 | 8,045 | 8,147 | |||||||||
NON-INTEREST EXPENSE |
||||||||||||
Salaries and employee benefits |
11,753 | 12,272 | 12,500 | |||||||||
Net occupancy expense |
2,756 | 2,811 | 3,144 | |||||||||
Goodwill impairment |
| | 4,821 | |||||||||
Other operating expense |
11,258 | 12,758 | 8,304 | |||||||||
Total non-interest expense |
25,767 | 27,841 | 28,769 | |||||||||
LOSS BEFORE INCOME TAXES |
(4,303 | ) | (23,124 | ) | (14,075 | ) | ||||||
BENEFIT FOR INCOME TAXES |
(1,561 | ) | (8,514 | ) | (3,824 | ) | ||||||
NET LOSS |
(2,742 | ) | (14,610 | ) | (10,251 | ) | ||||||
DIVIDENDS AND ACCRETION ON PREFERRED STOCK |
1,105 | 1,045 | | |||||||||
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS |
$ | (3,847 | ) | $ | (15,655 | ) | $ | (10,251 | ) | |||
BASIC LOSS PER SHARE |
$ | (1.38 | ) | $ | (5.68 | ) | $ | (4.20 | ) | |||
DILUTED LOSS PER SHARE |
$ | (1.38 | ) | $ | (5.68 | ) | $ | (4.20 | ) | |||
See Notes to Consolidated Financial Statements
F-5
Table of Contents
BLUE VALLEY BAN CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands, except share data)
(In thousands, except share data)
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||
Comprehensive | Preferred | Common | Paid-In | Retained | Comprehensive | |||||||||||||||||||||||
Income (Loss) | Stock | Stock | Capital | Earnings | Income (Loss) | Total | ||||||||||||||||||||||
BALANCE, DECEMBER 31, 2007 |
$ | | $ | 2,440 | $ | 10,312 | $ | 45,592 | $ | 590 | $ | 58,934 | ||||||||||||||||
Issuance of 21,750 shares of preferred stock |
22 | 21,639 | 21,661 | |||||||||||||||||||||||||
Issuance of stock warrants to purchase
111,083 shares of common stock |
89 | 89 | ||||||||||||||||||||||||||
Issuance of 288,943 shares of common stock
through rights offering |
289 | 4,912 | 5,201 | |||||||||||||||||||||||||
Issuance of 12,820 shares of restricted
stock, net of forfeitures |
13 | 296 | 309 | |||||||||||||||||||||||||
Issuance of 15,100 shares of common stock
through stock options exercised |
15 | 305 | 320 | |||||||||||||||||||||||||
Issuance of 3,587 shares of common stock
for the employee stock purchase plan |
3 | 112 | 115 | |||||||||||||||||||||||||
Net loss |
$ | (10,251 | ) | (10,251 | ) | (10,251 | ) | |||||||||||||||||||||
Accretion of discount on preferred shares |
1 | (1 | ) | | ||||||||||||||||||||||||
Change in derivative financial instrument,
net of income taxes (credit) of $(4) |
(6 | ) | (6 | ) | (6 | ) | ||||||||||||||||||||||
Change in unrealized appreciation on
available-for-sale securities, net of
income taxes of $44 |
67 | 67 | 67 | |||||||||||||||||||||||||
$ | (10,190 | ) | ||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2008 |
$ | 22 | $ | 2,760 | $ | 37,666 | $ | 35,340 | $ | 651 | $ | 76,439 | ||||||||||||||||
Issuance of 55,050 shares of restricted
stock, net of forfeitures |
55 | 232 | 287 | |||||||||||||||||||||||||
Issuance of 2,495 shares of common stock
for the employee stock purchase plan |
3 | 59 | 62 | |||||||||||||||||||||||||
Net loss |
(14,610 | ) | (14,610 | ) | (14,610 | ) | ||||||||||||||||||||||
Accretion of discount on preferred shares |
18 | (18 | ) | | ||||||||||||||||||||||||
Dividend on preferred shares |
(1,027 | ) | (1,027 | ) | ||||||||||||||||||||||||
Change in unrealized appreciation on
available-for-sale securities, net of
income taxes (credit) of $(365) |
(548 | ) | (548 | ) | (548 | ) | ||||||||||||||||||||||
$ | (15,158 | ) | ||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2009 |
$ | 22 | $ | 2,818 | $ | 37,975 | $ | 19,685 | $ | 103 | $ | 60,603 | ||||||||||||||||
Issuance of 22,186 shares of restricted
stock, net of forfeitures |
22 | 406 | 428 | |||||||||||||||||||||||||
Issuance of 3,465 shares of common stock
for the employee stock purchase plan |
3 | 32 | 35 | |||||||||||||||||||||||||
Net loss |
(2,742 | ) | (2,742 | ) | (2,742 | ) | ||||||||||||||||||||||
Accretion of discount on preferred shares |
18 | (18 | ) | | ||||||||||||||||||||||||
Dividend on preferred shares |
(1,087 | ) | (1,087 | ) | ||||||||||||||||||||||||
Change in unrealized appreciation on
available-for-sale securities, net of
income taxes (credit) of $(49) |
(73 | ) | (73 | ) | (73 | ) | ||||||||||||||||||||||
$ | (2,815 | ) | ||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2010 |
$ | 22 | $ | 2,843 | $ | 38,431 | $ | 15,838 | $ | 30 | $ | 57,164 | ||||||||||||||||
See Notes to Consolidated Financial Statements
F-6
Table of Contents
BLUE VALLEY BAN CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands)
(In thousands)
2010 | 2009 | 2008 | ||||||||||
OPERATING ACTIVITIES |
||||||||||||
Net loss |
$ | (2,742 | ) | $ | (14,610 | ) | $ | (10,251 | ) | |||
Adjustments to reconcile net loss to net cash flow
From operating activities: |
||||||||||||
Depreciation and amortization |
1,298 | 1,417 | 1,552 | |||||||||
Amortization (accretion) of premiums and discounts on
available-for-sale securities |
(73 | ) | 10 | (26 | ) | |||||||
Provision for loan losses |
3,095 | 21,635 | 17,025 | |||||||||
Provision for losses on foreclosed assets held for sale |
734 | 1,363 | | |||||||||
Goodwill impairment |
| | 4,821 | |||||||||
Deferred income taxes |
(1,561 | ) | (6,126 | ) | (1,223 | ) | ||||||
Stock dividends on Federal Home Loan Bank (FHLB) stock |
(104 | ) | (101 | ) | (188 | ) | ||||||
Net realized gains on available-for-sale securities |
(885 | ) | (346 | ) | (702 | ) | ||||||
Net (gain) loss on sale of foreclosed assets |
(168 | ) | (212 | ) | 46 | |||||||
Restricted stock earned and forfeited |
428 | 287 | 309 | |||||||||
Compensation expense related to the Employee Stock Purchase Plan |
3 | 7 | 10 | |||||||||
Originations of loans held for sale |
(135,930 | ) | (196,374 | ) | (136,798 | ) | ||||||
Proceeds from the sale of loans held for sale |
136,487 | 195,668 | 139,619 | |||||||||
Realized loss on loans held for sale fair value adjustment |
33 | 111 | | |||||||||
Proceeds from settlement of litigation |
| | 200 | |||||||||
Gain on settlement of litigation |
| | (1,000 | ) | ||||||||
Changes in: |
||||||||||||
Interest receivable |
520 | 970 | 1,348 | |||||||||
Net fair value of loan related commitments |
(128 | ) | (236 | ) | | |||||||
Income taxes receivable |
2,746 | | | |||||||||
Prepaid expenses and other assets |
981 | 839 | (3,591 | ) | ||||||||
Interest payable and other liabilities |
116 | 913 | (1,835 | ) | ||||||||
Net cash provided by operating activities |
4,850 | 5,215 | 9,316 | |||||||||
INVESTING ACTIVITIES |
||||||||||||
Net change in loans |
42,909 | 57,854 | (86,958 | ) | ||||||||
Proceeds from sales of loan participations |
32 | 4,199 | 1,514 | |||||||||
Purchase of premises and equipment |
(226 | ) | (136 | ) | (364 | ) | ||||||
Proceeds from sale of premises and equipment |
| | 16 | |||||||||
Proceeds from the sale of foreclosed assets, net of expenses |
9,077 | 16,431 | 3,744 | |||||||||
Purchases of available-for-sale securities |
(134,932 | ) | (85,749 | ) | (48,100 | ) | ||||||
Proceeds from maturities of available-for-sale securities |
115,000 | 69,750 | 33,210 | |||||||||
Proceeds from sales of available-for-sale securities |
29,885 | 11,346 | 23,702 | |||||||||
Purchases of Federal Home Loan Bank and Federal Reserve Bank stock |
| (521 | ) | (439 | ) | |||||||
Proceeds from the redemption of Federal Home Loan Bank stock,
Federal Reserve Bank stock, and other securities |
| 1,451 | | |||||||||
Net cash provided by (used in) investing activities |
61,745 | 74,625 | (73,675 | ) | ||||||||
FINANCING ACTIVITIES |
||||||||||||
Net increase (decrease) in demand deposits, money market, NOW and
savings accounts |
23,979 | 29,372 | (19,882 | ) | ||||||||
Net increase (decrease) in time deposits |
(72,871 | ) | (40,130 | ) | 84,380 | |||||||
Net increase (decrease) in federal funds purchased and other
interest-bearing liabilities |
2,628 | (11,425 | ) | (1,491 | ) | |||||||
Net decrease in short-term debt |
| | (25,000 | ) | ||||||||
Repayments of long-term debt |
(42,500 | ) | (5,396 | ) | (13,322 | ) | ||||||
Proceeds from long-term debt |
42,500 | | 40,000 | |||||||||
Prepayment penalty on modification of FHLB advances |
(2,569 | ) | | | ||||||||
Discount on repayment of long-term debt |
| (100 | ) | | ||||||||
Proceeds from sale of preferred stock and warrants through the Capital Purchase Plan |
| | 21,750 | |||||||||
Proceeds from sale of common stock through rights offering |
| | 5,201 | |||||||||
Dividends paid on preferred stock |
| (212 | ) | | ||||||||
Dividends paid on common stock |
| | (878 | ) | ||||||||
Net proceeds from the sale of additional stock through Employee
Stock Purchase Plan (ESPP) and stock options exercised |
35 | 62 | 435 | |||||||||
Net cash provided by (used in) financing activities |
(48,798 | ) | (27,829 | ) | 91,193 | |||||||
(Continued)
See Notes to Consolidated Financial Statements
F-7
Table of Contents
BLUE VALLEY BAN CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands)
(In thousands)
2010 | 2009 | 2008 | ||||||||||
Increase in cash and cash equivalents |
17,797 | 52,011 | 26,834 | |||||||||
Cash and cash equivalents, beginning of year |
96,984 | 44,973 | 18,139 | |||||||||
CASH AND CASH EQUIVALENTS, END OF YEAR |
$ | 114,781 | $ | 96,984 | $ | 44,973 | ||||||
SUPPLEMENTAL CASH FLOWS INFORMATION |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest |
$ | 14,372 | $ | 18,057 | $ | 21,382 | ||||||
Income taxes, net of refunds |
$ | (2,750 | ) | $ | (3,496 | ) | $ | 1,667 | ||||
Noncash investing and financing activities: |
||||||||||||
Transfer of loans to foreclosed property |
$ | 10,352 | $ | 32,234 | $ | 6,050 | ||||||
Restricted stock issued |
$ | 22 | $ | 55 | $ | 13 | ||||||
Preferred dividends accrued but not paid |
$ | 1,087 | $ | 815 | $ | |
See Notes to Consolidated Financial Statements
F-8
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company is a holding company for Bank of Blue Valley (the Bank), BVBC Capital Trust II
and BVBC Capital Trust III through 100% ownership of each. Blue Valley Building Corp. was a 100%
owned subsidiary of the Company until March 31, 2009. On March 31, 2009, the Company contributed
100% of Blue Valley Building Corp. to the Bank. In addition, the Company owned 49% of Homeland
Title, LLC until it closed its operations in March 2009.
The Bank is primarily engaged in providing a full range of banking and mortgage services to
individual and corporate customers in southern Johnson County, Kansas. The Bank also originates
residential mortgages locally and nationwide through its InternetMortgage.com website. The Bank is
subject to competition from other financial institutions. The Bank is also subject to regulation
by certain federal and state agencies and undergoes periodic examination by those regulatory
authorities.
Blue Valley Building Corp. is primarily engaged in leasing real property at its facilities in
Overland Park and Leawood, Kansas. As of March 31, 2009, Blue Valley Building Corp. was owned 100%
by the Bank of Blue Valley.
BVBC Capital Trust II and III are Delaware business trusts created in 2003 and 2005,
respectively, to offer trust preferred securities and to purchase the Companys junior subordinated
debentures. The Trusts have terms of 30 years, but may dissolve earlier as provided in their trust
agreements.
Homeland Title, LLC was a company providing title and settlement services and is no longer in
operation.
Operating Segment
The Company provides community banking services through its subsidiary bank, including such
products and services as loans; time deposits, checking and savings accounts; mortgage
originations; trust services; and investment services. These activities are reported as a single
operating segment.
Principles of Consolidation
The consolidated financial statements include the accounts of Blue Valley Ban Corp. and its
100% owned subsidiaries. Significant intercompany accounts and transactions have been eliminated
in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change include the
determination of the allowance for loan losses, valuation of real estate acquired in connection
with foreclosures or in satisfaction of loans, valuation of deferred tax assets and fair values of
financial instruments. In connection with the determination of the allowance for loan losses and
the valuation of foreclosed assets held for sale, management obtains independent appraisals for
significant properties.
F-9
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Management believes that the allowance for loan losses, valuation of foreclosed assets held
for sale, and valuation of deferred tax assets are adequate. While management uses available
information to recognize losses on loans, foreclosed assets held for sale and deferred tax assets,
changes in economic conditions may necessitate revision of these estimates in future years. In
addition, various regulatory agencies, as an integral part of their examination process,
periodically review the Companys allowance for loan losses, valuation of foreclosed assets held
for sale and deferred tax assets. Such agencies may require the Company to recognize additional
losses based on their judgments of information available to them at the time of their examination.
Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less
to be cash equivalents. At December 31, 2010, cash equivalents consisted primarily of federal
funds sold. The Company did not have an investment in federal funds sold at December 31, 2009.
One or more of the financial institutions holding the Companys cash accounts are
participating in the FDICs Transaction Account Guarantee Program. Under that program, through
December 31, 2010, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC
for the entire amount in the account. Pursuant to legislation enacted in 2010, the FDIC will fully
insure all noninterest-bearing transaction accounts beginning December 31, 2010 through December
31, 2012, at all FDIC-insured institutions.
For financial institutions opting out of the FDICs Transaction Account Guarantee Program or
interest-bearing cash accounts, the FDICs insurance limits were permanently increased to $250,000,
effective July 31, 2010. At December 31, 2010, the Companys cash accounts exceeded federally
insured limits by approximately $30,286,000.
The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal
Reserve Bank. The reserve required at December 31, 2010 was $1,159,000 and the deposit balance held
at the Federal Reserve Bank on December 31, 2010 was $67,111,000.
Investment in Securities
Available-for-sale securities, which include any security for which the Company has no
immediate plan to sell, but which may be sold in the future, are carried at fair value. Realized
gains and losses, based on amortized cost of the specific security, are recorded on trade date and
included in non-interest income. Unrealized gains and losses are recorded, net of related income
tax effects, in accumulated other comprehensive income. Purchase premiums and discounts are
amortized and accreted, respectively, to interest income using a method which approximates the
level-yield method over the terms of the securities. Interest on investments in debt securities is
included in income when earned.
Effective April 1, 2009, the Company adopted new accounting guidance related to recognition
and presentation of other-than-temporary impairment (ASC 320-10). When the Company does not intend
to sell a debt security, and it is more likely than not, the Company will not have to sell the
security before recovery of its cost basis, it recognizes the credit component of an
other-than-temporary impairment of a debt security in earnings and the remaining portion in other
comprehensive income. The credit loss component recognized in earnings is identified as the amount
of principal cash flows not expected to be received over the remaining term of the security as
projected based on cash flow projections. The Company did not have any securities with
other-than-temporary impairment at December 31, 2010.
F-10
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Prior to the adoption of the recent accounting guidance on April 1, 2009, management
considered, in determining whether other-than-temporary impairment exists, (1) the length of time
and the extent to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer and (3) the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for any anticipated recovery in
fair value.
For equity securities, when the Company has decided to sell an impaired available-for-sale
security and the entity does not expect the fair value of the security to fully recover before the
expected time of sale, the security is deemed other-than-temporarily impaired in the period in
which the decision to sell is made. The Company recognizes an impairment loss when the impairment
is deemed other-than-temporary even if a decision to sell has not been made.
Mortgage Loans Held for Sale
Effective April 1, 2009, the Company adopted Statement of Financial Account Standards No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of
FASB Statement No. 115, which was subsequently incorporated into the FASB Accounting Standards
Codification (ASC) in Topic 825, to account for mortgage loans originated after April 1, 2009.
Mortgage loans originated and intended for sale in the secondary market are carried at fair value
in the aggregate. Net unrealized gains and losses, if any, are recognized through a valuation
allowance by charges to non-interest income. Gain and losses, net of discounts collected or paid,
commitment fees paid and considering a normal servicing rate, are recognized in non-interest income
upon sale of the loan.
Prior to April 1, 2009, mortgage loans held for sale were carried at the lower of cost or fair
value, determined using an aggregate basis. Write-downs to fair value were recognized as a charge
to earnings at the time the decline in value occurred. Gains and losses resulting from sales of
mortgage loans were recognized when the respective loans were sold to investors. Gains and losses
were determined by the difference between the selling price and the carrying amount of the loans
sold, net of discounts collected or paid, commitment fees paid and considering a normal servicing
rate. Fees received from borrowers to guarantee the funding of mortgage loans held for sale were
recognized as income or expense when the loans were sold or when it was evident that the commitment
will not be used.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until
maturity or payoffs are reported at their outstanding principal balance adjusted for any charge
offs, the allowance for loan losses, and any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans. Interest income is reported using the
interest method and includes amortization of net deferred loan fees over the loan term. Generally,
the accrual of interest on loans is discontinued at the time the loan is ninety days past due and
interest is considered a loss, unless the loan is well-secured and in the process of collection.
Loans are placed on non-accrual or charged off at an earlier date if collection of principal or
interest is considered doubtful. When interest accrual is discontinued, all interest accrued but
not collected for the loan is reversed against interest income. The interest on these loans is
generally accounted for on a cash-basis or a cost recovery basis, meaning interest is not
recognized until the full past due balance has been collected. Loans may be returned to accrual
status when all the principal and interest amounts contractually due are brought current and future
payments are reasonably assured.
F-11
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses
The allowance for loan losses is managements estimate of probable losses which have occurred
as of the balance sheet date based on managements evaluation of risk in the loan portfolio. The
allowance for loan losses is increased by provisions charged to expense and reduced by loans
charged off when management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a monthly basis by management and is based on
managements periodic review of the collectibility of the loans in consideration of historical
experience, the nature and volume of the loan portfolio, adverse situations that may affect the
borrowers ability to repay, estimated value of underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates that are susceptible
to significant revision as more information becomes available.
The Company computes its allowance by assigning specific reserves to impaired loans, and then
applies general reserve factors to the rest of the loan portfolio. The general reserve covers non
classified loans and is based on historical charge off experience, expected loss given default
derived from Companys internal risk rating process and current and projected economic conditions
and factors. Other adjustments may be made to the allowance for pools of loans after an assessment
of internal and external influences on credit quality that are not fully reflected in the
historical loss or risk rating data.
A loan is considered impaired when, based on current information and events, it is probable
that the Company will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length
of delay, the reason for the delay, the borrowers prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan
basis by either the present value of expected future cash flows discounted at the loans effective
interest rate, the loans obtainable market price or the fair value of the collateral if the loan
is collateral dependent.
Premises and Equipment
Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged
to expense using the straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and depreciated using the straight-line method over the terms of the
respective lease or the estimated useful lives of the improvements, whichever is shorter.
The estimated useful lives for each major depreciable classification of premises and equipment
are as follows:
Buildings and improvements
|
35-40 years | |
Furniture and equipment
|
3-10 years |
F-12
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed Assets Held for Sale
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially
recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis.
Subsequent to foreclosure, valuations are periodically performed by management and the assets are
carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are other income and other operating expense.
Federal Home Loan Bank Stock, Federal Reserve Bank Stock and Other Securities
Federal Home Loan Bank and Federal Reserve Bank stock are required for institutions that are
members of the Federal Home Loan Bank and Federal Reserve systems. The required investment in the
stock is based on a predetermined formula, carried at cost and evaluated for impairment.
Derivatives
Derivative Loan Commitments
Mortgage loan commitments that relate to the origination of a mortgage that will be held for
sale upon funding are considered derivative instruments under the derivatives and hedging
accounting guidance (ASC 815, Derivatives and Hedging). Loan commitments that are derivatives are
recognized at fair value on the consolidated balance sheet in other assets and other liabilities
with changes in their fair values recorded in other income. The Company estimates the fair value
using a valuation model which considers differences between quoted prices for loans with similar
characteristics in the secondary market and the committed rates.
Forward Loan Sale Commitments
The Company carefully evaluates all loan sales agreements to determine whether they meet the
definition of a derivative under the derivatives and hedging accounting guidance (ASC 815), as
facts and circumstances may differ significantly. If agreements qualify, to protect against the
price risk inherent in derivative loan commitments, the Company uses best efforts forward loan sale
commitments to mitigate the risk of potential decreases in the values of loans that would result
from the exercise of the derivative loan commitments. Accordingly, forward loan commitments are
recognized at fair value on the consolidated balance sheet in other assets and other liabilities
with changes in their fair values recorded in other income. The Company estimates the fair value
of its forward loan commitments using a methodology similar to that used for derivative loan
commitments.
Goodwill
Goodwill impairment assessment was performed annually. When the implied fair value of
goodwill is lower than its carrying amount an impairment of goodwill is indicated and goodwill is
written down to its implied fair value in the period it is identified. Subsequent increases in
goodwill value are not recognized in the financial statements. As of December 31, 2008, it was
determined that the fair value of the Companys goodwill was lower than its carrying amount.
Accordingly, the Company recognized a goodwill impairment charge of $4,821,000. Management believes
this impairment was primarily attributable to the continued volatility throughout the financial
services industry and the effect such volatility 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.
F-13
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Core Deposit Intangible Assets
Intangible assets are being amortized on the straight-line basis over periods ranging from
seven to 15 years. Such assets are periodically evaluated as to the recoverability of their
carrying value.
Fee Income
Loan origination fees, net of direct origination costs, are recognized as income using the
level-yield method over the term of the loans.
Transfers of Financial Assets |
Transfers of financial assets are accounted for as sales, when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets
have been isolated from the Companyput presumptively beyond the reach of the transferor and its
creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets and (3) the Company does not maintain effective control over the transferred
assets through an agreement to repurchase them before their maturity or the ability to unilaterally
cause the holder to return specific assets.
Transfers between Fair Value Hierarchy Levels |
Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable
inputs) and Level 3 (significant unobservable inputs) are recognized on the period end date.
Income Taxes
The Company accounts for income taxes in accordance with income tax accounting guidance (ASC
740, Income Taxes). The income tax accounting guidance results in two components of income tax
expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded
for the current period by applying the provisions of the enacted tax law to the taxable income or
excess of deductions over revenues. The Company determines deferred income taxes using the
liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is
based on the tax effects of the differences between the book and tax bases of assets and
liabilities, and enacted changes in tax rates and laws are recognized in the period in which they
occur. Deferred 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.
Deferred income tax expense results from changes in deferred tax assets and liabilities
between periods. 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 term
more likely than not means a likelihood of more than 50 percent; the terms examined and upon
examination also include resolution of the related appeals or litigation processes, if any. A tax
position that meets the more-likely-than-not recognition threshold is initially and subsequently
measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of
being realized upon settlement with a taxing authority that has full knowledge of all relevant
information. The determination of whether or not a tax position has met the more-likely-than-not
recognition threshold considers the facts, circumstances and information available at the reporting
date and is subject to the managements judgment.
F-14
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company recognizes interest and penalties on income taxes as a component of income tax
expense. The Company files consolidated income tax returns with its subsidiaries. The Company is
generally not subject to federal, state and local examination by tax authorities for years prior to
2007.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and accumulated other comprehensive
income (loss), net of applicable income taxes. Accumulated other comprehensive income (loss)
includes unrealized appreciation (depreciation) on available-for-sale securities and unrealized and
realized gains and losses on derivative financial instruments. Net unrealized gain or loss on
available-for-sale securities, net of income taxes, included in accumulated other comprehensive
income was $30,000 and $103,000, respectively, at December 31, 2010 and 2009.
Reclassification
Certain reclassifications have been made to the 2009 and 2008 financial statements to conform
to the 2010 financial statement presentation. These reclassifications had no effect on net income.
F-15
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share
Basic earnings (loss) per share represents income available to common stockholders divided by
the weighted average number of shares outstanding during each year. Diluted earnings (loss) per
share reflects additional potential common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to income that would result from
the assumed issuance. The computation of per share earnings is as follows:
2010 | 2009 | 2008 | ||||||||||
(In thousands, except share and per share data) | ||||||||||||
Net loss |
$ | (2,742 | ) | $ | (14,610 | ) | $ | (10,251 | ) | |||
Dividends and accretion on preferred stock |
(1,105 | ) | (1,045 | ) | | |||||||
Net loss available to common shareholders |
$ | (3,847 | ) | $ | (15,655 | ) | $ | (10,251 | ) | |||
Average common shares outstanding |
2,773,039 | 2,754,419 | 2,438,809 | |||||||||
Average common share stock options
outstanding and restricted stock (B) |
15,115 | 8,184 | 21,236 | |||||||||
Average diluted common shares (B) |
2,788,154 | 2,762,603 | 2,460,045 | |||||||||
Basic loss per share |
$ | (1.38 | ) | $ | (5.68 | ) | $ | (4.20 | ) | |||
Diluted loss per share (A) |
$ | (1.38 | ) | $ | (5.68 | ) | $ | (4.20 | ) | |||
(A) | No shares of stock options, restricted stock or warrants were included in the computation of diluted earnings per share for any period there was a loss. | |
(B) | Warrants to purchase 111,083 shares of common stock at an exercise price of $29.37 per share were outstanding at December 31, 2010, 2009 and 2008, but were not included in the computation of diluted earnings per share because the warrants exercise price was greater than the average market price of the common shares, thus making the warrants anti-dilutive. Stock options to purchase 24,375 and 33,875 shares of common stock were outstanding at December 31, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because the options exercise price was greater than the average market price of the common shares, thus making the options anti-dilutive. |
Income available for common stockholders will be reduced by dividends declared in the
period on preferred stock (whether or not they are paid) and the accretion on the warrants.
F-16
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Future Accounting Requirements
On July 21, 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-20, Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses. This ASU amends FASB Accounting Standards Codification (ASC) Topic
310, Receivables, to improve the disclosures that an entity provides about the credit quality of
its financing receivables and the related allowance for credit losses. As a result of these
amendments, an entity is required to disaggregate, by portfolio segment or class of financing
receivable, certain existing disclosures and provide certain new disclosures about its financing
receivables and related allowance for credit losses.
Existing disclosures are amended to require an entity to provide a rollforward schedule of the
allowance for credit losses from the beginning of the reporting period to the end of the reporting
period on a portfolio segment basis, with the ending balance further disaggregated on the basis of
the impairment method. For each disaggregated ending balance in the rollforward schedule, the
related recorded investment in financing receivables must be disclosed. The disclosure would
include the nonaccrual status of financing receivables by class of financing receivables, as well
as the impaired financing receivables by class of financing receivables.
The amendments in the ASU also require an entity to provide the following additional
disclosures about its financing receivables: (1) the credit quality indicators of financing
receivables at the end of the reporting period by class of financing receivables; (2) the aging of
past due financing receivables at the end of the reporting period by class of financing
receivables; (3) the nature and extent of troubled debt restructurings that occurred during the
period by class of financing receivables and their effect on the allowance for credit losses; (4)
the nature and extent of financing receivables modified as troubled debt restructurings within the
previous 12 months that defaulted during the reporting period by class of financing receivables and
their effect on the allowance for credit losses; and (5) significant purchases and sales of
financing receivables during the reporting period disaggregated by portfolio segment.
For public entities, the disclosures as of the end of a reporting period are effective for
interim and annual reporting periods ending on or after December 15, 2010. The disclosures about
activity that occurs during a reporting period are effective for interim and annual reporting
periods beginning on or after December 15, 2010. Management has adopted this update and included
the disclosure in the consolidated financial statements. The adoption of this update had no
adverse impact on the Companys consolidated financial statements.
On January 19, 2011, the FASB issued ASU 2011-01, Receivables (Topic 310) Deferral of the
Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The
amendments in this ASU temporarily delay the effective date of the disclosures about troubled debt
restructurings in ASU 2010-20 for public entities. The effective date of the new disclosures about
troubled debt restructurings for public entities and the guidance for determining what constitutes
a troubled debt restructuring is being coordinated currently. The guidance is anticipated to be
effective for interim and annual periods ending after June 15, 2011. Management does not
anticipate that this update will have a material impact on the Companys consolidated financial
statements.
F-17
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 2: AVAILABLE-FOR-SALE SECURITIES
The amortized cost and estimated fair value, together with gross unrealized gains and losses,
of available-for-sale securities are as follows:
December 31, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
U.S. Government sponsored agencies |
$ | 62,990 | $ | 228 | $ | (179 | ) | $ | 63,039 | |||||||
Equity and other securities |
600 | 1 | | 601 | ||||||||||||
$ | 63,590 | $ | 229 | $ | (179 | ) | $ | 63,640 | ||||||||
December 31, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
U.S. Government sponsored agencies |
$ | 71,984 | $ | 338 | $ | (159 | ) | $ | 72,163 | |||||||
Equity and other securities |
600 | | (6 | ) | 594 | |||||||||||
$ | 72,584 | $ | 338 | $ | (165 | ) | $ | 72,757 | ||||||||
The amortized cost and estimated fair value of available-for-sale securities at December
31, 2010, by contractual maturity are shown below. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Amortized | ||||||||
Cost | Fair Value | |||||||
(In thousands) | ||||||||
Due in one year or less |
$ | 3,000 | $ | 3,016 | ||||
Due after one year through five years |
59,990 | 60,023 | ||||||
Due after five years through ten years |
| | ||||||
Due after ten years |
| | ||||||
Total |
62,990 | 63,039 | ||||||
Equity and other securities |
600 | 601 | ||||||
$ | 63,590 | $ | 63,640 | |||||
The book value and estimated fair value of securities pledged as collateral to secure
public deposits amounted to $5,002,000 and $5,013,000 at December 31, 2010 and $16,995,000 and
$17,117,000 at December 31, 2009.
The Company enters into sales of securities under agreements to repurchase. The amounts
deposited under these agreements represent short-term debt and are reflected as a liability in the
consolidated balance sheets. The securities underlying the agreements are book-entry securities.
During the period, securities held in safekeeping were pledged to the depositors under a written
custodial agreement that explicitly recognizes the depositors interest in the securities. At
December 31, 2010, or at any month end during the period, no material amount of agreements to
repurchase securities sold was outstanding with any individual entity.
F-18
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 2: AVAILABLE-FOR-SALE SECURITIES (Continued)
Information on sales of securities under agreements to repurchase is as follows:
2010 | 2009 | |||||||
(In thousands) | ||||||||
Balance as of December 31 |
$ | 17,674 | $ | 15,417 | ||||
Carrying value of securities pledged to secure agreements to repurchases
at December 31 |
$ | 27,031 | $ | 29,182 | ||||
Average balance during the year of securities sold under agreements to repurchase |
$ | 17,922 | $ | 22,546 | ||||
Maximum amount outstanding at any month-end during the year |
$ | 21,935 | $ | 25,189 |
Gross gains of $885,000, $346,000, and $702,000 were realized in 2010, 2009 and 2008,
respectively, and no gross losses were realized in 2010, 2009 and 2008, respectively, from sales of
available-for-sale securities.
Certain investments in debt and marketable equity securities are reported in the financial
statements at an amount less than their historical cost. Total fair value of these investments at
December 31, 2010 and 2009, was $29,813,000 and $20,426,000, which is approximately 46.8% and
28.0%, respectively, of the Companys available-for-sale investment portfolio. These declines in
fair value resulted primarily from recent increases in market interest rates. Based on evaluation
of available information and evidence, particularly recent volatility in market yields on debt
securities, management believes the declines in fair value for these securities are temporary.
Unrealized losses and fair value, aggregated by investment type and length of time that
individual securities have been in a continuous unrealized loss position are as follows:
December 31, 2010 | ||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | Total | |||||||||||||||||||||
Description of | Unrealized | Unrealized | Unrealized | |||||||||||||||||||||
Securities | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
U.S. Government sponsored agencies |
$ | 29,813 | $ | 179 | $ | | $ | | $ | 29,813 | $ | 179 | ||||||||||||
Equity and other securities |
| | | | | | ||||||||||||||||||
Total temporarily impaired
securities |
$ | 29,813 | $ | 179 | $ | | $ | | $ | 29,813 | $ | 179 | ||||||||||||
F-19
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 2: AVAILABLE-FOR-SALE SECURITIES (Continued)
December 31, 2009 | ||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Description of | Unrealized | Unrealized | Total | Unrealized | ||||||||||||||||||||
Securities | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
U.S. Government sponsored agencies |
$ | 19,832 | $ | 159 | $ | | $ | | $ | 19,832 | $ | 159 | ||||||||||||
Equity and other securities |
594 | 6 | | | 594 | 6 | ||||||||||||||||||
Total temporarily impaired securities |
$ | 20,426 | $ | 165 | $ | | $ | | $ | 20,426 | $ | 165 | ||||||||||||
The unrealized losses on the Companys investments in direct obligations of U.S. government
sponsored agencies were caused by interest rate increases. The contractual terms of those
investments do not permit the issuer to settle the securities at a price less than the amortized
cost bases of the investments. Because the Company does not intend to sell the investments and it
is not more likely than not the Company will be required to sell the investments before recovery of
their amortized cost basis, which may be maturity, the Company does not consider those investments
to be other-than-temporarily impaired at December 31, 2010.
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at December 31, 2010 and 2009 include the following:
2010 | 2009 | |||||||
(In thousands) | ||||||||
Commercial loans |
$ | 144,181 | $ | 142,528 | ||||
Commercial real estate loans |
169,253 | 167,581 | ||||||
Construction loans |
64,641 | 113,077 | ||||||
Home equity loans |
64,289 | 66,586 | ||||||
Residential real estate loans |
36,903 | 45,014 | ||||||
Lease financing |
5,530 | 11,259 | ||||||
Consumer loans |
7,657 | 8,066 | ||||||
Total loans |
492,454 | 554,111 | ||||||
Less: Allowance for loan losses |
14,731 | 20,000 | ||||||
Net loans |
$ | 477,723 | $ | 534,111 | ||||
F-20
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following tables present the balance in the allowance for loan losses and the recorded
investment in loans based on portfolio segment and impairment methods as of December 31, 2010 and
2009:
December 31, 2010 | ||||||||||||||||||||||||||||||||
Commercial Real | Residential Real | |||||||||||||||||||||||||||||||
(In thousands) | Commercial | Estate | Construction | Home Equity | Estate | Lease Financing | Consumer | Total | ||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||
Balance, beginning of year |
$ | 3,630 | $ | 7,253 | $ | 5,929 | $ | 1,061 | $ | 1,737 | $ | 238 | $ | 152 | $ | 20,000 | ||||||||||||||||
Provision charged to expense |
683 | (465 | ) | 2,189 | 571 | 400 | (171 | ) | (112 | ) | 3,095 | |||||||||||||||||||||
Losses charged off |
(1,364 | ) | (2,985 | ) | (3,662 | ) | (387 | ) | (660 | ) | (43 | ) | (7 | ) | (9,108 | ) | ||||||||||||||||
Recoveries |
390 | 171 | 123 | 17 | 11 | 14 | 18 | 744 | ||||||||||||||||||||||||
Balance, end of year |
$ | 3,339 | $ | 3,974 | $ | 4,579 | $ | 1,262 | $ | 1,488 | $ | 38 | $ | 51 | $ | 14,731 | ||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 1,832 | $ | 2,617 | $ | 3,647 | $ | 576 | $ | 912 | $ | 5 | $ | 2 | $ | 9,591 | ||||||||||||||||
Ending balance: collectively evaluated for impairment |
$ | 1,507 | $ | 1,357 | $ | 932 | $ | 686 | $ | 576 | $ | 33 | $ | 49 | $ | 5,140 | ||||||||||||||||
Loans: |
||||||||||||||||||||||||||||||||
Ending balance |
$ | 144,181 | $ | 169,253 | $ | 64,641 | $ | 64,289 | $ | 36,903 | $ | 5,530 | $ | 7,657 | $ | 492,454 | ||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 26,444 | $ | 26,704 | $ | 35,521 | $ | 3,544 | $ | 8,691 | $ | 983 | $ | 64 | $ | 101,951 | ||||||||||||||||
Ending balance: collectively evaluated for impairment |
$ | 117,737 | $ | 142,549 | $ | 29,120 | $ | 60,745 | $ | 28,212 | $ | 4,547 | $ | 7,593 | $ | 390,503 | ||||||||||||||||
December 31, 2009 | ||||||||||||||||||||||||||||||||
Commercial Real | Residential Real | |||||||||||||||||||||||||||||||
Commercial | Estate | Construction | Home Equity | Estate | Lease Financing | Consumer | Total | |||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||
Balance, beginning of year |
$ | 3,040 | $ | 2,507 | $ | 4,695 | $ | 409 | $ | 1,201 | $ | 449 | $ | 67 | $ | 12,368 | ||||||||||||||||
Provision charged to expense |
5,044 | 4,997 | 8,358 | 1,274 | 1,944 | (123 | ) | 141 | 21,635 | |||||||||||||||||||||||
Losses charged off |
(4,713 | ) | (374 | ) | (7,716 | ) | (653 | ) | (1,480 | ) | (109 | ) | (58 | ) | (15,103 | ) | ||||||||||||||||
Recoveries |
259 | 123 | 592 | 31 | 72 | 21 | 2 | 1,100 | ||||||||||||||||||||||||
Balance, end of year |
$ | 3,630 | $ | 7,253 | $ | 5,929 | $ | 1,061 | $ | 1,737 | $ | 238 | $ | 152 | $ | 20,000 | ||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 1,468 | $ | 5,773 | $ | 3,254 | $ | 209 | $ | 1,249 | $ | 16 | $ | 21 | $ | 11,990 | ||||||||||||||||
Ending balance: collectively evaluated for impairment |
$ | 2,162 | $ | 1,480 | $ | 2,675 | $ | 852 | $ | 488 | $ | 222 | $ | 131 | $ | 8,010 | ||||||||||||||||
Loans: |
||||||||||||||||||||||||||||||||
Ending balance |
$ | 142,528 | $ | 167,581 | $ | 113,077 | $ | 66,586 | $ | 45,014 | $ | 11,259 | $ | 8,066 | $ | 554,111 | ||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 18,260 | $ | 28,464 | $ | 53,934 | $ | 2,860 | $ | 14,660 | $ | 1,331 | $ | 160 | $ | 119,669 | ||||||||||||||||
Ending balance: collectively evaluated for impairment |
$ | 124,268 | $ | 139,117 | $ | 59,143 | $ | 63,726 | $ | 30,354 | $ | 9,928 | $ | 7,906 | $ | 434,442 |
F-21
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following table presents the credit risk profile of the Companys loan portfolio based on
the rating category and payment activity as of December 31, 2010 and 2009:
2010 | 2009 | |||||||||||||||||||||||
(In thousands) | Pass | Classified | Total | Pass | Classified | Total | ||||||||||||||||||
Commercial |
$ | 133,603 | $ | 10,578 | $ | 144,181 | $ | 129,596 | $ | 12,932 | $ | 142,528 | ||||||||||||
Commercial real estate |
148,892 | 20,361 | 169,253 | 143,050 | 24,531 | 167,581 | ||||||||||||||||||
Construction |
35,896 | 28,745 | 64,641 | 65,962 | 47,115 | 113,077 | ||||||||||||||||||
Home equity |
61,442 | 2,847 | 64,289 | 64,496 | 2,090 | 66,586 | ||||||||||||||||||
Residential real estate |
30,115 | 6,788 | 36,903 | 32,293 | 12,721 | 45,014 | ||||||||||||||||||
Lease financing |
5,048 | 482 | 5,530 | 10,918 | 341 | 11,259 | ||||||||||||||||||
Consumer |
7,605 | 52 | 7,657 | 7,958 | 108 | 8,066 | ||||||||||||||||||
Total |
$ | 422,601 | $ | 69,853 | $ | 492,454 | $ | 454,273 | $ | 99,838 | $ | 554,111 | ||||||||||||
The following table presents the Companys loan portfolio aging analysis as of December 31,
2010 and 2009:
December 31, 2010 | ||||||||||||||||||||||||||||
Greater than 90 | Total Loans | Total Loans > 90 | ||||||||||||||||||||||||||
(In thousands) | 30-59 Days Past Due | 60-89 Days Past Due | Days Past Due | Total Past Due | Current | Receivable | Days & Accruing | |||||||||||||||||||||
Commercial |
$ | 241 | $ | 307 | $ | 2,648 | $ | 3,196 | $ | 140,985 | $ | 144,181 | $ | | ||||||||||||||
Commercial real estate |
| | 1,247 | 1,247 | 168,006 | 169,253 | | |||||||||||||||||||||
Construction |
46 | | 7,936 | 7,982 | 56,659 | 64,641 | | |||||||||||||||||||||
Home equity |
200 | | 964 | 1,164 | 63,125 | 64,289 | | |||||||||||||||||||||
Residential real estate |
265 | 322 | 3,741 | 4,328 | 32,575 | 36,903 | | |||||||||||||||||||||
Lease financing |
20 | 51 | 114 | 185 | 5,345 | 5,530 | | |||||||||||||||||||||
Consumer |
4 | | | 4 | 7,653 | 7,657 | | |||||||||||||||||||||
Total |
$ | 776 | $ | 680 | $ | 16,650 | $ | 18,106 | $ | 474,348 | $ | 492,454 | $ | | ||||||||||||||
December 31, 2009 | ||||||||||||||||||||||||||||
Greater than 90 | Total Loans | Total Loans > 90 | ||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | Days Past Due | Total Past Due | Current | Receivable | Days & Accruing | ||||||||||||||||||||||
Commercial |
$ | 1,308 | $ | 25 | $ | 1,223 | $ | 2,556 | $ | 139,972 | $ | 142,528 | $ | | ||||||||||||||
Commercial real estate |
968 | | 9,684 | 10,652 | 156,929 | 167,581 | | |||||||||||||||||||||
Construction |
10,702 | 918 | 7,007 | 18,627 | 94,450 | 113,077 | | |||||||||||||||||||||
Home equity |
45 | | 318 | 363 | 66,223 | 66,586 | | |||||||||||||||||||||
Residential real estate |
1,164 | 684 | 6,688 | 8,536 | 36,478 | 45,014 | | |||||||||||||||||||||
Lease financing |
55 | | 254 | 309 | 10,950 | 11,259 | | |||||||||||||||||||||
Consumer |
27 | 59 | 6 | 92 | 7,974 | 8,066 | | |||||||||||||||||||||
Total |
$ | 14,269 | $ | 1,686 | $ | 25,180 | $ | 41,135 | $ | 512,976 | $ | 554,111 | $ | | ||||||||||||||
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC
310-10-35-16), when based on current information and events, it is probable the Company will be
unable to collect the scheduled payments of principal and interest when due according to the
contractual terms of the loan agreement. Impaired loans include non-performing loans but also
include loans modified in troubled debt restructurings where concessions have been granted to
borrowers experiencing financial difficulties. These concessions could include a reduction in the
interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other
actions intended to maximize collection.
F-22
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following table presents impaired loans for the years ended December 31, 2010 and 2009:
December 31, 2010 | ||||||||||||||||||||
Unpaid Principal | Average Investment | Interest Income | ||||||||||||||||||
(In thousands) | Recorded Balance | Balance | Specific Allowance | in Impaired Loans | Recognized | |||||||||||||||
Loans without a specific valuation allowance: |
||||||||||||||||||||
Commercial |
$ | 186 | $ | 281 | $ | | $ | 536 | $ | 24 | ||||||||||
Commercial real estate |
2,066 | 2,686 | | 1,802 | 37 | |||||||||||||||
Construction |
2,423 | 2,423 | | 2,601 | | |||||||||||||||
Home equity |
585 | 587 | | 102 | | |||||||||||||||
Residential real estate |
1,279 | 1,924 | | 1,391 | | |||||||||||||||
Lease financing |
140 | 256 | | 254 | 2 | |||||||||||||||
Consumer |
52 | 54 | | 50 | 3 | |||||||||||||||
Loans with a specific valuation allowance |
||||||||||||||||||||
Commercial |
$ | 2,710 | $ | 2,754 | $ | 709 | $ | 1,039 | $ | 7 | ||||||||||
Commercial real estate |
8,022 | 8,092 | 1,110 | 10,760 | | |||||||||||||||
Construction |
7,994 | 8,106 | 1,599 | 10,246 | 20 | |||||||||||||||
Home equity |
626 | 648 | 299 | 411 | | |||||||||||||||
Residential real estate |
4,274 | 5,136 | 534 | 5,283 | | |||||||||||||||
Lease financing |
| | | 2 | | |||||||||||||||
Consumer |
| | | 12 | | |||||||||||||||
Total: |
||||||||||||||||||||
Commercial |
$ | 2,896 | $ | 3,035 | $ | 709 | $ | 1,575 | $ | 31 | ||||||||||
Commercial real estate |
$ | 10,088 | $ | 10,778 | $ | 1,110 | $ | 12,562 | $ | 37 | ||||||||||
Construction |
$ | 10,417 | $ | 10,529 | $ | 1,599 | $ | 12,847 | $ | 20 | ||||||||||
Home equity |
$ | 1,211 | $ | 1,235 | $ | 299 | $ | 513 | $ | | ||||||||||
Residential real estate |
$ | 5,553 | $ | 7,060 | $ | 534 | $ | 6,674 | $ | | ||||||||||
Lease financing |
$ | 140 | $ | 256 | $ | | $ | 256 | $ | 2 | ||||||||||
Consumer |
$ | 52 | $ | 54 | $ | | $ | 62 | $ | 3 |
F-23
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
December 31, 2009 | ||||||||||||||||||||
Unpaid Principal | Average Investment | Interest Income | ||||||||||||||||||
(In thousands) | Recorded Balance | Balance | Specific Allowance | in Impaired Loans | Recognized | |||||||||||||||
Loans without a specific valuation allowance: |
||||||||||||||||||||
Commercial |
$ | 616 | $ | 679 | $ | | $ | 406 | $ | 8 | ||||||||||
Commercial real estate |
2,331 | 2,369 | | 1,088 | | |||||||||||||||
Construction |
5,398 | 6,636 | | 6,554 | 70 | |||||||||||||||
Home equity |
| | | 32 | 3 | |||||||||||||||
Residential real estate |
2,651 | 2,779 | | 1,085 | 2 | |||||||||||||||
Lease financing |
335 | 383 | | 244 | | |||||||||||||||
Consumer |
| | | 9 | | |||||||||||||||
Loans with a specific valuation allowance |
||||||||||||||||||||
Commercial |
$ | 740 | $ | 790 | $ | 512 | $ | 3,199 | $ | 36 | ||||||||||
Commercial real estate |
10,936 | 11,076 | 4,309 | 9,952 | 186 | |||||||||||||||
Construction |
5,807 | 7,409 | 839 | 13,576 | 146 | |||||||||||||||
Home equity |
412 | 425 | 170 | 423 | | |||||||||||||||
Residential real estate |
5,753 | 7,172 | 761 | 5,048 | 41 | |||||||||||||||
Lease financing |
| | | 80 | 3 | |||||||||||||||
Consumer |
6 | 7 | 1 | 34 | 2 | |||||||||||||||
Total: |
||||||||||||||||||||
Commercial |
$ | 1,356 | $ | 1,469 | $ | 512 | $ | 3,605 | $ | 44 | ||||||||||
Commercial real estate |
$ | 13,267 | $ | 13,445 | $ | 4,309 | $ | 11,040 | $ | 186 | ||||||||||
Construction |
$ | 11,205 | $ | 14,045 | $ | 839 | $ | 20,130 | $ | 216 | ||||||||||
Home equity |
$ | 412 | $ | 425 | $ | 170 | $ | 455 | $ | 3 | ||||||||||
Residential real estate |
$ | 8,404 | $ | 9,951 | $ | 761 | $ | 6,133 | $ | 43 | ||||||||||
Lease financing |
$ | 335 | $ | 383 | $ | | $ | 324 | $ | 3 | ||||||||||
Consumer |
$ | 6 | $ | 7 | $ | 1 | $ | 43 | $ | 2 |
Included in certain loan categories in the impaired loans are troubled debt restructurings
that were classified as impaired as of December 31, 2010:
(In thousands) | ||||
Commercial |
$ | 107 | ||
Commercial real estate |
7,204 | |||
Construction |
9,823 | |||
Home equity |
| |||
Residential real estate |
180 | |||
Lease financing |
110 | |||
Consumer |
| |||
$ | 17,424 | |||
F-24
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
In addition as of December 31, 2010, the Company had troubled debt restructurings that were
performing in accordance with their modified terms as follows:
(In thousands) | ||||
Commercial |
$ | 2,865 | ||
Commercial real estate |
2,013 | |||
Construction |
15,104 | |||
Home equity |
| |||
Residential real estate |
344 | |||
Lease financing |
402 | |||
Consumer |
| |||
$ | 20,728 | |||
As of December 31, 2010, the Company had $7,500,000 of commitments outstanding to borrowers
with troubled debt restructurings. However, these commitments are subject to approval prior to
advancement of funds to the borrower.
The following table presents the Companys non-accrual loans at December 31, 2010 and 2009:
2010 | 2009 | |||||||
(In thousands) | ||||||||
Commercial |
$ | 2,896 | $ | 1,327 | ||||
Commercial real estate |
10,088 | 13,267 | ||||||
Construction |
10,417 | 11,205 | ||||||
Home equity |
1,211 | 344 | ||||||
Residential real estate |
5,553 | 8,404 | ||||||
Lease financing |
140 | 335 | ||||||
Consumer |
52 | 6 | ||||||
$ | 30,357 | $ | 34,888 | |||||
NOTE 4: PREMISES AND EQUIPMENT
Major classifications of these assets are as follows:
2010 | 2009 | |||||||
(In thousands) | ||||||||
Land |
$ | 5,154 | $ | 5,154 | ||||
Buildings and improvements |
15,795 | 15,697 | ||||||
Furniture and equipment |
7,717 | 7,590 | ||||||
28,667 | 28,441 | |||||||
Less accumulated depreciation |
12,427 | 11,511 | ||||||
Total premises and equipment |
$ | 16,239 | $ | 16,930 | ||||
F-25
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 5: FORECLOSED ASSETS HELD FOR SALE
Activity in the allowance for losses on foreclosed assets was as follows:
2010 | 2009 | |||||||
(In thousands) | ||||||||
Balance, beginning of year |
$ | 166 | $ | | ||||
Provision charged to expense |
734 | 1,363 | ||||||
Charge offs, net of recoveries |
(419 | ) | (1,197 | ) | ||||
Balance, end of year |
$ | 481 | $ | 166 | ||||
Expenses applicable to foreclosed assets at December 31 include the following:
2010 | 2009 | |||||||
(In thousands) | ||||||||
Net loss (gain) on sales of foreclosed assets |
$ | (168 | ) | $ | (212 | ) | ||
Provision for losses |
734 | 1,363 | ||||||
Operating expenses, net of rental income |
1,656 | 1,902 | ||||||
$ | 2,222 | $ | 3,053 | |||||
NOTE 6: CORE DEPOSIT INTANGIBLE ASSETS
The carrying basis and accumulated amortization of recognized intangible assets at December
31, 2010 and 2009 were:
2010 | 2009 | |||||||||||||||
Gross | Gross | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
Amount | Amortization | Amount | Amortization | |||||||||||||
(In thousands) | ||||||||||||||||
Core Deposit Intangible |
$ | 3,286 | $ | (2,822 | ) | $ | 3,286 | $ | (2,679 | ) | ||||||
Amortization expense for the years ended December 31, 2010, 2009 and 2008 was $143,000,
$219,000 and $295,000, respectively. Estimated amortization expense for the remainder of the
amortization period is:
(In thousands) | ||||
2011
|
$ | 143 | ||
2012
|
143 | |||
2013
|
143 | |||
2014
|
35 |
F-26
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 7: DERIVATIVE INSTRUMENTS
The Company has commitments outstanding to extend credit on residential mortgages that have
not close prior to the end of the period. As the Company enters into commitments to originate
these loans, it also enters into commitments to sell the loans in the secondary market on a
best-efforts basis. The Company acquires such commitments to reduce interest rate risk on mortgage
loans in the process of origination and mortgage loans held for sale. These commitments to
originate or sell loans on a best efforts basis are considered derivative instruments under ASC
815. These statements require the Company to recognize all derivative instruments in the balance
sheet and to measure those instruments at fair value. As a result of measuring the fair value of
the commitments to originate loans, the Company recorded an increase in other assets of $1,000, a
decrease in other liabilities of $38,000 and an increase in other income of $39,000 for the year
ended December 31, 2010. For the year ended December 31, 2009, the Company recorded an increase in
other liabilities of $47,000 and an increase in other income of $47,000.
Additionally, the Company has commitments to sell loans that have closed prior to the end of
the period on a best efforts basis. Due to the mark to market adjustment on commitments to sell
loans held for sale the Company recorded an increase in other assets of $89,000 and an increase in
other income of $89,000 for the year ended December 31, 2010. For the year ended December 31,
2009, the Company recorded an increase in other assets of $283,000 and an increase in other income
of $283,000.
At December 31, 2010 and 2009, total mortgage loans in the process of origination amounted to
$1,688,000 and $4,102,000, respectively. At December 31, 2010 and 2009, related forward
commitments to sell mortgage loans amounted to approximately $8,162,000 and $8,752,000,
respectively.
The balance of derivative instruments related to commitments to originate and sell loans at
December 31, 2010 and 2009, is disclosed in Note 21, Disclosures About Fair Value of Assets and
Liabilities.
NOTE 8: INTEREST-BEARING DEPOSITS
Interest-bearing time deposits in denominations of $100,000 or more were $104,092,000 on
December 31, 2010 and $107,418,000 on December 31, 2009. The Company acquires brokered deposits in
the normal course of business. At December 31, 2010 and 2009, brokered deposits of $45,949,000 and
$76,874,000, respectively, were included in the Companys time deposit balance. Of the $45,949,000
in brokered deposits, $28,984,000 represented customer funds placed into the Certificate of Deposit
Account Registry Service (CDARS). The Bank is a member of the CDARS service which effectively
allows depositors to receive FDIC insurance on amounts larger than the FDIC insurance limit, which
is currently $250,000. CDARS allows the Bank to break large deposits into smaller amounts and
place them in a network of other CDARS institutions to ensure that full FDIC insurance coverage is
gained on the entire deposit. Although classified as brokered deposits for regulatory purposes,
funds placed through the CDARS program are Bank customer relationships that management views as
core funding.
At December 31, 2010, the scheduled maturities of time deposits are as follows:
(In thousands) | ||||
2011 |
$ | 129,844 | ||
2012 |
41,907 | |||
2013 |
19,817 | |||
2014 |
8,094 | |||
2015 |
14,721 | |||
Thereafter |
7,453 | |||
$ | 221,836 | |||
F-27
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 9: OPERATING LEASES
Blue Valley Building Corp. leases office space to others under noncancellable operating leases
expiring in various years through 2015. Minimum future rent receivable under noncancellable
operating leases at December 31, 2010 was as follows:
(In thousands) | ||||
2011 |
$ | 162 | ||
2012 |
116 | |||
2013 |
18 | |||
2014 |
18 | |||
2015 |
7 | |||
$ | 321 | |||
Consolidated rental and operating lease expenses incurred for space the Company leases
from others were $14,000, $6,000 and $34,000 in 2010, 2009 and 2008, respectively.
NOTE 10: SHORT TERM DEBT
The Company has a line of credit with the Federal Home Loan Bank of Topeka (FHLB) which is
collateralized by various assets including mortgage-backed loans, available-for-sale securities and
cash equivalents. At December 31, 2010 and 2009, there was no outstanding balance on the line of
credit. The variable interest rate was 0.26% on December 31, 2010 and 0.18% on December 31, 2009.
At December 31, 2010 approximately $25,187,000 was available. Advances are made at the discretion
of the Federal Home Loan Bank of Topeka.
The Company also has a line of credit with the Federal Reserve Bank of Kansas City which is
collateralized by various assets, including commercial and commercial real estate loans. At
December 31, 2010 and 2009, there was no outstanding balance on the line of credit. The line of
credit has a variable interest rate of federal funds rate plus 75 basis points and at December 31,
2010 approximately $25,089,000 was available.
F-28
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 11: LONG TERM DEBT
Long-term debt at December 31, 2010 and 2009 consisted of the following components:
2010 | 2009 | |||||||
(In thousands) | ||||||||
Federal Home Loan Bank advances (A) |
$ | 82,500 | $ | 82,500 | ||||
Less: Deferred prepayment penalty on
modification of FHLB advances |
(2,331 | ) | | |||||
Net Federal Home Loan Bank advances |
80,169 | 82,500 | ||||||
Subordinated Debentures BVBC Capital Trust II (B) |
7,732 | 7,732 | ||||||
Subordinated Debentures BVBC Capital Trust III (C) |
11,856 | 11,856 | ||||||
Total long-term debt |
$ | 99,757 | $ | 102,088 | ||||
(A) | Due in 2013, 2014, 2015, 2016 and 2018; collateralized by various assets including mortgage-backed loans, available-for-sale securities and cash equivalents totaling $172,452,000 at December 31, 2010. The interest rates on the advances range from 0.37% to 4.26%. Federal Home Loan Bank advance availability is determined quarterly and at December 31, 2010, approximately $25,187,000 was available. Advances are made at the discretion of the Federal Home Loan Bank of Topeka. | |
In the third quarter of 2010, the Company repaid $42,500,000 of FHLB advances by rolling the net present value of the advances being repaid into the funding cost of $42,500,000 of new advances. A $2,569,000 penalty was associated with paying off the original FHLB advances which is amortized as an adjustment of interest expense over the remaining term of the new FHLB advances using the straight line method. This transaction reduced the effective interest rate, as well as modified the maturity date on these borrowings. | ||
(B) | Due in 2033; interest only at three month LIBOR + 3.25% (3.54% at December 31, 2010 and 3.53% at December 31, 2009) due quarterly; fully and unconditionally guaranteed by the Company on a subordinated basis to the extent that the funds are held by the Trust. BVBC Capital Trust II issued and sold $7,500,000 in Capital Securities to third parties and $232,000 of Common Securities to the Company. The Company may prepay the subordinated debentures beginning in 2008, in whole or in part, at their face value plus accrued interest. | |
(C) | Due in 2035; interest only at three month LIBOR + 1.60% (1.90% at December 31, 2010 and 1.85% at December 31, 2009) due quarterly; fully and unconditionally guaranteed by the Company on a subordinated basis to the extent that the funds are held by the Trust. BVBC Capital Trust III issued and sold $11,500,000 in Preferred Securities to third parties and $356,000 in Common Securities to the Company. Subordinated to the trust preferred securities (B) due in 2033. The Company may prepay the subordinated debentures beginning in 2010, in whole or in part, at their face value plus accrued interest. |
At the request of the Federal Reserve Bank of Kansas City, quarterly payments are being
deferred on the Companys outstanding trust preferred securities. Under the governing documents of
the BVBC Capital Trust II and III, the quarterly payments due on April 24, 2009, through January
24, 2011 for BVBC Capital Trust II and March 31, 2009 through December 31, 2010 for BVBC Capital
Trust III were deferred. The Company has the right to declare such a deferral for up to 20
consecutive quarterly periods and deferral may only be declared as long as the Company is not then
in default under the provisions of the Amended and Restated Trust Agreement. During the deferral
period, interest on the indebtedness continues to accrue and the unpaid interest is compounded. In
addition, for BVBC Capital Trust III, the Company must also accrue additional interest that is
equal to the three month LIBOR rate plus 1.60% during the deferral period. All accrued interest
and compounded interest must be paid at the end of the deferral period.
For both BVBC Capital Trust II and BVBC Capital Trust III, as long as the deferral period
continues, the Company is prohibited from (i) declaring or paying any dividend on any of its
capital stock, which would include both its common stock and the outstanding preferred stock issued
to the United States Department of Treasury (the Treasury), or (ii) making any payment on any
debt security that is ranked pair passu with the debt securities issued by the respective trusts.
Because the Preferred Shares issued under the U.S. Treasurys Capital Purchase Plan (the
F-29
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 11: LONG TERM DEBT (Continued)
CPP) are subordinate to the trust preferred securities, the Company will be restricted from
paying dividends on these Preferred Shares until such time as all trust preferred dividends have
been brought current. See Note 13, Regulatory Matters for additional information.
Aggregate annual maturities of long-term debt at December 31, 2010 are as follows:
(In thousands) | ||||
2011 |
$ | | ||
2012 |
| |||
2013 |
20,000 | |||
2014 |
7,500 | |||
2015 |
20,000 | |||
Thereafter |
54,588 | |||
102,088 | ||||
Less: Deferred prepayment penalty on modification of
FHLB advances |
(2,331 | ) | ||
$ | 99,757 | |||
NOTE 12: INCOME TAXES
The provision for income taxes consists of the following:
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Taxes currently (refundable) payable |
$ | | $ | (2,388 | ) | $ | (2,601 | ) | ||||
Deferred income taxes |
(1,561 | ) | (6,126 | ) | (1,223 | ) | ||||||
$ | (1,561 | ) | $ | (8,514 | ) | $ | (3,824 | ) | ||||
A reconciliation of income tax expense at the statutory rate to the Companys actual
income tax expense is shown below:
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Computed at the statutory rate (34%) |
$ | (1,463 | ) | $ | (7,862 | ) | $ | (4,785 | ) | |||
Increase (decrease) resulting from: |
||||||||||||
Goodwill impairment |
| | 1,541 | |||||||||
Tax-exempt interest |
(5 | ) | (12 | ) | (20 | ) | ||||||
State income taxes |
124 | (208 | ) | (99 | ) | |||||||
Other |
(217 | ) | (432 | ) | (461 | ) | ||||||
Actual tax provision |
$ | (1,561 | ) | $ | (8,514 | ) | $ | (3,824 | ) | |||
F-30
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 12: INCOME TAXES (Continued)
The tax effects of temporary differences related to deferred taxes shown on the December 31,
2010 and 2009 consolidated balance sheets are as follows:
2010 | 2009 | |||||||
(In thousands) | ||||||||
Deferred tax assets: |
||||||||
Allowance for loan losses |
$ | 5,451 | $ | 7,385 | ||||
Net Operating Loss from Blue Valley Ban
Corp. and subsidiary |
6,169 | 2,840 | ||||||
Deferred compensation |
174 | 135 | ||||||
Offering costs |
200 | 210 | ||||||
Non-accrual loan interest |
75 | 60 | ||||||
Net Operating Loss carried from Unison
Bancorp Inc. and subsidiary acquisition |
| 77 | ||||||
Other |
88 | 28 | ||||||
12,157 | 10,735 | |||||||
Deferred tax liabilities: |
||||||||
Accumulated depreciation |
(346 | ) | (385 | ) | ||||
FHLBank stock basis |
(472 | ) | (433 | ) | ||||
Accumulated appreciation on available-for-
sale securities |
(20 | ) | (69 | ) | ||||
Prepaid intangibles |
(198 | ) | (177 | ) | ||||
Core Deposit Intangible related to Unison
Bancorp Inc. and subsidiary acquisition |
(136 | ) | (182 | ) | ||||
Other |
(9 | ) | (9 | ) | ||||
(1,181 | ) | (1,255 | ) | |||||
Net deferred tax asset |
$ | 10,976 | $ | 9,480 | ||||
The Company has unused Federal net operating loss carryforwards of $15,101,000, which
expires in 2030. The Company has unused Kansas Privilege Tax net operating loss carryforwards of
$26,620,000 which expire between 2018 and 2020.
NOTE 13: REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Companys financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company
and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and
Tier I capital to risk-weighted assets and of Tier I capital to average assets. Management
believes, as of December 31, 2010 and 2009, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 2010, the Bank had capital in excess of regulatory requirements for a well
capitalized institution. To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There
are no conditions or events since December 31, 2010 that management believes have changed the
Banks position.
F-31
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 13: REGULATORY MATTERS (Continued)
The Company and the Banks actual capital amounts and ratios are also presented in the table.
To Be Well Capitalized | ||||||||||||||||||||||||
For Capital | Under Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
December 31, 2010: |
||||||||||||||||||||||||
Total Capital
(to Risk Weighted Assets) |
||||||||||||||||||||||||
Consolidated |
$ | 73,320 | 12.66 | % | $ | 46,347 | 8.00 | % | N/A | |||||||||||||||
Bank Only |
$ | 76,034 | 13.15 | % | $ | 46,260 | 8.00 | % | $ | 57,825 | 10.00 | % | ||||||||||||
Tier 1 Capital
(to Risk Weighted Assets) |
||||||||||||||||||||||||
Consolidated |
$ | 65,986 | 11.39 | % | $ | 23,173 | 4.00 | % | N/A | |||||||||||||||
Bank Only |
$ | 68,722 | 11.88 | % | $ | 23,130 | 4.00 | % | $ | 34,695 | 6.00 | % | ||||||||||||
Tier 1 Capital
(to Average Assets) |
||||||||||||||||||||||||
Consolidated |
$ | 65,986 | 9.04 | % | $ | 29,213 | 4.00 | % | N/A | |||||||||||||||
Bank Only |
$ | 68,722 | 9.41 | % | $ | 29,215 | 4.00 | % | $ | 36,519 | 5.00 | % |
To Be Well Capitalized | ||||||||||||||||||||||||
For Capital | Under Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
December 31, 2009: |
||||||||||||||||||||||||
Total Capital
(to Risk Weighted Assets) |
||||||||||||||||||||||||
Consolidated |
$ | 78,424 | 12.54 | % | $ | 50,038 | 8.00 | % | N/A | |||||||||||||||
Bank Only |
$ | 79,140 | 12.67 | % | $ | 49,987 | 8.00 | % | $ | 62,484 | 10.00 | % | ||||||||||||
Tier 1 Capital
(to Risk Weighted Assets) |
||||||||||||||||||||||||
Consolidated |
$ | 70,455 | 11.26 | % | $ | 25,019 | 4.00 | % | N/A | |||||||||||||||
Bank Only |
$ | 71,179 | 11.39 | % | $ | 24,993 | 4.00 | % | $ | 37,490 | 6.00 | % | ||||||||||||
Tier 1 Capital
(to Average Assets) |
||||||||||||||||||||||||
Consolidated |
$ | 70,455 | 9.07 | % | $ | 31,083 | 4.00 | % | N/A | |||||||||||||||
Bank Only |
$ | 71,179 | 9.16 | % | $ | 31,083 | 4.00 | % | $ | 38,854 | 5.00 | % |
The Company and Bank are subject to certain restrictions on the amounts of dividends that
it may declare without prior regulatory approval. At December 31, 2010, any dividend declaration
would require regulatory approval.
F-32
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 13: REGULATORY MATTERS (Continued)
Preferred Stock and Warrants
On December 5, 2008, the Company issued and sold to the United States Department of Treasury
(the Treasury) 21,750 shares of Fixed Rate Cumulative Perpetual Preferred Stock (the Preferred
Shares), along with a ten year warrant to purchase 111,083 shares of the Companys common stock
for $29.37 per share, for a total cash price of $21,750,000 (the Transaction). The Preferred
Shares have a liquidation preference of $1,000 per share. The Transaction occurred pursuant to,
and is governed by the U.S. Treasurys Capital Purchase Plan (the CPP), which is designed to
attract broad participation by institutions, to stabilize the financial system, and to increase
lending for the benefit of the U.S. economy. In connection with the transaction, the Company
entered into a letter agreement with the Treasury which includes a Securities Purchase
Agreement-Standard Terms (the SPA). The Preferred Shares carry a 5% per year cumulative
preferred dividend rate, payable quarterly. The dividend rate increases to 9% after five years.
Dividends compound if they accrue and are not paid. During the first three years after the
transaction, the Company may not redeem the Preferred Shares except in conjunction with a qualified
equity offering meeting certain requirements. During the time that the Preferred Shares are
outstanding, a number of restrictions apply to the Company, including, among others:
| The Preferred Shares have a senior rank. The Company is not free to issue other preferred stock that is senior to the Preferred Shares. | |
| Until the third anniversary of the sale of the Preferred Shares, unless the Preferred Shares have been redeemed in whole or the Treasury has transferred all of the shares to a non-affiliated third party, the Company may not declare or pay a common stock dividend in an amount greater than the amount of the last quarterly cash dividend per share declared prior to October 14, 2008, or repurchase common stock or other equity shares (subject to certain limited exceptions) without the Treasurys approval. | |
| If the Company were to pay a cash dividend in the future, any such dividend would have to be discontinued if a Preferred Share dividend were missed. Thereafter, dividends on common stock could be resumed only if all Preferred Share dividends in arrears were paid. Similar restrictions apply to the Companys ability to repurchase common stock if Preferred Share dividends are missed. | |
| Failure to pay the Preferred Share dividend is not an event of default. However, a failure to pay a total of six Preferred Share dividends, whether or not consecutive, gives the holders of the Preferred Shares the right to elect two directors to the Companys Board of Directors. That right would continue until the Company pays all dividends in arrears. | |
| In conformity with requirements of the SPA and Section 111(b) of the Emergency Economic Stabilization Act of 2008 (the EESA), the Company and its subsidiary, Bank of Blue Valley, and each of its senior executive officers agreed to limit certain compensation, bonus, incentive and other benefits plans, arrangements, and policies with respect to the senior executive officers during the period that the Treasury owns any debt or equity securities acquired in connection with the Transaction. The applicable senior executive officers have entered into letter agreements with the Company consenting to the foregoing and have executed a waiver voluntarily waiving any claim against the Treasury or the Company for any changes to such senior executive officers compensation or benefits that are required to comply with Section 111(b) of EESA. |
The Companys preferred stock qualifies as Tier 1 capital in accordance with regulatory
capital requirements.
F-33
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 13: REGULATORY MATTERS (Continued)
The Warrant is exercisable immediately and expires in ten years. The Warrant has
anti-dilution protections and certain other protections for the holder, as well as potential
registration rights upon written request from the Treasury. If requested by the Treasury, the
Warrant (and the underlying common stock) may need to be listed on a national securities exchange.
The Treasury has agreed not to exercise voting rights with respect to common shares it may acquire
upon exercise of the Warrant. The number of common shares covered by the Warrant could have been
reduced by up to one-half if the Company completed an equity offering meeting certain requirements
by December 31, 2009. If the Preferred Shares are redeemed in whole, the Company has the right to
purchase any common shares held by the Treasury at their fair market value at that time.
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 Banks 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 Banks position on the 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 Banks 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. The Company and the Bank have complied will all items in the agreement.
At the request of the Federal Reserve Bank of Kansas City, the Company notified the United States
Department of the Treasury (the Treasury) of its intention to defer the quarterly dividend
payments on the Preferred Shares due to the Treasury since May 15, 2009. The dividend payment due
on August 15, 2010 was the sixth dividend payment deferred by the Company. As part of the Capital
Purchase Plan, the Company entered into a letter agreement with the Treasury on December 5, 2008,
which includes a Securities Purchase Agreement-Standard Terms. As part of the agreement, dividends
compound if they accrue and are not paid. Failure by the Company to pay the Preferred Share
dividend is not an event of default. However, a failure to pay a total of six Preferred Share
dividends, whether or not consecutive, gives the holders of the Preferred Shares the right to elect
two directors to the Companys Board of Directors. That right would continue until the Company
pays all dividends in arrears. At this time, the Treasury has not elected any directors to serve
on the Companys Board of Directors; however, beginning in November 2010 the Treasury assigned an
observer to attend the Companys board meetings. The Company has accrued for the dividends and
interest and has every intention to bring the obligation current as soon as permitted. As of
December 31, 2010, the Company had accrued $1,988,000 for the dividends and interest on outstanding
Preferred Shares.
F-34
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 14: TRANSACTIONS WITH RELATED PARTIES
At December 31, 2010 and 2009, the Company had loans outstanding to executive officers,
directors and to companies in which the Banks executive officers or directors were principal
owners, in the amounts of $20,549,000 and $22,387,000, respectively. Related party transactions
for 2010 and 2009 were as follows:
2010 | 2009 | |||||||
(In thousands) | ||||||||
Balance, beginning of year |
$ | 22,387 | $ | 28,692 | ||||
New loans and advances |
9,450 | 17,668 | ||||||
Repayments and reclassifications |
(11,288 | ) | (23,973 | ) | ||||
Balance, end of year |
$ | 20,549 | $ | 22,387 | ||||
In managements opinion, such loans and other extensions of credit and deposits were made
in the ordinary course of business and were made on substantially the same terms (including
interest rates and collateral) as those prevailing at the time for comparable transactions with
other persons. Further, in managements opinion, these loans did not involve more than the normal
risk of collectablity or present other unfavorable features.
Deposits from executive officers and directors held by the Company at December 31, 2010, and
2009 totaled $5,997,000 and $5,443,000, respectively.
NOTE 15: PROFIT SHARING AND 401(K) PLANS
The Companys profit sharing and 401(k) plans cover substantially all employees.
Contributions to the profit sharing plan are determined annually by the Board of Directors, and
participant interests are vested over a five-year period. The Company did not make a contribution
to the profit sharing plan during 2010, 2009 and 2008. The Companys 401(k) plan permits
participants to make contributions by salary reduction, based on which the Company matches a
ratable portion. The Companys matching contributions to the 401(k) plan are vested immediately.
The Companys matching contributions charged to expense for 2010, 2009 and 2008 were $282,000,
$302,000 and $312,000, respectively.
NOTE 16: EQUITY INCENTIVE COMPENSATION
The Company has an Equity Incentive Plan (the Plan) which allows the Company to issue equity
incentive compensation awards to its employees and directors in the forms of stock options,
restricted shares or deferred share units.
Under the fixed option provisions of the Plan, the Company may grant options for shares of
common stock that vest two years from the date of grant to its employees. At December 31, 2010,
the Company had 134,375 shares available to be granted (options granted prior to 1998 were subject
to an earlier plan with similar terms). The exercise price of each option is intended to equal the
fair value of the Companys stock on the date of grant, and maximum terms are 10 years.
During 2010, 2009 and 2008, the Company granted no stock options, but did grant 28,841, 60,350 and
15,100 shares of restricted common stock, respectively. Recipients of the restricted stock grant
who are employees fully vest in the stock after three years from the date of the grant. Recipients
of the restricted stock grant who are directors vested immediately in 2010 and 2009 and after one
year from the date of the grant in prior years. The non vested shares were 49,308, 61,750, and
21,100 as of December 31, 2010, 2009 and 2008, respectively. The cost basis of the restricted
shares granted, equal to the fair value of the Companys stock on the date of grant, will be
amortized to compensation expense ratably over the applicable vesting period. The amount of
unrecognized
F-35
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 16: EQUITY INCENTIVE COMPENSATION (Continued)
compensation costs was $264,000, $650,000, and $268,700 as of December 31, 2010, 2009, and 2008,
respectively. During 2010, 2009 and 2008, 834, 5,300 and 700 shares of restricted stock were
forfeited, respectively.
A summary of the status of option shares under the plan at December 31, 2010, 2009 and 2008,
and changes during the years then ended, is presented below:
2010 | 2009 | 2008 | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Exercise | Exercise | Exercise | ||||||||||||||||||||||
Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
Outstanding, beginning of year |
33,875 | $ | 20.51 | 51,225 | $ | 20.38 | 66,325 | $ | 19.73 | |||||||||||||||
Exercised |
| | | | (15,100 | ) | 17.56 | |||||||||||||||||
Forfeited |
9,500 | 16.50 | 17,350 | 20.12 | | | ||||||||||||||||||
Outstanding, end of year |
24,375 | $ | 22.07 | 33,875 | $ | 20.51 | 51,225 | $ | 20.38 | |||||||||||||||
Intrinsic value of shares exercised |
$ | | $ | | $ | 162,826 | ||||||||||||||||||
Options exercisable, end of year |
24,375 | $ | 22.07 | 33,875 | $ | 20.51 | 51,225 | $ | 20.38 | |||||||||||||||
The weighted-average remaining contractual life of option shares at December 31, 2010 was
1.42 years. Exercise prices ranged from $19.50 to $25.00. Information about options outstanding
and exercisable as of December 31, 2010 is set forth in the following table.
Options Outstanding and Exercisable | ||||||||||||
Number Outstanding | Weighted Average | |||||||||||
and Exercisable at | Remaining Contractual | Weighted Average | ||||||||||
Exercise Price | 12/31/10 | Life | Exercise Price | |||||||||
$19.50 |
13,000 | 1 year | $ | 19.50 | ||||||||
$25.00 |
11,375 | 2 years | $ | 25.00 | ||||||||
24,375 | ||||||||||||
NOTE 17: EMPLOYEE STOCK PURCHASE PLAN
The 2004 Blue Valley Ban Corp. employee stock purchase plan (ESPP) provides the right to
subscribe to 100,000 shares of common stock to substantially all employees of the Company and
subsidiaries, except those who are 5% or greater shareholders of the Company. The purchase price
for shares under the plan is determined by the Companys Board of Directors (or a designated
Committee thereof) and was set to 85% of the market price on either the grant date or the offering
date, whichever is lower, for the plan year beginning in February 2004. Expense associated with
the plan recognized in 2010, 2009 and 2008 was approximately $3,000, $7,000 and $10,000,
respectively. Information about employee stock purchase plan activity as of December 31, 2010,
2009 and 2008 is set forth in the following table.
Employee Stock Purchase Plan Activity | ||||||||
Plan year ending January | Shares purchased | Purchase Price | ||||||
2010 |
3,465 | $ | 8.71 | |||||
2009 |
2,495 | $ | 21.25 | |||||
2008 |
3,587 | $ | 27.20 |
F-36
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 18: GAIN ON SETTLEMENT OF LITIGATION
The Companys subsidiary, Bank of Blue Valley (Bank), entered into a settlement agreement
with an individual, based on a successful summary judgment obtained in the Circuit Court of Jackson
County, Missouri, for fraudulent misrepresentation by the individual. The settlement was for $1.0
million, of which $200,000 was received in cash in the third quarter of 2008, with the remaining
$800,000 payable by August 30, 2010 with the option to extend the payable date through August 30,
2012. The $800,000 was received in October 2010. The $800,000 was considered fair value and was
recognized as a gain contingency in 2008 in accordance with ASC 450, which requires the recognition
of a recovery when realization of the recovery is deemed probable. As the contingent portion of
the settlement was collateralized by real property legally owned by the individual, management
deemed the ultimate recovery of the settlement as probable. Therefore, an $800,000 miscellaneous
receivable was also recorded at the time of settlement and the funds were received in October 2010.
NOTE 19: OTHER INCOME/EXPENSE
Other income consists of the following:
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Rental income |
$ | 264 | $ | 377 | $ | 433 | ||||||
Realized gain on foreclosed assets |
434 | 730 | 149 | |||||||||
Other income |
447 | 557 | 428 | |||||||||
Total |
$ | 1,145 | $ | 1,664 | $ | 1,010 | ||||||
Other operating expenses consist of the following:
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Foreclosure expenses |
$ | 2,708 | $ | 3,862 | $ | 944 | ||||||
FDIC assessments |
2,076 | 2,267 | 482 | |||||||||
Professional fees |
1,520 | 1,297 | 1,096 | |||||||||
Data processing |
1,278 | 1,318 | 1,178 | |||||||||
ATM and network fees |
603 | 550 | 414 | |||||||||
Loan processing fees |
308 | 346 | 446 | |||||||||
Advertising |
190 | 172 | 717 | |||||||||
Other expense |
2,575 | 2,946 | 3,027 | |||||||||
Total |
$ | 11,258 | $ | 12,758 | $ | 8,304 | ||||||
F-37
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 20: FAIR VALUE OPTION
The Company elected to adopt The Fair Value Option for Financial Assets and Financial
Liabilities including an Amendment of FASB Statement No. 115, which was subsequently
incorporated into FASB Accounting Standards Codification in Topic 825, for mortgage loans held for
sale originated after April 1, 2009. This standard permits an entity to choose to measure many
financial instruments and certain other items at fair value. An entity will report unrealized
gains and losses on items for which the fair value option has been elected in earnings at each
reporting date.
In accordance with ASC 825, the Company has elected to measure loans held for sale at fair
value. Loans held for sale is made up entirely of mortgage loans held for immediate sale in the
secondary market with servicing release. These loans are sold prior to origination at a contracted
price to an outside investor on a best efforts basis and remain on the Companys balance sheet for
a short period of time (typically 30 to 60 days). It is managements opinion given the short-term
nature of these loans, that fair value provides a reasonable measure of the economic value of these
assets. In addition, carrying such loans at fair value eliminates some measure of volatility
created by the timing of sales proceeds from outside investors, which typically occur in the month
following origination.
The difference between the aggregate fair value and the aggregate unpaid principal balance of
loans held for sale was a loss of $144,000 at December 31, 2010 and $111,000 at December 31, 2009.
Losses from fair value changes included in loans held for sale fee income was $33,000 for the year
ended December 31, 2010 and $111,000 for the year ended December 31, 2009. Interest income on
loans held for sale is included in interest and fees on loan in the Companys consolidated
statement of operations. See Note 21 for additional disclosures regarding fair value of mortgage
loans held for sale.
NOTE 21: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES
ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The fair value hierarchy requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
There are three levels of inputs that may be used to measure fair value:
Level 1 | Quoted prices in active markets for identical assets or liabilities | ||
Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | ||
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Following is a description of the valuation methodologies used for instruments measured at
fair value on a recurring basis and recognized in the Companys consolidated balance sheet, as well
as the general classification of such instruments pursuant to the valuation hierarchy.
Available-for-Sale Securities
Where quoted market prices are available in an active market, securities are classified within
Level 1 of the valuation hierarchy. Level 1 securities include exchange traded equities. If
quoted market prices are not available, then fair values are estimated by using pricing models,
quoted prices of securities with similar characteristics or discounted cash flows. Level 2
securities include U.S. Government sponsored agencies. In certain cases where Level 1 or Level 2
inputs are not available, securities are classified within Level 3 of the hierarchy and include
other less liquid securities.
F-38
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 21: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
Mortgage Loans Held for Sale
Mortgage loans held for sale are valued using market prices for loans with similar
characteristics. This measurement is classified as Level 2 within the hierarchy.
Commitments to Originate Loans and Forward Sales Commitments
Commitments to originate loans and forward sales commitments are valued using a valuation
model which considers differences between quoted prices for loans with similar characteristics in
the secondary market and the committed rates. The valuation model includes assumptions which
adjust the price for the likelihood that the commitment will ultimately result in a closed loan.
These measurements are significant unobservable inputs and are classified as Level 3 within the
hierarchy.
F-39
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 21: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
The following table presents the fair value measurements of assets and liabilities recognized
in the Companys condensed consolidated balance sheet and the level within the fair value hierarchy
in which the fair value measurements fall at December 31, 2010 and 2009:
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Identical Assts | Observable Inputs | Inputs | ||||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(In thousands) | ||||||||||||||||
December 31, 2010: |
||||||||||||||||
Assets: |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
U.S. Government sponsored agencies |
$ | 63,039 | $ | | $ | 63,039 | $ | | ||||||||
Equity and other securities |
601 | 601 | | | ||||||||||||
Mortgage loans held for sale |
8,162 | | 8,162 | | ||||||||||||
Commitments to originate loans |
1 | | | 1 | ||||||||||||
Forward sales commitments |
372 | | | 372 | ||||||||||||
Total assets |
$ | 72,175 | $ | 601 | $ | 71,201 | $ | 373 | ||||||||
Liabilities: |
||||||||||||||||
Commitments to originate loans |
$ | 9 | $ | | $ | | $ | 9 | ||||||||
Forward sales commitments |
| | | | ||||||||||||
Total liabilities |
$ | 9 | $ | | $ | | $ | 9 | ||||||||
December 31, 2009: |
||||||||||||||||
Assets: |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
U.S. Government sponsored agencies |
$ | 72,163 | $ | | $ | 72,163 | $ | | ||||||||
Equity and other securities |
594 | 594 | | | ||||||||||||
Mortgage loans held for sale |
8,752 | | 8,752 | | ||||||||||||
Commitments to originate loans |
| | | | ||||||||||||
Forward sales commitments |
283 | | | 283 | ||||||||||||
Total assets |
$ | 81,792 | $ | 594 | $ | 80,915 | $ | 283 | ||||||||
Liabilities: |
||||||||||||||||
Commitments to originate loans |
$ | 47 | $ | | $ | | $ | 47 | ||||||||
Forward sales commitments |
| | | | ||||||||||||
Total liabilities |
$ | 47 | $ | | $ | | $ | 47 | ||||||||
F-40
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 21: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
The following table is a reconciliation of the beginning and ending balances of recurring fair
value measurements recognized in the Companys consolidated balance sheet using significant
unobservable (Level 3) inputs:
Commitments to | Forward Sales | |||||||
Originate Loans | Commitments | |||||||
(In thousands) | ||||||||
Balance as of December 31, 2008 |
$ | | $ | | ||||
Total changes in fair value: |
||||||||
Included in net income (loss) |
(47 | ) | 283 | |||||
Balance as of December 31, 2009 |
$ | (47 | ) | $ | 283 | |||
Balance as of December 31, 2009 |
$ | (47 | ) | $ | 283 | |||
Total changes in fair value: |
||||||||
Included in net income (loss) |
39 | 89 | ||||||
Balance as of December 31, 2010 |
$ | (8 | ) | $ | 372 | |||
Following is a description of the valuation methodologies used for financial and
nonfinancial instruments measured at fair value on a non-recurring basis and recognized in the
accompanying balance sheet, as well as the general classification of such instruments pursuant to
the valuation hierarchy.
Impaired Loans (Collateral Dependent)
Loans for which it is probable that the Company will not collect all principal and interest
due according to the contractual terms are measured for impairment. Allowable methods for
determining the amount of impairment include using the fair value of the collateral for collateral
dependent loans.
If the impaired loan is identified as collateral dependent, then the fair value method of
measuring the amount of impairment is utilized. This method requires obtaining a current
independent appraisal of the collateral and applying a discount factor to the value. Impaired
loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when
impairment is determined using the fair value method.
Foreclosed Assets Held for Sale
Foreclosed assets held for sale are carried at the fair value less costs to sell at the date
of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of carrying amount or
fair value less cost to sell.
F-41
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 21: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
The following table presents the fair value measurements of assets and liabilities measured at
fair value on a non-recurring basis at December 31, 2010 and 2009:
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Identical Assts | Observable Inputs | Inputs | ||||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(In thousands) | ||||||||||||||||
December 31, 2010: |
||||||||||||||||
Impaired loans, net of reserves |
$ | 26,106 | $ | | $ | | $ | 26,106 | ||||||||
Foreclosed assets held for sale, net |
3,360 | | | 3,360 | ||||||||||||
$ | 29,466 | $ | | $ | | $ | 29,466 | |||||||||
December 31, 2009: |
||||||||||||||||
Impaired loans, net of reserves |
$ | 28,393 | $ | | $ | | $ | 28,393 | ||||||||
Foreclosed assets held for sale, net |
8,231 | | | 8,231 | ||||||||||||
$ | 36,624 | $ | | $ | | $ | 36,624 | |||||||||
The following methods and assumptions were used to estimate the fair value of all other
financial instruments recognized in the accompanying consolidated balance sheets at amounts other
than fair value.
Cash and Cash Equivalents
For these short-term instruments, the carrying amount approximates fair value.
Loans
The fair value of loans is estimated by discounting the future cash flows using the market
rates at which similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturities. Loans with similar characteristics were aggregated for purposes of the
calculations. The carrying amount of accrued interest approximates its fair value.
Federal Home Loan Bank Stock, Federal Reserve Bank Stock, and other securities
The carrying amounts for these securities approximate their fair value.
Deposits
The fair value of demand deposits, savings accounts, NOW accounts and certain money market
deposits is the amount payable on demand at the reporting date (i.e., their carrying amount). The
fair value of fixed maturity time deposits is estimated using a discounted cash flow calculation
that applies the rates currently offered for deposits of similar remaining maturities. The
carrying amount of accrued interest payable approximates its fair value.
Securities Sold Under Agreement to Repurchase and Other Interest-Bearing Liabilities
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Long-Term Debt
Rates currently available to the Company for debt with similar terms and remaining maturities
are used to estimate fair value of existing debt.
F-42
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 21: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
Commitments to Extend Credit, Letters of Credit and Lines of Credit
The fair value of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed rates. The fair value of
letters of credit and lines of credit are based on fees currently charged for similar agreements or
on the estimated cost to terminate or otherwise settle the obligations with the counterparties at
the reporting date.
The following table presents estimated fair values of the Companys financial instruments not
previously disclosed at December 31, 2010 and 2009.
2010 | 2009 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 114,781 | $ | 114,781 | $ | 96,984 | $ | 96,984 | ||||||||
Loans, net of allowance for loan losses |
477,723 | 478,926 | 534,111 | 536,973 | ||||||||||||
Federal Home Loan Bank stock, Federal
Reserve Bank stock, and other
securities |
7,163 | 7,163 | 7,059 | 7,059 | ||||||||||||
Interest receivable |
1,783 | 1,783 | 2,303 | 2,303 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Deposits |
541,218 | 543,832 | 590,110 | 593,345 | ||||||||||||
Securities sold under agreement to
repurchase and other interest-bearing
liabilities |
18,748 | 18,748 | 16,120 | 16,120 | ||||||||||||
Long-term debt |
99,757 | 90,880 | 102,088 | 95,762 | ||||||||||||
Interest payable |
2,689 | 2,689 | 2,698 | 2,698 | ||||||||||||
Unrecognized financial instruments
(net of amortization): |
||||||||||||||||
Commitments to extend credit |
| | | | ||||||||||||
Letters of credit |
| | | | ||||||||||||
Lines of credit |
| | | |
F-43
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 22: COMMITMENTS, CREDIT RISKS AND CURRENT ECONOMIC CONDITIONS
The Company extends credit for commercial real estate mortgages, residential mortgages,
working capital financing and consumer loans to businesses and residents principally in southern
Johnson County. The Bank also purchases indirect leases from various leasing companies throughout
Kansas and Missouri.
Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require a payment of a fee. Since a portion
of the commitments may expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Each customers creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on
managements credit evaluation of the counterparty. Collateral held varies, but may include
accounts receivable, inventory, property, plant and equipment, commercial real estate and
residential real estate. At December 31, 2010 and 2009, the Company had outstanding commitments to
originate loans aggregating approximately $6,081,000 and $22,712,000, respectively. The
commitments extend over varying periods of time with the majority being disbursed within a one-year
period.
Mortgage loans in the process of origination represent amounts that the Company plans to fund
within a normal period of 60 to 90 days and which are intended for sale to investors in the
secondary market. Forward commitments to sell mortgage loans are obligations to deliver loans at a
specified price on or before a specified future date. The Bank acquires such commitments to reduce
market risk on mortgage loans in the process of origination and mortgage loans held for sale.
Total mortgage loans in the process of origination amounted to $1,688,000 and $4,102,000 and
mortgage loans held for sale amounted to $8,162,000 and $8,752,000 at December 31, 2010 and 2009,
respectively. Related forward commitments to sell mortgage loans amounted to approximately
$9,850,000 and $12,854,000 at December 31, 2010 and 2009, respectively. Mortgage loans in the
process of origination represent commitments to originate loans at both fixed and variable rates.
Letters of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. The Company had total outstanding letters of credit
amounting to $6,880,000 and $5,280,000 at December 31, 2010 and 2009, respectively.
Lines of credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Lines of credit generally have fixed expiration dates.
Since a portion of the line may expire without being drawn upon, the total unused lines do not
necessarily represent future cash requirements. Each customers creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on
managements credit evaluation of the counterparty. Collateral held varies, but may include
accounts receivable, inventory, property, plant and equipment, commercial real estate and
residential real estate. Management uses the same credit policies in granting lines of credit as
it does for on-balance sheet instruments. At December 31, 2010 and 2009, unused lines of credit
borrowings aggregated approximately $149,587,000 and $112,043,000, respectively.
The current economic environment presents financial institutions with unprecedented
circumstances and challenges which in some cases have resulted in large declines in the fair values
of investments and other assets,
constraints on liquidity and significant credit quality problems, including severe volatility
in the valuation of real estate and other collateral supporting loans. The financial statements
have been prepared using values and information currently available to the Company.
F-44
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 22: COMMITMENTS, CREDIT RISKS AND CURRENT ECONOMIC CONDITIONS (Continued)
Given the volatility of current economic conditions, the values of assets and liabilities
recorded in the financial statements could change rapidly, resulting in material future adjustments
in asset values, the allowance for loan losses, capital that could negatively impact the Companys
ability to meet regulatory capital requirements and maintain sufficient liquidity.
NOTE 23: LEGAL CONTINGENCIES
Various legal claims also arise from time to time in the normal course of business which, in
the opinion of management, will have no material effect on the Companys consolidated financial
statements.
NOTE 24: SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following table presents the unaudited results of operations for the past two years by
quarter. See discussion on earnings per share in Note 1: Nature of Operations and Summary of
Significant Accounting Policies in the Companys Consolidated Financial Statements.
2010 | 2009 | |||||||||||||||||||||||||||||||
Fourth | Third | Second | First | Fourth | Third | Second | First | |||||||||||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | |||||||||||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||||||||||||||
Interest income |
$ | 7,277 | $ | 7,653 | $ | 7,717 | $ | 7,656 | $ | 8,470 | $ | 8,830 | $ | 9,274 | $ | 9,720 | ||||||||||||||||
Interest expense |
2,966 | 3,473 | 3,909 | 4,015 | 4,125 | 4,438 | 4,716 | 4,708 | ||||||||||||||||||||||||
Net interest income |
4,311 | 4,180 | 3,808 | 3,641 | 4,345 | 4,392 | 4,558 | 5,012 | ||||||||||||||||||||||||
Provision for loan losses |
1,645 | | 1,200 | 250 | 2,500 | 6,210 | | 12,925 | ||||||||||||||||||||||||
Net interest income (loss) after
provision for loan losses |
2,666 | 4,180 | 2,608 | 3,391 | 1,845 | (1,818 | ) | 4,558 | (7,913 | ) | ||||||||||||||||||||||
Non-interest income |
2,299 | 2,231 | 1,631 | 1,573 | 1,626 | 1,819 | 2,453 | 1,801 | ||||||||||||||||||||||||
Realized gains on available-for
sale securities |
448 | 342 | 95 | | | | | 346 | ||||||||||||||||||||||||
Non-interest expense |
7,047 | 6,141 | 6,226 | 6,353 | 7,494 | 6,601 | 6,687 | 7,059 | ||||||||||||||||||||||||
Income (loss) before income taxes |
(1,634 | ) | 612 | (1,892 | ) | (1,389 | ) | (4,023 | ) | (6,600 | ) | 324 | (12,825 | ) | ||||||||||||||||||
Provision (benefit) for income taxes |
(595 | ) | 230 | (680 | ) | (516 | ) | (1,481 | ) | (2,431 | ) | 118 | (4,720 | ) | ||||||||||||||||||
Net income (loss) |
(1,039 | ) | 382 | (1,212 | ) | (873 | ) | (2,542 | ) | (4,169 | ) | 206 | (8,105 | ) | ||||||||||||||||||
Dividends on preferred shares |
289 | 272 | 272 | 272 | 290 | 272 | 271 | 212 | ||||||||||||||||||||||||
Net income (loss) available to |
||||||||||||||||||||||||||||||||
common shareholders |
$ | (1,328 | ) | $ | 110 | $ | (1,484 | ) | $ | (1,145 | ) | $ | (2,832 | ) | $ | (4,441 | ) | $ | (65 | ) | $ | (8,317 | ) | |||||||||
Net Income (loss) per Share Data |
||||||||||||||||||||||||||||||||
Basic |
$ | (0.47 | ) | $ | 0.04 | $ | (0.54 | ) | $ | (0.41 | ) | $ | (1.03 | ) | $ | (1.61 | ) | $ | (0.02 | ) | $ | (3.02 | ) | |||||||||
Diluted |
$ | (0.47 | ) | $ | 0.04 | $ | (0.54 | ) | $ | (0.41 | ) | $ | (1.03 | ) | $ | (1.61 | ) | $ | (0.02 | ) | $ | (3.02 | ) | |||||||||
Balance Sheet |
||||||||||||||||||||||||||||||||
Total assets |
$ | 723,101 | $ | 755,362 | $ | 818,275 | $ | 844,228 | $ | 773,967 | $ | 825,857 | $ | 811,333 | $ | 843,559 | ||||||||||||||||
Total loans, net |
477,723 | 483,165 | 498,238 | 507,910 | 534,111 | 560,880 | 585,474 | 610,404 | ||||||||||||||||||||||||
Stockholders equity |
57,164 | 58,786 | 58,786 | 59,583 | 60,603 | 63,519 | 67,858 | 67,908 |
The above unaudited financial information reflects all adjustments that are, in the
opinion of management, necessary to present a fair statement of the results of operations for the
interim periods presented.
F-45
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 25: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Condensed Balance Sheets
December 31, 2010 and 2009
December 31, 2010 and 2009
2010 | 2009 | |||||||
(In thousands) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 842 | $ | 899 | ||||
Investments in subsidiaries: |
||||||||
Bank of Blue Valley |
77,703 | 79,573 | ||||||
BVBC Capital Trust II |
232 | 232 | ||||||
BVBC Capital Trust III |
356 | 356 | ||||||
Other assets |
1,214 | 797 | ||||||
Total Assets |
$ | 80,347 | $ | 81,857 | ||||
LIABILITIES |
||||||||
Subordinated debentures |
$ | 19,588 | $ | 19,588 | ||||
Other liabilities |
3,595 | 1,666 | ||||||
Total Liabilities |
23,183 | 21,254 | ||||||
STOCKHOLDERS EQUITY |
||||||||
Preferred Stock |
22 | 22 | ||||||
Common stock |
2,843 | 2,818 | ||||||
Additional paid-in capital |
38,431 | 37,975 | ||||||
Retained earnings |
15,838 | 19,685 | ||||||
Accumulated other comprehensive income, net of income
tax of $20 and $69 at 2010 and 2009, respectively |
30 | 103 | ||||||
Total Stockholders Equity |
57,164 | 60,603 | ||||||
Total Liabilities and Stockholders Equity |
$ | 80,347 | $ | 81,857 | ||||
F-46
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 25: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (Continued)
Condensed Statements of Income
Years Ended December 31, 2010, 2009 and 2008
Years Ended December 31, 2010, 2009 and 2008
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Income |
||||||||||||
Dividends from subsidiaries |
$ | | $ | 700 | $ | 654 | ||||||
Other income |
20 | 20 | | |||||||||
20 | 720 | 654 | ||||||||||
Expenses |
1,496 | 1,336 | 2,541 | |||||||||
Loss before income taxes and equity in undistributed net
loss of subsidiaries |
(1,476 | ) | (616 | ) | (1,887 | ) | ||||||
Income tax (benefit) |
(531 | ) | (474 | ) | (1,117 | ) | ||||||
Loss before equity in undistributed net loss of subsidiaries |
(945 | ) | (142 | ) | (770 | ) | ||||||
Equity in undistributed net loss of subsidiaries |
(1,797 | ) | (14,468 | ) | (9,481 | ) | ||||||
Net loss |
$ | (2,742 | ) | $ | (14,610 | ) | $ | (10,251 | ) | |||
F-47
Table of Contents
BLUE VALLEY BAN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010, 2009 AND 2008
NOTE 25: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (Continued)
Condensed Statements of Cash Flows
Years Ended December 31, 2010, 2009 and 2008
Years Ended December 31, 2010, 2009 and 2008
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
OPERATING ACTIVITIES |
||||||||||||
Net loss |
$ | (2,742 | ) | $ | (14,610 | ) | $ | (10,251 | ) | |||
Items not requiring (providing) cash: |
||||||||||||
Deferred income taxes |
(417 | ) | (29 | ) | 46 | |||||||
Equity in undistributed net loss of subsidiaries |
1,797 | 14,468 | 9,481 | |||||||||
Restricted stock earned |
428 | 287 | 309 | |||||||||
Changes in: |
||||||||||||
Other assets |
| (243 | ) | (207 | ) | |||||||
Other liabilities |
842 | 696 | (308 | ) | ||||||||
Net cash provided by (used in) operating
activities |
(92 | ) | 569 | (930 | ) | |||||||
INVESTING ACTIVITIES |
||||||||||||
Capital contributed to subsidiary |
| (4,000 | ) | (19,578 | ) | |||||||
Net cash used in investing activities |
| (4,000 | ) | (19,578 | ) | |||||||
FINANCING ACTIVITIES |
||||||||||||
Repayments of long-term debt |
| | (17,781 | ) | ||||||||
Proceeds from short-term debt |
| | 15,000 | |||||||||
Dividends paid on common stock |
| | (878 | ) | ||||||||
Dividends paid on preferred stock |
| (212 | ) | | ||||||||
Proceeds from sale of preferred stock |
| | 21,750 | |||||||||
Proceeds from sale of common stock through the rights
offering |
| | 5,201 | |||||||||
Proceeds from sale of common stock through Employee
Stock Purchase Plan (ESPP) and stock options
exercised |
35 | 62 | 435 | |||||||||
Net cash provided by (used in) financing
activities |
35 | (150 | ) | 23,727 | ||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(57 | ) | (3,581 | ) | 3,219 | |||||||
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR |
899 | 4,480 | 1,261 | |||||||||
CASH AND CASH EQUIVALENTS,
END OF YEAR |
$ | 842 | $ | 899 | $ | 4,480 | ||||||
F-48