UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2011

¨	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 incorporation or organization)		(I.R.S. Employer Identification No.)

11935 Riley Overland Park, Kansas		66225-6128
(Address of principal executive offices)		(Zip Code)

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

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

Title of each class

Name of each exchange on which registered

Guarantee with respect to the Trust Preferred

Securities, $8.00 par value, of BVBC Capital

Trust I (None of which are currently outstanding)

None currently

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

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

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 x No ¨

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

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 x No ¨

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

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


Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

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

As of January 31, 2012 1,732,844 shares of the Registrant’s common stock were held by non-affiliates. The aggregate market value of these common shares, computed based on the June 30, 2011 closing price of the stock, was approximately $9.5 million. As of January 31, 2012 the registrant had 2,879,158 shares of Common Stock ($1.00 par value) outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

1. Part III – Proxy Statement for the 2012 Annual Meeting of Stockholders

BLUE VALLEY BAN CORP.

FORM 10-K INDEX


		Page No.
PART I.

Item 1.	Business		2

Item 1A.	Risk Factors		19

Item 1B.	Unresolved Staff Comments		24

Item 2.	Properties		25

Item 3.	Legal Proceedings		25

Item 4.	Mine Safety Disclosures		25

PART II.

Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		26

Item 6.	Selected Financial Data		27

Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations		29

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		54

Item 8.	Financial Statements and Supplementary Data		56

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		56

Item 9A.	Controls and Procedures		57

Item 9B.	Other Information		57

PART III.

Item 10.	Directors, Executive Officers and Corporate Governance		58

Item 11.	Executive Compensation		58

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		58

Item 13.	Certain Relationships, Related Transactions, and Director Independence		58

Item 14.	Principal Accountant Fees and Services		59

PART IV.

Item 15.	Exhibits, Financial Statement Schedules		59

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

We have experienced significant internal growth since the Company’s inception. As of December 31, 2011, we had five full service banking centers in Johnson County, Kansas, including our principal office and full-service banking centers in Leawood, Lenexa, Olathe and Shawnee, Kansas.

Our lending activities are focused on commercial, commercial real estate, construction, home equity and residential real estate lending. The Company strives to identify, develop and maintain diversified lines of business which provide acceptable risk-adjusted returns. In addition, the Bank provides 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, the Company derives non-interest income by providing mortgage origination, deposit and cash management, and trust and investment brokerage services.

In addition to the Bank, as of December 31, 2011, the Company had two wholly-owned subsidiaries: BVBC Capital Trust II and BVBC Capital Trust III, which were created to offer the Company’s trust preferred securities and to purchase our junior subordinated debentures. At December 31, 2008, the Company owned 100% of Blue Valley Building Corp., which owns the buildings and real property that comprise our headquarters, 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.

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

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

Our Market Area

The Company operates 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 County’s 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, 2011, total deposits in Johnson County, including those of banks, thrifts and credit unions, were approximately $14.4 billion, which represented 23.63% of total deposits in the state of Kansas and 33.00% 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 a highly developed retail area 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 operation was consolidated into the main bank and the Company listed the office building 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. The Company made this acquisition to continue its expansion in Johnson County and to establish the Company’s first presence in the Lenexa market.

Lending Activities

Overview. Our principal loan categories include commercial, commercial real estate, construction, home equity and residential real estate loans. We also offer a variety of equipment financing and consumer loans. Our primary source of interest income is interest earned on our loan portfolio. As of December 31, 2011, our loans represented approximately 67.06% of our total assets, our legal lending limit to any one borrower was $19.3 million, and our largest single borrower as of that date had outstanding loans of $15.4 million.

The ability of financial institutions, including us, to originate loans has been substantially reduced due to current economic conditions. However, the Company continues 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 our staff is attentive to our customers’ financial needs and develops 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 Bank’s policies delegate lending authority up to these amounts to an internal loan discount committee comprised of the Bank’s President and three 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, 2011.

LOAN PORTFOLIO


	As of December 31, 2011
	Amount		Percent
	(In thousands)
Commercial	$	130,398		29.71	%
Commercial real estate		154,109		35.12
Construction		48,438		11.04
Home equity		59,750		13.61
Residential real estate		37,882		8.63
Lease financing		2,268		0.52
Consumer		5,998		1.37

Total loans and leases		438,843		100.00	%
Less allowance for loan losses		13,189

Loans, net of allowance for loan losses	$	425,654

Commercial loans. As of December 31, 2011, approximately $130.4 million, or 29.71%, 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 and our reputation. Commercial loans have historically been a significant portion of our loan portfolio and we expect to continue our emphasis on this loan category.

The Bank’s commercial lending activities traditionally have been directed to small and medium-sized companies in or near Johnson County, Kansas, with annual sales generally between $100,000 and $20 million. The Bank’s commercial customers are largely firms engaged in manufacturing, service, retail, construction, and distribution with significant operations in our market areas. The Bank’s 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.

Included in commercial loans are Small Business Administration (SBA) loans which totaled approximately $5.7 million, or 4.40% of commercial loans at December 31, 2011. Of the $5.7 million in SBA loans, $4.3 million was 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. The Bank is approved to participate in the SBA Certified Lender, SBA Express and Patriot Express Programs and is an active SBA lender in our market area.

Commercial lending is subject to risks specific to the business of each borrower. In order to address these risks, the Bank seeks to understand the business of each borrower, place appropriate value on any collateral pledged to secure the loan or personal guarantee, 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, 2011, approximately $154.1 million, or 35.12%, 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, there are fewer alternative uses for the property, and repayment is dependent on the borrower’s operations. We attempt to mitigate these risks by carefully assessing property values, investigating the source of cash flow servicing the loan on the property and adhering to our lending and underwriting policies and procedures.

Construction loans. Our construction loans include loans to developers, home building contractors and other companies and consumers for the construction of single-family and multi-family properties, land development, and commercial buildings, such as retail and office buildings. As of December 31, 2011, approximately $48.4 million, or 11.04%, of our loan portfolio represented real estate construction loans. The builder and developer loan portfolio has been a consistent component of our loan portfolio over our history. The Bank’s experience and reputation in this area has enabled 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 obtained from a third party reporting entity. Construction loans are also made to individuals for houses that are being constructed by builders with whom the Bank generally has an existing relationship. Such loans are made on the basis of the individual’s financial condition, the loan to value ratio, the reputation of the builder, and whether the individual will be pre-qualified for permanent financing. During the last three years, the Bank has experienced a decline in construction loans originated, specifically in residential real estate construction and land development, as a result of the continued decline in the real estate industry and the continued slow down in new housing construction.

Risks related to construction lending include assessment of the market for the finished product, reasonableness of the construction budget, ability of the borrower to fund cost overruns, and the borrower’s ability to liquidate and repay the loan at a point when the loan-to-value ratio is the greatest. The Bank seeks 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, 2011, our home equity loans totaled $59.7 million, or 13.61%, of our total loan portfolio. Home equity loans are generally secured by second liens on residential real estate. Home equity loans are subject to the same risks as other loans to individuals, including the financial strength and employment stability of the borrower. The Bank attempts to mitigate these risks by carefully verifying and documenting the borrower’s credit quality, employment stability, monthly income, and understanding and documenting the value of the collateral.

Residential real estate loans. Our residential real estate loan portfolio consists primarily of first and second mortgage loans on residential properties. As of December 31, 2011, $37.9 million, or 8.63%, of our loan portfolio consisted of 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 2011, we originated approximately $66.0 million of residential mortgage loans held for sale, and we sold approximately $68.7 million in the secondary market. We originate conventional first mortgage loans through referrals from real estate brokers, builders, developers, prior customers and media advertising, as well as through our internet website, InternetMortgage.com. 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.

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. The Bank repurchased one loan during 2011 and did not repurchase any loans 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, 2011, our lease portfolio totaled $2.3 million, or 0.52%, 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, 2011, our consumer loans totaled $6.0 million, or 1.37% 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 individuals. A portion of the Bank’s consumer loan portfolio consists of indirect automobile loans offered through automobile dealerships located primarily in our trade area. As of December 31, 2011, approximately $308,000, or 5.14%, of the Bank’s consumer loan portfolio represented indirect automobile loans. The Bank’s loans made to individuals through this program generally represent loans to purchase new or late model automobiles. The Bank’s consumer and other loans are underwritten based on the borrower’s income, current debt, past credit history, collateral, and the reputation of the originating dealership with respect to indirect automobile loans.

Consumer loans are subject to the same risks as other loans to individuals, including the financial strength and employment stability of the borrower. In addition, some consumer loans are subject to the additional risk that the loan is 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 borrower’s credit quality, employment stability, monthly income, and with respect to indirect automobile loans, understanding and documenting the value of the collateral and the reputation of the originating dealership.

Investment Activities

The objectives of our investment policies are to:

•

secure the safety of principal;

•

provide adequate liquidity;

•

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

•

maximize after-tax income.

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

Deposit Services

The principal sources of funds for the Bank are core deposits from the local market areas surrounding the Bank’s banking centers, 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, a low-cost source of funds and cross-marketing opportunities. 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. The Bank’s Performance Checking 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. In February 2011, the Bank introduced the Ultimate Checking product which has also been an attractive product in our market area. The Ultimate Checking product is an interest-bearing demand product that pays a higher tiered rate of interest based on the dollar amount of signature based debit card transactions and the customer must have at least one direct deposit or ACH debit each statement qualification and be enrolled in e-statements. 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. In setting 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 gives depositors Federal Deposit Insurance Corporation (FDIC) insurance on amounts of certificate of deposits greater 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 Bank’s Funds Management policy allows for acceptance of brokered deposits excluding CDARS, up to 20% of total deposits, which can be utilized to support the growth of the Bank. As of December 31, 2011, the Bank had $10.1 million in brokered deposits excluding deposits in the CDARS program, or 2.07% of total deposits. The Bank had $24.4 million of customer funds placed into the CDARS program at December 31, 2011.

Trust Services

The Bank began offering trust services in 1996. Until 1999, the Bank’s trust services were offered exclusively through the employees of an unaffiliated trust company. The Bank hired a full-time officer in 1999 to develop the Bank’s trust business and the trust department now has three full-time officers. Trust services are marketed to both existing Bank customers and new customers. We believe that the ability to offer trust services as a part of our financial services to customers of the Bank presents a significant cross-marketing opportunity. The services currently offered by the Bank’s trust department include the administration of personal trusts, investment management agency accounts, self-directed individual retirement accounts, qualified retirement plans, corporate trust accounts and custodial trust accounts. As of December 31, 2011, the Bank’s trust department administered 258 accounts, with assets under administration of approximately $129.6 million. Trust services provide the Bank with a source of fee income and additional deposits. In 2011, the amount of our gross fee income from trust services was $527,000.

Investment Brokerage Services

In 1999, the Bank began offering investment brokerage services through an unrelated broker-dealer. These services are currently offered at all of our locations. Four individuals responsible for providing these services are joint employees of the Bank and the registered broker-dealer. As of December 31, 2011, the Bank’s investment brokerage services had assets under administration of approximately $80.5 million. Investment brokerage services provide a source of fee income for the Bank. In 2011, the amount of our fee income generated from investment brokerage services was $387,000.

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, 2011 the Bank had the following registered trademarks:

Bank of Blue Valley

DEPOSIT I.T.

INTERNETMORTGAGE.COM

Employees

At December 31, 2011, the Bank had approximately 173 total employees, with 162 full-time employees. The Company and its other subsidiaries do not have any employees. None of the Bank’s employees are subject to a collective bargaining agreement. We consider the Bank’s relationship with its employees to be excellent.

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, 2011, and their principal positions.


Name	Age	Positions
Directors

Robert D. Regnier	63	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	73	Director of Blue Valley Ban Corp. and the Bank
Michael J. Brown	55	Director of Blue Valley Ban Corp.
Robert D. Taylor	64	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	76	Director of the Bank
Richard L. Bond	76	Director of the Bank
Suzanne E. Dotson	65	Director of the Bank
Charles H. Hunter	69	Director of the Bank

Executive Officers who are not Directors

Mark A. Fortino	45	Executive Vice President and Chief Financial Officer of the Bank; Chief Financial Officer of Blue Valley Ban Corp.
Bruce A. Easterly	52	Executive Vice President – Chief Lending Officer of the Bank
Bonnie M. McConnaughy	52	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 SEC’s 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 Company’s business and prospects, and legislative and policy changes may affect the Company’s 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.

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.

•

Centralizes 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 company’s 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.

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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.

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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.

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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.

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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.

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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 are grandfathered under this provision.

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Mortgage reform and anti-predatory lending provision places new regulations on mortgage originators to ensure a borrower’s ability to repay and imposes new disclosure requirements and appraisal reforms.

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:

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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;

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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;

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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 executive’s annual compensation and do not fully vest during the restricted period; and

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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 institution’s 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 Company’s Board of Directors approved the Company’s participation in the program, and the Company entered into a Securities Purchase Agreement – Standard Terms on December 5, 2008. Pursuant to the agreement, the Company

issued and sold to the Treasury 21,750 shares of Fixed Rate Cumulative Perpetual Preferred Stock, along with a ten year warrant to purchase 111,083 shares of the Company’s common stock, for a total cash price of $21.75 million. Under the terms of the CPP, the Company is prohibited, without the consent of the Treasury, from declaring or paying a common stock dividend in an amount greater than the amount of the last quarterly cash dividend per share declared prior to October 14, 2008. Furthermore, as long as the preferred stock issued to the Treasury is outstanding, dividend payments and repurchases or redemptions relating to certain equity securities are prohibited until all accrued and unpaid dividends are paid on preferred stock, subject to certain limited exceptions. For additional information, see the liquidity and capital resources section under Managements Discussion and Analysis of Financial Condition and Results of Operation.

As part of the EESA, the FDIC 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 entity’s eligible debt as of September 30, 2008, with a nonrefundable fee of 75 basis points (annualized) for covered debt outstanding. The guarantee was originally effective through the earlier of the maturity date or on June 30, 2012. Under a four month extension of the program approved May 2009, participating entities that issued debt on or before April 1, 2009 were permitted to participate in the extended program without application to the FDIC and participating entities that had not issued such debt before April 1, 2009 could upon approval from the FDIC. As a result, all such participating entities were permitted to issue FDIC-guaranteed debt until October 31, 2009, which would be guaranteed through the earlier of mandatory conversion date, maturity date, or December 31, 2012. The FDIC has also established a limited six-month emergency facility. Under this facility, participating entities 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 provided 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 was a participant 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 government’s ability to fight money laundering by monitoring currency transactions and suspicious financial activities. The USA PATRIOT Act has significant implications for depository institutions involved in the transfer of money. Under the USA PATRIOT Act, a financial institution must establish due diligence policies, procedures, and controls reasonably designed to detect and report money laundering through correspondent accounts and private banking accounts. Financial institutions must follow regulations adopted by the Treasury to encourage financial institutions, their regulatory authorities, and law enforcement authorities to share information about individuals, entities, and organizations engaged in or suspected of engaging in terrorist acts or money laundering activities. Financial institutions must follow regulations setting forth minimum standards regarding customer identification. These regulations require financial institutions to implement reasonable procedures for verifying the identity of any person seeking to open an account, maintain records of the information used to verify the person’s identity, and consult lists

of known or suspected terrorists and terrorist organizations provided to the financial institution by government agencies. Every financial institution must establish anti-money laundering programs, including the development of internal policies and procedures, designation of a compliance officer, employee training, and an independent audit function.

Sarbanes-Oxley Act. The Sarbanes-Oxley Act, signed into law in 2001, addresses issues related to corporate governance of publicly traded companies. Sarbanes-Oxley Act requires, among other items, certification of the quality of financial reporting by the Chief Executive Officer and Chief Financial Officer, enhanced and timely disclosure of financial reporting and it strengthens the rules regarding auditor and audit committee independence. Certain provisions of the Sarbanes-Oxley Act were effective immediately and others became effective or are in process of becoming effective through Securities and Exchange Commission rules. The Company was subject to all provisions during 2009 with the exception of the auditor’s attestation on internal control over financial reporting. Under the Dodd-Frank Act, the Company is now exempt from the auditor’s 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.

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.

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:

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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);

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

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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:

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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

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

Bank holding companies may, however, engage in businesses found by the Federal Reserve to be “financial in nature,” as described above. Finally, subject to certain exceptions, the Bank Holding Company Act, the Change in Bank Control Act, and the Federal Reserve’s implementing regulations, require Federal Reserve approval prior to any acquisition of “control” of a bank holding company, such as Blue Valley 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 Reserve’s determination that the activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or non-bank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition. As of December 31, 2011, BVBC Capital Trust II and BVBC Capital Trust III are the Company’s only active direct subsidiaries that are not banks.

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

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

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

Under the terms of the Capital Purchase Plan, for so long as any preferred stock issued under the CPP remains outstanding, the Company is prohibited from declaring or paying a common stock dividend in an amount greater than the amount of the last quarterly cash dividend per share declared prior to October 14, 2008 without the Treasury’s consent. Furthermore, as long as the preferred stock issued to the Treasury is outstanding, dividend payments and repurchases or redemptions relating to certain equity securities are prohibited until all accrued and unpaid dividends are paid on preferred stock, subject to certain limited exceptions. At the request of the Federal Reserve Bank of Kansas City, the Company notified the Treasury of its intention to defer the quarterly payment on the preferred shares due to the Treasury 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 Company’s 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 Company’s Board of Directors; however, they have assigned an observer to attend the Company’s board meetings. The Company has accrued $3.2 million for the dividends and accrued interest and has every intention to bring the obligation current as soon as permitted. For additional information, see the liquidity and capital resources section under Management’s Discussion and Analysis of Financial Condition and Results of Operation.

Bank Regulations

The Bank operates under a Kansas state bank charter and is subject to regulation by the Office of the State Bank Commissioner and the Federal Reserve Bank. The Office of the State Bank Commissioner and the Federal Reserve Bank regulate or monitor all areas of the Bank’s operations, including capital requirements, issuance of stock, declaration of dividends, interest rates, deposits, loans, investments, borrowings, record keeping, establishment of branches, acquisitions, mergers, information technology and employee responsibility and conduct. The Office of the State Bank Commissioner places limitations on activities of the Bank, including the issuance of capital notes or debentures and the holding of real estate and personal property, and requires the Bank to maintain a certain ratio of reserves against deposits. The Office of the State Bank Commissioner requires the Bank to file a report annually, in addition to any periodic report requested.

The Board of Directors of 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 Bank’s asset quality. Under the terms of the agreement, the Company and the Bank agreed, among other things, to submit an enhanced written plan to strengthen credit risk management practices and improve the Bank’s position on past due loans, classified loans, and other real estate owned; review and revise its allowance for loan and lease loss methodology and maintain an adequate allowance for loan loss; maintain sufficient capital at the Company and Bank level; and improve the Bank’s earnings and overall condition. The Company and Bank have also agreed not to increase or guarantee any debt, purchase or redeem any shares of stock, or declare or pay any dividends without prior written approval from the Federal Reserve Bank. The Company and the Bank have substantially complied with all terms of the written agreement.

Deposit Insurance. The FDIC, through its Deposit Insurance Fund, insures the Bank’s deposit accounts up to the applicable limits of the FDIC. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act permanently raised 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. 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 at least semi-annually 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. Under the FDIC’s risk-based assessment rules, assessment rates range from 2.5 to 9 basis points for Risk Category I, 9 to 24 basis points for Risk Category II, 18 to 33 basis points for Risk Category III, and 30 to 45 basis points for Risk Category IV.

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 2011, the annual rate for this assessment was 0.68 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 0.66 basis points for the first quarter 2012. The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management is not aware of any activity or condition that could result in termination of the deposit insurance of the Bank.

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

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:

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“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.

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“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.

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“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%.

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“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%.

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

As of December 31, 2011, the Bank had capital in excess of the regulatory requirements for a “well capitalized” institution.

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:

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

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

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Restricting transactions with affiliates;

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Restricting the interest rate the institution may pay on deposits;

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Requiring that senior executive officers or directors be dismissed;

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Requiring the institution to divest subsidiaries;

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

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Appointing a receiver for the institution.

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

Federal Deposit Insurance Corporation Improvement Act. The Bank, having over $500 million in total assets, is subject to requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA 112). The primary purpose of FDICIA 112 is to provide a framework for early risk identification in financial management through an effective system of internal controls. Annual reporting requirements under FDICIA are as follows: (1) Annual audited financial statements; (2) Management report stating management’s responsibility for preparing the institution’s annual financial statements, establishing and maintaining an adequate internal control structure and procedures for financial reporting and for complying with laws and regulations, and assessment by management of the institution’s compliance with such laws and regulations; and (3) For insured depository institutions with consolidated total assets over $1.0 billion or more, the independent public accountant who audits the institution’s financial statements shall examine, attest to, and report separately on the assertion of management concerning the effectiveness of the institution’s internal control structure and procedures for financial reporting.

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

Community Reinvestment Act Requirements. The Community Reinvestment Act (CRA) of 1977 requires that, in connection with examinations of financial institutions within their jurisdiction, the federal banking regulators must evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. In its most recent CRA examination dated 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 Company’s securities and using those securities as collateral for loans. These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds for acquisitions and for payment of dividends, interest and operating expenses. Further, the Bank Holding Company Act and Federal Reserve regulations prohibit a bank holding company and its subsidiaries from engaging in various tie-in arrangements in connection with extensions of credit, leases or sales of property or furnishing of services.

Reserve Requirements. The Federal Reserve requires all depository institutions to maintain reserves against their transaction accounts. For net transaction accounts in 2012, the first $11.5 million, up from $10.7 million in 2011, is exempt from reserve requirements. A three percent reserve ratio will be assessed on net transaction accounts over $11.5 million up to and including $71.0 million, up from $58.8 million in 2011. A ten percent reserve ratio is assessed on net transaction accounts in excess of $71.0 million (subject to adjustment by the Federal Reserve). The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements.

Other Regulations

Interest and various other charges collected or contracted for by the Bank are subject to state usury laws and other federal laws concerning interest rates. The Bank’s loan operations are also subject to federal laws applicable to credit transactions. The Federal Truth in Lending Act governs disclosures of credit terms to consumer borrowers. The Home Mortgage Disclosure Act of 1975 requires financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves. The Equal Credit Opportunity Act prohibits discrimination on the basis of race, creed or other prohibited factors in extending credit. The Fair and Accurate Credit Transactions Act of 2003 governs the use and provision of information to credit reporting agencies. This act also requires financial

institutions to establish reasonable procedures of identifying identity theft. The Fair Debt Collection Act governs the manner in which consumer debts may be collected by collection agencies. The various federal agencies charged with the responsibility of implementing these federal laws have adopted various rules and regulations. The deposit operations of the Bank are also subject to the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records, the Electronic Funds Transfer Act, and Regulation E issued by the Federal Reserve to implement that Act, which govern automatic deposits to and withdrawals from the use of ATMs and other electronic banking services.

Item 1A:

Risk Factors

An investment in securities issued by the Company is subject to risks inherent to our business. 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 the Company’s 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 Company’s stock could decline. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitute forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause the Company’s actual results to differ from those expressed in any forward-looking statements.

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

We are particularly exposed to downturns in the U.S. real estate market. Dramatic declines over the past three 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 continuation or worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry, and could further negatively affect the Company’s financial results.

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

The new home real estate market in our geographic market area has 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 2010 and 2011. If the current economic environment continues for a prolonged period of time or deteriorates further, collateral values may further decline and may result in increased credit losses in these loans and additional loan foreclosures.

Current levels of market volatility.

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

Our future ability to raise capital may be limited.

Our ability to raise capital in the current economic and regulatory environment may be limited. During fiscal year 2008, we completed a rights offering in which we sold $5.2 million worth of our common stock to certain existing stockholders at a price of $18 per share. In addition to the rights offering in 2008, we participated in the U.S. Treasury’s CPP program. Through that program, Treasury purchased 21,750 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A. This raised $21.75 million in additional capital. Should it become necessary to raise capital, opportunities to do so will not be as readily identifiable, and will likely be on less favorable terms than those previously available.

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 Bank’s position on past due loans, classified loans, and other real estate owned; review and revise its allowance for loan and lease loss methodology and maintain an adequate allowance for loan loss; maintain sufficient capital at the Company and Bank level; and improve the Bank’s earnings and overall condition. The Company and Bank have also agreed not to increase or guarantee any debt, purchase or redeem any shares or stock, or declare or pay any dividends without prior written approval from the Federal Reserve Bank. The Company and the Bank have substantially 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 Company’s 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 Company’s board; however, they have assigned an observer to attend the Company’s board meetings. The Company has accrued for these dividends and it intends to bring the obligation current as soon as permitted.

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

The Company funds its 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, 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 impact 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 affected 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 has experienced a downturn since the last quarter of 2007 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. As these market conditions continue, or deteriorate further, or as the slow economy continues 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 have the ability to repay credit that we have extended to them. This risk is inherent in the banking business. Like all financial institutions, the Company maintains an allowance for loan losses to absorb probable loan losses in our loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio credit quality, economic and regulatory conditions and unidentified losses inherent in the current loan portfolio. However, we cannot predict loan losses with certainty, and we cannot assure you that our allowance for loan losses will be sufficient to cover our future loan losses. Loan losses in excess of our reserves would have an adverse effect on our financial condition and results of operations. The loan loss provision related to loans secured by real estate has increased. This increase is a result of the continued industry wide decline in the real estate market and general economy. If the trend is prolonged and losses continue to increase, our results of operations would continue to be negatively impacted by higher loan losses.

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

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

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

The Company uses valuation methodologies, estimates and assumptions for certain assets measured at fair value and loan collateral which could be subject to differing interpretations and could result in changes to asset or collateral valuations that could have an impact on the Company’s financial condition or operating results.

The Company uses various valuation methodologies, estimates and assumptions when measuring the fair value of financial assets, liabilities, loan collateral and other real estate owned. Fair values and the information used to record valuation adjustments are based on quoted market prices, third-party appraisals and /or other observable inputs provided by third-party sources. Any changes in underlying factors, assumptions or estimates in any of these areas could impact the Company’s financial results.

It may be difficult to value certain assets if comparable sales become less frequent and/or market data becomes less observable. Assets or loan collateral that were in active markets with significant observable data may become illiquid due to the current financial environment. In such cases, asset valuations may require more subjective judgment and estimates. The changing real estate market conditions could materially impact the valuation of assets and loan collateral as reported within the Company’s financial statements and changes in estimated values could vary significantly from one period to the next. Decreases in value may have a negative impact on the Company’s financial results.

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. The change in control agreements include provisions regarding maintenance of the Company’s confidential information, non-solicitation and non-competition that would extend for a period of twelve months. 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 over the last three years. The Company has $1.0 million of bank owned life insurance on each employee named above with the Bank of Blue Valley as beneficiary of the policies. The Company has 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, 2011 was above the “well capitalized” level under regulatory definitions. However, continued losses could cause our capital level to fall to a level that is below the “well capitalized” level under regulatory definitions. Failure to maintain well capitalized status could result in adverse regulatory actions against us, as well as jeopardize our ability to acquire needed funding through sources such as brokered deposits, Federal Home Loan advances, or unsecured Federal funds credit lines, and could damage our reputation in our deposit markets, possibly resulting in deposit declines that could decrease our liquidity. Additional significant increases in our allowance for loan losses, significant write-downs of assets, or other operating losses would decrease our capital levels further.

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

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

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.

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.

Various new regulations have been imposed over the past year, with additional regulations being proposed. Changing regulation, along with possible changes in tax laws and accounting rules, may have a significant impact on the way that financial institutions conduct their business. Complying with increased regulations may increase our costs and limit the availability of our business opportunities.

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 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 Company’s 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 an operations center location. In January 2009, the Company placed the 7900 College Boulevard location up for lease or possible sale. The portions of these premises listed below as subleased are leased to third parties. The following table sets forth the locations of the banking and operations centers, dates opened, mortgage indebtedness, and occupancy:


Location	Year Occupied	Mortgage Indebtedness as of December 31, 2011	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	27% occupied by the Bank; 15% occupied by one sublease; 58% is being marketed for sublease

Leawood Banking Center 13401 Mission Road Leawood, Kansas *	2004	None	45% occupied by the Bank, 49% occupied by five subleases; 6% is being marketed for sublease

Lenexa Banking Center 9500 Lackman Road Lenexa, Kansas **	2007	None	100%

*	The building is owned by Blue Valley Building Corp, which is owned 100% by the Bank.

**	The building is owned by the Bank.

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:

Mine Safety Disclosures

No items are reportable.

Part II

Item 5:

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

Market for Common Stock

We are a reporting company under the Securities Exchange Act 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, 2012, there were approximately 179 stockholders of record of our common stock. The following table sets forth the high and low bid prices of the Company’s common stock since the first quarter of 2010 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.


	2011				2010
	High		Low		High		Low
Fiscal Quarter
First	$	8.00	$	6.50	$	10.25	$	8.50
Second		8.00		5.50		9.75		7.00
Third		8.00		4.80		9.40		6.50
Fourth		6.00		4.10		8.00		5.50

Dividends

The Company did not declare a common stock dividend in 2009, 2010 or 2011.

The Company’s 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations), prior regulatory approval is currently required prior to the payment of any dividends by the Company or the Bank. After that agreement is terminated, our Board of Directors anticipates the ability to declare future dividends, subject to limitations imposed by regulatory capital guidelines and approval, as permitted by the Company’s profitability and liquidity. The date for termination of that agreement is not known. In addition, the Company is subject to dividend limitations as part of the Capital Purchase Plan. As long as any preferred stock issued under the CPP remains outstanding, the Company is prohibited, without the consent of the Treasury, from declaring or paying a common stock dividend. The Company did not pay a cash dividend to our common stockholders in the fiscal years ended 2009, 2010 or 2011, and we do not know when we will be able to resume paying cash dividends.

Item 6:

Selected Financial Data

The following table presents our consolidated financial data as of and for the five years ended December 31, 2011, and should be read in conjunction with the consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each of which is included elsewhere in this Form 10-K. The selected balance sheet and statements of operations data, insofar as they relate to the five years in the five-year period ended December 31, 2011, have been derived from our audited consolidated financial statements.


	As of and for the Year Ended December 31,
	2011			2010			2009			2008			2007
	(In thousands, except share and per share data)
Selected Statements of Operations Data
Interest and dividend income:
Interest and fees on loans .	$	25,277		$	28,011		$	33,996		$	41,245		$	47,194
Federal funds sold and other short-term investments		151			245			144			378			557
Available-for-sale securities		1,202			1,825			1,943			3,375			4,466
Dividends on Federal Home Loan Bank and Federal Reserve Bank Stock		225			222			211			265			323

Total interest and dividend income		26,855			30,303			36,294			45,263			52,540

Interest expense:
Interest-bearing demand deposits		1,611			2,343			2,589			1,394			656
Savings and money market deposit accounts		346			438			490			2,402			6,362
Other time deposits		3,755			7,746			10,742			12,139			13,134
Funds borrowed		3,543			3,836			4,166			5,756			5,430

Total interest expense		9,255			14,363			17,987			21,691			25,582

Net interest income		17,600			15,940			18,307			23,572			26,958
Provision for loan losses		3,300			3,095			21,635			17,025			2,855

Net interest income (loss) after provision for loan losses		14,300			12,845			(3,328	)		6,547			24,103

Non-interest income:
Loans held for sale fee income		2,120			3,506			2,785			2,136			3,160
NSF charges and service fees		944			1,062			1,472			1,641			1,418
Other service charges		2,276			2,021			1,778			1,658			1,412
Realized gains on available-for-sale securities		–			885			346			702			105
Gain on settlement of litigation		–			–			–			1,000			–
Other income		984			1,145			1,664			1,010			782

Total non-interest income		6,324			8,619			8,045			8,147			6,877

Non-interest expense:
Salaries and employee benefits		10,955			11,753			12,272			12,500			13,570
Net occupancy expense		2,599			2,756			2,811			3,144			3,200
Goodwill impairment		–			–			–			4,821			–
Foreclosed assets expense		5,219			2,708			3,862			944			339
Other operating expense		7,851			8,550			8,896			7,360			7,108

Total non-interest expense		26,624			25,767			27,841			28,769			24,217

Income (loss) before income taxes		(6,000	)		(4,303	)		(23,124	)		(14,075	)		6,763
Provision (benefit) for income taxes		9,823			(1,561	)		(8,514	)		(3,824	)		2,275

Net income (loss)	$	(15,823	)	$	(2,742	)	$	(14,610	)	$	(10,251	)	$	4,488

Per Share Data
Basic earnings	$	(6.03	)	$	(1.38	)	$	(5.68	)	$	(4.20	)	$	1.86
Diluted earnings		(6.03	)		(1.38	)		(5.68	)		(4.20	)		1.84
Dividends		0.00			0.00			0.00			0.00			0.36
Book value basic (at end of period)		6.60			12.66			14.09			19.97			24.34
Weighted average common shares outstanding:
Basic		2,806,299			2,773,039			2,754,419			2,438,809			2,410,621
Diluted		2,827,888			2,788,154			2,762,603			2,460,045			2,438,203
Dividend payout ratio		0.00	%		0.00	%		0.00	%		0.00	%		19.35	%


	As of and for the Year Ended December 31,
	2011			2010			2009			2008			2007
	(In thousands)
Selected Balance Sheet Data (at end of period):
Total available-for-sale securities	$	61,790		$	63,640		$	72,757		$	68,681		$	76,653
Total mortgage loans held for sale, fair value		5,686			8,162			8,752			8,157			10,978
Total loans		438,843			492,454			554,111			662,401			596,646
Total assets		654,452			723,101			773,967			815,700			736,213
Total deposits		490,413			541,218			590,110			600,868			536,370
Funds borrowed		115,806			118,505			118,208			135,129			134,942
Total stockholders’ equity		40,455			57,164			60,603			76,439			58,934
Trust assets under administration		129,580			125,702			105,071			112,688			104,167

Selected Financial Ratios and Other Data:
Performance Ratios:
Net interest margin (1)		2.91	%		2.23	%		2.43	%		3.20	%		3.92	%
Non-interest income to average assets		0.93			1.09			0.99			1.04			0.95
Non-interest expense to average assets		3.90			3.26			3.42			3.67			3.34
Net overhead ratio (2)		2.97			2.14			2.40			2.59			2.35
Efficiency ratio (3)		111.29			104.92			105.65			90.70			71.57
Return on average assets (4)		(2.32	)		(0.35	)		(1.79	)		(1.31	)		0.62
Return on average equity (5)		(51.84	)		(10.25	)		(33.07	)		(17.53	)		7.88

Asset Quality Ratios:
Non-performing loans to total loans		2.58	%		6.16	%		6.30	%		6.54	%		4.22	%
Allowance for possible loan losses to:
Total loans		3.01			2.99			3.61			1.87			1.51
Non-performing loans		116.46			48.53			57.33			28.54			35.65
Net charge-offs to average total loans		1.04			1.61			2.30			2.16			0.06
Non-performing loans to total assets		1.73			4.20			4.51			5.31			3.42

Balance Sheet Ratios:
Loans to deposits		89.48	%		90.99	%		93.90	%		110.24	%		111.24	%
Average interest-earning assets to average interest-bearing liabilities		116.17			113.18			115.08			116.25			118.92

Capital Ratios:
Total equity to total assets		6.18	%		7.91	%		7.83	%		9.37	%		8.01	%
Total capital to risk-weighted assets ratio		12.08			12.66			12.54			13.82			11.53
Tier 1 capital to risk-weighted assets ratio		9.80			11.39			11.26			12.57			10.28
Tier 1 capital to average assets ratio		8.04			9.04			9.07			11.50			9.86
Average equity to average assets ratio		7.97			7.48			8.47			7.66			7.85

(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.

Item 7:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following presents management’s discussion and analysis of our financial condition and results of operations as of the dates and for the periods indicated. You should read this discussion in conjunction with our “Selected Consolidated Financial Data,” our consolidated financial statements and the accompanying notes, and 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,” or the negative of these terms or other comparable terminology. The Company is unable to predict the actual results of its future plans or strategies with certainty. Factors which could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, fluctuations in market rates of interest and loan and deposit pricing; inability to maintain or increase deposit base and secure adequate funding; a continued deterioration of general economic conditions or the demand for housing in the Company’s market areas; deterioration in the demand for mortgage financing; legislative or regulatory changes; regulatory action; continued adverse developments in the Company’s loan or investment portfolio; any inability to obtain funding on favorable terms; the Company’s non-payment on TARP funds or Trust Preferred Securities; the loss of key personnel; significant increases in competition; potential unfavorable 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 management’s estimate of probable credit losses inherent in the loan portfolio as of the balance sheet date. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The adequacy of the allowance 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

•

management’s judgment with respect to current economic conditions and their impact on the existing loan portfolio.

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 loan’s effective interest rate, or based on the loan’s observable market value or the fair value of the collateral if the loan is collateral dependent. The general reserve loss factors are determined based on such items as management’s evaluation of risk in the portfolio, local economic conditions, and historical loss experience. The Bank has further refined its risk grading system by developing associated reserve factors for each risk grade.

As discussed in Notes 1 and 12 of the consolidated financial statements, the Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. Deferred income taxes represent the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to the management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company regularly monitors taxing authorities for changes in laws and regulations and their interpretations of the judicial system.

Overview

The Company continued to face challenges during 2011; however, the Company was able to show improvement in several areas of operation. The Company experienced an improvement in net interest income by $1.7 million, or 10.41%, to $17.6 million for 2011, as compared to $15.9 for 2010. The improvement was the result of a decline in interest expense, which decreased $5.1 million, or 35.56%, as compared to 2010, due to the impact of lower market interest rates on interest-bearing deposits and a decline in the average balance of time deposits. The Company had funds from various time deposits mature during 2011, and as those higher rate time deposits matured they were renewed at lower rates. In addition, some time deposits were not renewed as the renewal rate for these time deposits was at a lower rate. The Company experienced improvement in asset quality due to the focus on improving the Company’s asset quality, specifically non-performing loans. Non-performing loans have declined $19.0 million, or 62.69%, from 2010 as management has aggressively managed defaults within the loan portfolio. 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 2011 of $15.8 million, an increase of $13.1 million, or 477.06%, from the $2.7 million net loss in 2010. The net loss for 2011 was primarily attributed to the $12.6 million valuation allowance recorded for the Company’s deferred tax asset. Due to the Company’s losses recorded over the last four years, the Company assessed the deferred tax asset during 2011 and recognized a $12.6 million valuation allowance on the deferred tax asset based on historical and current information available relating to the Company’s ability to recognize the deferred tax asset in future near term periods. Loss per share on a diluted basis was $6.03 for the year ended December 31, 2011, an increase of 336.96% compared to diluted loss per share of $1.38 for the previous year. The Company’s returns on average assets and average stockholders’ equity for 2011 were negative 2.32% and negative 51.84% compared to negative 0.35% and negative 10.25%, respectively, for 2010.

Net interest income for 2011 was $17.6 million compared to $15.9 million earned during 2010. The increase of $1.7 million, or 10.41%, was attributed to a decrease in interest expense by $5.1 million, or 35.56% as compared to 2010. Interest expense declined due to the impact of lower market interest rates on interest-bearing deposits and a decline in the average balance of time deposits. In 2010 and 2011 the Company had funds from various time deposit

promotions mature, and as those higher rate time deposits matured they were renewed at lower market rates. As the renewal rate for these deposits was much lower, some deposits were not renewed. In addition, the Company entered into a restructuring transaction during the third quarter of 2010 of $42.5 million of its $82.5 million in Federal Home Loan Bank advances. This transaction reduced the effective interest rate, as well as modified the maturity date on these borrowings. This increase in net interest income was partially offset by the decline in interest income by $3.4 million, or 11.38%, as compared to the same period in 2010. The lower interest income was primarily a result of a decline in the average outstanding loan balances for year ended December 31, 2011 by $53.0 million, or 10.22%, as compared to 2010, as a result of loan payoffs, lower loan origination volume due to the current economic environment and loan foreclosures of $17.4 million. Interest income also declined due to lower interest earned on available-for-sale securities by $623,000, or 34.14%, as compared to prior year. The Company had $67.0 million in available-for-sale securities called or matured during the year and the funds from these securities were reinvested at lower yields due to the current rate environment and the securities available in the market place for investing.

The provision for loan losses in 2011 was $3.3 million compared to $3.1 million in 2010. The Company has experienced a reduction in non-performing loans by $19.0 million, or 62.69%, and a decline in net loan charge offs by $3.5 million, or 42.11%, since December 31, 2010. The provision for loan losses recorded in 2011 was primarily related to declines in collateral values of properties secured by real estate.

Non-interest income declined 26.63% to $6.3 million in 2011 compared to $8.6 million in 2010. The decline in non-interest income was a result of a decrease in loans held for sale fee income of $1.4 million, or 39.53%, due to a decline in residential mortgage loan origination and refinancing volume as a result of the economic environment. The Company realized gains of $885,000 on the sale of $29.0 million in available-for-sale securities during 2010. No securities were sold during 2011. Other income decreased $161,000, or 14.06%, 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 2011 was a loss of $257,000 compared to a gain of $128,000 in 2010, a decline of $385,000. The fair value on these commitments will fluctuate based on the market rates for mortgage loans. The decrease in other income was partially offset by higher gains realized on the sale of foreclosed assets held for sale and increases in rental income and foreclosed assets held for sale rental income. The decrease in non-interest income was partly offset by an increase in other service charges by $255,000, or 12.62%, as compared to 2010. The increase in other service charges was primarily attributed to income generated from signature based debit card transactions associated with our Performance and Ultimate Checking products and increased activity in our trust services.

Non-interest expense increased 3.33% to $26.6 million in 2011 from $25.8 million in 2010. The increase in non-interest expense was attributed to a higher foreclosed assets expense by $2.5 million, or 92.73%, as compared to the prior year. The Company recorded a provision for losses on foreclosed assets held for sale of $3.2 million in 2011, compared to a provision of $734,000 for 2010, representing an increase of $2.4 million, as a result of a decline in real estate value related to specific foreclosed properties. The increase in non-interest expense was offset by a decline in salaries and employee benefits by $798,000, or 6.79%, as a result of lower salaries expense due to 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. Other operating expenses declined $699,000, or 8.18%, as compared to the prior year, due to a decline in legal fees, data processing and FDIC deposit assessment. The FDIC deposit assessment has decreased as a result of a decrease in the assessment base and a change in the assessment rates as of April 1, 2011.

Total assets at December 31, 2011, were $654.5 million, a decrease of $68.6 million, or 9.49%, from $723.1 million at December 31, 2010. Deposits and stockholders’ equity at December 31, 2011 were $490.4 million and $40.5 million, compared with $541.2 million and $57.2 million at December 31, 2010, decreases of $50.8 million, or 9.39%, and $16.7 million, or 29.23%, respectively.

Loans at December 31, 2011 totaled $438.8 million, a decrease of $53.7 million, or 10.89%, compared to December 31, 2010. The loan to deposit ratio at December 31, 2011 was 89.48% compared to 90.99% at December 31, 2010. Our funding philosophy for loans not held for sale is to primarily increase deposits from retail and commercial deposit sources and secondarily use other borrowing sources as necessary to fund loans within the limits of the Bank’s capital base.

Net Interest Income

A primary component of our net income is our net interest income. Net interest income is determined by the spread between the fully tax equivalent (FTE) yields we earn on our interest-earning assets and the rates we pay on our interest-bearing liabilities, as well as the relative amounts of such assets and liabilities. FTE net interest margin is determined by dividing FTE net interest income by average interest-earning assets. The following discussion should be read along with analysis of the “Average Balances, Yields and Rates” table on page 34.

Years ended December 31, 2011 and 2010. FTE net interest income for 2011 increased to $17.6 million from $15.9 million in 2010, a $1.7 million, or 10.41%, increase.

FTE interest income for 2011 was $26.9 million, a decrease of $3.4 million, or 11.38%, from $30.3 million in 2010. The decrease in interest income was attributed to a decline in the average balances on earning assets, specifically lower average balances on outstanding loans, federal funds sold and other short-term investments and available-for-sale securities. The overall yield on average earning assets increased 20 basis points to 4.43% for year ended December 31, 2011, compared to 4.23% for the prior year. The increase in yield is attributed to the decline in volume of loans on non-accrual during 2011 as compared to the prior year. In addition, the Company has received $270,000 in cash interest on loans previously on non-accrual and subsequently paid off or placed on accrual status and recovering interest income on the cost recovery method. Interest and fees on loans declined $2.7 million, or 9.76%, for the year ended December 31, 2011, as compared to the prior year as a result of the decline in average outstanding balance of loans by $53.0 million, or 10.22%, due to loan payoffs, lower loan origination volume due to the current economic environment and loan foreclosures. Average available federal funds sold and other short-term investments decreased $37.3 million, or 36.95%, as compared to 2010. The decrease in average federal funds sold and other short-term investments was attributed to a decline in the average interest-bearing deposits, specifically time deposits, as discussed below. Interest income on available-for-sale securities decreased $623,000, or 34.14%, as a result of a decrease in the average balance of available-for-sale securities by $17.2 million, or 20.41%, over the prior year. Available-for-sale securities of $29.0 million were sold during 2010 to reduce the long term maturity risk within the portfolio as a result of the rate environment. In addition, as higher yielding securities of $67.0 million for the year ended December 31, 2011 and $115.0 million for the year ended December 31, 2010 were called or matured, they were reinvested in lower yielding securities due to the rate environment and the securities available in the market for investing, thus resulting in a decline in interest income.

Interest expense for 2011 was $9.3 million, a decrease of $5.1 million, or 35.56%, from $14.4 million in 2010. 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, savings and money market deposits, time deposits and long-term debt. The rate paid on total average interest-bearing liabilities decreased to 1.77% for the year ended December 31, 2011, compared to 2.27% in 2010, a decrease of 50 basis points. Average interest-bearing liabilities decreased $111.2 million, or 17.57%, to $521.5 million at December 31, 2011, compared to $632.7 million at December 31, 2010. The decrease was a result of lower average balance of time deposits and savings and money market deposits. Average time deposits decreased $114.2 million, or 37.68%, partially as a result of the Company not renewing $28.9 million of brokered deposits excluding CDARS deposits in 2010 and $6.8 million in brokered deposits that matured in 2011. The Company replaced brokered funds with core deposits by generating increased interest in our Performance Checking products and in February 2011 started offering a new product, Ultimate Checking. The Company also had several higher rate time deposit promotions mature in 2010 and 2011 and these time deposits were renewed at a lower rate. As the renewal rate for these time deposits was at a lower rate, some time deposits were not renewed. The savings and money market deposits decreased $2.3 million, or 2.69%, as customers have moved their funds into interest-bearing demand accounts, specifically Performance and Ultimate Checking accounts, as these products offer a more attractive rate. Interest-bearing demand deposits have increased $7.9 million, or 6.25%, however the interest expense associated with these accounts has declined $732,000, or 31.24%, as a result of lowering the interest rate paid on the Performance and Ultimate Checking accounts in response to a decline in the rates paid in the market. Interest expense for long-term debt is lower as a result of the Company’s 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.

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 Company’s 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.

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,
	2011								2010								2009
	Average Balance			Interest		Average Yield/ Rate			Average Balance			Interest		Average Yield/ Rate			Average Balance			Interest		Average Yield/ Rate
(In thousands)
Assets
Federal funds sold and other short-term investments	$	63,635		$	151		0.24	%	$	100,929		$	245		0.24	%	$	68,310		$	144		0.21	%
Available-for-sale securities – taxable		66,913			1,202		1.80			84,070			1,825		2.17			60,441			1,943		3.21
Mortgage loans held for sale		3,820			152		3.98			6,761			302		4.47			9,875			477		4.83
Loans, net of unearned discount and fees (1)		465,053			25,125		5.40			518,010			27,709		5.35			608,080			33,519		5.51
Federal Home Loan and Federal Reserve Bank Stock		6,377			225		3.53			6,275			222		3.54			6,742			211		3.13

Total earning assets		605,798			26,855		4.43			716,045			30,303		4.23			753,448			36,294		4.82

Cash and due from banks – non-interest bearing		33,724								37,565								36,257
Allowance for loan losses		(13,708	)							(17,991	)							(19,647	)
Premises and equipment, net		16,048								16,601								18,270
Other assets		41,104								38,007								26,639

Total assets	$	682,966							$	790,227							$	814,967

Liabilities and Stockholders’ Equity
Deposits-interest bearing:
Interest-bearing demand accounts	$	133,531		$	1,611		1.21	%	$	125,672		$	2,343		1.86	%	$	96,315		$	2,589		2.69	%
Savings and money market deposits		82,462			346		0.42			84,745			438		0.52			93,672			490		0.52
Time deposits		188,906			3,755		1.99			303,130			7,746		2.56			337,363			10,742		3.18

Total interest-bearing deposits		404,899			5,712		1.41			513,547			10,527		2.05			527,350			13,821		2.62

Other interest-bearing liabilities		17,045			41		0.24			18,477			45		0.24			23,261			58		0.25
Long-term debt		99,537			3,502		3.52			100,644			3,791		3.77			104,096			4,108		3.95

Total interest-bearing liabilities		521,481			9,255		1.77			632,668			14,363		2.27			654,707			17,987		2.75

Non-interest bearing deposits		98,927								91,863								86,744
Other liabilities		8,151								6,577								4,478
Stockholders’ equity		54,407								59,119								69,038

Total liabilities and stockholders’ equity	$	682,966							$	790,227							$	814,967

FTE net interest income/spread				$	17,600		2.66	%				$	15,940		1.96	%				$	18,307		2.07	%

FTE net interest margin							2.91	%							2.23	%							2.43	%

(1)	Includes average balances and income from loans on non-accrual status.

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)
	2011 Compared to 2010									2010 Compared to 2009
	Change Due to Rate			Change Due to Volume			Total Change			Change Due to Rate			Change Due to Volume			Total Change
Federal funds sold and other short-term investments	$	(3	)	$	(91	)	$	(94	)	$	21		$	80		$	101
Available-for-sale securities – taxable		(313	)		(310	)		(623	)		(631	)		513			(118	)
Mortgage loans held for sale		(33	)		(117	)		(150	)		(36	)		(139	)		(175	)
Loans, net of unearned discount and fees		265			(2,849	)		(2,584	)		(987	)		(4,823	)		(5,810	)
Federal Home Loan and Federal Reserve Bank Stock		(1	)		4			3			28			(17	)		11

Total interest income		(85	)		(3,363	)		(3,448	)		(1,605	)		(4,386	)		(5,991	)

Interest-bearing demand accounts		(827	)		95			(732	)		(794	)		548			(246	)
Savings and money market deposits		(82	)		(10	)		(92	)		(3	)		(49	)		(52	)
Time deposits		(1,716	)		(2,275	)		(3,991	)		(2,115	)		(881	)		(2,996	)
Other interest-bearing liabilities		(1	)		(3	)		(4	)		(2	)		(11	)		(13	)
Long-term debt		(250	)		(39	)		(289	)		(185	)		(132	)		(317	)

Total interest expense		(2,876	)		(2,232	)		(5,108	)		(3,099	)		(525	)		(3,624	)

Net interest income	$	2,791		$	(1,131	)	$	1,660		$	1,494		$	(3,861	)	$	(2,367	)

Provision for Loan Losses

The Company makes provisions for loan losses in amounts management deems necessary to maintain the allowance for loan losses at an appropriate level. The allowance for loan losses is based upon the analysis of several factors, including general economic conditions, analysis of impaired loans, general reserve factors, changes in loan mix, and current and historical charge-offs by loan type. Historical charge off information currently utilized is based on three year weighted average of net charge offs by loan type with more weight given to more current data due to the current economic environment. The Company’s credit administration function performs monthly analyses on the loan portfolio to assess and report on risk levels, delinquencies, internal ranking system and overall credit exposure. Management and the Bank’s Board of Directors review the allowance for loan losses monthly, considering such factors as current and projected economic conditions, loan growth, the composition of the loan portfolio, loan trends and classifications, and other factors. Economic conditions monitored include but are not limited to: Johnson County, KS unemployment rate; consumer confidence; foreclosure rates; vacant property rates; 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, 2011, we provided $3.3 million for loan losses, as compared to $3.1 million for the year ended December 31, 2010, an increase of $205,000, or 6.62%. In 2011, the Company experienced a reduction in non-performing loans by $19.0 million, or 62.69% and a decline in net loan charge offs by $3.5 million, or 42.11%. The provision for loan losses recorded in 2011 was primarily related to declines in collateral values of properties secured by real estate. The allowance for loan losses as a percentage of loans was 3.01% at December 31, 2011, compared to 2.99% in 2010 and 3.61% in 2009. 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 economic 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, 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%. The significant provision for loan losses recorded in 2009 was a result of refining the Company’s 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.

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,
	2011		2010		2009
(In thousands)
Loans held for sale fee income	$	2,120	$	3,506	$	2,785
NSF charges and service fees		944		1,062		1,472
Other service charges		2,276		2,021		1,778
Realized gains on available-for-sale securities		—		885		346
Other income		984		1,145		1,664

Total non-interest income	$	6,324	$	8,619	$	8,045

Non-interest income decreased $2.3 million from the prior year to $6.3 million for 2011 compared with $8.6 million for 2010, a decrease of 26.63%. Loans held for sale fee income decreased $1.4 million, or 39.53%, as compared to 2010. The volume of closed residential mortgage loans held for sale decreased in 2011 to $66.0 million, from $135.9 million in 2010 and $196.4 million in 2009 as a result of the economic environment and declining real estate industry. 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. Another factor contributing to the decline in non-interest income was the Company realized gains on available-for-sale securities of $885,000 in 2010 as a result of the Company selling $29.0 million in available-for-sale securities. No securities were sold in 2011. Securities were sold during 2010 to reduce the long-term maturity risk within the investment portfolio due to the rate environment.

Other changes reflected in non-interest income include a decrease in NSF charges and service fees by $118,000, or 11.11%, as compared to 2010. The decrease was due to fewer overdraft items by our customers and a change in account service charges on commercial accounts. Other service charge income, which includes income from trust services, investment brokerage, merchant bankcard processing and debit card processing, increased by $255,000, or 12.62%. This increase was a result of income generated from signature based debit card transactions associated with our Performance and Ultimate Checking products and an increase in fee income generated from our trust services due to increased market activity. Other income decreased $161,000, or 14.06%, 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 2011 was a loss of $257,000 compared to a gain of $128,000 in 2010, a decline of $385,000. The fair value on these commitments will fluctuate based on the market rates for mortgage loans. The decrease in other income was partially offset by higher gains realized on the sale of foreclosed assets held for sale and an increase in rental income and foreclosed assets held for sale rental income. Future growth of other non-interest income categories is dependent on new product development and growth in our customer base.

Non-interest income for 2010 increased to $8.6 million compared to $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. 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.

Other changes reflected in non-interest income in 2010 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 $128,000 compared to a gain of $236,000 in 2009, a decline of $108,000, 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 Expense

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

NON-INTEREST EXPENSE


	Year Ended December 31,
	2011		2010		2009
(In thousands)
Salaries and employee benefits	$	10,955	$	11,753	$	12,272
Net occupancy expense		2,599		2,756		2,811
Foreclosed assets expense		5,219		2,708		3,862
Other operating expense		7,851		8,550		8,896

Total non-interest expenses	$	26,624	$	25,767	$	27,841

Non-interest expense increased $857,000, or 3.33% to $26.6 million during 2011, compared to $25.8 million in the prior year. The increase in non-interest expense was attributed to an increase in foreclosed assets expense by $2.5 million, or 92.73%, as compared to 2010. Foreclosed assets expense has increased as a result of the Company recording a $3.2 million provision for losses on foreclosed assets held for sale in 2011 compared to $734,000 in 2010, representing an increase of $2.4 million. The increase in provision for losses on foreclosed assets held for sale was a result of a decline in real estate value related to specific foreclosed properties. In addition, expenses related to foreclosed assets held for sale have increased as a result of an increase in the number of foreclosed properties. 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. If the decline in real estate values continues, the Company could experience additional provisions in losses on foreclosed assets held for sale.

Other factors contributing to the change in non-interest expense include a decrease in salaries and employee benefits by $798,000, or 6.79%, as a result of lower salaries expense due to 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. Other operating expenses declined $699,000, or 8.18%, as compared to the prior year, due to a decline in legal fees, data processing and FDIC deposit assessment. The FDIC deposit assessment has decreased as a result of a decrease in the assessment base and a change in the assessment rates as of April 1, 2011. Net occupancy expense declined slightly by $157,000, or 5.70%, as a result of lower depreciation and repairs and maintenance expense.

Non-interest expense for 2010 decreased 7.45% to $25.8 million, compared to $27.8 million in 2009. The decrease in non-interest expense was attributed to a decrease in foreclosed assets expense of $1.2 million, or 29.88%, as a result of the Company recording a $734,000 provision for losses on foreclosed assets held for sale in 2010 compared to $1.4 million in 2009. The provision for losses on foreclosed assets held for sale 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 to loan workouts, routine litigation and foreclosed assets held for sale. Other factors contributing to the change in non-interest expense included 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.

Income Taxes

Our income tax benefit during 2011 was $2.8 million, compared to our income tax benefit of $1.6 million during 2010, and income tax benefit of $8.5 million during 2009. The benefit in 2011 reflects our net loss for the 2011 fiscal year. Our consolidated effective income tax rates, before consideration of the valuation allowance, of 36%,

36% and 37% for the three years ended December 31, 2011, 2010, and 2009, respectively, varies from the statutory rate principally due to the effects of state income taxes. Due to the Company’s losses recorded over the last four years, the Company assessed the deferred tax asset during 2011 and recognized a $12.6 million valuation allowance on the deferred tax asset based on historical and current information available relating to the Company’s ability to recognize the deferred tax asset in future near term periods. As the Company shows profits in the future, portions of this allowance may be able to be recognized in future years.

Financial Condition

Total assets for the Company at December 31, 2011 were $654.5 million, a decrease of $68.6 million, or 9.49%, compared to $723.1 million at December 31, 2010. Deposits were $490.4 million compared with $541.2 million at December 31, 2010, a decrease of $50.8 million, or 9.39%. Stockholders’ equity was $40.5 million at December 31, 2011 compared with $57.2 million at December 31, 2010, a decrease of $16.7 million, or 29.23%.

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 corporate debt, sub-prime mortgages and other higher yielding investments. As of December 31, 2011, 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, 2011 were $61.8 million, a decrease of $1.8 million, or 2.91%, compared to $63.6 million at December 31, 2010. The Company had $67.0 million in available-for-sale securities called or mature during 2011 and at this time the Company has only reinvested $64.9 million of the funds into purchases of available for sale securities as a result of 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,
	2011		2010		2009
(In thousands)
U.S. government sponsored agency securities	$	61,171	$	63,039	$	72,163
Equity and other securities		619		601		594

Total	$	61,790	$	63,640	$	72,757

The following table sets forth the maturities, carrying value, and average yields for securities in our investment portfolio at December 31, 2011. 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


	One Year or Less					One to Five Years					Five to Ten Years					More Than Ten Years					Total Investment Securities
	Carrying Value		Average Yield			Carrying Value		Average Yield			Carrying Value		Average Yield			Carrying Value		Average Yield			Carrying Value		Average Yield
(In thousands)
Available-For-Sale
U.S. government sponsored agency	$	6,024		0.90	%	$	30,011		0.88	%	$	25,136		2.60	%	$	—		—	%	$	61,171		1.59	%
Equity and other securities with no defined maturity		—		—			—		—			—		—			—		—			619		2.98

Total available-for-sale	$	6,024		0.90	%	$	30,011		0.88	%	$	25,136		2.60	%	$	—		—	%	$	61,790		1.60	%

Loans Held for Sale. Mortgage loans held for sale at December 31, 2011 totaled $5.7 million, a decrease of $2.5 million, or 30.34%, compared to $8.2 million at December 31, 2010. The Company has elected to carry loans held for sale at fair value. The volume of loans held for sale originated during 2011 slowed as a result of a slow down in mortgage originations and refinancing due to the economic environment. The Company’s 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 $250,000 (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. Our loan portfolio reflects an emphasis on commercial, commercial real estate, construction, home equity and real estate lending. We also offer 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 64.83%, 63.65% and 55.96% of our total loans at December 31, 2011, 2010 and 2009, respectively.

Loans were $438.8 million at December 31, 2011, a decrease of $53.7 million, or 10.89%, compared to December 31, 2010. The Bank experienced decreases in most loan categories during 2011. These decreases were attributable to several larger loans paying off, the foreclosure of approximately $17.4 million of foreclosed assets held for sale during 2011, 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 89.48% at December 31, 2011, compared to 90.99% at December 31, 2010, and 93.90% at December 31, 2009.

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


	As of December 31,
	2011					2010					2009					2008					2007
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	(In thousands)
Commercial	$	130,398		29.71	%	$	144,181		29.28	%	$	142,528		25.72	%	$	172,647		26.06	%	$	139,120		23.32	%
Commercial real estate		154,109		35.12			169,253		34.37			167,581		30.24			170,697		25.77			150,655		25.25
Construction		48,438		11.04			64,641		13.13			113,077		20.41			182,933		27.62			188,229		31.55
Home equity		59,750		13.61			64,289		13.05			66,586		12.02			59,257		8.94			38,473		6.45
Residential real estate		37,882		8.63			36,903		7.49			45,014		8.12			43,695		6.60			37,511		6.29
Lease financing		2,268		0.52			5,530		1.12			11,259		2.03			18,927		2.86			19,724		3.30
Consumer		5,998		1.37			7,657		1.56			8,066		1.46			14,245		2.15			22,934		3.84

Total loans and leases		438,843		100.00	%		492,454		100.00	%		554,111		100.00	%		662,401		100.00	%		596,646		100.00	%

Less allowance for loan losses		13,189					14,731					20,000					12,368					8,982

Loans, net	$	425,654				$	477,723				$	534,111				$	650,033				$	587,664

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, 2011, 2010 and 2009, 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 $48.4 million, or 11.04%, of total loans, as of December 31, 2011. Of the $48.4 million, approximately $18.3 million were for new single and multi-family housing construction and $19.7 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 Bank’s lending limit under federal law to any one borrower was $19.3 million at December 31, 2011. The Bank’s largest single borrower, net of participations, at December 31, 2011 had outstanding loans of $15.4 million.

The following table presents the aggregate maturities of loans in each major category of our loan portfolio as of December 31, 2011, 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, 2011 which have predetermined interest rates (fixed) or adjustable interest rates (variable). Actual maturities may differ from the contractual maturities shown below as a result of renewals and prepayments or the timing of loan sales.

MATURITIES AND SENSITIVITIES OF LOANS TO

CHANGES IN INTEREST RATES


	As of December 31, 2011
									More than One Year
	Less than one year		One to five years		Over five years		Total		Fixed		Variable
(In thousands)
Commercial	$	73,814	$	42,268	$	14,316	$	130,398	$	22,659	$	33,925
Commercial Real Estate		32,395		111,540		10,174		154,109		81,091		40,623
Construction		37,503		10,515		420		48,438		2,348		8,587

Non-accrual loans included in the more than one year category for fixed rate loans were $208,000 and for variable rate loans were $264,000.

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. Interest accrued but not collected for the loans placed on non-accrual or charged off is reversed against interest income. The interest on these loans is generally accounted for on a cash basis or a cost recovery method, 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.

The following table sets forth our non-performing assets as of the dates indicated:

NON-PERFORMING ASSETS


	As of December 31,
	2011			2010			2009			2008			2007
(In thousands)
Commercial and all other loans:
Past due 90 days or more	$	—		$	—		$	—		$	—		$	680
Non-accrual		2,029			2,896			1,327			2,143			60
Commercial real estate loans:
Past due 90 days or more		—			—			—			—			—
Non-accrual		1,340			10,088			13,267			1,951			512
Construction loans:
Past due 90 days or more		—			—			—			—			10,699
Non-accrual		3,058			10,417			11,205			32,110			10,115
Home equity loans:
Past due 90 days or more		—			—			—			—			637
Non-accrual		2,676			1,211			344			488			—
Residential real estate loans:
Past due 90 days or more		—			—			—			—			1,194
Non-accrual		2,204			5,553			8,404			6,129			189
Lease financing:
Past due 90 days or more		—			—			—			—			11
Non-accrual		18			140			335			475			1,084
Consumer loans:
Past due 90 days or more		—			—			—			—			13
Non-accrual		—			52			6			36			—
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		11,325			30,357			34,888			43,332			25,194

Foreclosed assets held for sale		29,246			20,144			19,434			4,783			2,523

Total non-performing assets	$	40,571		$	50,501		$	54,322		$	48,115		$	27,717

Total non-performing loans to total loans		2.58	%		6.16	%		6.30	%		6.54	%		4.22	%
Total non-performing loans to total assets		1.73			4.20			4.51			5.31			3.42
Allowance for loan losses to non-performing loans		116.46			48.53			57.33			28.54			35.65
Non-performing assets to loans and foreclosed assets held for sale		8.67			9.85			9.47			7.21			4.63

Non-performing assets. Non-performing assets decreased to $40.6 million at December 31, 2011 from $50.5 million at December 31, 2010, an improvement of 19.66%. Non-performing loans decreased to $11.3 million at December 31, 2011 from $30.4 million at December 31, 2010, an improvement of 62.69%. The decrease was attributed to a decline in non-performing commercial real estate loans by $8.7 million, non-performing construction loans by $7.4 million and non-performing residential real estate loans by $3.3 million from December 31, 2010. The decrease in commercial real estate loans was the result of the foreclosure on three credit relationships and the result of two credit relationships being upgraded to pass rated loans due to improvement in the credit quality of the borrowers and the borrowers having shown a history and ability to pay as agreed. The decline in non-performing construction loans was primarily the result of foreclosure on three builder portfolios and the decrease in residential real estate was the result of foreclosure on two builder portfolios. The decrease was partly offset by an increase in non-performing home equity loans by $1.5 million due to the deterioration in the credit quality of one credit relationship. 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 $29.2 million as of December 31, 2011, compared to $20.1 million at December 31, 2010. During 2011, the Company sold $5.6 million in foreclosed assets and transferred $17.4 million in loans to foreclosed assets. 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, 2011, our average year-end ratio of non-performing loans to total loans was 5.16%. As of December 31, 2011, our ratio of non-performing loans to total loans was 2.58%, which is below our recent historical averages primarily due to the Bank’s focus on improving credit quality. As of December 31, 2011, our ratio of allowance for loan losses to non-performing loans was 116.46%, compared to 48.53% at December 31, 2010. 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 42 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, 2011.


	Year Ended December 31, 2011
(In thousands)
Gross interest income (since date of non-accrual) if the loans had been current and accruing interest	$	681
Interest income reversed at time loan placed on non-accrual		115
Cash interest received during the period		270

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, troubled debt restructurings and certain other loans identified by management. For loans placed on non-accrual, accrual of interest is discontinued and interest accrued but not collected 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 cash basis or cost recovery method, 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 $31.2 million at December 31, 2011, $51.1 million at December 31, 2010, and $35.0 million at December 31, 2009, with related allowances for loan losses of $6.6 million, $6.2 million, and $6.6 million, respectively.

Included in certain loan categories in the impaired loans are loans designated as troubled debt restructurings and classified as impaired. At December 31, 2011, the Company had $2.6 million of commercial loans, $5.2 million of commercial real estate loans, $13.7 million of construction loans, $3.3 million of residential real estate loans and $290,000 of lease financing loans that were modified in troubled debt restructurings and classified as impaired.

Total interest income of $1.2 million, $93,000 and $497,000 was recognized on average impaired loans of $39.4 million, $53.8 million and $41.7 million for 2011, 2010 and 2009, respectively. Included in this total is cash basis interest income of $270,000, $88,000 and $212,000 recognized on non-accrual impaired loans during 2011, 2010 and 2009, respectively.

Allowance For Loan Losses. The adequacy of the allowance is analyzed monthly based on internal loan reviews and quality measurements of our loan portfolio. The allowance for loan losses is increased by provisions charged to expense and reduced by loans charged-off, net of recoveries. The Bank computes its allowance by assigning specific reserves to impaired loans, and then applies general reserves, based on loss factors, to the remainder of the loan portfolio. The loss factors are determined based on such items as management’s evaluation of risk in the portfolio, current and projected local and national economic conditions, loan growth, loan trends and classifications and historical loss experience. Specific allowances are accrued on specific loans evaluated for impairment for which the basis of each loan, including accrued interest, exceeds the discounted amount of expected future collections of interest and principal or, alternatively, the fair value of the loan collateral.

The following table sets forth information regarding changes in our allowance for loan and valuation losses for the periods indicated.

SUMMARY OF LOAN LOSS EXPERIENCE

AND RELATED INFORMATION


	As of and for the Year Ended December 31,
	2011			2010			2009			2008			2007
(In thousands)
Balance at beginning of period	$	14,731		$	20,000		$	12,368		$	8,982		$	6,106

Loans charged-off:
Commercial loans		582			1,364			4,713			6,603			215
Commercial real estate loans		1,218			2,985			374			262			—
Construction loans		2,352			3,662			7,716			6,022			244
Home equity loans		725			387			653			127			—
Residential real estate loans		637			660			1,480			424			49
Lease financing		—			43			109			372			139
Consumer loans		—			7			58			112			16

Total loans charged-off		5,514			9,108			15,103			13,922			663
Recoveries:
Commercial loans		282			390			259			223			294
Commercial real estate loans		91			171			123			—			1
Construction loans		60			123			592			24			—
Home equity loans		48			17			31			—			—
Residential real estate loans		157			11			72			1			6
Lease financing		25			14			21			29			9
Consumer loans		9			18			2			6			14

Total recoveries		672			744			1,100			283			324

Net loans charged-off		4,842			8,364			14,003			13,639			339
Allowance of acquired company		—			—			—			—			360
Provision for loan losses		3,300			3,095			21,635			17,025			2,855

Balance at end of period	$	13,189		$	14,731		$	20,000		$	12,368		$	8,982

Loans outstanding:
Average	$	465,053		$	518,010		$	608,080		$	631,673		$	563,224
End of period		438,843			492,454			554,111			662,401			596,646
Ratio of allowance for loan losses to loans outstanding:
Average		2.84	%		2.84	%		3.29	%		1.96	%		1.59	%
End of period		3.01			2.99			3.61			1.87			1.51
Ratio of net charge-offs to:
Average loans		1.04			1.61			2.30			2.16			0.06
End of period loans		1.10			1.70			2.53			2.06			0.06

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,
	2011					2010					2009					2008					2007
	Amount		% of Total Allowance			Amount		% of Total Allowance			Amount		% of Total Allowance			Amount		% of Total Allowance			Amount		% of Total Allowance
(In thousands)
Commercial	$	2,987		22.65	%	$	3,339		22.66	%	$	3,630		18.15	%	$	3,040		24.58	%	$	1,790		19.93	%
Commercial real estate		3,772		28.60			3,974		26.98			7,253		36.27			2,507		20.27			1,597		17.78
Construction		2,721		20.63			4,579		31.08			5,929		29.65			4,695		37.96			4,188		46.63
Home equity		1,338		10.14			1,262		8.57			1,061		5.30			409		3.31			247		2.75
Residential real estate		2,312		17.53			1,488		10.10			1,737		8.68			1,201		9.71			377		4.20
Lease financing		30		0.23			38		0.26			238		1.19			449		3.63			664		7.39
Consumer		29		0.22			51		0.35			152		0.76			67		0.54			119		1.32

Total	$	13,189		100.00	%	$	14,731		100.00	%	$	20,000		100.00	%	$	12,368		100.00	%	$	8,982		100.00	%

Deposits. Deposits are the primary funding source for the Company. Deposits declined by $50.8 million, or 9.39%, to $490.4 million for the year ended December 31, 2011, compared to $541.2 million for the year ended December 31, 2010. The decline in deposits was attributed to a decrease in time deposits by $55.2 million, or 24.91%. The decline in time deposits was a result of a higher rate time deposit promotion that matured during the third quarter of 2011 and approximately $22.9 million in time deposits were not renewed at this time due to rate environment. As a result of lower time deposit rates, as time deposits mature some have not renewed or have invested their funds in a higher yielding products such as our Performance and Ultimate Checking products. This decrease was offset by an increase in savings, NOW and money market deposits by $4.6 million, or 2.10%. The increase in savings, NOW and money market deposits was the result of growth experienced in money market and savings accounts. The Company’s Performance and Ultimate Checking products continue to be attractive to our market as these products pay a higher rate of interest to the customer as long as the customer meets the signature based debit card transactions qualifications 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 and Ultimate Checking products have 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 alternative sources 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.

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,
	2011								2010								2009
	Balance		Percent of Deposits			Weighted Average Rate			Balance		Percent of Deposits			Weighted Average Rate			Balance		Percent Of Deposits			Weighted Average Rate
(In thousands)
Demand	$	100,842		20.56	%		—	%	$	100,975		18.65	%		—	%	$	91,158		15.45	%		—	%
Savings		13,814		2.82			0.19			11,040		2.04			0.24			8,947		1.52			0.25
Interest-bearing demand		133,702		27.26			1.21			140,697		26.00			1.86			117,519		19.91			2.69
Money Market		75,468		15.39			0.46			66,670		12.32			0.56			77,779		13.18			0.55
Time Deposits		166,587		33.97			1.99			221,836		40.99			2.56			294,707		49.94			3.18

Total deposits	$	490,413		100.00	%				$	541,218		100.00	%				$	590,110		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, 2011:

AMOUNTS AND MATURITIES OF

TIME DEPOSITS OF $100,000 OR MORE


	As of December 31, 2011
	Amount		Weighted Average Rate
(In thousands)
Three months or less	$	27,894		0.97	%
Over three months through six months		8,375		0.89
Over six months through twelve months		23,628		1.53
Over twelve months		26,454		2.40

Total	$	86,351		1.56	%

Liquidity and Capital Resources

Liquidity. Liquidity is measured by a financial institution’s ability to raise funds through deposits, borrowed funds, capital, or the sale of marketable assets, such as residential mortgage loans or a portfolio of SBA loans. Other sources of liquidity, including cash flow from the repayment of loans, are also considered in determining whether liquidity is satisfactory. Liquidity is also achieved through growth of core deposits, 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 $250,000 (excluding brokered deposits), were 88.93% of our total deposits at December 31, 2011 and 86.48% of total deposits at December 31, 2010. 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 $250,000 placed in the CDARS program are added back, our core deposit ratio would be 93.91% at December 31, 2011 and 91.83% at December 31, 2010. Generally, the Company’s funding strategy is to fund loan growth with core deposits and utilize alternative sources of funds such as advances/borrowings from the Federal Home Loan Bank of Topeka (“FHLB”), as well as the brokered CD market to provide for additional liquidity needs, as necessary, and take advantage of opportunities for lower costs.

The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks governed and regulated by the Federal Housing Finance Board. The Federal Home Loan Banks provide a central credit facility for member institutions. The Bank, as a member of the FHLB of Topeka, is required to acquire and hold shares of capital stock in the FHLB 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 FHLB advances to meet the activity-based stock requirement. The Bank is currently in compliance with this requirement, with a $4.5 million investment in stock of the FHLB of Topeka as of December 31, 2011. The Bank had $82.5 million in outstanding long-term advances from the FHLB of Topeka at December 31, 2011 and 2010. If needed, FHLB borrowings are also used to fund originations of mortgage loans held for sale. Advance availability with the FHLB 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 FHLB. At December 31, 2011, approximately $16.3 million was available but unused as the Bank was operating with cash and cash equivalents of approximately $99.9 million.

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, 2011 was $32.6 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. The Bank is a member of the Certificate of Deposit Account Registry Service which effectively allows depositors to receive FDIC insurance on amounts greater 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. CDARS has enabled us to maintain our customer relationships as well as provide funding for the Company to maintain its liquidity position. As of December 31, 2011, the Bank had approximately $34.5 million in brokered deposits of which $24.4 million were customer funds placed in the CDARS program, as compared to $45.9 million in brokered deposits of which $29.0 million were customer funds placed in the CDARS program at December 31, 2010. The decrease in brokered deposits during 2011 was primarily the result of $6.8 million in brokered deposits maturing and not renewed during 2011. The Company has worked on replacing brokered funds with core deposits through time deposit promotions and generating increased interest in our Performance and Ultimate checking products.

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 has deferred the quarterly dividend payment on the Preferred Shares due to the Treasury since May 15, 2009. 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 Company’s Board of Directors. That right continues until the Company pays all dividends in arrears. As of December 31, 2011, the Company has deferred 11 dividend payments. At this time, the Treasury has not elected any directors to serve on the Company’s Board of Directors; however, they have assigned an observer to attend the Company’s board meetings. The Company has accrued for the interest and the dividends and has every intention to bring the obligation current as soon as permitted. As of December 31, 2011, the Company has accrued $5.6 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.

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


	Amount outstanding at period end		Average amount outstanding during the period (1)		Maximum Outstanding At any Month end		Weighted average interest rate during the period			Weighted Average interest rate at period end
(In thousands)
At or for the year ended December 31, 2011:
Federal Home Loan Bank borrowings	$	—	$	2	$	—		0.24	%		—	%
Federal Funds purchased		—		2		—		1.14			—
Federal Reserve Bank line of credit		—		—		—		—			—
Repurchase agreements and other interest bearing liabilities		15,372		17,041		20,111		0.24			0.24

Total	$	15,372	$	17,045				0.24			0.24

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	$	—	$	7	$	—		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	$	23,261				0.25			0.24

(1)	Calculations are based on daily averages where available and monthly averages otherwise.

Capital Resources. At December 31, 2011, our total stockholders’ equity was $40.5 million, and our equity to asset ratio was 6.18%. At December 31, 2010, our total stockholders’ equity was $57.2 million, and our equity to asset ratio was 7.91%.

The Federal Reserve Board’s risk-based guidelines establish a risk-adjusted ratio, relating capital to different categories of assets and off-balance sheet exposures, such as loan commitments and standby letters of credit. These guidelines place a strong emphasis on tangible stockholder’s equity as the core element of the capital base, with appropriate recognition of other components of capital. At December 31, 2011, our Tier 1 capital ratio was 9.80%, while our total risk-based capital ratio was 12.08%, both of which exceed the capital minimums established in the risk-based capital requirements.

Our risk-based capital ratios at December 31, 2011, 2010 and 2009 are presented below.

RISK-BASED CAPITAL


	December 31,
	2011			2010			2009
(In thousands)
Tier 1 capital
Stockholders’ equity	$	40,455		$	57,164		$	60,603
Intangible assets		(321	)		(464	)		(607	)
Unrealized (appreciation) depreciation on available-for-sale securities and derivative instruments		(123	)		(30	)		(106	)
Disallowed deferred tax asset		—			(9,684	)		(8,435	)
Trust preferred securities (1)		13,444			19,000			19,000

Total Tier 1 capital		53,455			65,986			70,455

Tier 2 capital
Qualifying allowance for loan losses		6,897			7,334			7,969
Trust preferred securities (1)		5,556			—			—
Qualifying unrealized gains on available-for-sale equity securities		9			—			—

Total Tier 2 capital		12,462			7,334			7,969

Total risk-based capital	$	65,917		$	73,320		$	78,424

Risk weighted assets	$	545,494		$	579,334			625,475

Ratios at end of period
Total capital to risk-weighted assets ratio		12.08	%		12.66	%		12.54	%
Tier 1 capital to risk-weighted assets ratio		9.80	%		11.39	%		11.26	%
Tier 1 capital to average assets ratio (leverage ratio)		8.04	%		9.04	%		9.07	%

Minimum guidelines
Total capital to risk-weighted assets ratio		8.00	%		8.00	%		8.00	%
Tier 1 capital to risk-weighted assets ratio		4.00	%		4.00	%		4.00	%
Tier 1 capital to average assets ratio (leverage 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). Only $13.4 million of the trust preferred securities balance of $19.0 million has been included in Tier 1 capital as of December 31, 2011. All of the trust preferred securities balance of $19.0 million have been included as Tier 1 capital as of December 31, 2010 and 2009.

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 Company’s common stock for $29.37 per share, for a total cash price of $21.75 million. The Transaction occurred pursuant to the U.S. Treasury’s 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:

•

The Preferred Shares have a senior rank. The Company is not free to issue other preferred stock that is senior to the Preferred Shares.

•

Until the third anniversary of the sale of the Preferred Shares, unless the Preferred Shares have been redeemed in whole or the Treasury has transferred all of the shares to a non-affiliated third party, the Company may not declare or pay a common stock dividend in an amount greater than the amount of the last quarterly cash dividend per share declared prior to October 14, 2008, or repurchase common stock or other equity shares (subject to certain limited exceptions) without the Treasury’s approval.

•

If the Company were to pay a cash dividend in the future, any such dividend would have to be discontinued if a Preferred Share dividend were missed. Thereafter, dividends on common stock could be resumed only if all Preferred Share dividends in arrears were paid. Similar restrictions apply to the Company’s ability to repurchase common stock if Preferred Share dividends are missed.

•

Failure to pay the Preferred Share dividend is not an event of default. However, a failure to pay a total of six Preferred Share dividends, whether or not consecutive, gives the holders of the Preferred Shares the right to elect two directors to the Company’s Board of Directors. That right would continue until the Company pays all dividends in arrears. As of December 31, 2011, the Company has deferred 11 Preferred Share dividend payments.

•

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 officer’s compensation or benefits that are required to comply with Section 111(b) of EESA.

The Warrant is exercisable immediately and expires in ten years. The Warrant has anti-dilution protections and certain other protections for the holder, as well as potential registration rights upon written request from the Treasury. If requested by the Treasury, the Warrant (and the underlying common stock) may need to be listed on a national securities exchange. The Treasury has agreed not to exercise voting rights with respect to common shares it may acquire upon exercise of the Warrant. 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.

Contractual Obligations

Our known contractual obligations outstanding as of December 31, 2011 are presented below.


				Payments due by Period
	Total			Amortization			Less than 1 year		1 – 3 years		3 – 5 years		More than 5 years
(In thousands)
Time deposit obligations	$	166,587		$	—		$	100,404	$	40,071	$	24,447	$	1,665
Long-term debt obligations		102,088			—			—		27,500		30,000		44,588
Less: Deferred prepayment penalty on modification of Federal Home Loan Bank advances		(1,654	)		(1,654	)		—		—		—		—

Total obligations	$	267,021		$	(1,654	)	$	100,404	$	67,571	$	54,447	$	46,253

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 20 to the consolidated financial statements included in this report.

Off-Balance Sheet Arrangements

The Company enters into off-balance sheet arrangements in the ordinary course of business. Our off-balance sheet arrangements generally are limited to commitments to extend credit, mortgage loans in the process of origination and forward commitments to sell those mortgage loans, letters of credit and lines of credit.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. At December 31, 2011, the Company had outstanding commitments to originate loans aggregating approximately $22.7 million. 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. Total mortgage loans in the process of origination amounted to $1.4 million at December 31, 2011. Mortgage loans in the process of origination represent commitments to originate loans at both fixed and variable rates. Mortgage loans held for sale amounted to $5.7 million at December 31, 2011.

Forward commitments to sell mortgage loans are obligations to sell loans at a specified price on or before a specified future date. These commitments are acquired to reduce market risk on mortgage loans in the process of origination

and mortgage loans held for sale since the Company is exposed to interest rate risk during the period between issuing a loan commitment and the sale of the loan into the secondary market. Related forward commitments to sell mortgage loans were approximately $7.1 million at December 31, 2011.

Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company had total outstanding letters of credit amounting to $853,000 at December 31, 2011, with terms ranging from one year to three years.

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance sheet instruments. At December 31, 2011, the Company has unused lines of credit to borrowers aggregating approximately $141.2 million for commercial, commercial real estate, and construction lines and $38.4 for open-end consumer lines of credit.

Future Accounting Requirements

On June 16, 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This update is intended to increase the prominence of other comprehensive income in financial statements. The main provision of this update provides that an entity that reports items of other comprehensive income has the option to present comprehensive income in either one or two consecutive financial statements. In the single statement approach the entity must present the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income. In the two-statement approach, an entity must present the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The option in current GAAP that permits the presentation of other comprehensive income in the statement of changes in equity has been eliminated. The amendments for this update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Management does not anticipate that this update will have a material impact on the Company’s consolidated financial statements.

On December 23, 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This update defers the specific requirement to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income. This update does not defer the requirement to report comprehensive income either in a single continuous statement or in two separate but consecutive financial statements. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Management does not anticipate that this update will have a material impact on the Company’s consolidated financial statements.

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 Bank’s asset quality. Under the terms of the agreement, the Company and the Bank agreed, among other things, to submit an enhanced written plan to strengthen credit risk management practices and improve the Bank’s position on 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 Bank’s earnings and overall condition. The Company and Bank have also agreed not to increase or guarantee any debt, purchase or redeem any shares of stock or declare or pay any dividends without prior written approval from the Federal Reserve Bank. The Company and the Bank have substantially complied with all terms of the written agreement.

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 and interest rate risk policy are 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 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 interest rate risk policy includes guidelines for exposure and monitoring interest rate risk fluctuations and establishes reporting requirements to the Bank’s 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 Company’s current sensitivity to instantaneous and permanent changes in interest rates. The system simulates the Company’s asset and liability base and projects future net interest income results under several interest rate assumptions. This allows management to view how changes in interest rates will affect the spread between the yield received on assets and the cost of deposits and borrowed funds.

The asset/liability modeling system is also used to analyze the net economic value of equity at risk under instantaneous shifts in interest rates. The “net economic value of equity at risk” is defined as the market value of assets less the market value of liabilities plus/minus the market value of any off-balance sheet positions. By effectively looking at the present value of all future cash flows on or off the balance sheet, the net economic value of equity modeling takes a longer-term view of interest rate risk.

We strive to maintain a position such that current changes in interest rates will not affect net interest income or the economic value of equity by more than 5%, per 50 basis points. The following table sets forth the estimated percentage change in the Bank’s net interest income over the next twelve month period and net economic value of equity at risk at December 31, 2011 based on the indicated instantaneous and permanent changes in interest rates.


Changes in Interest Rates	Net Interest Income (next 12 months)			Net Economic Value of Equity at Risk
200 basis point rise		17.13	%		5.44	%
100 basis point rise		7.13	%		2.96	%
Base Rate Scenario		—			—
25 basis point decline		(2.48	)%		(1.82	)%

The above table indicates that, at December 31, 2011, 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 and Ultimate 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 could 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.

The above table also indicates that, at December 31, 2011, in the event of a sudden increase in prevailing market rates, the economic value of our equity would increase. Given our current asset/liability position, a 100 and 200 basis point increase in interest rates will result in an increase in the 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 Company’s 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 FHLB. 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 decrease in the economic value of our equity. Currently, under a falling rate environment, the Company’s estimated market value of loans could increase as a result of fixed rate loans, net of possible prepayments. 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 FHLB. 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.

The following table summarizes the anticipated maturities or repricing of our interest-earning assets and interest-bearing liabilities as of December 31, 2011, 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	$	23,178		$	40,671		$	63,849		$	56,680		$	51,275		$	14,716		$	186,520
Average Interest Rate		4.44	%		6.23	%		5.58	%		6.12	%		6.27	%		6.07	%		5.97	%
Variable Rate Loans		234,062			8,487			242,549			3,128			11,982			350			258,009
Average Interest Rate		4.74	%		4.06	%		4.71	%		5.54	%		5.86	%		3.88	%		4.78	%
Fixed Rate Investments		—			16,005			16,005			14,991			10,038			20,137			61,171
Average Interest Rate		—	%		1.00	%		1.00	%		0.58	%		1.22	%		3.00	%		1.59	%
Variable Rate Investments		619			—			619			—			—			—			619
Average Interest Rate		2.98	%		—	%		2.98	%		—	%		—	%		—	%		2.98	%
Interest Bearing Deposits		76,419			—			76,419			—			—			—			76,419
Average Interest Rate		0.19	%		—	%		0.19	%		—	%		—	%		—	%		0.19	%
Federal Funds Sold		—			—			—			—			—			—			—
Average Interest Rate		—	%		—	%		—	%		—	%		—	%		—	%		—	%

Total interest-earning assets	$	334,278		$	65,163		$	399,441		$	74,799		$	73,295		$	35,203		$	582,738

Interest-Bearing Liabilities:
Interest-bearing demand	$	133,365		$	—		$	133,365		$	—		$	—		$	—		$	133,365
Average Interest Rate		1.28	%		—	%		1.28	%		—	%		—	%		—	%		1.28	%
Savings and money market		89,619			—			89,619			—			—			—			89,619
Average Interest Rate		0.37	%		—	%		0.37	%		—	%		—	%		—	%		0.37	%
Time deposits		43,002			57,407			100,409			30,155			34,358			1,665			166,587
Average Interest Rate		1.11	%		1.38	%		1.26	%		2.19	%		2.90	%		2.38	%		1.78	%
Funds borrowed		79,360			—			79,360			10,000			26,446			—			115,806
Average Interest Rate		2.31	%		—	%		2.31	%		3.71	%		3.30	%		—	%		2.66	%

Total interest-bearing liabilities	$	345,346		$	57,407		$	402,753		$	40,155		$	60,804		$	1,665		$	505,377

Cumulative:
Rate sensitive assets (RSA)	$	334,278		$	399,441		$	399,441		$	474,240		$	547,535		$	582,738		$	582,738
Rate sensitive liabilities (RSL)		345,346			402,753			402,753			442,908			503,712			505,377			505,377
GAP (GAP = RSA – RSL)		(11,068	)		(3,312	)		(3,312	)		31,332			43,823			77,361			77,361
RSA/RSL		96.80	%		99.18	%		99.18	%		107.07	%		108.70	%		115.31	%
RSA/Total assets		51.08			61.03			61.03			72.46			83.66			89.04
RSL/Total assets		52.77			61.54			61.54			67.68			76.97			77.22
GAP/Total assets		(1.69	)		(0.51	)		(0.51	)		4.79			6.70			11.82
GAP/RSA		(3.31	)		(0.83	)		(0.83	)		6.61			8.00			13.28

Certain assumptions contained in the above table may 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 20 to the consolidated financial statements included in this report.

Item 8:

Financial Statements and Supplementary Data

See index to Blue Valley Ban Corp. financial statements on page F-1.

Item 9:

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

No items are reportable.

Item 9A:

Controls and Procedures

Management, including the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2011. Based upon the evaluation, management concluded that the Company’s disclosure controls and procedures are effective to ensure that all material information requiring disclosure in this annual report was made known to them in a timely manner.

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. During the year, the Company made no significant changes in internal controls over financial reporting or in other factors that could materially affect the Company’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting:

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2011.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report to this annual report.

Item 9B:

Other Information

No items are reportable.

Part III

Item 10:

Directors, Executive Officers and Corporate Governance

Information regarding the Company’s directors and executive officers is included in the Company’s Proxy Statement for the 2012 Annual Meeting of Stockholders and is hereby incorporated by reference.

Information regarding the Bank’s directors and executive officers is included in Part I of this Form 10-K under the caption “Directors and Executive Officers of the Registrant.”

The Company has adopted a code of conduct that applies to our principal executive, financial, and accounting officers. A copy of our code of conduct can be obtained free of charge by contacting us directly at:

Investor Relations

11935 Riley

Overland Park, KS 66213

913.338.1000

Email: ir@bankbv.com

We intend to disclose any amendments to, or waivers from, any provision of our code of conduct that applies to our chief executive officer, chief financial officer, or chief accounting officer by posting such information to our website located at www.BankBV.com.

Item 11:

Executive Compensation

This information is included in the Company’s Proxy Statement for the 2012 Annual Meeting of Stockholders and is hereby incorporated by reference.

Item 12:

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

This information is included in the Company’s Proxy Statement for the 2012 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, 2011, the Bank had aggregate loans outstanding to such persons of approximately $13.1 million, which represented 32.32% of our stockholders’ equity of $40.5 million on that date. These loans at the time of origination:

•

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.

Information regarding Director Independence is included in the Company’s Proxy Statement for the 2012 Annual Meeting of Stockholders and is hereby incorporated by reference.

Item 14:

Principal Accounting Fees and Services

This information is included in the Company’s Proxy Statement for the 2012 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

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 22, 2012	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 22, 2012	By:	/s/ Robert D. Regnier
		Robert D. Regnier, President,
		Chief Executive Officer and Director
		(Principal Executive Officer)

Date: March 22, 2012	By:	/s/ Mark A. Fortino
		Mark A. Fortino, Chief Financial Officer
		(Principal Financial and Accounting Officer)

Date: March 22, 2012	By:	/s/ Donald H. Alexander
		Donald H. Alexander, Director

Date: March 22, 2012	By:	/s/ Michael J. Brown
		Michael J. Brown, Director

Date: March 22, 2012	By:	/s/ Robert D. Taylor
		Robert D. Taylor, Director


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 Businessmen’s Assurance Company of America, dated July 15, 1994. *

	10.3	Assignment of Leases and Rents between Blue Valley Building and Businessmen’s Assurance Company of America dated July 15, 1994. *

	10.4	Line of Credit Note with JP Morgan Chase dated June 15, 2005 ****

	10.5	Term Note with JP Morgan Chase dated June 15, 2005 ****


	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-16.

	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.

	101.			Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flow and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text*******

	*			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.
	*******			As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended.

BLUE VALLEY BAN CORP.

DECEMBER 31, 2011, 2010 AND 2009

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES


	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		F-2

CONSOLIDATED FINANCIAL STATEMENTS

Balance Sheets		F-3
Statements of Operations		F-5
Statements of Stockholders’ Equity		F-6
Statements of Cash Flows		F-7
Notes to Financial Statements		F-9

F-1

Report of Independent Registered Public Accounting Firm

Audit Committee,

Board of Directors and Stockholders

Blue Valley Ban Corp.

Overland Park, Kansas

We have audited the accompanying consolidated balance sheets of Blue Valley Ban Corp. (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits also included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Blue Valley Ban Corp. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

/s/ BKD, LLP

Kansas City, Missouri

March 22, 2012

F-2

BLUE VALLEY BAN CORP.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2011 AND 2010

(In thousands, except share data)

ASSETS


	2011		2010
Cash and due from banks	$	23,480	$	37,255
Interest bearing deposits in other financial institutions		76,419		67,526
Federal funds sold		—		10,000

Cash and cash equivalents		99,899		114,781
Available-for-sale securities		61,790		63,640
Mortgage loans held for sale, fair value		5,686		8,162
Loans, net of allowance for loan losses of $13,189 and $14,731 in 2011 and 2010, respectively		425,654		477,723
Premises and equipment, net		15,897		16,239
Foreclosed assets held for sale, net		29,246		20,144
Interest receivable		1,573		1,783
Deferred income taxes		911		10,976
Prepaid expenses and other assets		6,106		2,026
Federal Home Loan Bank stock, Federal Reserve Bank stock, and other securities		7,369		7,163
Core deposit intangible asset, at amortized cost		321		464

Total assets	$	654,452	$	723,101

See Notes to Consolidated Financial Statements

F-3

BLUE VALLEY BAN CORP.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2011 AND 2010

(In thousands, except share data)

LIABILITIES AND STOCKHOLDERS’ EQUITY


	2011		2010
LIABILITIES
Deposits
Demand	$	100,842	$	100,975
Savings, NOW and money market		222,984		218,407
Time		166,587		221,836

Total deposits		490,413

BLUE VALLEY BAN CORP 10-K