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, 2013

[ ]	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 [Ö ]

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 [Ö ] 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 [Ö] 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 [Ö] 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. [Ö]

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 [Ö ]

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

As of February 28, 2014 1,807,988 shares of the Registrant’s common stock were held by non-affiliates. The aggregate market value of these common shares, computed based on the February 28, 2014 closing price of the stock, was approximately $17.0 million. As of February 28, 2012 the registrant had 4,593,690 shares of Common Stock ($1.00 par value) outstanding.

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, references to “we,” “us,” “our,” “Company” and “Blue Valley” refer to Blue Valley Ban Corp., a Kansas corporation unless the context otherwise requires or where otherwise indicated. References to the “Bank” refer to the Company’s primary wholly-owned subsidiary, Bank of Blue Valley.

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

The Bank operates a total of five banking center locations in Johnson County, Kansas, including our main office, which includes a lobby banking center in Overland Park, as well as full-service offices 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. In addition, the Bank infrequently engages in lease financing and provides consumer lending. We strive to identify, develop and maintain diversified lines of business that provide acceptable risk-adjusted returns.

We seek to develop lines of business that diversify the Bank’s revenue sources, increase the Bank’s non-interest income and offer additional value-added services to the Bank’s 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 Bank derives non-interest income by providing mortgage origination, deposit and cash management services, as well as trust and investment brokerage services.

In addition to the Bank, we have 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 (“Subordinated Debentures”).

Our principal executive offices are located at 11935 Riley, Overland Park, Kansas 66213, 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 Bank 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. We believe that coupling our strategy of providing exceptional customer service and local decision making with attractive market demographics has led to the historical growth of our total assets and deposits.

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, 2013, total deposits in Johnson County, including those of banks, thrifts and credit unions, were approximately $15.2 billion, which represented 23.53% of total deposits in the state of Kansas and 33.30% of total deposits in the Kansas City MSA. We have less than 1% share of the deposits in the Kansas City MSA and approximately 3.00% of the total deposits in Johnson County, Kansas.

As our founders anticipated, the trade area surrounding our main banking facility in Overland Park, Kansas has become one of the most highly developed retail areas in the Kansas City MSA. Our Olathe, Kansas facility is located approximately 10 miles southwest of our main office. We opened our Olathe branch in 1994 when we acquired the deposits of the Olathe branch of a failed savings and loan association. We made this acquisition because it was located in a contiguous market area and we believed that it represented a stable deposit base. In 2001, the operations of this branch were moved across the street into a more suitable location which the Bank acquired. The Shawnee, Kansas banking facility is approximately 20 miles northwest of our headquarters location. We opened our Shawnee grocery branch for the convenience of our existing customers in Shawnee, and to expand our market presence in Shawnee. During the first quarter of 2001, construction of our free-standing banking facility in Shawnee, Kansas was completed and operations commenced. The Leawood, Kansas banking facility is approximately 5 miles southeast of our headquarters location. We opened our Leawood grocery branch during October of 2002 to expand our market presence in Leawood. In 2002, we also acquired land for a 20,000 square foot branch and office building in Leawood. In the second quarter of 2004 we completed construction of our freestanding banking facility in Leawood and operations commenced in that facility. During 2003 we acquired an office building in Overland Park, Kansas approximately 1 mile northwest of our headquarters location. During 2010, the Company listed the office building for lease or possible sale. In addition to leasing space at this location to tenants, we have currently consolidated our bank operations at this location. The Lenexa, Kansas banking facility is approximately 7 miles northwest of our headquarters location. The Lenexa facility was opened in February 2007 when we acquired Unison Bancorp, Inc., and its subsidiary, Western National Bank. We made this acquisition to continue our expansion in Johnson County and to establish our first presence in the Lenexa market.

Lending Activities

Overview. Our principal loan categories include commercial, commercial real estate, construction, home equity and residential mortgages. We also offer a variety of consumer loans and infrequently engage in lease financing. Our primary source of interest income is interest earned on our loan portfolio. As of December 31, 2013, our loans represented approximately 68.10% of our total assets, our legal lending limit to any one borrower was $19.0 million, and our largest single borrower as of that date had outstanding loans of $14.0 million.

From the Company’s inception, we were successful in expanding our loan portfolio because of the commitment of our staff and the economic growth in our area of operation. Our staff has significant experience in lending and has been successful in offering our products to both potential and existing customers. We believe that we have been successful in maintaining our customers because of our staff’s attentiveness to their financial needs and the development of professional relationships with them. We strive to become a strategic business partner with our customers, not just a source of funds.

We conduct our lending activities pursuant to the lending administration policies adopted by our Board of Directors. These policies currently require the approval of our loan committee of all commercial credits in excess of $1.5 million and all real estate credits in excess of $2.5 million. Commercial loans up to $1.5 million and real estate loans up to $2.5 million can generally be approved by the Bank’s President with two loan administration officers.

Our management information systems and loan review policies are designed to monitor lending sufficiently to ensure adherence to our loan policies. The following table shows the composition of our loan portfolio at December 31, 2013.

LOAN PORTFOLIO

	As of December 31, 2013
	Amount		Percent
	(In thousands)
Commercial	$	120,283		29.00	%
Commercial real estate		145,045		34.97
Construction		44,806		10.80
Residential real estate		44,771		10.79
Home equity		43,169		10.41
Consumer		8,885		2.14
Lease financing		7,836		1.89
Total loans and leases		414,795		100.00	%
Less allowance for loan losses		8,992
Loans, net of allowance for loan losses	$	405,803

Commercial loans. As of December 31, 2013, approximately $120.3 million, or 29.00%, 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 business development efforts of the Bank’s seasoned commercial lending staff, our complementary product and services mix 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 historically 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 primarily firms engaged in manufacturing, service, retail, construction, distribution and sales with significant operations in our market areas. The Bank’s commercial loans are primarily secured by real estate, accounts receivable, inventory and equipment, and the Bank may seek to obtain guarantees from principal parties related to the borrower for its commercial loans. The Bank primarily underwrites its commercial loans on the basis of the borrower’s cash flow, financial condition and ability to service the debt, as well as the value of any underlying collateral and the financial capacity of any guarantors.

Included in commercial loans are Small Business Administration (SBA) loans which totaled approximately $3.0 million, or 2.49% of commercial loans, at December 31, 2013. In the event of default, the SBA guarantees the repayment of a portion of the principal on these loans, plus accrued interest on the guaranteed portion of the loan. Of the $3.0 million in SBA loans, $2.2 million was government guaranteed. 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 mitigate these risks, we seek to understand the business of each borrower, place appropriate value on any guarantee or collateral pledged to secure the loan, and govern the advance and repayment of principal as well as structure the loan amortization to maintain the adequacy of 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 commercial facilities, retail and office buildings and churches. As of December 31, 2013, approximately $145.0 million, or 34.97% 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 securing the loan, the cash flow and financial condition of the borrowing entity and property securing the loan, and the financial condition and capacity of guarantors.

Risks inherent in commercial real estate lending are related to the market value of the property securing the loan, the underlying cash flows, secondary repayment sources and documentation. Commercial real estate lending generally involves more risk than residential real estate lending because loan balances may be greater and repayment is dependent on the cash flows from the property securing the loan and/or the borrower’s operations. We attempt to mitigate these risks by carefully assessing property values, analyzing the primary source(s) of cash flow servicing the loan, analyzing financial condition and capacity of guarantors and adhering to our lending and underwriting policies and procedures.

Construction loans. Our construction loans include loans to home building contractors and other companies and consumers for the construction of single-family and multi-family properties and commercial buildings, such as retail and office buildings as well as land development. As of December 31, 2013, approximately $44.8 million, or 10.80% of our loan portfolio, represented real estate construction loans. The builder and developer loan portfolio has been a consistent material 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 select builders. Construction loans are made to qualified developers and builders to develop land for construction of residential and commercial buildings as well as 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 reputation, experience, financial condition and capacity of the borrowing entity, the ratio of the loan balance to the appraised value of the property securing the loan, and general conditions of the real estate market with respect to the subdivision and surrounding area obtained from an independent third party. Construction loans are also made to individuals for houses to be constructed by builders with whom the Bank generally has an existing relationship. Such loans are made on the basis of the borrower’s financial condition and capacity, the loan to value ratio, the reputation of the builder, and the borrower’s pre-qualification for permanent financing. During the four years ending December 31, 2012, the Bank had experienced a decline in originations of construction loans from levels experienced previous to that period, specifically in residential real estate construction and land development, as a result of the continued decline in the real estate industry and the continued slowdown in new housing construction. During 2013, improved economic conditions have stabilized this decline.

Risks related to construction lending arise from potential decline in the market value for the completed project, reasonableness of the construction budget, ability of the borrower to fund unforeseen cost variances over the construction budget, and the borrower’s ability to liquidate and repay the loan at a point when the loan-to-value ratio is the greatest. Among other factors, the Bank seeks to manage these risks by ensuring, throughout the construction process, that the loan to value ratio of the loan does not exceed acceptable levels, ensuring that funds disbursed are within parameters set by the original construction budget, and by properly documenting and analyzing each construction draw.

Residential real estate loans. Our residential real estate loan portfolio consists primarily of first and second mortgage loans secured by residential properties. As of December 31, 2013, $44.8 million, or 10.79%, of our loan portfolio consisted of residential mortgage loans. The terms of these loans typically include monthly payments based on a 15 to 30 year amortization with 3 to 7 year balloon payments to mitigate interest rate risk, and they accrue interest at a fixed or variable rate. These products and terms enable us to offer credit to individuals who are self-employed or have significant income from S-corporations, limited liability companies, 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 the years ending December 31, 2013 and 2012, we originated approximately $53.3 million and $83.5 million, respectively, of residential mortgage loans held for sale, and we sold approximately $59.5 million and $81.5 million, respectively, in the secondary market. We originate conventional first mortgage loans through referrals from real estate brokers, builders, developers and prior customers as well as through our Internet websites. 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 typically 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 other credit information gathered 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 typically 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 from the various secondary market investors for cash on a limited recourse basis. Consequently, foreclosure losses on all sold loans are primarily the responsibility of the investor and not that of the Bank. In our recent experience, the Bank has not been required to repurchase significant amounts of loans. The Bank did not repurchase any loans during the years ending December 31, 2013 or December 31, 2012, and during the year ending December 31, 2011, the Company repurchased one loan from an investor for which no losses have been recognized.

As with other loans to individuals, the risks related to residential mortgage loans primarily include the sufficiency of the value of collateral securing the loan and the financial condition and capacity of the borrower. The Bank attempts to manage these risks by performing a pre-funding underwriting that includes analyzing, verifying and documenting the borrower’s credit qualifications, employment stability, monthly income, identification and verification of the source and amount of down payments as well as analyzing and documenting the value of the collateral.

Home equity loans. As of December 31, 2013, our home equity loans totaled $43.2 million, or 10.41% of our 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 capacity of the borrower. The Bank attempts to mitigate these risks by carefully analyzing, verifying and documenting the borrower’s credit qualifications, employment stability, monthly income, and understanding and documenting the value of the collateral.

Consumer loans. As of December 31, 2013, our consumer loans totaled $8.9 million, or 2.14% 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 loans secured by automobiles and recreational vehicles, as well as home improvement loans, unsecured lines of credit and other loans to individuals. Consumer loans are subject to the same risks as other loans to individuals, including the financial condition and capacity 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 analyzing, verifying and documenting the borrower’s credit qualifications and monthly income as well as analyzing and documenting the value of the collateral.

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, 2013, our lease portfolio totaled $7.8 million, or 1.89%, 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 on an infrequent basis for customers who maintain an ongoing relationship with the Bank through participation in other Bank product offerings. Our leases are generally underwritten based on several factors, including the overall credit worthiness, experience, current financial condition and capacity 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 collateral securing the lease 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 lease amortization to ensure that the value of the collateral exceeds the lease balance during the term of the lease.

Investment Activities

The objectives of our investment policies are to:

· secure the safety of principal;

· provide adequate liquidity;

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

· maximize after-tax income.

We conduct our investing activities pursuant to an Investment Policy adopted by our Board of Directors. The Investment Policy establishes guidelines and objectives for permissible types of investments, liquidity management, investment maturities, and investment portfolio administration. The Company invests primarily in obligations of agencies of the United States and bank qualified municipal bonds issued by state and local political subdivisions. Although direct obligations of the United States are permitted by our Investment Policy, we currently do not hold any in our portfolio. In order to ensure the safety of principal, 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 may enter into federal funds transactions with our principal correspondent banks, and depending on our liquidity position, may 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 financial institution; while conversely, the purchase of federal funds is effectively a short-term loan from another financial institution 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 introduced its Performance Checking product in 2007, which 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 certain signature based debit card transactional requirements and at least one direct deposit or ACH debit within 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 certain signature based debit card transactional requirements, the dollar amount of signature based debit card transactions and the customer’s acceptance of e-statements. The Bank realizes non-interest income from the signature based debit card transactions that, when netted against the cost of the 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 provide 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 in comparison to alternative funding sources. In setting deposit rates, management also considers profitability, the matching of term lengths of funding sources 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”) and Promontory Interfinancial Network Insured Cash Sweep (“ICS”) service which effectively provides depositors with Federal Deposit Insurance Corporation (“FDIC”) insurance on amounts in excess of FDIC insurance coverage limits, which is currently $250,000 per insured capacity, of

certificate of deposits through CDARS, and demand and money market deposit accounts through ICS. CDARS and ICS allows the Bank to break large deposits into smaller amounts and place them in a network of other CDARS and ICS banks to reach full FDIC insurance coverage on the entire deposit account balance.

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, 2013, the Bank’s trust department administered 285 accounts, with assets under administration of approximately $155.3 million. Trust services provide the Bank with a source of fee income and additional deposits. For the years ended December 31, 2013, 2012 and 2011, the amount of our gross fee income from trust services was $560,000, $543,000 and $527,000, respectively.

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. Currently, four individuals responsible for providing these services are joint employees of the Bank and the registered broker-dealer. As of December 31, 2013, the Bank’s investment brokerage services had assets under administration of approximately $104.0 million. Investment brokerage services provide a source of fee income for the Bank. For the years ended December 31, 2013, 2012 and 2011, the amount of our fee income generated from investment brokerage services was $500,000, $434,000 and $387,000, respectively.

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 and accessibility of products, services and delivery channels. 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, 2013 the Bank had the following registered trademarks:

BANK OF BLUE VALLEY

DEPOSIT I.T.

INTERNETMORTGAGE.COM

Employees

At December 31, 2013, 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, 2013, and their principal positions.

Name	Age	Positions

Directors

Robert D. Regnier	65	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	75	Director of Blue Valley Ban Corp. and the Bank
James Gegg	62	Director of Blue Valley Ban Corp.
Robert D. Taylor	66	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	78	Director of the Bank
Richard L. Bond	78	Director of the Bank
Suzanne E. Dotson	66	Director of the Bank
Charles H. Hunter	71	Director of the Bank

Executive Officers who are not Directors

Mark A. Fortino	47	Executive Vice President and Chief Financial Officer of the Bank; Chief Financial Officer of Blue Valley Ban Corp.
Bruce A. Easterly	54	Executive Vice President – Chief Lending Officer of the Bank
Bonnie M. McConnaughy	54	Senior Vice President – Deposit Operations and e-Business Solutions of the Bank

Available Information

Our website address is http://www.bankbv.com. Information included to 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 can be obtained free of charge from our website.

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.

Permanently increases the FDIC deposit insurance per depositor from $100,000 to $250,000 and provides unlimited deposit coverage for non-interest bearing transaction accounts at all insured depository institutions until December 31, 2012.

Repeals the federal prohibitions on the payment of interest on demand deposits, thus permitting depository institutions to pay interest on business transactions and other accounts.

Requires the Federal Reserve to issue rules to limit the amount of any debit card interchange fee that an issuer may receive or charge with respect to electronic debit card transactions to be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. Cards issued by banks with less than $10 billion in assets are to be exempt from this requirement, thus Blue Valley Ban Corp. would be exempt from this requirement.

Implements corporate governance revisions for public companies, including proxy access requirements for stockholders and stockholder non-binding vote on executive compensation and “golden parachute’ payments.

Restricts the ability of banks to apply trust preferred securities toward regulatory capital requirements. However, Tier 1 Capital treatment for trust preferred securities issued before May 19, 2010 is grandfathered for bank holding companies with less than $15 billion in total assets. Blue Valley Ban Corp.’s trust preferred issuances are grandfathered under this provision.

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.

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 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 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 Troubled Asset Relief Program (“TARP”) Capital Purchase Program (“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. On October 21, 2013, the Fixed Rate Cumulative Preferred Stock was auctioned by the Treasury for $21.26 million. As a result, the Fixed Rate Cumulative Preferred Stock is now held by third party investors unaffiliated with the U.S. government and except for certain certification and disclosure requirements we are no longer subject to the rules and regulations that were established with the CPP.

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.

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 Treasury, 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.

Basel III Capital Requirements. On July 2, 2013, the Board of Governors of the Federal Reserve System (“Board”) approved a final rule to establish a new comprehensive regulatory capital framework for all US banking organizations. On July 9, 2013, the final rule was approved (as an interim final rule) by the Federal Deposit Insurance Corporation (“FDIC”). The Regulatory Capital Framework (Basel III) implements several changes to the US regulatory capital framework required by the Dodd-Frank Act. The new US capital framework imposes higher minimum capital requirements, additional capital buffers above those minimum requirements, a more restrictive definition of capital, and higher risk weights for various enumerated classifications of assets, the combined impact of which effectively results in substantially more demanding capital standards for US banking organizations.

The Basel III final rule establishes a new common equity tier 1 capital (“CET1”) requirement, an increase in the tier 1 capital requirement from 4.0% to 6.0% and maintains the current 8.0% total capital requirement. The new CET1 and minimum tier 1 capital requirements are effective January 1, 2015. In addition to these minimal capital ratios, the Basel final rule requires that all banking organizations maintain a “capital conservation buffer” consisting of common equity tier 1 capital (“CET1”) in an amount equal to 2.5% of risk-weighted assets in order to avoid restrictions on their ability to make capital distributions and to pay certain discretionary bonus payments to executive officers. Consequently, the capital conservation buffer effectively increases the minimum CET1 capital, tier 1 capital, and total capital requirements for US banking organizations to 7.0%, 8.5%, and 10.5%, respectively. Banking organizations with capital levels that fall within the buffer will be required to limit dividends, share repurchases or redemptions (unless replaced within the same calendar quarter by capital instruments of equal or higher quality), and discretionary bonus payments. The capital conservation buffer is phased in over a 5-year period beginning January 1, 2016.

As required by Dodd-Frank, the Basel III final rule requires that capital instruments such as trust preferred securities and cumulative preferred shares be phased-out of tier 1 capital by January 1, 2016, for banking organizations that had $15 billion or more in total consolidated assets as of December 31, 2009 and permanently grandfathers as tier 1 capital such instruments issued by these smaller entities prior to May 19, 2010 (provided they do not exceed 25 percent of tier 1 capital). Our Subordinated Debentures are grandfathered under this provision.

The Basel III final rule provides banking organizations under $250 billion in total consolidated assets or under $10 billion in foreign exposures with a one-time “opt-out” right to continue excluding Accumulated Other Comprehensive Income from CET1 capital. The election to opt out must be made on the banking organization’s first Call Report filed after January 1, 2015.

The Basel III final rule requires that goodwill and other intangible assets (other than mortgage servicing assets), net of associated deferred tax liabilities (“DTLs”), be deducted from CET1 capital. Additionally, deferred tax assets (“DTAs”) that arise from net operating loss and tax credit carryforwards, net of associated DTLs and valuation allowances, are fully deducted from CET1 capital. However, DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, along with mortgage servicing assets and “significant” (defined as greater than 10% of the issued and outstanding common stock of the unconsolidated financial institution) investments in the common stock of unconsolidated “financial institutions” are partially includible in CET1 capital, subject to deductions defined in the final rule.

Based on a preliminary assessment of the impact of Basel III and in consideration of the capital plan for the Company, management of the Company anticipates that the Company and Bank will be in compliance with the Basel III guidelines within the implementation periods.

Bank Holding Company Regulation

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

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

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

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

Merging or consolidating with another bank holding company.

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

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

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

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

Bank holding companies may, however, engage in businesses found by the Federal Reserve to be “financial in nature,” as described above. Finally, subject to certain exceptions, the Bank Holding Company Act, the Change in Bank Control Act, and the Federal 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, 2013, 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.

As long as the Fixed Rate Cumulative Preferred Stock 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 has deferred the payment of quarterly dividends on the Fixed Rate Cumulative Preferred Stock since May 15, 2009. The Fixed Rate Cumulative Preferred Stock carries a 5% per year cumulative preferred dividend rate, payable quarterly. The dividend rate increases to 9% beginning with the May 15, 2014 quarterly payment, which will cause our quarterly dividend to increase from $271,875 to $493,375. Dividends compound if they accrue and are not paid. Failure by the Company to pay dividends on the Fixed Rate Cumulative Preferred Stock 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 Fixed Rate Cumulative Preferred Stock 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, 2013, the Company has deferred 19 dividend payments. In 2012, the holder of the Fixed Rate Cumulative Preferred Stock, elected James L. Gegg to serve on the Company’s Board of Directors. This board seat was terminated in 2013 upon completion of the auction of our Fixed Rate Cumulative Preferred Stock by the Treasury to private investors, almost all of whom have waived their right to elect directors. In recognition of Mr. Gegg’s valuable contributions, the Board of Directors subsequently appointed Mr. Gegg to the Board on a full-time basis.

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 related 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 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 substantially complied with all terms of the written agreement.

As a result of a November 12, 2012 regulatory examination, which noted the improved financial condition of the Company and the Bank, satisfactory risk management processes, and senior management oversight, as well as full compliance with all actionable provisions of the Written Agreement, the Federal Reserve Bank of Kansas City terminated the November 4, 2009 Written Agreement and, effective January 11, 2013, replaced it with a Memorandum of Understanding. The MOU’s purpose is to maintain the financial soundness of the Company and the Bank, and provides among other things, the Company and the Bank will continue to work on improvement of asset quality, maintain an adequate allowance for loan losses, maintain adequate capital, improve earnings, and not declare or pay any dividends or increase or guarantee any debt without prior written approval from the Federal Reserve Bank and the OSBC.

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 recommend rulemaking if required.

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. FICO assessment rate is adjusted quarterly to reflect changes in the assessment bases of the fund. 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:

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

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

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

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

“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, 2013, 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:

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

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

Restricting transactions with affiliates;

Restricting the interest rate the institution may pay on deposits;

Requiring that senior executive officers or directors be dismissed;

Requiring the institution to divest subsidiaries;

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

Appointing a receiver for the institution.

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

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 August 13, 2012, 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. Effective December 27, 2012, the Federal Reserve requires all depository institutions to maintain reserves against their transaction accounts. For net transaction accounts, the first $12.4 million is exempt from reserve requirements. A three percent reserve ratio will be assessed on net transaction accounts over $12.4 million up to and including $79.5 million. A ten percent reserve ratio is assessed on net transaction accounts in excess of $79.5 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

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 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 are cautionary statements identifying important factors that could cause the Company’s actual results to differ from those expressed in any forward-looking statements.

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

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

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

We are a relatively small organization and depend on the services of all of our employees. Our growth and development to date has depended in a large part on a few key employees who have primary responsibility for maintaining personal relationships with our largest customers. The unexpected loss of services of one or more of these key employees could have a material adverse effect on our operations. Our key employees are Robert D. Regnier, Mark A. Fortino, Bruce A. Easterly, and Bonnie M. McConnaughy. Each of these persons is an officer of the Bank. We do not have written employment or non-compete agreements with any of these key employees; however, if employment was terminated, Mr. Regnier would lose 8,930 Blue Valley Ban Corp. Restricted Stock Awards and Mr. Fortino, Mr. Easterly, and Ms. McConnaughy would each lose 1,000 of Blue Valley Ban Corp. Restricted Stock Awards. We carry bank owned life insurance policies on each of these executive officers.

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. As discussed on page [52], we use an asset/liability modeling system to analyze our current sensitivity to instantaneous and permanent changes in interest rates. The system simulates our 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. Among other strategies, we attempt to mitigate the risk from increases in interest rates by maintaining a significant level of adjustable rate loans in our portfolio, and attempt to mitigate the risk from declines in interest rates by implementing rate floors for our adjustable rate loan portfolio and managing our level of fixed rate liabilities. As illustrated in the Interest-Rate Sensitivity Analysis on page [54], as of December 31, 2013, approximately 55% of our loan portfolio has variable rates, and approximately 50% of our loan portfolio matures or reprices in 90 days or less. As a result of the number of adjustable rate loans in our portfolio, increases in interest rates will expose us to greater risk of delinquencies and defaults on such loans, which could lead to decreased earnings. In addition, increased interest rates may decrease the number of loans that we originate, which could also lead to decreased earnings.

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 medium- and small-sized businesses that are the focus of our customer base. Adverse changes in economic conditions in the Kansas City MSA, including Johnson County, Kansas, could impair our ability to collect loans, reduce our growth rate and have a negative effect on our overall financial condition.

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

Some borrowers may not repay loans that we make to them. This risk is inherent in the banking business. Like all financial institutions, the Company maintains an allowance for loan losses to absorb probable loan losses in our loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio credit quality, economic and regulatory conditions and unidentified losses inherent in the current loan portfolio. However, we cannot predict loan losses with certainty, and we cannot assure you that our allowance will be sufficient to cover our future loan losses. Loan losses in excess of our reserves would have a material adverse effect on our financial condition and results of operations.

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.

Our concentration of loans secured by real estate may continue to adversely affect our financial condition and results of operations.

As of December 31, 2013, approximately $145.0 million, or 34.97% of our loan portfolio, represented commercial real estate loans, approximately $44.8 million, or 10.80% represented construction loans, approximately $44.8 million, or 10.79%, of our loan portfolio consisted of residential mortgage loans and approximately $43.2 million, or 10.41% represented home equity loans. A downturn in the real estate market, the deterioration in the value of collateral, and the local and national economic recessions would adversely affect our customers’ ability to sell or refinance real estate and repay their loans. In the event we are required to foreclose on a property securing one of our mortgage loans, or otherwise pursue remedies in order to protect our investment, we may be unable to recover enough value from the collateral to prevent a loss.

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 Bank is subject to possible future repurchase and indemnification demands on mortgage loans previously sold to investors.

The Bank is subject to possible future repurchase and indemnification demands for future losses realized by investors for alleged breaches of representations and warranties on mortgage loans previously sold to investors. The financial services industry has been materially and adversely impacted by a prolonged period of negative economic conditions, including, but not limited to, high levels of unemployment, declines in asset values, as well as delinquencies and defaults on loans. These defaults on loans include, but are not limited to, possible “strategic defaults” which are characterized by borrowers that appear to have the financial means to meet the debt service requirements of their loans, however, elect not to do so because the value of the assets securing their debts may have declined below the amount of the debt or in consideration of statutory restrictions which impede a lender’s ability to exercise prudent collection efforts or foreclose in an efficient manner. The Company’s consolidated financial statements have been prepared using values and information currently available to the Company; however, there can be no assurance that the impact of these conditions will cease or reverse to mitigate possible risk of future potential losses by the Bank.

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.

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

Blue Valley and the Bank are subject to extensive governmental regulation. Blue Valley, as a bank holding company, is regulated primarily by the Federal Reserve Bank. The Bank is a commercial bank chartered by the State of Kansas and regulated by the Federal Reserve, the Federal Deposit Insurance Corporation, and the OSBC. These federal and state bank regulators have the ability, should the situation require, to impose significant regulatory and operational restrictions as well as levy monetary fines and/or penalties upon us and the Bank. Any such restrictions imposed by federal and state bank regulators could affect the profitability of the Blue Valley and the Bank.

The Company and Bank have entered into an agreement with the Federal Reserve Bank of Kansas City, which requires us to dedicate a significant amount of resources to complying with the agreement and may have a material adverse effect on our operations and the value of our securities.

As a result of a November 12, 2012 regulatory examination, which noted the improved financial condition of the Company and the Bank, satisfactory risk management processes, and senior management oversight, as well as full compliance with all actionable provisions of the Written Agreement, the Federal Reserve Bank of Kansas City terminated the November 4, 2009 Written Agreement and, effective January 11, 2013, replaced it with the MOU. The MOU’s purpose is to maintain the financial soundness of the Company and the Bank, and provides among other things, the Company and the Bank will continue to work on improvement of asset quality, maintain an adequate allowance for loan losses, maintain adequate capital, improve earnings, and not declare or pay any dividends or increase or guarantee any debt without prior written approval from the Federal Reserve Bank and the OSBC.

If the Company and Bank do not comply with the MOU, we could be subject to the assessment of civil money penalties, further regulatory sanctions, or other regulatory enforcement actions.

We are not paying dividends on our common stock and are deferring distributions on our preferred stock, had previously deferred distributions on our subordinated debentures, and are otherwise restricted from paying cash dividends on our common stock. The failure to resume paying dividends and distributions may adversely affect us.

Under the terms of the MOU, prior regulatory approval is currently required before the payment of any dividends. The Company relies on dividends from the Bank to assist in making debt service and dividend payments. There is no assurance that the Company will resume paying dividends on its common stock. Even if the Company resumes paying dividends, future payment of cash dividends on its common stock, if any, will be subject to the prior payment of any unpaid dividends and deferred distributions on the Subordinated Debentures and the Fixed Rate Cumulative Preferred Stock. Under the governing documents of our Subordinated Debentures issued by BVBC Capital Trust II and III, the quarterly payments since April 24, 2009 for BVBC Capital Trust II and since March 31, 2009 for BVBC Capital Trust III had been deferred through December 30, 2013. We had received regulatory approval and utilized the proceeds from the December 23, 2013 initial close of our December 2013 Offering to bring current all previously accrued and unpaid dividends and interest on our Subordinated Debentures issued by BVBC Capital Trust II and III prior to December 31, 2013. Subsequent to December 31, 2013, we received approval for the Bank to pay dividends to the Company to pay amounts needed to pay quarterly dividends due in March and April, 2014 for our Subordinated Debentures.

In addition, at the request of the Federal Reserve Bank of Kansas City, we have deferred the quarterly dividend payment on the Fixed Rate Cumulative Preferred Stock since May 15, 2009. The Fixed Rate Cumulative Preferred Stock carries a 5% per year cumulative preferred dividend rate, payable quarterly. The dividend rate increases to 9% beginning with the May 15, 2014 quarterly payment, which will cause our quarterly dividend to increase from $271,875 to $493,375. Dividends compound if they accrue and are not paid. Failure by us to pay the preferred share dividend is not an event of default and we have accrued for all deferred dividends and compounded interest through December 31, 2013. As of December 31, 2013 and December 31, 2012, we had accrued $5.8 million and $4.5 million, respectively, for dividends and interest on the Fixed Rate Cumulative Preferred Stock.

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 customers 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 mitigate damage caused by security breaches or viruses. To the extent that the Bank’s activities or the activities of its customers 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 and potential customers to lose confidence in the Bank’s systems and could adversely affect its reputation and its ability to retain and/or grow deposits

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, 2013	Occupancy
Overland Park Banking Center 11935 Riley Overland Park, KS *	1994	None	100%
Olathe Banking Center 1235 E. Santa Fe Olathe, KS **	2001	None	100%
Shawnee Banking Center 5520 Hedge Lane Terrace Shawnee, KS **	2001	None	100%
College Boulevard Office 7900 College Boulevard Overland Park, KS *	2003	None	24% by Bank and common area 65% by Sublessor 11% Marketed for Sublease
Leawood Banking Center 13401 Mission Road Leawood, KS *	2004	None	47% by Bank and common area 50% by Sublessor 3% Marketed for Sublease
Lenexa Banking Center 9500 Lackman Road Lenexa, KS **	2007	None	100%

* The building is owned by Blue Valley Building Corp.

** 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 (the “1934 Act”), as amended, as a result of a registration statement filed with the Securities and Exchange Commission in December, 2013 for a common stock rights offering that we completed during January 2014. On January 16, 2014, we filed a Form 15 with the Securities and Exchange Commission suspending our reporting obligations under the 1934 Act. Shares of our common stock are quoted on the OTCQB under the trading symbol “BVBC.” As of January 31, 2014, there were approximately 174 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 2012 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.

	2013				2012
Fiscal Quarter	High		Low		High		Low
First	$	9.50	$	4.50	$	5.50	$	3.85
Second		7.90		7.25		3.55		3.55
Third		7.55		6.26		4.49		4.00
Fourth		8.00		6.00		4.50		4.50

Dividends

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 dividends on our Preferred Shares or if we elect to defer interest payments on our outstanding junior subordinated debentures, we are prohibited from paying dividends on our common stock during such deferral. As a result of a Memoranda of Understanding (MOU) 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), the Company and Bank have 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. After that agreement is terminated, our Board of Directors anticipates restoration of 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. We have not declared or paid a cash dividend to our common stockholders since 2007, 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, 2013, 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, 2013, have been derived from our audited consolidated financial statements.

	As of and for the
	Year Ended December 31,
	2013			2012			2011			2010			2009
	(In thousands, except share and per share data)
Selected Statements of Operations Data
Interest and dividend income:
Interest and fees on loans.	$	20,800		$	22,852		$	25,277		$	28,011		$	33,996
Federal funds sold and other short-term investments		135			193			151			245			144
Available-for-sale securities		1,683			1,097			1,202			1,825			1,943
Dividends on Federal Home Loan Bank and Federal Reserve Bank Stock		239			241			225			222			211
Total interest and dividend income		22,857			24,383			26,855			30,303			36,294

Interest expense:
Interest-bearing demand deposits		313			700			1,611			2,343			2,589
Savings and money market deposit accounts		275			291			346			438			490
Other time deposits		1,661			2,487			3,755			7,746			10,742
Funds borrowed		3,222			3,714			3,543			3,836			4,166
Total interest expense		5,471			7,192			9,255			14,363			17,987
Net interest income		17,386			17,191			17,600			15,940			18,307
Provision for loan losses		950			1,200			3,300			3,095			21,635
Net interest income (loss) after provision for loan losses		16,436			15,991			14,300			12,845			(3,328	)

Non-interest income:
Loans held for sale fee income		1,456			2,447			2,120			3,506			2,785
NSF charges and service fees		968			980			944			1,062			1,472
Other service charges		2,478			2,472			2,276			2,021			1,778
Realized gains on available-for-sale securities		127			–			–			885			346
Other income		3,443			1,535			984			1,145			1,664
Total non-interest income		8,472			7,434			6,324			8,619			8,045

Non-interest expense:
Salaries and employee benefits		11,079			10,587			10,955			11,753			12,272
Net occupancy expense		2,620			2,568			2,599			2,756			2,811
Foreclosed assets expense		3,612			2,647			5,219			2,708			3,862
Other operating expense		6,855			7,506			7,851			8,550			8,896
Total non-interest expense		24,166			23,308			26,624			25,767			27,841
Income (loss) before income taxes		742			117			(6,000	)		(4,303	)		(23,124	)
Provision (benefit) for income taxes		(300	)		(150	)		9,823			(1,561	)		(8,514	)
Net Income (loss)		1,042			267			15,823			(2,742	)		(14,610	)
Dividends and accretion on preferred stock		1,104			1,106			1,106			1,105			1,045
Net loss available to common stockholders	$	(62	)	$	(839	)	$	(16,929	)	$	(3,847	)	$	(15,655	)

Per Share Data
Basic earnings	$	(0.02	)	$	(0.29	)	$	(6.03	)	$	(1.38	)	$	(5.68	)
Diluted earnings		(0.02	)		(0.29	)		(6.03	)		(1.38	)		(5.68	)
Dividends		0.00			0.00			0.00			0.00			0.00
Book value basic (at end of period)		4.73			6.18			6.60			12.66			14.09
Weighted average common shares outstanding:
Basic		2,930,115			2,855,566			2,806,299			2,773,039			2,754,419
Diluted		2,951,376			2,867,563			2,827,888			2,788,154			2,762,603
Dividend payout ratio		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%

	As of and for the
	Year Ended December 31,
	2013			2012			2011			2010			2009
Selected Balance Sheet Data
(at end of period):
Total available-for-sale securities	$	100,657		$	77,845		$	61,790		$	63,640		$	72,757
Total mortgage loans held for sale, fair value		1,438			7,621			5,686			8,162			8,752
Total loans		414,795			415,671			438,843			492,454			554,111
Total assets		609,086			657,005			654,452			723,101			773,967
Total deposits		448,368			484,466			490,413			541,218			590,110
Funds borrowed		110,222			122,779			115,806			118,505			118,208
Total stockholders’ equity		42,228			39,815			40,455			57,164			60,603
Trust assets under administration		155,315			140,976			129,580			125,702			105,071

Selected Financial Ratios and Other Data:
Performance Ratios:
Net interest margin (1)		3.13	%		2.92	%		2.91	%		2.23	%		2.43	%
Non-interest income to average assets		1.36			1.14			0.93			1.09			0.99
Non-interest expense to average assets		3.87			3.57			3.90			3.26			3.42
Net overhead ratio (2)		2.52			2.43			2.97			2.14			2.40
Efficiency ratio (3)		93.45			94.65			111.29			104.92			105.65
Return on average assets (4)		0.17			0.04			(2.32	)		(0.35	)		(1.79	)
Return on average equity (5)		(0.37	)		(4.97	)		(51.84	)		(10.25	)		(33.07	)

Asset Quality Ratios:
Non-performing loans to total loans		1.71	%		1.16	%		2.58	%		6.16	%		6.30	%
Allowance for possible loan losses to:
Total loans		2.17			2.18			3.01			2.99			3.61
Non-performing loans		126.55			187.23			116.46			48.53			57.33
Net charge-offs to average total loans		0.25			1.24			1.04			1.61			2.30
Non-performing loans to total assets		1.17			0.74			1.73			4.20			4.51
Non-performing assets to total assets		5.40			5.60			6.20			6.98			7.02
Foreclosed assets held for sale to non-performing assets		78.41			86.85			72.09			39.89			35.77
Texas Ratio (6)		45.81			49.16			52.59			54.91			54.90
Classified asset ratio (7)		64.61			73.69			96.68			107.84			129.10

Balance Sheet Ratios:
Loans to deposits		92.51	%		85.80	%		89.48	%		90.99	%		93.90	%
Average interest-earning assets to average interest-bearing liabilities		116.53			118.52			116.17			113.18			115.08

Capital Ratios:
Total equity to total assets		6.93	%		6.06	%		6.18	%		7.91	%		7.83	%
Total capital to risk-weighted assets ratio		13.90			12.01			12.08			12.66			12.54
Tier 1 capital to risk-weighted assets ratio		11.96			9.70			9.80			11.39			11.26
Tier 1 capital to average assets ratio		10.07			8.17			8.04			9.04			9.07
Average equity to average assets ratio		6.07			6.07			7.97			7.48			8.47

(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 loss available to common stockholders divided by average common equity.

(6)	The sum of non-performing assets and loans past due > 90 days divided by tangible equity capital plus the allowance for loan losses (Bank ratio).

(7)	Classified assets divided by the sum of Tier 1 Capital plus the allowance for loan losses (Bank ratio)

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

2012 was a pivotal year for us in terms of operating results and asset quality improvement, and these trends have continued through 2013. We recorded net income of $1.0 million (net loss available to common stockholders of $62,000 after dividends and accretion on preferred stock) compared to net income of $267,000 (net loss available to common stockholders of $839,000 after dividends and accretion on preferred stock) during the prior year period. Our net interest income increased $200,000, or 1.13%, to $17.4 million compared to $17.2 million in the prior year. Additionally, our asset quality has continued to improve, which was a contributing factor for our improved performance in 2013. Non-performing assets (non-accrual loans plus foreclosed assets held for sale) of $32.9 million as of December 31, 2013 were reduced by 10.51% from $36.8 million as of December 31, 2012 as a result of write-downs and sales of foreclosed assets held for sale, improving economic conditions and continued prudent credit administration by management. The improvements in the credit quality of our loan portfolio, in addition to reduction in the amount of loan losses charged off to the allowance for loan losses, precipitated a reduction in the recorded loan loss provision in 2013 to $950,000 compared to a provision of $1.2 million during the previous year. As a result of the improvement in our credit quality during 2013, we recorded negative provisions for loan losses of $1.7 million during the year, however, near the end of January, 2014, based on a review of updated financial information from the borrower and discussions with the borrower, we determined that the credit quality of a $5.0 million commercial loan relationship had deteriorated substantially in the previous period. This precipitated a downgrade to the loans in the relationship and necessitated that we record a $2.65 million provision as of December 31, 2013, resulting in a provision for loan losses of $950,000 for the year ending December 31, 2013. The recorded balance of foreclosed assets for sale declined to $25.8 million at December 31, 2013 from $31.9 million at December 31, 2012. We continue to actively market and manage these properties. For the year ended December 31, 2013, non-interest income increased 13.96% to $8.5 million from $7.4 million for the year ended December 31, 2012, and for the year ended December 31, 2013 non-interest expense increased 3.68% to $24.2 million from $23.3 million for the year ended December 31, 2012. Our loss per share on a diluted basis was $0.02 for the year ending December 31, 2013, an improvement compared to diluted loss per share of $0.29 for the year ended December 31, 2012. Our year to date returns on average assets and average common stockholders’ equity for 2013 were 0.17% and negative 0.37%, compared to 0.04% and negative 4.97%, respectively, for the year ended December 31, 2012.

Net interest income for the year ending December 31, 2013 was $17.4 million, a slight increase of $195,000 or 1.13%, compared to $17.2 million for 2012. Despite a decline in total average earning assets of approximately

$30.5 million or 5.16%, this relative stability of our net interest income resulted from the reduction in average balance of time deposits, our reduction in rates on deposits and investment of available liquidity to increase and diversify our investment portfolio. Total interest income declined by approximately $1.5 million or 6.26%. Our yield on interest earning assets, on a fully tax equivalent (FTE) basis, declined slightly, to 4.11% in 2013 compared to 4.14% in 2012. The $30.5 million decline in average earning assets in 2013 compared to 2012 was principally in our loan portfolio and other short-term investments, though some of the decline in these categories was offset by increases in our investment securities portfolio. Total interest expense declined by approximately $1.7 million or 23.61%. Average interest bearing liabilities declined by approximately $17.7 million or 3.55%. The decline in interest expense was a result of the decrease in average interest bearing liabilities plus a decrease in rates paid on deposits and securities sold under agreement to repurchase (“repo accounts”), included in other interest-bearing liabilities, in 2013 compared to 2012. As market rates have declined, we have continued to lower rates on deposit accounts and repo accounts to match the current deposit and repo account rates in our market. In addition, we had account balances from various previous time deposit promotions which, upon maturity, were either redeemed and the funds were withdrawn or were renewed at lower market rates. Recent increases in longer-term market interest rates have not had a material impact on our net interest income due to the repricing characteristics of our interest earning assets and interest-bearing liabilities, and the indices upon which their rates are derived. Future changes in interest rates can impact our operating performance and financial condition in diverse ways. 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. Our analysis of the impact of changes in interest rates on page [52] indicates that, at December 31, 2013, 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 the Bank’s asset sensitive position and loans repricing at a faster rate in a rising rate environment than our interest-bearing liabilities. In the decreasing rate scenarios, the adjustable rate assets (loans) reprice to lower rates faster than our liabilities, but our fixed-rate liabilities – long-term FHLBank 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 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.

Analysis of the credit quality of our loan portfolio and other factors used to determine the level of the Allowance for Loan Losses precipitated a provision for loan loss of $950,000 for 2013 compared to a provision for loan losses of $1.2 million in 2012. During 2013, we experienced a decline in the balance of the total loan portfolio as well as a relatively high ratio of net recoveries to loans charged off during the year compared to recent periods. The provision for loan losses recorded in 2012 was primarily related to declines in collateral values of commercial and commercial real estate loans.

Non-interest income increased 13.96% to $8.5 million in 2013 compared to $7.4 million in 2012. The increase in non-interest income resulted from our realization of approximately $1.0 million of income upon payment of the deferred interest due for BVBC Capital Trust III due to a change in assumptions in the calculation for interest due on the securities, an increase of $770,000 in gains realized on the sale of foreclosed assets held for sale and $127,000 of gains realized from the sale of available for sale investment securities, which were offset by a decline of approximately $990,000 or 41.50% in fee income from loans held for sale. Fluctuations in mortgage interest rates during 2013 resulted in a decline in mortgage refinance volume across our industry, which negatively impacted our mortgage operations and resulted in a decline in our loans held for sale fee income in 2013.

Non-interest expense increased 3.68% to $24.1 million in 2013 from $23.3 million in 2012. The increase in non-interest expense was primarily attributed to increases of $965,000 or 36.46%, in foreclosed assets expense, $492,000, or 4.65%, in salaries and employee benefits expenses, partially offset by a decrease of $651,000 in other operating expense. We recorded a provision for losses on foreclosed assets held for sale of $2.1 million in 2013, compared to a provision of $866,000 in 2012. This increase is principally the result of the write-down of the recorded value of a single unique foreclosed asset held for sale. Other expenses related to foreclosed assets held for sale declined $316,000, or 17.75% in 2013. The decline in other operating expense in 2013 was primarily the result of a decline in FDIC premiums and regulatory fees expense, which have primarily resulted from improvements in our asset quality, as well as a decline in professional fees resulting from our decision to discontinue filing reports with the Securities and Exchange Commission as well as improvements in asset quality.

Total assets at December 31, 2013 were $609.1 million, a decrease of $47.9 million, or 7.29%, from $657.0 million at December 31, 2012. Deposits at December 31, 2013 were $448.4 million compared with $484.5 million at December 31, 2012, a decrease of $36.1 million, or 7.45%. Stockholders’ equity at December 31, 2013 was $42.2 million compared with $39.8 million at December 31, 2012, an increase of $2.4 million, or 6.06%.

Loans at December 31, 2013 totaled $414.8 million, a decrease of $876,000, or 0.21%, compared to December 31, 2012. The loan to deposit ratio at December 31, 2013 was 92.51% compared to 85.80% at December 31, 2012. 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 32.

Years ended December 31, 2013 and 2012. FTE net interest income increased to $17.6 million for 2013 from $17.2 million in 2012, an increase of $308,000, or 1.79%.

FTE interest income for 2013 was $23.0 million, a decrease of $1.4 million, or 5.78%, from $24.4 million in 2012. The decrease was a result of a slight overall decline in yields on average earning assets, a decline in the average earning asset volume and a change in the earning asset mix. The overall yield on average earning assets declined slightly by 3 basis points to 4.11% in 2013 compared to 4.14% in 2012. This decline was realized primarily in the yield on loans, which declined 23 basis points. In addition, the average outstanding balance of loans decreased $20.1 million in 2013, or 4.68%, compared to 2012. The average balance of federal funds sold and other short-term investments also decreased $30.0 million, or 36.09% in 2013 compared to 2012. The declines in these earning asset categories were partially offset by an increase in the combined average balance of taxable and non-taxable available for sale investment securities of $19.7 million, or 29.52% in 2013 compared to 2012, as we deployed excess liquidity and diversified our investment portfolio. The decline in the average balance of higher yielding loans in 2013 was a result of loan payoffs, suppressed loan demand due to current economic conditions and competitive factors. The change in the mix of the available for sale securities portfolio enabled the average FTE yield on available-for-sale securities to increase by approximately 40 basis points in 2013 to 2.13% from 1.73%.

Interest expense for 2013 was $5.5 million, a decrease of $1.7 million, or 23.93%, from $7.2 million in 2012. The decline in interest expense resulted from a decrease in the average balance of time deposits and the average rate paid on interest-bearing deposits and repo agreements, included in other interest-bearing liabilities. The average rate on interest bearing deposits declined to 0.64% in 2013 from 0.92% in 2012 and the average rate paid on repo agreements declined to 0.08% in 2013 from 0.23% in 2012. As market rates have declined, we continued to lower our rates on deposit accounts and repo agreements to match the current deposit and repo agreement rates in our market. Further, as a result, we continued to have time deposit account balances from various previous time deposit promotions which, upon maturity, either redeemed and the funds were withdrawn or renewed at lower market rates. Additionally, we restructured $40.0 million of our $62.5 million of FHLBank advances during the fourth quarter of 2013, further reducing overall interest expense on these borrowings.

Years ended December 31, 2012 and 2011. FTE net interest income for 2012 decreased to $17.2 million from $17.6 million in 2011, a decrease of $351,000, or 1.99%.

FTE interest income for 2012 was $24.4 million, a decrease of $2.4 million, or 8.99%, from $26.9 million in 2011. The decrease was a result of an overall decline in yields on average earning assets, a decline in the average earning asset volume and a change in the earning asset mix. The overall yield on average earning assets decreased 29 basis points to 4.14% compared to 4.43% in 201l. This decline was realized primarily in yields on loans and loans held

for sale, with respective declines of 12 basis points and 51 basis points. In addition, the average outstanding balance of loans declined $35.0 million, or 7.54% in 2012 compared to 2011. Partially offsetting the decline in the average balance of loans, the average balance of federal funds sold and other short-term investments increased by $19.5 million, or 30.72% in 2012 compared to 2011. The decline in the average balance of higher yielding loans in 2013 was a result of loan payoffs, suppressed loan demand due to current economic conditions and competitive factors. The average balance for available-for-sale securities was materially unchanged at $66.8 million in 2012 compared to 2011. The yields on taxable available-for-sale securities continued to decline, to an average rate of 1.55% in 2012 from an average rate of 1.80% in 2011. As higher yielding securities matured or were called, the funds from the maturities were reinvested in a lower-yielding interest rate environment. However, we diversified its investment portfolio in 2012 with the purchase of non-taxable investment securities available for sale which earned an average FTE yield of 3.88%. Consequently, the average FTE yield for total investment securities available for sale was 1.73% in 2012, compared to 1.80% in 2011.

Interest expense for 2012 was $7.2 million, a decrease of $2.1 million, or 22.29%, from $9.3 million in 2011. The decline in interest expense resulted from a decrease in the average rate paid on average interest-bearing deposits and a decrease in the average balance of time deposits. The average rate paid on total average interest-bearing deposits decreased to 0.92% for the year ended December 31, 2012, compared to 1.41% in 2011, a decrease of 49 basis points. As market rates declined, we lowered its rates on deposit accounts to match the current deposit rates in our market. Further, as a result, we continued to have time deposit account balances from various previous time deposit promotions which, upon maturity, either redeemed and the funds were withdrawn or renewed at lower market rates.

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,
	2013								2012								2011
	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	$	53,167		$	135		0.25	%	$	83,186		$	193		0.23	%	$	63,635		$	151		0.24	%
Available-for-sale securities – taxable		71,339			1,267		1.78			61,710			958		1.55			66,913			1,202		1.80
Available-for-sale securities –non- taxable		15,170			587		3.87			5,084			197		3.88
Mortgage loans held for sale		3,957			119		3.01			4,107			142		3.47			3,820			152		3.98
Loans, net of unearned discount and fees (1)		409,882			20,681		5.05			430,008			22,710		5.28			465,053			25,125		5.40
Federal Home Loan and Federal Reserve Bank Stock		6,556			239		3.64			6,473			241		3.71			6,377			225		3.53
Total earning assets		560,071			23,028		4.11			590,568			24,441		4.14			605,798			26,855		4.43
Cash and due from banks – non-interest bearing		17,244								17,366								33,724
Allowance for loan losses		(8,611	)							(10,544	)							(13,708	)
Premises and equipment, net		15,580								15,742								16,048
Other assets		39,544								39,832								41,104
Total assets	$	623,828							$	652,965							$	682,966

Liabilities and Stockholders’ Equity
Deposits-interest bearing:
Interest-bearing demand accounts	$	121,214		$	313		0.26	%	$	126,500		$	700		0.55	%	$	133,531		$	1,611		1.21	%
Savings and money market deposits		108,062			275		0.25			96,176			291		0.30			82,462			346		0.42
Time deposits		123,457			1,661		1.35			156,739			2,487		1.59			188,906			3,755		1.99
Total interest-bearing deposits		352,733			2,249		0.64			379,415			3,478		0.92			404,899			5,712		1.41
Other interest-bearing liabilities		31,661			26		0.08			18,674			44		0.23			17,045			41		0.24
Long-term debt		96,218			3,196		3.32			100,213			3,670		3.66			99,537			3,502		3.52
Total interest-bearing liabilities		480,612			5,471		1.14			498,302			7,192		1.44			521,481			9,255		1.77
Non-interest bearing deposits		98,295								105,226								98,927
Other liabilities		11,571								9,779								8,151
Stockholders’ equity		38,150								39,657								54,407
Total liabilities and stockholders’ equity	$	628,628							$	652,965							$	682,966
FTE net interest income/spread				$	17,557		2.97	%				$	17,249		2.70	%				$	17,600		2.66	%
FTE net interest margin							3.13	%							2.92	%							2.91	%

(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)
	2013 Compared to 2012									2012 Compared to 2011
	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	$	19		$	(77	)	$	(58	)	$	(3	)	$	45		$	42
Available-for-sale securities – taxable		138			171			309			(163	)		(81	)		(244	)
Available-for-sale securities – nontaxable		-			390			390			-			197			197
Mortgage loans held for sale		(19	)		(5	)		(24	)		(19	)		10			(10	)
Loans, net of unearned discount and fees		(1,014	)		(1,015	)		(2,029	)		(564	)		(1,851	)		(2,415	)
Federal Home Loan and Federal Reserve Bank Stock		(5	)		4			(1	)		11			4			16
Total interest income		(881	)		(532	)		(1,413	)		(738	)		(1,676	)		(2,414	)
Interest-bearing demand accounts		(373	)		(14	)		(387	)		(873	)		(38	)		(911	)
Savings and money market deposits		(46	)		30			(16	)		(97	)		42			(55	)
Time deposits		(378	)		(448	)		(826	)		(754	)		(514	)		(1,268	)
Other interest-bearing liabilities		(28	)		10			(18	)		(1	)		4			3
Long-term debt		(342	)		(132	)		(474	)		143			25			168
Total interest expense		(1,167	)		(554	)		(1,721	)		(1,582	)		(481	)		(2,063	)
Net interest income	$	286		$	22		$	308		$	845		$	(1,196	)	$	(351	)

Provision for Loan Losses

We make 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 numerous factors, including general economic conditions, analysis of impaired and classified loans, general reserve factors, changes in loan mix, and current and historical charge-offs by loan type. The historical charge off information currently utilized is based on a three year weighted average of net charge offs by loan type with greater weight given to more current data due to the assessed relevance. Our 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, including assessment of the factors listed above. Economic conditions monitored include, but are not limited to: Johnson County, KS and U.S. unemployment rates; trends in home sales; consumer confidence; trends in U.S. Gross Domestic Product and

leading economic indicators; foreclosure rates; commercial real estate vacancy 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.

Years ended December 31, 2013 and 2012. Analysis of the credit quality of our loan portfolio and other factors used to determine the level of the Allowance for Loan Losses precipitated a provision for loan loss of $950,000 for 2013 compared to a provision for loan losses of $1.2 million in 2012. During 2013, we experienced a decline in the balance of the total loan portfolio as well as a relatively high ratio of net recoveries to loans charged off during the year compared to recent periods. We charged off loans totaling $1.6 million to the allowance for loan losses and received recoveries totaling $590,000 in 2013, compared to 2012, when we charged off loans totaling $6.1 million to the allowance for loan losses and received recoveries totaling $785,000. The improvements in the credit quality of our loan portfolio, in addition to reduction in the amount of loan losses charged off to the allowance for loan losses, precipitated a reduction in the recorded loan loss provision in 2013 to $950,000 compared to a provision of $1.2 million during the previous year. As a result of the improvement in our credit quality during 2013, we had recorded negative provisions for loan losses of $1.7 million during the year, however, near the end of January, 2014, we determined that the credit quality of a $5.0 million commercial loan relationship had deteriorated substantially in the previous period, which precipitated a downgrade to the loans and necessitated that we record a $2.65 million provision as of December 31, 2013. The provision for loan losses recorded during the year ending December 31, 2012 was primarily related to declines in collateral values of commercial loans. The allowance for loan losses as a percentage of loans was 2.17% at December 31, 2013, compared to 2.18% at December 31, 2012. Management believes they have identified the significant classified and non-performing loans and will continue to exercise prudent efforts to pursue collection of these loans. If real estate and general economic conditions are more adverse than management anticipates and losses increase, we could experience higher than anticipated loan losses in the future.

Years ended December 31, 2012 and 2011. During the year ended December 31, 2012, we recorded a $1.2 million provision for loan losses compared to $3.3 million for the year ended December 31, 2011, a decrease of $2.1 million, or 63.64%. In 2012, we experienced a reduction in non-performing loans by $6.5 million, or 57.29%. During the year ending December 31, 2012, we charged off loans totaling $6.1 million to the allowance for loan losses and received recoveries totaling $785,000, compared to the previous year, when we charged off loans totaling $5.5 million to the allowance for loan losses and received recoveries totaling $672,000. The provision for loan losses recorded in 2012 was primarily related to declines in collateral values of commercial and commercial real estate loans. The allowance for loan losses as a percentage of loans was 2.18% at December 31, 2012, compared to 3.01% in 2011.

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,
	2013		2012		2011
(In thousands)
Loans held for sale fee income	$	1,456	$	2,447	$	2,120
NSF charges and service fees		968		980		944
Other service charges		2,478		2,472		2,276
Realized gains on available-for-sale securities		127		-		-
Other income		3,443		1,535		984
Total non-interest income	$	8,472	$	7,434	$	6,324

Years ended December 31, 2013 and 2012. Non-interest income increased 13.96% to $8.5 million in 2013 compared to $7.4 million in 2012. The increase in non-interest income resulted from our realization of approximately $1.0 million of income upon payment of the deferred interest due for BVBC Capital Trust III due to a change in assumptions in the calculation for interest due on the securities and an increase of $770,000 in gains

realized on the sale of foreclosed assets held for sale, included in other income, and $127,000 of gains realized from the sale of available for sale investment securities, which were offset by a decline of approximately $990,000, or 41.50%, in loans held for sale fee income. Fluctuations in mortgage interest rates during 2013 resulted in a decline in mortgage refinance volume across our industry, which negatively impacted our mortgage operations and resulted in a decline in our loans held for sale fee income in 2013. Sustainability of the level of loans held for sale fee income is primarily dependent upon economic factors, the interest rate environment and the efficiency and functionality of the secondary market, and secondarily dependent on our ability to adapt to regulatory changes, introduction of new products into the market and alternative delivery channels. NSF charges and service fees income and other service charges income, which includes income from trust services, investment brokerage, merchant bankcard processing and debit card processing, were not materially changed during the year ended December 31, 2013 compared to the prior year period. Future growth of NSF charges and service fee income and other service charge income is primarily dependent on new product development and growth in our customer base and is also subject to the impact of regulatory changes. Securities were sold at a gain during 2013 to better position the available-for-sale securities portfolio in consideration of the current interest rate environment. No securities were sold in 2012.

Years ended December 31, 2012 and 2011. Non-interest income increased $1.1 million from the prior year to $7.4 million for 2012 compared with $6.3 million for 2011, an increase of 17.55%. Loans held for sale fee income increased $327,000, or 15.42%, in 2012 compared to 2011. The volume of closed residential mortgage loans held for sale increased in 2012 to $83.5 million, from $66.0 million in 2011 as a result of the a favorable interest rate environment and stabilizing to slightly improving economic factors. NSF charges and service fees were materially unchanged in 2012 compared to 2011. Other service charge income, which includes income from trust services, investment brokerage, merchant bankcard processing and debit card processing, increased by $196,000, or 8.61% in 2012 compared to 2011. This increase was primarily a result of increased debit & ATM card fee income, due to increased usage, and investment service fee income. Other income increased $551,000, or 56.00%, primarily due to mark to market adjustments on commitments to sell loans and an increase in rental income on foreclosed assets held for sale. The net change in fair value of mortgage loan-related commitments for 2012 was $76,000 compared to a loss of $257,000 in 2011, an increase of $333,000. The fair value on these commitments fluctuates based on the market rates for mortgage loans. Rental income on foreclosed assets held for sale increased $131,000 in 2012 compared to 2011 as a result of the transfer of a loan, secured by a leased property, to foreclosed assets held for sale in 2012.

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,
	2013		2012		2011
(In thousands)
Salaries and employee benefits	$	11,079	$	10,587	$	10,955
Net occupancy expense		2,620		2,568		2,599
Foreclosed asset expense		3,612		2,647		5,219
Other operating expense		6,855		7,506		7,851
Total non-interest expenses	$	24,166	$	23,308	$	26,624

Years ended December 31, 2013 and 2012. Non-interest expense increased 3.68% to $24.2 million in 2013 from $23.3 million in 2012. The increase in non-interest expense was primarily attributed to increases of $965,000 or 36.46%, in foreclosed assets expense, $492,000, or 4.65%, in salaries and employee benefits expenses due to merit increases and personnel changes, partially offset by a decrease of $651,000 in other operating expense. We recorded a provision for losses on foreclosed assets held for sale of $2.1 million in 2013, compared to a provision of $866,000 in 2012. This increase is principally the result of the write-down of the recorded value of a single unique foreclosed asset held for sale. Other expenses related to foreclosed assets held for sale, including insurance, appraisals, utilities, real estate property taxes, legal, repairs and maintenance, and associated loss on sale, declined $258,000, or

16.05% in 2013. The decline in other operating expense in 2013 was primarily the result of a decline in FDIC premiums and regulatory fees expense, which have primarily resulted from improvements in our asset quality, as well as a decline in professional fees resulting from our decision to discontinue filing reports with the Securities and Exchange Commission as well as improvements in asset quality.

Years ended December 31, 2012 and 2011. Non-interest expense decreased $3.3 million, or 12.45% to $23.3 million during 2012, compared to $26.6 million in the prior year. The decrease in non-interest expense was attributable to a reduction in foreclosed assets expense by $2.6 million, or 49.28%, compared to 2011. We recorded a provision for losses on foreclosed assets held for sale of $867,000 in 2012, compared to a provision of $3.2 million in 2011, a reduction of $2.3 million or 72.55% in 2012. Other expenses related to foreclosed assets held for sale, including insurance, appraisals, utilities, real estate property taxes, legal, repairs and maintenance, and associated loss on sale, declined $280,000, or 13.59% in 2012. We continue to actively maintain, manage and market these foreclosed properties with the intent to prudently facilitate their sale.

Other factors contributing to the change in non-interest expense in 2012 included a decrease in salaries and employee benefits of $368,000, or 3.36%, resulting from the reduction in the number of employees and reduction in compensation expense related to the vesting of restricted shares. Other operating expenses declined $345,000, or 4.39%, compared to the prior year, due to a reduction in FDIC premiums and regulatory fees. FDIC premiums and regulatory fees decreased resulted primarily from improvements in our asset quality as well as a decline in the Bank’s assessment base.

Income Taxes

Years ended December 31, 2013, 2012 and 2011. We recognized an income tax provision of $200,000 and $50,000 for the years ending December 31, 2013 and 2012, respectively, and income tax benefit of $2.8 million during 2011. The provision (benefit) in each year reflects our net income (loss). Our consolidated effective income tax rates, before consideration of the valuation allowance, of 27%, 43% and 46% for the three years ended December 31, 2013, respectively, vary from the statutory rate principally due to the effects of state income taxes and non-taxable income and non-deductible expenses. Due to our losses recorded over the four years ending December 31, 2011 and information available relating to our ability to recognize the deferred tax asset in future near term periods, we assessed the deferred tax asset during that year and recognized a $12.6 million valuation allowance on the deferred tax asset. We recognized a small portion of this valuation allowance, $500,000 and $200,000, in 2013 and 2012, respectively, as a result of our positive earnings. As we continue to recognize profits in the future, we may be able to recognize additional portions of this allowance in future years.

Financial Condition

Our total assets at December 31, 2013 were $609.1 million, a decrease of $47.9 million or 7.29% from $657.0 million at December 31, 2012. Total deposits at December 31, 2013 were $448.4 million, a decrease of $36.1 million or 7.45% from $484.5 million at December 31, 2012. Stockholders’ equity increased $2.4 million, or 6.06%, to $42.2 million at December 31, 2013 compared to $39.8 million at December 31, 2012. We held a common stock Rights Offering (“Offering”), and had raised net proceeds of approximately $6.3 million with the December 23, 2013 initial close of the Offering, with a subsequent final closing on January 15, 2014. The purpose of the initial close of the Offering provided funding to bring all previously accrued and unpaid dividends and interest on our Subordinated Debentures, and avoid a default on those Subordinated Debentures at December 31, 2013. The increase to stockholders’ equity from the Offering was partially offset by a loss in accumulated other comprehensive income of $4.2 million, resulting from the impact of changes in market interest rates on the unrealized appreciation (depreciation) on available-for-sale securities, net of income taxes.

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, 2013, the securities in our investment portfolio were

classified as available-for-sale in order to provide management the greatest amount of flexibility in managing the overall interest rate risk of the portfolio as market conditions change over time and to provide us with an additional source of liquidity when necessary as pledging requirements permit.

Total investment securities at December 31, 2013 were $100.7 million, an increase of $22.8 million or 29.30% from $77.8 million at December 31, 2012. The increases to the investment portfolio during 2013 and 2012 occurred as we deployed excess liquidity and diversified our investment portfolio. The Company sold approximately $5.5 million of available for sale investment securities, and realized a net-gain of $127,000 in 2013, to better position the available-for-sale investment securities portfolio in consideration of the current interest rate environment. No securities were sold in 2012. We had $29.9 million and $91.0 million in available-for-sale securities called or mature during the years ended December 31, 2013 and 2012, respectively, and we invested $66.0 million and $107.2 million into purchases of available for sale securities during the respective periods.

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,
	2013		2012		2011
(In thousands)
U.S. government sponsored agency securities	$	68,313	$	63,148	$	61,171
State and political subdivision securities		19,764		14,074
U.S. government sponsored agency mortgage- backed securities		7,183		–		–
U.S. small business administration loan pool certificates		4,810		–		–
Equity and other securities		587		623		619
Total	$	100,657	$	77,845	$	61,790

The following table sets forth the maturities, carrying value, and average yields for securities in our investment portfolio at December 31, 2013. 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 securities	$	–		%	$	–		%	$	9,839		2.03	%	$	58,474		1.89	%	$	68,313		1.59	%
State and political subdivision securities		–				–				386		2.22			19,378		3.52			19,764		3.33
U.S government sponsored agencies mortgage-backed securities with no defined maturity		–				–				–					–					7,183		1.92
U.S. small business loan pool certificates with no defined maturity		–				–				–					–					4,810		2.27
Equity and other securities with no defined maturity		–				–				–					–					587		2.04
Total available-for-sale	$	–		%	$	–		%	$	10,225		2.04	%	$	77,852		2.30	%	$	100,657		2.07	%

Loans Held for Sale. Mortgage loans held for sale at December 31, 2013 were $1.4 million, a $6.2 million, or 81.13%, decrease from $7.6 million at December 31, 2012. Total mortgage loans held for sale at December 31, 2012 increased $1.9 million, or 34.03%, compared to $5.7 million at December 31, 2011. We have elected to carry loans held for sale at fair value. The decline in both the recorded balance as of December 31, 2013 as well as in the volume of residential mortgage loans held for sale originated during the year ended December 31, 2013 compared to the comparable prior year period were the result of fluctuations in mortgage interest rates during 2013 and the resultant decline in mortgage refinance volume across our industry, which negatively impacted our mortgage operations in 2013. Our 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 residential real estate lending. We also offer a variety of consumer loans and infrequently engage in lease financing. We emphasize commercial lending to professionals, businesses and their owners. Commercial loans and loans secured by commercial real estate accounted for 63.97%, 62.24% and 64.83% of our total loans at December 31, 2013, 2012 and 2011, respectively.

Total loans were $414.8 million at December 31, 2013, a decrease of $876,000, or 0.21% from $415.7 million at December 31, 2012. During 2013, we were able to stabilize the previous declining trend in loans as a result of our increased origination volume due to our business development efforts and a more stable/improving economic conditions as well as a reduction in the foreclosure and transfer to foreclosed property held for sale. Approximately $4.4 million of loans were transferred to foreclosed property during the year ended December 31, 2013 compared to $10.5 million in 2012.

The loan to deposit ratio increased to 92.51% as of December 31, 2013 compared to 85.80% at December 31, 2012 and 89.48% at December 31, 2011.

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,
	2013					2012					2011					2010					2009
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	(In thousands)
Commercial	$	120,283		29.00	%	$	115,520		27.79	%	$	130,398		29.71	%	$	144,181		29.28	%	$	142,528		25.72	%
Commercial real estate		145,045		34.97			143,198		34.45			154,109		35.12			169,253		34.37			167,581		30.24
Construction		44,806		10.80			46,515		11.19			48,438		11.04			64,641		13.13			113,077		20.41
Home equity		43,169		10.41			49,529		11.92			59,750		13.61			64,289		13.05			66,586		12.02
Residential real estate		44,771		10.79			43,584		10.49			37,882		8.63			36,903		7.49			45,014		8.12
Lease financing		7,836		1.89			10,054		2.42			2,268		0.52			5,530		1.12			11,259		2.03
Consumer		8,885		2.14			7,271		1.74			5,998		1.37			7,657		1.56			8,066		1.46
Total loans and leases		414,795		100.00	%		415,671		100.00	%		438,843		100.00	%		492,454		100.00	%		554,111		100.00	%

Less allowance for loan losses		8,992					9,057					13,189					14,731					20,000

Loans, net	$	405,803				$	406,614				$	425,654				$	477,723				$	534,111

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, 2013, 2012 and 2011, 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 $44.8 million, or 10.80%, of total loans, as of December 31, 2013. Of the $44.8 million, approximately $29.6 million were for new single and multi-family housing construction and $15.4 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 $19.0 million at December 31, 2013. The Bank’s largest single borrower, net of participations, at December 31, 2013 had outstanding loans of $14.0 million.

The following table presents the aggregate maturities of loans in each major category of our loan portfolio as of December 31, 2013, 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, 2013 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, 2013
									More than One Year
	Less than one year		One to five years		Over five years		Total		Fixed		Variable
(In thousands)
Commercial	$	57,501	$	47,012	$	15,770	$	120,283	$	31,679	$	31,103
Commercial Real Estate		34,680		81,226		29,139		145,045		82,475		27,890
Construction		31,389		13,417	__			44,806		1,470		11,947

Non-accrual loans included in the more than one year category for fixed rate loans were $1.6 million and for variable rate loans were $16,000.

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:

	As of December 31,
	2013			2012			2011			2010			2009
(In thousands)
Commercial and all other loans:
Past due 90 days or more	$	-		$	-		$	-		$	-		$	-
Non-accrual		5,194			1,131			2,029			2,896			1,327
Commercial real estate loans:
Past due 90 days or more		-			-			-			-			-
Non-accrual		-			1,537			1,340			10,088			13,267
Construction loans:
Past due 90 days or more		-			-			-			-			-
Non-accrual		660			910			3,058			10,417			11,205
Home equity loans:
Past due 90 days or more		-			-			-			-			-
Non-accrual		232			175			2,676			1,211			344
Residential real estate loans:
Past due 90 days or more		-			-			-			-			-
Non-accrual		1,020			1,084			2,204			5,553			8,404
Lease financing:
Past due 90 days or more		-			-			-			-			-
Non-accrual		-			-			18			140			335
Consumer loans:
Past due 90 days or more		-			-			-			-			-
Non-accrual		-			-			-			52			6
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		7,106			4,837			11,325			30,357			34,888
Foreclosed assets held for sale		25,801			31,936			29,246			20,144			19,434
Total non-performing assets	$	32,907		$	36,773		$	40,571		$	50,501		$	54,322

Total non-performing loans to total loans		1.71	%		1.16	%		2.58	%		6.16	%		6.30	%
Total non-performing loans to total assets		1.16			0.74			1.73			4.20			4.51
Allowance for loan losses to non-performing loans		89.26			187.22			116.46			48.53			57.33
Non-performing assets to loans and foreclosed assets held for sale		7.47			8.22			8.67			9.85			9.47

NON-PERFORMING ASSETS

Non-performing assets. Non-performing assets declined to $32.9 million at December 31, 2013 from $36.8 million at December 31, 2012, a reduction of $3.9 million, or 10.51%. Non-performing assets at December 31, 2012 declined $3.8 million, or 9.36% from $40.6 million at December 31, 2011. Non-performing loans increased by $2.3 million, or 46.91% to $7.1 million as of December 31, 2013, compared to $4.8 million at December 31, 2012. Non-performing loans as of December 31, 2012 declined $6.5 million, or 57.29% from $11.3 million at December 31, 2011. The balance of non-performing loans as of December 31, 2013 was significantly impacted by our determination, near the end of January, 2014, that the credit quality of a $5.0 million commercial loan relationship had deteriorated substantially in the previous period, which precipitated a downgrade to the loans in the relationship to nonaccrual status. Prior to the recognition of the downgrade to this commercial loan relationship, we had experienced significant declines to non-performing loans which were attributable to loan pay-offs and pay-downs, upgrades, charge-offs and foreclosures. Future weakening in real estate and general economic conditions could cause us to 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 prudently manage these situations. Foreclosed assets held for sale were $25.8 million at December 31, 2013 compared to $31.9 million as of December 31, 2012 and $29.2 million at December 31, 2011. During the years ending December 31, 2013 and December 31, 2012, we sold $6.0 million and $5.9 million in foreclosed assets, respectively, and transferred $4.4 million and $10.5 million in loans to foreclosed assets, respectively. We are actively marketing these properties and working to reduce the balance of foreclosed assets held for sale.

As illustrated in the table above, during the most recent five years ending December 31, 2013, our ratio of non-performing loans to total loans has declined from its highest year-end point during that period, 6.30% as of December 31, 2009 to 1.71% as of December 31, 2013, primarily due to our focus on improving credit quality. As of December 31, 2013 and December 31, 2012, our ratio of allowance for loan losses to non-performing loans was 89.26%, compared to 187.23% at December 31, 2012. We continue 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, 2013.

	Year Ended December 31, 2013
(In thousands)
Gross interest income (since date of non-accrual) if the loans had been current and accruing interest	$	396
Interest income reversed at time loans placed on non-accrual		32
Cash interest received during the period		72

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 $10.9 million at December 31, 2013, $20.2 million at December 31, 2012, and $31.2 million at December 31, 2011, with related allowances for loan losses of $3.8 million, $3.1 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, 2013, the Company had $271,000 of commercial loans, $423,000 of commercial real estate loans, $3.0 million of construction loans and $154,000 of lease financing loans that were modified in troubled debt restructurings and classified as impaired.

Total interest income of $534,000, $1.0 million and $1.2 million was recognized on average impaired loans of $14.1 million, $26.4 million and $39.4 million for 2013, 2012 and 2011, respectively. Included in this total is cash basis interest income of $72,000, $199,000 and $270,000 recognized on non-accrual impaired loans during 2013, 2012 and 2011, 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,
	2013			2012			2011			2010			2009
(In thousands)
Balance at beginning of period	$	9,057		$	13,189		$	14,731		$	20,000		$	12,368

Loans charged-off:
Commercial loans		141			2,030			582			1,364			4,713
Commercial real estate loans		672			2,239			1,218			2,985			374
Construction loans		250			882			2,352			3,662			7,716
Home equity loans					417			725			387			653
Residential real estate loans		523			540			637			660			1,480
Lease financing		-			9			-			43			109
Consumer loans		18			-			-			7			58
Total loans charged-off		1,604			6,117			5,514			9,108			15,103
Recoveries:
Commercial loans		319			179			282			390			259
Commercial real estate loans		27			20			91			171			123
Construction loans		171			481			60			123			592
Home equity loans		30			58			48			17			31
Residential real estate loans		40			43			157			11			72
Lease financing								25			14			21
Consumer loans		2			4			9			18			2
Total recoveries		589			785			672			744			1,100
Net loans charged-off		1,014			5,332			4,842			8,364			14,003
Allowance of acquired company		-			-			-			-			-
Provision for loan losses		950			1,200			3,300			3,095			21,635

Balance at end of period	$	8,992		$	9,057		$	13,189		$	14,731		$	20,000

Loans outstanding:
Average	$	406,112		$	430,008		$	465,053		$	518,010		$	608,080
End of period		414,795			415,617			438,843			492,454			554,111
Ratio of allowance for loan losses to loans outstanding:
Average		2.21	%		2.11	%		2.84	%		2.84	%		3.29	%
End of period		2.17			2.18			3.01			2.99			3.61
Ratio of net charge-offs to:
Average loans		0.25			1.24			1.04			1.61			2.30
End of period loans		0.24			1.28			1.10			1.70			2.53

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,
	2013					2012					2011					2010					2009

	Amount		% of Total Allowance			Amount		% of Total Allowance			Amount		% of Total Allowance			Amount		% of Total Allowance			Amount		% of Total Allowance
(In thousands)
Commercial	$	4,556		50.66	%	$	2,097		23.15	%	$	2,987		22.65	%	$	3,339		22.67	%	$	3,630		18.15	%
Commercial real estate		1,870		20.79			3,582		39.55			3,772		28.60			3,974		26.98			7,253		36.27
Construction		1,426		15.86			1,543		17.04			2,721		20.63			4,579		31.08			5,929		29.65
Home equity		484		5.39			634		7.00			1,338		10.14			1,262		8.57			1,061		5.31
Residential real estate		618		6.88			1,138		12.56			2,312		17.53			1,488		10.10			1,737		8.69
Lease financing		20		0.22			46		0.51			30		0.23			38		0.26			238		1.19
Consumer		18		0.20			17		0.19			29		0.22			51		0.35			152		0.76
Total	$	8,992		100.00	%	$	9,057		100.00	%	$	13,189		100.00	%	$	14,731		100.00	%	$	20,000		100.00	%

Deposits. Deposits are the primary funding source for the Company. Deposits declined by $36.1 million, or 7.45%, to $448.4 million during the year ended December 31, 2013, compared to $484.5 million as of December 31, 2012. The decline in deposits was primarily caused by a decline in time deposits of $21.1 million, or 15.59% and a decrease in demand deposits of $12.7 million, or 11.20%. The decline in demand deposits was attributed to the December 31, 2012 expiration of FDIC Transaction Account Guarantee (“TAG”) program. Since 2008, the TAG program has provided unlimited deposit insurance on non-interest bearing transaction accounts for participating institutions. The Bank was a TAG participant. In contemplation of the December 31, 2012 expiration of the TAG program, we proactively engaged our large demand deposit customers to assist them in determining prudent alternate deposit / investment products. Consequently, we were able to substantially offset the reduction in demand deposit balances caused by the expiration of the TAG program with customer reallocation of funds into the Bank’s Certificate of Deposit Account Registry Service (“CDARS”) and Promontory Interfinancial Network Insured Cash Sweep (“ICS”) programs as well as the Bank’s securities sold under agreement to repurchase (“repo”) accounts, included in other interest-bearing liabilities. For the year ended December 31, 2013 customer placed in the CDARS and ICS deposit programs increased by approximately $5.4 million and repo balances increased by $10.7 million. The decline in time deposits was primarily attributable to the decline in market interest rates. As market rates have declined, we have continued to lower our rates on time deposit accounts to match the current time deposit rates in our market. As a result of lower time deposit rates, as time deposits have matured some accounts have not renewed; rather, have redeemed and the funds were withdrawn.

The Bank introduced its Performance and Ultimate Checking products in 2007 and 2011, respectively. The 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 certain signature based debit card transactional requirements and at least one ACH or direct deposit within each statement qualification cycle. The Bank realizes non-interest income from the signature based debit card transactions, when netted against the cost of the 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,
	2013								2012								2011

			Percent			Weighted					Percent			Weighted					Percent			Weighted
			of			Average					of			Average					Of			Average
	Balance		Deposits			Rate			Balance		Deposits			Rate			Balance		Deposits			Rate
(In thousands)
Demand	$	100,965		22.52	%		––	%	$	113,698		23.47	%		––	%	$	100,842		20.56	%		––	%
Savings		17,229

BLUE VALLEY BAN CORP 10-K