TWST: We'd like to begin with a brief historical sketch of Blue Valley and a picture of the things you are doing right now.
Mr. Fortino: The bank was formed in 1989 by Bob Regnier. He came out with a group of investors and about $2.5 million in capital and started the bank. The bank has grown successfully since that time and has achieved return on equities in excess of 15% for many of those years. So he has been able to grow quickly to a $700 million organization and at the same time maintain a strong level of profitably. The bank has been known over those years for commercial real estate lending; that has been the backbone. Bob was a commercial real estate lender himself when he worked for Boatmen's Bank, which is now Bank of America. He came out here with another lender and a couple of other people, and started with a small base of customers and built on it through a high level of customer service. Although strongly commercially focused, we have also now established a strong retail presence in the Johnson County Market Place. We have a lot of retail products and services to offer. In addition residential mortgage lending is also a major part of our business model. Mortgage lending is something that we've always done, but in the last five years, we've really gotten into it in a much larger way through our domain name InternetMortgage.com. InternetMortgage.com allows us to do mortgages all over the country, so it's not just Kansas City-based - it's national lending.
TWST: What's on your strategic agenda for the next two to three years?
Mr. Fortino: Over the next two to three years, we are going to continue to look for branching opportunities. People keep asking us, "Are you going to venture into Missouri? Are you going to branch out?" Right now, our strategic focus is very concentrated. We want to be a major player in the Johnson County [Kansas] marketplace. We believe that this is a very good marketplace; it's strong from an income standpoint. The average median household incomes in some of the ZIP codes that we are in are well over $100,000. The top nine ZIP codes have household incomes of over $100,000 and household average home values of over $300,000. So there are a lot of good economics in the Johnson County marketplace. That's our primary focus. However, one thing that does take us out of Johnson County and across the country is the mortgage business. It's currently our plan to look to strategic markets around the country to put LPOs in and branch out our mortgage operation. The refi business over the Internet is great, and InternetMortgage.com has been great from that perspective, but we believe that in order to be positioned for purchase markets we are going to need to do that with relationships with realtors. You really can only successfully do that with LPOs - it's hard to do that long distance. So that will be one area where you will see us venturing out of the Johnson County marketplace.
TWST: What would be some year-by-year milestones for investors to be looking for?
Mr. Fortino: When somebody looks at us, it's very important that they continue to look at our net interest margin. It's still our core business, and monitoring our margin compared to other banks is very important. We've seen a very good expansion of our margin at a time when a lot of banks have been squeezed. We've been able to maintain our yield on loans. Our yield on loans for 2006 for our bank was 8.09, and our peer was 7.83. So we've been very successful in maintaining a very good spread. We're watching that net interest margin, as well as the non-interest income. With the greater significant emphasis in mortgage that we have compared to a lot of other banks, watching our non-interest income is going to be a critical ratio for us to manage by. Our mortgage business gives us a very effective business edge. When rates start to come back down again and margins get squeezed - as they do for most institutions - that mortgage income should pick up, and we should see that non-interest income taking off. However, when rates go up, the net interest margin expands and mortgage volume drops off and the non-interest income decreases. We're seeing that now with where rates are. We're still getting great rates -6.25% or 6% 30-year fixed is not a bad rate in the mortgage industry but it's not what it was. So although our net interest margin has expanded, our non-interest income has declined. However, our overall profitability remains strong. So those are the two factors to watch for. When people are looking at us, they have to look at both the net interest margin and the non-interest income number.
TWST: What would be the two or three best reasons for the long-term investor to take a good look at Blue Valley?
Mr. Fortino: I think that it comes down to the numbers. If you look at what our current stock price is, Friday it closed at $40.00, and last year's earnings were $2.88. That's a p/e of 13.28. When you look at the average deal values of banks in the Midwest of companies under $1 billion like ourselves, the average deal value in January was between 20 and 25 times earnings. I don't ever advise anybody to buy the stock and trade it in a day. These kinds of investments are ones that you should be in for the long haul, and what you're hoping for is that some day, the guy backs up with a big enough truck and convinces Bob that he needs to sell.
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