ITEM 1. DESCRIPTION OF BUSINESS.
Valley Ridge Financial Corp. (the "Corporation") is a Michigan bank holding corporation with its headquarters in Kent City, Michigan. The Corporation was formed on May 20, 1988. The Corporation is the parent company of Valley Ridge Bank, a Michigan banking corporation. Valley Ridge Bank is the Corporation's only subsidiary. Valley Ridge Bank owns a 20% interest in a non-banking corporation, West Shore Computer Services, Inc., a data processing firm and owns 100% of the outstanding shares of Valley Ridge Investments, Inc., a company that holds a 6% interest in a title company, Valley Ridge Realty, Inc., a real estate brokerage company, and Valley Ridge Financial Services, Inc., an insurance agency.
On July 1, 1996, Community Bank Corporation ("Community") merged with and into the Corporation (the "Merger"). The then-shareholders of Community received 152,159 shares of the Common Stock of the Corporation ("Valley Ridge Common Stock") for the shares of common stock of Community that they held, in addition to cash in lieu of fractional shares. The Merger was treated as a pooling of interests for accounting purposes and the assets and liabilities of Community were carried forward in the Corporation's accounts.
Effective at the close of business on December 6, 1996, the Corporation's two subsidiary banks, The Grant State Bank ("Grant") and Kent City State Bank ("Kent City"), were consolidated into a single banking corporation (the "Consolidation"). The purpose of the Consolidation was to allow the Corporation to further realize operational efficiencies and provide more consistent and improved service to the market areas that the Corporation had been servicing. The Consolidation resulted in a single bank named "Valley Ridge Bank" (the "Bank"). On December 31, 1998, the Bank had assets totaling $148 million, deposits of $119.6 million and shareholders' equity of $14.2 million.
The Corporation and the Bank operate in a single industry segment--the business of commercial banking, mortgage banking and other related activities. The Bank is a full service bank offering customary commercial banking services, which include commercial and retail loans, business and personal checking accounts, savings and individual retirement accounts, time deposit instruments, automated transaction machine services, money transfer services and safe deposit facilities, and insurance and real estate brokerage services. No material part of the business of the Corporation or the Bank is dependent upon a single customer or very few customers, the loss of which would have a materially adverse effect on the Corporation.
The principal markets for the Corporation's financial services are presently the Michigan communities in which the Bank's offices are located and the areas immediately surrounding those communities. The Corporation and the Bank serve these markets through eight offices located in Kent City, Coopersville, Egelston, Grant, Newaygo, Ravenna, Sparta and White Cloud, Michigan. This diversification allows the Bank to spread some of its market risk over a wider area and not be subject to downturns in any specific community. Within this market area, the Bank competes with various banks, savings and loan associations and credit unions. The Bank is the only bank with offices in Kent City and Grant, Michigan. Other banks and financial institutions have offices in some of the towns where the Bank's branches are located. The Corporation and the Bank have no material foreign assets or income.
The business of banking is highly competitive. In addition to competition from other commercial banks, banks face significant competition from savings and loan associations, credit unions, finance companies, insurance companies and investment and brokerage firms. The principal methods of competition for financial services are price (interest rates paid on deposits, interest rates charged on borrowings and fees charged for services) and service (convenience and quality of services rendered to customers).
Banks and bank holding companies are extensively regulated. The Bank is chartered under state law and is supervised, examined and regulated by both the Financial Institutions Bureau of the Michigan Department of Consumer and Industry Services (the "FIB") and the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Corporation is regulated by the Federal Reserve Board. Deposits of the Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC") to the extent provided by law.
Federal and state laws that govern banks significantly limit their business activities in a number of respects. Prior approval of the Federal Reserve Board, and in some cases various other government agencies, is required for the Corporation to acquire control of any additional banks or other operating subsidiaries. The business activities of the Corporation and the Bank are limited to banking and other activities that are determined by the Federal Reserve Board to be closely related to banking.
The Corporation is a legal entity separate and distinct from the Bank. There are legal limitations on the extent to which the Bank can lend or otherwise supply funds to the Corporation. In addition, payment of dividends to the Corporation by the Bank is subject to various state and federal regulatory limitations.
Under Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to the Bank and to commit resources to support it. Under federal law, the FDIC also has authority to impose special assessments on insured depository institutions to repay FDIC borrowings from the United States Treasury or other sources and to establish semi-annual assessment rates on Bank Insurance Fund ("BIF") member banks to maintain the BIF at the designated reserve ratio required by law.
Banks are subject to a number of federal and state laws and regulations that have a material impact on their business. These include, among others, state usury laws, state laws relating to fiduciaries, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, electronic funds transfer laws, redlining laws, antitrust laws, environmental laws and privacy laws. The instruments of monetary policy of authorities such as the Federal Reserve Board may influence the growth and distribution of bank loans, investments and deposits, and may also affect interest rates on loans and deposits. These policies may have a significant effect on the operating results of banks.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") substantially changed the geographic constraints applicable to the banking industry. The Riegle-Neal Act allows bank holding companies to acquire banks located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state law. Effective June 1, 1997, the Riegle-Neal Act also allowed banks to establish interstate branch networks through acquisitions of other banks. The establishment of DE NOVO interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if specifically authorized by state law. The legislation allowed individual states to "opt-out" of certain provisions of the Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997.
Michigan permits both U.S. and non-U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits, in appropriate circumstances and with the approval of the Commissioner of the FIB, (i) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (ii) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (iii) consolidation of Michigan banks and FDIC-insured banks,
savings banks or savings and loan associations located in other states having laws permitting such consolidation, (iv) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (v) establishment by foreign banks of branches located in Michigan.
The nature of the business of the Bank is such that it holds title, on a temporary or permanent basis, to a number of parcels of real property. These include properties owned for branch offices and other business purposes as well as properties taken in or in lieu of foreclosure to satisfy loans in default. Under current state and federal laws, present and past owners of real property may be exposed to liability for the cost of cleanup of environmental contamination on or originating from those properties, even if they are wholly innocent of the actions that caused the contamination. These liabilities can be material and can exceed the value of the contaminated property.
The Corporation and the Bank employed approximately 100 persons (85 persons on a full-time equivalent basis) at December 31, 1998.
Certain statistical information describing the business of the Corporation follows. Additional statistical information describing the business of the Corporation and the Bank appears in Management's Discussion and Analysis or Plan of Operation included in Item 6 of this report and in the Consolidated Financial Statements and notes thereto included in Item 7 of this report.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY.
The Corporation maintains its offices and conducts its business operations from the principal banking office of the Bank in Kent City, Michigan. The Bank's principal office is located at 450 West Muskegon Avenue, Kent City, Michigan. These premises encompass approximately 24,000 square feet, all of which are occupied by the Bank and the Corporation. The Corporation also owns property located at 6 North Main Street, Kent City, Michigan, the former location of the Bank's principal office. The Corporation also owns a vacant lot located in an industrial park in Coopersville, Michigan.
The Bank owns the premises occupied by its branch offices at the following addresses, all of which are in Michigan: 10 West Main Street, Grant (4,051 square feet), the corner of M-37 and M-82, Newaygo (1,450 square feet), 661 West Randall Road, Coopersville (1,950 square feet); 3069 Slocum Road, Ravenna (3,300 square feet); 5475 Apple Avenue, Egelston (3,300 square feet); and 11 South State
Street, Sparta (1,040 square feet). The Bank leases its office at 47 South Charles Street, White Cloud, Michigan (approximately 500 square feet). The Corporation believes all of its and the Bank's properties are in good condition and repair and are adequately covered by insurance.
As part of its business, the Bank generates all types of mortgages. The Bank occasionally purchases mortgages as part of its business, but typically relies on its ability to generate mortgages for most purposes.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Corporation or the Bank is party, as plaintiff or defendant, to legal proceedings in the normal course of operations. No pending litigation is considered material at this time.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for Valley Ridge Common Stock. Transactions in Valley Ridge Common Stock are occasionally effected by individuals on an informal basis. Some transactions are effected through the involvement of local brokerage firms. The prices at which such transactions are effected are only occasionally reported to the Corporation. As of December 31, 1998, there were approximately 490 record holders of shares of Valley Ridge Common Stock.
The Corporation has paid regular cash dividends since June 30, 1989. The following table summarizes the quarterly cash dividends paid to common shareholders during the last two full years, retroactively adjusted for a 5-for-4 stock split during October 1997, which was effected in the form of a stock dividend:
Holders of Valley Ridge Common Stock are entitled to receive dividends when, as and if declared by the Corporation's board of directors out of funds legally available for that purpose. The earnings of the Corporation, through dividends paid by the Bank, are the principal source of funds to pay cash dividends. Consequently, cash dividends are dependent upon the earnings, capital needs, regulatory constraints and other factors affecting the Corporation. Federal and state banking laws and regulations place certain restrictions on the amount of dividends and loans that a bank can pay to its parent company. These restrictions are not expected to prohibit the Corporation from continuing its normal dividend policy.
ITEM 6.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion is provided by Valley Ridge Financial Corp. management as its analysis of the consolidated financial condition and results of operations of the Corporation. This analysis should be read in conjunction with the consolidated financial statements and related notes.
TWELVE MONTHS ENDED DECEMBER 31, 1998 AND 1997
RESULTS OF OPERATIONS: The Corporation reported net income of $1,627,173 or $2.62 per share for 1998. This was 9.8% higher than the $1,481,712, or $2.39 per share, earned in 1997. The increase in net income was primarily a result of increased net interest income from $5,920,713 in 1997 to $6,384,613 in 1998, along with an increase in non-interest income from $1,085,728 in 1997 to $1,382,786 in 1998.
The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the related yields, as well as the interest expense on average interest-bearing liabilities.
The following table presents the dollar amount of change in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and change due to rate.
Net interest margin remained strong at 5.48% for 1998, a decline of 20 basis points from 1997. The decrease is largely due to increased competition for loan and deposit accounts. Average loans, including loans held for sale, increased by 6.8% to $95,943,606 with a year-to- year increase in mortgage loans, including loans held for sale, of 17.8% in 1998. The increase in mortgage loans is primarily due to the favorable rate environment. Average securities increased 31.4% to $26,189,105. Average interest-bearing deposits increased $8,970,118 or 10.6%. The increase is primarily the result of various CD promotions throughout 1998. Average other borrowings increased by 26.4% to $11,399,995, and average equity increased $1,470,611, an 11.7% increase.
The provision for loan losses was $300,000 and $190,000 for 1998 and 1997. The provision for loan losses represents the adjustment to the allowance for loan losses needed to maintain the allowance at a level determined by management to cover inherent losses within the Corporation's loan portfolio. The allowance for loan losses is based on the application of projected loss ratios to the risk-ratings of loans, both individually and by category. Projected loss ratios
incorporate such factors as recent loss experience, current economic conditions and trends, trends in past due and impaired loans, and risk characteristics of various categories and concentrations of loans. Most of the loans charged-off were consumer loans for both years.
The allowance for loan losses at December 31, 1998 was 1.4 times the average of impaired loans for the year. Loan recoveries were 19% of the prior year's charge-offs. Net charge-offs for 1998 decreased from $185,382 in 1997 to $98,072. The provision for loan losses was increased to $300,000 to allow for an increase in loan growth and downward trends in the agricultural economy. The net effect was a $201,928 increase in the allowance balance at December 31, 1998. These factors result in an increase in the ratio of allowance to total loans from 1.28% to 1.40%. Management believes that this level of allowance is adequate to cover problem credits in the loan portfolio.
The balance of impaired loans at December 31, 1998 of $166,317 is $1,893,443 lower than at December 31, 1997. This decrease is due primarily to two commercial credits which were considered impaired at December 31, 1997, but subsequently paid off during 1998. As indicated in Note 4 of the consolidated financial statements, management does not anticipate significant loss exposure relating to the loans classified as impaired and has established no specific reserves against those loans due to favorable collateral positions.
The allowance for loan losses was allocated in an amount deemed necessary to provide for probable losses within the following loan categories as of December 31:
Noninterest income was $1,382,786 and $1,085,728 for 1998 and 1997, respectively. The increase was primarily a result of increased other income and net realized gain on the sale of securities for 1998 compared to 1997. Other income increased from 1997 to 1998 as a result of increased income from West Shore Computer Services, Inc. West Shore Computer Services, Inc. is owned jointly by Valley Ridge with several other community banks and provides data processing services to Valley Ridge and other banks. Noninterest expense increased to $5,436,531 compared to $4,921,337 in 1997. Noninterest expense was higher in 1998 when compared to 1997 largely because of salaries and benefits, which increased $323,294 or 13.2%. Increases from 1997 to 1998 in occupancy expense of $88,113 or 27.1% and furniture and fixtures expense of $62,968 or 23.5% also contributed to the increase in noninterest expense. The increase in occupancy and furniture and fixtures expenses can be attributed to the completion of a new corporate office during 1998.
Following are overall return percentages and the dividend pay-out ratio for the past two years:
Management is not aware of any existing trends, events, uncertainties or current recommendations by regulatory authorities that are expected to have a material impact on Valley Ridge's future operating results or financial condition.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES: Total assets increased by $17,320,601 or 13.2% to $148,195,110 at December 31, 1998 compared to $130,874,509 at December 31, 1997. This growth is attributable primarily to growth in the loan portfolio which was funded by deposit growth. This growth was partially due to Valley Ridge benefiting from consolidation of major regional banks in some of its markets. Total liabilities increased by $16,133,526 or 13.7% to $133,710,659 at December 31, 1998 compared to $117,577,133 at December 31, 1997. The increase in shareholders' equity is due primarily to retention of earnings and an increase of $151,566 in the unrealized gain on securities available for sale.
Total loans increased by $7,016,611 or 7.6% from the balance at December 31, 1997 to $99,433,953 at December 31, 1998. In addition, loans held for sale were $3,670,761 at December 31, 1998 compared to zero at December 31, 1997. Deposits increased by $14,407,816 or 13.7% to $119,582,751 at December 31, 1998. The overall impact of these two changes was a decrease in the net loan to deposit ratio to 82% at December 31, 1998 compared to 87% at December 31, 1997. The allowance for loan losses increased by $201,928 causing the ratio of reserves to outstanding loans to increase from 1.28% at December 31, 1997 to 1.40% at December 31, 1998.
The following table shows the maturity of commercial, consumer, real estate construction and agricultural loans outstanding at December 31, 1998. Also provided below is the amount due after one year classified according to the terms of the loans. Demand loans, loans with no stated maturity and overdrafts are reported as due in one year or less.
The time remaining until maturity of time certificates of deposit of $100,000 or more at December 31, 1998 were as follows:
Valley Ridge paid dividends totaling $621,394 in 1998, compared to $434,049 paid during 1997.
The Corporation's capital ratios exceeded the minimum levels prescribed by the Federal Reserve Board, as shown in Note 16 of the consolidated financial statements.
Total cash, cash equivalents and investment securities totaled $36,700,174 at December 31, 1998 or 25% of total assets. The principal source of funding for the Corporation continues to come from its deposit customers, which have historically been a stable source of
funds. Other sources of funding include normal loan repayments, sales and maturities of securities, federal funds available from correspondent banks, and additional advances available from the Federal Home Loan Bank. Management believes that the current level of liquidity is sufficient to meet the normal operating needs of the Bank.
As of December 31, 1998, the securities of no issuer except the U.S. Government had an aggregate carrying value that exceeded 10% of shareholders' equity.
Accrued expenses and other liabilities increased by $805,441 or 72.0%, from 1997. Included in this increase are an increase in commercial loan participation payments in process, an increase in accrued deferred director expenses, and an increase in the deferred tax portion of the unrealized gains on securities available for sale.
Securities sold under agreements to repurchase generally mature within one to three days from the transaction date. Valley Ridge Bank has pledged certain investment securities, which are held in safekeeping, as collateral against these borrowings. Valley Ridge Bank had $1,204,014 and $283,745 in repurchase agreements at year end 1998 and 1997.
The Corporation had $11,000,000 in advances from the Federal Home Loan Bank at year end 1998 and 1997. Each advance requires monthly interest payments at either fixed or adjustable rates. These borrowings are collateralized by nonspecific loans within the mortgage portfolio up to the principal outstanding and nonspecific qualifying securities within the securities portfolio.
The following table shows the interest sensitivity gaps for four different time intervals as of December 31, 1998.
The above table is based on contractual terms. Mortgage-backed securities do not have a single maturity date and, therefore, were excluded from investment securities. Savings accounts, money market accounts, and NOW accounts are subject to immediate withdrawal and are presented as repricing in the earliest period presented. Although demand and savings accounts, for which rates paid are not readjusted on a pre-established contract cycle and are subject to immediate withdrawal, are presented as repricing in the 0-3 months period, management believes that these types of accounts are not as sensitive to changes in interest rates in the short-term as this presentation would indicate. The Corporation is liability sensitive in periods out to 12 months in the amount of $35,420,000; however, this is offset in the 1-5 years period with a positive interest sensitivity gap of $37,697,000. The cumulative gap increases to $26,281,000 for all time periods. Management strives to maintain a positive cumulative gap for periods out to five years. The practice of underwriting loans with maturity dates of five years or less and with variable rates allows for a repricing of those assets over a relatively short period.
Additionally, management does not aggressively price deposits, preferring to maintain a level of lending supported primarily by its base of core deposits. The Corporation's asset/liability management committee meets semi-annually, or more often as needed, to review gap positions and determine management strategies for loan and deposit pricing, purchase and sale of securities, and other borrowing decisions.
IMPACT OF INFLATION AND CHANGING PRICES. Most assets and liabilities of a financial institution are monetary in nature. This differs from most commercial and industrial companies that have significant investments in fixed assets or inventories. The effect of inflation on financial institutions is to a large extent indirect and the measure of such impact is largely subjective.
Noninterest expenses tend to rise during periods of general inflation. Inflation levels are to some degree reflected in interest rates. Changes in interest rates, which are to some extent attributable to changes in inflation rates or uncertainty concerning changes in inflation rates, do affect the earnings of the Corporation. The Corporation seeks to protect net interest income from the adverse effects of interest rate fluctuations through its asset/liability management program.
The Corporation's management believes that increases in financial institution assets and deposits result in part from monetary inflation. As assets increase, the financial institution must increase equity capital proportionately to maintain appropriate relationships between assets and equity.
IMPACT OF ACCOUNTING STANDARDS EFFECTIVE IN FUTURE PERIODS: In 1998, the Financial Accounting Standards Board issued Statement No. 133, ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES, which will require, in 2000, the recording of derivatives at fair value in the balance sheet, with changes in fair value running through the income statement. Also issued in 1998 was Statement No. 134, MORTGAGE-BACKED SECURITIES AFTER SECURITIZATION, which will allow, in 1999, mortgage loans that are securitized to be classified as trading, available for sale, or, in certain circumstances, held to maturity. Currently, these must be classified as trading. Management does not anticipate that the adoption of these standards will have a significant impact on the Corporation's consolidated financial statements.
YEAR 2000 READINESS DISCLOSURE
The Corporation is currently in the process of addressing an issue that is facing all users of automated information systems. The issue is that many computer systems that process transactions based on two
digits representing the year of the transaction may recognize a date using "00" as the year 1900 rather than the year 2000. The inability to correctly recognize "00" as the year 2000 could affect a wide variety of automated information systems, such as mainframe applications, personal computers and communication systems, in the form of software failure, errors or miscalculations.
The Corporation has developed a plan to prepare for the year 2000. This plan includes the performance of an inventory of hardware and software applications, communicating with third party vendors, suppliers and customers, and obtaining certifications of compliance from third party providers. The Corporation's core computer services provider, West Shore Computer Services, Inc. ("West Shore") (20% of the stock of which is owned by the Corporation) has implemented its own plan to perform an inventory of its systems and ensure that its systems are year 2000 compliant. As of December 31, 1998, West Shore had completed approximately 85% of its plan.
The Corporation had completed approximately 85% of its plan as of December 31, 1998 at a cost of $62,000. This includes costs related to personnel, programming, and hardware and software upgrades and replacements. Management anticipates that an additional $40,000 in personnel, programming, and hardware and software upgrades and replacements will be required to complete the plan during 1999. While additional unforeseen costs may occur, these costs are not expected to be significant.
The impact of the year 2000 issue on the Corporation will depend not only on corrective actions that the Corporation takes, but also on the way in which year 2000 issues are addressed by governmental agencies, businesses and other third parties that provide services or data to, or receive services or data from, the Corporation, or whose financial condition or operational capability is important to the Corporation. To reduce this exposure, the Corporation has initiated formal communications with its significant suppliers and large customers to determine the extent to which the Corporation's interface systems are vulnerable to those third parties' failures to resolve their own year 2000 issues. The Corporation is continuing to seek assurances from its third party vendors and suppliers confirming that the third parties' software systems are year 2000 compliant or an expected compliance date by mid 1999. The Corporation is continuing to seek assurances that the systems of other companies on which the Corporation's systems rely will be timely converted or modified. If such modifications and conversions are not completed timely, their inability to correctly recognize the year 2000 could have an adverse impact on the operations of the Corporation.
The Corporation's credit risk associated with borrowers may increase to the extent borrowers fail to adequately address year 2000 issues. As a result, the Bank identified its material borrowers and has assessed these borrowers'
year 2000 readiness. The material borrowers' year 2000 readiness will be monitored periodically, based on the level of risk that the year 2000 has been estimated to potentially impact the business of each borrower.
The Corporation is preparing general contingency plans to address unforeseen year 2000 issues, including plans in the event that mission critical systems experience difficulties or other significant third parties fail to adequately address year 2000 issues. Such plans principally involve the operation of systems in an off-line environment. This would be accomplished by the manual and desktop computer update of financial records until problems or difficulties are remedied. Internal remediation plans are being developed in the remaining information and non-information technology areas. The Corporation is also enhancing its existing business resumption plans to reflect year 2000 issues. It is developing plans, designed to coordinate the efforts of its personnel and resources, in addressing any year 2000 difficulties that become evident after December 31, 1999. There can be no assurance that any plans will fully mitigate any such difficulties. Furthermore, there may be certain mission critical third parties, such as utilities or telecommunication companies, where alternative arrangements or other sources are limited or unavailable.
The Corporation believes that with modifications to existing hardware and software and conversions to new hardware and software, the year 2000 issue should not pose significant operational problems for its computer systems and that costs to be incurred are not expected to be material to the Corporation's results of operations, liquidity or capital resources.
There can be no guarantee that these estimates will be achieved and actual results could differ from those anticipated. Specific factors that might cause differences include, but are not limited to, the ability of other companies on which the Corporation's systems rely to modify or convert their systems to be year 2000 complaint, the ability to locate and correct all relevant computer codes, and similar uncertainties. This year 2000 readiness disclosure is in part based upon and repeats information provided to the Corporation by outside sources, including its customers, suppliers, and other business partners and the vendors and licensors of the Corporation's software, hardware and other systems and equipment. Although the Corporation believes this outside information is accurate, the Corporation is not the original source of this outside information and has not independently verified the information.
FORWARD-LOOKING STATEMENTS
This discussion and analysis of financial condition and results of operations, and other sections of this report, contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation itself. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. Year 2000 related remediation, cost and risk assessments are necessarily statements of belief as to the outcome of future events, based in part on information provided by vendors and others that the Corporation has not independently verified. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, the Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.
Future Factors include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulations; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior as well as their ability to repay loans; the ability of companies on which the Corporation relies to make their computer systems year 2000 compliant; and changes in the national economy. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.
ITEM 7.
ITEM 7. FINANCIAL STATEMENTS.
VALLEY RIDGE FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
VALLEY RIDGE FINANCIAL CORP. CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1998 and 1997 - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
VALLEY RIDGE FINANCIAL CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31, 1998 and 1997 - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
VALLEY RIDGE FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 1998 and 1997 - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
VALLEY RIDGE FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1998 and 1997 - -------------------------------------------------------------------------------
Supplemental disclosure of non-cash investing activities - See Note 1
- ------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
VALLEY RIDGE FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 - -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include Valley Ridge Financial Corp. and its wholly-owned subsidiary, Valley Ridge Bank, and its wholly-owned subsidiaries, Valley Ridge Realty, Inc., Valley Ridge Investments, Inc., and Valley Ridge Financial Services, Inc. after elimination of significant intercompany transactions and accounts.
NATURE OF OPERATIONS: Valley Ridge Financial Corp. ("Corporation") is a regional, community-based financial institution, that owns all of the outstanding stock of Valley Ridge Bank ("Bank"). The Bank's loan and deposit accounts are primarily with customers located in Western Michigan, within the counties of Kent, Ottawa, Muskegon and Newaygo. A real estate agency was purchased during 1998. The Corporation and its subsidiaries are primarily organized to operate in the banking industry. Substantially all revenues are derived from banking products and services.
USE OF ESTIMATES: To prepare financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses and fair values of financial instruments are particularly subject to change.
CASH FLOW REPORTING: Cash and cash equivalents include cash on hand, demand deposits with other financial institutions and federal funds sold. Cash flows are reported net for customer loan and deposit transactions, interest-bearing time deposits with other financial institutions and short-term borrowings with maturities of 90 days or less.
SECURITIES: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported separately in shareholders' equity, net of tax. Gains and losses on the sales of securities available for sale are determined using the specific allocation method. Securities are written down to fair value when a decline in fair value is not
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
temporary. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings.
LOANS: Loans are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically when payments are past due over 90 days. Payments received on such loans are reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation allowance, increased by the provision for loan losses and recoveries, and decreased by charge-offs. Management estimates the allowance balance required based on past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated in the aggregate for smaller- balance loans of similar nature such as residential mortgage, consumer and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that all principal and interest amounts will not be collected according to the original terms of the loan.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using both straight-line and accelerated methods over the estimated useful lives of the respective assets.
OTHER REAL ESTATE OWNED: Real estate properties acquired in collection of a loan are recorded at fair value at acquisition. Any reduction to fair value from the carrying value of the related loan is accounted for as a loan loss. After acquisition, a valuation allowance reduces the reported amount to the lower of the initial amount or fair value less costs to sell. Expenses, gains and losses
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
on disposition, and changes in the valuation allowance are reported in other expenses. The Corporation held approximately $662,000 of other real estate at December 31, 1998. The Corporation did not hold other real estate at December 31, 1997.
SERVICING RIGHTS: Servicing rights represent the allocated value of servicing rights retained on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance.
INTANGIBLES: Purchased intangibles, primarily goodwill and core deposit value, are recorded at cost and amortized over the estimated lives. Goodwill amortization is straight-line over 25 years, and core deposit amortization is accelerated over 12 years.
LONG-TERM ASSETS: These assets are reviewed for impairment when events indicate the carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at discounted amounts.
EMPLOYEE BENEFITS: The Bank maintains profit sharing and 401(k) plans for substantially all employees. Contributions to the profit sharing plan are made at the discretion of the Board of Directors. The 401(k) plan allows employee contributions up to 12% of employee compensation. Up to 6% of the contributions are matched at 50% by the Bank.
The Corporation also maintains an Employee Stock Ownership Plan (ESOP) covering substantially all full-time employees after one year of service, which invests primarily in stock of Valley Ridge Financial Corp. Accordingly, compensation expense is recorded based on the cash or fair value of shares contributed or committed to be contributed to the plan.
RESTRICTED STOCK AWARDS: The measurement of total compensation cost for restricted stock awards is based upon the fair value of the shares at the grant date. Compensation expense is recognized on a prorata basis over the vesting period of the award. The unearned compensation value of the restricted stock awards is shown as a reduction of shareholders' equity.
STOCK OPTIONS: Expense for employee compensation is recognized only if the options are granted below the market price at the date of
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
grant. As shown in a separate footnote, pro forma disclosures of net income and earnings per share are provided as if the fair value method were used for stock-based compensation.
INCOME TAXES: Income tax expense is the sum of the current year income tax return liability plus the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed separately. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
DIVIDEND RESTRICTIONS: Banking regulations require the maintenance of certain capital levels and may limit the amount of dividends which may be paid by the Bank to the Corporation or by the Corporation to shareholders.
EARNINGS PER SHARE: Basic earnings per share is based on weighted- average common shares outstanding, including shares held by the ESOP. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and unrealized gains and losses on securities available for sale which are also recognized as separate components of equity. The accounting standard that requires reporting comprehensive income first applies for 1998, with prior information restated to be comparable.
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: During 1998, the Corporation transferred $3,670,761 from portfolio loans to loans held for sale.
RECLASSIFICATIONS: Some items in prior financial statements have been reclassified to conform with the current presentation.
NOTE 2 - CASH AND DUE FROM BANKS
Minimum cash balances, which are based on the deposit levels of the Bank, are required to be maintained by the Federal Reserve as legal reserve requirements. Cash balances restricted from usage due to these requirements were approximately $690,000 and $448,000 at December 31, 1998 and 1997, respectively.
NOTE 3 - SECURITIES
The amortized cost and fair values of securities at year-end were as follows:
NOTE 3 - SECURITIES (Continued)
The amortized cost and fair values of debt investment securities at year-end 1998, by contractual maturity, are shown below. Expected
NOTE 3 - SECURITIES (Continued)
maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, mortgage-backed securities, are shown separately.
Gross realized gains from sales of securities available for sale were $182,493 and $41,048 for 1998 and 1997. Gross losses on those sales were $225 and $8,657 for 1998 and 1997.
Securities with a par value of approximately $400,000, were pledged to secure public deposits and for various other purposes as required or permitted by law at December 31, 1998 and 1997. Securities with a par value of $2,000,000 were pledged to secure short-term borrowings at December 31, 1998. Nonspecific securities were pledged to secure FHLB advances at December 31, 1998.
NOTE 4 - LOANS
Year-end loans were as follows:
Loans serviced for others were $16,670,404 and $12,215,000 at year-end 1998 and 1997.
Activity in the allowance for loan losses was as follows:
Impaired loans were as follows:
NOTE 5 - PREMISES AND EQUIPMENT - NET
Year-end premises and equipment were as follows:
NOTE 6 - DEPOSITS
Deposits at year-end are summarized as follows:
NOTE 6 - DEPOSITS (Continued)
At year-end 1998 and 1997, stated maturities of all time deposits were as follows:
Time deposit accounts of $100,000 or more were $9,379,000 and $7,632,000 at year-end 1998 and 1997.
NOTE 7 - BORROWINGS
At year-end 1998, the Corporation had the following advances from the Federal Home Loan Bank ("FHLB"):
Each advance requires monthly interest payments at either fixed or adjustable rates. These borrowings are collateralized by nonspecific loans within the mortgage portfolio and nonspecific qualifying securities within the securities portfolio up to the principal outstanding.
NOTE 8 - FEDERAL INCOME TAXES
The provision for income taxes consists of:
Year-end deferred tax assets and liabilities consist of:
No valuation allowance has been recorded against the deferred tax assets.
NOTE 8 - FEDERAL INCOME TAXES (Continued)
The effective tax rate differs from the statutory federal income tax rate as follows:
NOTE 9 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow:
NOTE 9 - EARNINGS PER SHARE (Continued)
1,450 shares of unearned restricted stock were not considered in computing diluted earnings per common share for 1998 because they were antidilutive.
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Bank maintains profit sharing and 401(k) plans for substantially all employees. Under the plans, employees may make voluntary contributions based on a percentage of covered compensation. The plans also allow the Bank, at the discretion of the Board of Directors, to provide an annual contribution. The Bank's cash contributions to the profit sharing plan were $120,000 in 1998 and 1997. Additionally, the Bank made matching contributions to the 401(k) plan of $39,200 and $38,600 in 1998 and 1997.
The Corporation also maintains an Employee Stock Ownership Plan (ESOP), covering substantially all full-time employees after one year of service, which invests primarily in stock of Valley Ridge Financial Corp. In accordance with the terms of the ESOP, the Corporation may make discretionary contributions to the plan. The amount of the annual contribution to the ESOP is determined by the Board of Directors. The Corporation made ESOP contributions totaling $50,000 in 1998 and $35,000 in 1997. At December 31, 1998, the plan had no indebtedness and held 19,356 shares of stock, allocated to employees and voted by trustees of the plan. Upon distribution of shares to a participant, the participant has the right to require the Corporation to purchase shares at their fair value in accordance with the terms and conditions of the plan. The fair value of the shares allocated as of December 31, 1998, was $677,460.
NOTE 11 - STOCK INCENTIVE PLAN
A stock incentive plan was established during 1998 for directors, officers, and other key employees of the Corporation and its subsidiaries. The plan authorizes the issuance of up to 30,000 shares in the form of stock options and restricted stock awards.
Stock options for nonemployee directors are granted at the market price on the date of grant. Stock options awarded to nonemployee directors are fully vested on the date of grant and expire five years from the date of grant. Half of the restricted stock awards vest at the date of grant with the remainder vesting in five equal annual installments from the date of grant.
NOTE 11 - STOCK INCENTIVE PLAN (Continued)
A summary of the activity in the plan is as follows:
Compensation expense related to restricted stock awards was $40,440 for 1998.
Had compensation cost for stock options been measured using FASB Statement No. 123, net income and earnings per share would have been the pro forma amounts indicated below. The pro forma effect may increase in the future if more options are granted.
NOTE 11 - STOCK INCENTIVE PLAN (Continued)
The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date:
NOTE 12 - DIRECTOR DEFERRED COMPENSATION PLAN
The Corporation instituted a Director Deferred Compensation Plan in 1994, whereby directors may periodically defer a portion of current compensation. The Corporation has committed to pay to the directors, or the directors' designated beneficiaries or survivors, the total amount of deferred compensation plus accumulated interest at or following retirement. The interest is added to the accumulated deferred compensation liability at a periodic compound rate. The agreement also addresses termination, disability or death prior to retirement. The Corporation purchased single premium universal life insurance policies in connection with the establishment of the plan. The cash surrender value of these policies as of December 31, 1998 and 1997 was $1,854,412 and $1,596,551, which was included in other assets. The compensation expense was $173,900 and $165,656 for 1998 and 1997, respectively. The portion of the compensation expense deferred for 1998 and 1997 was $160,800 and $153,381, respectively. The accrued deferred compensation liability was $569,145 and $408,345 as of December 31, 1998 and 1997.
NOTE 13 - RELATED PARTIES
Certain directors and executive officers of the Corporation, including their immediate families and companies in which they are principal owners, were loan customers of the Corporation. At December 31, 1998 and 1997, the Corporation had approximately $2,115,000 and $1,844,000 in outstanding loans to directors and executive officers. New loans and repayments were $2,545,000 and $2,274,000, respectively, during 1998.
Related party deposits totaled approximately $2,514,000 and $3,519,000 at year-end 1998 and 1997.
NOTE 14 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the consolidated financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on financial condition or results of operations.
Some financial instruments are used to meet customer financing needs and to reduce exposure to interest rate changes. These financial instruments include commitments to extend credit and standby letters of credit. These involve, to varying degrees, credit and interest-rate risk in excess of the amount reported in the financial statements.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment, and generally have fixed expiration dates. Standby letters of credit are conditional commitments to guarantee a customer's performance to a third party. Exposure to credit loss if the other party does not perform is represented by the contractual amount for commitments to extend credit and standby letters of credit. Collateral or other security is normally not obtained for these financial instruments prior to their use, and many of the commitments are expected to expire without being used.
NOTE 14 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES (Continued)
Commitments at year-end were as follows:
Substantially all of the commitments to make loans at December 31, 1998 were made at fixed rates ranging from 6.25% to 9.50%. These commitments generally have termination dates of one year or less and may require a fee. Since many of the above commitments expire without being used, the above amounts do not necessarily represent future cash commitments. No losses are anticipated as a result of these transactions.
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for financial instruments. The carrying amount is considered to estimate fair value for cash and short-term instruments, demand deposits, short-term borrowings, accrued interest, and variable rate loans or deposits that reprice frequently and fully. Securities fair values are based on quoted market prices or, if no quotes are available, on the rate and term of the security and on information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, the fair value is estimated by discounted cash flow analysis using current market rates for the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Fair value of loans held for sale is based on market estimates. The fair value of debt is based on currently available rates for similar financing. The estimated fair value of other financial instruments and off-balance-sheet loan commitments approximate cost and are not considered significant to this presentation.
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Financial instruments at year-end were as follows, in thousands:
NOTE 16 - REGULATORY MATTERS
The Corporation and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative and qualitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices.
The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.
NOTE 16 - REGULATORY MATTERS (Continued)
Actual capital levels (in millions) and minimum required levels for the Bank were:
The Bank was categorized as well capitalized at year end 1998 and 1997.
NOTE 17 - VALLEY RIDGE FINANCIAL CORP. (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS
Following are condensed parent company only financial statements.
NOTE 17 - VALLEY RIDGE FINANCIAL CORP. (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS (Continued)
NOTE 18 - SHAREHOLDERS' EQUITY
On September 24, 1997, the Board of Directors approved a five-for-four split of the Corporation's common stock for shareholders, effected in the form of a stock dividend. The stated par value of each share was not changed. All share and per share amounts have been adjusted to reflect the stock split.
[CROWE CHIZEK LOGO]
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders Valley Ridge Financial Corp. Kent City, Michigan
We have audited the accompanying consolidated balance sheets of Valley Ridge Financial Corp. as of December 31, 1998 and 1997 and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of Valley Ridge Financial Corp. at December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
s/ Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP
Grand Rapids, Michigan February 19, 1999
ITEM 8.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Corporation's board of directors is divided into three classes, which are as nearly equal in number as possible. Each director is a member of a class that has a term of office of three years, with the term of office of one class expiring at the annual meeting of shareholders in each successive year.
All directors of the Corporation also have been directors of the Bank since the Consolidation. Directors who were directors of Community before the Merger also concurrently served as directors of Grant from the date of their election or appointment as a director of Community until the Consolidation. Directors who were not directors of Community also concurrently served as directors of Kent City from the date of their election or appointment as a director of the Corporation until the Consolidation.
Except as otherwise indicated, all of the named individuals have had the same principal employment for over five years. Executive officers are appointed annually and serve at the pleasure of the board of directors of the Corporation.
DIRECTORS WITH TERMS EXPIRING IN 1999
Michael E. McHugh (age 49) has been a director of the Corporation and/or Kent City since 1989. Mr. McHugh is Secretary and Treasurer of the Corporation. Mr. McHugh has also been Executive Vice President of the Bank (and, before the Consolidation, Kent City) since 1987.
Dennis C. Nelson (age 50) has been a director of the Corporation since the Merger and was a director of Community and/or Grant from 1985 until the Merger. Mr. Nelson is a dentist practicing in Grant, Michigan.
John J. Niederer (age 63) has been a director of the Corporation and/or Kent City since 1994. Mr. Niederer has been President and sole shareholder of Greenridge Fruit, Inc., a distributor of fruit, since 1990. Prior to that, Mr. Niederer was Vice President of Wm. Bolthouse Farms, Inc., a producer and distributor of vegetables.
Paul K. Spoelman (age 63) has been a director of the Corporation and/or Kent City since 1994. Mr. Spoelman is a shareholder and founder of Spoelman, Hovingh & Feldt, Inc., an accounting firm.
Donald Swanson (age 64) has been a director of the Corporation and/or Kent City since 1981. Mr. Swanson is Chairman and a majority shareholder of Swanson Pickle Co., Inc., a producer and distributor of pickles.
Donald VanSingel (age 55) has been Vice Chairman and a director of the Corporation since the Merger and was Chairman of Community and/or Grant from 1982 until the Merger and a director of Community and/or Grant from 1973 until the Merger. Mr. VanSingel has been a consultant for Governmental Consultant Services, Inc. since 1993. Prior to that, Mr. VanSingel served in the Michigan House of Representatives.
DIRECTORS WITH TERMS EXPIRING IN 2000
Jerome B. Arends (age 54) has been a director of the Corporation and/or Kent City since 1987. Mr. Arends is Chief Executive Officer and President of Ravenna Farm Equipment, Inc., a distributor of farm implements and equipment.
K. Timothy Bull (age 51) has been a director of the Corporation and/or Kent City since 1993 and was also a director of the Corporation from 1988 until 1991. Mr. Bull is President and sole shareholder of Moon Lake Orchards, Inc., a producer of fruit.
Richard L. Edgar (age 54) has been a director of the Corporation and/or Kent City since 1974. Mr. Edgar has been President and Chief Executive Officer of the Corporation since 1988, and President and Chief Executive Officer of the Bank (and, before the Consolidation, Kent City) since 1987. Prior to that, Mr. Edgar served Kent City in various management and other capacities since 1963. Mr. Edgar is also a director of West Shore Computer Services, Inc., a data processing company in which the Bank is a 20% shareholder.
Fred J. Finkbeiner (age 69) has been a director of the Corporation since the Merger and was a director of Community and/or Grant from 1965 until the Merger. In 1996, Mr. Finkbeiner retired as a Sales Manager at V & P Produce, a distributor of vegetables located in Grant, Michigan.
DIRECTORS WITH TERMS EXPIRING IN 2001
Gary Gust (age 54) has been a director of the Corporation and/or Kent City since 1991. Mr. Gust is President and sole shareholder of Gust Construction Company, a general contractor.
Ronald L. Hansen (age 54) has been a director of the Corporation since the Merger and was a director of Community from 1990 until the Merger. Mr. Hansen has been Vice President of the Corporation since the Merger and a Senior Vice President of the Bank since the Consolidation. Prior to that, Mr. Hansen was Secretary of Community from 1994 until the Merger, President and Chief Executive Officer of Grant from 1994 until the Consolidation, a director of Grant from 1982 until the Consolidation and Vice President and Cashier of Grant from 1982 until 1994. Prior to that, Mr. Hansen served Grant in various management and other capacities since 1973.
Robert C. Humphreys (age 60) has been a director of the Corporation and/or Kent City since 1988. Mr. Humphreys has been Chairman of the Board of the Corporation and the Bank (and, before the Consolidation, Kent City) since 1993. Mr. Humphreys owns and operates Humphreys Orchards, a producer of fruit.
Ben J. Landheer (age 63) has been a director of the Corporation since the Merger and was a director of Community and/or Grant from 1991 until the Merger. Mr. Landheer owns and operates Landheer Insurance Agency, an agent for insurance companies offering a broad range of insurance products.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Robert L. Karpinski (age 58) is Senior Vice President of the Bank and has served the Bank in various executive capacities since January 1985.
As of the date of this Form 10-KSB, directors and officers of the Corporation and persons who beneficially own more than 10% of the outstanding shares of Valley Ridge Common Stock were not subject to the reporting obligations of Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
ITEM 10.
ITEM 10. EXECUTIVE COMPENSATION.
The following table shows certain information concerning the compensation for services rendered during each of the three years in the period ended December 31, 1998, of the Chief Executive Officer of the Corporation and each executive officer of the Corporation who earned cash compensation in excess of $100,000 during 1998. Messrs. Edgar, McHugh and Hansen were compensated by the Bank in the capacities indicated in the table.
During 1998, the Bank compensated its directors at the rate of $3,800 per year and $400 per regular board meeting attended, except that the Chairman of the Board was paid $500 per meeting attended. Directors who were not executive officers of the Corporation or the Bank also received $125 per committee meeting attended. The Corporation has entered into deferred compensation agreements with some of its directors under which payments will be made to the directors after their retirement.
Effective January 1, 1997, the Bank entered into Executive Employee Salary Continuation Agreements (the "Agreements") with each of the named executive officers. Under the Agreements, an executive officer is eligible to receive payment of a monthly retirement benefit from the Bank for 180 months following normal retirement date (age 65). An executive officer may retire early, after age 60, and receive a reduced benefit, or retire after age 65 and receive an increased benefit. If an executive officer terminates employment prior to early retirement, a vested benefit is payable. Vesting is based on five years of employment commencing January 1, 1997, with 100% vesting given upon death, disability or other involuntary termination of employment for reasons other than "cause." If a named executive officer dies before receiving the entire benefit, remaining payments will be made to a beneficiary. If the officer is terminated prior to early retirement, without "cause" but following a "change in control"
of the Bank (as these terms are defined in the Agreements), the officer named will receive the vested benefit plus payment of one year's salary. The monthly normal retirement benefit for each executive officer is $3,275 for Mr. Edgar, $758 for Mr. McHugh, and $1,825 for Mr. Hansen.
Effective January 13, 1998, Mr. Edgar and Mr. McHugh have employment agreements with the Corporation under which Mr. Edgar serves as President and Chief Executive Officer, and Mr. McHugh serves as Secretary, Treasurer and Chief Financial Officer, of the Corporation and the Bank. Mr. Edgar's agreement provides for a minimum annual salary of $116,761, or any increased amount authorized by the Board of Directors, and Mr. McHugh's agreement provides for a minimum annual salary of $80,340, or any increased amount authorized by the Board of Directors. Both agreements provide for annual salary reviews and bonuses in the discretion of the Board of Directors. Both agreements provide that if the Corporation terminates the executive's employment other than for "cause" or due to the executive's extended "disability" (as those terms are defined in the agreements), or if the executive terminates the employment for "good reason" (as defined in the agreements), the executive will be entitled to severance pay consisting of continuation of his salary and benefits for the remaining term of the his agreement. Severance pay would be reduced by the amount of any disability benefits received by the executive (other than benefits under a specifically identified disability insurance policy) and would also be reduced as much as necessary to avoid any part of the executive's compensation from the Corporation being classified as "excess parachute payments" under Section 280G of the Internal Revenue Code. Severance pay is subject to discontinuance if the executive materially competes with the Corporation. The term of Mr. Edgar's agreement is five years and extended one year on each anniversary of the effective date unless the Board of Directors gives written notice of its intention not to extend the term. The term of Mr. McHugh's agreement is five years.
Ronald L. Hansen has an employment agreement with the Corporation. Under this agreement, Mr. Hansen is to serve the Corporation and the Bank in his present capacity for an annual salary of $70,000 and discretionary bonuses to be determined by the board of directors of the Corporation. Mr. Hansen's salary is reviewed at least annually by the board of directors and may be increased, but not decreased. Upon termination of his employment agreement by the Corporation without "cause" or by Mr. Hansen for "good reason" before a "change in control" of the Corporation (as these terms are defined in the agreements), Mr. Hansen is entitled to his salary and benefits, as if termination of his employment had not occurred, through June 30, 2001. If such termination occurs after a change in control, Mr.
Hansen is entitled to his salary and benefits, as if termination of his employment had not occurred, until the later of (i) June 30, 2001, or (ii) three years after the change in control; provided that the amount of salary and benefits continuation attributable to the period beyond June 30, 2001, will be subject to a reduction to the extent of any portion of that amount that constitutes an "excess parachute payment" (as that term is defined in Section 280G of the Internal Revenue Code of 1986, as amended).
ITEM 11.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information concerning the number of shares of Valley Ridge Common Stock held as of December 31, 1998 by each shareholder who is known to the Corporation's management to have been the beneficial owner of more than 5% of the outstanding shares of Valley Ridge Common Stock as of that date:
The following table shows certain information concerning the number of shares of Valley Ridge Common Stock held as of December 31, 1998, by each of the Corporation's directors, each of the named executive officers and all of the Corporation's directors and executive officers as a group:
ITEM 12.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Directors and officers of the Corporation and their associates were customers of and had transactions with the Bank in the ordinary course of business between January 1, 1998, and March 29, 1999. It is anticipated that such transactions will take place in the future in the ordinary course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features.
ITEM 13.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS. The following exhibits are filed as part of this Form 10-KSB:
NUMBER EXHIBIT
3.1 RESTATED ARTICLES OF INCORPORATION. Previously filed as Exhibit 3.1 to the Corporation's Quarterly Report on Form 10-QSB for the Quarter ended June 30, 1998. Here incorporated by reference.
3.2 BYLAWS AND AMENDMENTS. Previously filed as Exhibit 3(b) to the Corporation's Form S-4 Registration Statement filed January 30, 1996. Here incorporated by reference.
4.1 FORM OF STOCK CERTIFICATE. Previously filed as Exhibit 4(a) to the Corporation's Form S-4 Registration Statement filed January 30, 1996. Here incorporated by reference.
4.2 LONG-TERM DEBT. The Corporation is a party to several long- term debt agreements which at the time of this report do not exceed 10% of the Corporation's total consolidated assets. The Corporation agrees to furnish copies of the agreements defining the rights of the other parties thereto to the Securities and Exchange Commission upon request.
10.1 DATA PROCESSING AGREEMENT. Previously filed as Exhibit 10(a) to the Corporation's Form S-4 Registration Statement filed January 30, 1996. Here incorporated by reference.
10.2 VALLEY RIDGE EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. Previously filed as Exhibit 10(b) to the Corporation's Form S-4 Registration Statement filed January 30, 1996. Here incorporated by reference.
10.3 KENT CITY STATE BANK PROFIT SHARING/401(K) PLAN. Previously filed as Exhibit 10(c) to the Corporation's Form S-4 Registration Statement filed January 30, 1996. Here incorporated by reference.
10.4 DIRECTORS' DEFERRED COMPENSATION PLAN AND FORM OF DIRECTORS' DEFERRED COMPENSATION AGREEMENT. Previously filed as Exhibit 10(d) to the Corporation's Form S-4 Registration Statement filed January 30, 1996. Here incorporated by reference.
10.5 EMPLOYMENT AGREEMENT WITH RONALD HANSEN. Previously filed as Exhibit 10.6 to the Corporation's Form 10-KSB filed March 31, 1997. Here incorporated by reference.
10.6 EMPLOYMENT AGREEMENT WITH MICHAEL MCHUGH. Previously filed as Exhibit 10.6 to the Corporation's Form 10-KSB filed March 31, 1998. Here incorporated by reference.
10.7 EMPLOYMENT AGREEMENT WITH RICHARD EDGAR. Previously filed as Exhibit 10.7 to the Corporation's Form 10-KSB filed March 31, 1998. Here incorporated by reference.
10.8 FORM OF SALARY CONTINUATION AGREEMENT. Previously filed as Exhibit 10.8 to the Corporation's Form 10-KSB filed March 31, 1998. Here incorporated by reference.
10.9 STOCK INCENTIVE PLAN OF 1998. Previously filed as Exhibit 10.1 to the Corporation's Quarterly Report on Form 10-QSB for the Quarter ended June 30, 1998. Here incorporated by reference.
21 SUBSIDIARIES OF THE REGISTRANT.
24 POWERS OF ATTORNEY.
27 FINANCIAL DATA SCHEDULE.
___________________________
Management contract or compensatory plan or arrangement.
The Corporation will furnish a copy of any exhibit listed above to any shareholder of the Corporation without charge upon written request to Michael E. McHugh, Secretary, Valley Ridge Financial Corp., 430 West Muskegon Avenue, Kent City, Michigan 49330.
REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the fourth quarter of 1998.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VALLEY RIDGE FINANCIAL CORP. (Registrant)
March 30, 1999 By /S/RICHARD L. EDGAR Richard L. Edgar President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
March 30, 1999 * Jerome B. Arends Director
March 30, 1999 * K. Timothy Bull Director
March 30, 1999 /S/RICHARD L. EDGAR Richard L. Edgar President, Chief Executive Officer and Director (Principal Executive Officer)
March 30, 1999 * Fred J. Finkbeiner Director
March 30, 1999 * Gary Gust Director
March 30, 1999 * Ronald L. Hansen Director and Vice President
March 30, 1999 * Robert C. Humphreys Chairman of the Board and Director
March 30, 1999 * Ben J. Landheer Director
March 30, 1999 /S/MICHAEL E. MCHUGH Michael E. McHugh Secretary and Treasurer and Director (Principal Financial and Accounting Officer)
March 30, 1999 * Dennis C. Nelson Director
March 30, 1999 * John J. Niederer Director
March 30, 1999 * Paul K. Spoelman Director
March 30, 1999 * Donald Swanson Director
March 30, 1999 * Donald VanSingel Director
*By /S/RICHARD L. EDGAR Richard L. Edgar Attorney-in-Fact
EXHIBIT INDEX
NUMBER EXHIBIT
3.1 ARTICLES OF INCORPORATION. Previously filed as Exhibit 3.1 to the Corporation's Quarterly Report on Form 10-QSB for the Quarter ended June 30, 1998. Here incorporated by reference.
3.2 BYLAWS AND AMENDMENTS. Previously filed as Exhibit 3(b) to the Corporation's Form S-4 Registration Statement filed January 30, 1996. Here incorporated by reference.
4.1 FORM OF STOCK CERTIFICATE. Previously filed as Exhibit 4(a) to the Corporation's Form S-4 Registration Statement filed January 30, 1996. Here incorporated by reference.
4.2 LONG-TERM DEBT. The Corporation is a party to several long- term debt agreements which at the time of this report do not exceed 10% of the Corporation's total consolidated assets. The Corporation agrees to furnish copies of the agreements defining the rights of the other parties thereto to the Securities and Exchange Commission upon request.
10.1 DATA PROCESSING AGREEMENT. Previously filed as Exhibit 10(a) to the Corporation's Form S-4 Registration Statement filed January 30, 1996. Here incorporated by reference.
10.2 VALLEY RIDGE EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. Previously filed as Exhibit 10(b) to the Corporation's Form S-4 Registration Statement filed January 30, 1996. Here incorporated by reference.
10.3 KENT CITY STATE BANK PROFIT SHARING/401(K) PLAN. Previously filed as Exhibit 10(c) to the Corporation's Form S-4 Registration Statement filed January 30, 1996. Here incorporated by reference.
10.4 DIRECTORS' DEFERRED COMPENSATION PLAN AND FORM OF DIRECTORS' DEFERRED COMPENSATION AGREEMENT. Previously filed as Exhibit 10(d) to the Corporation's Form S-4 Registration Statement filed January 30, 1996. Here incorporated by reference.
10.5 EMPLOYMENT AGREEMENT WITH RONALD HANSEN. Previously filed as Exhibit 10.6 to the Corporation's Form 10-KSB filed March 31, 1997. Here incorporated by reference.
10.6 EMPLOYMENT AGREEMENT WITH MICHAEL MCHUGH. Previously filed as Exhibit 10.6 to the Corporation's Form 10-KSB filed March 31, 1998. Here incorporated by reference.
10.7 EMPLOYMENT AGREEMENT WITH RICHARD EDGAR. Previously filed as Exhibit 10.7 to the Corporation's Form 10-KSB filed March 31, 1998. Here incorporated by reference.
10.8 FORM OF SALARY CONTINUATION AGREEMENT. Previously filed as Exhibit 10.8 to the Corporation's Form 10-KSB filed March 31, 1998. Here incorporated by reference.
10.9 STOCK INCENTIVE PLAN OF 1998. Previously filed as Exhibit 10.1 to the Corporation's Quarterly Report on Form 10-QSB for the Quarter ended June 30, 1998. Here incorporated by reference.
21 SUBSIDIARIES OF THE REGISTRANT.
24 POWERS OF ATTORNEY.
27 FINANCIAL DATA SCHEDULE.
_________________________
Management contract or compensatory plan or arrangement.