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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-30447
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VALLEY COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1913479
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1307 EAST MAIN, PUYALLUP, WASHINGTON 98372
(Address of principal executive offices) (Zip Code)
(253) 848-2316
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $1.00 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark 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. [ ]
Aggregate market value of voting stock held by non-affiliates of the
registrant as of February 16, 2001: $22,996,500
Number of shares of common stock outstanding as of February 16, 2001: 1,133,588
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth
herein, is incorporated herein by reference from the registrant's definitive
proxy statement relating to the annual meeting of stockholders to be held in
2001, which definitive proxy statement shall be filed with the Securities and
Exchange Commission within 120 days after the end of the fiscal year to which
this Report relates.
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Valley Community Bancshares, Inc.
TABLE OF CONTENTS
THE COMPANY 1
SELECTED FINANCIAL DATA 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 5
MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 17
INDEPENDENT AUDITOR'S REPORT 18
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet 19
Consolidated Statement of Income 20
Consolidated Statement of Changes in Stockholders' Equity 21
Consolidated Statement of Cash Flows 22
Notes to Consolidated Financial Statements 23
FINANCIAL DATA SUPPLEMENT
Average Balances and an Analysis of Average Rates Earned and Paid 40
Analysis of Changes in Interest Income and Expense 42
Supervision and Regulation 43
National Monetary Policies 48
Executive Officers of the Company 49
FORM 10-K CROSS REFERENCE INDEX 50
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 51
SIGNATURES 52
CORPORATE DIRECTORY 54
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Valley Community Bancshares, Inc.
THE COMPANY
FORWARD-LOOKING STATEMENTS
Except for historical financial information contained herein, certain matters
discussed in this Form 10-K of Valley Community Bancshares, Inc. constitute
"forward-looking statements" within the meaning of the Securities Exchange Act
of 1934, as amended. Forward-looking statements are subject to risks and
uncertainties that may cause actual future results to differ materially. Such
risks and uncertainties with respect to Valley Community Bancshares, Inc.,
Puyallup Valley Bank, and Valley Bank include, but are not limited to, those
related to the economic environment, particularly in the areas in which the
Company and the Banks operate, competitive products and pricing, fiscal and
monetary policies of the U.S. government, changes in governmental regulations
affecting financial institutions, including regulatory fees and capital
requirements, changes in prevailing interest rates, acquisitions and the
integration of acquired businesses, credit risk management and asset/liability
management, the financial and securities markets, and the availability of and
costs associated with sources of liquidity.
GENERAL
Valley Community Bancshares, Inc. (the "Company") is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended. The
administrative offices of the Company are located at 1307 East Main Avenue,
Puyallup, Washington 98372, and its telephone number is (253) 848-2316.
The Company was organized and incorporated under the laws of the State of
Washington as a holding company for its principal banking subsidiary, Puyallup
Valley Bank, a state chartered, Federal Deposit Insurance Corporation (the
"FDIC") insured commercial bank, through a reorganization completed on July 1,
1998. The Company conducts its business primarily through Puyallup Valley Bank,
but has recently completed the acquisition of Valley Bank, a newly organized
state chartered FDIC insured commercial bank subsidiary located in Auburn,
Washington. Puyallup Valley Bank and Valley Bank are referred to as the "Banks"
in this discussion.
The principal sources of the Company's revenue are (i) interest and fees on
loans; (ii) deposit service charges; (iii) merchant credit card processing fees;
(iv) federal funds sold (funds loaned on a short-term basis to other banks); and
(v) interest on investments (principally government securities). The Banks'
lending activity consists of short- to medium-term commercial and consumer
loans, including operating loans and lines of credit, equipment loans,
automobile loans, recreational vehicle and truck loans, personal loans or lines
of credit, home improvement loans, and rehabilitation loans. The Banks also
offer cash management services, merchant credit card processing, safe deposit
boxes, wire transfers, direct deposit of payroll and social security checks,
automated teller machine access, and automatic drafts for various accounts.
PUYALLUP VALLEY BANK
Puyallup Valley Bank is a Washington State charted commercial bank that provides
full-service banking to businesses and residents within the Puyallup community
and its surrounding area. Puyallup Valley Bank places particular emphasis on
serving the small to medium-sized business segment of the market by making
available a line of banking products tailored to their needs, with those
services delivered by experienced professionals concerned with building
long-term relationships. Puyallup Valley Bank conducts business out of six
full-service offices and one drive-up facility.
The organizers of Puyallup Valley Bank commenced formation efforts in 1972.
Puyallup Valley Bank was formally incorporated on January 9, 1973, under the
laws of the State of Washington after having received approval to organize from
the Division of Banks of the Washington Department of Financial Institutions
(the "Division") and the FDIC, and commenced operations during October 1973.
Puyallup Valley Bank was organized with capital of $400,000 through the sale of
20,000 shares of Common Stock at a sales price of $20 per share.
VALLEY BANK
Valley Bank is a Washington State chartered, FDIC insured commercial bank that
commenced operations on January 11, 1999. Valley Bank was formally incorporated
December 3, 1998, under the laws of the State of Washington after having
received approval to organize from the Division and the FDIC. Valley Bank was
founded by a group of business and professional individuals in the King County
area as a commercial bank subsidiary of the Company to serve the needs of the
community in and around the city of Auburn. Valley Bank engages in a general
commercial banking business in the Auburn area of King County and offers
commercial banking services to small and medium-size businesses, professionals,
and retail customers in the Bank's market area.
Valley Bank is a solely owned subsidiary of the Company with initial capital of
$4,025,000, the minimum amount required to capitalize a bank in the Auburn
community under federal and state law.
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Valley Community Bancshares, Inc.
THE COMPANY
MARKET AREA
The Company's principal market area is located in South King County and Eastern
Pierce County regions of Washington State. King County and Pierce County are the
two most populous counties in Washington State, with over 2,000,000 residents.
The economy of the region is dependent upon aerospace, high technology, foreign
trade, and natural resources, including agriculture and timber. The region has
become more diversified over the past decade as a result of the success of
software companies such as Microsoft and the establishment of numerous research
and biotechnology firms. The regional economy generally has experienced strong
growth and stability in recent years.
Eastern Pierce County, where Puyallup Valley Bank has six locations, is located
approximately 30 miles southeast of Seattle and 5 miles northeast of Tacoma, the
region's two largest cities. The area includes several residential and
agricultural communities including Puyallup, South Hill, Sumner, Edgewood,
Graham, Orting, and Summit/Fredrickson, and has a population in excess of
100,000 residents. This area is characterized as the Company's principal market
area.
South King County, where Valley Bank has one location in Auburn, is centrally
located between Seattle and Tacoma and has a population of over 140,000
residents. The community is supported by light industry, aerospace, and forest
products industries. The Company considers the Auburn and Kent Valley a natural
area of expansion because of its close proximity to Eastern Pierce County.
BUSINESS STRATEGY
As a locally owned financial institution, the Company emphasizes local banking
needs. The Company seeks to achieve growth and maintain a strong return on
equity. The strategy to accomplish these goals is to focus on small businesses
that traditionally develop an exclusive relationship with a single bank. The
Banks also have the size to give personal attention required by business people
and significant credit expertise to help these businesses meet their goals.
The Banks offer to their customers a full range of deposit services that are
typically available in most banks and savings and loan associations, including
checking accounts, savings accounts, and other time deposits of various types,
ranging from money market accounts to longer-term certificates of deposit. One
major goal in developing the Banks' product mix is to keep the product offerings
as simple as possible, both in terms of the number of products and the features
and benefits of the individual services. The transaction accounts and time
certificates are tailored to the principal market areas at rates competitive in
the area. In addition, retirement accounts such as IRAs (Individual Retirement
Accounts) are available. The FDIC, up to the maximum amount, insures all deposit
accounts. The Banks solicit these accounts from small to medium-sized businesses
in their respective primary trade areas, and from individuals who live and/or
work within these areas.
The Banks offer loans to their diverse markets and communities. The market
consists of south King County and east Pierce County in general and the areas in
and around Puyallup and Auburn in particular. Loans are provided to creditworthy
borrowers regardless of their race, color, national origin, religion, sex, age,
marital status, sexual orientation, disability, receipt of public assistance, or
any basis prohibited by law. The Banks intend to fulfill this commitment while
maintaining prudent credit practices. In the course of fulfilling their
obligation to meet the credit needs of the communities which they serve, the
Banks give consideration to each credit application regardless of the fact that
the applicant may reside in a low to moderate income neighborhood, and without
regard to the geographic location of the residence, property, or business within
their market areas.
The Banks provide innovative, quality, financial products that meet the banking
needs of their customers and communities. The loan programs and acceptance of
certain loans may vary from time to time, depending upon funds available and
regulations governing the banking industry. The Banks offer all basic types of
credit to their local communities, including commercial and consumer loans. The
types of loans within these categories are as follows:
Commercial Loans
Commercial loans are typically made to sole proprietorships, partnerships,
corporations, and other business entities, municipalities, and individuals,
where the loan is to be used primarily for business purposes. The types of loans
the Banks offer include:
- - Small Business Administration financing programs
- - operating and working capital loans
- - loans to finance capital purchases
- - commercial real estate loans
- - business lines of credit
- - term loans
- - loans to professionals
- - letters of credit
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Valley Community Bancshares, Inc.
THE COMPANY
Consumer Loans
Consumer loans are typically available to finance consumer purchases, such as
automobiles, household furnishings, boats, and education. Loans are available on
both a secured and an unsecured basis. The following types of consumer loans are
available:
- - automobiles and trucks
- - boats and recreational vehicles
- - personal loans and lines of credit
- - home equity lines of credit
- - home improvement and rehabilitation loans
- - credit card services
- - consumer real estate loans
Other types of credit programs, such as loans to nonprofit organizations, public
entities, for community development, and other governmental offered programs,
also are available.
The Banks offer traditional banking services, such as safe deposit boxes, wire
transfers, direct deposit of payroll and social security checks, and automated
teller machines. During 2000, the Banks' began to offer debit cards to checking
account customers.
EMPLOYEES
At December 31, 2000, the Banks had 52 full-time and 21 part-time employees. The
Company does not have any employees. Management considers its relations with
employees to be satisfactory.
COMPETITION
The geographic market area served by the Banks is highly competitive with
respect to both loans and deposits. The Banks compete principally with
commercial banks, savings and loan associations, credit unions, mortgage
companies, and other financial institutions. The major commercial bank
competitors are the regional banks (Columbia State Bank and Frontier Bank) and
national banks (Key Bank National Association, Bank of America National Trust
and Savings Association, U.S. Bank National Association and Wells Fargo Bank)
that have a branch or branches within the Banks' primary trade areas. Washington
Mutual Savings Bank is another formidable competitor within the Banks' primary
trade area. Among the advantages such larger banks have are their ability to
finance wide-ranging advertising campaigns and to allocate their investment
assets to geographic regions of higher yield and demand. Such banks offer
certain services which are not offered directly by the Banks (but are offered
indirectly through correspondent institutions); and, by virtue of their greater
total capitalization (legal lending limits to an individual customer are based
upon a percentage of a bank's total shareholder equity accounts), such banks
have substantially higher lending limits than the Banks.
The Banks also compete with the financial markets for funds. For instance,
yields on corporate and government debt securities and other commercial paper
affect the ability of commercial banks to attract and hold deposits. Further,
commercial banks compete for available funds with money market instruments and
similar investment vehicles offered by institutions such as brokerage firms,
credit card companies, and retailers (e.g., Sears, Roebuck & Co.). In periods of
high interest rates, such money market funds have provided substantial
competition to banks for deposits, and it is anticipated that they may continue
to do so in the future.
In order to compete with the other financial institutions in their primary trade
areas, the Banks use, to the fullest extent possible, the flexibility which is
accorded by independent status. This includes an emphasis on specialized
services, local promotional activity, and personal contacts by the Banks'
officers, directors and employees. The Banks also provide special services and
programs for individuals in their primary trade areas who are employed in the
business and professional fields.
The Company anticipates bank competition will continue to change dramatically
over the next several years as the major regional and national banks continue to
consolidate. These larger financial institutions will continue the trend of
consolidating their branch systems and providing incentives to their customers
to use electronic banking instead of visiting branches. It is anticipated that
credit unions, because of their tax benefits, will also continue to show growth.
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Valley Community Bancshares, Inc.
SELECTED FINANCIAL DATA
The following financial data of the Company are derived from the Company's
historical audited financial statements and related footnotes.
VALLEY COMMUNITY BANCSHARES, INC.
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
STATEMENT OF INCOME DATA
Interest income $ 10,533 $ 8,958 $ 8,694 $ 8,291 $ 7,516
Interest expense 3,715 2,973 3,139 3,079 2,939
---------- ---------- ---------- ---------- ----------
Net interest income 6,818 5,985 5,555 5,212
4,577
Provision for loan losses 145 84 9 66 24
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 6,673 5,901 5,546 5,146 4,553
Noninterest income 661 589 662 647 696
Noninterest expense 4,998 4,516 4,111 3,604 3,367
---------- ---------- ---------- ---------- ----------
Income before provision for income tax 2,336 1,974 2,097 2,189
1,882
Provision for income tax 728 580 616 597 517
---------- ---------- ---------- ---------- ----------
Net income $ 1,608 $ 1,394 $ 1,481 $ 1,592 $ 1,365
========== ========== ========== ========== ==========
PER-SHARE DATA
Cash dividends $ 564 $ 135 $ 871 $ 457 $ 429
Cash dividends per weighted average shares
outstanding $ 0.50 $ 0.12 $ 0.86 $ 0.46 $ 0.43
Basic earnings per share $ 1.42 $ 1.24 $ 1.46 $ 1.59 $ 1.38
Diluted earnings per share $ 1.39 $ 1.21 $ 1.41 $ 1.53 $ 1.34
Weighted average shares outstanding 1,131,484 1,119,780 1,012,844 1,001,013 987,192
Weighted average diluted shares outstanding 1,153,883 1,152,576 1,047,745 1,038,599 1,021,198
BALANCE SHEET DATA
Total Assets $ 146,769 $ 133,837 $ 125,329 $ 112,994 $ 106,897
Net loans 93,518 77,675 66,841 63,740 57,582
Deposits 125,047 113,809 110,283 98,150 93,488
Shareholders' equity 20,125 18,724 14,078 13,436 12,240
Equity to assets ratio 13.71% 13.99% 11.23% 11.89% 11.45%
FIVE YEAR FINANCIAL PERFORMANCE
Net income $ 1,608 $ 1,394 $ 1,481 $ 1,592 $ 1,365
Average assets 142,864 132,945 118,960 111,302 102,331
Average Stockholders' Equity 19,084 17,862 13,742 12,632 11,483
Return on average assets (net income divided by
average assets) 1.13% 1.05% 1.24% 1.43% 1.33%
Return on average equity (net income divided by
average equity) 8.43% 7.80% 10.78% 12.60% 11.89%
Efficiency ratio (noninterest expense divided by
noninterest income plus net interest income) 66.83% 68.69% 66.13% 61.51% 63.85%
Ratio of noninterest Expense to Average Assets 3.50% 3.40% 3.46% 3.24% 3.29%
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Valley Community Bancshares, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion is provided for the consolidated operations of the
Company, which include its wholly owned subsidiaries, Puyallup Valley Bank and
Valley Bank. The purpose of this discussion is to focus on significant factors
affecting the Company's financial condition and results of operations.
RESULTS OF OPERATIONS
The Company earned net income of $1,608,000 in 2000, compared to net income of
$1,394,000 in 1999 and net income of $1,481,000 in 1998. The decrease in
operating income from 1998 to 1999 is the result of the expansion strategy
embarked on by the Company in 1998, when the Company organized as a holding
company for its principal banking subsidiary, Puyallup Valley Bank, through
reorganization completed on July 1, 1998. Subsequently, the Company completed a
new branch facility in Graham, Washington, and completed the organization of
Valley Bank on January 11, 1999. This expansion is primarily responsible for the
$87,000 decrease in net income reported in 1999 over 1998. The $214,000 increase
in net income during 2000 over 1999 is the result of an increase in net interest
income resulting from a significant increase in the Company's loan portfolio.
The Company's net income is derived principally from the operating results of
its banking subsidiaries, namely Puyallup Valley Bank and Valley Bank. Puyallup
Valley Bank is a well-established commercial bank and generates the Company's
operating income. Puyallup Valley Bank had net income of $1,734,000 in 2000,
$1,520,000 in 1999, and $1,568,000 in 1998. The increase in Puyallup Valley
Bank's net income, during 2000 is the result of an increase in net interest
income resulting from a 14 percent increase in loans. The decrease in Puyallup
Valley Bank's net income, during 1998 and 1999, is related to the opening of a
new branch facility in Graham, Washington during the fourth quarter of 1998.
Valley Bank, which incurred losses of $93,000 in 2000 and $125,000 in 1999, is
anticipated to continue to incur operating losses during the early years of its
operation. It is anticipated that the losses incurred by Valley Bank during its
initial years will not have a significant impact on the Company. However, there
can be no assurance that Valley Bank will not incur more significant losses,
which could have an adverse impact on the Company's earnings, dividend payments,
or future growth.
Performance Ratios
The following table shows the various performance ratios for the Company for the
past five years:
VALLEY COMMUNITY BANCSHARES, INC.
RETURN ON EQUITY AND ASSETS
FOR THE YEAR ENDED DECEMBER 31,
2000 1999 1998 1997 1996
----- ----- ----- ----- -----
Return on average assets (net income divided by average assets) 1.13% 1.05% 1.24% 1.43% 1.33%
Return on average equity (net income divided by average equity) 8.43% 7.80% 10.78% 12.60% 11.89%
Dividend payout ratio (dividends per share divided by net income per share) 35.18% 9.64% 60.18% 31.71% 36.16%
Equity to assets ratio (average equity divided by average assets) 13.36% 13.44% 11.55% 11.35% 11.22%
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Valley Community Bancshares, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Interest Income
The Company's largest component contributing to net income is net interest
income, which is the difference between interest earned on earning assets
(primarily loans, federal funds sold and deposits in banks, and investments) and
interest paid on interest bearing liabilities (deposits and borrowings). The
volume of and yields earned on earning assets and the volume of and the rates
paid on interest bearing liabilities determine net interest income. Interest
earned and interest paid is also affected by general economic conditions,
particularly changes in market interest rates, and by government policies and
the action of regulatory authorities. Net interest income divided by average
earning assets is referred to as net interest margin. For the years December 31,
2000, 1999, and 1998, the Company's net interest margin was 5.25 percent, 4.99
percent, and 5.18 percent, respectively.
Net interest income during 2000, 1999, and 1998 totaled $6,818,000, $5,985,000,
and $5,555,000, respectively, representing a 13.9 percent increase in 2000 over
1999 and a 7.7 percent in 1999 over 1998. The 2000 increase resulted from an
increase in average earning assets and from an increase in the Company's net
interest margin. The 1999 increase resulted from an increase in average earning
assets, partially offset by a decrease in the Company's net interest margin.
Provision for Loan Losses
Provisions for loan losses reduce net interest income. The provision for loan
losses reflects management's judgment of the expense to be recognized in order
to maintain an adequate allowance for loan losses. For further discussion
regarding the allowance for loan losses see the discussion on allowance for loan
losses under Risk Elements. The Company provided $145,000 for loan losses during
2000 compared to $84,000 in 1999 and $9,000 in 1998. The 2000 and 1999
provisions were primarily related to an increase in the Company's loan
portfolio. The relatively lower 1998 provision was the result of a significant
recovery that increased the allowance for loan losses to an acceptable level.
The 2000 and 1999 provisions were also impacted by Valley Bank, which had no
allowance established upon the commencement of its lending operations.
Management anticipates that continued growth in the Company's loan portfolio
would require increases in loan loss provisions during the year 2001.
Noninterest Income and Expense
Net income is also affected by noninterest income (primarily service charges,
and other operating income) and noninterest expenses (primarily salaries and
employee benefits, occupancy, equipment, and other operating expenses).
Noninterest income during 2000, 1999, and 1998 totaled $661,000, $589,000, and
$662,000, respectively, representing a 12.2 percent increase in 2000 over 1999
and an 11.0 percent decrease in 1999 over 1998. The increase in 2000 was
primarily the result of higher ATM/debit card service income and higher fees
from the sale of mutual funds and annuities, partially offset by lower
origination fees on mortgage loans brokered. The decrease in 1999 was primarily
related to lower origination fees on mortgage loans brokered, which decreased as
a result of higher mortgage interest rates in 1999 and a lower volume of loan
applications processed. Noninterest income during 1998 was favorably impacted by
a significant increase in origination fees on mortgage loans brokered, which
increased as a result of lower mortgage interest rates in 1998 and a higher
volume of loan applications processed.
Noninterest expense during 2000, 1999, and 1998 totaled $4,998,000, $4,516,000,
and $4,111,000, respectively, representing a 10.7 percent increase in 2000 over
1999 and a 9.9 percent increase in 1999 over 1998. The increase in 2000 and 1999
was primarily related to higher salary and employee benefits, occupancy and
equipment, and other operating expenses associated with the operation of the new
Graham branch facility (November 1998), the formation of Valley Bank (January
1999), and the operation of the new Valley Bank main office facility (June
2000). The increase in 1998 was related primarily to organizational costs
associated with the formation of the holding company and Valley Bank. The
percentage of noninterest expense to average assets was 3.50 percent in 2000,
compared to 3.40 percent and 3.46 percent during 1999 and 1998, respectively.
Provision for Income Taxes
The Company's provision for income taxes is a significant reduction of operating
income. The provisions for 2000, 1999, and 1998 were $728,000, $580,000, and
$616,000, respectively. These amounts represent an effective taxing rate of 29
percent during 1999 and 1998, and 31 percent during 2000. The Company's marginal
tax rate is currently 34 percent. The difference between the Company's effective
and marginal tax rate is primarily related to investments made in tax-exempt
securities. The 2000 increase in the effective rate is the result of a decrease
in the Company's tax-exempt security portfolio.
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Valley Community Bancshares, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CREDIT MANAGEMENT
The Company strives to achieve sound credit risk management. In order to achieve
this goal the Company has established stringent, centralized credit policies and
uniform underwriting criteria for all loans. The Company emphasizes
diversification in the types of loans offered, regular credit examinations, and
quarterly reviews of large loans and of loans experiencing deterioration in
credit quality. The Company identifies potential problem loans early, charges
off loans promptly, and maintains an adequate allowance for loan loss. In order
to achieve sound credit risk management, the Company has established certain
credit guidelines for its lending portfolio.
Loan Portfolio
Managing risk is an essential part of successfully operating a financial
institution. The most prominent risk exposures regarding the loan portfolio are
credit quality and interest rate risk. Credit quality risk is the risk of not
collecting interest and/or principal balance of a loan when it is due. Interest
rate risk is the potential reduction of net interest income and changes in the
value of financial instruments as the result of rate movements. The Company's
loan portfolio is originated and managed with these risks in mind.
The Company follows loan and interest-rate risk policies that have been approved
by the Banks' Board of Directors and are overseen by the Executive Loan
Committee, the Asset Liability Committee, and management. These policies
establish lending limits, review and grading criteria, and other guidelines such
as loan administration, the allowance for loan losses, and maturity and interest
rate repricing criteria. Loan applications are approved by the Banks' Board of
Directors and/or designated officers in accordance with respective guidelines
and underwriting policies of the Company. Loans to one borrower are limited by
applicable state and federal banking laws and are further limited by internal
limits. Credit limits generally vary according to the type of loan and the
individual loan officer's experience.
Types of Loans
The following table sets forth the composition of the Company's loan portfolio
for the past five years ending at December 31, 2000 (dollars in thousands):
VALLEY COMMUNITY BANCSHARES, INC.
LOAN PORTFOLIO
OUTSTANDING BALANCE AT DECEMBER 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------
Real Estate
Construction $ 5,959 $ 7,384 $ 4,890 $ 1,282 $ 5,796
Mortgage 16,701 15,867 13,788 15,087 12,602
Commercial 52,620 40,254 34,696 33,132 26,999
Commercial 16,258 12,892 12,496 11,694 10,858
Consumer and other 2,523 1,864 1,854 2,274 2,103
Lease financing 560 377
-------- -------- ------- ------- -------
Total loans 94,621 78,638 67,724 63,469 58,358
Unearned income (7) (4)
-------- -------- ------- ------- -------
Net loans $ 94,614 $ 78,634 $67,724 $63,469 $58,358
======== ======== ======= ======= =======
The Company's loan portfolio primarily consists of commercial loans, residential
real estate loans, and commercial real estate loans. At December 31, 2000, loans
totaled approximately $94.614 million, which equals approximately 76 percent of
total deposits and 64 percent of total assets. At December 31, 2000, the
majority of loans were originated directly by the Company to borrowers within
the Company's principal market area. As a result, the Company has significant
risk because of a lack of geographical diversification. The Company mitigates
this risk primarily by diversifying the loan portfolio by industry and customer
and by strong credit underwriting criteria. At December 31, 2000, approximately
37 percent of the Company's loan portfolio had adjustable rate features and
approximately 63 percent were fixed. Approximately 70 percent of adjustable rate
loans adjust within a twelve-month period and 99 percent of the Company's fixed
rate loan portfolio is scheduled to mature within a five-year period.
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Valley Community Bancshares, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Commercial loans consist primarily of loans to business for various purposes,
including revolving lines of credit, equipment loans, and letters of credit.
These loans generally have short maturities, have either adjustable or fixed
rates, and are unsecured or secured by inventory, accounts receivable,
equipment, and/or real estate. The Company monitors portfolio diversification by
industry and by customer. At December 31, 2000, approximately 66 percent had
adjustable rates and 34 percent had fixed rates.
Real estate loans include various types of loans for which the Company holds
real property as collateral, and consist of loans primarily on single-family
residences and commercial properties. These loans generally are secured by a
first priority lien but may also be secured by a second priority lien. Real
estate loans typically have maturities extending to five years and have fixed or
adjustable rate features. Construction loans are typically made to contractors
to construct single-family residences and commercial buildings and generally
have maturities to eighteen months. Currently, the Company does not originate
real estate for sale to the secondary market; however, the Company brokers real
estate loans to other financial institutions for a fee. At December 31, 2000,
approximately 71 percent of the Company's real estate loans were fixed rate and
approximately 29 percent had adjustable rate features. However, 99 percent of
the Company's real estate loans are scheduled to mature and have adjustable
rates within a five-year period.
Consumer loans include various types of loans such as automobiles, boats and
recreational vehicles, personal and home equity lines of credit, and other
consumer orientated loans. At December 31, 2000, approximately 82 percent of the
consumer loan portfolio had fixed rate and approximately 18 percent had
adjustable rate features.
There are no foreign loans outstanding during the years presented.
The interest rates charged on loans vary with the degree of risk, the amount of
the loan, and the maturity of the loan. Competitive pressures, market interest
rates, the availability of funds, and government regulation further influence
them.
Maturities and Sensitivities of Loans to Changes in Interest Rates
The contractual maturities of the Company's loan portfolio are as shown below.
Actual maturities may differ from contractual maturities because individual
borrowers may have the right to prepay loans with or without prepayment
penalties.
VALLEY COMMUNITY BANCSHARES, INC.
LOANS AS OF DECEMBER 31, 2000 (IN THOUSANDS)
AFTER ONE
YEAR BUT
WITHIN WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -------
Real Estate
Construction $ 5,350 $ 559 $ 50 $ 5,959
Mortgage 1,197 14,411 1,093 16,701
Commercial 9,789 42,734 97 52,620
Commercial 10,794 5,235 229 16,258
Consumer and other 1,052 1,075 396 2,523
Lease financing 39 521 560
------- ------- ------ -------
Total loans $28,221 $64,535 $1,865 $94,621
======= ======= ====== =======
Loan maturities after one year with:
Fixed rates $54,106 $1,672
Variable rates 10,429 193
------- ------
$64,535 $1,865
======= ======
8
11
Valley Community Bancshares, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-Performing Assets
Non-performing assets consist of: (1) nonaccrual loans; (2) loans 90 days or
more past due; (3) restructured loans for which concessions, including the
reduction of interest rates below a rate otherwise available to that borrower or
the deferral of interest or principal, have been granted due to the borrower's
weakened financial condition; and (4) other real estate owned.
The following table sets forth information concerning the Company's
non-performing assets for the year ended December 31, 2000 (dollars in
thousands).
VALLEY COMMUNITY BANCSHARES, INC.
Non-performing Assets
Year ended December 31,
------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Non-performing assets:
Nonaccrual loans $ * $ * $ * $ $509
Loans 90 days or more past due 507
Restructured loans
--- --- --- ---- ----
* * * 507 509
Other real estate owned
--- --- --- ---- ----
Total nonperforming assets $ * $ * $ * $507 $509
=== === === ==== ====
* For the years ended December 31, 2000, 1999, and 1998 there were no
non-performing assets.
The accrual of interest on nonaccrual and other impaired loans is discontinued
at 90 days or when, in the opinion of management, the borrower may be unable to
meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently recognized
only to the extent cash payments are received. Interest income on restructured
loans is recognized pursuant to the terms of the new loan agreement. Interest
income on other impaired loans is monitored and based upon the terms of the
underlying loan agreement. However, the recorded net investment in impaired
loans, including accrued interest, is limited to the present value of the
expected cash flows of the impaired loan or the observable fair market value of
the loan's collateral.
During 2000, 1999, and 1998 the amount of loans placed on nonaccrual status was
nominal, therefore, there was a minimal impact to interest income during those
periods presented.
9
12
Valley Community Bancshares, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Summary of Loan Loss Experience
Changes in the Allowance for Loan Losses
The following table sets forth information regarding changes in the Company's
allowance for loan losses for the most recent five years (dollars in thousands):
VALLEY COMMUNITY BANCSHARES, INC.
LOAN LOSS EXPERIENCE
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- -------- ------- -------
Balance at beginning of period $ 959 $ 883 $ 840 $ 776 $ 752
Charge-offs:
Consumer and other 20 8 11 3 1
------- ------- -------- ------- -------
20 8 11 3 1
Recoveries:
Real Estate
Commercial 42
Commercial 3
Consumer and other 12 1 1
------- ------- -------- ------- -------
12 45 1 1
Net charge-offs 8 8 (34) 2
Provision for loan losses 145 84 9 66 24
------- ------- -------- ------- -------
Balance at end of period $ 1,096 $ 959 $ 883 $ 840 $ 776
======= ======= ======== ======= =======
Average loans outstanding $87,934 $72,135 $ 65,331 $63,810 $58,615
Ratio of net charge-offs during the
period to average loans outstanding 0.01% 0.01% -0.05% 0.00% 0.00%
Ratio of allowance for loan losses
to average loans outstanding 1.25% 1.33% 1.35% 1.32% 1.32%
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries), and established through a provision for credit
losses charged to expense. Loans are charged against the allowance for credit
losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb losses inherent in existing loans, commitments to extend credit and
standby letters of credit based on evaluations of collectibility, and prior loss
experience of loans. The evaluations take into consideration such factors as
changes in the nature and volume of the portfolio, overall portfolio quality,
loan concentrations, specific problem loans, commitments, standby letters of
credit, and current economic conditions that may affect the borrowers' ability
to pay.
A material estimate that is particularly susceptible to significant change
relates to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the estimated
losses on loans and foreclosed assets held for sale, management obtains
independent appraisals for significant properties.
10
13
Valley Community Bancshares, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The majority of the Company's loan portfolio consists of commercial loans and
single-family residential loans secured by real estate in the Puyallup and
Pierce County area and also in the Auburn and King County area. Real estate
prices in this market are stable at this time. However, the ultimate
collectibility of a substantial portion of the Company's loan portfolio may be
susceptible to change in local market conditions in the future.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Company to recognize additional
losses based on their judgment about information available to them at the time
of their examination.
Breakdown of Allowance for Loan Losses by Category
The following table sets forth information concerning the Company's allocation
of the allowance for loan losses (dollars in thousands):
VALLEY COMMUNITY BANCSHARES, INC.
LOAN LOSS EXPERIENCE
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- -------------- -------------- -------------- -------------
Amount % * Amount % * Amount % * Amount % * Amount % *
Balance at end of period applicable to:
Real Estate
Construction $ 60 6% $ 55 10% $ 37 7% $ 10 2% $ 43 10%
Mortgage 17 18% 16 20% 14 20% 15 24% 13 22%
Commercial 184 55% 141 51% 121 51% 116 52% 94 46%
Commercial 163 17% 129 16% 125 19% 117 18% 109 18%
Consumer and other 50 3% 37 2% 37 3% 45 4% 42 4%
Lease financing 11 1% 4 1%
Unallocated 611 NA 577 NA 549 NA 537 NA 475 NA
------ ---- ---- ---- ---- ---- ---- ---- ---- ---
$1,096 100% $959 100% $883 100% $840 100% $776 100%
====== ==== ==== ==== ==== ==== ==== ==== ==== ===
* Percent of loans in each category to total loans
Analysis of the Allowance for Loan Losses
The allowance for loan losses reflects management's best estimate of probable
losses that have been incurred as of the balance sheet date. The allowance for
loan losses is maintained at a level considered adequate by management to
provide for loan losses inherent in the loan portfolio based on management's
assessment of various factors affecting the loan portfolio, including local
economic conditions and growth of the loan portfolio and its composition.
Non-performing loans and net charge-offs during these periods have been minimal,
demonstrating strong credit quality. Increases in the allowance for loan losses
made through provisions were primarily a result of loan growth.
Management determines the amount of the allowance for loan losses by utilizing a
loan grading system to determine risk in the loan portfolio and by considering
the results of credit reviews. The loan portfolio is separated by quality and
then by loan type. Loans of acceptable quality are evaluated as a group, by loan
type, with a specific loss rate assigned to the total loans in each type, but
unallocated to any individual loan. Conversely, each adversely classified loan
is individually analyzed, to determine an estimated loss amount. A valuation
allowance is also assigned to these adversely classified loans, but at a higher
loss rate due to the greater risk of loss. For those loans where the estimated
loss is greater than the background percentage, the estimated loss amount is
considered specifically allocated to the allowance.
Although management has allocated a portion of the allowance to the loan
categories using the method described above, the adequacy of the allowance must
be considered as a whole. To mitigate the imprecision in most estimates of
expected loan losses, the allocated component of the allowance is supplemented
by an unallocated component. The unallocated portion includes management's
judgmental determination of the amounts necessary for qualitative factors such
as the consideration of new products and policies, economic conditions,
concentrations of credit risk, and the experience and abilities of lending
personnel. Loan concentrations, quality, terms, and basic underlying assumptions
remained substantially unchanged during the period.
11
14
Valley Community Bancshares, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company uses the historical loss experience method in conjunction with the
specific identification method for calculation of the adequacy of allowance for
loan losses. A six-year average historical loan loss rate is calculated. This
experience loss rate is applied to graded loans that are not adversely
classified for a subtotal of needed allowance. Loans adversely classified are
analyzed for potential loss on an individual basis. This subtotal is added to
the experience subtotal and the total is compared to the allowance for loan
losses.
The Company also evaluates current conditions and may adjust the historical loss
estimate by qualitative factors that affect loan repayment. These factors may
include levels of, and trends in, delinquencies and non-accruals; trends in
volume and terms of loans; effects of any changes in lending policies;
experience, ability and depth of management and lending staff; national and
local economic trends; concentrations of credit; and any legal and regulatory
requirements.
INVESTMENT PORTFOLIO
The following table sets forth the carrying values, by type, of the securities
in the Company's portfolio (in thousands):
VALLEY COMMUNITY BANCSHARES, INC.
INVESTMENT PORTFOLIO (IN THOUSANDS)
OUTSTANDING BALANCE AT DECEMBER 31,
---------- ---------- ----------
2000 1999 1998
---------- ---------- ----------
U.S. Treasury and U.S. Government
corporations and agencies $ 24,491 $ 27,901 $ 26,449
States of the United States and political subdivisions 4,776 5,121 6,640
Other securities 1,495 1,481 528
---------- ---------- ----------
Total $ 30,762 $ 34,503 $ 33,617
========== ========== ==========
Investments in States of the United States and political subdivisions represent
purchases of municipal bonds located in Washington State.
Investment in other securities includes corporate debt obligations made in
companies located and doing business throughout the United States. The debt
obligations were all within the credit ratings acceptable under the Company's
investment policy.
The investments below are reported by contractual maturity. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without prepayment penalties.
VALLEY COMMUNITY BANCSHARES, INC.
INVESTMENTS AS OF DECEMBER 31, 2000 (IN THOUSANDS) AFTER ONE AFTER FIVE
YEAR BUT YEARS BUT
WITHIN WITHIN WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
---------- ---------- ---------- ---------- ----------
U.S. Treasury and U.S. Government
corporations and agencies $ 8,435 $ 10,657 $ 1,179 $ 4,220 $ 24,491
States of the United States and political
subdivisions 1,082 2,998 696 4,776
Other securities 502 993 1,495
---------- ---------- ---------- ---------- ----------
Total $ 10,019 $ 14,648 $ 1,875 $ 4,220 $ 30,762
========== ========== ========== ========== ==========
Weighted average yield *
U.S. Treasury and U.S. Government
corporations and agencies 5.48% 6.33% 7.27% 7.53% 6.29%
States of the United States and political
subdivisions 4.31% 4.60% 4.84% 4.57%
Other securities 5.34% 5.77% 5.63%
---------- ---------- ---------- ---------- ----------
Total 5.35% 5.94% 6.37% 7.53% 5.99%
========== ========== ========== ========== ==========
* Yield on tax-exempt obligations has not been computed on a tax-equivalent
basis.
12
15
Valley Community Bancshares, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DEPOSITS
Types of Deposits
The Company's primary source of funds is customer deposits. The Company attempts
to maintain a high percentage of non-interest-bearing deposits, which are a
low-cost funding source. In addition, the Company offers a variety of
interest-bearing accounts designed to attract both short-term and longer-term
deposits from customers. Interest-bearing accounts earn interest at rates
established by Bank Management based on competitive market factors and the
Company's need for funds. The Company traditionally has not purchased brokered
deposits and does not intend to do so in the future.
The following table sets forth the average balances for each major category of
deposit and the weighted average interest rate paid for deposits during the year
ended December 31, (dollars in thousands):
VALLEY COMMUNITY BANCSHARES, INC.
DEPOSITS
AVERAGE DEPOSITS BY TYPE
-------------------- --------------------- ------------------- ---------
2000 1999 1998 1997
-------------------- --------------------- ------------------- ---------
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT
-------- -------- -------- -------- -------- -------- --------
Non-interest-bearing demand
deposits $ 23,484 $22,737 $19,492 $ 16,832
Interest-bearing demand 16,345 1.03% 16,279 1.19% 14,143 1.51% 13,395
deposits
Money market deposit 30,672 3.60% 28,963 3.26% 27,806 3.58% 24,979
Savings 11,119 1.96% 12,392 2.08% 10,848 2.36% 10,331
Time certificates < $100,000 22,699 5.31% 21,019 4.67% 21,284 5.27% 22,141
Time certificates > $100,000 17,797 5.48% 12,582 4.59% 10,212 5.06% 9,727
-------- -------- -------- --------
$122,116 $113,972 $103,785 $ 97,405
======== ======== ======== ========
-------- --------------------
1996
-------- --------------------
RATE AMOUNT RATE
-------- -------- --------
Non-interest-bearing demand
deposits $ 15,157
Interest-bearing demand 1.61% 11,697 1.60%
deposits
Money market deposit 3.81% 18,822 3.77%
Savings 2.45% 10,425 2.45%
Time certificates < $100,000 5.17% 23,569 5.28%
Time certificates > $100,000 4.97% 10,021 5.15%
--------
$ 89,691
========
Certificates of Deposit and Time Deposits
The following table shows the amounts and remaining maturities of time
certificates of deposit that had balances of more than $100,000 at December 31,
(in thousands):
VALLEY COMMUNITY BANCSHARES, INC.
DEPOSIT MATURITY
OUTSTANDING BALANCE AT DECEMBER 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
3 months or less $ 10,599 $ 7,235 $ 5,997 $ 4,668 $ 6,024
Over 3 through 12 months 8,696 6,820 4,368 4,076 3,644
Over 12 through 36 months 459 500 327 606 427
Over 36 months 182 172
-------- -------- -------- -------- --------
Total $ 19,754 $ 14,555 $ 10,874 $ 9,522 $ 10,095
======== ======== ======== ======== ========
13
16
Valley Community Bankshares Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Management actively analyzes and manages the Company's liquidity position. The
objective of liquidity management is to ensure the availability of sufficient
cash flows to meet all financial commitments and to capitalize on opportunities
for profitable business expansion. Management believes that the Company's cash
flow will be sufficient to support its existing operations for the foreseeable
future.
Cash flows from operations contribute significantly to liquidity as well as
proceeds from maturities of securities and increasing customer deposits. As
indicated on the Company's Consolidated Statement of Cash Flows, net cash from
operating activities contributed $2.3 million to liquidity in 2000, $2.0 million
in 1999, and $1.8 million in 1998. The majority of the Company's funding comes
from customer deposits within its operating region. Customer deposits provided
$11.2 million in 2000, $3.5 million in 1999 and $12.1 million in 1998. In both
2000 and 1999, certificates of deposit over $100,000 provided the majority of
the deposit growth while in 1998 the deposit growth was primarily in core
deposits (demand, money market, and savings accounts). The majority of the $19.8
million of certificates of deposit over $100,000 are from local bank customers
and are not solicited from brokers or municipalities. The Company considers
these deposits a stable source of funds.
Another important source of liquidity is investments in federal funds and
interest-bearing deposits with banks and the Company's security portfolio. The
Company maintains a ladder of securities that provides prepayments and payments
at maturity and a portfolio of available-for-sale securities that could be
converted to cash quickly. Proceeds from maturities of securities provided $10.4
million in 2000, $15.4 million in 1999, and $16.2 million in 1998.
Borrowing represents an important long-term and manageable source of liquidity
based on the Company's ability to raise new funds and renew maturing liabilities
in a variety of markets. The Banks are members of the Federal Home Loan Bank of
Seattle and have committed lines of credit up to 10 percent of assets. In
addition, the Banks have committed line-of-credit agreements totaling
approximately $7.1 million from unaffiliated banks with various maturities.
The Company's total stockholders' equity increased to $20.1 million at December
31, 2000, from $18.7 million at December 31, 1999. At December 31, 2000,
stockholders' equity was 13.71 percent of total assets, compared to 13.99
percent at December 31, 1999. At December 31, 2000, the Company held cash on
hand and due from banks, interest-bearing deposits with banks, and federal funds
sold of approximately $14.6 million. In addition, at such date $30.5 million of
the Company's investments were classified as available-for-sale.
The capital levels of the Company exceed applicable regulatory guidelines at
December 31, 2000. Management believes the Company's capital will be adequate to
fund the start-up and related costs associated with any new branches and Valley
Bank until it can achieve the deposit and loan levels necessary to be
profitable.
The primary impact of inflation on the Company's operations is increased asset
yields, deposit costs, and operating overhead. Unlike most industries, virtually
all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates generally have a more significant impact on
a financial institution's performance than they would on non-financial
companies. Although interest rates do not necessarily move in the same direction
or to the same extent as the prices of goods and services, increases in
inflation generally have resulted in increased interest rates. The effects of
inflation can magnify the growth of assets and, if significant, require that
equity capital increase at a faster rate than would be otherwise necessary.
INTEREST RATE RISK
Interest rate risk refers to the exposure of earnings and capital arising from
changes in interest rates. Management's objectives are to control interest rate
risk and to ensure predictable and consistent growth of earnings and capital.
Interest rate risk management focuses on fluctuations in net interest income
identified through computer simulations to evaluate volatility by varying
interest rate, spread, and volume assumptions. The risk is quantified and
compared against tolerance levels.
The simulation model used by the Company combines the significant factors that
affect interest rate sensitivity into a comprehensive earnings simulation.
Earning assets and interest-bearing liabilities with longer lives may be subject
to more volatility than those with shorter lives. The model accounts for these
differences in its simulations. At December 31, 2000, the simulation modeled the
impact of assumptions that interest rates would increase or decrease 200 basis
points. Results indicated the Company was positioned so equity would not drop
below that point where the Company, for regulatory purposes, would no longer
continue to be classified "well capitalized." It should be emphasized that the
model is static in nature and does not take into consideration possible
management actions to minimize the impact on equity. Management also matches
assets and liabilities on a maturity gap analysis and repricing gap analysis to
assist in interest rate sensitivity measurement.
14
17
Valley Community Bancshares, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest rate sensitivity is closely related to liquidity because each is
directly affected by the maturity of assets and liabilities. Management
considers any asset or liability that matures, or is subject to repricing over
one year, to be interest sensitive, although continual monitoring is also
performed for other time intervals. The difference between interest-sensitive
assets and liabilities for a defined period of time is known as the
interest-sensitive "gap" and may be either positive or negative. If positive,
more assets reprice before liabilities; if negative, the reverse is true. In
theory, if the gap is positive, a decrease in general interest rates might have
an adverse impact on earnings as interest income decreases faster than interest
expense. This assumes that management adjusts rates equally as general interest
rates fall. Conversely, an increase in interest rates would increase net
interest income as interest income increases faster than interest expense.
However, the exact impact of the gap on future income is uncertain both in
timing and amount because interest rates for the Company's assets and
liabilities can change rapidly as a result of market conditions and customer
patterns.
The simulation model process provides a dynamic assessment of interest rate
sensitivity, whereas a static interest rate gap table is compiled as of a point
in time. The model simulations differ from a traditional gap analysis because a
traditional gap analysis does not reflect the multiple effects of interest rate
movement on the entire range of assets and liabilities, and ignores the future
impact of new business strategies.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's results of operations are largely dependent upon its ability to
manage market risks. Changes in interest rates can have a significant effect on
the Company's financial condition and results of operation. Other types of
market risk such as foreign currency exchange rate risk and commodity price risk
do not arise in the normal course of the Banks' business activities. The Company
does not use interest rate risk management products such as interest rate swaps,
hedges, or derivatives, nor does management intend to use such products in the
future. All of the Company's transactions are denominated in U.S. Dollars.
Approximately 37 percent of the Company's loan portfolio have interest rates
that are variable. Fixed rate loans are generally made with a term of five years
or less.
The following table (in thousands) sets forth the estimated maturity or
repricing and the resulting interest sensitivity gap, of the Company's
interest-earning assets and interest-bearing liabilities, and the cumulative
interest sensitivity gap at December 31, 2000. The expected maturities are
presented on a contractual basis. Actual maturities may differ from contractual
maturities because of prepayment assumptions, early withdrawal of deposits, and
competition.
VALLEY COMMUNITY BANCSHARES, INC.
CONTRACTUAL MATURITY OR REPRICING OUTSTANDING BALANCE AT DECEMBER 31, 2000
LESS THAN THREE ONE TO OVER
THREE MONTHS TO FIVE FIVE CUMULATIVE
MONTHS ONE YEAR YEARS YEARS TOTAL
---------- ---------- ---------- ---------- ----------
Interest-earning assets
Interest-bearing deposits with banks $ 7,650 $ 2,373 $ 100 $ $ 10,123
Investments 6,549 9,149 14,314 750 30,762
Loans 24,178 9,176 60,413 847 94,614
Other 447 447
---------- ---------- ---------- ---------- ----------
Total interest-earning assets $ 38,824 $ 20,698 $ 74,827 $ 1,597 $ 135,946
========== ========== ========== ========== ==========
Interest-bearing liabilities
Interest bearing demand deposits $ 17,417 $ $ $ $ 17,417
Money market deposits, and Savings 40,161 40,161
Time certificates < $100,000 5,917 16,139 1,519 23,575
Time certificates > $100,000 10,599 8,696 459 19,754
Other borrowed funds 557 557
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 74,651 $ 24,835 $ 1,978 $ $ 101,464
Interest sensitivity gap $ (35,827) $ (4,137) $ 72,849 $ 1,597 $ 34,482
========== ========== ========== ========== ==========
Cumulative interest sensitivity gap $ (35,827) $ (39,964) $ 32,885 $ 34,482
========== ========== ========== ==========
Cumulative interest sensitivity gap
as a percent of total assets -24.41% -27.23% 22.41% 23.49%
========== ========== ========== ==========
15
18
Valley Community Bancshares, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities and periods to repricing, they may react differently to
changes in market interest rates. Also, interest rates on assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest
rates on other assets and liabilities may follow changes in market interest
rates. Additionally, certain assets have features that restrict changes in the
interest rates of such assets, both on a short-term basis and over the lives of
such assets.
According to the traditional banking industry static gap table set forth above,
the Company was liability sensitive with a negative cumulative one-year gap of
$40.0 million or --27.2 percent of total assets at December 31, 2000. In
general, based upon the Company's mix of deposits, loans, and investments,
increases in interest rates would be expected to result in a decrease in the
Company's net interest margin, and a decrease in interest rates would be
expected to result in an increase in the Company's net interest margin.
As noted above, the static gap report is subject to inherent limitations. To
more accurately predict the Company's interest rate exposure, a financial
analysis (dynamic gap) to analyze the change in the net interest margin from a
changing rate environment is provided below. This estimate of interest rate
sensitivity takes into account the differing time intervals and rate change
increments of each type of interest-sensitive asset and liability. It then
measures the projected impact of changes in market interest rates on the
Company's net interest income, net interest margin, and return on equity.
Based on a financial analysis performed as of December 31, 2000, which takes
into account how the specific interest rate scenario would be expected to affect
each interest-earning asset and each interest-bearing liability, the Company
estimates that changes in the federal fund interest rate would affect the
Company's performance as follows.
VALLEY COMMUNITY BANCSHARES, INC.
FINANCIAL ANALYSIS
INCREASE (DECREASE) IN
---------------------------------------------------
NET INTEREST NET INTEREST RETURN ON
INCOME MARGIN EQUITY
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
(Current federal fund rate is 6.50%)
Federal fund rate increase of:
100 basis points to 7.50% $ (46) -0.12% -0.33%
200 basis points to 8.50% $ (14) -0.14% -0.23%
Federal fund rate decrease of:
100 basis points to 5.50% $ 92 0.07% 0.08%
200 basis points to 4.50% $ 228 0.13% 0.50%
No assurances can be given that the actual net interest margin (percentage) or
net interest income would increase or decrease by such amounts in a 100 or 200
basis point increase or decrease in the federal fund rate.
16
19
Valley Community Bancshares, Inc.
MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Nature of Trading Market
At February 16, 2001, the Company had approximately 709 shareholders of record.
The stock is not traded on any exchange or automated quotation system, and there
is no firm that makes a market in the stock. Shareholders who typically have
held the stock for investment have held the stock. Therefore, there is no active
trading market for the stock and no assurance can be given that an active
trading market for the stock will develop. During 2000, there were 141 transfers
known to the Company. These transfers involved a total of 60,731 shares. Sales
prices have ranged from $25 to $30, to the Company's best knowledge. The last
trade occurred on November 11, 2000, and was for four shares of Common Stock at
a price of $25 per share. These prices are not necessarily indicative of the
fair market value of the stock, nor is the Company necessarily aware of all
transfers or the price of those transfers.
Dividend History
The Company (Puyallup Valley Bank prior to July 1, 1998) has paid, since
Puyallup Valley Bank's inception in 1973, a combination of stock and cash
dividends to its shareholders. Since 1993, Puyallup Valley Bank has paid a stock
dividend of 5 percent per year and a cash dividend of 50 cents per share per
year. Since July 1, 1998, the Company paid a cash dividend of 38 cents during
1998, a 12 cents dividend during 1999, and a 50 cents dividend during 2000. On
January 26, 2001, the Board of Directors of the Company declared a cash dividend
of 55 cents per share, which was paid during February 2001 to those shareholders
of record on December 31, 2000.
Although the Company intends to continue its policy of paying cash dividends on
its Common Stock in amounts not less than those paid in recent periods, the
ability of the Company to continue to pay such dividends will depend primarily
upon the earnings of Puyallup Valley Bank and Valley Bank and their ability to
pay dividends to the Company, as to which there can be no assurance. For the
foreseeable future, none of the earnings of Valley Bank will be dividends to the
Company, as the capital will be retained at Valley Bank to promote its growth.
The ability of the Banks to pay dividends is governed by various statutes. These
statutes provide that no bank shall declare or pay any dividend in an amount
greater than its retained earnings, without approval from the Director. The
Director shall, in his or her discretion, have the power to require any bank to
suspend the payment of any and all dividends until all requirements that may
have been made by the Director shall have been complied with, and upon such
notice to suspend dividends, no bank shall thereafter declare or pay any
dividends until such notice has been rescinded in writing.
17
20
Valley Community Bancshares, Inc.
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
VALLEY COMMUNITY BANCSHARES, INC.
We have audited the accompanying consolidated balance sheet of Valley Community
Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2000 and
1999, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company'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 audits 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 above present
fairly, in all material respects, the financial position of Valley Community
Bancshares, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with generally accepted
accounting principles.
/s/ MOSS ADAMS LLP
Everett, Washington
February 16, 2001
18
21
Valley Community Bancshares, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
DECEMBER 31,
-----------------------
2000 1999
--------- ---------
ASSETS
Cash and due from banks $ 4,466 $ 5,127
Interest-bearing deposits with banks 10,123 9,692
Securities available-for-sale 30,483 33,262
Securities held-to-maturity 279 1,241
Federal Home Loan Bank stock 447 420
--------- ---------
45,798 49,742
Loans 94,614 78,634
Less allowance for loan losses 1,096 959
--------- ---------
Loans, net 93,518 77,675
--------- ---------
Accrued interest receivable 952 851
Premises and equipment, net 5,712 4,717
Real estate held for investment 224 224
Other assets 565 628
--------- ---------
Total assets $ 146,769 $ 133,837
========= =========
LIABILITIES
Deposits
Non-interest-bearing $ 24,140 $ 21,349
Interest-bearing 100,907 92,460
--------- ---------
Total deposits 125,047 113,809
Other borrowed funds 557 539
Accrued interest payable 597 347
Other liabilities 443 418
--------- ---------
Total liabilities 126,644 115,113
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share; 5,000,000 shares authorized;
1,133,588 and 1,125,561 shares issued and outstanding in 2000
and 1999, respectively 1,134 1,126
Additional paid-in capital 16,322 16,286
Retained earnings 2,613 1,569
Accumulated other comprehensive income (loss), net of tax 56 (257)
--------- ---------
Total stockholders' equity 20,125 18,724
--------- ---------
Total liabilities and stockholders' equity $ 146,769 $ 133,837
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
19
22
Valley Community Bancshares, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
---------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $ 7,961 $ 6,247 $ 6,121
Interest on federal funds sold and deposits in banks 718 784 972
Securities available-for-sale 1,800 1,837 1,437
Securities held-to-maturity 54 90 164
---------- ---------- ----------
Total interest income 10,533 8,958 8,694
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 3,670 2,955 3,105
Interest on federal funds and other short-term borrowings 45 18 34
---------- ---------- ----------
Total interest expense 3,715 2,973 3,139
---------- ---------- ----------
Net interest income 6,818 5,985 5,555
PROVISION FOR LOAN LOSSES 145 84 9
---------- ---------- ----------
Net interest income after provision for loan losses 6,673 5,901 5,546
---------- ---------- ----------
NONINTEREST INCOME
Service charges 333 329 318
Gain on sale of investment securities, net 1 2
Origination fees on mortgage loans brokered 35 47 139
Other operating income 293 212 203
---------- ---------- ----------
Total noninterest income 661 589 662
---------- ---------- ----------
NONINTEREST EXPENSE
Salaries 1,974 1,849 1,741
Employee benefits 508 420 375
Occupancy 487 449 341
Equipment 488 471 389
Organizational costs 131
Other operating expenses 1,541 1,327 1,134
---------- ---------- ----------
Total non interest expense 4,998 4,516 4,111
---------- ---------- ----------
INCOME BEFORE INCOME TAX 2,336 1,974 2,097
PROVISION FOR INCOME TAX 728 580 616
---------- ---------- ----------
NET INCOME $ 1,608 $ 1,394 $ 1,481
========== ========== ==========
EARNINGS PER SHARE
Basic $ 1.42 $ 1.24 $ 1.46
Diluted $ 1.39 $ 1.21 $ 1.41
Weighted average shares outstanding 1,131,484 1,119,780 1,012,844
Weighted average diluted shares outstanding 1,153,883 1,152,576 1,047,745
The accompanying notes are an integral part of these consolidated
financial statements.
20
23
Valley Community Bancshares, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
COMMON STOCK ADDITIONAL
--------------------------- PAID-IN COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL INCOME EARNINGS
----------- ----------- ----------- ------------- ------------
BALANCE, 12/31/1997 964,686 $ 965 $ 10,585 $ 1,794
Net income $ 1,481 1,481
Other comprehensive income
Unrealized gain on securities,
Net of $10 tax 19
-----------
Comprehensive income $ 1,500
===========
Holding company reorganization 893 (893)
Cash dividend (871)
Stock dividend 48,043 48 1,153 (1,201)
Common stock exercised
Under stock option plan 2,253 2 11
---------- ----------- ----------- -----------
BALANCE 12/31/1998 1,014,982 1,015 12,642 310
Net income $ 1,394 1,394
Other comprehensive income
Unrealized loss on securities,
Net of $190 tax (368)
-----------
Comprehensive income $ 1,026
===========
Common stock issued 106,189 106 3,610
Cash dividend (135)
Common stock exercised
Under stock option plan 4,390 5 34
---------- ----------- ----------- -----------
BALANCE, 12/31/1999 1,125,561 1,126 16,286 1,569
Net income $ 1,608 1,608
Other comprehensive
Unrealized gain on securities,
Net of $161 tax 313 313
-----------
Comprehensive income $ 1,921
===========
Cash dividend (564)
Common stock exercised
Under stock option plan 8,027 8 36
---------- ----------- ----------- -----------
BALANCE, 12/31/2000 1,133,588 $ 1,134 $ 16,322 $ 2,613
========== =========== =========== ===========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME (LOSS), NET EQUITY
------------------ -------------
BALANCE, 12/31/1997 $ 92 $ 13,436
Net income 1,481
Other comprehensive income
Unrealized gain on securities,
Net of $10 tax 19 19
Comprehensive income
Holding company reorganization
Cash dividend (871)
Stock dividend
Common stock exercised
Under stock option plan 13
----------- -----------
BALANCE 12/31/1998 111 14,078
Net income 1,394
Other comprehensive income
Unrealized loss on securities,
Net of $190 tax (368) (368)
Comprehensive income
Common stock issued 3,716
Cash dividend (135)
Common stock exercised
Under stock option plan 39
----------- -----------
BALANCE, 12/31/1999 (257) 18,724
Net income 1,608
Other comprehensive
Unrealized gain on securities,
Net of $161 tax 313
Comprehensive income
Cash dividend (564)
Common stock exercised
Under stock option plan 44
----------- -----------
BALANCE, 12/31/2000 $ 56 $ 20,125
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
21
24
Valley Community Bancshares, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,608 $ 1,394 $ 1,481
Adjustments to reconcile net income to net cash
from operating activities
Provisions for loan losses 145 84 9
Depreciation 435 415 307
Deferred income tax 28 (8) (33)
Net amortization on securities 34 70 62
FHLB stock dividends (27) (29) (10)
Gain on sale of securities available-for-sale (1) (2)
Loss on sale of premises and equipment 4
Increase in accrued interest receivable (101) (79) (103)
Increase (decrease) in other assets (131) 85 (74)
Increase in accrued interest payable 250 7 21
Increase in other liabilities 26 24 188
---------- ---------- ----------
Net cash from operating activities 2,271 1,962 1,846
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold 2,530 (530)
Net (increase) decrease in interest-bearing deposits with banks (431) 1,578 1,600
Purchase of securities available-for-sale (6,169) (17,919) (26,432)
Proceeds from sales of securities available-for-sale 1,001 2,377
Proceeds from maturities of securities available-for-sale 9,388 14,311 13,619
Proceeds from maturities of securities held-to-maturity 962 1,094 2,562
Purchase stock in FHLB (36) (345)
Net increase in loans (15,988) (10,918) (3,110)
Additions to premises and equipment (1,430) (1,464) (796)
Additions to real estate held for investment (1)
Reduction to real estate held for investment 32
---------- ---------- ----------
Net cash from investing activities (13,668) (9,791) (11,056)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 11,238 3,526 12,133
Net increase (decrease) in other borrowed funds 18 305 (649)
Cash dividends paid (564) (135) (871)
Common stock issued 3,591
Stock options exercised 44 39 13
---------- ---------- ----------
Net cash from financing activities 10,736 7,326 10,626
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (661) (503) 1,416
CASH AND DUE FROM BANKS, beginning of year 5,127 5,630 4,214
---------- ---------- ----------
CASH AND DUE FROM BANKS, end of year $ 4,466 $ 5,127 $ 5,630
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for
Interest $ 3,465 $ 2,966 $ 3,118
========== ========== ==========
Income taxes $ 795 $ 563 $ 655
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Unrealized gains (losses) on securities available-for-sale $ 474 $ (558) $ 29
========== ========== ==========
Common stock issued for land $ $ 125 $
========== ========== ==========
Deferred tax on unrealized gains (losses) on securities
Available-for-sale $ (161) $ 189 $ 10
========== ========== ==========
22
The accompanying notes are an integral part of these
consolidated financial statements
25
Valley Community Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Valley Community
Bancshares, Inc. (the Company) and its wholly owned subsidiaries Puyallup Valley
Bank and Valley Bank (collectively, the "Banks"). All significant intercompany
transactions and balances have been eliminated in consolidation.
DESCRIPTION OF BUSINESS
The Company is a Washington State bank holding company headquartered in
Puyallup, Washington. The Company was organized as a holding company for its
principal bank subsidiary, Puyallup Valley Bank, through reorganization
completed on July 1, 1998. The Company conducts its business primarily through
the Bank. The Company recently became a multi-bank holding company by assisting
in the formation of Valley Bank, a wholly owned subsidiary of the Company,
beginning January 11, 1999.
The Company's main office is located in Puyallup, Washington, which also serves
as the main office of Puyallup Valley Bank. Valley Bank is located in Auburn,
Washington. The Company provides a full range of commercial banking services to
small and medium-sized businesses, professionals, and other individuals through
banking offices located in Puyallup and Auburn, Washington, and their environs.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. These assumptions and estimates affect the reported amounts of
assets and liabilities, and disclosures of contingent assets and liabilities at
the date of the consolidated financial statements. They also affect the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, and amounts due from banks. Cash and cash equivalents have an original
maturity of three months or less.
INTEREST-BEARING DEPOSITS WITH BANKS
Interest-bearing deposits with banks include interest-bearing deposits at the
Federal Home Loan Bank and certificates of deposit in financial institutions
located throughout the United States. All certificates of deposit are under the
FDIC insurance limit.
INVESTMENT SECURITIES
Investment securities are classified into one of three categories: (1)
held-to-maturity, (2) available-for-sale, or (3) trading. Investment securities
are categorized as held-to-maturity when the Company has the positive intent and
ability to hold those securities to maturity. Securities, which are
held-to-maturity, are stated at cost and adjusted for amortization of premiums
and accretion of discounts, which are recognized as adjustments to interest
income.
Investment securities categorized as available-for-sale are generally held for
investment purposes (to maturity), although unanticipated future events may
result in the sale of some securities. Available-for-sale securities are
recorded at estimated fair value, with the net unrealized gain or loss included
in comprehensive income, net of the related tax effect. Realized gains or losses
on dispositions are based on the net proceeds and the adjusted carrying amount
of securities sold, using the specific identification method.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary are recognized by
write-downs of the individual securities to their fair value. Such write-downs
would be included in earnings as realized losses.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity. The Company had no trading securities at
December 31, 2000 and 1999.
FEDERAL HOME LOAN BANK STOCK
The Company's investment in Federal Home Loan Bank (the FHLB) stock is carried
at par value ($100 per share), which reasonably approximates its fair value. As
a member of the FHLB system, the Company is required to maintain a minimum level
of investment in FHLB stock based on specified percentages of its outstanding
FHLB advances. The Company may request redemption at par value of any stock in
excess of the amount the Company is required to hold. Stock redemptions are at
the discretion of the FHLB.
23
26
Valley Community Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LOANS
Loans that management has the intent and ability to hold for the foreseeable
future, or until maturity or pay-off, are reported at their outstanding
principal, and are adjusted for any charge-offs, the allowance for loan losses,
and any deferred fees or costs on originated loans and unamortized premiums or
discounts on purchased loans. Loan origination fees and certain direct
origination costs are capitalized and recognized as an adjustment of the yield
of the related loan.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received. Interest income on restructured loans is recognized pursuant to the
terms of the new loan agreement. Interest income on other impaired loans is
monitored and based upon the terms of the underlying loan agreement. However,
the recorded net investment in impaired loans, including accrued interest, is
limited to the present value of the expected cash flows of the impaired loan or
the observable fair market value of the loan, or the fair market value of the
loan's collateral.
ALLOWANCE FOR LOAN LOSS
The allowance for loan loss is management's best estimate of loan losses
incurred at the balance sheet date. The allowance for loan losses is increased
by charges to income and decreased by charge-offs (net of recoveries), and
established through a provision for credit losses charged to expense. Loans are
charged against the allowance for credit losses when management believes that
the collectibility of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb losses inherent in existing
loans, commitments to extend credit and standby letters of credit based on
evaluations of collectibility, and prior loss experience of loans. The
evaluations take into consideration such factors as changes in the nature and
volume of the portfolio, overall portfolio quality, loan concentrations,
specific problem loans, commitments, standby letters of credit, and current
economic conditions that may affect the borrowers' ability to pay.
A material estimate that is particularly susceptible to significant change
relates to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the estimated
losses on loans and foreclosed assets held for sale, management obtains
independent appraisals for significant properties.
The majority of the Company's loan portfolio consists of commercial loans and
single-family residential loans secured by real estate in the Puyallup and
Pierce County area and also in the Auburn and King County area. Real estate
prices in this market are stable at this time. However, the ultimate
collectibility of a substantial portion of the Company's loan portfolio may be
susceptible to change in local market conditions in the future.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Company to recognize additional
losses based on their judgment about information available to them at the time
of their examination.
Management determines the adequacy of the allowance for loan losses by utilizing
a loan grading system to determine risk in the loan portfolio and by considering
the results of credit reviews. The loan portfolio is separated by quality and
then by loan type. Loans of acceptable quality are evaluated as a group, by loan
type, with a specific loss rate assigned to the total loans in each type, but
unallocated to any individual loan. Conversely, each adversely classified loan
is individually analyzed, to determine an estimated loss amount. A valuation
allowance is also assigned to these adversely classified loans, but at a higher
loss rate due to the greater risk of loss. For those loans where the loss is
greater than the background percentage, the estimated loss amount is considered
specifically allocated to the allowance.
Although management has allocated a portion of the allowance to the loan
categories using the method described above, the adequacy of the allowance must
be considered as a whole. To mitigate the imprecision in most estimates of
expected loan losses, the allocated component of the allowance is supplemented
by an unallocated component. The unallocated portion includes management's
judgmental determination of the amounts necessary for qualitative factors such
as the consideration of new products and policies, economic conditions,
concentrations of credit risk, and the experience and abilities of lending
personnel. Loan concentrations, quality, terms, and basic underlying assumptions
remained substantially unchanged during the period.
24
27
Valley Community Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated amortization and
depreciation. Leasehold improvements are amortized on a straight-line basis over
the lives of the respective leases. Depreciation is computed on the
straight-line method over the following estimated useful lives:
Building and improvements 10 - 40 years
Furniture, fixtures, and equipment 3 - 10 years
REAL ESTATE HELD FOR INVESTMENT
Real estate held for investment is property that was acquired for resale. The
property is recorded at the lower of cost or fair value and is periodically
evaluated to determine that the carrying value does not exceed the fair value of
the property. The amount the Company will ultimately recover may differ from the
carrying value of the asset because of future market factors beyond the
Company's control.
INCOME TAX
The Company records its provision for income taxes using the liability method.
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
RESTRICTED ASSETS
Federal Reserve Board Regulations require maintenance of certain minimum reserve
balances on deposit with the Federal Reserve Bank. The amounts of such balances
on deposit were approximately $916,000 and $868,000 at December 31, 2000 and
1999, respectively.
STOCK OPTION PLAN
The Company recognizes the financial effects of stock options in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. Stock options are issued at a price that approximates the fair value
of the Company's stock as of the grant date. Under APB 25, options issued in
this manner do not result in the recognition of employee compensation in the
Company's financial statements.
FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of
credit, and standby letters of credit. Such financial instruments are recorded
in the financial statements when they are funded, or related fees are incurred
or received.
EARNINGS PER SHARE
Basic earnings per share amounts are computed based on the weighted average
number of shares outstanding during the period after giving retroactive effect
to stock dividends and stock splits. Diluted earnings per share amounts are
computed by determining the number of additional shares that are deemed
outstanding due to stock options under the treasury stock method.
ADVERTISING COSTS
The Company expenses advertising costs as they are incurred and these are not
considered to be material.
IMPACT OF NEW ACCOUNTING ISSUES
During the year 2000 the Financial Accounting Standard Board issued the
following accounting standards.
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and
138, establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company will implement this statement effective January
1, 2001. The Company does not expect the statement will result in a material
impact on its financial position or results of operations.
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, was issued in September 2000 and establishes the
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. The statement is effective for
transfers of financial assets occurring after March 31, 2001, applied
prospectively and effective for disclosures about securitizations, and for
reclassification and disclosure about collateral in financial statements for
fiscal years ending after December 15, 2000. The Company does not expect the
statement will result in a material impact on its financial position or results
of operations.
25
28
Valley Community Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
Investment securities have been classified according to management's intent. The
carrying amount of securities and their estimated fair values are as follows (in
thousands):
DECEMBER 31, 2000
SECURITIES AVAILABLE-FOR-SALE GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
U.S. Treasury and U.S. Government
corporations and agencies $ 16,652 $ 77 $ 30 $ 16,699
State and political subdivisions 4,710 38 7 4,741
Mortgage-backed securities 7,531 47 30 7,548
Other 1,504 9 1,495
---------- ---------- ---------- ----------
30,397 162 76 30,483
---------- ---------- ---------- ----------
SECURITIES HELD-TO-MATURITY
U.S. Treasury and U.S. Government
corporations and agencies 244 4 248
State and political subdivisions 35 35
---------- ---------- ---------- ----------
279 4 283
---------- ---------- ---------- ----------
$ 30,676 $ 166 $ 76 $ 30,766
========== ========== ========== ==========
DECEMBER 31, 1999
SECURITIES AVAILABLE-FOR-SALE GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
U.S. Treasury and U.S. Government
corporations and agencies $ 18,630 $ 23 $ 224 $ 18,429
State and political subdivisions 4,233 7 39 4,201
Mortgage-backed securities 9,269 14 132 9,151
Other 1,520 39 1,481
---------- ---------- ---------- ----------
33,652 44 434 33,262
---------- ---------- ---------- ----------
SECURITIES HELD-TO-MATURITY
U.S. Treasury and U.S. Government
corporations and agencies 321 2 323
State and political subdivisions 920 4 924
---------- ---------- ---------- ----------
1,241 6 1,247
---------- ---------- ---------- ----------
$ 34,893 $ 50 $ 434 $ 34,509
========== ========== ========== ==========
26
29
Valley Community Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated market value of securities available-for-sale
and securities held-to-maturity, at December 31, 2000, by contractual maturity,
are shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without prepayment penalties.
AVAILABLE-FOR-SALE HELD-TO-MATURITY
-------------------------- --------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
Due in one year or less $ 10,014 $ 9,984 $ 35 $ 35
Due from one to five years 14,599 14,648
Due from five to ten years 1,856 1,875
Due after ten years 3,928 3,976 244 248
---------- ---------- ---------- ----------
Totals $ 30,397 $ 30,483 $ 279 $ 283
========== ========== ========== ==========
Proceeds from sales of available-for-sale investment securities were $0,
$1,001,000, and $2,377,000 in 2000, 1999, and 1998, respectively.
Gross gains from the sales of available-for-sale investment securities were $0,
$1,000, and $5,000 in 2000, 1999, and 1998, respectively. The Company incurred
gross losses of $0 in 2000 and 1999, and $3,000 in 1998.
Investments in state and political subdivisions represent purchases of municipal
bonds located in Washington State. Investments in corporate debt obligations are
made in companies located and doing business throughout the United States. The
debt obligations were all within the credit ratings acceptable under the
Company's investment policy.
Investment securities with a book value of $3,361,000 and $3,864,000 at 2000 and
1999, respectively, have been pledged to secure public deposits, as required by
law, and other purposes. The estimated fair value of these pledged securities is
$3,354,000 and $3,829,000 at December 31, 2000 and 1999, respectively.
NOTE 3 - LOANS
The major classifications of loans at December 31 are summarized as follows
(dollars in thousands):
2000 1999
---------- ----------
Real Estate
Construction $ 5,959 $ 7,384
Mortgage 16,701 15,867
Commercial 52,620 40,254
Commercial 16,258 12,892
Consumer and other 2,523 1,864
Lease 560 377
---------- ----------
94,621 78,638
Less deferred loan fees, net (7) (4)
---------- ----------
Totals $ 94,614 $ 78,634
========== ==========
27
30
Valley Community Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (CONTINUED)
Contractual maturities of loans as of December 31, 2000 are as shown below.
Actual maturities may differ from contractual maturities because individual
borrowers may have the right to prepay loans with or without prepayment
penalties.
WITHIN 1 YEAR 1 - 5 YEARS AFTER 5 YEARS TOTAL
-------------- -------------- -------------- --------------
Commercial $ 10,794 $ 5,235 $ 229 $ 16,258
Real Estate, commercial 9,789 42,734 97 52,620
Real Estate, construction 5,350 559 50 5,959
Real Estate, mortgage 1,197 14,411 1,093 16,701
Consumer and other 1,052 1,075 396 2,523
Lease 39 521 560
-------------- -------------- -------------- --------------
$ 28,221 $ 64,535 $ 1,865 $ 94,621
============== ============== ============== ==============
1 - 5 YEARS AFTER 5 YEARS
-------------- --------------
Loans maturing after one year with:
Fixed rates $ 54,106 $ 1,672
Variable rates 10,429 193
-------------- --------------
$ 64,535 $ 1,865
============== ==============
At December 31, 2000 and 1999, the Company had no loans that were specifically
classified as impaired and, therefore, no allocation of the allowance for
possible credit losses was considered necessary at December 31, 2000 and 1999.
The effects of troubled debt restructurings are not considered material to the
Company's financial position and results of operations.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are summarized as follows (dollars in
thousands):
2000 1999 1998
---------- ---------- ----------
Balance, beginning of year $ 959 $ 883 $ 840
Provision for loan losses 145 84 9
Additions from recoveries 12 45
Loans charged off (20) (8) (11)
---------- ---------- ----------
Balance, end of year $ 1,096 $ 959 $ 883
========== ========== ==========
28
31
Valley Community Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 consisted of the following (dollars in
thousands):
2000 1999
---------- ----------
Equipment, furniture, and fixtures $ 3,264 $ 3,205
Land and buildings 5,964 3,748
Construction in progress 950
---------- ----------
9,228 7,903
Less: accumulated depreciation (3,516) (3,186)
---------- ----------
$ 5,712 $ 4,717
========== ==========
Depreciation expense on premises and equipment totaled $435,000 in 2000,
$415,000 in 1999, and $307,000 in 1998.
NOTE 6 - DEPOSITS
Interest-bearing deposits at December 31 consisted of the following (dollars in
thousands):
2000 1999
---------- ----------
Demand accounts $ 17,417 $ 15,926
Money market accounts 29,841 28,603
Savings accounts 10,320 12,002
Certificates of deposit over $100,000 19,754 14,555
Other certificates of deposit 23,575 21,374
---------- ----------
$ 100,907 $ 92,460
========== ==========
At December 31, 2000, the scheduled maturities of certificates of deposit are as
follows (dollars in thousands):
2001 $ 41,351
2002 1,863
2003 52
2004 6
2005 56
----------
$ 43,329
==========
29
32
Valley Community Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - CREDIT ARRANGEMENTS
The Banks are members of the Federal Home Loan Bank of Seattle. As a member,
Puyallup Valley Bank has a committed line of credit up to 10 percent of total
assets. Valley Bank's credit line is on a case-by-case basis. Borrowings
generally provide for interest at the then current published rates. There were
no borrowings outstanding at December 31, 2000 or 1999. During 2000, the maximum
amount of borrowings outstanding totaled $2,700,000. The average amounts of
borrowings outstanding during 2000 were $327,000 at an average weighted interest
rate of 6.63 percent. There were no borrowings outstanding during 1999 and 1998.
At December 31, 2000, committed line-of-credit agreements totaling approximately
$7,100,000 were available to the Company from unaffiliated banks with maturities
that range from April 2001 to June 2001. Such lines generally provide for
interest at the then existing federal funds rate. There were no borrowings
outstanding under these credit arrangements at December 31, 2000 and 1999. There
were no borrowings outstanding during 2000, 1999, and 1998.
NOTE 8 - INCOME TAXES
The components of the provision for federal income tax expense for the years
ended December 31, are as follows (dollars in thousands):
2000 1999 1998
-------- -------- --------
Current $ 700 $ 588 $ 649
Deferred 28 (8) (33)
-------- -------- --------
$ 728 $ 580 $ 616
======== ======== ========
A reconciliation of the effective income tax rate with the federal
statutory rate is as follows (dollars in thousands):
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ---------- ---------- ---------- ---------- ----------
Federal income tax at
statutory rates $ 794 34% $ 671 34% $ 713 34%
Effect of tax-exempt
interest income (73) -3% (96) -5% (108) -5%
Other 7 5 11
---------- ---------- ---------- ---------- ---------- ----------
$ 728 31% $ 580 29% $ 616 29%
========== ========== ========== ========== ========== ==========
30
33
Valley Community Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES (CONTINUED)
The following are the significant components of deferred tax assets and
liabilities at December 31 (dollars in thousands):
2000 1999
---------- ----------
Deferred tax assets
Allowance for loan losses $ 301 $ 270
Unrealized loss on securities available-for-sale 132
Deferred compensation 54 36
Other 23 31
---------- ----------
378 469
---------- ----------
Deferred tax liabilities
Accumulated depreciation 119 32
Unrealized gain on securities available-for-sale 29
Other 47 65
---------- ----------
195 97
---------- ----------
Net deferred tax asset $ 183 $ 372
========== ==========
The Bank believes, based on available information, all deferred assets will be
realized in the normal course of business; therefore, these assets have not been
reduced by a valuation allowance.
NOTE 9 - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
In January 1998, the Company distributed 48,043 shares of common stock in
connection with 5 percent stock dividends. All references in the accompanying
consolidated financial statements to the average number of shares of common
stock and per-share amounts have been restated to reflect these stock dividends.
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
31
34
Valley Community Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL (CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2000, that the
Company meets all capital adequacy requirements to which it is subject.
As of December 31, 2000, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company must maintain minimum total risk-based, Tier I
risk-based, Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Company's actual capital amounts and ratios are also presented in the table
(dollars in thousands):
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER PROMPT
ACTUAL ADEQUACY PURPOSES CORRECTIVE ACTION PROVISIONS
---------------------- ---------------------- ----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- -------- -------- --------
As of December 31, 2000:
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 21,164 19.75% $ 8,575 8.00% $ 10,718 10.00%
Puyallup Valley Bank $ 14,375 15.25% $ 7,543 8.00% $ 9,429 10.00%
Valley Bank $ 3,932 36.12% $ 871 8.00% $ 1,089 10.00%
Tier I Capital
(to Risk-Weighted Assets)
Consolidated $ 20,068 18.72% $ 4,287 4.00% $ 6,431 6.00%
Puyallup Valley Bank $ 13,404 14.22% $ 3,771 4.00% $ 5,657 6.00%
Valley Bank $ 3,807 34.97% $ 435 4.00% $ 653 6.00%
Tier I Capital
(to Average Assets)
Consolidated $ 20,068 13.46% $ 5,963 4.00% $ 7,454 5.00%
Puyallup Valley Bank $ 13,404 9.99% $ 5,368 4.00% $ 6,710 5.00%
Valley Bank $ 3,807 29.01% $ 525 4.00% $ 656 5.00%
As of December 31, 1999:
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 19,940 21.70% $ 7,357 8.00% $ 9,196 10.00%
Puyallup Valley Bank $ 13,867 16.30% $ 6,814 8.00% $ 8,518 10.00%
Valley Bank $ 3,962 68.00% $ 466 8.00% $ 583 10.00%
Tier I Capital
(to Risk-Weighted Assets)
Consolidated $ 18,981 20.60% $ 3,678 4.00% $ 5,518 6.00%
Puyallup Valley Bank $ 12,970 15.20% $ 3,407 4.00% $ 5,111 6.00%
Valley Bank $ 3,900 66.90% $ 233 4.00% $ 350 6.00%
Tier I Capital
(to Average Assets)
Consolidated $ 18,981 13.80% $ 5,522 4.00% $ 6,903 5.00%
Puyallup Valley Bank $ 12,970 10.00% $ 5,194 4.00% $ 6,492 5.00%
Valley Bank $ 3,900 53.40% $ 292 4.00% $ 365 5.00%
32
35
Valley Community Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
(a) FINANCIAL INSTRUMENTS - The Company is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the balance sheets.
The Company's exposure to credit loss, in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit, is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. A summary
of commitments at December 31 is as follows (dollars in thousands):
2000 1999
---------- ----------
Commitments to extend credit $ 15,084 $ 13,910
Standby letters of credit 321 343
---------- ----------
$ 15,405 $ 14,253
========== ==========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company's experience has been that customers draw
upon approximately 75 percent of loan commitments. While approximately all of
commercial letters of credit are utilized, a significant portion of such
utilization is on an immediate payment basis. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if it is deemed necessary by the Company upon extension of credit, is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property and equipment,
and income producing properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above, and is required in instances where the Company deemed
necessary.
(b) OPERATING LEASE COMMITMENTS - The Company leases its operating facilities
under agreements, which expire between 2001 and 2005. The agreements require the
Company to pay certain operating expenses. The approximate annual commitment for
rental space under these operating leases is summarized as follows (dollars in
thousands):
YEAR ENDING
DECEMBER 31,
- ------------------------
2001 $ 102
2002 74
2003 35
2004 8
2005 3
-------
$ 222
=======
Rental expense charged to operations was $107,000, $109,000, and $45,000 for the
years ended December 31, 2000, 1999, and 1998, respectively.
(c) LEGAL PROCEEDINGS - The Company and its subsidiaries are from time to time
defendants in and are threatened with various legal proceedings arising from
their regular business activities. Management, after consulting with legal
counsel, is of the opinion that the ultimate liability, if any, resulting from
these and other pending or threatened actions and proceedings will not have a
material effect on the financial position or results of operation of the Company
and its subsidiaries.
33
36
Valley Community Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers, principal stockholders, and companies in
which they have a beneficial interest, are loan customers of the Company. All
loans and loan commitments were made in compliance with applicable laws and
regulations on substantially the same terms (including interest rates and
collateral) as those prevailing at the time for comparable transactions with
other persons and do not involve more than the normal risk of collectibility or
present any other unfavorable features.
Such loans had aggregate balances and activity during 2000, 1999, and 1998 as
follows (dollars in thousands):
2000 1999 1998
-------- -------- --------
Balance at beginning of year $ 2,139 $ 550 $ 500
New loans or advances 1,205 2,378 50
Repayments (1,134) (789)
-------- -------- --------
Balance at end of year $ 2,210 $ 2,139 $ 550
======== ======== ========
Deposits from related parties totaled approximately $6,482,000, $5,175,000, and
$4,677,000 at December 31, 2000, 1999, and 1998, respectively.
NOTE 12 - EMPLOYEE BENEFITS
The Company has a 401(k) defined contribution plan for those employees who meet
the eligibility requirements set forth in the plan. Contributions to the plan,
adopted in January 1987, are at the discretion of the Company's Board of
Directors. Eligible employees can contribute up to 12% of compensation. The
Company made no contributions to the plan in 2000, 1999, or 1998.
The Company also has a noncontributory profit-sharing plan covering
substantially all employees. Contributions to the plan are at the discretion of
the Company's Board of Directors, and totaled $96,500, $84,000, and $94,000 in
2000, 1999, and 1998, respectively.
NOTE 13 - STOCK OPTION PLAN
The Company has a qualified incentive stock option plan that provides for the
awarding of stock options to certain officers and employees of the Company. The
awarding of stock options is at the discretion of the Board of Directors.
Options granted under the plan vest under a schedule determined by the Board of
Directors and expire ten years from the date of the grant. The exercise price of
all options granted under the plan is equal to the fair value of the common
stock on the date of the grant. Average exercise price per share, number of
shares authorized, available for grant, granted, exercised, outstanding, and
currently exercisable reflect the dilutive effect of stock dividends and stock
splits.
Pro forma information regarding net income and earnings per share is required by
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. The pro forma information recognizes, as compensation, the
estimated fair value of stock options granted using an option valuation model
known as the Black-Scholes model. Pro forma earnings per share amounts reflect
an adjustment as if the fair value of the options were recognized as
compensation for the period.
For the most part, variables and assumptions are used in the model. For the
periods 2000, 1999, and 1998, respectively, the risk-free interest rate is 6.25
percent, 5.75 percent, and 5.75 percent, the dividend yield rate is 1.9 percent,
1.4 percent, and 1.7 percent, the price volatility is not meaningful, and the
weighted average expected life of the options has been measured at 7 years.
The fair value of options issued in 1999 was estimated at $24,000. There were no
options issued in 2000. The remaining unrecognized compensation for fair value
of stock options was approximately $17,000 as of December 31, 2000.
34
37
Valley Community Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCK OPTION PLAN (CONTINUED)
Management believes that the variables and assumptions used in the
options-pricing model are subjective and represent only one estimate of possible
value. The fair value of options granted, that are recognized in pro forma
earnings, is shown below:
In thousands, except for per share amounts
2000 1999 1998
--------- --------- ---------
Pro forma disclosures
Net income as reported $ 1,608 $ 1,394 $ 1,481
Additional compensation for fair value of stock options
(5) (3) (2)
--------- --------- ---------
Pro forma net income $ 1,603 $ 1,391 $ 1,479
========= ========= =========
Earnings per share
Basic
As reported $ 1.42 $ 1.24 $ 1.46
========= ========= =========
Pro forma $ 1.42 $ 1.24 $ 1.46
========= ========= =========
Diluted
As reported $ 1.39 $ 1.21 $ 1.41
========= ========= =========
Pro forma $ 1.39 $ 1.21 $ 1.41
========= ========= =========
Information with respect to option transactions is summarized as follows:
AVERAGE
EXERCISE CURRENTLY OPTIONS
AUTHORIZED PRICE EXERCISED OUTSTANDING EXERCISABLE
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 159,070 $ 10.69 102,634 51,884 38,188
1998 Option plan 100,000
Granted 33.00 13,750
Exercised 5.99 2,253 (2,253) (2,253)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 259,070 15.70 104,887 63,381 35,935
Granted 35.00 14,500
Exercised 8.68 4,390 (4,390) (4,390)
Expired and forfeitures 34.14 (8,750)
Vested 5,464
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 259,070 18.00 109,277 64,741 37,009
Granted
Exercised 5.42 8,027 (8,027) (8,027)
Expired and forfeitures
Vested 2,982
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 259,070 $ 19.78 117,304 56,714 31,964
=========== =========== =========== =========== ===========
35
38
Valley Community Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCK OPTION PLAN (CONTINUED)
Additional financial data pertaining to outstanding stock options is as follows:
WEIGHTED AVERAGE WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE NUMBER EXERCISE PRICE OF
RANGE OF NUMBER OF CONTRACTUAL EXERCISE PRICE OF EXERCISABLE EXERCISABLE
EXERCISE PRICES OPTION SHARES LIFE (IN YEARS) OPTION SHARES OPTION SHARES OPTION SHARES
- ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
$ 9.70 24,122 1.90 $ 9.70 24,122 $ 9.70
$ 12.34 - 12.36 6,684 3.07 $ 12.34 6,684 $ 12.34
$ 15.54 1,158 4.45 $ 15.54 1,158 $ 15.54
$ 23.81 5,250 6.89 $ 23.81
$ 25.00 2,000 7.22 $ 25.00
$ 35.00 17,500 8.26 $ 35.00
NOTE 14 - EARNINGS PER SHARE
The numerators and denominators of basic and fully diluted earnings per share
are as follows:
In thousands, except for per share amounts
2000 1999 1998
-------- -------- --------
Net income (numerator) $ 1,608 $ 1,394 $ 1,481
======== ======== ========
Shares used in the calculation (denominator)
Weighted average shares outstanding 1,131,484 1,119,780 1,012,844
Effect of dilutive stock options 22,399 32,796 34,901
Fully diluted shares 1,153,883 1,152,576 1,047,745
======== ======== ========
Basic earnings per share $ 1.42 $ 1.24 $ 1.46
======== ======== ========
$ 1.39 $ 1.21 $ 1.41
======== ======== ========
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, Disclosures About Fair
Value of Financial Instruments. The Company, using available market information
and appropriate valuation methodologies, has determined the estimated fair value
amounts. However, considerable judgment is necessary to interpret market data in
the development of the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts. The fair value of commitments to customers is not considered
material since they are for relatively short periods of time and subject to
customary credit terms. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it is
practicable to estimate that value:
(a) CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS WITH BANKS, OTHER
BORROWED FUNDS, AND FEDERAL FUNDS SOLD - For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
(b) SECURITIES - For securities, fair values are based on quoted market prices
or dealer quotes, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
(c) FEDERAL HOME LOAN BANK STOCK - The carrying amount is a reasonable estimate
of fair value.
36
39
Valley Community Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
(d) LOANS - The fair value of loans generally is estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
For certain homogeneous categories of loans, such as Small Business
Administration guaranteed loans, fair value is estimated using the quoted market
prices for securities backed by similar loans, adjusted for differences in loan
characteristics.
(e) DEPOSITS - The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the reporting date. The
fair value of fixed-maturity certificates of deposit is estimated by discounting
the future cash flows using the rates currently offered for deposits of similar
remaining maturities.
(f) LIMITATIONS - The fair value estimates presented herein are based on
pertinent information available to management as of the applicable date.
(g) OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS - Commitments to extend credit and
letters of credit represent the principal categories of off-balance-sheet
instruments (Note 10). The fair value of these commitments is not material since
they are for a short period of time and subject to customary credit terms.
The estimated fair values of the Company's financial instruments at December 31
are as follows (dollars in thousands):
2000 1999
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial Assets:
Cash and due from banks, interest-
bearing deposits with banks, and $ 14,589 $ 14,589 $ 14,819 $ 14,819
federal funds sold
Securities $ 30,762 $ 30,766 $ 34,503 $ 34,509
Federal Home Loan Bank stock $ 447 $ 447 $ 420 $ 420
Loans $ 94,614 $ 94,078 $ 78,634 $ 77,667
Financial Liabilities:
Deposits $ 125,047 $ 125,057 $ 113,809 $ 113,725
Other borrowed funds $ 557 $ 557 $ 539 $ 539
NOTE 16 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION
Condensed balance sheet at December 31, 2000 and 1999 (dollars in thousands):
2000 1999
------- -------
ASSETS
Cash and due from bank $ 831 $ 1,131
Investment in Banks 17,267 16,613
Other assets 2,051 980
------- -------
Total assets $20,149 $18,724
======= =======
LIABILITIES
Accounts payable $ 24 $
------- -------
Total liabilities 24
TOTAL STOCKHOLDERS' EQUITY 20,125 18,724
------- -------
Total liabilities and stockholders' equity $20,149 $18,724
======= =======
37
40
Valley Community Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION (CONTINUED)
2000 1999 1998
---------- ---------- ----------
INCOME
Dividend from Bank $ 1,300 $ 900 $ 2,075
Other income 46 27
---------- ---------- ----------
Total income 1,346 927 2,075
---------- ---------- ----------
EXPENSES
Other expenses 99 15 131
---------- ---------- ----------
Total expenses 99 15 131
NET INCOME BEFORE FEDERAL INCOME TAX AND
EQUITY IN UNDISTRIBUTED INCOME OF BANK 1,247 912 1,944
INCOME TAX 20 (13) 44
---------- ---------- ----------
NET INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF BANK 1,267 899 1,988
EQUITY IN UNDISTRIBUTED INCOME OF BANK 341 495
DISTRIBUTIONS RECEIVED IN EXCESS OF BANK INCOME (1,294)
---------- ---------- ----------
NET INCOME $ 1,608 $ 1,394 $ 694
========== ========== ==========
Condensed statement of cash flows for the year ended December 31, 2000 and 1999,
and for the period from inception (July 1, 1998) to December 31, 1998 (dollars
in thousands):
2000 1999 1998
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,608 $ 1,394 $ 694
Adjustments to reconcile net income to net cash from operating activities
Distributions received in excess of subsidiary bank income (341) (495) 1,294
Other operating activities 36 (54) 26
---------- ---------- ----------
Net cash from operating activities 1,303 845 2,014
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of premises and equipment (1,083) (776) (50)
Investment in Valley Bank (4,025)
---------- ---------- ----------
Net cash from investing activities (1,083) (4,801) (50)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of Common Stock 44 3,630 13
Dividend (564) (135) (385)
---------- ---------- ----------
Net cash from financing activities (520) 3,495 (372)
NET INCREASE (DECREASE) IN CASH (300) (461) 1,592
CASH, beginning of year 1,131 1,592
---------- ---------- ----------
CASH, end of year $ 831 $ 1,131 $ 1,592
========== ========== ==========
38
41
Valley Community Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - SUBSEQUENT EVENT
DIVIDENDS - On January 26, 2001, the Board of Directors of the Company declared
a cash dividend of $.55 per share. The dividend was paid during February 2001 to
those shareholders of record on December 31, 2000. The dividend was
approximately $624,000.
NOTE 18 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION - UNAUDITED
Quarterly financial information for the year ended December 31, 2000 and 1999 is
summarized as follows:
VALLEY COMMUNITY BANCSHARES, INC.
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
2000 FIRST SECOND THIRD FOURTH YEAR ENDED
QUARTER QUARTER QUARTER QUARTER DECEMBER 31,
---------- ---------- ---------- ---------- ----------
STATEMENT OF INCOME DATA
Interest Income $ 2,400 $ 2,568 $ 2,740 $ 2,825 $ 10,533
Interest expense 773 896 1,014 1,032 3,715
---------- ---------- ---------- ---------- ----------
Net interest income 1,627 1,672 1,726 1,793 6,818
Provision for loan losses 27 32 43 43 145
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 1,600 1,640 1,683 1,750 6,673
Noninterest income 142 147 191 181 661
Noninterest expense 1,203 1,213 1,238 1,344 4,998
---------- ---------- ---------- ---------- ----------
Income before provision for income tax 539 574 636 587 2,336
Provision for income tax 162 169 202 195 728
---------- ---------- ---------- ---------- ----------
Net Income $ 377 $ 405 $ 434 $ 392 $ 1,608
========== ========== ========== ========== ==========
PER-SHARE DATA
Basic earnings per share $ 0.33 $ 0.36 $ 0.38 $ 0.35 $ 1.42
Diluted earnings per share $ 0.33 $ 0.35 $ 0.38 $ 0.34 $ 1.39
Weighted average shares outstanding 1,125,562 1,133,148 1,133,588 1,133,638 1,131,484
Weighted average diluted shares outstanding 1,154,009 1,155,785 1,153,049 1,152,689 1,153,883
1999 FIRST SECOND THIRD FOURTH YEAR ENDED
QUARTER QUARTER QUARTER QUARTER DECEMBER 31,
---------- ---------- ---------- ---------- ----------
STATEMENT OF INCOME DATA
Interest Income $ 2,134 $ 2,173 $ 2,283 $ 2,368 $ 8,958
Interest expense 730 716 753 774 2,973
---------- ---------- ---------- ---------- ----------
Net interest income 1,404 1,457 1,530 1,594 5,985
Provision for loan losses 15 16 21 32 84
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 1,389 1,441 1,509 1,562 5,901
Noninterest income 154 138 151 146 589
Noninterest expense 1,142 1,094 1,146 1,134 4,516
---------- ---------- ---------- ---------- ----------
Income before provision for income tax 401 485 514 574 1,974
Provision for income tax 117 145 136 182 580
---------- ---------- ---------- ---------- ----------
Net Income $ 284 $ 340 $ 378 $ 392 $ 1,394
========== ========== ========== ========== ==========
PER-SHARE DATA
Basic earnings per share $ 0.26 $ 0.30 $ 0.34 $ 0.35 $ 1.24
Diluted earnings per share $ 0.25 $ 0.29 $ 0.33 $ 0.34 $ 1.21
Weighted average shares outstanding 1,108,227 1,123,699 1,123,586 1,123,608 1,119,780
Weighted average diluted shares outstanding 1,142,447 1,156,635 1,156,741 1,154,481 1,152,576
39
42
Valley Community Bancshares, Inc.
FINANCIAL DATA SUPPLEMENT
AVERAGE BALANCES AND AN ANALYSIS OF AVERAGE RATES EARNED AND PAID
The following tables show average balances and interest income or interest
expense, with the resulting average yield or rate by category or average earning
asset or interest-bearing liability.
VALLEY COMMUNITY BANCSHARES, INC.
AVERAGE BALANCES AND AN ANALYSIS OF AVERAGE RATES EARNED AND PAID
(DOLLARS IN THOUSANDS)
2000 1999
---------------------------------------------- -----------------------------
AVERAGE REVENUE/ YIELD/ AVERAGE REVENUE/
ASSETS BALANCE EXPENSE RATE BALANCE EXPENSE
----------- ----------- ----------- ----------- -----------
Interest-earning assets
Loans (1)
Commercial $ 19,767 $ 1,916 9.69% $ 17,607 $ 1,559
Real estate 60,078 5,213 8.68% 47,601 4,044
Installment 6,276 533 8.49% 5,642 477
Other 1,813 190 10.48% 1,285 116
Fees on loans 109 51
----------- ----------- ----------- ----------- -----------
Total loans (including fees) 87,934 7,961 9.05% 72,135 6,247
Investment securities
Taxable 28,052 1,638 5.84% 29,255 1,608
Tax-exempt (2) 4,913 327 6.66% 6,350 439
----------- ----------- ----------- ----------- -----------
Total investment securities 32,965 1,965 5.96% 35,605 2,047
Interest-bearing deposits with banks 10,534 690 6.55% 13,669 722
Federal funds sold 1,229 59
Federal Home Loan Bank Stock 430 28 6.51% 392 29
----------- ----------- ----------- ----------- -----------
Total Interest-earning assets $ 131,863 $ 10,644 8.07% $ 123,030 $ 9,104
Non-interest-earning assets
Cash and due from banks 5,466 5,187
Premises and equipment, net 5,586 4,478
Other, less allowance for loan losses (51) 250
----------- -----------
Total non-interest-earning assets 11,001
9,915
----------- -----------
TOTAL ASSETS $ 142,864 $ 132,945
=========== ===========
(DOLLARS IN THOUSANDS)
1999 1998
---------------------- ---------------------------------------------
YIELD/ AVERAGE REVENUE/ YIELD/
ASSETS RATE BALANCE EXPENSE RATE
----------- ----------- ----------- -----------
Interest-earning assets
Loans (1)
Commercial 8.85% $ 16,678 $ 1,550 9.29%
Real estate 8.50% 41,439 3,687 8.90%
Installment 8.45% 5,800 503 8.67%
Other 9.03% 1,414 131 9.26%
Fees on loans 250
----------- ----------- ----------- -----------
Total loans (including fees) 8.66% 65,331 6,121 9.37%
Investment securities
Taxable 5.50% 21,149 1,238 5.85%
Tax-exempt (2) 6.92% 7,265 550 7.57%
----------- ----------- ----------- -----------
Total investment securities 5.75% 28,414 1,788 6.29%
Interest-bearing deposits with banks 5.28% 13,347 765 5.73%
Federal funds sold 4.80% 3,665 197 5.38%
Federal Home Loan Bank Stock 7.40% 135 10 0.00%
----------- ----------- ----------- -----------
Total Interest-earning assets 7.40% $ 110,892 $ 8,881 8.01%
Non-interest-earning assets
Cash and due from banks 4,158
Premises and equipment, net 3,496
Other, less allowance for loan losses 414
-----------
Total non-interest-earning assets 8,068
-----------
TOTAL ASSETS $ 118,960
===========
1 Average loan balances include nonaccrual loans, if any. Interest income
on nonaccrual loans has been included.
2 Tax-exempt income has been adjusted to a tax-equivalent basis using an
incremental rate of 34%.
40
43
Valley Community Bancshares, Inc.
FINANCIAL DATA SUPPLEMENT
AVERAGE BALANCES AND AN ANALYSIS OF AVERAGE RATES EARNED AND PAID- (CONTINUED)
VALLEY COMMUNITY BANCSHARES, INC.
AVERAGE BALANCES AND AN ANALYSIS OF AVERAGE RATES EARNED AND PAID
(DOLLARS IN THOUSANDS)
2000 1999
--------------------------------------------- ----------------------------
AVERAGE REVENUE/ YIELD/ AVERAGE REVENUE/
BALANCE EXPENSE RATE BALANCE EXPENSE
----------- ----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits
Savings, NOW accounts, and
money markets $ 58,136 $ 1,489 2.56% $ 57,634 $ 1,396
Time deposits < $100,000 22,699 1,205 5.31% 21,019 981
Time deposits > $100,000 17,797 976 5.48% 12,582 578
----------- ----------- ----------- ----------- -----------
Total deposits 98,632 3,670 3.72% 91,235 2,955
Other borrowed funds 742 45 6.06% 414 18
----------- ----------- ----------- ----------- -----------
Total Interest-bearing liabilities $ 99,374 $ 3,715 3.74% $ 91,649 $ 2,973
----------- -----------
Non-interest-bearing liabilities
Demand deposits 23,484 22,737
Other liabilities 922 697
----------- -----------
24,406 23,434
Stockholders' equity 19,084 17,862
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 142,864 $ 132,945
=========== ===========
Net interest income $ 6,929 5.25% $ 6,131
=========== ===========
Margin Analysis
Interest income/earning assets $ 10,644 8.07% $ 9,104
Interest expense/earning assets 3,715 2.82% 2,973
Net interest income/earning assets 6,929 5.25% 6,131
(DOLLARS IN THOUSANDS)
1999 1998
---------------------- ---------------------------------------------
YIELD/ AVERAGE REVENUE/ YIELD/
RATE BALANCE EXPENSE RATE
----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits
Savings, NOW accounts, and
money markets 2.42% $ 52,797 $ 1,466 2.78%
Time deposits < $100,000 4.67% 21,284 1,122 5.27%
Time deposits > $100,000 4.59% 10,212 517 5.06%
----------- ----------- ----------- -----------
Total deposits 3.24% 84,293 3,105 3.68%
Other borrowed funds 4.35% 691 34 4.92%
----------- ----------- ----------- -----------
Total Interest-bearing liabilities 3.24% $ 84,984 $ 3,139 3.69%
-----------
Non-interest-bearing liabilities
Demand deposits 19,492
Other liabilities 742
-----------
20,234
Stockholders' equity 13,742
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 118,960
===========
Net interest income 4.98% $ 5,742 5.18%
===========
Margin Analysis
Interest income/earning assets 7.40% $ 8,881 8.01%
Interest expense/earning assets 2.42% 3,139 2.83%
Net interest income/earning assets 4.98% 5,742 5.18%
41
44
Valley Community Bancshares, Inc.
FINANCIAL DATA SUPPLEMENT
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
The following table sets forth, on a tax-equivalent basis, a summary of the
changes in net interest income and expense resulting from changes in volume and
rates.
VALLEY COMMUNITY BANCSHARES, INC.
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
(IN THOUSANDS AND IN TAX EQUIVALENT BASIS)
2000 COMPARED TO 1999 1999 COMPARED TO 1998
----------------------------------- ------------------------------------
VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- ---
Interest income
Loans
Commercial $ 201 $ 156 $ 357 $ 84 $ (75) $ 9
Real estate 1,081 88 1,169 529 (172) 357
Installment 54 2 56 (14) (12) (26)
Other 53 21 74 (12) (3) (15)
Fees on loans 58 58 (199) (199)
--------- --------- --------- --------- --------- ---------
Total loans (including fees) 1,389 325 1,714 587 (461) 126
Investment securities
Taxable (68) 98 30 450 (80) 370
Tax-exempt (96) (16) (112) (66) (45) (111)
--------- --------- --------- --------- --------- ---------
Total investment securities (164) 82 (82) 384 (125) 259
Interest-bearing deposits with banks (185) 153 (32) 18 (61) (43)
Federal funds sold (30) (30) (60) (119) (19) (138)
Federal Home Loan Bank Stock 3 (4) (1) 19 19
--------- --------- --------- --------- --------- ---------
Total Interest-earning assets 1,013 526 1,539 889 (666) 223
Interest-bearing liabilities
Deposits
Savings, NOW accounts, and
money markets 12 81 93 127 (197) (70)
Time deposits < $100,000 82 142 224 (14) (127) (141)
Time deposits > $100,000 271 127 398 112 (51) 61
--------- --------- --------- --------- --------- ---------
Total deposits 365 350 715 225 (375) (150)
Other borrowed funds 18 9 27 (12) (4) (16)
--------- --------- --------- --------- --------- ---------
Total Interest-bearing liabilities 383 359 742 213 (379) (166)
--------- --------- --------- --------- --------- ---------
Net interest income/earning assets $ 630 $ 167 $ 797 $ 676 $ (287) $ 389
========= ========= ========= ========= ========= =========
1 The change in interest due to both volume and yield/rate has been allocated
to change due to volume and change due to yield/rate in proportion to the
absolute value of the change in each.
2 Balances of nonaccrual loans, if any, and related income recognized have
been included for computational purposes.
3 Tax-exempt income has been converted to a tax-equivalent basis using an
incremental tax rate of 34%.
42
45
Valley Community Bancshares, Inc.
FINANCIAL DATA SUPPLEMENT
SUPERVISION AND REGULATION
SUPERVISION AND REGULATION
The following generally refers to certain statutes and regulations affecting the
banking industry. These references provide brief summaries and therefore are not
complete and are qualified by the statutes and regulations referenced. In
addition, due to the numerous statutes and regulations that apply to and
regulate the operation of the banking industry, many are not referenced below.
The Company and the Banks are subject to extensive federal and Washington State
legislation, regulation, and supervision. These laws and regulations are
primarily intended to protect depositors and the FDIC rather than shareholders
of the Company. The laws and regulations affecting banks and bank holding
companies have changed significantly over recent years, and there is reason to
expect that similar changes will continue in the future. Any change in
applicable laws, regulations, or regulatory policies may have a material effect
on the business, operations, and prospects of the Company. The Company is unable
to predict the nature or the extent of the effects on its business and earnings
that any fiscal or monetary policies or new federal or state legislation may
have in the future.
The Company
The Company is a bank holding company by virtue of its ownership of the Banks,
and is registered as such with the Federal Reserve. The Company is subject to
regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA"),
which subjects the Company and the Banks to supervision and examination by the
Federal Reserve. Under the BHCA, the Company files with the Federal Reserve
annual reports of its operations and such additional information as the Federal
Reserve may require. The Federal Reserve Board may examine a bank holding
company and any of its subsidiaries and charge the company for the cost of such
an examination.
Source of Strength to the Banks. The Federal Reserve Board takes the position
that a bank holding company is required to serve as a source of financial and
managerial strength to its subsidiary banks and may not conduct its operations
in an unsafe or unsound manner. In addition, it is the Board's position that in
serving as a source of strength to its subsidiary banks, bank holding companies
should use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Board to be an unsafe
and unsound banking practice or a violation of the Board's regulations or both.
Federal Reserve Approval. Bank holding companies must obtain the Federal
Reserve's approval before they: (1) acquire direct or indirect ownership or
control of any voting shares of any bank if, after such acquisition, they would
own or control, directly or indirectly, more than 5 percent of the voting shares
of such bank; (2) merge or consolidate with another bank holding company; and
(3) acquire substantially all of the assets of any additional banks. Until
September 1995, the BHCA also prohibited bank holding companies from acquiring
any such interest in any bank or bank holding company located in a state other
than the state in which the bank holding company was located, unless the laws of
both states expressly authorized the acquisition. Now, subject to certain state
restrictions, such as age and contingency laws, a bank holding company that is
adequately capitalized and adequately managed may acquire the assets of an
out-of-state bank.
Control of Nonbanks. With certain exceptions, the BHCA also prohibits bank
holding companies from acquiring direct or indirect ownership or control of
voting shares in any company other than a bank or a bank holding company unless
the Federal Reserve finds the company's business to be incidental to the
business of banking. When making this determination, the Federal Reserve in part
considers whether allowing a bank holding company to engage in those activities
would offer advantages to the public that would outweigh possible adverse
effects.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("Economic
Growth Act") amended the BHCA to eliminate the requirement that a bank holding
company seek Federal Reserve approval before engaging de novo in permissible
nonbanking activities, if the holding company is well capitalized and meets
certain other criteria specified in the same statute. A bank holding company
meeting the specifications is now required only to notify the Federal Reserve
within ten business days after the activity has begun.
43
46
Valley Community Bancshares, Inc.
FINANCIAL DATA SUPPLEMENT
SUPERVISION AND REGULATION
Control Transactions. The Change in Bank Control Act of 1978, as amended,
requires a person or group of persons acquiring "control" of a bank holding
company to provide the FRB with at least 60 days' prior written notice of the
proposed acquisition. Following receipt of this notice, the Federal Reserve has
60 days to issue a notice disapproving the proposed acquisition, but the Federal
Reserve may extend this time period for up to another 30 days. An acquisition
may be completed before the disapproval period expires if the Federal Reserve
issues written notice of its intent not to disapprove the action. Under a
rebuttable presumption established by the Federal Reserve, the acquisition of 10
percent or more of a class of voting stock of a bank holding company with a
class of securities registered under Section 12 of the Securities Exchange Act
of 1934, as amended ("Exchange Act") would, under the circumstances set forth in
the presumption, constitute the acquisition of control. In addition, any
"company" would be required to obtain the approval of the Federal Reserve under
the BHCA before acquiring 25 percent (5 percent if the "company" is a bank
holding company) or more of the outstanding shares of the Company, or otherwise
obtain control over the Company.
Affiliate Transactions. The Company and the Banks are deemed affiliates within
the meaning of the Federal Reserve Act, and transactions between affiliates are
subject to certain restrictions. Generally, Sections 23A and 23B of the Federal
Reserve Act: (1) limit the extent to which the financial institution or its
subsidiaries may engage in "covered transactions" with an affiliate, as defined,
to an amount equal to 10 percent of such institution's capital and surplus and
an aggregate limit on all such transactions with all affiliates to an amount
equal to 20 percent of such capital and surplus, and (2) require all
transactions with an affiliate, whether or not "covered transactions," to be on
terms substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to nonaffiliates. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee, and
other similar type of transactions.
Management Regulation. Federal law: (1) sets forth the circumstances under which
officers or directors of a financial institution may be removed by the
institution's federal supervisory agency; (2) places restraints on lending by an
institution to its executive officers, directors, principal stockholders, and
their related interests; and (3) prohibits management personnel from serving as
a director or in other management positions of another financial institution
whose assets exceed a specified amount or which has an office within a specified
geographic area.
Tie-in Limitations. The Company and the Banks are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, sale or
lease of property, or furnishing of services. For example, with certain
exceptions, neither the Company nor the Banks may condition an extension of
credit on either (1) a requirement that the customer obtain additional services
provided by it or (2) an agreement by the customer to refrain from obtaining
other services from a competitor. Effective April 1997, the Federal Reserve has
adopted significant amendments to its anti-tying rules that: (1) remove Federal
Reserve-imposed anti-tying restrictions on bank holding companies and their
non-bank subsidiaries; (2) create exemptions from the statutory restriction on
bank tying arrangements to allow banks greater flexibility to package products
with their affiliates; and (3) establish a safe harbor from the tying
restrictions for certain foreign transactions.
Banking Subsidiaries
Applicable federal and state statutes and regulations governing a bank's
operations relate, among other matters, to capital requirements, required
reserves against deposits, investments, loans, legal lending limits, certain
interest rates payable, mergers and consolidations, borrowings, issuance of
securities, payment of dividends (see below), establishment of branches, and
dealings with affiliated persons. The FDIC has authority to prohibit banks under
their supervision from engaging in what they consider to be an unsafe and
unsound practice in conducting their business.
The Banks are state-chartered commercial banks subject to extensive regulation
and supervision by the Washington Department of Financial Institutions Division
of Banks ("DFI"). The Banks are also subject to regulation and examination by
the FDIC, which insures their respective deposits to the maximum extent
permitted by law. The federal laws that apply to the Banks regulate, among other
things, the scope of their business, their investments, their reserves against
deposits, the timing of the availability of deposited funds, and the nature and
amount of and collateral for loans. The laws and regulations governing the Banks
generally have been promulgated to protect depositors and not to protect
stockholders of such institutions or their holding companies.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires federal banking regulators to adopt regulations or guidelines in a
number of areas to ensure bank safety and soundness, including: internal
controls; credit underwriting; asset growth; management compensation; ratios of
classified assets to capital; and earnings. FDICIA also contains provisions
which are intended to change independent auditing requirements; restrict the
activities of state-chartered insured banks; amend various consumer banking
laws; limit the ability of "undercapitalized banks" to borrow from the Federal
Reserve's discount window; and require regulators to perform periodic on-site
bank examinations and set standards for real estate lending.
44
47
Valley Community Bancshares, Inc.
FINANCIAL DATA SUPPLEMENT
SUPERVISION AND REGULATION
Loans to One Borrower. Each of the Banks is subject to limitations on the
aggregate amount of loans that it can make to any one borrower, including
related entities. Applicable regulations generally limit loans to one borrower
to 20 percent of unimpaired capital. Each of the Banks is in compliance with
applicable loans-to-one-borrower requirements.
FDIC Insurance. Generally, the FDIC, for up to a maximum amount of $100,000,
insures customer deposit accounts in banks. The FDIC has adopted a risk-based
insurance assessment system under which depository institutions contribute funds
to the BIF and/or the SAIF, as applicable, based on their risk classification.
In September of 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act") was
enacted. The Funds Act provided, among other things, for the recapitalization of
the SAIF through a special assessment on all depository institutions that hold
SAIF insured deposits. The one-time assessment was designed to place the SAIF at
its 1.25 reserve ratio goal.
The FDIC may terminate the deposit insurance of any insured depository
institution if it 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. The insurance may be
terminated permanently, if the institution has no tangible capital. If deposit
insurance is terminated, the accounts at the institution at the time of the
termination, less subsequent withdrawals, will continue to be insured for a
period of six months to two years, as determined by the FDIC.
Capital Adequacy Requirements. The Federal Reserve and the FDIC (collectively,
the "Agencies") have adopted risk-based capital guidelines for banks and bank
holding companies that are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among banks and bank holding companies
and account for off-balance-sheet items. The guidelines are minimums, and the
federal regulators have noted that banks and bank holding companies
contemplating significant expansion programs should not allow expansion to
diminish their capital ratios and should maintain ratios in excess of the
minimums. Failure to achieve and maintain adequate capital levels may give rise
to supervisory action through the issuance of a capital directive to ensure the
maintenance of required capital levels.
The current guidelines require all federally regulated banks to maintain a
minimum risk-based total capital ratio equal to 8 percent, of which at least 4
percent must be Tier 1 capital. Tier 1 capital includes common shareholders'
equity, qualifying perpetual preferred stock, and minority interests in equity
accounts of consolidated subsidiaries, but excludes goodwill and most other
intangibles and the allowance for loan and lease losses. Tier 2 capital includes
the excess of any preferred stock not included in Tier 1 capital, mandatory
convertible securities, hybrid capital instruments, subordinated debt and
intermediate term-preferred stock, 20 percent of unrealized gain of equity
securities, and general reserves for loan and lease losses up to 1.25 percent of
risk-weighted assets. Neither of the Banks has received any notice indicating
that it will be subject to higher capital requirements.
Under these guidelines, banks' assets are given risk-weights of 0 percent, 20
percent, 50 percent, or 100 percent. Most loans are assigned to the 100 percent
risk category, except for first mortgage loans fully secured by residential
property and, under certain circumstances, residential construction loans (both
carry a 50 percent rating). Most investment securities are assigned to the 20
percent category, except for municipal or state revenue bonds (which have a 50
percent rating) and direct obligations of or obligations guaranteed by the
United States Treasury or United States Government Agencies (which have a 0
percent rating).
The Agencies have also implemented a leverage ratio, which is equal to Tier 1
capital as a percentage of average total assets less intangibles, to be used as
a supplement to the risk-based guidelines. The principal objective of the
leverage ratio is to limit the maximum degree to which a bank may leverage its
equity capital base. The minimum required leverage ratio for top-rated
institutions is 3 percent, but most institutions are required to maintain an
additional cushion of at least 100 to 200 basis points. Any institution
operating at or near the 3 percent level is expected to be a strong banking
organization without any supervisory, financial, or operational weaknesses or
deficiencies. Any institutions experiencing or anticipating significant growth
would be expected to maintain capital ratios, including tangible capital
positions, well above the minimum levels.
Prompt Corrective Action. Regulations adopted by the Agencies as required by
FDICIA impose even more stringent capital requirements. The FDIC and other
Agencies must take certain "prompt corrective action" when a bank fails to meet
capital requirements. The regulations establish and define five capital levels:
(1) "well-capitalized," (2) "adequately capitalized," (3) "undercapitalized,"
(4) "significantly undercapitalized" and (5) "critically undercapitalized." To
qualify as "well-capitalized," an institution must maintain at least 10 percent
total risk-based capital, 6 percent Tier 1 risk-based capital, and a leverage
ratio of no less than 5 percent. Increasingly severe restrictions are imposed on
the payment of dividends and management fees, asset growth and other aspects of
the operations of institutions that fall below the category of being "adequately
capitalized" (which requires at least 8 percent total risk-based capital, 4
percent Tier 1 risk-based capital, and a leverage ratio of at least 4 percent).
Undercapitalized institutions are required to develop and implement capital
plans acceptable to the appropriate federal regulatory agency. Such plans must
require that any company that controls the undercapitalized institution must
provide certain guarantees that the institution will comply with the plan until
it is adequately capitalized. As of the date of this Form 10-K, neither the
Company nor their respective subsidiaries were subject to any regulatory order,
agreement, or directive to meet and maintain a specific capital level for any
capital measure.
45
48
Valley Community Bancshares, Inc.
FINANCIAL DATA SUPPLEMENT
SUPERVISION AND REGULATION
Restrictions on Dividends. Dividends paid to the Company by Puyallup Valley Bank
are the material source of the Company's cash flow. Various federal and state
statutory provisions limit the amount of dividends banking subsidiaries are
permitted to pay to their holding companies without regulatory approval. Federal
Reserve policy further limits the circumstances under which bank holding
companies may declare dividends. For example, a bank holding company should not
continue its existing rate of cash dividends on its common stock unless its net
income is sufficient to fully fund each dividend and its prospective rate of
earnings retention appears consistent with its capital needs, asset quality, and
overall financial condition.
If, in the opinion of the applicable federal banking agency, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
institution, could include the payment of dividends), the agency may require,
after notice and hearing, that such institution cease and desist from such
practice. In addition, the Federal Reserve and the FDIC have issued policy
statements, which provide that insured banks and bank holding companies should
generally pay dividends only out of current operating earnings.
Under Washington law, the Banks may not declare or pay a cash dividend on their
capital stock if it would cause their net worth to be reduced below (1) the
amounts required for liquidation accounts or (2) the net worth requirements, if
any, imposed by the Director of DFI. Dividends on the Banks' capital stock may
not be paid in an aggregate amount greater than the aggregate retained earnings
of the Bank, without the approval of DFI.
Federal Reserve System. The Federal Reserve requires all depository institutions
to maintain reserves against their transaction accounts (primarily checking
accounts) and non-personal time deposits. Currently, reserves of 3 percent must
be maintained against total transaction accounts of $49.8 million or less (after
a $4.2 million exemption), and an initial reserve of 10 percent (subject to
adjustment by the Federal Reserve to a level between 8 percent and 14 percent)
must be maintained against that portion of total transaction accounts in excess
of such amount. Both of the Banks are in compliance with applicable
requirements.
The balances maintained to meet the reserve requirements imposed by the Federal
Reserve may be used to satisfy applicable liquidity requirements. Because
required reserves must be maintained in the form of vault cash or a
non-interest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the earning assets of the Company and its
banking subsidiaries.
Regulatory Developments
Congress has enacted significant federal banking legislation in recent years.
Included in this legislation have been the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). FIRREA, among other
things, (i) created two deposit insurance funds administered by the FDIC, the
Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"),
(ii) permitted commercial banks that meet certain housing-related asset
requirements to secure advances and other financial services from local FHLBs,
(iii) restructured the federal regulatory agencies for savings associations, and
(iv) enhanced the regulators' enforcement powers over financial institutions and
their affiliates.
FDICIA went substantially farther than FIRREA in establishing a more rigorous
regulatory environment. Under FDICIA, regulatory authorities are required to
enact a number of new regulations, substantially all of which are now effective.
These regulations include among other things, (i) a new method for calculating
deposit insurance premiums based on risk,(ii) restrictions on acceptance of
brokered deposits except by well-capitalized institutions, (iii) additional
limitations on loans to executive officers and directors of banks, (iv) the
employment of interest rate risk in the calculation of risk-based capital, (v)
safety and soundness standards that take into consideration, among other things,
management, operations, asset quality, earnings, and compensation, (vi) a
five-tiered rating system from well-capitalized to critically undercapitalized,
along with the prompt corrective action the agencies may take depending on the
category, and (vii) new disclosure and advertising requirements with respect to
interest paid on savings accounts.
FDICIA and regulations adopted by the FDIC impose additional requirements for
annual independent audits and reporting when a bank begins a fiscal year with
assets of $500 million or more. Such banks, or their holding companies, are also
required to establish audit committees consisting of directors who are
independent of management.
Interstate Banking and Branching: The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Act") generally permits nationwide
interstate banking and branching by relaxing federal law restrictions on
interstate banking and providing general authorization for interstate branching.
Subject to certain state laws, such as age and contingency laws, the Interstate
Act allows adequately capitalized and adequately managed bank holding companies
to purchase the assets of out-of-state banks. Additionally, since June 1, 1997,
the Interstate Act permits interstate bank mergers, subject to these state laws,
unless the home state of either merging bank has "opted-out" of these provisions
by enacting "opt-out" legislation. The Interstate Act does allow states to
impose certain conditions on interstate bank mergers within their borders; for
example, states may require that the in-state merging bank exist for up to five
years before the interstate merger. Under the Interstate Act, states may also
"opt-in" to de novo branching, allowing out-of-state banks to establish de novo
branches within the state.
46
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Valley Community Bancshares, Inc.
FINANCIAL DATA SUPPLEMENT
SUPERVISION AND REGULATION
In 1996, Washington enacted "opting-in" legislation authorizing interstate
mergers pursuant to the Interstate Act. Accordingly, as of June 6, 1996, an
out-of-state bank holding company may now acquire more than 5 percent of the
voting shares of a Washington-based bank, regardless of reciprocity, provided
such bank or its predecessor has been doing business for at least five years
prior to the acquisition. Further, an out-of-state bank may engage in banking in
Washington if the requirements of Washington's interstate banking statute are
met, and the bank either (1) was lawfully engaged in banking in Washington on
June 6, 1996, (2) resulted from an interstate combination pursuant to Washington
law, (3) resulted from a relocation of a head office of a state bank or a main
office of a national bank pursuant to federal law, or (4) resulted from the
establishment of a savings bank branch in compliance with applicable Washington
law. Additionally, the Director of the Division may approve interstate
combinations if the basis for such approval does not discriminate against
out-of-state banks, out-of-state holding companies, or their subsidiaries.
The Agencies recently adopted regulations under which banks are prohibited from
using their interstate branches primarily for deposit production. The Agencies
have accordingly implemented a loan-to-deposit ratio screen to ensure compliance
with this prohibition.
Further effects on the Company and the Banks may result from the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Community
Development Act"). The Community Development Act (i) establishes and funds
institutions that are focused on investing in economically distressed areas, and
(ii) streamlines the procedures for certain transactions by financial
institutions with federal banking agencies.
Among other things, the Community Development Act requires the federal banking
agencies to (i) consider the burdens that are imposed on financial institutions
when new regulations are issued or new compliance burdens are created, and (ii)
coordinate their examinations of financial institutions when more than one
agency is involved. The Community Development Act also streamlines the
procedures for forming certain one-bank holding companies and engaging in
authorized non-banking activities.
Various regulatory relief provisions were also enacted by recent legislation.
The new legislation includes, among other things, changes to (i) the Truth in
Lending Act and the Real Estate Settlement Procedures Act to coordinate and
simplify the two laws' disclosure requirements, (ii) eliminate civil liability
for violations of the Truth in Savings Act after five years, (iii) streamline
the application process for a number of bank holding company and bank
applications, (iv) establish a privilege from discovery in any civil or
administrative proceeding or bank examination for any fair lending self-trust
results conducted by, or on behalf of, a financial institution in certain
circumstances, (v) repeal the FDICIA requirement that independent public
accountants attest to compliance with designated safety and soundness
regulations, (vi) impose a continuous regulatory review of regulations to
identify and eliminate outdated and unnecessary rules, and (vii) various other
miscellaneous provisions to reduce regulatory burdens.
In 1999, the Financial Services Modernization Act was enacted, which: (1)
repealed historical restrictions on preventing banks from affiliating with
securities firms, (2) broadens the activities that may be conducted by national
banks and banking subsidiaries of holding companies, and (3) provides an
enhanced framework for protecting the privacy of consumers' information. In
addition, bank holding companies may be owned, controlled, or acquired by any
company engaged in financially related activities, as long as such company meets
regulatory requirements. To the extent that this legislation permits banks to
affiliate with financial services companies, the banking industry may experience
further consolidation, although the impact of this legislation on the Company
and the Banks is unclear at this time.
Regulatory Enforcement Authority
The enforcement powers available to federal banking regulators are substantial
and include, among other things, the ability to assess civil monetary penalties,
to issue cease-and-desist or removal orders, and to initiate injunctive actions
against banking organizations and institution-affiliated parties, as defined. In
general, enforcement actions must be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions, or inactions, may
provide the basis for enforcement action, including misleading or untimely
reports filed with regulatory authorities. Applicable law also requires public
disclosure of final enforcement actions by the federal banking agencies.
47
50
Valley Community Bancshares, Inc.
FINANCIAL DATA SUPPLEMENT
NATIONAL MONETARY POLICIES
NATIONAL MONETARY POLICIES
In addition to being affected by general economic conditions, the earnings and
growth of the Banks are affected by the policies of regulatory authorities,
including the Board of Governors of the Federal Reserve System. An important
function of the Federal Reserve System is to regulate the money supply, credit
conditions, and interest rates. Among the instruments used to implement these
objectives are open market operations in U.S. Government securities, changes in
reserve requirements against bank deposits, and the Federal Reserve Discount
Rate, which is the rate charged member banks to borrow from the Federal Reserve
Bank. These instruments are used in varying combinations to influence overall
growth and distribution of credit, bank loans, investments, and deposits, and
their use may also affect interest rates charged on loans or paid on deposits.
The monetary policies of the Federal Reserve Board have had a significant effect
on the operating results of commercial banks in the past and are expected to do
so in the future. Also important in terms of effect on banks are controls on
interest rates paid by banks on deposits and types of deposits that may be
offered by banks. The Depository Institutions Deregulation Committee, created by
Congress in 1980, phased out ceilings on the rate of interest that may be paid
on deposits by commercial banks and savings and loan associations, with the
result that the differentials between the maximum rates banks and savings and
loans can pay on deposit accounts have been eliminated. The effect of
deregulation of deposit interest rates has been to increase banks' cost of funds
and to make banks more sensitive to fluctuations in market rates.
48
51
Valley Community Bancshares, Inc.
FINANCIAL DATA SUPPLEMENT
EXECUTIVE OFFICERS OF THE COMPANY
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information about the executive officers
of the Company.
HAS SERVED AS EXECUTIVE OFFICER
NAME AGE POSITION WITH THE COMPANY OF THE COMPANY SINCE
- -------------------- ------ -------------------------------------------------- ------------------------------------
David H. Brown 55 Director, President and CEO 1989
Joseph E. Riordan 47 Executive Vice President and CFO 1997
Roy W. Thompson 58 Executive Vice President and Credit Administrator 1989
Richard D. Pickett 51 President and CEO of Valley Bank 1999
The principal occupation or business and experience of the Executive Officers of
the Company for the past five years is set forth below. All officers are elected
by the Board of Directors and serve at the pleasure of the Board for an
unspecified term.
DAVID H. BROWN has been the President and Chief Executive Officer of the Company
since its formation and the President and Chief Executive Officer of Puyallup
Valley Bank since 1989. Prior to joining Puyallup Valley Bank, Mr. Brown was an
executive officer with Seafirst Bank for twenty years, beginning as a Management
Trainee and concluding his tenure at Seafirst as Manager of Southwest Corporate
Banking. Mr. Brown is a graduate of Pacific Coast Banking School and holds a BA
from Washington State University.
JOSEPH E. RIORDAN has been Senior Vice President and Chief Financial Officer of
the Company since its formation and Senior Vice President and Chief Financial
Officer of Puyallup Valley Bank since 1997. In January 2001, Mr. Riordan was
named Executive Vice President of the Company and Puyallup Valley Bank. Prior to
joining the Company and Puyallup Valley Bank, Mr. Riordan was Vice President of
Finance InterWest Bancorp, Inc. From 1985 through 1996, Mr. Riordan was Vice
President and Secretary-Treasurer of Central Bancorporation. Mr. Riordan's
career in the banking industry spans over twenty years. Mr. Riordan is a
Certified Public Accountant, a Certified Management Accountant, and holds a BA
in Business Administration from Central Washington University. Mr. Riordan is
the Senior Vice President and Chief Financial Officer of Valley Bank.
ROY W. THOMPSON has been Senior Vice President of the Company since its
formation and Senior Vice President and Credit Administrator of Puyallup Valley
Bank since 1989. In January 2001, Mr. Thompson was named Executive Vice
President of the Company and Puyallup Valley Bank. Prior to joining Puyallup
Valley Bank, Mr. Thompson was Vice President and Account Officer of U.S. Bank of
Washington in Private Banking. From 1983 through 1988, Mr. Thompson was Vice
President and Credit Administrator of Seattle-First National Bank. Mr.
Thompson's career in the banking industry spans over twenty years. Mr. Thompson
is a graduate of Pacific Coast Banking School, holds an MBA in Finance from the
United States International University and a BS in Business from the University
of Southern California. Mr. Thompson is the Senior Vice President and Credit
Administrator of Valley Bank.
RICHARD D. PICKETT is President and CEO of Valley Bank. Prior to joining Valley
Bank, Mr. Pickett was an officer with Seafirst Bank for over twenty-five years,
beginning as a Management Trainee and concluding his tenure at Seafirst as
Commercial Banking Team Leader. Mr. Pickett is a graduate of Pacific Coast
Banking School, the University of Southern California Executive Leadership
School, and holds a BA from Washington State University.
49
52
Valley Community Bancshares, Inc.
FORM 10-K CROSS REFERENCE INDEX
FORM 10-K CROSS REFERENCE INDEX
This Annual Report and Form 10-K incorporate into a single document the
requirements of the accounting profession and the Securities and Exchange
Commission.
FORM 10-K
PART AND
ITEM NO. CAPTION PAGE NUMBER
- -------- ------- -----------
PART I
Item 1. Business 1-3, 31 (Note 9)
Description of Business 43-48
Distribution of Assets, Liabilities and Stockholders'
Equity; Interest Rates and Interest Differential 40-42
Investment Portfolio 12, 26 (Note 2)
Loan Portfolio 7-9, 27 (Note 3)
Summary of Loan Loss Experience 10-12, 28 (Note 4)
Deposits 13, 29 (Note 6)
Return on Equity and Assets 5
Short-Term Borrowings 30 (Note 7)
Item 2. Properties 29 (Note 5)
Item 3. Legal Proceedings 33 (Note 10)
Item 4. Submission of Matters to Vote of Security Holders Not applicable
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 17
Item 6. Selected Financial Data 4
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 5-14
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 14-16
Item 8. Financial Statements and Supplementary Data 18-39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable
PART III
Item 10. Directors and Executive Officers of the Registrant 49*
Item 11. Executive Compensation **
Item 12. Security Ownership of Certain Beneficial Owners ***
Item 13. Certain Relationships and Related Transactions ****
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K 51
* For information about Valley Community Bancshares directors and executive
officers, see the discussion under "Election of Directors" and "Compliance
With Section 16(a) of the Exchange Act," in the definitive Proxy Statement
for Valley Community Bancshares Annual Meeting of Shareholders to be held
on April 26, 2001, filed with the Securities and Exchange Commission (the
"Proxy Statement"), incorporated herein by reference.
** See the discussion under "Executive Compensation" of the Proxy Statement,
incorporated herein by reference.
*** See the discussion under "Security Ownership of Certain Beneficial Owners
and Management" of the Proxy Statement, incorporated herein by reference.
**** See the discussion under "Interest of Management in Certain Transactions"
of the Proxy Statement, incorporated herein by reference.
50
53
Valley Community Bancshares, Inc.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following exhibits are either filed herewith or have been previously filed
with the Securities and Exchange Commission and are filed herewith by
incorporation by reference:
(A) (1) Consolidated Financial Statements
(i) Independent Auditor's Report
(ii) Consolidated Balance Sheet as of December 31, 2000, and 1999
(iii) Consolidated Statement of Income for Years Ended December 31,
2000, 1999, and 1998
(iv) Consolidated Statement of Changes in Stockholders' Equity for
Years Ended December 31, 2000, 1999, and 1998
(v) Consolidated Statement of Cash Flows for the Years Ended
December 31, 2000, 1999, and 1998
(vi) Notes to Consolidated Financial Statements
(2) All required financial statement schedules are included in the
Notes to Consolidated Financial Statements
(B) Reports on Form 8-K:
None
(C) 3.1 Articles of Incorporation of the Company*
3.2 Bylaws of the Company*
10.1 Severance agreement for Mr. Brown*
10.2 Severance agreement for Mr. Thompson*
10.3 Severance agreement for Mr. Riordan*
10.4 Severance agreement for Mr. Pickett*
10.5 Deferred Compensation Agreement for Mr. Brown*
10.6 Amendment to Deferred Compensation Agreement for Mr. Brown
10.7 Deferred Compensation Agreement for Mr. Thompson
10.8 1998 Stock Option Plan*
10.9 401(k) Defined Contribution Plan and Noncontributory Profit
Sharing Plan Adoption Agreement*
21 Subsidiaries of the Company*
24 Power of Attorney is set forth on the signature page of this
Registration Statement
* Incorporated by reference to the Exhibits set forth on Registrant's
Amended Registration Statement on Form 10 filed with the Securities
and Exchange Commission on September 6, 2000.
51
54
Valley Community Bancshares, Inc.
SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 9th day of March
2001.
VALLEY COMMUNITY BANCSHARES, INC.
(Registrant)
By: /s/ DAVID H. BROWN
-----------------------------------------
David H. Brown
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf by the registrant and
in the capacities indicated, on the 9th day of March 2001.
Principal Executive Officer
By: /s/ DAVID H. BROWN
-----------------------------------------
David H. Brown
President and Chief Executive Officer
Principal Financial Officer
By: /s/ JOSEPH E. RIORDAN
-----------------------------------------
Joseph E. Riordan
Executive Vice President and
Chief Financial Officer
David H. Brown, pursuant to a power of attorney, which is being filed with this
Form 10-K, has signed this report on March 9, 2001 as attorney in fact for the
following directors who constitute a majority of the Board.
Thomas R. Absher
Warren D. Hunt
A. Eugene Hammermaster
William E. Fitchitt
David K. Hamry
Steven M. Harris
Roger L. Knutson
Thomas M. Pasquire
/s/ DAVID H. BROWN
-------------------------------------
David H. Brown
Attorney-in-fact
March 9, 2001
52
55
Valley Community Bancshares, Inc.
POWER OF ATTORNEY
We, the undersigned directors of Valley Community Bancshares, Inc., do
hereby severally constitute and appoint David H. Brown our true and lawful
attorney and agent to execute on our names in our capacities as directors and to
file the Form 10-K and any amendments thereto on behalf of Valley Community
Bancshares, Inc. to enable Valley Community Bancshares, Inc. to comply with the
rules, regulations and requirements of the Securities and Exchange Commission.
/s/ WARREN D. HUNT Chairman of the Board February 21, 2001
- ----------------------------------
Warren D. Hunt
/s/ DAVID H. BROWN Director/President/CEO February 21, 2001
- ----------------------------------
David H. Brown
/s/ THOMAS R. ABSHER Director February 21, 2001
- ----------------------------------
Thomas R. Absher
/s/ A. EUGENE HAMMERMASTER Director February 21, 2001
- ----------------------------------
A. Eugene Hammermaster
/s/ WILLIAM E. FITCHETT Director February 27, 2001
- ----------------------------------
William E. Fitchett
/s/ DAVID K. HAMRY Director February 21, 2001
- ----------------------------------
David K. Hamry
/s/ STEVEN M. HARRIS Director February 27, 2001
- ----------------------------------
Steven M. Harris
/s/ ROGER L. KNUTSON Director February 27, 2001
- ----------------------------------
Roger L. Knutson
/s/ THOMAS M. PASQUIRE Director February 21, 2001
- ----------------------------------
Thomas M. Pasquire
53
56
Valley Community Bancshares, Inc.
CORPORATE DIRECTORY
VALLEY COMMUNITY BRANCH LOCATIONS CANYON ROAD BRANCH
BANCSHARES, INC. 12803 Canyon Road
DOWNTOWN BRANCH Puyallup, WA 98373
CORPORATE HEADQUARTERS 209 South Meridian Avenue (253) 770-7686
1307 East Main Avenue Puyallup, WA 98371
Puyallup, WA 98372 (253) 848-7248 Greta Prince
(253) 848-2316 Vice President
Christine Tallariti Branch Manager
Vice President
PUYALLUP VALLEY BANK Branch Manager Leo Dreith
WWW.PUYALLUPVALLEYBANK.COM Vice President
Carol Smith Commercial Loan Officer
ADMINISTRATION Vice President
David H. Brown Commercial Loan Officer
President & CEO GRAHAM BRANCH
9921 224th Street East
Roy W. Thompson DOWNTOWN DRIVE-UP Graham, WA 98338
Executive Vice President 112 East Main Avenue (253) 875-3675
Credit Administrator Puyallup, WA 98371
(253) 848-7240 Marge O'Hern
Joseph E. Riordan Vice President
Executive Vice President Branch Manager
Chief Financial Officer SUMMIT BRANCH
10413 Canyon Road East
Marta J. Nelson Puyallup, WA 98373 VALLEY BANK
Vice President (253) 770-7699
Senior Operations & MAIN OFFICE
Personnel Officer Greta Prince 1001 D Street NE
Vice President Auburn, WA 98002
Marge O'Hern Branch Manager (253) 288-2101
Vice President
District Retail Manager Dean A. Bonnell Richard D. Pickett
Vice President President & CEO
Diane Cox Investment Executive
Vice President Joyce Van Lant
Data Processing Manager Vice President
SOUTH HILL BRANCH Commercial Loan Officer
MAIN OFFICE 15815 Meridian Avenue East
1307 East Main Avenue Puyallup, WA 98375 Carol Long
Puyallup, WA 98372 (253) 848-1968 Assistant Vice President
(253) 848-2316 Loan Services Officer
Marge O'Hern
Yvonne Narrow Vice President Lori Wells
Vice President Branch Manager Assistant Vice President
Branch Manager Operations Supervisor
Greg A. Jones
Vice President
Commercial Loan Officer
Jennifer Kuhlman
Vice President
Commercial Loan Officer
Carol Lambert
Real Estate Manager
NOTICE OF AVAILABILITY
Financial information about this holding company is available to our
shareholders, customers, and other interested parties upon request.
In accordance with federal regulations to facilitate more informed decision
making by depositors, we will provide an Annual Disclosure Statement containing
financial information for the last two years. This information will be updated
each year end and be available by March 31. To obtain a copy of the Annual
Disclosure Statement, please write to:
Joseph E. Riordan, Executive Vice President/CFO
Valley Community Bancshares Inc.
P.O. Box 578 Puyallup, WA 98371
(FDIC LOGO) This annual report is furnished to shareholders and customers of the
Company pursuant to the requirements of the Federal Deposit Insurance
Corporation (FDIC) to provide an annual disclosure statement. This statement has
not been reviewed or confirmed for accuracy or relevance by the FDIC.
54
57
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Articles of Incorporation of the Company*
3.2 Bylaws of the Company*
10.1 Severance agreement for Mr. Brown*
10.2 Severance agreement for Mr. Thompson*
10.3 Severance agreement for Mr. Riordan*
10.4 Severance agreement for Mr. Pickett*
10.5 Deferred Compensation Agreement for Mr. Brown*
10.6 Amendment to Deferred Compensation Agreement for Mr. Brown
10.7 Deferred Compensation Agreement for Mr. Thompson
10.8 1998 Stock Option Plan*
10.9 401(k) Defined Contribution Plan and Noncontributory Profit
Sharing Plan Adoption Agreement*
21 Subsidiaries of the Company*
24 Power of Attorney is set forth on the signature page of this
Registration Statement
* Incorporated by reference to the Exhibits set forth on Registrant's Amended
Registration Statement on Form 10 filed with the Securities and Exchange
Commission on September 6, 2000.
55