<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number: 333-00724
VALLEY RIDGE FINANCIAL CORP.
(Name of Small Business Issuer in Its Charter)
MICHIGAN 38-2888214
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
6 NORTH MAIN STREET
KENT CITY, MICHIGAN 49330
(Address of Principal Executive Offices) (Zip Code)
(616) 678-5911
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: NONE
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 _____
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the year ended December 31, 1996, were $10,231,227.
As of February 5, 1997, the aggregate market value of the voting stock held
by non-affiliates of the issuer was approximately $10,029,581. This amount
is based on the sale price of $28.75 per share for the registrant's stock as
of such date.
<PAGE>
As of February 1, 1997, the issuer had outstanding 496,089 shares of
Common Stock, par value $10.00 per share.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Valley Ridge Financial Corp. ("Valley Ridge") is a Michigan bank
holding company with its headquarters in Kent City, Michigan. Valley Ridge
was formed on May 20, 1988. Valley Ridge is the parent company of Valley
Ridge Bank, a Michigan banking corporation. Valley Ridge Bank is Valley
Ridge's only subsidiary. Valley Ridge Bank owns a 20% interest in a
non-banking corporation, West Shore Computer Services, Inc., a data
processing firm.
On July 1, 1996, Community Bank Corporation ("Community") merged with
and into Valley Ridge (the "Merger"). At the time of the Merger, Community
and its subsidiary, The Grant State Bank, had assets of $26 million,
deposits of $23 million, a net loan portfolio of $19 million, and
shareholders' equity of $2 million. The then-shareholders of Community
received 121,727 shares of the Common Stock of Valley Ridge, $10 par value
("Valley Ridge Common Stock"), for each share of common stock of Community
that each shareholder held, in addition to cash in lieu of fractional
shares. The Merger was treated as a pooling of interests for accounting
purposes and the assets and liabilities of Community were carried forward
in Valley Ridge's accounts.
Effective at the close of business on December 6, 1996, Valley Ridge's
two subsidiary banks, The Grant State Bank ("Grant") and Kent City State
Bank ("Kent City"), were consolidated into a single banking corporation
(the "Consolidation"). At the effective time of the Consolidation, Kent
City had, on a consolidated basis, assets totaling approximately $88
million and deposits of approximately $69 million and Grant had, on a
consolidated basis, assets totaling approximately $26 million and
deposits of approximately $23 million. The purpose of the Consolidation
was to allow Valley Ridge to further realize operational efficiencies and
provide more consistent and improved service to the market areas that
Valley Ridge had been servicing. The Consolidation resulted in a single
bank named "Valley Ridge Bank" (the "Bank"). On December 31, 1996, the Bank
had assets totaling $116 million, deposits of $95 million and shareholders'
equity of $12 million.
Valley Ridge and the Bank are engaged in the business of commercial
banking, mortgage banking and other related activities. The Bank is a full
service bank offering customary commercial banking services, which include
commercial and retail loans, business and personal checking accounts,
savings and individual retirement accounts, time deposit instruments,
automated transaction machine services, money transfer services, and safe
deposit facilities. No material part of the business of Valley Ridge or
the Bank is dependent upon a single customer or very few customers, the
loss of which would have a materially adverse effect on Valley Ridge.
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The principal markets for Valley Ridge's financial services are
presently the Michigan communities in which the Bank's offices are located
and the areas immediately surrounding those communities. Valley Ridge and
the Bank serve these markets through seven offices located in Kent City,
Coopersville, Egelston, Grant, Newaygo, Ravenna, and Sparta, Michigan.
This diversification allows the Bank to spread some of its market risk over
a wider area and not be subject to downturns in any specific community.
Within this market area, the Bank competes with various banks, savings and
loan associations, and credit unions. The Bank is the only bank with
offices in Kent City and Grant, Michigan. Other banks and financial
institutions have offices in some of the towns where the Bank's branches
are located. Valley Ridge and the Bank have no material foreign assets or
income.
Valley Ridge and the Bank employed approximately 83 persons (69
persons on a full-time equivalent basis) at December 31, 1996.
The business of banking is highly competitive. In addition to
competition from other commercial banks, banks face significant competition
from savings and loan associations, credit unions, finance companies,
insurance companies, and investment and brokerage firms. The principal
methods of competition for financial services are price (interest rates
paid on deposits, interest rates charged on borrowings, and fees charged
for services) and service (convenience and quality of services rendered to
customers).
Banks and bank holding companies are extensively regulated. The Bank
is chartered under state law and is supervised, examined, and regulated by
both the Financial Institutions Bureau of the Michigan Department of
Consumer and Industry Services and the Board of Governors of the Federal
Reserve System ("Federal Reserve Board"). Valley Ridge is regulated by the
Federal Reserve Board. Deposits of the Bank are insured by the Federal
Deposit Insurance Corporation ("FDIC") to the extent provided by law.
Federal and state laws that govern banks significantly limit their
business activities in a number of respects. Prior approval of the Federal
Reserve Board, and in some cases various other government agencies, is
required for Valley Ridge to acquire control of any additional banks or
other operating subsidiaries. The business activities of Valley Ridge and
the Bank are limited to banking and other activities that are determined by
the Federal Reserve Board to be closely related to banking.
Valley Ridge is a legal entity separate and distinct from the Bank.
There are legal limitations on the extent to which the Bank can lend or
otherwise supply funds to Valley Ridge. In addition, payment of dividends
to Valley Ridge by the Bank is subject to various state and federal
regulatory limitations.
Under Federal Reserve Board policy, Valley Ridge is expected to act as
a source of financial strength to the Bank and to commit resources to
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support it. Under federal law, the FDIC also has authority to impose
special assessments on insured depository institutions to repay FDIC
borrowings from the United States Treasury or other sources and to
establish semiannual assessment rates on Bank Insurance Fund ("BIF") member
banks to maintain the BIF at the designated reserve ratio required by law.
Banks are subject to a number of federal and state laws and
regulations that have a material impact on their business. These include,
among others, state usury laws, state laws relating to fiduciaries, the
Truth in Lending Act, the Truth in Savings Act, the Equal Credit
Opportunity Act, the Fair Credit Reporting Act, the Expedited Funds
Availability Act, the Community Reinvestment Act, electronic funds transfer
laws, redlining laws, antitrust laws, environmental laws and privacy laws.
The instruments of monetary policy of authorities such as the Federal
Reserve Board may influence the growth and distribution of bank loans,
investments and deposits, and may also affect interest rates on loans and
deposits. These policies may have a significant effect on the operating
results of banks.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") substantially changed the geographic
constraints applicable to the banking industry. Effective September 29,
1995, the Riegle-Neal Act allows bank holding companies to acquire banks
located in any state in the United States without regard to geographic
restrictions or reciprocity requirements imposed by state law. Effective
June 1, 1997 (or earlier if expressly authorized by applicable state law),
the Riegle-Neal Act also allows banks to establish interstate branch
networks through acquisitions of other banks. The establishment of DE NOVO
interstate branches or the acquisition of individual branches of a bank in
another state (rather than the acquisition of an out-of-state bank in its
entirety) is allowed by the Riegle-Neal Act only if specifically authorized
by state law. The legislation allows individual states to "opt-out" of
certain provisions of the Riegle-Neal Act by enacting appropriate
legislation prior to June 1, 1997.
Michigan exercised its right to opt-in early to the Riegle-Neal Act,
and now permits both U.S. and non-U.S. banks to establish branch offices in
Michigan. Effective November 29, 1995, the Michigan Banking Code permits,
in appropriate circumstances and with the approval of the Commissioner of
the Financial Institutions Bureau, (i) acquisition of Michigan banks by
FDIC-insured banks, savings banks or savings and loan associations located
in other states, (ii) sale by a Michigan bank of branches to an FDIC-insured
bank, savings bank or savings and loan association located in a state in
which a Michigan bank could purchase branches of the purchasing entity,
(iii) consolidation of Michigan banks and FDIC-insured banks, savings banks
or savings and loan associations located in other states having laws
permitting such consolidation, (iv) establishment of branches in Michigan by
FDIC-insured banks located in other states, the District of Columbia or U.S.
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territories or protectorates having laws permitting a Michigan bank to
establish a branch in such jurisdiction, and (v) establishment by foreign
banks of branches located in Michigan.
The nature of the business of the Bank is such that it holds title,
on a temporary or permanent basis, to a number of parcels of real property.
These include properties owned for branch offices and other business
purposes as well as properties taken in or in lieu of foreclosure to
satisfy loans in default. Under current state and federal laws, present
and past owners of real property may be exposed to liability for the cost of
cleanup of contamination on or originating from those properties, even if
they are wholly innocent of the actions that caused the contamination.
These liabilities can be material and can exceed the value of the
contaminated property.
Certain statistical information describing the business of Valley Ridge
follows. Additional statistical information describing the business of
Valley Ridge and the Bank appears in Management's Discussion and Analysis or
Plan of Operation included in Item 6 of this report and in the Consolidated
Financial Statements and notes thereto included in Item 7 of this report.
ANALYSIS OF INVESTMENT SECURITIES PORTFOLIO
The following table shows, by class of maturities at December 31,
1996, the amounts and weighted average yields of investment securities <F1>:
<TABLE>
<CAPTION>
Carrying Average
Value Yield<F2>
-------- --------
(Dollars in thousands)
<S> <C> <C>
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies
One year or less $ 501 5.95%
Over one through five years -- --
Total 501 5.95
------- -----
Obligations of states and political subdivisions
One year or less 1,445 8.96
Over one through five years 1,431 10.28
Over five through ten years 3,091 8.91
Over ten years 9,187 8.66
Total 15,154 8.89
------- -----
Mortgage-backed securities and other 3,130 7.04%
Total $18,785 8.06%
======= =====
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<PAGE>
<FN>
Because of their variable payments, mortgage-backed securities are not
reported by a specific maturity grouping.
<F1> Calculated on the basis of the cost and effective yields weighted for
the scheduled maturity of each security.
<F2> Weighted average yield has been computed on a fully taxable equivalent
basis. The rates shown on state and municipal securities have been
adjusted to a fully taxable equivalent using a federal income tax rate
of 34%.
</FN>
</TABLE>
As of December 31, 1996, the securities of no issuer except the U.S.
Government had an aggregate carrying value that exceeded 10% of
shareholders' equity.
LOAN PORTFOLIO
The following table shows the maturity of commercial, agricultural,
and real estate construction loans outstanding at December 31, 1996. Real
estate-construction loans are residential non-owner occupied. Also provided
below are the amounts due after one year classified according to the terms
of the loans. Demand loans, loans with no stated maturity and overdrafts
are reported as due in one year or less.
<TABLE>
<CAPTION>
DUE IN DUE AFTER ONE
ONE YEAR YEAR THROUGH DUE AFTER
OR LESS FIVE YEARS FIVE YEARS
------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Commercial $26,071 $11,203 $ 546
Consumer 5,131 5,808 94
Real estate 8,979 23,487 3,168
$40,181 $40,498 $ 3,808
======= ======= =======
Loans due after one year
With fixed rates $40,498 $ 3,808
With floating rates -- --
Total $40,498 $ 3,808
======= =======
</TABLE>
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<PAGE>
AVERAGE DEPOSITS
The time remaining until maturity of time certificates of deposit and
other time deposits of $100,000 or more at December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Three months or less $ 231,985
Over three months through six months 329,860
Over six months through twelve months 1,403,485
Over twelve months 3,204,867
Total $5,170,197
==========
</TABLE>
ITEM 2. DESCRIPTION OF PROPERTY.
Valley Ridge maintains its offices and conducts its business
operations from the principal banking office of the Bank in Kent City,
Michigan. Valley Ridge owns one parcel of approximately five acres of vacant
land in Kent City, Michigan, and a vacant lot in an industrial park in
Coopersville, Michigan.
The Bank's principal office is located at 6 North Main Street, Kent
City, Michigan. These premises encompass approximately 12,724 square feet
in two buildings, all of which are occupied by the Bank and Valley Ridge.
The Bank owns the premises occupied by its branch offices at the following
addresses, all of which are in Michigan: 10 West Main Street, Grant (4,051
square feet), the corner of M-37 and M-82 (1,450 square feet), 661 West
Randall Road, Coopersville (1,950 square feet); 3069 Slocum Road, Ravenna
(3,300 square feet); and 5475 Apple Avenue, Egelston (3,300 square feet).
The Bank leases its office at 11 South State Street, Sparta (1,040 square
feet). Valley Ridge believes all of its and the Bank's properties are in
good condition and repair.
As part of its business, the Bank generates all types of mortgages.
The Bank occasionally purchases mortgages as part of its business, but
typically relies on its ability to generate mortgages for most purposes.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, Valley Ridge or the Bank is party, as plaintiff or
defendant, to legal proceedings in the normal course of operations. No
pending litigation is considered material at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for Valley Ridge Common
Stock. Transactions in Valley Ridge Common Stock are occasionally effected
by individuals on an informal basis. Some transactions are effected
through the involvement of local brokerage firms. The prices at which such
transactions are effected are only occasionally reported to Valley Ridge.
As of March 1, 1997, there were approximately 481 record holders of shares
of Valley Ridge Common Stock. On December 31, 1996, Valley Ridge sold 500
shares of Valley Ridge Common Stock, par value $10, to the Valley Ridge
Employee Stock Ownership Plan. The aggregate proceeds received by Valley
Ridge were $14,125. This transaction was based on the exemptions from
registration contained in Sections 4(2) and 3(a)(11) of the Securities Act
of 1933.
Valley Ridge has paid regular cash dividends since June 30, 1989.
The following table summarizes the quarterly cash dividends paid to common
shareholders during the last two full years, retroactively adjusted for a
2-for-1 stock split during January, 1995, which was effected in the form of
a stock dividend:
<TABLE>
<CAPTION>
QUARTER 1995 1996
------- ---- ----
<S> <C> <C> <C>
1st $ .20 $ .20
2nd .20 .20
3rd .20 .20
4th .20 .20
------- -------
Total $ .80 $ .80
======= =======
</TABLE>
Holders of Valley Ridge Common Stock are entitled to receive dividends
when, as and if declared by Valley Ridge's board of directors out of funds
legally available for that purpose. The earnings of Valley Ridge, through
dividends paid by the Bank, are the principal source of funds to pay cash
dividends. Consequently, cash dividends are dependent upon the earnings,
capital needs, regulatory constraints and other factors affecting Valley
Ridge. Federal and state banking laws and regulations place certain
restrictions on the amount of dividends and loans that a bank can pay to
its parent company. These restrictions are not expected to prohibit Valley
Ridge from continuing its normal dividend policy.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion is provided by Valley Ridge management as its
analysis of the consolidated financial condition and results of operations
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<PAGE>
of Valley Ridge (the "Corporation"). This analysis should be read in
conjunction with the Consolidated Financial Statements and related
footnotes. As more fully described in Note 2 of the Consolidated Financial
Statements, Valley Ridge merged with Community Bank Corporation in 1996 in a
business combination accounted for under the pooling of interests method of
accounting and, accordingly, the Corporation's Consolidated Financial
Statements have been restated for all periods presented.
RESULTS OF OPERATIONS. The Corporation reported net income of
$1,213,675 or $2.45 per share for 1996. This was 9% lower than the
$1,333,197, or $2.68 per share, earned in 1995. The decrease in net income
was primarily a result of increased other expenses, partially offset by
improved net interest income. Net interest income, before the provision for
loan losses, of $5,618,111 was approximately 2.8% higher than the $5,467,092
reported for 1995.
The following table presents, for the periods indicated, the total
dollar amount of interest income from average interest-earning assets and
the related yields, as well as the interest expense on average interest-
bearing liabilities.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995
------------------------------ --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Taxable investment
securities $ 6,767,139 $ 409,635 6.05% $ 8,175,162 $ 526,678 6.44%
Tax-exempt securities <F1> 11,831,352 1,088,706 9.20 9,067,189 858,152 9.46
------------ ----------- ------------ ----------
Total securities 18,598,491 1,498,341 8.06 17,242,351 1,384,830 8.03
Loans <F2> 82,520,055 7,858,041 9.52 77,605,716 7,639,040 9.84
Federal funds sold 3,678,014 208,483 5.67 2,994,848 169,884 5.67
------------ ----------- ------------ ----------
Total earning assets 104,796,560 9,564,865 9.13 97,842,915 9,193,754 9.40
Nonaccrual loans 82,576 154,427
Less allowance for loan
losses (1,204,067) (1,084,868)
Cash and due from banks 5,358,165 4,849,111
Other non-earning assets 4,973,138 4,926,442
------------ ------------
Total assets $114,006,372 $106,688,027
============ ============
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995
---------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand
deposits $ 11,207,524 $ 207,371 1.85% $ 11,768,324 $ 267,443 2.27%
Savings deposits 31,956,320 790,344 2.47 32,132,409 875,596 2.72
Time deposits 38,361,407 2,163,767 5.64 36,989,413 2,093,795 5.66
------------ ----------- ----------- ----------
Total interest-bearing
deposits 81,525,251 3,161,482 3.88 80,890,146 3,236,834 4.00
Other borrowings 6,373,150 361,914 5.68 2,432,876 159,090 6.54
------------ ----------- ----------- ----------
Total interest-bearing
liabilities 87,898,401 3,523,396 4.00 83,323,022 3,395,924 4.08
----------- ----------
Demand deposits 13,247,326 -- 11,951,273 --
Other liabilities 1,129,502 764,916
------------ -----------
Total liabilities 102,275,229 96,039,211
Average equity 11,731,143 10,648,816
------------ -----------
Total liabilities and
equity $114,006,372 $106,688,027
============ ============
Net interest income $ 6,041,469 $5,797,830
=========== ==========
Rate spread 5.12 5.32
Net interest margin 5.76 5.93
<FN>
<F1> Yields reflected have been computed on a tax equivalent basis
using a marginal tax rate of 34%. Interest for 1996 and 1995
includes loan fees of $284,000 and $332,821, respectively.
<F2> Average outstanding balances exclude non-accruing loans.
</FN>
</TABLE>
The following table presents the dollar amount of change in interest
income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated,
have been allocated proportionately to the change due to volume and the
change due to rate.
-9-
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 OVER 1995
----------------------------
TOTAL VOLUME RATE
----- ------ ----
<S> <C> <C> <C>
Increase (decrease) in interest income
Loans $ 219,001 $ 473,329 $ (254,328)
Taxable securities (117,043) (86,654) (30,389)
Tax-exempt securities<F1> 230,554 254,960 (24,406)
Federal funds sold 38,599 38,724 (125)
--------- -------- ----------
Net change in tax-equivalent income 371,111 680,359 (309,248)
Increase (decrease) in interest expense
Interest-bearing demand deposits (60,072) (12,261) (47,811)
Savings deposits (85,252) (4,774) (80,478)
Time deposits 69,972 77,411 (7,439)
Federal Home Loan Bank advances 202,824 226,305 (23,481)
--------- -------- ----------
Net change in interest expense 127,472 286,681 (159,209)
--------- -------- ----------
Net change in tax-equivalent
net interest income $ 243,639 $393,678 $ (150,039)
========= ======== ==========
<FN>
<F1> Interest is presented on a tax equivalent basis using a marginal tax
rate of 34%.
</FN>
</TABLE>
Net interest margin remained strong at 5.76% for 1996, a decline of 17
basis points from 1995. Average loans increased by 6% to $82,520,055, with
year to year increases in consumer and agricultural loans of 19% and 23%,
respectively, in 1996. Total securities increased 8% to $18,598,491.
Yields on assets and rates paid on the cost of funds both decreased
resulting in negative rate variances, which were more than offset by
positive volume variances for total securities and loans. Average deposits
were stable, increasing .8%, or $635,105. Average other borrowings
increased by nearly $4,000,000 to $6,473,150 and average equity increased
$1,082,327, a 10% increase.
The provision for loan losses was $117,200 and $122,400 for 1996 and
1995, respectively. The provision for loan losses represents the adjustment
to the allowance for loan losses needed to maintain the allowance at a level
determined by management to be sufficient to cover inherent losses within
Valley Ridge's loan portfolio. The allowance for loan losses is based on
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the application of projected loss ratios to the risk-ratings of loans,
both individually and by category. Projected loss ratios incorporate
such factors as recent loss experience, current economic conditions and
trends, trends in past due and impaired loans, and risk characteristics
of various categories of loans. The activity in the allowance for loan
losses is included in Note 5 to the Consolidated Financial Statements.
Most of the loans charged off were consumer loans.
<TABLE>
<CAPTION>
As of and for the years
ended December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Provision for loan losses $ 117,000 $ 122,000
Net charge-offs 44,000 43,000
Allowance for loan losses at year end 1,182,000 1,109,000
Allowance for loan losses as a percentage of
total loans as of year end 1.40% 1.36%
Ratio of net charge-offs to average total loans
outstanding during the year .00053 .00057
</TABLE>
The allowance for loan losses was 4.6 times impaired loans at
December 31, 1996. Loan recoveries in 1996 were about 50% of the prior
year's charge-offs. The allowance for loan losses was allocated in the
amount deemed reasonably necessary to provide for possible losses
within the following loan categories as of December 31:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
-------------------- --------------------
BALANCE AT END OF ALLOCATED % OF TOTAL ALLOCATED % OF TOTAL
PERIOD ALLOCATED TO ALLOWANCE LOANS ALLOWANCE LOANS
------------------- --------- ---------- --------- ----------
<S><C> <C> <C> <C> <C>
Commercial and agricultural $ 267 45.00% $ 292 44.00%
Real estate - mortgage 67 42.00 65 45.00
Consumer 201 13.00 172 11.00
Unallocated 647 581
------ -------
$1,182 100.00% $ 1,110 100.00%
====== ====== ======= ======
</TABLE>
Impaired loan disclosures are included in Note 5 to the Consolidated
Financial Statements. Loan performance is reviewed regularly by loan review
personnel, loan officers and senior management. Loans are placed on
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<PAGE>
nonaccrual status when principal or interest is past due 90 days or more and
the loan is not well-secured and in the process of collection, or when
reasonable doubt exists concerning collectibility of interest or principal.
Any interest previously accrued but not collected is reversed and charged
against current earnings.
Noninterest income was $1,089,720 and $900,994 for 1996 and 1995,
respectively. The increase was primarily a result of increased
service charges on deposit accounts and increased investment center
income during 1996 compared to 1995. The increase in noninterest
income was more than offset by an increase in noninterest expense to
$5,010,664 in 1996 compared to $4,489,379 in 1995. Noninterest expense was
higher in 1996 when compared to 1995 largely because of merger costs.
Costs directly associated with the merger transaction were $223,000 in
1996 and $117,000 in 1995. These direct cost increases, mostly in
legal and professional fees, plus costs indirectly associated with the
merger resulted in most of the increase in noninterest expenses.
Salaries and benefits increased 10% in 1996 to $2,383,880 from
$2,172,850 in 1995, occupancy costs increased 21% to $335,095 in 1996
and supplies were up 42% to $205,462 in 1996.
As discussed in Note 13 to the Consolidated Financial Statements, the
Corporation is negotiating to construct a new corporate office in
Kent City. The cost of constructing and furnishing the new facility
is estimated at $2.8 million. While construction of the new office will
result in increased occupancy expense, management believes it will enable
the Corporation to continue to grow and facilitate operating efficiencies.
The support operations of the former Community Bank Corporation
in Grant and Newaygo were consolidated with those of the Corporation
in Kent City in December 1996. Grant and Newaygo offices are now
operated as Valley Ridge Bank branches. In 1997 and thereafter, the
Corporation expects to begin realizing cost savings through operational
efficiencies from the merger and related consolidation of bank operations
completed in 1996.
The following are overall return percentages and the dividend pay-out
ratio for the past two years:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Return on assets 1.06% 1.27%
Return on equity 10.35 13.07
Dividend pay-out ratio 30.81 24.52
Equity to assets ratio 10.39 9.79
</TABLE>
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<PAGE>
Management is not aware of any existing trends, events, uncertainties
or current recommendations by regulatory authorities that are expected
to have a material impact on Valley Ridge's future operating results
or financial condition.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES. Total assets
increased by slightly more than 1%, or $1,307,039, to $115,646,936 at
December 31, 1996 compared to $114,339,897 at December 31, 1995. Total
liabilities increased by less than 1%, or $477,415, to $103,624,936 at
December 31, 1996 compared to $103,147,413 at December 31, 1995. The
increase in shareholders' equity is due to retention of earnings and
sales of stock to the employee stock ownership plan, partially offset
by a decline in the unrealized gain on securities available for sale.
Total loans increased by 3.7%, or $3,008,867, from the balance at
December 31, 1995 to $84,487,001 at December 31, 1996. Deposits
decreased by $1,775,372, or 1.8%, to $84,535,547 at December 31, 1996.
The overall impact of these two changes increased the net loan to
deposit ratio to 88.1% at December 31, 1996 compared to 83.4% at
December 31, 1995. The allowance for loan losses increased by $73,055,
causing the ratio of reserves to outstanding loans to increase from
1.36% at December 31, 1995 to 1.40% at December 31, 1996.
Valley Ridge paid dividends totaling $374,528 in 1996, compared to
$325,039 paid during 1995.
Average shareholders' equity to total assets was 10.39% at December
31, 1996, compared to the 9.79% ratio at the end of 1995. The
Corporation's capital ratios exceeded the minimum levels prescribed by
the Federal Reserve Board, as shown in Note 15 of the Consolidated
Financial Statements.
Total cash and cash equivalents and investment securities totaled
$26,300,934 at December 31, 1996, or about 23% of total assets. The
principal source of funding for Valley Ridge continues to come from
its deposit customers, which have historically been a stable source of
funds. Other sources of funding include normal loan repayments, sales
and maturities of securities, federal funds available from correspondent
banks, and additional advances available from the Federal Home Loan
Bank. Management believes that the current level of liquidity is
sufficient to meet the normal operating needs of Valley Ridge.
Accrued expenses and other liabilities decreased by 66%, or
$1,348,115 from 1995. This decrease was due to the purchase of
$1.3 million in securities in December 1995 that was not settled until
January 1996. There were no such transactions in December 1996.
Securities sold under agreements to repurchase generally mature
within one to three days from the transaction date. Valley Ridge Bank has
-13-
<PAGE>
pledged certain investment securities, which are held in safekeeping,
as collateral against these borrowings. Valley Ridge Bank did not
participate in repurchase agreements during 1995.
The following table shows the interest sensitivity gaps for four
different time intervals as of December 31, 1996.
<TABLE>
<CAPTION>
MATURITY OR REPRICING FREQUENCY
-------------------------------
0-3 MONTHS 3-12 MONTHS 1-5 YEARS OVER 5 YEARS
---------- ----------- --------- ------------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans:
Fixed $ 3,965,267 $ 11,024,820 $ 40,497,588 $ 3,807,622
Variable 24,287,990 903,714
Investment securities 1,230,391 3,294,927 2,070,468 12,188,781
Federal funds sold 2,600,000
------------
Total $ 32,083,648 $ 15,223,461 $ 42,568,056 $ 15,996,403
============ ============= ============= ============
INTEREST-BEARING LIABILITIES
Certificates of deposit $ 7,443,872 $ 15,039,232 $ 15,195,385 $ 124,473
Savings accounts 28,514,811
Money market accounts 3,289,979
Now accounts 10,096,697
FHLB Loan 5,000,000 3,000,000
------------ ------------- -------------
Total $ 49,345,359 $ 20,039,232 $ 18,195,385 $ 124,473
============ ============= ============= ============
Interest sensitivity gap $(17,261,711) $ (4,815,771) $ 24,372,671 $ 15,871,930
============ ============= ============= ============
Cumulative gap $ (22,077,482) $ 2,295,189 $ 18,167,119
============= ============= ============
</TABLE>
The above table is based on contractual terms. Savings accounts,
money market accounts, and NOW accounts are subject to immediate
withdrawal and are presented as repricing in the earliest period
presented. Although demand and savings accounts, for which rates paid
are not readjusted on a pre-established contract cycle and are subject
to immediate withdrawal, are presented as repricing in the 0-3 month
period, management believes that these types of accounts are not as
sensitive to changes in interest rates in the short-term as this
presentation would indicate. The Corporation is liability sensitive
in periods out to twelve months; however, this is offset in the 1-5
-14-
<PAGE>
year period with a positive cumulative gap of $2,295,189. The
cumulative gap increases to $18,167,119 for all time periods.
Management strives to maintain a positive cumulative gap for periods
out to five years. The practice of underwriting loans with maturity
dates of five years or less and with variable rates allows for a
repricing of those assets over a relatively short period. Additionally,
management does not aggressively price deposits, preferring to keep
its base of core deposits at a level that supports its lending
activities. The Corporation's asset/liability management committee
meets semi-annually, or more often as needed, to review gap positions
and determine management strategies for loan and deposit pricing,
purchase and sale of securities, and other borrowing decisions.
IMPACT OF INFLATION AND CHANGING PRICES. Most assets and liabilities
of a financial institution are monetary in nature. This differs from
most commercial and industrial companies that have significant investments
in fixed assets or inventories. The effect of inflation on financial
institutions is to a large extent indirect and the measure of such impact
is largely subjective.
Noninterest expenses tend to rise during periods of general inflation.
Inflation levels are to some degree reflected in interest rates. Changes
in interest rates, which are to some extent attributable to changes in
inflation rates or uncertainty concerning changes in inflation rates, do
affect the earnings of the Corporation. The Corporation seeks to protect
net interest income from the adverse effects of interest rate
fluctuations through its asset/liability management program.
The Corporation's management believes that increases in financial
institution assets and deposits result in part from monetary inflation.
As assets increase, the financial institution must increase equity
capital proportionately to maintain appropriate relationships between
assets and equity.
IMPACT OF ACCOUNTING STANDARDS EFFECTIVE IN FUTURE PERIODS. Statement
of Financial Accounting Standard No. 125, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES ("SFAS
125"), was issued by the Financial Accounting Standards Board in 1996.
It revises the accounting for transfers of financial assets, such as
loans and securities, and for distinguishing between sales and secured
borrowings. It is effective for some transactions in 1997 and others
in 1998. The effect of SFAS 125 on the Consolidated Financial Statements
has not yet been determined.
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, EARNINGS PER SHARE
("SFAS 128"), which revises the accounting requirements for calculating
earnings per share. Basic earnings per share for 1997 and later will be
-15-
<PAGE>
calculated solely on average common shares outstanding. Diluted earnings
per share will reflect the potential dilution of stock options and other
common stock equivalents. All prior calculations will be restated to be
comparable to the new methods. Since the Corporation has had no dilution
from stock options or other common stock equivalents, SFAS 128 will not
significantly affect future amounts reported by the Corporation for basic
earnings per share.
-16-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
<TABLE>
VALLEY RIDGE FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,916,367 $ 6,983,451
Federal funds sold 2,600,000 3,100,000
------------ ------------
Total cash and cash equivalents 7,516,367 10,083,451
Securities available for sale 18,784,567 18,236,175
Other securities - Federal Reserve stock and
Federal Home Loan Bank stock 1,128,346 710,946
Total loans 84,487,001 81,478,134
Allowance for loan losses (1,182,154) (1,109,099)
------------ ------------
83,304,847 80,369,035
Accrued interest receivable 928,754 989,336
Premises and equipment - net 2,249,164 2,338,534
Other assets 1,734,891 1,612,420
------------ ------------
Total assets $115,646,936 $114,339,897
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 14,889,481 $ 14,524,286
Interest-bearing 79,646,066 81,786,633
------------ ------------
Total 94,535,547 96,310,919
Securities sold under agreement to repurchase 400,902
Other borrowings 8,000,000 4,800,000
Accrued expenses and other liabilities 688,119 2,036,234
------------ ------------
Total liabilities 103,624,568 103,147,153
Shareholders' equity
Common stock, $10 par value: 1,000,000 shares
authorized and 496,089 shares outstanding in
1996; 500,000 shares authorized and 494,589
shares outstanding in 1995 4,960,890 4,945,890
Surplus 1,396,736 1,375,061
-17-
<PAGE>
Retained earnings 5,196,705 4,358,989
Net unrealized gain on securities available for
sale, net of tax of ($241,110) in 1996 and
($264,172) in 1995 468,037 512,804
------------ ------------
Total shareholders' equity 12,022,368 11,192,744
------------ ------------
Total liabilities and shareholders' equity $115,646,936 $114,339,897
============ ============
</TABLE>
See accompanying notes to Consolidated Financial Statements.
-18-
<PAGE>
<TABLE>
VALLEY RIDGE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans, including fees $ 7,804,843 $ 7,600,074 $ 6,493,779
Federal funds sold 208,483 169,884 124,057
Securities
Taxable 409,635 526,678 636,879
Nontaxable 718,546 566,380 451,027
----------- ----------- -----------
Total interest income 9,141,507 8,863,016 7,705,742
Interest expense
Deposits 3,161,482 3,236,834 2,549,277
Other 361,914 159,090 1,800
----------- ----------- -----------
Total interest expense 3,523,396 3,395,924 2,551,077
----------- ----------- -----------
NET INTEREST INCOME 5,618,111 5,467,092 5,154,665
Provision for loan losses 117,200 122,400 85,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,500,911 5,344,692 5,069,665
Noninterest income
Service charges 861,687 753,122 695,906
Net realized gain on sale of securities 11,008 9,611 16,542
Net realized gain on sale of loans 31,280 8,931 14,853
Other income 185,745 129,330 98,478
----------- ----------- -----------
Total noninterest income 1,089,720 900,994 825,779
Noninterest expense
Salaries and benefits 2,383,880 2,172,850 2,015,391
Occupancy 335,095 276,788 299,603
Furniture and fixtures 302,912 311,595 303,127
Legal and professional fees 393,024 149,708 147,321
FDIC insurance premium 4,000 104,706 204,982
Data processing 191,008 185,880 192,234
Supplies 205,462 144,769 123,875
Other expense 1,195,283 1,143,083 1,077,453
----------- ----------- -----------
-19-
<PAGE>
Total noninterest expenses 5,010,664 4,489,379 4,363,986
----------- ----------- -----------
INCOME BEFORE FEDERAL INCOME TAX 1,579,967 1,756,307 1,531,458
Federal income tax expense 366,292 423,110 375,307
----------- ----------- -----------
NET INCOME $ 1,213,675 $ 1,333,197 $ 1,156,151
=========== =========== ===========
Net income per share $ 2.45 $ 2.70 $ 2.34
=========== =========== ===========
Average shares outstanding 495,431 494,521 493,293
=========== =========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
-20-
<PAGE>
<TABLE>
VALLEY RIDGE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31
<CAPTION>
NET UNREALIZED
GAIN (LOSS)
ON SECURITIES TOTAL
COMMON RETAINED AVAILABLE SHAREHOLDERS'
STOCK SURPLUS EARNINGS FOR SALE EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $ 2,699,720 $ 1,336,187 $ 4,744,456 $ 395,613 $ 9,175,976
Net income for 1994 1,156,151 1,156,151
Stock split (5 for 4) 370,400 (376,104) (5,704)
Stock split (2 for 1) 1,859,310 (1,859,310)
Sale of stock to ESOP (1,542 shares) 6,460 23,184 29,644
Cash dividend ($.76 per share) (309,362) (309,362)
Net change in unrealized gain (loss) on securities
available for sale, net of tax of $215,734 (418,777) (418,777)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1994 4,935,890 1,359,371 3,355,831 (23,164) 9,627,928
Net income for 1995 1,333,197 1,333,197
Sale of stock to ESOP (1,000 shares) 10,000 15,690 (5,000) 20,690
Cash dividend ($.80 per share) (325,039) (325,039)
Net change in unrealized gain (loss) on securities
available for sale, net of tax of ($276,105) 535,968 535,968
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 $ 4,945,890 $ 1,375,061 $ 4,358,989 $ 512,804 $11,192,744
Net income for 1996 1,213,675 1,213,675
Sale of stock to ESOP (1,500 shares) 15,000 21,675 36,675
Cash dividend ($.80 per share) (374,528) (374,528)
Purchase of fractional shares (1,431) (1,431)
Net change in unrealized gain (loss) on securities
available for sale, net of tax of $23,062 (44,767) (44,767)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 $ 4,960,890 $ 1,396,736 $ 5,196,705 $ 468,037 $12,022,368
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
-21-
<PAGE>
<TABLE>
VALLEY RIDGE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,213,675 $ 1,333,197 $ 1,156,151
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 231,798 244,576 290,972
Amortization of the premiums and
discounts on securities, net 94,979 112,300 153,423
Provision for loan losses 117,200 122,400 85,000
Gain on sale of securities (11,008) (9,611) (16,542)
Gain on sale of loans (31,280) (8,931) (14,853)
Loans originated for sale (2,794,525) (1,114,749) (1,317,847)
Proceeds from loans sold 2,825,805 1,123,680 1,332,700
Deferred federal income taxes (73,927) (62,105) (7,488)
Net change in:
Accrued interest receivable and
other assets (72,828) 99,803 (1,185,917)
Accrued expenses and other liabilities (1,274,188) 1,103,296 18,500
----------- ----------- -----------
Net cash from operating activities 225,701 2,943,856 494,099
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans (3,053,012) (5,535,275) (6,223,101)
Proceeds from:
Sale of securities available for sale 4,516,521 6,182,899 2,027,730
Repayments and maturities of securities
available for sale 4,539,552 135,022 3,754,322
Repayments and maturities of securities
held to maturity 2,053,546 1,492,780
Purchase of:
Securities available for sale (9,756,265) (9,208,090) (3,862,419)
Securities held to maturity (800,000) (687,300)
Federal Reserve stock (24,000)
FHLB stock (417,400) (263,600) (16,700)
Premises and equipment, net (108,427) (166,108) (276,399)
----------- ----------- -----------
Net cash from investing activities (4,279,031) (7,625,606) (3,791,087)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock $ 36,675 $ 20,690 $ 29,644
Payments for fractional shares (1,431) (5,704)
Net increase (decrease) in short-term
borrowings 400,902 (100,000) 100,000
-22-
<PAGE>
Net increase (decrease) in deposits (1,775,372) 5,430,193 119,315
Advances from Federal Home Loan Bank 4,000,000 4,800,000 2,000,000
Payments on Federal Home Loan
Bank advances (800,000) (2,009,000) (20,000)
Dividends paid (374,528) (325,039) (309,362)
Net change in other long-term debt (12,000)
----------- ----------- -----------
Net cash from financing activities 1,486,246 7,816,844 1,901,893
----------- ----------- -----------
Net change in cash and cash equivalents (2,567,084) 3,135,094 (1,395,095)
Cash and cash equivalents at beginning of year 10,083,451 6,948,357 8,343,452
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,516,367 $10,083,451 $ 6,948,357
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 3,523,774 $ 3,361,552 $ 2,529,255
Income taxes 597,274 473,348 272,572
</TABLE>
Upon the adoption of SFAS No. 115 at January 1, 1994, the
Corporation transferred $12,296,926 from investment securities held
for sale to securities available for sale.
Pursuant to the FASB implementation guide for SFAS No. 115, the
Corporation transferred securities held to maturity with a fair value
of $5,167,147 to securities available for sale in December 1995.
See accompanying notes to consolidated financial statements.
-23-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of Valley Ridge Financial Corporation and its
wholly-owned subsidiary, Valley Ridge Bank, after elimination of
significant intercompany transactions and accounts. As more fully
described in Note 2, the Corporation's consolidated financial
statements have been restated to include the results of Community Bank
Corporation for all periods presented.
NATURE OF OPERATIONS: Valley Ridge Financial Corp. ("Corporation")
is a regional, community-based financial institution, that owns all
of the outstanding stock of Valley Ridge Bank ("Bank"). The Bank's
loan and deposit accounts are primarily with customers located in
Western Michigan, within the counties of Kent, Ottawa, Muskegon and
Newaygo.
USE OF ESTIMATES: To prepare financial statements in conformity with
generally accepted accounting principles, management makes estimates
and assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements
and the disclosures provided, and future results could differ. The
allowance for loan losses, fair values of financial instruments, and
the status of contingencies are particularly subject to change.
CASH FLOW REPORTING: Cash and cash equivalents are defined as cash
and due from banks and federal funds sold, as well as investments with
original maturities under 90 days. Net cash flows are reported for
customer loan and deposit transactions and interest-earning deposits
with other banks.
SECURITIES: Securities available for sale consist of those securities
which might be sold prior to maturity due to changes in interest
rates, prepayment risks, yield and availability of alternative
investments, liquidity needs or other factors. Securities classified
as available for sale are reported at their fair value and the related
unrealized holding gain or loss is reported, net of related income tax
effects, as a separate component of shareholders' equity, until
realized. Securities held to maturity are investment securities for
which the Corporation has the positive intent and ability to hold to
maturity and are reported at cost, adjusted for premiums and discounts
that are recognized in interest income using the interest method over
the period to maturity.
(Continued)
-24-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premiums and discounts on securities are recognized in interest income
using the interest method over the estimated life of the security.
Gains and losses on the sale of securities available for sale are
determined based upon amortized cost of the specific security sold.
LOANS HELD FOR SALE: Loans held for sale are reported at the lower of
cost or market value in the aggregate.
LOANS: Loans are reported at the principal balance outstanding, net
of deferred loan fees and costs, the allowance for loan losses, and
charge-offs. Interest income is reported on the interest method and
includes amortization of net deferred loan fees and costs over the
loan term.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a
valuation allowance, increased by the provision for loan losses and
recoveries, and decreased by charge-offs. Management estimates the
allowance balance required based on past loan loss experience, known
and inherent risks in the portfolio, information about specific
borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be
made for specific loans, but the entire allowance is available for any
loan that, in management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is
not expected. Impairment is evaluated in aggregate for smaller-balance
loans of similar nature such as residential mortgage, consumer
and credit card loans, and on an individual loan basis for other
loans. If a loan is impaired, a portion of the allowance is allocated
so that the loan is reported, net, at the present value of estimated
future cash flows using the loan's existing rate. Loans are evaluated
for impairment when payments are delayed, typically 90 days or more,
or when the internal grading system indicates a doubtful
classification.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost
less accumulated depreciation. Depreciation is computed using both
straight-line and accelerated methods over the estimated useful lives
of the respective assets. Maintenance, repairs and minor alterations
are charged to current operations as expenditures occur and major
improvements are capitalized. These assets are reviewed for
impairment under SFAS No. 121 when events indicate the carrying amount
may not be recoverable.
(Continued)
-25-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
OTHER REAL ESTATE: Real estate acquired in settlement of loans is
initially reported at estimated fair value at acquisition. After
acquisition, a valuation allowance reduces the reported amount to the
lower of the initial amount or fair value less costs to sell.
Expenses, gains and losses on disposition, and changes in the
valuation allowance are reported in net loss on other real estate.
The Corporation did not hold other real estate at December 31, 1996 or
1995.
SERVICING RIGHTS: Prior to adopting SFAS No. 122 at the start of
1996, servicing right assets were not recorded for rights to service
originated mortgage loans sold. Subsequent to adopting this standard,
servicing rights represent the allocated value of servicing rights
retained on loans sold. Servicing rights are expensed in proportion
to, and over the period of, estimated net servicing revenues.
Impairment of this asset is evaluated based on the fair value of the
rights, using groupings of the underlying loans as to interest rates
and then, secondarily, as to geographic and prepayment
characteristics. Any impairment of a grouping is reported as a
valuation allowance. Adoption of SFAS No. 122 was not material to the
1996 consolidated financial statements.
GOODWILL AND IDENTIFIED INTANGIBLES: Goodwill is the excess of
purchase price over the fair value of identified net assets acquired
in purchase business combinations. Goodwill is expensed on the
straight-line method over no more than 15 years. Identified
intangibles represent the value of depositor relationships purchased
and are being amortized using a straight-line method over the
estimated life of the deposits of 8 years. Goodwill and identified
intangibles are assessed for impairment based on estimated
undiscounted cash flows, and written down if necessary. Business
combinations accounted for as pooling-of-interests do not result in any
intangible assets.
EMPLOYEE BENEFITS: The Corporation maintains profit sharing and
401(k) plans for substantially all employees. Contributions to the
profit sharing plan are made at the discretion of the Board of
Directors. The 401(k) plan allows employee contributions up to 12% of
employee compensation. Up to 6% of the contributions are matched at
50% by the Corporation. The Corporation also maintains an Employee
Stock Ownership Plan (ESOP) covering substantially all full-time
employees after one year of service, which invests primarily in stock
of Valley Ridge Financial Corp. (see also Note 10).
(Continued)
-26-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES: Income tax expense is the sum of the current year
income tax due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the expected
future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities, computed using
enacted tax rates. A valuation allowance, if needed, reduces deferred
tax assets to the amount expected to be realized.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial
instruments are estimated using relevant market information and other
assumptions, as more fully disclosed separately. Fair value estimates
involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments and other factors, especially
in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on- and off-balance-sheet
financial instruments does not include the value of anticipated
future business or the values of assets and liabilities not considered
financial instruments.
NET INCOME PER SHARE: Net income per share of common stock is based
on weighted-average outstanding shares during the year, adjusted for
stock splits. Prior period amounts have been restated to reflect the
impact of additional shares issued as part of the 1996 merger (see
Note 2).
RECLASSIFICATIONS: Some items in prior financial statements have been
reclassified to conform with the current presentation (also see Note
17).
NOTE 2 - MERGER
In September of 1995, the Corporation announced that it had signed a
definitive agreement to merge with Community Bank Corporation, parent
company of The Grant State Bank. The shareholders of both the Corporation
and Community Bank Corporation voted to approve the transaction on
June 25, 1996. Valley Ridge Financial Corp. issued 121,727 shares of
common stock in exchange for all of the outstanding shares of Community
Bank Corporation common stock. The transaction was consummated on
July 1, 1996, structured as a tax-free exchange and accounted for under
the pooling-of-interests method of accounting. Accordingly, the
(Continued)
-27-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 2 - MERGER (Continued)
Corporation's consolidated financial statements have been restated to
include the results of Community Bank Corporation for all periods
presented. Costs incurred to effect the combination have been expensed as
incurred and were $223,000 in 1996 and $117,000 in 1995.
The combined and separate results of Valley Ridge Financial Corp. and
Community Bank Corporation during the periods preceding the merger were as
follows:
<TABLE>
<CAPTION>
VALLEY RIDGE COMMUNITY
FINANCIAL CORP. BANK CORP. COMBINED
-------------- --------- --------
<S> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED):
Net interest income $ 1,272,417 $ 749,179 $ 2,021,596
Net income 457,441 157,157 614,598
Total assets 86,516,759 25,642,939 112,159,698
Securities 15,281,840 1,723,765 17,005,605
Loans, net 60,010,891 19,131,787 79,142,678
Deposits 71,754,827 23,033,698 94,788,525
Shareholders' equity 8,886,933 2,404,005 11,290,938
YEAR ENDED DECEMBER 31, 1995:
Net interest income $ 3,928,825 $ 1,538,267 $ 5,467,092
Net income 969,525 363,672 1,333,197
Total assets 85,595,716 28,744,181 114,339,897
Securities 15,924,540 3,022,581 18,947,121
Loans, net 61,412,259 18,956,776 80,369,035
Deposits 70,941,762 25,369,157 96,310,919
Shareholders' equity 8,914,788 2,277,956 11,192,744
YEAR ENDED DECEMBER 31, 1994:
Net interest income $ 3,765,599 $ 1,389,066 $ 5,154,665
Net income 875,920 280,231 1,156,151
Total assets 79,160,401 24,175,482 103,335,883
Securities 12,786,999 3,561,912 16,348,911
Loans, net 57,546,944 17,409,216 74,956,160
Deposits 68,969,244 21,911,482 90,880,726
Shareholders' equity 7,693,892 1,934,072 9,627,964
</TABLE>
(Continued)
-28-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 2 - MERGER (Continued)
In December 1996, The Grant State Bank was consolidated with and into Kent
City State Bank, which changed its name to Valley Ridge Bank.
NOTE 3 - CASH AND DUE FROM BANKS
Minimum cash balances, which are based on the deposit levels of the Bank,
are required to be maintained by the Federal Reserve as legal reserve
requirements. Cash balances restricted from usage due to these requirements
were approximately $320,000 and $337,000 at December 31, 1996 and 1995,
respectively.
NOTE 4 - SECURITIES
The amortized cost and fair values of securities at December 31 were as
follows:
<TABLE>
AVAILABLE FOR SALE
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUES
---- ---- ------ ------
<S> <C> <C> <C> <C>
1996
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 500,553 $ 72 $ 500,625
Obligations of states and political subdivisions 14,492,219 693,876 $ (32,192) 15,153,903
------------ --------- ----------- ------------
14,992,772 693,948 (32,192) 15,654,528
Mortgage-backed securities 3,084,101 45,938 3,130,039
------------ --------- ----------- ------------
$ 18,076,873 $ 739,886 $ (32,192) $ 18,784,567
============ ========= =========== ============
1995
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 2,515,321 $ 11,998 $ 2,527,319
Obligations of states and political subdivisions 11,289,255 699,249 $ (118) 11,988,386
------------ --------- ----------- ------------
13,804,576 711,247 (118) 14,515,705
Mortgage-backed securities 3,654,623 70,368 (4,521) 3,720,470
------------ --------- ----------- ------------
$ 17,459,199 $ 781,615 $ (4,639) $ 18,236,175
============ ========= =========== ============
</TABLE>
(Continued)
-29-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 4 - SECURITIES (Continued)
<TABLE>
OTHER SECURITIES
<CAPTION>
COST AND
FAIR VALUE
----------
<S> <C> <C>
1996
Federal Reserve stock $ 168,750
Federal Home Loan Bank stock 954,600
Farmer Mac stock 4,996
------------
$ 1,128,346
============
1995
Federal Reserve stock $ 168,750
Federal Home Loan Bank stock 537,200
Farmer Mac stock 4,996
------------
$ 710,946
============
</TABLE>
The amortized cost and fair values of debt investment securities at
December 31, 1996, 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 call
or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUES
---- ------
<S> <C> <C>
Due in one year or less $ 1,933,602 $ 1,945,941
Due after one year through five years 1,347,856 1,430,588
Due after five years through ten years 2,852,910 3,091,025
Due after ten years 8,858,404 9,186,974
------------ ------------
14,992,772 15,654,528
Mortgage-backed securities 3,084,101 3,130,039
------------ ------------
$ 18,076,873 $ 18,784,567
============ ============
</TABLE>
(Continued)
-30-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 4 - SECURITIES (Continued)
Because of their variable payments, mortgage-backed securities are not
reported by a specific maturity grouping.
Proceeds from sales of securities during 1996, 1995 and 1994 were
$4,516,521, $6,182,899 and $2,027,730. Gross gains were realized on
those sales of $27,748, $39,295 and $39,797 for 1996, 1995 and 1994.
Gross losses on those sales were $16,740, $29,684 and $23,255 for
1996, 1995 and 1994.
Securities with a par value of approximately $1,526,000 and $300,000
were pledged to secure public deposits and for various other purposes
as required or permitted by law at December 31, 1996 and 1995.
Securities with a par value of $2,000,000 were pledged to secure
short-term borrowings at December 31, 1995.
Pursuant to the FASB Special Report, A GUIDE TO IMPLEMENTATION OF STATEMENT
NO. 115 ON ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES,
the entire portfolio of held to maturity securities, with a carrying value
of $5,046,621, fair value of $5,167,147 and unrealized gain of $120,526,
was transferred to the available for sale classification in December 1995.
Management believes classification of all securities as available for sale
will provide the Bank greater flexibility in managing the Bank's assets and
liabilities.
NOTE 5 - LOANS
Major loan classifications as of December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commercial $ 30,295,008 $ 29,593,883
Residential real estate 35,634,383 36,510,926
Consumer 11,032,450 9,242,008
Agricultural 7,525,160 6,131,317
------------- --------------
84,487,001 81,478,134
Allowance for loan losses (1,182,154) (1,109,099)
------------- --------------
$ 83,304,847 $ 80,369,035
============= ==============
</TABLE>
(Continued)
-31-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 5 - LOANS (Continued)
Loans held for sale at year-end 1996 and 1995 were included in
residential real estate loans and were not material. Loans serviced
for others were $10,351,000 and $8,642,000 at year-end 1996 and 1995.
An analysis of changes in the allowance for loan losses for the years
ended December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance at beginning of year $ 1,109,099 $ 1,029,210
Provision charged to operating expense 117,200 122,400
Recoveries on loans previously
charged to the allowance 56,025 72,705
Loans charged off (100,170) (115,216)
----------- -----------
Balance at end of year $ 1,182,154 $ 1,109,099
=========== ===========
</TABLE>
Impaired loans were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Year-end loans with no allowance for loan
losses allocated $ 256,104 $ 5,536
Year-end loans with allowance for loan
losses allocated 3,474
Amount of the allowance allocated 1,500
Average of impaired loans during the year 119,578 16,142
Interest income recognized during impairment 11,541 1,365
Cash basis interest income recognized 5,272 3,779
</TABLE>
The Corporation did not have any foreclosed real estate at year-end
1996 or 1995.
(Continued)
-32-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 6 - PREMISES AND EQUIPMENT - NET
Premises and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
ACCUMULATED CARRYING
COST DEPRECIATION VALUE
---- ------------ -------
<S> <C> <C> <C>
1996
Land $ 305,422 $ 305,422
Building and improvements 2,283,787 $ (866,479) 1,417,308
Furniture and equipment 2,432,757 (1,906,323) 526,434
------------ ------------ ------------
$ 5,021,966 $ (2,772,802) $ 2,249,164
============ ============ ============
1995
Land $ 305,422 $ 305,422
Building and improvements 2,281,224 $ (802,370) 1,478,854
Furniture and equipment 2,332,657 (1,778,399) 554,258
------------ ------------ ------------
$ 4,919,303 $ (2,580,769) $ 2,338,534
============ ============ ============
</TABLE>
NOTE 7 - DEPOSITS
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Noninterest-bearing demand deposit accounts $ 14,889,481 $ 14,524,286
Money market accounts 16,083,109 14,405,525
NOW and Super NOW accounts 10,096,697 13,645,466
Savings accounts 15,663,298 16,424,532
Certificates of deposit 37,802,962 37,311,110
------------ ------------
$ 94,535,547 $ 96,310,919
============ ============
</TABLE>
(Continued)
-33-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 7 - DEPOSITS (Continued)
At year-end 1996, stated maturities of time deposits were:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 $ 22,483,104
1998 11,583,040
1999 2,174,227
2000 719,059
2001 719,059
Thereafter 124,473
------------
$ 37,802,962
============
</TABLE>
Time deposit accounts individually exceeding $100,000 totaled
approximately $4,387,000 and $5,390,000 at year-end 1996 and 1995.
NOTE 8 - BORROWINGS
At December 31, 1996, the Corporation had the following advances from
the Federal Home Loan Bank ("FHLB"):
<TABLE>
<CAPTION>
TYPE INTEREST RATE MATURITY DATE AMOUNT
---- ------------- ------------- ------
<S> <C> <C> <C> <C>
Fixed 5.730% July 21, 1997 $ 2,000,000
Adjustable 5.567 October 8, 1997 3,000,000
Fixed 5.260 February 1, 1999 1,000,000
Fixed 5.230 February 1, 1999 2,000,000
------------
$ 8,000,000
============
</TABLE>
Each advance requires monthly interest payments at either fixed or
adjustable rates. The variable rate is based on the "FHLB" overnight
rate and adjusts quarterly. These borrowings are collateralized by
nonspecific loans within the mortgage portfolio up to the principal
outstanding. The adjustable rate note has no prepayment penalties
while the fixed rate notes carry a minimum prepayment penalty of
$5,000.
(Continued)
-34-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 9 - FEDERAL INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current expense $ 440,219 $ 485,215 $ 382,795
Deferred benefit (73,927) (62,105) (7,488)
----------- ----------- -----------
$ 366,292 $ 423,110 $ 375,307
=========== =========== ===========
</TABLE>
Year-end deferred tax asset and liabilities consist of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 256,601 $ 225,186
Deferred loan fees 32,894 24,700
Deferred compensation 85,168 49,743
Core deposit amortization 29,270 24,513
Other 25,639 18,616
---------- ----------
429,572 342,758
Deferred tax liabilities
Fixed assets (154,760) (151,576)
Net unrealized appreciation on securities
available for sale (241,110) (264,172)
Accrual to cash (71,330) (64,200)
Other (7,442) (4,869)
---------- ----------
(474,642) (484,817)
---------- ----------
Net deferred tax liability $ (45,070) $ (142,059)
========== ==========
</TABLE>
No valuation allowance has been recorded against the deferred tax
assets.
(Continued)
-35-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 9 - FEDERAL INCOME TAXES (Continued)
The effective tax rate differs from the statutory federal income tax
rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory rates $ 537,189 $ 597,144 $ 520,696
Increase (decrease) from
Tax-exempt interest (273,857) (221,212) (169,313)
Nondeductible interest expense 29,156 23,791 14,642
Expense (income) related to
officers' life insurance (11,860) (13,910) 1,223
Nondeductible acquisition costs 64,430 27,006
Others, net 21,234 10,291 8,059
----------- ---------- -----------
Income tax expense $ 366,292 $ 423,110 $ 375,307
=========== ========== ===========
</TABLE>
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Corporation maintains profit sharing and 401(k) plans for
substantially all employees. Under the plans, employees may make
voluntary contributions based on a percentage of covered compensation.
The plans also allow the Corporation, at the discretion of the Board
of Directors, to provide an annual contribution. The Corporation's
cash contributions to the profit sharing plan were $125,000, $83,700
and $83,680 in 1996, 1995 and 1994. Additionally, the Corporation
made matching contributions to the 401(k) plan of $28,600, $26,900 and
$25,300 in 1996, 1995 and 1994.
The Corporation also maintains an Employee Stock Ownership Plan
(ESOP), covering substantially all full-time employees after one year
of service, which invests primarily in stock of Valley Ridge Financial
Corp. In accordance with the terms of the ESOP, the Corporation may
make discretionary contributions to the plan. The amount of the annual
contribution to the ESOP is determined by the Board of Directors. The
Corporation made ESOP contributions totaling $20,000 in 1996 and $30,000
during 1995 and 1994. At December 31, 1996, the plan had no indebtedness
and held 13,490 shares of stock, allocated to employees and voted by
trustees of the plan. Upon distribution of shares to a participant, the
(Continued)
-36-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 10 - EMPLOYEE BENEFIT PLANS (Continued)
participant has the right to require the Corporation to purchase shares
at their fair value in accordance with the terms and conditions of the
plan. The fair value of the shares allocated as of December 31, 1996,
was $354,787. The change in value of ESOP share securities was an
increase of $97,002 in 1996, $20,134 in 1995 and $55,321 in 1994.
Community Bank Corporation sponsored a noncontributory defined benefit
pension plan covering substantially all of its employees. On
December 31, 1996, the plan was curtailed such that no benefits for
future service will be accrued. The plan benefits were based on years
of service, age of employee and the employee's compensation during the
last ten years of employment. Plan assets are invested in
certificates of deposit and other interest-bearing securities at
December 31, 1996 and 1995.
Pension expense (income) was ($24,077), $10,541 and $53,025 in 1996,
1995 and 1994.
The components of net pension expense (income) are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during the
period $ 16,904 $ 13,541 $ 32,207
Interest cost on the projected benefit
obligation 23,664 16,726 32,391
Return on plan assets (34,181) (46,990) 7,394
Net amortization and deferral 13,126 27,264 (18,967)
Net effect of plan curtailment (43,590)
-------- ------- --------
$(24,077) $ 10,541 $ 53,025
======== ======== ========
</TABLE>
(Continued)
-37-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 10 - EMPLOYEE BENEFIT PLANS (Continued)
The funded status of the plan and amounts recognized in the
consolidated balance sheet are as follows:
<TABLE>
<CAPTION>
1996<F*> 1995
---- ----
<S> <C> <C>
Actuarial present value of projected benefit
obligation
Accumulated benefit obligation
Vested $(147,309) $(174,467)
Nonvested (1,651) (2,548)
--------- ---------
(148,960) (177,015)
Provision for future salary increases (66,290)
--------- ---------
Projected benefit obligation (148,960) (243,305)
Plan assets at fair value 211,503 280,095
--------- ---------
Excess of plan assets over projected
benefit obligation 62,543 36,790
Unrecognized net gain (12,887) (53,541)
Unrecognized net transition asset (11,107) (18,170)
Unrecognized prior service cost 10,586
--------- ---------
Prepaid (accrued) pension expense $ 38,549 $ (24,335)
========= =========
<FN>
<F*> After adjustments for curtailment.
</FN>
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Major assumptions used:
Discount rate 7.50%
Rate of increase in compensation levels (1995 only) 4.00
Expected long-term rate of return on plan assets 8.00
</TABLE>
(Continued)
-38-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 11 - DIRECTOR DEFERRED COMPENSATION PLAN
The Corporation instituted a Director Deferred Compensation Plan in
1994, whereby directors may periodically defer a portion of current
compensation. The Corporation has committed to pay to the directors,
or the directors' designated beneficiaries or survivors, the total
amount of deferred compensation plus accumulated interest at or
following retirement. The interest is added to the accumulated
deferred compensation liability at a periodic compound rate. The
agreement also addresses termination, disability or death prior to
retirement. The Corporation purchased single premium universal life
insurance policies in connection with the establishment of the plan.
The cash surrender value of these policies as of December 31, 1996 and
1995 was $1,347,969 and $1,228,386 which was included in other assets.
The compensation expense was $160,400 and $94,400 for 1996 and 1995.
The portion of the compensation expense deferred for 1996 and 1995 was
$109,800 and $84,600. The accrued deferred compensation liability was
$251,564 and $147,373 as of December 31, 1996 and 1995.
NOTE 12 - RELATED PARTIES
Certain directors and executive officers of the Corporation, including
their immediate families and companies in which they are principal
owners, were loan customers of the Corporation. At December 31, 1996
and 1995, the Corporation had approximately $1,047,000 and $1,300,000,
respectively, in outstanding loans to directors and executive
officers. New loans and repayments were $800,000 and $1,053,000,
respectively, during 1996.
Related party deposits totaled approximately $1,276,000 and $2,176,000
at year-end 1996 and 1995.
NOTE 13 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the
financial statements, including claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these
matters is not expected to have a material effect on financial
condition or results of operations.
Some financial instruments are used in the normal course of business
to meet the financing needs of customers and to reduce exposure to
interest rate changes. These financial instruments include
(Continued)
-39-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 13 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES (Continued)
commitments to extend credit and standby letters of credit. These
involve, to varying degrees, credit and interest-rate risk in excess
of the amount reported in the financial statements.
Exposure to credit loss if the other party does not perform is
represented by the contractual amount for commitments to extend credit
and standby letters of credit. The same credit policies are used for
commitments and conditional obligations as are used for loans
although, collateral or other security is normally not required to
support financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
commitment. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being used,
total commitments does not necessarily represent future cash
requirements. Standby letters of credit are conditional commitments
to guarantee a customer's performance to a third party.
A summary of the notional or contractual amounts of financial
instruments with off-balance-sheet risk at year-end follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commitments to make loans $ 6,437,396 $ 2,819,967
Commercial unused lines of credit 9,746,000 5,939,000
Consumer unused lines of credit 1,578,565 1,631,272
Standby letters of credit 50,000 40,000
</TABLE>
Commitments to make loans and unused lines of credit at fixed rates
were $7,145,812 and $1,526,000 at rates from 8.25% to 18.0% at
December 31, 1996 and 1995. These commitments generally have
termination dates of one year or less and may require a fee. Since
many of the above commitments expire without being used, the above
amounts do not necessarily represent future cash commitments. No
losses are anticipated as a result of these transactions.
The Corporation conducts substantially all of its business operations
in Western Michigan.
(Continued)
-40-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 13 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES (Continued)
The Corporation is in negotiations to construct a new corporate office in
Kent City. The cost of constructing and furnishing the new facility is
estimated to be approximately $2.8 million.
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to estimate fair
value for cash and short-term instruments, demand deposits, short-term
borrowings, accrued interest, and variable rate loans or deposits that
reprice frequently and fully. Securities fair values are based on quoted
market prices or, if no quotes are available, on the rate and term of the
security and on information about the issuer. For fixed rate loans or
deposits and for variable rate loans or deposits with infrequent repricing
or repricing limits, the fair value is estimated by discounted cash flow
analysis using current market rates for the estimated life and credit risk.
Fair values for impaired loans are estimated using discounted cash flow
analyses or underlying collateral values, where applicable. Fair value of
loans held for sale is based on market estimates. The fair value of debt is
based on currently available rates for similar financing. The estimated
fair value of other financial instruments and off-balance-sheet loan
commitments approximate cost and are not considered significant to this
presentation.
The estimated year-end fair values of financial instruments were:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
------- -------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
(000's omitted) (000's omitted)
<S> <C> <C> <C> <C> <C>
Financial assets
Cash and short term investments $ 7,516 $ 7,516 $ 10,083 $ 10,083
Securities available for sale 18,785 18,785 18,236 18,236
Other securities 1,128 1,128 711 711
Loans - net 83,305 83,741 80,369 80,426
Accrued interest receivable 929 929 989 989
(Continued)
-41-
<PAGE>
Financial liabilities
Deposit liabilities 94,536 94,931 96,311 96,793
Accrued interest payable 211 211 213 213
Short-term borrowings 401 401
Other borrowings 8,000 7,601 4,800 4,802
</TABLE>
NOTE 15 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. Capital amounts and classifications
are also subject to qualitative judgments by regulators about
components, risk weightings, and other factors, and the regulators can
lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized,
although these terms are not used to represent overall financial
condition. If adequately capitalized, regulatory approval is required
to accept brokered deposits. If undercapitalized, capital
distributions are limited, as is asset growth and expansion, and plans
for capital restoration are required. The minimum requirements are:
<TABLE>
<CAPTION>
CAPITAL TO RISK-
WEIGHTED ASSETS
---------------
TIER 1 CAPITAL
TOTAL TIER 1 TO AVERAGE ASSETS
----- ------ -----------------
<S> <C> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8 4 4
Undercapitalized 6 3 3
</TABLE>
(Continued)
-42-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 15 - REGULATORY MATTERS (Continued)
At year end, consolidated actual capital levels (in millions) and
minimum required levels for the Bank were:
<TABLE>
<CAPTION>
MINIMUM REQUIRED
TO BE WELL
MINIMUM REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
------ ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1996
Total capital (to risk weighted assets) $ 12.3 15.4% $ 6.4 8.0% $ 8.0 10.0%
Tier 1 capital (to risk weighted assets) 11.3 14.1 3.2 4.0 4.8 6.0
Tier 1 capital (to average assets) 11.3 11.8 3.8 4.0 4.8 5.0
1995
Total capital (to risk weighted assets) $ 11.1 15.8% $ 5.6 8.0% $ 7.0 10.0%
Tier 1 capital (to risk weighted assets) 10.4 14.8 2.8 4.0 4.2 6.0
Tier 1 capital (to average assets) 10.4 9.6 4.4 4.0 5.5 5.0
</TABLE>
The Bank was categorized as well capitalized at year end 1996 and
1995.
NOTE 16 - VALLEY RIDGE FINANCIAL CORP. (PARENT COMPANY
ONLY) CONDENSED FINANCIAL STATEMENTS
The Corporation's primary source of funds to pay dividends to shareholders
is the dividends it receives from the Bank. The Bank is subject to
certain restrictions on the amount of dividends that it may declare
without prior regulatory approval. At December 31, 1996, $2,720,700
of retained earnings were available for dividend declaration without
prior regulatory approval.
Dividends paid to the Corporation by its banking subsidiaries amounted
to $581,145 in 1996, $454,948 in 1995 and $347,975 in 1994.
Following are condensed parent company only financial statements.
(Continued)
-43-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash $ 58,383 $ 96,134
Investment in subsidiary 11,813,749 10,974,025
Other assets 150,263 150,263
------------- ------------
Total assets $ 12,022,395 $ 11,220,422
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 27 $ 27,678
Shareholders' equity 12,022,368 11,192,744
------------- ------------
Total liabilities and equity $ 12,022,395 $ 11,220,422
============= ============
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income
Dividends from subsidiary $ 581,145 $ 454,948 $ 347,975
Other 39 633 635
---------- ---------- ----------
Total income 581,184 455,581 348,610
Expenses
Other operating expenses 252,000 141,565 21,432
---------- ---------- ----------
INCOME BEFORE INCOME TAX AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARIES 329,184 314,016 327,178
Federal income tax expense (credit) (31,308) (7,545) (4,400)
Equity in undistributed net income of
subsidiary 853,183 1,011,636 824,573
---------- ---------- ----------
NET INCOME $1,213,675 $1,333,197 $1,156,151
========== ========== ==========
</TABLE>
(Continued)
-44-
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 16 - VALLEY RIDGE FINANCIAL CORP. (PARENT COMPANY
ONLY) CONDENSED FINANCIAL STATEMENTS (Continued)
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income $1,213,675 $ 1,333,197 $1,156,151
Adjustments to reconcile net income to
net cash from operating activities
Equity in undistributed earnings
of subsidiary (884,491) (1,011,636) (824,573)
Change in other assets 4,541 4,599
Change in other liabilities (27,651) 18,678 (20,000)
---------- ----------- ----------
Net cash from operating
activities 301,533 344,780 316,177
Financing activities
Dividends paid (374,528) (325,039) (309,362)
Sale of common stock 36,675 20,690 29,644
Purchase of fractional shares (1,431) (5,706)
---------- ----------- ----------
Net cash from financing activities (339,284) (304,349) (285,424)
---------- ----------- ----------
Net change in cash (37,751) 40,431 30,753
Cash at beginning of year 96,134 55,703 24,950
---------- ----------- ----------
CASH AT END OF YEAR $ 58,383 $ 96,134 $ 55,703
========== =========== ==========
</TABLE>
NOTE 17 - STOCK SPLITS
On April 28, 1994 and January 26, 1995, the Board of Directors
approved a five-for-four stock split and a two-for-one split,
(Continued)
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<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 17 - STOCK SPLITS (Continued)
respectively, of the Corporation's common stock for shareholders,
effected in the form of a stock dividend. The 1995 transaction has been
reflected during 1994 in the consolidated statement of changes in
shareholders' equity. Issuance of the Corporation's common stock as
part of the merger with Community Bank Corporation has been reflected
at January 1, 1994 under the pooling-of-interests method of
accounting. Only the average shares outstanding and the net income
per share amounts have been adjusted to reflect the merger. The
stated par value of each share was not changed from $10. All share
and per share amounts have been adjusted to reflect the stock splits.
NOTE 18 - PENDING ACCOUNTING CHANGES
Financial Accounting Standard No. 125, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES, was
issued by the Financial Accounting Standards Board in 1996. It
revises the accounting for transfers of financial assets, such as
loans and securities, and for distinguishing between sales and secured
borrowings. It is effective for some transactions in 1997 and others
in 1998. The effect on the financial statements has not yet been
determined.
-46-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Valley Ridge Financial Corp.
Kent City, Michigan
We have audited the accompanying consolidated balance sheets of Valley Ridge
Financial Corp. and its wholly-owned subsidiary, Valley Ridge Bank, as of
December 31, 1996 and 1995 and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are
the responsibility of the Corporation's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
The consolidated financial statements as of December 31, 1995 and 1994, and
for the years then ended have been restated to reflect the pooling of
interests with Community Bank Corporation as described in Note 2 to the
consolidated financial statements. We did not audit the 1995 and 1994
financial statements of Community Bank Corporation, which statements reflect
total assets of $28,744,181 as of December 31, 1995, and net income of
$363,672 and $280,231 for the years ended December 31, 1995 and 1994,
respectively. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Community Bank Corporation as of December 31, 1995, and
for the years ended December 31, 1995 and 1994, is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of Valley
Ridge Financial Corp. and its wholly-owned subsidiary, Valley Ridge
Bank, at December 31, 1996 and 1995, and the results of their operations and
their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
/s/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 21, 1997
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<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Valley Ridge's board of directors is divided into three classes,
which will be as nearly equal in number as possible. Each director is
a member of a class that has a term of office of three years, with the
term of office of one class expiring at the annual meeting of
shareholders in each successive year.
Except as otherwise indicated, all of the named individuals have
had the same principal employment for over five years. Executive
officers are appointed annually and serve at the pleasure of the board
of directors of Valley Ridge. All executive officers of Valley Ridge are
also directors of Valley Ridge.
DIRECTORS WITH TERMS EXPIRING IN 1997
Jerome B. Arends (age 52) has been a director of Valley Ridge
since 1988. Mr. Arends is Chief Executive Officer and President and
sole shareholder of Ravenna Farm Equipment, Inc., a distributor of
farm implements and equipment.
K. Timothy Bull (age 49) has been a director of Valley Ridge
since 1993 and was also a director of Valley Ridge from 1988 until
1991. Mr. Bull is President and sole shareholder of Moon Lake
Orchards, Inc., a producer of fruit.
Richard L. Edgar (age 52) has been a director of Valley Ridge
since 1988. Mr. Edgar has been President and Chief Executive Officer
of Valley Ridge since 1988 and President and Chief Executive Officer
of the Bank since 1987. Prior to that, Mr. Edgar served the Bank in
various management and other capacities since 1963. Mr. Edgar is also
a director of West Shore Computer Services, Inc., a data processing
company in which the Bank is a 20% shareholder.
Fred J. Finkbeiner (age 67) has been a director of Valley Ridge since
July 1996 and was a director of Community from 1990 until 1996. In 1996,
Mr. Finkbeiner retired as a Sales Manager at V & P Produce, a distributor
of vegetables located in Grant, Michigan.
-48-
<PAGE>
DIRECTORS WITH TERMS EXPIRING IN 1998
Gary Gust (age 52) has been a director of Valley Ridge since
1991. Mr. Gust is President and sole shareholder of Gust Construction
Company, a general contractor.
Ronald L. Hansen (age 52) has been a director of Valley Ridge since
July 1996 and was a director of Community from 1990 until 1996. Mr. Hansen
is Vice President of Valley Ridge and was Secretary of Community and
President and Chief Executive Officer of Grant from 1994 until 1996 and a
director of Grant from 1982 until 1996. Prior to that, Mr. Hansen served
Grant in various management and other capacities since 1973.
Robert C. Humphreys (age 58) has been a director of Valley Ridge
since 1988. Mr. Humphreys has been Chairman of the Board of Valley
Ridge since 1993. Mr. Humphreys owns and operates Humphreys Orchards,
a producer of fruit.
Ben J. Landheer (age 61) has been a director of Valley Ridge since
July 1996 and was a director of Community from 1991 until 1996. Mr.
Landheer owns and operates Landheer Insurance Agency, an agent for
insurance companies offering a broad range of insurance products.
DIRECTORS WITH TERMS EXPIRING IN 1999
Michael E. McHugh (age 47) has been a director of Valley Ridge
since 1989. Mr. McHugh is Secretary and Treasurer of Valley Ridge.
Mr. McHugh has also been Executive Vice President of the Bank since
1987.
Dennis C. Nelson (age 48) has been a director of Valley Ridge since
July 1996 and was a director of Community from 1990 until 1996. Mr. Nelson
is a dentist practicing in Grant, Michigan.
John J. Niederer (age 61) has been a director of Valley Ridge
since 1993. Mr. Niederer has been President and sole shareholder of
Greenridge Fruit, Inc., a distributor of fruit, since 1990. Prior to
that, Mr. Niederer was Vice President of Wm. Bolthouse Farms, Inc., a
producer and distributor of vegetables.
Paul K. Spoelman (age 61) has been a director of Valley Ridge
since 1994. Mr. Spoelman is a shareholder and founder of Spoelman,
Hovingh & Feldt, Inc., an accounting firm.
Donald Swanson (age 62) has been a director of Valley Ridge since
1988. Mr. Swanson is President and a majority shareholder of Swanson
Pickle Co., Inc., a producer and distributor of pickles.
-49-
<PAGE>
Donald VanSingel (age 53) has been a director of Valley Ridge since
1996 and was Chairman and a director of Community from 1990 until 1996.
Mr. VanSingel has been a consultant for Governmental Consultant Services,
Inc. since 1993. Prior to that, Mr. VanSingel served in the Michigan
House of Representatives.
ITEM 10. EXECUTIVE COMPENSATION.
The following table shows certain information concerning the
compensation for services rendered during each of the three years in
the period ended December 31, 1996, of the Chief Executive Officer of
Valley Ridge and each executive officer of Valley Ridge who earned cash
compensation in excess of $100,000 during 1996. Mr. Edgar and Mr. McHugh
was compensated by the Bank in the capacities indicated in the table.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
ANNUAL COMPENSATION
NAME AND
PRINCIPAL ALL OTHER
POSITION YEAR SALARY<F1> BONUS<F2> COMPENSATION<F3>
-------- ---- ---------- --------- ----------------
<S> <C> <C> <C> <C>
Richard L. Edgar 1996 $ 119,950 $ 30,000 $ 27,403
Director, President 1995 $ 112,455 $ 26,534 $ 26,031
and Chief Executive 1994 $ 108,700 $ 20,811 $ 25,824
Officer of Valley Ridge
and the Bank
Michael E. McHugh 1996 $ 86,250 $ 18,000 $ 18,055
Director, Secretary and 1995 $ 80,663 $ 16,124 $ 16,373
Treasurer of Valley Ridge 1994 $ 77,850 $ 12,285 $ 16,053
and Executive Vice
President of the Bank
<FN>
<F1> Includes compensation deferred under the Bank's Profit
Sharing/401(k) Plan and director fees paid by the Bank and its
predecessors.
<F2> Includes compensation deferred under the Bank's Profit
Sharing/401(k) Plan.
<F3> All other compensation for 1996 includes: (i) contributions by
the Bank under the Profit Sharing/401(k) Plan; (ii) contributions
by Valley Ridge under the Valley Ridge Employee Stock Ownership
-50-
<PAGE>
Plan; and (iii) amounts paid by the Bank for life insurance. The
amounts included for each such factor for 1996 are:
(i) (ii) (iii)
------ ----- -----
Mr. Edgar 18,058 2,376 6,969
Mr. McHugh 13,119 1,588 3,348
</FN>
</TABLE>
During 1996, the Bank compensated its directors at the rate
of $3,600 per year and $400 per regular board meeting attended, except
that the Chairman of the Board was paid $500 per meeting attended.
Directors who were not executive officers of Valley Ridge or the Bank
also received $100 per committee meeting attended. Valley Ridge has
entered into deferred compensation agreements with some of its
directors under which payments will be made to the directors after
their retirement. From January until August 1996, Grant compensated its
directors at the rate of $5,000 per year and $125 per regular board
meeting attended. After August 1996, Grant compensated its directors
at the same rate as the Bank.
Ronald L. Hansen has an employment agreement with Valley Ridge.
Under this agreement, Mr. Hansen is to serve Valley Ridge and the Bank
in his present capacity for an annual salary of $70,000 and
discretionary bonuses to be determined by the board of directors of
Valley Ridge. Mr. Hansen's salary is reviewed at least annually by
the board of directors and may be increased, but not decreased. Upon
termination of his employment agreement by Valley Ridge without
"cause" or by Mr. Hansen for "good reason" before a "change in
control" of Valley Ridge (as these terms are defined in the
agreements), Mr. Hansen is entitled to his salary and benefits, as if
termination of his employment had not occurred, through June 30, 2001.
If such termination occurs after a change in control, Mr. Hansen is
entitled to his salary and benefits, as if termination of his
employment had not occurred, until the later of (i) June 30, 2001, or
(ii) three years after the change in control; provided that the amount
of salary and benefits continuation attributable to the period beyond
June 30, 2001, will be subject to a reduction to the extent of any
portion of that amount that constitutes an "excess parachute payment"
(as that term is defined in Section 280G of the Internal Revenue Code
of 1986, as amended).
ITEMS 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth information concerning the number
of shares of Valley Ridge Common Stock held as of February 1, 1997,
by each shareholder who is known to Valley Ridge management to have
-51-
<PAGE>
been the beneficial owner of more than 5% of the outstanding shares of
Valley Ridge Common Stock as of that date:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP<F1>
-----------------------------------------
SOLE SHARED
VOTING VOTING OR TOTAL
NAME AND ADDRESS OF AND DISPOSI- DISPOSITIVE BENEFICIAL PERCENT
BENEFICIAL OWNER TIVE POWER POWER<F2> OWNERSHIP OF CLASS
- ------------------- ------------ ----------- --------- --------
<S> <C> <C> <C> <C>
Robert C. Humphreys 15,974 15,888 31,862 6.42%
17660 Westbrook Drive
Casnovia, MI 49318
Valley Ridge Bank
Bank Profit Sharing Plan Trust
c/o NBD Bank
200 Ottawa, N.W.
Grand Rapids, MI 49503 -- 31,032 31,032 6.26%
__________________________
(Footnotes begin on page 53.)
</TABLE>
The following table shows certain information concerning the
number of shares of Valley Ridge Common Stock held as of February 1,
1997, by each of Valley Ridge's directors, each of the named executive
officers, and all of Valley Ridge's directors and executive officers
as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP<F1>
-----------------------------------------
SOLE SHARED
VOTING AND VOTING OR TOTAL
NAME OF DISPOSITIVE DISPOSITIVE BENEFICIAL PERCENT
BENEFICIAL OWNER POWER POWER<F2> OWNERSHIP OF CLASS
- ------------------- ------------ ----------- --------- --------
<S> <C> <C> <C> <C>
Jerome B. Arends 4,664 3,872 8,536 1.72%
K. Timothy Bull 159 23,457 23,616 4.76
Richard L. Edgar 21,187<F3><F4> 3,136 24,323<F3><F4> 4.85
Fred J. Finkbeiner -- 4,838 4,838 *
Gary Gust 9,114 8,530 17,644 3.56
Ronald L. Hansen -- 2,071 2,071 *
Robert C. Humphreys 15,974 15,888 31,862 6.42
Ben J. Landheer 11,692 -- 11,692 2.36
Michael E. McHugh 18,403<F3><F4> 876 19,279<F3><F4> 3.89
-52-
<PAGE>
Dennis C. Nelson -- -- -- *
John J. Niederer -- 327 327 *
Paul K. Spoelman 545 -- 545 *
Donald Swanson 3,250 609 3,859 *
Donald VanSingel -- 3,758 3,758 *
All directors and
executive officers
as a group 84,988 67,362 152,350 30.40%
<FN>
_________________________
<F*> Less than 1%
<F1> The numbers of shares stated are based on information furnished
by each person listed and include shares personally owned of
record by that person and shares which under applicable
regulations are deemed to be otherwise beneficially owned by that
person. Under these regulations, a beneficial owner of a
security includes any person who, directly or indirectly, through
any contract, arrangement, understanding, relationship or
otherwise has or shares voting power or dispositive power with
respect to the security. Voting power includes the power to vote
or direct the voting of the security. Dispositive power
includes the power to dispose or direct the disposition of the
security. A person will also be considered the beneficial owner
of a security if the person has a right to acquire beneficial
ownership of the security within 60 days.
<F2> These numbers include shares over which the listed person is
legally entitled to share voting or dispositive power by reason
of joint ownership, trust, or other contract or property right,
and shares held by spouses and children over whom the listed
person may have substantial influence by reason of relationship.
<F3> Mr. Edgar may be considered to have voting and/or dispositive
control over 31,032 shares of Valley Ridge Common Stock held by the
Valley Ridge Bank Profit Sharing Plan Trust by reason of the
capacities in which he serves at Valley Ridge and the Bank. The
number of shares reported as beneficially owned by Mr. Edgar
excludes, and Mr. Edgar disclaims beneficial ownership of, 16,835
shares of Valley Ridge Common Stock held by the Valley Ridge
Bank Profit Sharing Plan Trust. The number of shares reported
includes 1,874 shares allocated to Mr. Edgar's account under
the Valley Ridge Employee Stock Ownership Plan which are also
included in the number reported as beneficially owned by Mr.
McHugh (as to which Mr. McHugh disclaims beneficial ownership). The
number of shares reported also includes 5,116 shares subject to an
option exercisable within 60 days of February 1, 1997.
-53-
<PAGE>
<F4> Mr. McHugh is the trustee of the Valley Ridge Employee Stock
Ownership Plan. As trustee, Mr. McHugh has nominal voting and
dispositive power over shares held in trust, limited by the terms
of the governing plan and trust agreements and his legal and
fiduciary duties. The number of shares reported as beneficially
owned by Mr. McHugh includes 12,273 shares held by the Valley
Ridge Employee Stock Ownership Plan of which Mr. McHugh disclaims
beneficial ownership (including the 1,874 shares allocated to
Mr. Edgar's account under that plan).
</FN>
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Directors and officers of Valley Ridge and their associates
were customers of and had transactions with the Bank in the ordinary
course of business between January 1, 1996, and March 15, 1997. It is
anticipated that such transactions will take place in the future in
the ordinary course of business. All loans and commitments included
in such transactions were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and did not
involve more than the normal risk of collectibility or present other
unfavorable features.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS. The following exhibits are filed as part of this Form
10-KSB:
NUMBER EXHIBIT
3.1 ARTICLES OF INCORPORATION. Previously filed as Exhibit 3(a)
to Valley Ridge's Form S-4 Registration Statement filed
January 30, 1996. Here incorporated by reference.
3.2 BYLAWS AND AMENDMENTS. Previously filed as Exhibit 3(b) to
Valley Ridge's Form S-4 Registration Statement filed January
30, 1996. Here incorporated by reference.
4.1 FORM OF STOCK CERTIFICATE. Previously filed as Exhibit 4(a)
to Valley Ridge's Form S-4 Registration Statement filed
January 30, 1996. Here incorporated by reference.
4.2 LONG-TERM DEBT. Valley Ridge is a party to several long-term
debt agreements which at the time of this report do not exceed
10% of Valley Ridge's total consolidated assets. Valley Ridge
-54-
<PAGE>
agrees to furnish copies of the agreements defining the rights
of the other parties thereto to the Securities and Exchange
Commission upon request.
10.1 DATA PROCESSING AGREEMENT. Previously filed as Exhibit
10(a) to Valley Ridge's Form S-4 Registration Statement filed
January 30, 1996. Here incorporated by reference.
10.2 VALLEY RIDGE EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST.*
Previously filed as Exhibit 10(b) to Valley Ridge's Form S-4
Registration Statement filed January 30, 1996. Here incorporated
by reference.
10.3 KENT CITY STATE BANK PROFIT SHARING/401(K) PLAN.*
Previously filed as Exhibit 10(c) to Valley Ridge's Form S-4
Registration Statement filed January 30, 1996. Here incorporated
by reference.
10.4 DIRECTORS' DEFERRED COMPENSATION PLAN AND FORM OF DIRECTORS'
DEFERRED COMPENSATION AGREEMENT.* Previously filed as
Exhibit 10(d) to Valley Ridge's Form S-4 Registration Statement
filed January 30, 1996. Here incorporated by reference.
10.5 LEASE AGREEMENT FOR SPARTA OFFICE. Previously filed as
Exhibit 10(e) to Valley Ridge's Form S-4 Registration Statement
filed January 30, 1996. Here incorporated by reference.
10.6 EMPLOYMENT AGREEMENT.*
11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS.
21 SUBSIDIARIES OF THE REGISTRANT.
24 POWERS OF ATTORNEY.
27 FINANCIAL DATA SCHEDULE.
___________________________
* Management contract or compensatory plan or arrangement.
Valley Ridge will furnish a copy of any exhibit listed above to
any shareholder of Valley Ridge without charge upon written request to
Michael E. McHugh, Secretary, Valley Ridge Financial Corp., 6 North Main
Street, Kent City, Michigan 49330.
REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
fourth quarter of 1996.
-55-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
Valley Ridge caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VALLEY RIDGE FINANCIAL CORP.
(Registrant)
Date: March 31, 1997 By /s/Richard L. Edgar
Richard L. Edgar
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of Valley Ridge and in the
capacities and on the dates indicated.
March 31, 1997 * /s/Jerome B. Arends
Jerome B. Arends
Director
March 31, 1997 */s/K. Timothy Bull
K. Timothy Bull
Director
March 31, 1997 /s/Richard L. Edgar
Richard L. Edgar
President, Chief Executive Officer and
Director (Principal Executive Officer)
March 31, 1997 */s/Fred J. Finkbeiner
Fred J. Finkbeiner
Director
March 31, 1997 */s/Gary Gust
Gary Gust
Director
-56-
<PAGE>
March 31, 1997 */s/Ronald L. Hansen
Ronald L. Hansen
Director and Vice President
March 31, 1997 */s/Robert C. Humphreys
Robert C. Humphreys
Chairman of the Board and Director
March 31, 1997 */s/Ben J. Landheer
Ben J. Landheer
Director
March 31, 1997 /s/Michael E. McHugh
Michael E. McHugh
Secretary and Treasurer and Director
(Principal Financial and Accounting
Officer)
March 31, 1997 */s/Dennis C. Nelson
Dennis C. Nelson
Director
March 31, 1997 */s/John J. Niederer
John J. Niederer
Director
March 31, 1997 */s/Paul K. Spoelman
Paul K. Spoelman
Director
March 31, 1997 */s/Donald Swanson
Donald Swanson
Director
March 31, 1997 */s/Donald VanSingel
Donald VanSingel
Director
*By /s/Richard L. Edgar
Richard L. Edgar
Attorney-in-Fact
-57-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER
3.1 ARTICLES OF INCORPORATION. Previously filed as Exhibit 3(a)
to Valley Ridge's Form S-4 Registration Statement filed
January 30, 1996. Here incorporated by reference.
3.2 BYLAWS AND AMENDMENTS. Previously filed as Exhibit 3(b) to
Valley Ridge's Form S-4 Registration Statement filed January
30, 1996. Here incorporated by reference.
4.1 FORM OF STOCK CERTIFICATE. Previously filed as Exhibit 4(a)
to Valley Ridge's Form S-4 Registration Statement filed
January 30, 1996. Here incorporated by reference.
4.2 LONG-TERM DEBT. Valley Ridge is a party to several
long-term debt agreements which at the time of this report
do not exceed 10% of Valley Ridge's total consolidated
assets. Valley Ridge agrees to furnish copies of the
agreements defining the rights of the other parties thereto
to the Securities and Exchange Commission upon request.
10.1 DATA PROCESSING AGREEMENT. Previously filed as Exhibit
10(a) to Valley Ridge's Form S-4 Registration Statement
filed January 30, 1996. Here incorporated by reference.
10.2 VALLEY RIDGE EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST.*
Previously filed as Exhibit 10(b) to Valley Ridge's Form S-4
Registration Statement filed January 30, 1996. Here
incorporated by reference.
10.3 KENT CITY STATE BANK PROFIT SHARING/401(K) PLAN.*
Previously filed as Exhibit 10(c) to Valley Ridge's Form S-4
Registration Statement filed January 30, 1996. Here
incorporated by reference.
10.4 DIRECTORS' DEFERRED COMPENSATION PLAN AND FORM OF DIRECTORS'
DEFERRED COMPENSATION AGREEMENT.* Previously filed as
Exhibit 10(d) to Valley Ridge's Form S-4 Registration
Statement filed January 30, 1996. Here incorporated by
reference.
10.5 LEASE AGREEMENT FOR SPARTA OFFICE. Previously filed as
Exhibit 10(e) to Valley Ridge's Form S-4 Registration
Statement filed January 30, 1996. Here incorporated by
reference.
10.6 EMPLOYMENT AGREEMENT.*
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<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER
11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS.
21 SUBSIDIARIES OF THE REGISTRANT.
24 POWERS OF ATTORNEY.
27 FINANCIAL DATA SCHEDULE.
___________________________
* Management contract or compensatory plan or arrangement.
-59-
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
AGREEMENT made and entered into this 26th day of June, 1996, but
as of the Effective Date hereinafter defined, by and between COMMUNITY BANK
CORPORATION ("CBC") and RONALD L. HANSEN ("Employee");
WHEREAS, CBC has retained the services of the Employee as a
senior executive officer, and the Employee has accepted such employment;
and
WHEREAS, the parties have operated in an employment relationship
for several years; and
WHEREAS, the parties desire to enter into this Agreement, which
is intended to set forth in its entirety the terms and conditions of the
employment relationship between CBC and the Employee; and
WHEREAS, the board of directors of CBC has approved this
Agreement and authorized the chairman of the board to enter into this
Agreement with the Employee;
NOW, THEREFORE, IT IS AGREED as follows:
1. EMPLOYMENT. The Employee is employed to render such executive
services to CBC as may from time to time be reasonably directed by CBC's
Chairman of the Board and/or the CBC board of directors. Among his other
duties, it is contemplated that he will serve as the president and chief
executive officer of CBC's Subsidiary Bank ("Subsidiary Bank"). If,
following the Effective Date of this Agreement, CBC merges with Valley
Ridge Financial Corporation ("VRFC") and the Kent City State Bank and the
Subsidiary Bank are consolidated or merged into one bank (the "Mergers"),
all references in this Agreement to CBC shall refer to the successor
corporation of CBC and VRFC ("Surviving Corporation") and all references in
this Agreement to the Subsidiary Bank shall refer to the successor bank to
the Grant State Bank and the Kent City State Bank (the "Merged Bank").
Following the Mergers, it is not expected that the Employee will serve as
the president and chief executive officer of the Merged Bank. It is,
however, expected that the Employee will continue to be a senior executive
officer of the Merged Bank and of the Surviving Corporation.
2. COMPENSATION. CBC agrees to pay the Employee during the term of
this Agreement a salary in the sum of Seventy Thousand Dollars ($70,000)
per annum provided, however, that any salary and bonuses (other than
bonuses provided for in Section 3 of this Agreement) paid to the Employee
by any subsidiary of CBC shall be deemed to reduce the salary paid to the
Employee pursuant to this Section 2. The salary provided herein shall be
payable in accordance with the periodic payment procedures for all
employees of CBC. The Employee's salary shall be reviewed by the board of
directors of CBC not less often than annually beginning on the date one (1)
<PAGE>
year subsequent to the Effective Date ("First Anniversary Date") and may be
increased (but not decreased) from time to time in such amounts as the
board in its discretion may determine. The Employee's salary shall be
subject to the usual withholding taxes required with respect to
compensation paid by a corporation to an employee.
3. DISCRETIONARY BONUSES. In addition to the salary provided for in
Section 2, the Employee shall be entitled to participate in discretionary
bonuses as may be from time to time authorized and declared by the board of
directors of CBC or the Subsidiary Bank to their respective executive
employees. No other compensation provided for in this Agreement shall be
deemed a substitute for the Employee's right to participate in such bonuses
when and as declared by the board of directors.
4. RETIREMENT, EMPLOYEE BENEFIT PLANS, AND FRINGE BENEFITS.
(a) The Employee shall be entitled to participate in any
plan of CBC or the Subsidiary Bank relating to pension, thrift,
deferred profit-sharing, group life insurance, medical coverage,
education, or other retirement or employee benefits that CBC or
the Subsidiary Bank may adopt for the benefit of its executive
employees.
(b) The Employee shall be eligible to participate in any
other fringe benefits which may be, or may later become,
applicable to CBC's or the Subsidiary Bank's executive or
salaried employees, including, but not limited to, the following:
health plans; insurance plans; use of a company automobile;
membership in various social business and trade organizations; a
reasonable expense account; the payment of reasonable expenses
for attending annual and periodic meetings of trade associations;
and any other benefits which are commensurate with the
responsibilities and functions to be performed by the Employee
under this Agreement.
5. TERM. The term of employment under this Agreement shall be a
period commencing on the Effective Date hereof and ending five (5) years
thereafter.
6. EFFECTIVE DATE. For purposes of this Agreement the "Effective
Date" is July 1, 1996.
7. STANDARDS. The Employee shall perform his duties under this
Agreement in accordance with reasonable standards established from time to
time by the board of directors of CBC.
8. VACATIONS. The Employee shall be entitled, without loss of pay,
to absent himself voluntarily from the performance of his employment under
-2-
<PAGE>
this Agreement, all such voluntary absences to count as vacation time,
provided that:
(a) The Employee shall be entitled to annual vacation time
of not less than four (4) weeks per year.
(b) The timing of vacations shall be scheduled in a
reasonable, mutually agreeable manner. The Employee shall not be
entitled to receive any additional compensation from CBC on
account of his failure to take vacation time, nor shall he be
entitled to accumulate vacation time from one calendar year to
the next, except that Employee may carry over up to 1 week of
vacation each year to be used during the first 3 months of the
following year.
(c) In addition to the aforesaid vacation time, the
Employee shall be entitled, without loss of pay, to disability
leave with pay for any continuous absence of up to ninety (90)
days due to disability; after 90 continuous days, paragraph 10
shall apply. Employee may also absent himself voluntarily from
the performance of his employment with CBC for such additional
periods of time and for such valid and legitimate reasons as the
board of directors in its sole discretion may determine.
Further, the board of directors shall be entitled to grant to the
Employee, at the Employee's request, additional leaves of absence
with or without pay at such time or times and upon such terms and
conditions as the board, in its discretion, may determine.
9. TERMINATION OF EMPLOYMENT.
(a) The Employee's employment under this Agreement may be
terminated at any time by the board of directors of CBC for
"Cause" (as defined below). The Employee shall have no right to
receive severance pay or any other remuneration whatsoever under
this Agreement for any period after voluntary termination without
"Good Reason" (as defined below) or termination for Cause. For
purposes of Agreement, for "Cause" shall mean termination for
only the following reasons:
(i) Willful misconduct materially adverse to CBC or
the Subsidiary Bank;
(ii) Willful breach of a fiduciary duty involving
personal profit;
(iii) Willful violation of any law, rule, or regulation
materially relating to the operation of CBC or the
Subsidiary Bank;
-3-
<PAGE>
(iv) The order of any court or supervising agency with
jurisdiction over the affairs of CBC or the Subsidiary Bank;
or
(v) The Employee's intentional material violation of
any material provision of this Agreement, if Employee fails
to cure the breach within a reasonable time after written
notice from CBC's board of directors informing him of the
breach.
For purposes of this Agreement, no act or failure to
act on the Employee's behalf shall be considered "willful" or
"intentional" unless done, or admitted to be done, by him not in
good faith and unless he knew or should have known that his
action or omission was not in, or was opposed to, the best
interests of CBC or the Subsidiary Bank; provided, that any act
or omission to act on the Employee's behalf in reliance upon an
opinion of counsel to CBC shall not be deemed to be willful. The
Employee shall not be deemed to have been terminated for cause
unless or until there shall have been delivered to him a copy of
a certification of a majority of the non-officer members of the
CBC's board of directors finding that, in the good faith opinion
of such majority, the employee was guilty of conduct deemed to be
cause and specifying the details thereof, after reasonable notice
to the Employee and an opportunity for him, together with his
counsel, to be heard before such majority. No such determination
of the board shall affect Employee's right to determination
through the legal system of whether there was in fact cause for
termination.
(b) The Employee may terminate his employment at any time
upon ninety (90) days' written notice to CBC or upon such shorter
period as may be agreed upon between the Employee and the board
of directors of CBC. In the event of such termination without
Good Reason, CBC shall be obligated only to continue to pay the
Employee's salary and provide the other benefits provided by this
Agreement up to the date of the termination.
(c) The Employee may terminate his employment with CBC for
"Good Reason" which shall mean the following:
(i) A material change made by CBC in the Employee's
status or position as a senior executive officer of CBC or
the Subsidiary Bank except as contemplated in Section 1 of
this Agreement;
(ii) The assignment to the Employee of any duties or
responsibilities which are materially inconsistent with such
-4-
<PAGE>
status or position, or a material reduction in the duties
and responsibilities previously exercised by the Employee
except as contemplated in Section 1 of this Agreement;
(iii) The imposition of any requirement, whether by
relocation of CBC's offices or otherwise, that the Employee
perform his normal day-to-day duties and responsibilities
outside of an area within a thirty (30) mile radius of
Grant, Michigan;
(iv) Failure of CBC to elect the Employee as a senior
executive officer and a director of the Subsidiary Bank; or
(v) Material breach by CBC of any material provision
of Agreement, if CBC fails to cure the breach within a
reasonable time after Employee has given CBC's board of
directors written notice of the breach.
(d) If the Employee's employment is terminated by CBC
without Cause or terminated by the Employee for Good Reason, the
Employee shall be entitled to continuation of his salary and
benefits as follows:
(i) if the termination occurs before a Change in
Control of CBC, the Employee's salary and benefits will be
continued through June 30, 2001, as if termination of his
employment had not occurred; or
(ii) if the termination occurs after a Change in
Control or is In Contemplation of a Change in Control, the
Employee's salary and benefits will be continued, as if
termination of his employment had not occurred, through June
30, 2001 or, if longer, until three (3) years after the date
of the Change in Control, provided that the amount of salary
and benefit continuation attributable to the period beyond
June 30, 2001 will be subject to reduction to the extent of
any portion of such amount that constitutes an Excess
Parachute Payment.
Payment of salary and continuation of benefits as
provided in this subparagraph 9(d) shall continue regardless of
whether the Employee finds new employment following such
termination, and without reduction due to any earnings of
Employee from any other employment or self employment, as long as
the new employment or self employment is not competitive with CBC
or the Subsidiary Bank. If continuation of a specific benefit is
not possible under applicable law, Employee shall be provided
with an equal substitute benefit or, if that is not possible,
-5-
<PAGE>
with cash in lieu of such benefit; such substitute benefit or
cash shall be structured or supplemented as necessary to place
Employee in the same economic position, after all applicable
taxes, as if the benefit had been continued.
(e) In the event of the death of the Employee while still
employed under this Agreement (or while receiving salary and
benefit continuation under section 9(d)), the Employee's estate
or beneficiary (designated in writing) shall be entitled to
receive the salary (or salary continuation under section 9(d))
due the Employee through the last day of the calendar month in
which his death shall have occurred plus such other benefits as
shall have accrued under this Agreement up to the date of death,
plus an additional amount equal to the Employee's annual salary
as of the date of death.
(f) If the Employee is temporarily prohibited from
participating in the conduct of CBC's affairs at the request of
or by the order of any court or supervising agency with
jurisdiction over CBC, CBC's obligations under this Agreement
shall not terminate and the Employee shall be placed on
administrative leave with or without pay in the discretion of the
board of directors. If the charges in the proceeding out of
which such request or order is issued mature into a permanent
prohibition order, unless stayed by appropriate proceedings,
CBC's obligations hereunder shall terminate as of the effective
date of such permanent order.
(g) If the Employee is permanently prohibited from
participating in the conduct of CBC's affairs by the final order
of any court or supervising agency with jurisdiction over CBC,
all obligations of CBC under this Agreement shall terminate, as
of the effective date of the order, but vested rights of the
parties shall not be affected.
(h) All obligations under this Agreement may be terminated,
except to the extent determined that continuation of the
Agreement is necessary for the continued operation of CBC:
(i) By the Federal Deposit Insurance Corporation
("FDIC") at the FDIC enters into an agreement to provide
assistance to or on behalf of CBC; and
(ii) By the Federal Reserve Board ("FRB"), or any other
agency, at the time the FRB approves a supervisory merger to
resolve problems related to the operation of CBC or when CBC
is determined by the FRB to be in an unsafe or unsound
condition. Any rights of the parties that have already
vested, however, shall not be affected by such action.
-6-
<PAGE>
(i) As used in subparagraph 9(d):
(i) the term "Change in Control" shall mean the
occurrence of any one or more of the following, except that
it shall not mean the Mergers:
(1) Any person is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of CBC representing
twenty-five percent (25%) or more of the combined
voting power of CBC's then outstanding securities; or
(2) Any of the following occur:
(A) Any merger or consolidation of CBC, other
than a merger or consolidation in which the
voting securities of CBC immediately prior to
the merger or consolidation continue to
represent (either by remaining outstanding or
being converted into securities of the
surviving entity) more than fifty percent
(50%) or more of the combined voting power of
CBC or surviving entity immediately after the
merger or consolidation with another entity;
(B) Any sale, exchange, lease, mortgage, pledge,
transfer or other disposition (in a single
transaction or a series of related
transactions) of assets or earning power
aggregating more than fifty percent (50%) of
the assets or earning power of CBC on a
consolidated basis;
(C) Any complete liquidation or dissolution of
CBC;
(D) Any reorganization, reverse stock split, or
recapitalization of CBC which would result in
a Change in Control; or
(E) Any transaction or series of related
transactions having, directly or indirectly,
the same effect as any of the foregoing.
(ii) the term "In Contemplation of a Change in Control"
shall mean a termination within 12 months before a Change in
Control, in anticipation of such Change in Control.
-7-
<PAGE>
(iii) the term "Excess Parachute Payments" means
Parachute Payments subject to an excise tax on "excess
parachute payments" as provided under <Section> 280G of the
Internal Revenue Code.
10. DISABILITY. If the Employee shall become and remain disabled or
incapacitated to the extent that he is unable to perform his duties under
this Agreement for a continuous period of ninety (90) days or more, then,
in that event, from the time that such period shall have elapsed until such
disability or incapacity shall have ceased:
(a) He shall be entitled to receive disability benefits of
the type provided for executive employees of CBC and the
Subsidiary Bank; and
(b) He shall not be entitled to receive salary payments
pursuant to this Employment Agreement.
11. NO ASSIGNMENTS. This Agreement is personal to each of the
parties hereto, and neither party may assign or delegate any of the rights
or obligations hereunder without first obtaining the written consent of the
other party. However, this Agreement shall be binding upon any successor
or assignee of CBC.
12. OTHER CONTRACTS. All other prior agreements regarding conditions
of employment, whether written or oral, are hereby superseded by this
Agreement.
13. NOTICES. Any notices under this Agreement shall be deemed given
when in writing and delivered personally or sent by certified mail, postage
prepaid, to the last known address of the party to whom notice is given.
If sent by mail, notice shall be deemed given on the second day after
mailing.
14. AMENDMENTS. No amendments or additions to this Agreement shall
be binding unless in writing and signed by both parties, except as herein
otherwise provided.
15. PARAGRAPH HEADINGS. The paragraph headings used in this
Agreement are included solely for convenience and shall not affect or be
used in connection with the interpretation of this Agreement.
16. SEVERABILITY. The provisions of this Agreement shall be deemed
severable, and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
17. GOVERNING LAW. Agreement shall be governed by the laws of the
United States of America and the State of Michigan.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on
the day and year first above written.
COMMUNITY BANK CORPORATION
By /S/ ELMO CAMPBELL
President
Employer
/S/ RONALD L. HANSEN
Ronald L. Hansen
Employee
-9-
<PAGE>
EXHIBIT 11
EARNINGS PER COMMON SHARE
Earnings per share are calculated on the basis of the weighted
average number of shares outstanding. Earnings per share amounts are based
on 495,431 and 494,521 shares for the years December 31, 1996 and 1995,
respectively. All share amounts have been restated to reflect stock
dividends and splits.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
As of December 31, 1996, the Registrant had the following
subsidiaries:
<TABLE>
<CAPTION>
SUBSIDIARY STATE OF INCORPORATION
---------- ----------------------
<S> <C> <C>
Valley Ridge Bank Michigan
</TABLE>
<PAGE>
EXHIBIT 24
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Valley Ridge Financial Corp., does hereby
appoint RICHARD L. EDGAR and MICHAEL E. McHUGH; or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Valley Ridge Financial Corp. on Form 10-KSB for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 29, 1997 /s/ Jerry Arends
(signature)
JERRY ARENDS
(please type or print name)
DIRECTOR
(please type or print title)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Valley Ridge Financial Corp., does hereby
appoint RICHARD L. EDGAR and MICHAEL E. McHUGH; or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Valley Ridge Financial Corp. on Form 10-KSB for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 25 1997 /s/ K. Timothy Bull
(signature)
K. TIMOTHY BULL
(please type or print name)
DIRECTOR
(please type or print title)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Valley Ridge Financial Corp., does hereby
appoint RICHARD L. EDGAR and MICHAEL E. McHUGH; or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Valley Ridge Financial Corp. on Form 10-KSB for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 25, 1997 /s/ Fred J. Finkbeiner
(signature)
FRED J. FINKBEINER
(please type or print name)
DIRECTOR
(please type or print title)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Valley Ridge Financial Corp., does hereby
appoint RICHARD L. EDGAR and MICHAEL E. McHUGH; or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Valley Ridge Financial Corp. on Form 10-KSB for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 25, 1997 /s/ Gary Gust
(signature)
GARY GUST
(please type or print name)
DIRECTOR
(please type or print title)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Valley Ridge Financial Corp., does hereby
appoint RICHARD L. EDGAR and MICHAEL E. McHUGH; or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Valley Ridge Financial Corp. on Form 10-KSB for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: February, 5, 1997 /s/ Ronald Hansen
(signature)
RONALD HANSEN
(please type or print name)
VICE PRESIDENT AND DIRECTOR
(please type or print title)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Valley Ridge Financial Corp., does hereby
appoint RICHARD L. EDGAR and MICHAEL E. McHUGH; or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Valley Ridge Financial Corp. on Form 10-KSB for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 28, 1997 /s/ Robert C. Humphreys
(signature)
ROBERT C. HUMPHREYS
(please type or print name)
DIRECTOR
(please type or print title)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Valley Ridge Financial Corp., does hereby
appoint RICHARD L. EDGAR and MICHAEL E. McHUGH; or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Valley Ridge Financial Corp. on Form 10-KSB for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: February 6, 1997 /s/ Ben J. Landheer
(signature)
BEN J. LANDHEER
(please type or print name)
DIRECTOR
(please type or print title)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Valley Ridge Financial Corp., does hereby
appoint RICHARD L. EDGAR and MICHAEL E. McHUGH; or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Valley Ridge Financial Corp. on Form 10-KSB for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: February 6, 1997 /s/ Dennis C. Nelson, D.D.S.
(signature)
DENNIS C. NELSON, D.D.S.
(please type or print name)
DIRECTOR
(please type or print title)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Valley Ridge Financial Corp., does hereby
appoint RICHARD L. EDGAR and MICHAEL E. McHUGH; or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Valley Ridge Financial Corp. on Form 10-KSB for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 25, 1997 /s/ John Niederer
(signature)
JOHN NIEDERER
(please type or print name)
DIRECTOR
(please type or print title)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Valley Ridge Financial Corp., does hereby
appoint RICHARD L. EDGAR and MICHAEL E. McHUGH; or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Valley Ridge Financial Corp. on Form 10-KSB for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 27, 1997 /s/ Paul K. Spoelman
(signature)
PAUL K. SPOELMAN
(please type or print name)
DIRECTOR
(please type or print title)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Valley Ridge Financial Corp., does hereby
appoint RICHARD L. EDGAR and MICHAEL E. McHUGH; or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Valley Ridge Financial Corp. on Form 10-KSB for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 25, 1997 /s/ Donald W. Swanson
(signature)
DONALD W. SWANSON
(please type or print name)
DIRECTOR
(please type or print title)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Valley Ridge Financial Corp., does hereby
appoint RICHARD L. EDGAR and MICHAEL E. McHUGH; or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Valley Ridge Financial Corp. on Form 10-KSB for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: January 25, 1997 /s/ Donald VanSingel
(signature)
DONALD VANSINGEL
(please type or print name)
DIRECTOR
(please type or print title)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS OF VALLEY RIDGE FINANCIAL CORP. AND
SUBSIDIARIES FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,916
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,785
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 84,487
<ALLOWANCE> 1,182
<TOTAL-ASSETS> 115,647
<DEPOSITS> 94,536
<SHORT-TERM> 401
<LIABILITIES-OTHER> 688
<LONG-TERM> 8,000
<COMMON> 4,961
0
0
<OTHER-SE> 5,665
<TOTAL-LIABILITIES-AND-EQUITY> 115,647
<INTEREST-LOAN> 7,805
<INTEREST-INVEST> 1,128
<INTEREST-OTHER> 208
<INTEREST-TOTAL> 9,142
<INTEREST-DEPOSIT> 3,161
<INTEREST-EXPENSE> 3,523
<INTEREST-INCOME-NET> 5,618
<LOAN-LOSSES> 117
<SECURITIES-GAINS> 11
<EXPENSE-OTHER> 5,011
<INCOME-PRETAX> 1,580
<INCOME-PRE-EXTRAORDINARY> 1,580
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,214
<EPS-PRIMARY> 2.45
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<LOANS-NON> 155
<LOANS-PAST> 560
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 1,109
<CHARGE-OFFS> 100
<RECOVERIES> 56
<ALLOWANCE-CLOSE> 1,182
<ALLOWANCE-DOMESTIC> 535
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 647
</TABLE>
