<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, 1997
[ ] 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
Incorporation or Organization) Identification No.)
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 registrant: (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, 1997, were
$11,022,366.
<PAGE>
As of February 5, 1998, the aggregate market value of the common stock held
by non-affiliates of the registrant was approximately $11,921,179.50. This
amount is based on the sale price of $28.50 per share for the registrant's
stock as of such date.
As of March 26, 1998, the registrant had outstanding 619,979 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. (the "Corporation") is a Michigan bank
holding corporation with its headquarters in Kent City, Michigan. The
Corporation was formed on May 20, 1988. The Corporation is the parent
company of Valley Ridge Bank, a Michigan banking corporation. Valley Ridge
Bank is the Corporation's only subsidiary. Valley Ridge Bank owns a 20%
interest in a non-banking corporation, West Shore Computer Services, Inc.,
a data processing firm.
On July 1, 1996, Community Bank Corporation ("Community") merged with
and into the Corporation (the "Merger"). The then-shareholders of
Community received 152,159 shares of the Common Stock of the Corporation,
$10 par value ("Valley Ridge Common Stock"), for the shares of common stock
of Community that they held, in addition to cash in lieu of fractional
shares. The Merger was treated as a pooling of interests for accounting
purposes and the assets and liabilities of Community were carried forward
in the Corporation's accounts.
Effective at the close of business on December 6, 1996, the
Corporation's two subsidiary banks, The Grant State Bank ("Grant") and Kent
City State Bank ("Kent City"), were consolidated into a single banking
corporation (the "Consolidation"). The purpose of the Consolidation was to
allow the Corporation to further realize operational efficiencies and
provide more consistent and improved service to the market areas that the
Corporation had been servicing. The Consolidation resulted in a single
bank named "Valley Ridge Bank" (the "Bank"). On December 31, 1997, the
Bank had assets totaling $131 million, deposits of $105 million and
shareholders' equity of $13 million.
The Corporation 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 the Corporation or
the Bank is dependent upon a single customer or very few customers, the
loss of which would have a materially adverse effect on the Corporation.
The principal markets for the Corporation's financial services are
presently the Michigan communities in which the Bank's offices are located
and the areas immediately surrounding those communities. The Corporation
and the Bank serve these markets through eight offices located in Kent
City, Coopersville, Egelston, Grant, Newaygo, Ravenna, Sparta and White
Cloud, Michigan. This diversification allows the Bank to spread some of
2
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its market risk over a wider area and not be subject to downturns in any
specific community. Within this market area, the Bank competes with
various banks, savings and loan associations and credit unions. The Bank
is the only bank with offices in Kent City and Grant, Michigan. Other
banks and financial institutions have offices in some of the towns where
the Bank's branches are located. The Corporation and the Bank have no
material foreign assets or income.
The business of banking is highly competitive. In addition to
competition from other commercial banks, banks face significant competition
from savings and loan associations, credit unions, finance companies,
insurance companies and investment and brokerage firms. The principal
methods of competition for financial services are price (interest rates
paid on deposits, interest rates charged on borrowings and fees charged for
services) and service (convenience and quality of services rendered to
customers).
Banks and bank holding companies are extensively regulated. The Bank
is chartered under state law and is supervised, examined and regulated by
both the Financial Institutions Bureau of the Michigan Department of
Consumer and Industry Services (the "FIB") and the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board"). The Corporation
is regulated by the Federal Reserve Board. Deposits of the Bank are
insured by the Federal Deposit Insurance Corporation (the "FDIC") to the
extent provided by law.
Federal and state laws that govern banks significantly limit their
business activities in a number of respects. Prior approval of the Federal
Reserve Board, and in some cases various other government agencies, is
required for the Corporation to acquire control of any additional banks or
other operating subsidiaries. The business activities of the Corporation
and the Bank are limited to banking and other activities that are
determined by the Federal Reserve Board to be closely related to banking.
The Corporation is a legal entity separate and distinct from the Bank.
There are legal limitations on the extent to which the Bank can lend or
otherwise supply funds to the Corporation. In addition, payment of
dividends to the Corporation by the Bank is subject to various state and
federal regulatory limitations.
Under Federal Reserve Board policy, the Corporation is expected to act
as a source of financial strength to the Bank and to commit resources to
support it. Under federal law, the FDIC also has authority to impose
special assessments on insured depository institutions to repay FDIC
borrowings from the United States Treasury or other sources and to
establish semi-annual assessment rates on Bank Insurance Fund ("BIF") member
banks to maintain the BIF at the designated reserve ratio required by law.
3
<PAGE>
Banks are subject to a number of federal and state laws and
regulations that have a material impact on their business. These include,
among others, state usury laws, state laws relating to fiduciaries, the
Truth in Lending Act, the Truth in Savings Act, the Equal Credit
Opportunity Act, the Fair Credit Reporting Act, the Expedited Funds
Availability Act, the Community Reinvestment Act, electronic funds transfer
laws, redlining laws, antitrust laws, environmental laws and privacy laws.
The instruments of monetary policy of authorities such as the Federal
Reserve Board may influence the growth and distribution of bank loans,
investments and deposits, and may also affect interest rates on loans and
deposits. These policies may have a significant effect on the operating
results of banks.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") substantially changed the geographic
constraints applicable to the banking industry. The Riegle-Neal Act allows
bank holding companies to acquire banks located in any state in the United
States without regard to geographic restrictions or reciprocity
requirements imposed by state law. Effective June 1, 1997 (or earlier if
expressly authorized by applicable state law), the Riegle-Neal Act also
allowed banks to establish interstate branch networks through acquisitions
of other banks. The establishment of DE NOVO interstate branches or the
acquisition of individual branches of a bank in another state (rather than
the acquisition of an out-of-state bank in its entirety) is allowed by the
Riegle-Neal Act only if specifically authorized by state law. The
legislation allowed individual states to "opt-out" of certain provisions of
the Riegle-Neal Act by enacting appropriate legislation prior to June 1,
1997.
Michigan permits both U.S. and non-U.S. banks to establish branch
offices in Michigan. The Michigan Banking Code permits, in appropriate
circumstances and with the approval of the Commissioner of the FIB,
(i) acquisition of Michigan banks by FDIC-insured banks, savings banks or
savings and loan associations located in other states, (ii) sale by a
Michigan bank of branches to an FDIC-insured bank, savings bank or savings
and loan association located in a state in which a Michigan bank could
purchase branches of the purchasing entity, (iii) consolidation of Michigan
banks and FDIC-insured banks, savings banks or savings and loan
associations located in other states having laws permitting such
consolidation, (iv) establishment of branches in Michigan by FDIC-insured
banks located in other states, the District of Columbia or U.S. territories
or protectorates having laws permitting a Michigan bank to establish a
branch in such jurisdiction, and (v) establishment by foreign banks of
branches located in Michigan.
The nature of the business of the Bank is such that it holds title, on
a temporary or permanent basis, to a number of parcels of real property.
These include properties owned for branch offices and other business
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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.
The Corporation and the Bank employed approximately 85 persons (76
persons on a full-time equivalent basis) at December 31, 1997.
Certain statistical information describing the business of the
Corporation follows. Additional statistical information describing the
business of the Corporation and the Bank appears in Management's Discussion
and Analysis or Plan of Operation included in Item 6 of this report and in
the Consolidated Financial Statements and notes thereto included in Item 7
of this report.
ANALYSIS OF INVESTMENT SECURITIES PORTFOLIO
The following table shows, by class of maturities at December 31,
1997, 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 $ -- --%
Over one through five years 3,063 6.65
Over five through ten years 3,005 6.97
Over ten years -- --
------- ----
Total $ 6,068 6.81%
Obligations of states and political subdivisions
One year or less $ 2,118 9.14%
Over one through five years 2,043 9.64
Over five through ten years 2,736 9.65
Over ten years 9,035 8.58
------- ----
Total $15,932 8.97%
5
<PAGE>
Mortgage-backed securities and other $ 1,300 7.57%
Total $23,300 8.32%
======= ====
<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, 1997, 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, consumer, real
estate construction and agricultural loans outstanding at December 31,
1997. 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 DUE
ONE YEAR YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS
------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Commercial $15,191 $19,785 $1,139
Consumer 1,880 11,455 536
Real estate 9,037 21,939 4,463
Agricultural 1,748 4,378 866
------- ------- ------
$27,856 $57,557 $7,004
======= ======= ======
6
<PAGE>
Loans due after one year
With fixed rates $46,316 $3,206
With floating rates 11,241 3,798
------- ------
Total $57,557 $7,004
======= ======
</TABLE>
AVERAGE DEPOSITS
The time remaining until maturity of time certificates of deposit of
$100,000 or more at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Three months or less $2,696,439
Over three months through six months 2,026,664
Over six months through twelve months 1,946,517
Over twelve months 962,794
Total $7,632,414
==========
</TABLE>
7
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
The Corporation maintains its offices and conducts its business
operations from the principal banking office of the Bank in Kent City,
Michigan. The Corporation owns one parcel of approximately five acres of
land at 450 West Muskegon Street in Kent City, Michigan, and a vacant lot
in an industrial park in Coopersville, Michigan. The land in Kent City is
the site of the new main office of the Corporation and the Bank. This
structure is under construction and is approximately 60% completed (total
24,000 square feet). The estimated cost of the project is $2.8 million.
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 the
Corporation. 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); 5475 Apple Avenue, Egelston (3,300 square
feet); and 11 South State Street, Sparta (1,040 square feet). The Bank
leases its office at 47 South Charles Street, White Cloud, Michigan
(approximately 500 square feet). The Corporation believes all of its and
the Bank's properties are in good condition and repair and are adequately
covered by insurance.
As part of its business, the Bank generates all types of mortgages.
The Bank occasionally purchases mortgages as part of its business, but
typically relies on its ability to generate mortgages for most purposes.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Corporation or the Bank is party, as plaintiff
or defendant, to legal proceedings in the normal course of operations. No
pending litigation is considered material at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
8
<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 the
Corporation. As of December 31, 1997, there were approximately 499 record
holders of shares of Valley Ridge Common Stock.
The Corporation has paid regular cash dividends since June 30, 1989.
The following table summarizes the quarterly cash dividends paid to common
shareholders during the last two full years, retroactively adjusted for a
5-for-4 stock split during October 1997, which was effected in the form
of a stock dividend:
<TABLE>
<CAPTION>
QUARTER 1996 1997
------- ---- ----
<S> <C> <C> <C>
1st $.16 $.16
2nd .16 .16
3rd .16 .16
4th .16 .22
---- ----
Total $.64 $.70
==== ====
</TABLE>
Holders of Valley Ridge Common Stock are entitled to receive dividends
when, as and if declared by the Corporation's board of directors out of
funds legally available for that purpose. The earnings of the Corporation,
through dividends paid by the Bank, are the principal source of funds to
pay cash dividends. Consequently, cash dividends are dependent upon the
earnings, capital needs, regulatory constraints and other factors affecting
the Corporation. Federal and state banking laws and regulations place
certain restrictions on the amount of dividends and loans that a bank can
pay to its parent company. These restrictions are not expected to prohibit
the Corporation from continuing its normal dividend policy.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion is provided by the Corporation's management
as its analysis of the consolidated financial condition and results of
9
<PAGE>
operations of the Corporation. This analysis should be read in conjunction
with the consolidated financial statements and related notes. As more
fully described in Note 2 of the consolidated financial statements, the
Corporation merged with Community Bank Corporation in 1996 in a business
combination accounted for under the pooling-of-interests method of
accounting.
TWELVE MONTHS ENDED DECEMBER 31, 1997 AND 1996
RESULTS OF OPERATIONS. The Corporation reported net income of
$1,481,712 or $2.39 per share for 1997. This was 22.1% higher than the
$1,213,675, or $1.96 per share, earned in 1996. The increase in net income
was primarily a result of increased net interest income from $5,618,111 in
1996 to $5,920,713 in 1997, along with a decrease in expenses due to costs
incurred in connection with the Merger in 1996.
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,
. . . . . . . . . . 1 9 9 7 . . . . . . . . . . . . . . . . . 1 9 9 6. . . . . . . .
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Taxable investment
securities $ 6,707,055 $ 414,079 6.17% $ 6,767,139 $ 409,635 6.05%
Tax-exempt securities <F1> 13,217,462 1,202,770 9.10 11,831,352 1,088,706 9.20
------------ ----------- ------------ ----------
Total securities 19,924,517 1,616,849 8.11 18,598,491 1,498,341 8.06
Loans <F2> 89,814,550 8,648,756 9.63 82,520,055 7,858,041 9.52
Federal funds sold 2,209,315 113,259 5.13 3,678,014 208,483 5.67
------------ ----------- ------------ ----------
Total earning assets 111,948,382 10,378,864 9.27 104,796,560 9,564,865 9.13
Nonaccrual loans 162,015 82,576
Less allowance for loan
losses (1,175,479) (1,204,067)
Cash and due from banks 5,741,211 5,358,165
Other non-earning assets 5,379,438 4,973,138
------------ ------------
Total assets $122,055,567 $114,006,372
============ ============
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
. . . . . . . . . . 1 9 9 7 . . . . . . . . . . . . . . . . . 1 9 9 6. . . . . . . .
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand
deposits $ 13,008,853 $ 210,677 1.62% $ 11,207,524 $ 207,371 1.85%
Savings deposits 28,178,318 740,033 2.63 31,956,320 790,344 2.47
Time deposits 43,747,811 2,550,362 5.83 38,361,407 2,163,767 5.64
------------ ---------- ------------ ----------
Total interest-bearing
deposits 84,934,982 3,501,072 4.12 81,525,251 3,161,482 3.88
Other borrowings 9,015,974 514,853 5.71 6,373,150 361,914 5.68
------------ ---------- ------------ ----------
Total interest-bearing
liabilities 93,950,956 4,015,925 4.27 87,898,401 3,523,396 4.01
---------- ----------
Demand deposits 14,381,087 13,247,326
Other liabilities 1,141,626 1,129,502
------------ ------------
Total liabilities 109,473,669 102,275,229
Average equity 12,581,898 11,731,143
------------ ------------
Total liabilities and
equity $122,055,567 $114,006,372
============ ============
Net interest income $6,362,939 $6,041,469
========== ==========
Rate spread 5.00 5.12
Net interest margin 5.68 5.76
<FN>
<F1> Yields reflected have been computed on a tax equivalent basis using a
marginal tax rate of 34%.
<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 change due to
rate.
11
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
. . . . . . 1997 OVER 1996. . . . . . . . . . .1996 OVER 1995 . . . . . .
TOTAL VOLUME RATE TOTAL VOLUME RATE
----- ------ ---- ----- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest
income
Loans $790,715 $701,549 $ 89,166 $219,001 $473,329 $(254,328)
Taxable securities 4,444 (3,659) 8,103 (117,043) (86,654) (30,389)
Nontaxable securities 114,064 126,256 (12,192) 230,554 254,960 (24,406)
Federal funds sold (95,224) (76,829) (18,395) 38,599 38,724 (125)
-------- -------- -------- -------- -------- ---------
Net change in tax-
equivalent income 813,999 747,317 66,682 371,111 680,359 (309,248)
Increase (decrease) in interest
expense
Interest-bearing demand
deposits 3,306 30,989 (27,683) (60,072) (12,261) (47,811)
Savings deposits (50,311) (97,233) 46,922 (85,252) (4,774) (80,478)
Time deposits 386,595 312,045 74,550 69,972 77,411 (7,439)
Other borrowings 152,939 150,906 2,033 202,824 226,305 (23,481)
-------- -------- -------- -------- -------- ---------
Net change in interest
expense 492,529 396,707 95,822 127,472 286,681 (159,209)
-------- -------- -------- -------- -------- ---------
Net change in tax-
equivalent net
interest income $321,470 $350,610 $(29,140) $243,639 $393,678 $(150,039)
======== ======== ======== ======== ======== =========
</TABLE>
Net interest margin remained strong at 5.68% for 1997, a decline of 8
basis points from 1996. Average loans increased by 8.8% to $89,814,550
with year-to-year increases in consumer and commercial loans of 25.7% and
19.2% in 1997. The increase in consumer loans is primarily due to an
increase in dealer indirect lending. The increase in commercial loans is
due to internal growth generated by commercial loan officers and increased
participations with other financial institutions. Average securities
increased 7.1% to $19,924,517. Yields on assets and rates paid on cost of
funds both increased resulting in positive rate variances which were
partially offset by negative volume variances for federal funds. Average
deposits were stable, increasing 4.8% or $4,543,492. Average other
borrowings increased by nearly $2,650,000 to $9,015,974, and average equity
increased $850,755, a 7.3% increase.
12
<PAGE>
The provision for loan losses was $190,000 and $117,200 for 1997 and
1996. The provision for loan losses represents the adjustment to the
allowance for loan losses needed to maintain the allowance at a level
determined by management to cover inherent losses within the Corporation's
loan portfolio. The allowance for loan losses is based on the application
of projected loss ratios to the risk-ratings of loans, both individually
and by category. Projected loss ratios incorporate such factors as recent
loss experience, current economic conditions and trends, trends in past due
and impaired loans, and risk characteristics of various categories and
concentrations of loans. The activity in the allowance 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,
---------------------------
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year $1,182,154 $1,109,099
Provision charged to operating expense 190,000 117,200
Recoveries on loans previously charged to the allowance 42,725 56,025
Loans charged off (228,107) (100,170)
---------- ----------
Net charge-offs (185,382) (44,145)
---------- ----------
Balance at end of year 1,186,772 1,182,154
========== ==========
Allowance for loan losses as a percentage of:
Total loans as of year-end 1.28% 1.40%
Ratio of net charge-offs to average total loans outstanding
during the year .0021 .0005
</TABLE>
The allowance for loan losses was 57.6% of impaired loans at
December 31, 1997. Loan recoveries were about 43% of the prior year's
charge-offs. Net charge-offs for 1997 increased from $44,000 to $185,000.
Management increased the level of provision expense as a result from
$117,000 in 1996 to $190,000 in 1997. The net effect was a $5,000 increase
in the allowance balance at December 31, 1997. These factors result in a
decrease in the allowance to total loan coverage from 1.40% to 1.28%.
Management believes that this level of reserve is adequate to cover
potential problem credits in the loan portfolio.
The balance of impaired loans at December 31, 1997 of $2,059,760 is
$1,803,656 higher than at December 31, 1996. This increase is due
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<PAGE>
primarily to two commercial credits which are not performing as agreed and
are thus considered impaired under Statement of Accounting Standards No.
114. As indicated in Note 5 of the consolidated financial statements,
management does not anticipate significant loss exposure relating to the
loans classified as impaired and has established specific reserves of only
$2,000 against those loans due to favorable collateral positions.
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 7 1 9 9 6
------- -------
BALANCE AT END OF PRINCIPAL ALLOCATED % OF TOTAL PRINCIPAL ALLOCATED % OF TOTAL
PERIOD ALLOCATED TO BALANCE ALLOWANCE LOANS BALANCE ALLOWANCE LOANS
------------------- ------- --------- ----- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Commercial and agricultural $43,108 $ 268 47.00% $37,820 $ 267 45.00%
Real estate - mortgages 35,438 67 38.00 35,634 67 42.00
Consumer 13,871 202 15.00 11,033 201 13.00
Unallocated 650 647
------- ------ ------ ------- ------ ------
$92,417 $1,187 100.00% $84,487 $1,182 100.00%
======= ====== ====== ======= ====== ======
</TABLE>
Noninterest income was $1,085,728 and $1,089,720 for 1997 and 1996,
respectively. The decrease was primarily a result of reduced service
charge income for 1997 compared to 1996. Noninterest expense decreased to
$4,921,337 compared to $5,010,664 in 1996. The reduction in service charge
income is due to some differences in 1996 in customer deposit account
structure between The Grant State Bank and Valley Ridge Bank, as well as
reduced levels of NSF checks drawn on the Bank. Noninterest expense was
higher in 1996 when compared to 1997 largely because of costs associated
with the Merger. These costs were $223,000 in 1996. Salaries and benefits
increased 2.5% in 1997 to $2,443,936 from $2,383,880 in 1996, and supplies
were up 12.1% to $230,298 while occupancy costs decreased 3.2% to $324,255.
The increase in supplies is due to new supplies required as a result of the
Merger and change of the Bank's name from Kent City State Bank to Valley
Ridge Bank. In addition, data processing expenses increased by $58,997 due
to additional data processing needs of the consolidated Bank.
As discussed in Note 13 to the consolidated financial statements, the
Corporation is constructing a new corporate office in Kent City, Michigan.
The cost of constructing the new facility is estimated at $2.8 million.
14
<PAGE>
While this will result in increased occupancy expense, management believes
the new offices will contribute to the Corporation's continued growth and
increase operating efficiency.
The back room 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 Bank branches. In 1997, the Corporation began realizing
some cost savings through operational efficiencies from the Merger and
expects further realization of cost savings from the Consolidation in 1998.
Following are overall return percentages and the dividend pay-out
ratio for the past two years:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C> <C>
Return on assets 1.13% 1.06%
Return on equity 11.14 10.35
Dividend pay-out ratio 29.29 30.81
Equity to assets ratio 10.16 10.40
</TABLE>
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 13% or $15,227,573 to $130,874,509 at
December 31, 1997 compared to $115,646,936 at December 31, 1996. This
growth is attributable primarily to growth in the loan portfolio which was
funded by deposit growth and increased Federal Home Loan Bank borrowings.
Total liabilities increased by slightly more than 13% or $13,952,565 to
$117,577,133 at December 31, 1997 compared to $103,624,568 at December 31,
1996. The increase in shareholders' equity is due to retention of
earnings, and an increase of $230,730 in the unrealized gain on securities
available for sale.
Total loans increased by 9.4% or $7,930,341 from the balance at
December 31, 1996 to $92,417,342 at December 31, 1997. Deposits increased
by $10,639,388 or 11.3% to $105,174,935 at December 31, 1997. The increase
in deposits is due to the opening of the White Cloud branch during 1997, as
well as a certificate of deposit promotion offered by the Bank. The
remainder of the increase in deposits is due to improved marketing efforts
of the Bank with the change in name and logo of the Bank. The overall
15
<PAGE>
impact of these two changes was a decrease in the net loan to deposit ratio
to 86.7% at December 31, 1997 compared to 88.1% at December 31, 1996. The
allowance for loan losses increased by only $4,618 causing the ratio of
reserves to outstanding loans to decrease from 1.40% at December 31, 1996
to 1.28% at December 31, 1997.
Valley Ridge paid dividends totaling $434,049 in 1997, compared to
$374,528 paid during 1996.
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, cash equivalents and investment securities totaled
$31,803,042 at December 31, 1997 or approximately 24.3% of total assets.
The principal source of funding for the Corporation continues to come from
its deposit customers, which have historically been a stable source of
funds. Other sources of funding include normal loan repayments, sales and
maturities of securities, federal funds available from correspondent banks,
and additional advances available from the Federal Home Loan Bank.
Management believes that the current level of liquidity is sufficient to
meet the normal operating needs of the Bank.
Accrued expenses and other liabilities increased by 62.5%, or $430,334
from 1996. Included in this increase are an increase in federal income tax
payable of 101.8% to $158,730, an increase in accrued deferred director
expenses of 62.3% to $408,345, and an increase in the deferred tax portion
of the unrealized gains on securities available for sale of 49.6% to
$359,971.
Securities sold under agreements to repurchase generally mature within
one to three days from the transaction date. Valley Ridge Bank has pledged
certain investment securities, which are held in safekeeping, as collateral
against these borrowings. Valley Ridge Bank had $283,745 and $400,902 in
repurchase agreements at year end 1997 and 1996.
The Corporation had $11,000,000 and $8,000,000 in advances from the
Federal Home Loan Bank at year end 1997 and 1996. Each advance requires
monthly interest payments at either fixed or adjustable rates. These
borrowings are collateralized by nonspecific loans within the mortgage
portfolio up to the principal outstanding.
The following table shows the interest sensitivity gaps for four
different time intervals as of December 31, 1997.
16
<PAGE>
<TABLE>
<CAPTION>
MATURITY OR REPRICING FREQUENCY
-------------------------------
0-3 MONTHS 3-12 MONTHS 1-5 YEARS 5 YEARS+
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans $ 35,779,000 $ 15,890,000 $38,151,000 $ 2,597,000
Investment securities 100,000 2,252,299 6,172,448 14,775,533
Federal funds sold 3,000,000
------------ ------------ ----------- -----------
Total $ 38,879,000 $ 18,142,299 $44,323,448 $17,371,533
============ ============ =========== ===========
INTEREST-BEARING LIABILITIES
Certificates of deposit $ 13,106,377 $ 21,420,612 $12,980,028 $ 36,940
Savings accounts 15,779,490
Money market accounts 14,768,774
Now accounts 10,617,089
FHLB Loan 3,000,000 8,000,000
------------ ------------ ----------- -----------
Total $ 57,271,730 $ 21,420,612 $20,980,028 $ 36,940
============ ============ =========== ===========
Interest sensitivity gap $(18,392,730) $ (3,278,313) $23,343,420 $17,334,593
============ ============ =========== ===========
Cumulative gap $(21,671,043) $ 1,672,377 $19,006,970
============ =========== ===========
</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 months period; management believes that
these types of accounts are not as sensitive to changes in interest rates
in the short-term as this presentation would indicate. The Corporation is
liability sensitive in periods out to 12 months in the amount of
$21,671,043, however, this is offset in the 1-5 years period with a
positive interest sensitivity gap of $23,343,420. The cumulative gap
increases to $19,006,970 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
17
<PAGE>
price deposits, preferring to maintain a level of lending supported
primarily by its base of core deposits. The Corporation's asset/liability
management committee meets semi-annually, or more often as needed, to
review gap positions and determine management strategies for loan and
deposit pricing, purchase and sale of securities, and other borrowing
decisions.
IMPACT OF INFLATION AND CHANGING PRICES. Most assets and liabilities
of a financial institution are monetary in nature. This differs from most
commercial and industrial companies that have significant investments in
fixed assets or inventories. The effect of inflation on financial
institutions is to a large extent indirect and the measure of such impact
is largely subjective.
Noninterest expenses tend to rise during periods of general inflation.
Inflation levels are to some degree reflected in interest rates. Changes
in interest rates, which are to some extent attributable to changes in
inflation rates or uncertainty concerning changes in inflation rates, do
affect the earnings of the Corporation. The Corporation seeks to protect
net interest income from the adverse effects of interest rate fluctuations
through its asset/liability management program.
The Corporation's management believes that increases in financial
institution assets and deposits result in part from monetary inflation. As
assets increase, the financial institution must increase equity capital
proportionately to maintain appropriate relationships between assets and
equity.
IMPACT OF ACCOUNTING STANDARDS EFFECTIVE IN FUTURE PERIODS. In 1997,
the Financial Accounting Standards Board issued Statement No. 130,
REPORTING COMPREHENSIVE INCOME, which will require, in 1998, the reporting
of comprehensive income (net income plus changes in holding gains and
losses on available for sale securities) and Statement No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which may require
redetermination of industry segment financial information beginning in
1998. Management does not anticipate that adoption of these standards will
have a significant impact on the Corporation's consolidated financial
statements.
YEAR 2000 COMPLIANCE. The Corporation is currently in the process of
addressing an issue that is facing all users of automated information
systems. The issue is that many computer systems that process transactions
based on two digits representing the year of the transaction may recognize
a date using "00" as the year 1900 rather than the year 2000. The inability
to correctly recognize "00" as the year 2000 could affect a wide variety of
automated information systems, such as mainframe applications, personal
computers and communication systems, in the form of software failure,
errors or miscalculations.
18
<PAGE>
The Corporation has developed a plan to prepare for the year 2000.
This plan includes the performance of an inventory of software applications
(approximately 50% complete), communicating with third party vendors and
suppliers, and obtaining certifications of compliance from third party
providers. The Corporation's core computer services provider, West Shore
Computer Services, Inc. ("West Shore") (20% of the stock of which is owned
by the Corporation) has implemented its own plan to perform an inventory of
its systems and ensure that its systems are year 2000 compliant. The
Corporation believes that West Shore has completed approximately 15% of its
plan.
The Corporation will continue to assess the impact of the year 2000
issue on the remainder of its computer-based systems and applications
throughout 1998. The Corporation's goal is to perform tests of its systems
and applications during 1998 and to have all systems and applications
compliant with the century change by early 1999.
The Corporation is continuing to seek assurances that the systems of
other companies on which the Corporation's systems rely will be timely
converted or modified. If such modifications and conversions are not
completed timely, their inability to correctly recognize the year 2000
could have an adverse impact on the operations of the Corporation.
The Corporation believes that with modifications to existing software
and conversions to new software, the year 2000 issue should not pose
significant operational problems for its computer systems and that costs to
be incurred are not expected to be material to the Corporation's results of
operations, liquidity or capital resources.
The date on which the Corporation projects it will complete the year
2000 modifications was based on management's best estimates. There can be
no guarantee that these estimates will be achieved and actual results could
differ from those anticipated. Specific factors that might cause
differences include, but are not limited to, the ability of other companies
on which the Corporation's systems rely to modify or convert their systems
to be year 2000 compliant, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
FORWARD-LOOKING STATEMENTS. This discussion and analysis of financial
condition and results of operations, and other sections of this report,
contain forward-looking statements that are based on management's beliefs,
assumptions, current expectations, estimates and projections about the
financial services industry, the economy, and about the Corporation itself.
Words such as "anticipates," "believes," "estimates," "expects,"
"forecasts," "intends," "is likely," "plans," "predicts," "projects,"
variations of such words and similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions
19
<PAGE>
("Future Factors") that are difficult to predict with regard to timing,
extent, likelihood and degree of occurrence. Therefore, actual results and
outcomes may materially differ from what may be expressed or forecasted in
such forward-looking statements. Furthermore, the Corporation undertakes no
obligation to update, amend or clarify forward-looking statements, whether
as a result of new information, future events or otherwise.
Future Factors include changes in interest rates and interest rate
relationships; demand for products and services; the degree of competition
by traditional and non-traditional competitors; changes in banking
regulations; changes in tax laws; changes in prices, levies and
assessments; the impact of technological advances; governmental and
regulatory policy changes; the outcomes of pending and future litigation
and contingencies; trends in customer behavior as well as their ability to
repay loans; and changes in the national economy. These are representative
of the Future Factors that could cause a difference between an ultimate
actual outcome and a preceding forward-looking statement.
20
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
<TABLE>
VALLLEY RIDGE FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
- ---------------------------------------------------------------------------
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,502,762 $ 4,916,367
Federal funds sold 3,000,000 2,600,000
------------ ------------
Total cash and cash equivalents 8,502,762 7,516,367
Securities available for sale 23,300,280 18,784,567
Other securities 1,345,596 1,128,346
Total loans 92,417,342 84,487,001
Allowance for loan losses (1,186,772) (1,182,154)
------------ ------------
91,230,570 83,304,847
Accrued interest receivable 1,084,995 928,754
Premises and equipment - net 3,428,200 2,249,164
Other assets 1,982,106 1,734,891
------------ ------------
Total assets $130,874,509 $115,646,936
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 16,465,625 $ 14,889,481
Interest-bearing 88,709,310 79,646,066
------------ ------------
Total 105,174,935 94,535,547
Securities sold under agreement to repurchase 283,745 400,902
Other borrowings 11,000,000 8,000,000
Accrued expenses and other liabilities 1,118,453 688,119
------------ ------------
Total liabilities 117,577,133 103,624,568
22
<PAGE>
Shareholders' equity
Common stock, $10 par value: 1,000,000 shares
authorized and 619,979 shares outstanding in
1997; 1,000,000 shares authorized and 496,089
shares outstanding in 1996 6,199,790 4,960,890
Surplus 1,396,736 1,396,736
Retained earnings 5,002,083 5,196,705
Net unrealized gain on securities available for sale 698,767 468,037
------------ ------------
Total shareholders' equity 13,297,376 12,022,368
------------ ------------
Total liabilities and shareholders' equity $130,874,509 $115,646,936
============ ============
</TABLE>
21
<PAGE>
<TABLE>
VALLEY RIDGE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31
- ---------------------------------------------------------------------------
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans, including fees $8,615,472 $7,804,843 $7,600,074
Federal funds sold 113,259 208,483 169,884
Securities
Taxable 414,079 409,635 526,678
Nontaxable 793,828 718,546 566,380
---------- ---------- ----------
Total interest income 9,936,638 9,141,507 8,863,016
Interest expense
Deposits 3,501,072 3,161,482 3,236,834
Other 514,853 361,914 159,090
---------- ---------- ----------
Total interest expense 4,015,925 3,523,396 3,395,924
---------- ---------- ----------
NET INTEREST INCOME 5,920,713 5,618,111 5,467,092
Provision for loan losses 190,000 117,200 122,400
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 5,730,713 5,500,911 5,344,692
Noninterest income
Service charges 796,071 861,687 753,122
Net realized gain on sale of securities 32,391 11,008 9,611
Net realized gain on sale of loans 28,912 31,280 8,931
Other income 228,354 185,745 129,330
---------- ---------- ----------
Total noninterest income 1,085,728 1,089,720 900,994
Noninterest expense
Salaries and benefits 2,443,936 2,383,880 2,172,850
Occupancy 324,255 335,095 276,788
Furniture and fixtures 268,446 302,912 311,595
Legal and professional fees 178,753 393,024 149,708
FDIC insurance premium 9,249 4,000 104,706
23
<PAGE>
Data processing 250,005 191,008 185,880
Supplies 230,298 205,462 144,769
Other expense 1,216,395 1,195,283 1,143,083
---------- ---------- ----------
Total noninterest expenses 4,921,337 5,010,664 4,489,379
---------- ---------- ----------
INCOME BEFORE FEDERAL INCOME TAX 1,895,104 1,579,967 1,756,307
Federal income tax expense 413,392 366,292 423,110
---------- ---------- ----------
NET INCOME $1,481,712 $1,213,675 $1,333,197
========== ========== ==========
Basic earnings per share $ 2.39 $ 1.96 $ 2.16
========== ========== ==========
Weighted average shares outstanding 619,979 619,289 618,151
========== ========== ==========
</TABLE>
24
<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, 1995 $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 ($0.64 per share) (325,039) (325,039)
Net change in unrealized gain
(loss) on securities avail-
able 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 ($0.64 per share) (374,528) (374,528)
Purchase of fractional shares (1,431) (1,431)
Net change in unrealized gain
(loss) on securities avail-
able for sale, net of tax
of $23,062 (44,767) (44,767)
---------- ---------- ---------- -------- -----------
</TABLE>
- ---------------------------------------------------------------------------
(Continued)
25
<PAGE>
<TABLE>
VALLEY RIDGE FINANICAL 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, DECEMBER 31, 1996 $4,960,890 $1,396,736 $5,196,705 $468,037 $12,022,368
Net income for 1997 1,481,712 1,481,712
Stock split (5 for 4) 1,238,900 (1,242,285) (3,385)
Cash dividend ($0.70 per share) (434,049) (434,049)
Net change in unrealized gain
(loss) on securities avail-
able for sale, net of tax
of ($118,861) 230,730 230,730
---------- ---------- ---------- -------- -----------
BALANCE, DECEMBER 31, 1997 $6,199,790 $1,396,736 $5,002,083 $698,767 $13,297,376
========== ========== ========== ======== ===========
</TABLE>
- ---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
26
<PAGE>
<TABLE>
VALLEY RIDGE FINANICAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
- ---------------------------------------------------------------------------
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,481,712 $ 1,213,675 $ 1,333,197
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 229,078 231,798 244,576
Amortization of the premiums and
discounts on securities, net 37,827 94,979 112,300
Provision for loan losses 190,000 117,200 122,400
Gain on sale of securities (32,391) (11,008) (9,611)
Gain on sale of loans (28,912) (31,280) (8,931)
Loans originated for sale (3,998,400) (2,794,525) (1,114,749)
Proceeds from loans sold 4,027,312 2,825,805 1,123,680
Net change in
Accrued interest receivable and
other assets (430,726) (72,828) 99,803
Accrued expenses and other liabilities 311,473 (1,348,115) 1,041,191
------------ ----------- -----------
Net cash from operating activities 1,786,973 225,701 2,943,856
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans (8,115,723) (3,053,012) (5,535,275)
Proceeds from
Sale of securities available for sale 4,529,869 4,516,521 6,182,899
Repayments and maturities of securities
available for sale 3,489,823 4,539,552 135,022
Repayments and maturities of securities
held to maturity 2,053,546
Purchases of
Securities available for sale (12,191,250) (9,756,265) (9,208,090)
Securities held to maturity (800,000)
Federal Reserve stock (11,250) (24,000)
FHLB stock (206,000) (417,400) (263,600)
Premises and equipment (1,380,844) (108,427) (166,108)
------------ ----------- -----------
Net cash from investing activities (13,885,375) (4,279,031) (7,625,606)
</TABLE>
- ---------------------------------------------------------------------------
(Continued)
27
<PAGE>
<TABLE>
VALLEY RIDGE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
- ---------------------------------------------------------------------------
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock $ 36,675 $ 20,690
Payments for fractional shares $ (3,385) (1,431)
Net increase (decrease) in short-term
borrowings (117,157) 400,902 (100,000)
Net increase (decrease) in deposits 10,639,388 (1,775,372) 5,430,193
Advances from Federal Home Loan Bank 8,000,000 4,000,000 4,800,000
Payments on Federal Home Loan
Bank advances (5,000,000) (800,000) (2,009,000)
Dividends paid (434,049) (374,528) (325,039)
----------- ----------- -----------
Net cash from financing activities 13,084,797 1,486,246 7,816,844
----------- ----------- -----------
Net change in cash and cash equivalents 986,395 (2,567,084) 3,135,094
Cash and cash equivalents at beginning of year 7,516,367 10,083,451 6,948,357
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,502,762 $ 7,516,367 $10,083,451
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 3,924,056 $ 3,523,774 $ 3,361,552
Income taxes 418,556 597,274 473,348
</TABLE>
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.
28
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include Valley Ridge Financial Corp. and its wholly-owned subsidiary,
Valley Ridge Bank, after elimination of significant intercompany
transactions and accounts.
NATURE OF OPERATIONS: Valley Ridge Financial Corp. ("Corporation") is
a regional, community-based financial institution, that owns all of the
outstanding stock of Valley Ridge Bank ("Bank"). The Bank's loan and
deposit accounts are primarily with customers located in Western Michigan,
within the counties of Kent, Ottawa, Muskegon and Newaygo.
USE OF ESTIMATES: To prepare financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and future results could differ. The allowance for
loan losses and fair values of financial instruments are particularly
subject to change.
CASH FLOW REPORTING: Cash and cash equivalents include cash on hand,
demand deposits with other financial institutions and federal funds sold.
Cash flows are reported net for customer loan and deposit transactions,
interest-bearing time deposits with other financial institutions and short-
term borrowings with maturities of 90 days or less.
SECURITIES: Securities are classified as held to maturity and carried
at amortized cost when management has the positive intent and ability to
hold them to maturity. Securities are classified as available for sale
when they might be sold before maturity. Securities available for sale are
carried at fair value, with unrealized holding gains and losses reported
separately in shareholders' equity, net of tax. Securities are written
down to fair value when a decline in fair value is not temporary. Interest
and dividend income, adjusted by amortization of purchase premium or
discount, is included in earnings.
LOANS: Loans are reported at the principal balance outstanding, net
of unearned interest, deferred loan fees and costs, and an allowance for
loan losses. Interest income is reported on the interest method and
includes amortization of net deferred loan fees and costs over the loan
term.
29
<PAGE>
Interest income is not reported when full loan repayment is in doubt,
typically when payments are past due over 90 days. Payments received on
such loans are reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a
valuation allowance, increased by the provision for loan losses and
recoveries, and decreased by charge-offs. Management estimates the
allowance balance required based on past loan loss experience, known and
inherent risks in the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's
judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is
not expected. Impairment is evaluated in aggregate for smaller-balance
loans of similar nature such as residential mortgage, consumer and credit
card loans, and on an individual loan basis for other loans. If a loan is
impaired, a portion of the allowance is allocated so that the loan is
reported, net, at the present value of estimated future cash flows using
the loan's existing rate. Loans are evaluated for impairment when payments
are delayed, typically 90 days or more, or when it is probable that all
principal and interest amounts will not be collected according to the
original terms of the loan.
- ---------------------------------------------------------------------------
(Continued)
30
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost
less accumulated depreciation. Depreciation is computed using both
straight-line and accelerated methods over the estimated useful lives of
the respective assets.
OTHER REAL ESTATE OWNED: Real estate properties acquired in
collection of a loan are recorded at fair value at acquisition. Any
reduction to fair value from the carrying value of the related loan is
accounted for as a loan loss. After acquisition, a valuation allowance
reduces the reported amount to the lower of the initial amount or fair
value less costs to sell. Expenses, gains and losses on disposition, and
changes in the valuation allowance are reported in other expenses. The
Corporation held approximately $61,000 of other real estate at December 31,
1997. The Corporation did not hold other real estate at December 31, 1996.
SERVICING RIGHTS: Servicing rights represent the allocated value of
servicing rights retained on loans sold. Servicing rights are expensed in
proportion to, and over the period of, estimated net servicing revenues.
Impairment is evaluated based on the fair value of the rights, using
groupings of the underlying loans as to interest rates and then,
secondarily, as to geographic and prepayment characteristics. Any
impairment of a grouping is reported as a valuation allowance.
INTANGIBLES: Purchased intangibles, primarily goodwill and core
deposit value, are recorded at cost and amortized over the estimated lives.
Goodwill amortization is straight-line over 25 years, and core deposit
amortization is accelerated over 12 years.
LONG-TERM ASSETS: These assets are reviewed for impairment under
Statement of Financial Accounting Standards (SFAS) No. 121 when events
indicate the carrying amount may not be recoverable.
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
Bank.
The Corporation also maintains an Employee Stock Ownership Plan (ESOP)
covering substantially all full-time employees after one year of service,
31
<PAGE>
which invests primarily in stock of Valley Ridge Financial Corp. The ESOP
is accounted for in accordance with AICPA Statement of Position 93-6.
Accordingly, compensation expense is recorded based on the cash or fair
value of shares contributed or committed to be contributed to the plan.
INCOME TAXES: Income tax expense is the sum of the current year
income tax return liability plus the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the expected future
tax consequences of temporary differences between the carrying amounts and
tax bases of assets and liabilities, computed using enacted tax rates. A
valuation allowance, if needed, reduces deferred tax assets to the amount
expected to be realized.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial
instruments are estimated using relevant market information and other
assumptions, as more fully disclosed separately. Fair value estimates
involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments and other factors, especially in
the absence of broad markets for particular items. Changes in assumptions
or in market conditions could significantly affect the estimates.
- ---------------------------------------------------------------------------
(Continued)
32
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
DIVIDEND RESTRICTIONS: Banking regulations require the maintenance of
certain capital levels and may limit the amount of dividends which may be
paid by the Bank to the Corporation or by the Corporation to shareholders.
EARNINGS PER SHARE: Basic earnings per share is based on weighted-
average common shares outstanding, including shares held by the ESOP.
Diluted earnings per share further assumes issue of any dilutive potential
common shares. For the periods presented, there were no potential common
shares. The accounting standard for computing earnings per share (EPS) was
revised for 1997, but had no effect on the EPS data reported by the
Corporation for 1997 or prior years. Earnings per share data are restated
for all subsequent stock dividends and splits.
RECLASSIFICATIONS: Some items in prior financial statements have been
reclassified to conform with the current presentation.
NOTE 2 - MERGER
Valley Ridge Financial Corp. issued 152,159 shares of common stock in
July 1996, in exchange for all of the outstanding shares of Community Bank
Corporation common stock. The transaction was structured as a tax-free
exchange and accounted for under the pooling-of-interests method of
accounting. Accordingly, the Corporation's 1996 and 1995 consolidated
financial statements include the results of Community Bank Corporation for
all periods presented.
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 $448,000 and $320,000 at December 31, 1997
and 1996, respectively.
NOTE 4 - SECURITIES
The amortized cost and fair values of securities at year-end were as
follows:
33
<PAGE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUES
---- ----- ------ ------
<S> <C> <C> <C> <C>
1997
- -----
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 6,007,814 $ 60,431 $ 6,068,245
Obligations of states and
political subdivisions 14,964,077 986,125 $(17,868) 15,932,334
----------- ---------- -------- -----------
20,971,891 1,046,556 (17,868) 22,000,579
Mortgage-backed securities 1,269,652 30,407 (358) 1,299,701
----------- ---------- -------- -----------
$22,241,543 $1,076,963 $(18,226) $23,300,280
=========== ========== ======== ===========
</TABLE>
- ---------------------------------------------------------------------------
(Continued)
34
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
NOTE 4 - SECURITIES (Continued)
<TABLE>
<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
=========== ========== ======== ===========
</TABLE>
OTHER SECURITIES
<TABLE>
<CAPTION>
COST AND
FAIR VALUE
----------
<S> <C> <C>
1997
Federal Reserve stock $ 180,000
Federal Home Loan Bank stock 1,160,600
Farmer Mac stock 4,996
----------
$1,345,596
==========
35
<PAGE>
1996
Federal Reserve stock $ 168,750
Federal Home Loan Bank stock 954,600
Farmer Mac stock 4,996
----------
$1,128,346
==========
</TABLE>
The amortized cost and fair values of debt investment securities at
year-end 1997, 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. Securities not due at a single maturity date,
mortgage-backed securities, are shown separately.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUES
---- ------
<S> <C> <C>
Due in one year or less $ 2,104,682 $ 2,118,422
Due after one year through five years 4,971,832 5,106,625
Due after five years through ten years 5,447,285 5,740,408
Due after ten years 8,448,092 9,035,124
----------- -----------
20,971,891 22,000,579
Mortgage-backed securities 1,269,652 1,299,701
----------- -----------
$22,241,543 $23,300,280
=========== ===========
</TABLE>
- ---------------------------------------------------------------------------
(Continued)
36
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
NOTE 4 - SECURITIES (Continued)
Gross realized gains from sales of securities available for sale were
$41,048, $27,748 and $39,295 for 1997, 1996 and 1995. Gross losses on
those sales were $8,657, $16,740 and $29,684 for 1997, 1996 and 1995.
Securities with a par value of approximately $400,000 and $1,526,000,
were pledged to secure public deposits and for various other purposes as
required or permitted by law at December 31, 1997 and 1996. Securities
with a par value of $1,000,000 were pledged to secure short-term borrowings
at December 31, 1997.
NOTE 5 - LOANS
Year-end loans are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commercial $36,115,052 $30,295,008
Residential real estate 35,438,635 35,634,383
Consumer 13,871,065 11,032,450
Agricultural 6,992,590 7,525,160
----------- -----------
$92,417,342 $84,487,001
=========== ===========
</TABLE>
Loans serviced for others were $12,215,000 and $10,351,000 at year-end 1997
and 1996.
Activity in the allowance for loan losses is as follows:
37
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year $1,182,154 $1,109,099
Provision charged to operating expense 190,000 117,200
Recoveries on loans previously
charged to the allowance 42,725 56,025
Loans charged off (228,107) (100,170)
---------- ----------
Balance at end of year $1,186,772 $1,182,154
========== ==========
</TABLE>
- ---------------------------------------------------------------------------
(Continued)
38
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
NOTE 5 - LOANS (Continued)
Impaired loans are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Year-end loans with no allowance for loan losses allocated $2,059,760 $256,104
Year-end loans with allowance for loan losses allocated 11,225 3,474
Amount of the allowance allocated 2,000 1,500
Average of impaired loans during the year 1,247,719 119,578
Interest income recognized during impairment 103,995 11,541
Cash basis interest income recognized 109,515 5,272
</TABLE>
NOTE 6 - PREMISES AND EQUIPMENT - NET
Year-end premises and equipment are as follows:
<TABLE>
<CAPTION>
ACCUMULATED CARRYING
COST DEPRECIATION VALUE
---- ------------ -----
<S> <C> <C> <C>
1997
Land $ 305,422 $ 305,422
Building and improvements 2,398,275 $ (928,748) 1,469,527
Construction in progress 965,194 965,194
Furniture and equipment 2,734,763 (2,046,706) 688,057
---------- ----------- ----------
$6,403,654 $(2,975,454) $3,428,200
========== =========== ==========
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
---------- ----------- ----------
39
<PAGE>
$5,021,966 $(2,772,802) $2,249,164
========== =========== ==========
</TABLE>
- ---------------------------------------------------------------------------
(Continued)
40
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
NOTE 7 - DEPOSITS
Deposits at year-end are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Noninterest-bearing demand deposit accounts $ 16,465,625 $14,889,481
Money market accounts 14,768,774 16,083,109
NOW and Super NOW accounts 10,617,089 10,096,697
Savings accounts 15,779,490 15,663,298
Certificates of deposit 47,543,957 37,802,962
------------ -----------
$105,174,935 $94,535,547
============ ===========
</TABLE>
At year-end 1997 and 1996, stated maturities of all time deposits were as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C> <C>
1997 $22,483,104
1998 $34,526,988 11,583,040
1999 9,577,930 2,174,227
2000 2,510,232 719,059
2001 445,933 719,059
2002 445,933 124,473
Thereafter 36,941
----------- -----------
$47,543,957 $37,802,962
=========== ===========
</TABLE>
Time deposit accounts of $100,000 or more were approximately $7,632,000 and
$5,170,000 at year-end 1997 and 1996.
- ---------------------------------------------------------------------------
(Continued)
41
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
NOTE 8 - BORROWINGS
At year-end 1997, 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>
Variable 5.779 October 22, 1998 $ 3,000,000
Fixed 5.230 February 1, 1999 1,000,000
Fixed 5.260 February 1, 1999 2,000,000
Fixed 6.070 July 9, 1999 2,000,000
Fixed 6.080 September 22, 1999 3,000,000
-----------
$11,000,000
===========
</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.
NOTE 9 - FEDERAL INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current expense $428,296 $440,219 $485,215
Deferred benefit (14,904) (73,927) (62,105)
-------- -------- --------
$413,392 $366,292 $423,110
======== ======== ========
</TABLE>
42
<PAGE>
Year-end deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 218,266 $ 256,601
Deferred loan fees 40,258 32,894
Deferred compensation 129,473 85,168
Core deposit amortization 31,420 29,270
Other 8,034 25,639
--------- ---------
427,451 429,572
Deferred tax liabilities
Fixed assets (153,369) (154,760)
Net unrealized appreciation on
securities available for sale (359,971) (241,110)
Accrual to cash (47,553) (71,330)
Other (15,585) (7,442)
--------- ---------
(576,478) (474,642)
--------- ---------
Net deferred tax liability $(149,027) $ (45,070)
========= =========
</TABLE>
- ---------------------------------------------------------------------------
(Continued)
43
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
NOTE 9 - FEDERAL INCOME TAXES (Continued)
No valuation allowance has been recorded against the deferred tax assets.
The effective tax rate differs from the statutory federal income tax rate
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rates $644,335 $537,189 $597,144
Increase (decrease) from
Tax-exempt interest (283,084) (273,857) (221,212)
Nondeductible interest expense 29,693 29,156 23,791
Income related to officers' life insurance (9,561) (11,860) (13,910)
Nondeductible acquisition costs 64,430 27,006
Others, net 32,009 21,234 10,291
-------- -------- --------
Income tax expense $413,392 $366,292 $423,110
======== ======== ========
</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 $120,000, $125,000 and $83,700 in 1997, 1996
and 1995. Additionally, the Corporation made matching contributions to the
401(k) plan of $38,600, $28,600 and $26,900 in 1997, 1996 and 1995.
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
44
<PAGE>
Corporation made ESOP contributions totaling $35,000 in 1997, $20,000 in
1996, and $30,000 in 1995. At December 31, 1996, the plan had no
indebtedness and held 17,356 shares of stock, allocated to employees and
voted by trustees of the plan. Upon distribution of shares to a
participant, the participant has the right to require the Corporation to
purchase shares at their fair value in accordance with the terms and
conditions of the plan. The fair value of the shares allocated as of
December 31, 1997, was $485,968.
- ---------------------------------------------------------------------------
(Continued)
45
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
NOTE 10 - EMPLOYEE BENEFIT PLANS (Continued)
Community Bank Corporation sponsored a noncontributory defined benefit
pension plan covering substantially all of its employees. As of
December 31, 1996, the plan was terminated. During 1997, the Corporation
recognized a gain of approximately $12,000 on settlement of the plan. 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 were invested in certificates of deposit and other interest-bearing
securities at December 31, 1996.
Pension expense (income) was ($24,077) and $10,541 in 1996 and 1995.
The components of net pension expense (income) are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Service cost - benefits earned during the period $ 16,904 $ 13,541
Interest cost on the projected benefit obligation 23,664 16,726
Return on plan assets (34,181) (46,990)
Net amortization and deferral 13,126 27,264
Net effect of plan curtailment (43,590)
-------- --------
$(24,077) $ 10,541
======== ========
</TABLE>
The funded status of the plan and amounts recogized in the consolidated
balance sheet, after adjustments for curtailment, are as follows:
46
<PAGE>
<TABLE>
<CAPTION>
1996
----
<S> <C>
Accumulated benefit obligation
Vested $(147,309)
Nonvested (1,651)
---------
Projected benefit obligation (148,960)
Plan assets at fair value 211,503
---------
Excess of plan assets over projected benefit obligation 62,543
Unrecognized net gain (12,887)
Unrecognized net transition asset (11,107)
--------
Prepaid pension expense $ 38,549
========
Major assumptions used:
Discount rate 7.50%
Rate of increase in compensation levels 4.00
Expected long-term rate of return on plan assets 8.00
</TABLE>
- ---------------------------------------------------------------------------
(Continued)
47
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
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, 1997 and 1996 was $1,596,551 and $1,347,969 which was
included in other assets. The compensation expense was $165,656, $160,400
and $94,400 for 1997, 1996 and 1995, respectively. The portion of the
compensation expense deferred for 1997, 1996 and 1995 was $153,381,
$109,800 and $184,600, respectively. The accrued deferred compensation
liability was $408,345 and $251,564 as of December 31, 1997 and 1996.
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, 1997 and 1996, the
Corporation had approximately $1,844,000 and $1,047,000 in outstanding
loans to directors and executive officers. New loans and repayments were
$2,470,000 and $1,673,000, respectively, during 1997.
Related party deposits totaled approximately $3,519,000 and $1,276,000
at year-end 1997 and 1996.
NOTE 13 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the
consolidated financial statements, including claims and legal actions
arising in the ordinary course of business. In the opinion of management,
after consultation with legal counsel, the ultimate disposition of these
matters is not expected to have a material effect on financial condition or
results of operations.
48
<PAGE>
Some financial instruments are used to meet customer financing needs
and to reduce exposure to interest rate changes. These financial
instruments include commitments to extend credit and standby letters of
credit. These involve, to varying degrees, credit and interest-rate risk
in excess of the amount reported in the financial statements.
- ---------------------------------------------------------------------------
(Continued)
49
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
NOTE 13 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
(Continued)
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
commitment, and generally have fixed expiration dates. Standby letters of
credit are conditional commitments to guarantee a customer's performance to
a third party. Exposure to credit loss if the other party does not perform
is represented by the contractual amount for commitments to extend credit
and standby letters of credit. Collateral or other security is normally
not obtained for these financial instruments prior to their use, and many
of the commitments are expected to expire without being used.
Commitments at year-end are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commitments to make loans $ 2,212,220 $6,437,396
Commercial unused lines of credit 14,210,000 9,746,000
Consumer unused lines of credit 1,959,000 1,578,565
Standby letters of credit 265,000 50,000
</TABLE>
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 is constructing a new corporate office in Kent City.
The cost of constructing the new facility is estimated to be approximately
$2.8 million. Construction in progress is $965,000 at December 31, 1997.
Management anticipates completion of the facility in June 1998.
- ---------------------------------------------------------------------------
(Continued)
50
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
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.
Financial instruments at year-end are as follows, in thousands:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
------- -------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
(000's omitted) (000's omitted)
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term investments $ 8,503 $ 8,503 $ 7,516 $ 7,516
Securities available for sale 23,300 23,300 18,785 18,785
Other securities 1,346 1,346 1,128 1,128
Loans - net 91,231 90,546 83,305 83,741
Accrued interest receivable 1,085 1,085 929 929
Financial liabilities
Deposit liabilities 105,175 104,992 94,536 94,931
Accrued interest payable 303 303 211 211
Short-term borrowings 284 284 401 401
Other borrowings 11,000 10,995 8,000 7,601
</TABLE>
- ---------------------------------------------------------------------------
(Continued)
51
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
NOTE 15 - REGULATORY MATTERS
The Corporation and Bank are subject to regulatory capital
requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve quantitative
and qualitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although
these terms are not used to represent overall financial condition. If
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as is
asset growth and expansion, and plans for capital restoration are required.
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>
1997
- -----
Total capital (to risk weighted assets) $13.5 14.8% $7.3 8.0% $9.1 10.0%
Tier 1 capital (to risk weighted assets) 12.3 13.6 3.6 4.0 5.5 6.0
Tier 1 capital (to average assets) 12.3 9.6 5.1 4.0 6.4 5.0
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
</TABLE>
The Bank was categorized as well capitalized at year end 1997 and 1996.
- ---------------------------------------------------------------------------
(Continued)
52
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
NOTE 16 - VALLEY RIDGE FINANCIAL CORP. (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS
Following are condensed parent company only financial statements.
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash $ 74,416 $ 58,383
Investment in subsidiary 13,072,724 11,813,749
Other assets 150,263 150,263
----------- -----------
Total assets $13,297,403 $12,022,395
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 27 $ 27
Shareholders' equity 13,297,376 12,022,368
----------- -----------
Total liabilities and equity $13,297,403 $12,022,395
=========== ===========
</TABLE>
- ---------------------------------------------------------------------------
(Continued)
53
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
NOTE 16 - VALLEY RIDGE FINANCIAL CORP. (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS (Continued)
<TABLE>
CONDENSED STATEMENTS OF INCOME
<CAPTION>
. . . . . .YEARS ENDED DECEMBER 31, . . . .
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income
Dividends from subsidiary $ 525,000 $ 581,145 $ 454,948
Other 39 39 633
---------- ---------- ----------
Total income 525,039 581,184 455,581
Expenses
Other operating expenses 71,572 252,000 141,565
---------- ---------- ----------
INCOME BEFORE INCOME TAX AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARIES 453,467 329,184 314,016
Federal income tax credit (24,321) (31,308) (7,545)
Equity in undistributed net income of subsidiary 1,003,924 853,183 1,011,636
---------- ---------- ----------
NET INCOME $1,481,712 $1,213,675 $1,333,197
========== ========== ==========
</TABLE>
- ---------------------------------------------------------------------------
(Continued)
54
<PAGE>
VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------
NOTE 16 - VALLEY RIDGE FINANCIAL CORP. (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS (Continued)
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
. . . . . . YEARS ENDED DECEMBER 31,. . . .
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income $1,481,712 $1,213,675 $1,333,197
Adjustments to reconcile net income to
net cash from operating activities
Equity in undistributed earnings
of subsidiary (1,028,245) (884,491) (1,011,636)
Change in other assets 4,541
Change in other liabilities (27,651) 18,678
---------- ---------- ----------
Net cash from operating activities 453,467 301,533 344,780
Financing activities
Dividends paid (434,049) (374,528) (325,039)
Sale of common stock 36,675 20,690
Purchase of fractional shares (3,385) (1,431)
---------- ---------- ----------
Net cash from financing activities (437,434) (339,284) (304,349)
---------- ---------- ----------
Net change in cash 16,033 (37,751) 40,431
Cash at beginning of year 58,383 96,134 55,703
---------- ---------- ----------
CASH AT END OF YEAR $ 74,416 $ 58,383 $ 96,134
========== ========== ==========
</TABLE>
NOTE 17 - SHAREHOLDERS' EQUITY
On September 24, 1997, the Board of Directors approved a five-for-four
split of the Corporation's common stock for shareholders, effected in the
55
<PAGE>
form of a stock dividend. 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 split.
Issuance of the Corporation's common stock as part of the merger with
Community Bank Corporation has been reflected at January 1, 1995 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.
56
<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. as of December 31, 1997 and 1996 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, 1997.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1995 financial
statements of Community Bank Corporation, which statements reflect net
income of $363,672 for the year ended December 31, 1995. 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 for the year ended December 31, 1995, 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. at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
s/Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 20, 1998
57
<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.
The Corporation's board of directors is divided into three classes,
which are as nearly equal in number as possible. Each director is a member
of a class that has a term of office of three years, with the term of
office of one class expiring at the annual meeting of shareholders in each
successive year.
All directors of the Corporation also have been directors of the Bank
since the Consolidation. Directors who were directors of Community before
the Merger also concurrently served as directors of Grant from the date of
their election or appointment as a director of Community until the
Consolidation. Directors who were not directors of Community also
concurrently served as directors of Kent City from the date of their
election or appointment as a director of the Corporation until the
Consolidation.
Except as otherwise indicated, all of the named individuals have had
the same principal employment for over five years. Executive officers are
appointed annually and serve at the pleasure of the board of directors of
the Corporation. All executive officers of the Corporation are also
directors of the Corporation.
DIRECTORS WITH TERMS EXPIRING IN 1998
Gary Gust (age 53) has been a director of the Corporation and/or
Kent City since 1991. Mr. Gust is President and sole shareholder of Gust
Construction Company, a general contractor.
Ronald L. Hansen (age 53) has been a director of the Corporation since
the Merger and was a director of Community from 1990 until the Merger. Mr.
Hansen has been Vice President of the Corporation since the Merger and a
Senior Vice President of the Bank since the Consolidation. Prior to that,
Mr. Hansen was Secretary of Community from 1994 until the Merger, President
and Chief Executive Officer of Grant from 1994 until the Consolidation, a
director of Grant from 1982 until the Consolidation and Vice President and
Cashier of Grant from 1982 until 1994. Prior to that, Mr. Hansen served
Grant in various management and other capacities since 1973.
58
<PAGE>
Robert C. Humphreys (age 59) has been a director of the Corporation
and/or Kent City since 1988. Mr. Humphreys has been Chairman of the Board
of the Corporation and the Bank (and, before the Consolidation, Kent City)
since 1993. Mr. Humphreys owns and operates Humphreys Orchards, a producer
of fruit.
Ben J. Landheer (age 62) has been a director of the Corporation since
the Merger and was a director of Community and/or Grant from 1991 until the
Merger. Mr. Landheer owns and operates Landheer Insurance Agency, an agent for
insurance companies offering a broad range of insurance products.
DIRECTORS WITH TERMS EXPIRING IN 1999
Michael E. McHugh (age 48) has been a director of the Corporation and/or
Kent City since 1989. Mr. McHugh is Secretary and Treasurer of the Corporation.
Mr. McHugh has also been Executive Vice President of the Bank (and, before the
Consolidation, Kent City) since 1987.
Dennis C. Nelson (age 49) has been a director of the Corporation since
the Merger and was a director of Community and/or Grant from 1985 until the
Merger. Mr. Nelson is a dentist practicing in Grant, Michigan.
John J. Niederer (age 62) has been a director of the Corporation and/or
Kent City since 1994. Mr. Niederer has been President and sole shareholder of
Greenridge Fruit, Inc., a distributor of fruit, since 1990. Prior to that, Mr.
Niederer was Vice President of Wm. Bolthouse Farms, Inc., a producer and
distributor of vegetables.
Paul K. Spoelman (age 62) has been a director of the Corporation and/or
Kent City since 1994. Mr. Spoelman is a shareholder and founder of Spoelman,
Hovingh & Feldt, Inc., an accounting firm.
Donald Swanson (age 63) has been a director of the Corporation and/or Kent
City since 1981. Mr. Swanson is Chairman and a majority shareholder of Swanson
Pickle Co., Inc., a producer and distributor of pickles.
Donald VanSingel (age 54) has been Vice Chairman and a director of the
Corporation since the Merger and was Chairman of Community and/or Grant
from 1982 until the Merger and a director of Community and/or Grant from
1973 until the Merger. Mr. VanSingel has been a consultant for
Governmental Consultant Services, Inc. since 1993. Prior to that, Mr.
VanSingel served in the Michigan House of Representatives.
DIRECTORS WITH TERMS EXPIRING IN 2000
Jerome B. Arends (age 53) has been a director of the Corporation and/or
Kent City since 1987. Mr. Arends is Chief Executive Officer and President of
Ravenna Farm Equipment, Inc., a distributor of farm implements and equipment.
59
<PAGE>
K. Timothy Bull (age 50) has been a director of the Corporation and/or Kent
City since 1993 and was also a director of the Corporation from 1988 until 1991.
Mr. Bull is President and sole shareholder of Moon Lake Orchards, Inc., a
producer of fruit.
Richard L. Edgar (age 53) has been a director of the Corporation and/or
Kent City since 1974. Mr. Edgar has been President and Chief Executive Officer
of the Corporation since 1988, President and Chief Executive Officer of the Bank
(and, before the Consolidation, Kent City) since 1987. Prior to that, Mr.
Edgar served Kent City in various management and other capacities since
1963. Mr. Edgar is also a director of West Shore Computer Services, Inc.,
a data processing company in which the Bank is a 20% shareholder.
Fred J. Finkbeiner (age 68) has been a director of the Corporation
since the Merger and was a director of Community and/or Grant from 1965
until the Merger. In 1996, Mr. Finkbeiner retired as a Sales Manager at V
& P Produce, a distributor of vegetables located in Grant, Michigan.
As of the date of this Form 10-KSB, directors and officers of the
Corporation and persons beneficially owning more than 10% of the
outstanding shares of Valley Ridge Common Stock were not subject to the
reporting obligations of Section 16(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act").
ITEM 10. 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, 1997, of the Chief Executive Officer of the
Corporation and each executive officer of the Corporation who earned cash
compensation in excess of $100,000 during 1997. Mr. Edgar and Mr. McHugh
were compensated by the Bank in the capacities indicated in the table.
60
<PAGE>
<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 1997 $123,510 $32,900 $31,801
Director, President 1996 119,950 30,000 27,403
and Chief Executive 1995 112,455 26,534 26,031
Officer of the Corporation
and the Bank
Michael E. McHugh 1997 $ 88,050 $19,740 $18,406
Director, Secretary and 1996 86,250 18,000 18,055
Treasurer of the Corporation 1995 80,663 16,124 16,373
and Director 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 1997 includes: (i) contributions by the
Bank under the Profit Sharing/401(k) Plan; (ii) contributions by the
Corporation under the Valley Ridge Employee Stock Ownership Plan; and
(iii) amounts paid by the Bank for life insurance. The amounts
included for each such factor for 1997 are:
(I) (II) (III)
------- ------ ------
Mr. Edgar $21,328 $3,455 $7,018
Mr. McHugh 12,719 2,318 3,369
</FN>
</TABLE>
During 1997, 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 the Corporation or the Bank also received
$100 per committee meeting attended. The Corporation has entered into
deferred compensation agreements with some of its directors under which
payments will be made to the directors after their retirement.
61
<PAGE>
Effective January 1, 1997, the Bank entered into Executive Employee
Salary Continuation Agreements (the "Agreements") with each of its
executive officers. Under the Agreements, an executive officer is eligible
to receive payment of a monthly retirement benefit from the Bank for 180
months following normal retirement date (age 65). An executive officer may
retire early, after age 60, and receive a reduced benefit, or retire after
age 65 and receive an increased benefit. If an executive officer
terminates employment prior to early retirement, a vested benefit is
payable. Vesting is based on five years of employment commencing January
1, 1997, with 100% vesting given upon death, disability or other
involuntary termination of employment for reasons other than "cause." If
an executive officer dies before receiving the entire benefit, remaining
payments will be made to a beneficiary. If an executive officer is
terminated prior to early retirement, without "cause" but following a
"change in control" of the Bank (as these terms are defined in the
Agreements), the executive officer will receive the vested benefit plus
payment of one year's salary. The monthly normal retirement benefit for
each executive officer is $3,275 for Mr. Edgar, $758 for Mr. McHugh, and
$1,825 for Mr. Hansen
Effective January 13, 1998, Mr. Edgar and Mr. McHugh have employment
agreements with the Corporation under which Mr. Edgar serves as President
and Chief Executive Officer, and Mr. McHugh serves as Secretary, Treasurer
and Chief Financial Officer, of the Corporation and the Bank. Mr. Edgar's
agreement provides for a minimum annual salary of $116,761, or any
increased amount authorized by the Board of Directors, and Mr. McHugh's
agreement provides for a minimum annual salary of $80,340, or any increased
amount authorized by the Board of Directors. Both agreements provide for
annual salary reviews and bonuses in the discretion of the Board of
Directors. Both agreements provide that if the Corporation terminates the
executive's employment other than for "cause" or due to the executive's
extended "disability" (as those terms are defined in the agreements), or if
the executive terminates the employment for "good reason" (as defined in
the agreements), the executive will be entitled to severance pay consisting
of continuation of his salary and benefits for the remaining term of the
his agreement. Severance pay would be reduced by the amount of any
disability benefits received by the executive (other than benefits under a
specifically identified disability insurance policy) and would also be
reduced as much as necessary to avoid any part of the executive's
compensation from the Corporation being classified as "excess parachute
payments" under Section 280G of the Internal Revenue Code. Severance pay
is subject to discontinuance if the executive materially competes with the
Corporation. The term of Mr Edgar's agreement is five years and extended
one year on each anniversary of the effective date unless the Board of
Directors gives written notice of its intention not to extend the term.
The term of Mr. McHugh's agreement is five years.
62
<PAGE>
Ronald L. Hansen has an employment agreement with the Corporation.
Under this agreement, Mr. Hansen is to serve the Corporation and the Bank
in his present capacity for an annual salary of $70,000 and discretionary
bonuses to be determined by the board of directors of the Corporation. Mr.
Hansen's salary is reviewed at least annually by the board of directors and
may be increased, but not decreased. Upon termination of his employment
agreement by the Corporation without "cause" or by Mr. Hansen for "good
reason" before a "change in control" of the Corporation (as these terms are
defined in the agreements), Mr. Hansen is entitled to his salary and
benefits, as if termination of his employment had not occurred, through
June 30, 2001. If such termination occurs after a change in control, Mr.
Hansen is entitled to his salary and benefits, as if termination of his
employment had not occurred, until the later of (i) June 30, 2001, or (ii)
three years after the change in control; provided that the amount of salary
and benefits continuation attributable to the period beyond June 30, 2001,
will be subject to a reduction to the extent of any portion of that amount
that constitutes an "excess parachute payment" (as that term is defined in
Section 280G of the Internal Revenue Code of 1986, as amended).
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 December 31, 1997 by each
shareholder who is known to the Corporation's management to have been the
beneficial owner of more than 5% of the outstanding shares of Valley Ridge
Common Stock as of that date:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP OF
VALLEY RIDGE COMMON STOCK <F1>
--------------------------------------------
SOLE SHARED
AND VOTING VOTING OR TOTAL
NAME AND ADDRESS OF DISPOSITIVE DISPOSITIVE BENEFICIAL PERCENT
BENEFICIAL OWNER POWER POWER<F2> OWNERSHIP OF CLASS
- ------------------- ----------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Robert C. Humphreys 21,488 20,482 41,970 6.77%
17660 Westbrook Drive
Casnovia, MI 49318
63
<PAGE>
Valley Ridge Bank
Bank Profit Sharing Plan Trust
c/o NBD Bank
200 Ottawa, N.W.
Grand Rapids, MI 49503 15,095 25,820 40,915 6.60
- --------------------------
(Footnotes begin on page 44.)
</TABLE>
The following table shows certain information concerning the number of
shares of Valley Ridge Common Stock held as of December 31, 1997, by each
of the Corporation's directors, each of the named executive officers and
all of the Corporation's directors and executive officers as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP OF
VALLEY RIDGE COMMON STOCK <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 6,809 4,965 11,774 1.90%
K. Timothy Bull 323 29,373 29,696 4.79
Richard L. Edgar 27,289<F3><F4> 3,920 31,209<F3><F4> 4.98
Fred J. Finkbeiner -- 6,113 6,113 <F*>
Gary Gust 11,392 10,840 22,232 3.59
Ronald L. Hansen -- 2,588 2,588 <F*>
Robert C. Humphreys 21,488 20,482 41,970 6.77
Ben J. Landheer 14,911 -- 14,911 2.41
Michael E. McHugh 24,622<F3><F4> 1,096 25,718<F3><F4> 4.15
Dennis C. Nelson 333 -- 333 <F*>
John J. Niederer -- 1,736 1,736 <F*>
Paul K. Spoelman 1,731 -- 1,731 <F*>
Donald Swanson 5,437 1,494 6,931 1.12
Donald VanSingel -- 4,750 4,750 <F*>
All directors and
executive officers
as a group 112,187 87,357 199,544 31.86%
- -------------------------
<FN>
<F*>Less than 1%
64
<PAGE>
<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 is also 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 influence
by reason of relationship.
<F3> Mr. Edgar may be considered to have voting and/or dispositive control
over 40,915 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 the Corporation and the Bank. The number of shares
reported as beneficially owned by Mr. Edgar excludes, and Mr. Edgar
disclaims beneficial ownership of, 22,169 shares of Valley Ridge
Common Stock held by the Valley Ridge Bank Profit Sharing Plan Trust.
The number of shares reported includes 2,148 shares allocated to Mr.
Edgar's account under the Valley Ridge Employee Stock Ownership Plan
which are also included in the number of shares reported as
beneficially owned by Mr. McHugh (as to which Mr. McHugh disclaims
beneficial ownership). The number of shares reported also includes
6,395 shares subject to a private option exercisable within 60 days of
December 31, 1997.
<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 15,611
shares held by the Valley Ridge Employee Stock Ownership Plan of which
Mr. McHugh disclaims beneficial ownership (including the 2,148 shares
allocated to Mr. Edgar's account under that plan).
</FN>
</TABLE>
65
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Directors and officers of the Corporation and their associates
were customers of and had transactions with the Bank in the ordinary course
of business between January 1, 1997, and March 1, 1998. 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
the Corporation'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 the
Corporation's Form S-4 Registration Statement filed January 30,
1996. Here incorporated by reference.
4.1 FORM OF STOCK CERTIFICATE. Previously filed as Exhibit 4(a) to
the Corporation's Form S-4 Registration Statement filed
January 30, 1996. Here incorporated by reference.
4.2 LONG-TERM DEBT. The Corporation is a party to several long-term
debt agreements which at the time of this report do not exceed
10% of the Corporation's total consolidated assets. The
Corporation agrees to furnish copies of the agreements defining
the rights of the other parties thereto to the Securities and
Exchange Commission upon request.
10.1 DATA PROCESSING AGREEMENT. Previously filed as Exhibit 10(a) to
the Corporation's Form S-4 Registration Statement filed January
30, 1996. Here incorporated by reference.
10.2 VALLEY RIDGE EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST.<F*>
Previously filed as Exhibit 10(b) to the Corporation's Form S-4
Registration Statement filed January 30, 1996. Here incorporated
by reference.
66
<PAGE>
10.3 KENT CITY STATE BANK PROFIT SHARING/401(K) PLAN.<F*> Previously
filed as Exhibit 10(c) to the Corporation's Form S-4 Registration
Statement filed January 30, 1996. Here incorporated by
reference.
10.4 DIRECTORS' DEFERRED COMPENSATION PLAN AND FORM OF DIRECTORS'
DEFERRED COMPENSATION AGREEMENT.<F*> Previously filed as Exhibit
10(d) to the Corporation's Form S-4 Registration Statement filed
January 30, 1996. Here incorporated by reference.
10.5 EMPLOYMENT AGREEMENT WITH RONALD HANSEN.<F*> Previously filed as
Exhibit 10.6 to the Corporation's Form 10-KSB filed March 31,
1997. Here incorporated by reference.
10.6 EMPLOYMENT AGREEMENT WITH MICHAEL MCHUGH.<F*>
10.7 EMPLOYMENT AGREEMENT WITH RICHARD EDGAR.<F*>
10.8 FORM OF SALARY CONTINUATION AGREEMENT.<F*>
21 SUBSIDIARIES OF THE REGISTRANT.
24 POWERS OF ATTORNEY.
27 FINANCIAL DATA SCHEDULE.
- ---------------
<F*>Management contract or compensatory plan or arrangement.
The Corporation will furnish a copy of any exhibit listed above to any
shareholder of the Corporation without charge upon written request to
Michael E. McHugh, Secretary, Valley Ridge Financial Corp., 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 1997.
67
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VALLEY RIDGE FINANCIAL CORP.
(Registrant)
March 30, 1998 By S/RICHARD L. EDGAR
Richard L. Edgar
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
March 30, 1998 *_______________________________________
Jerome B. Arends
Director
March 30, 1998 *_______________________________________
K. Timothy Bull
Director
March 30, 1998 S/RICHARD L. EDGAR
Richard L. Edgar
President, Chief Executive Officer and
Director (Principal Executive Officer)
March 30, 1998 *_______________________________________
Fred J. Finkbeiner
Director
March 30, 1998 *_______________________________________
Gary Gust
Director
68
<PAGE>
March 30, 1998 *_______________________________________
Ronald L. Hansen
Director and Vice President
March 30, 1998 *_______________________________________
Robert C. Humphreys
Chairman of the Board and Director
March 30, 1998 *_______________________________________
Ben J. Landheer
Director
March 30, 1998 S/MICHAEL E. MCHUGH
Michael E. McHugh
Secretary and Treasurer and Director
(Principal Financial and Accounting
Officer)
March 30, 1998 *_______________________________________
Dennis C. Nelson
Director
March 30, 1998 *_______________________________________
John J. Niederer
Director
March 30, 1998 *_______________________________________
Paul K. Spoelman
Director
March 30, 1998 *_______________________________________
Donald Swanson
Director
March 30, 1998 *_______________________________________
Donald VanSingel
Director
69
<PAGE>
*By S/RICHARD L. EDGAR
Richard L. Edgar
Attorney-in-Fact
70
<PAGE>
EXHIBIT INDEX
NUMBER EXHIBIT
3.1 ARTICLES OF INCORPORATION. Previously filed as Exhibit 3(a) to
the Corporation'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 the
Corporation's Form S-4 Registration Statement filed January 30,
1996. Here incorporated by reference.
4.1 FORM OF STOCK CERTIFICATE. Previously filed as Exhibit 4(a) to
the Corporation's Form S-4 Registration Statement filed
January 30, 1996. Here incorporated by reference.
4.2 LONG-TERM DEBT. The Corporation is a party to several long-term
debt agreements which at the time of this report do not exceed
10% of the Corporation's total consolidated assets. The
Corporation agrees to furnish copies of the agreements defining
the rights of the other parties thereto to the Securities and
Exchange Commission upon request.
10.1 DATA PROCESSING AGREEMENT. Previously filed as Exhibit 10(a) to
the Corporation's Form S-4 Registration Statement filed January
30, 1996. Here incorporated by reference.
10.2 VALLEY RIDGE EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST.<F*>
Previously filed as Exhibit 10(b) to the Corporation's Form S-4
Registration Statement filed January 30, 1996. Here incorporated
by reference.
10.3 KENT CITY STATE BANK PROFIT SHARING/401(K) PLAN.<F*> Previously
filed as Exhibit 10(c) to the Corporation's Form S-4 Registration
Statement filed January 30, 1996. Here incorporated by
reference.
10.4 DIRECTORS' DEFERRED COMPENSATION PLAN AND FORM OF DIRECTORS'
DEFERRED COMPENSATION AGREEMENT.<F*> Previously filed as Exhibit
10(d) to the Corporation's Form S-4 Registration Statement filed
January 30, 1996. Here incorporated by reference.
10.5 EMPLOYMENT AGREEMENT WITH RONALD HANSEN.<F*> Previously filed as
Exhibit 10.6 to the Corporation's Form 10-KSB filed March 31,
1997. Here incorporated by reference.
10.6 EMPLOYMENT AGREEMENT WITH MICHAEL MCHUGH.<F*>
71
<PAGE>
10.7 EMPLOYMENT AGREEMENT WITH RICHARD EDGAR.<F*>
10.8 FORM OF SALARY CONTINUATION AGREEMENT.<F*>
21 SUBSIDIARIES OF THE REGISTRANT.
24 POWERS OF ATTORNEY.
27 FINANCIAL DATA SCHEDULE.
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<F*>Management contract or compensatory plan or arrangement.
72
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
AGREEMENT made and entered into January 13, 1998, but as of
the Effective Date hereinafter defined, by and between VALLEY RIDGE FINANCIAL
CORPORATION ("VRFC") and MICHAEL MC HUGH ("Employee");
WHEREAS, VRFC 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 VRFC and the Employee; and
WHEREAS, the board of directors of VRFC 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 VRFC as may from time to time be reasonably directed by VRFC's
Chairman of the Board and/or the VRFC board of directors. Among his other
duties, it is contemplated that he will serve as the Secretary and Treasurer,
and Chief Financial Officer of VRFC and Executive Vice President and Chief
Financial Officer of VRFC's subsidiary, Valley Ridge Bank ("Subsidiary Bank").
2. COMPENSATION. VRFC agrees to pay the Employee during the term
of this Agreement a salary in the sum of at least Eighty Thousand Three
Hundred Forty Dollars ($80,340) per annum ("Minimum Salary") 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 VRFC 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 VRFC. The Employee's salary shall be reviewed
by the board of directors of VRFC not less often than annually beginning on the
date one (1) 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; any such increased salary shall
become the new Minimum Salary. The Employee's salary shall be subject to the
usual payroll withholding 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
<PAGE>
directors of VRFC 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 VRFC or the Subsidiary Bank relating to pension,
thrift, deferred profit-sharing, group life insurance, medical
coverage, education, or other retirement or employee benefits
that VRFC 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 VRFC'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.
(c) VRFC shall continue to pay the $3,000 annual
premium to keep the Northwestern Mutual Life Insurance Policy
owned by Employee in effect.
(d) VRFC shall continue to pay the premiums to
maintain Employee's disability insurance coverage under the
current Provident Companies executive disability policy.
5. TERM. The initial term of this Agreement shall be a period of
five years commencing on the Effective Date, subject to earlier termination as
provided herein. Reference herein to the term of this Agreement shall refer to
such term.
6. EFFECTIVE DATE. For purposes of this Agreement the "Effective
Date" is January 13, 1998.
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 VRFC.
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<PAGE>
8. VACATIONS. The Employee shall be entitled, without loss of
pay, to absent himself voluntarily from the performance of his employment under
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, and
five (5) personal days each 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
VRFC 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 one
(1) week of vacation each year to be used during the first six
(6) 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 VRFC
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 VRFC
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 VRFC or the Subsidiary Bank;
(ii) Willful breach of a fiduciary duty
involving personal profit;
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<PAGE>
(iii) Willful violation of any law, rule, or
regulation materially relating to the operation of VRFC
or the Subsidiary Bank;
(iv) The order of any court or supervising
agency with jurisdiction over the affairs of VRFC 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 VRFC'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 VRFC 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 VRFC 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 VRFC'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 VRFC or upon
such shorter period as may be agreed upon between the Employee
and the board of directors of VRFC. In the event of such
termination without Good Reason, VRFC 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
VRFC for "Good Reason", which shall mean, the occurrence of any
of the following events without Employees consent:
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<PAGE>
(i) A material demotion or other adverse
change made by VRFC in the Employee's status or
position as a senior executive officer of VRFC or the
Subsidiary Bank;
(ii) The assignment to the Employee of any
duties or responsibilities which are materially
inconsistent with such status or position, or a
material reduction in the duties and responsibilities
previously exercised by the Employee;
(iii) The imposition of any requirement,
whether by relocation of VRFC'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 Kent City, Michigan;
(iv) Failure of VRFC to elect the Employee
as chief financial officer and a director of the
Subsidiary Bank; or
(v) Material breach by VRFC of any
material provision of Agreement, if VRFC fails to cure
the breach within a reasonable time after Employee has
given VRFC's board of directors written notice of the
breach.
Before terminating his employment for good reason pursuant to
this section 9(c), the Employee shall give written notice to
VRFC's board of directors of the act or omission constituting
"Good Reason," within 60 days after the occurrence of such act
or omission. If the board of directors promptly corrects such
act or omission, and takes reasonable measures to prevent its
recurrence, Employee shall not be entitled to terminate the
employment with Good Reason. Otherwise, Employee may terminate
the employment for Good Reason within 60 days after such notice
to the board of directors. If Employee fails to give notice as
provided above, Employee may not terminate the Employment for
Good Reason on account of such act or omission.
(d) If the Employee's employment is terminated by
VRFC without Cause or terminated by the Employee for Good
Reason, the Employee shall be entitled to continuation of his
salary and benefits until the end of the Term of this Agreement
as if termination of his employment had not occurred.
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
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<PAGE>
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 materially
competitive with VRFC or the Subsidiary Bank. Any amounts
received under VRFC's director deferred compensation program,
any retirement plans or VRFC's Supplemental Executive
Retirement Plan (SERP) shall not reduce the pay continuation
under this paragraph 9(d). The salary continuation provided in
this subparagraph 9(d) shall be reduced, however (but not below
zero) by any disability benefits received by the Employee
during the Severance Pay Period (other than benefits received
under the policy referred to in paragraph 4(d) of this
Agreement). 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, 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.
If any payment to or benefit continuation for
the Employee (or the Employee's estate or beneficiary, pursuant
to paragraph 12(b) constitutes a "parachute payment "under
Internal Revenue Code section 280(G) and, when added to all
other payments to the Employee that are "parachute payments"
would result in "excess parachute payments" to Employee (as
defined under IRC <Section>280(G) being nondeductible by the
Corporation under IRC <Section>280(G), then the payments and
benefit continuation provided for under this section 9(d) shall
be reduced (but not below 0) or delayed until there are no such
excess parachute payments. The amount of any reduction or
delay shall be determined by VRFC's certified public
accountants, in consultation with the Employee.
(e) In the event of the death of the Employee
while still employed under this Agreement the Employee's estate
or beneficiary shall not be entitled to salary and benefit
continuation under section 9(d), but shall be entitled to
receive the salary 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 the affairs of VRFC or the
Subsidiary Bank at the request of or by the order of any court
or supervising agency with jurisdiction over VRFC, VRFC's
obligations under this Agreement shall not terminate and the
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<PAGE>
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, VRFC'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 VRFC's affairs or those of the
Subsidiary Bank by the final order of any court or supervising
agency with jurisdiction over VRFC, all obligations of VRFC
under this Agreement shall terminate, as of the effective date
of the order; vested rights of the parties shall not be
affected, but Employee shall not be entitled to salary or
benefit continuation under section 9(d) of this Agreement if
his employment is terminated pursuant to this section 9(g).
(h) All obligations under this Agreement may be
terminated, except to the extent it is determined that
continuation of the Agreement is necessary for the continued
operation of VRFC or the Subsidiary Bank:
(i) By the Federal Deposit Insurance
Corporation ("FDIC") at the time the FDIC enters into
an agreement to provide assistance to or on behalf of
VRFC or the Subsidiary Bank; 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 VRFC or when VRFC or the Subsidiary Bank
is determined by the FRB to be in an unsafe or unsound
condition. Any rights of the parties that have already
vested, shall not be affected by such action, but
Employee shall not be entitled to salary or benefit
continuation under Section 9(d) of this Agreement if
his employment is terminated pursuant to this section
9(h).
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 VRFC
and the Subsidiary Bank (including at least the benefits
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<PAGE>
provided by the disability policy referred to in paragraph 4(d)
of this Agreement); and
(b) he shall not be entitled to receive salary
payments pursuant to this Employment Agreement.
If Employee remains disabled or incapacitated as defined above
for a continuous period of 6 months, or for a total of 12 months in any two
calendar year period, the Board of Directors of VRFC may terminate Employee's
employment without salary or benefit continuation under section 9(d).
11. ATTORNEY FEES. In the event that VRFC exercises its right of
Termination for Cause, but it is determined by a court of competent jurisdiction
or by an arbitrator that cause did not exist for such termination, or if in any
event it is determined by any such court or arbitrator that VRFC or the
Subsidiary Bank has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorneys' fees, incurred in challenging
such termination or collecting such amounts. Such reimbursement shall be in
addition to any rights to which the Employee is otherwise entitled under this
Agreement.
12. No Assignments.
(a) This Agreement is personal to each of the
parties hereto, and neither party may assign or delegate any of
its rights or obligations hereunder without first obtaining the
written consent of the other party; provided, however, that
VRFC shall require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of VRFC
or the Subsidiary, by an assumption agreement in form and
substance satisfactory to the Employee, to expressly assume and
agree to perform this Agreement in the same manner and to the
same extent that VRFC would be required to perform it if no
such succession or assignment had taken place. Failure of VRFC
to obtain such an assumption agreement prior to the
effectiveness of any such succession or assignment shall be a
breach of this Agreement and shall entitle the Employee to
compensation from VRFC in the same amount and on the same terms
as the compensation pursuant to section 9(d) hereof. For
purposes of implementing the provisions of this section 12(a),
the date on which any such succession becomes effective shall
be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's
personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the
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<PAGE>
Employee should die while any amounts would still be payable to the
Employee hereunder if the Employee had continued to live (including but
not limited to salary and benefit continuation to which Employee
becomes conditioned under section 9(d) as a result of a covered
termination of the Employment before Employee's death) all such amounts,
unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to the Employee's devisee, legatee or other
designee or if there is no such designee, to the Employee's estate.
13. OTHER CONTRACTS. All other prior agreements regarding
conditions of employment, whether written or oral, are hereby superseded by this
Agreement.
14. 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.
15. AMENDMENTS. No amendments or additions to this Agreement shall
be binding unless in writing and signed by both parties, except as herein
otherwise provided.
16. 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.
17. 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.
18. GOVERNING LAW. Agreement shall be governed by the laws of the
United States of America and the State of Michigan.
IN WITNESS WHEREOF, the parties have executed this Agreement on
the day and year first above written.
VALLEY RIDGE FINANCIAL CORPORATION
By /s/ ROBERT C. HUMPHREYS
Robert Humphreys,
Chairman of the Board
Employer
/s/ MICHAEL MCHUGH
Michael Mc Hugh
Employee
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<PAGE>
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
AGREEMENT made and entered into January 13, 1998, but as of the
Effective Date hereinafter defined, by and between VALLEY RIDGE FINANCIAL
CORPORATION ("VRFC") and RICHARD L. EDGAR ("Employee");
WHEREAS, VRFC 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 VRFC and the Employee; and
WHEREAS, the board of directors of VRFC 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 VRFC as may from time to time be reasonably directed by VRFC's
Chairman of the Board and/or the VRFC board of directors. Among his other
duties, it is contemplated that he will serve as the President and Chief
Executive Officer of VRFC and VRFC's subsidiary, Valley Ridge Bank
("Subsidiary Bank").
2. COMPENSATION. VRFC agrees to pay the Employee during the term of
this Agreement a salary in the sum of at least One Hundred Sixteen Thousand
Seven Hundred Sixty-one Dollars ($116,761) per annum ("Minimum Salary")
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 VRFC
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 VRFC. The Employee's salary
shall be reviewed by the board of directors of VRFC not less often than annually
beginning on the date one (1) 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; any such
increased salary shall become the new Minimum Salary. The Employee's
salary shall be subject to the usual payroll withholding required with
respect to compensation paid by a corporation to an employee.
<PAGE>
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 VRFC 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 VRFC or the Subsidiary Bank relating to pension, thrift,
deferred profit-sharing, group life insurance, medical coverage,
education, or other retirement or employee benefits that VRFC 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 VRFC'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.
(c) VRFC shall continue to pay the $6,000 annual premium to
keep the Northwestern Mutual Life Insurance Policy owned by
Employee in effect.
(d) VRFC shall continue to pay the premiums to maintain
Employee's disability insurance coverage under the current
Provident Companies executive disability policy.
5. TERM. The initial term of this Agreement shall be a period of
five years commencing on the Effective Date, subject to earlier termination
as provided herein. Beginning on the first anniversary of the Effective
Date, and on each anniversary thereafter, the term of this Agreement shall
be extended for a period of one year in addition to the then-remaining
term, UNLESS the Bank has given notice to the Employee in writing at least
90 days prior to such anniversary that the term of this Agreement shall not
be extended further; if such notice is given, this Agreement will expire at
the end of the then-remaining term. Reference herein to the term of this
Agreement shall refer to both such initial term and such extended terms.
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6. EFFECTIVE DATE. For purposes of this Agreement the "Effective
Date" is January 13, 1998.
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 VRFC.
8. VACATIONS. The Employee shall be entitled, without loss of pay,
to absent himself voluntarily from the performance of his employment under
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 five (5) weeks per year, and five (5) personal
days each 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 VRFC 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 one (1) week
of vacation each year to be used during the first six (6) 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 VRFC 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 VRFC 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:
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(i) Willful misconduct materially adverse to VRFC 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 VRFC or
the Subsidiary Bank;
(iv) The order of any court or supervising agency with
jurisdiction over the affairs of VRFC 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 VRFC'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 VRFC 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 VRFC 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 VRFC'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 VRFC or upon such
shorter period as may be agreed upon between the Employee and the
board of directors of VRFC. In the event of such termination
without Good Reason, VRFC 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.
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<PAGE>
(c) The Employee may terminate his employment with VRFC for
"Good Reason", which shall mean, the occurrence of any of the
following events without Employees consent:
(i) A material demotion or other adverse change made
by VRFC in the Employee's status or position as a senior
executive officer of VRFC or the Subsidiary Bank;
(ii) The assignment to the Employee of any duties or
responsibilities which are materially inconsistent with such
status or position, or a material reduction in the duties
and responsibilities previously exercised by the Employee;
(iii) The imposition of any requirement, whether by
relocation of VRFC'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 Kent
City, Michigan;
(iv) Failure of VRFC to elect the Employee as chief
executive officer and a director of the Subsidiary Bank; or
(v) Material breach by VRFC of any material provision
of Agreement, if VRFC fails to cure the breach within a
reasonable time after Employee has given VRFC's board of
directors written notice of the breach.
Before terminating his employment for good reason pursuant to
this section 9(c), the Employee shall give written notice to
VRFC's board of directors of the act or omission constituting
"Good Reason," within 60 days after the occurrence of such act or
omission. If the board of directors promptly corrects such act
or omission, and takes reasonable measures to prevent its
recurrence, Employee shall not be entitled to terminate the
employment with Good Reason. Otherwise, Employee may terminate
the employment for Good Reason within 60 days after such notice
to the board of directors. If Employee fails to give notice as
provided above, Employee may not terminate the Employment for
Good Reason on account of such act or omission.
(d) If the Employee's employment is terminated by VRFC
without Cause or terminated by the Employee for Good Reason, the
Employee shall be entitled to continuation of his salary and
benefits until the end of the Term of this Agreement as if
termination of his employment had not occurred.
Payment of salary and continuation of benefits as
provided in this subparagraph 9(d) shall continue regardless of
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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 materially
competitive with VRFC or the Subsidiary Bank. Any amounts
received under VRFC's director deferred compensation program, any
retirement plans or VRFC's Supplemental Executive Retirement Plan
(SERP) shall not reduce the pay continuation under this paragraph
9(d). The salary continuation provided in this subparagraph 9(d)
shall be reduced, however (but not below zero) by any disability
benefits received by the Employee during the Severance Pay Period
(other than benefits received under the policy referred to in
paragraph 4(d) of this Agreement). 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, 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.
If any payment to or benefit continuation for the
Employee (or the Employee's estate or beneficiary, pursuant to
paragraph 12(b) constitutes a "parachute payment "under Internal
Revenue Code section 280(G) and, when added to all other payments
to the Employee that are "parachute payments" would result in
"excess parachute payments" to Employee (as defined under IRC
<Section>280(G) being nondeductible by the Corporation under IRC
<Section>280(G), then the payments and benefit continuation
provided for under this section 9(d) shall be reduced (but not
below 0) or delayed until there are no such excess parachute
payments. The amount of any reduction or delay shall be
determined by VRFC's certified public accountants, in
consultation with the Employee.
(e) In the event of the death of the Employee while still
employed under this Agreement the Employee's estate or
beneficiary shall not be entitled to salary and benefit
continuation under section 9(d), but shall be entitled to receive
the salary 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 the affairs of VRFC or the
Subsidiary Bank at the request of or by the order of any court or
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supervising agency with jurisdiction over VRFC, VRFC'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, VRFC'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 VRFC's affairs or those of the
Subsidiary Bank by the final order of any court or supervising
agency with jurisdiction over VRFC, all obligations of VRFC under
this Agreement shall terminate, as of the effective date of the
order; vested rights of the parties shall not be affected, but
Employee shall not be entitled to salary or benefit continuation
under section 9(d) of this Agreement if his employment is
terminated pursuant to this section 9(g).
(h) All obligations under this Agreement may be terminated,
except to the extent it is determined that continuation of the
Agreement is necessary for the continued operation of VRFC or the
Subsidiary Bank:
(i) By the Federal Deposit Insurance Corporation
("FDIC") at the time the FDIC enters into an agreement to
provide assistance to or on behalf of VRFC or the Subsidiary
Bank; 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 VRFC or when
VRFC or the Subsidiary Bank is determined by the FRB to be
in an unsafe or unsound condition. Any rights of the
parties that have already vested, shall not be affected by
such action, but Employee shall not be entitled to salary or
benefit continuation under Section 9(d) of this Agreement if
his employment is terminated pursuant to this section 9(h).
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 VRFC and the
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Subsidiary Bank (including at least the benefits provided by the
disability policy referred to in paragraph 4(d) of this
Agreement); and
(b) he shall not be entitled to receive salary payments
pursuant to this Employment Agreement.
If Employee remains disabled or incapacitated as defined above
for a continuous period of 6 months, or for a total of 12 months in any two
calendar year period, the Board of Directors of VRFC may terminate
Employee's employment without salary or benefit continuation under section
9(d).
11. ATTORNEY FEES. In the event that VRFC exercises its right of
Termination for Cause, but it is determined by a court of competent
jurisdiction or by an arbitrator that cause did not exist for such
termination, or if in any event it is determined by any such court or
arbitrator that VRFC or the Subsidiary Bank has failed to make timely
payment of any amounts owed to the Employee under this Agreement, the
Employee shall be entitled to reimbursement for all reasonable costs,
including attorneys' fees, incurred in challenging such termination or
collecting such amounts. Such reimbursement shall be in addition to any
rights to which the Employee is otherwise entitled under this Agreement.
12. NO ASSIGNMENTS.
(a) This Agreement is personal to each of the parties
hereto, and neither party may assign or delegate any of its
rights or obligations hereunder without first obtaining the
written consent of the other party; provided, however, that VRFC
shall require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all
or substantially all of the business and/or assets of VRFC or the
Subsidiary, by an assumption agreement in form and substance
satisfactory to the Employee, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent
that VRFC would be required to perform it if no such succession
or assignment had taken place. Failure of VRFC to obtain such an
assumption agreement prior to the effectiveness of any such
succession or assignment shall be a breach of this Agreement and
shall entitle the Employee to compensation from VRFC in the same
amount and on the same terms as the compensation pursuant to
section 9(d) hereof. For purposes of implementing the provisions
of this section 12(a), the date on which any such succession
becomes effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's
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personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the
Employee should die while any amounts would still be payable to the
Employee hereunder if the Employee had continued to live (including
but not limited to salary and benefit continuation to which Employee
becomes conditioned under section 9(d) as a result of a covered
termination of the Employment before Employee's death) all such
amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to the Employee's devisee, legatee or
other designee or if there is no such designee, to the Employee's
estate.
13. OTHER CONTRACTS. All other prior agreements regarding conditions
of employment, whether written or oral, are hereby superseded by this
Agreement.
14. 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.
15. AMENDMENTS. No amendments or additions to this Agreement shall
be binding unless in writing and signed by both parties, except as herein
otherwise provided.
16. 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.
17. 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.
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<PAGE>
18. GOVERNING LAW. Agreement shall be governed by the laws of the
United States of America and the State of Michigan.
IN WITNESS WHEREOF, the parties have executed this Agreement on
the day and year first above written.
VALLEY RIDGE FINANCIAL CORPORATION
By/s/ ROBERT C. HUMPHREYS
Robert Humphreys,
Chairman of the Board
Employer
/s/ RICHARD L. EDGAR
Richard L. Edgar
Employee
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Exhibit 10.8
The following persons have Executive Employee Salary
Continuation Agreements with the Corporation in the form filed
herewith with the names or amounts set forth below inserted in
the blanks identified by the following column headings.
(I) (II) (III)
Richard L. Edgar $39,300 $3,275.00
Michael McHugh 9,100 758.33
Ronald Hansen 21,900 1,825.00
<PAGE>
EXECUTIVE EMPLOYEE SALARY
CONTINUATION AGREEMENT
FOR
(i)
<PAGE>
TABLE OF CONTENTS
PAGE
SECTION 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 ADMINISTRATIVE COMMITTEE. . . . . . . . . . . . . . . . . 2
1.2 AGE . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 CHANGE IN CONTROL . . . . . . . . . . . . . . . . . . . . 2
1.4 CREDITING RATE. . . . . . . . . . . . . . . . . . . . . . 3
1.5 DISABILITY. . . . . . . . . . . . . . . . . . . . . . . 3
1.6 DISCHARGE FOR CAUSE . . . . . . . . . . . . . . . . . . . 3
1.7 EARLY RETIREMENT DATE . . . . . . . . . . . . . . . . . . 4
1.8 MORTALITY ASSUMPTIONS . . . . . . . . . . . . . . . . . . 4
1.9 NORMAL RETIREMENT DATE. . . . . . . . . . . . . . . . . . 4
1.10 TERMINATION OF EMPLOYMENT . . . . . . . . . . . . . . . . 4
1.11 VESTING . . . . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
PAYMENT OF BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1 BENEFITS UPON NORMAL RETIREMENT.. . . . . . . . . . . . . 5
3.2 BENEFITS UPON EARLY RETIREMENT. . . . . . . . . . . . . . 5
3.3 BENEFITS UPON LATE RETIREMENT.. . . . . . . . . . . . . . 6
3.4 BENEFITS UPON DISABILITY. . . . . . . . . . . . . . . . . 6
3.5 OTHER TERMINATIONS OF EMPLOYMENT. . . . . . . . . . . . . 6
(a) VOLUNTARY TERMINATION OF EMPLOYMENT PRIOR TO THE
EARLY RETIREMENT DATE OR DISCHARGE FOR CAUSE AT
ANY TIME . . . . . . . . . . . . . . . . . . . . . . 6
(b) INVOLUNTARY TERMINATION OF EMPLOYMENT PRIOR TO THE
EARLY RETIREMENT DATE OTHER THAN BECAUSE OF DEATH,
DISABILITY OR DISCHARGE FOR CAUSE. . . . . . . . . . 6
(c) TERMINATION OF EMPLOYMENT AT OR AFTER A CHANGE IN
OWNERSHIP OF CONTROL.. . . . . . . . . . . . . . . . 7
3.6 SURVIVORSHIP BENEFITS.. . . . . . . . . . . . . . . . . 8
(a) PRIOR TO COMMENCEMENT OF NORMAL OR EARLY
RETIREMENT BENEFITS. . . . . . . . . . . . . . . . . 8
(b) AFTER COMMENCEMENT OF BENEFITS . . . . . . . . . . . 8
3.7 RECIPIENTS OF PAYMENTS: DESIGNATION OF BENEFICIARY. . . 8
3.8 ACCELERATION OF BENEFITS. . . . . . . . . . . . . . . . . 9
SECTION 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ADDITIONAL CHANGE IN CONTROL PROVISIONS . . . . . . . . . . . . . . 9
4.1 APPLICATION OF SECTION. . . . . . . . . . . . . . . . . . 9
4.2 LIMIT ON PAYMENTS.. . . . . . . . . . . . . . . . . . . . 9
4.3 DETERMINATION BY EXPERTS. . . . . . . . . . . . . . . . . 9
4.4 PARTICIPANT'S COSTS OF ENFORCEMENT. . . . . . . . . . . . 10
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SECTION 5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ADMINISTRATION AND INTERPRETATION OF THIS AGREEMENT . . . . . . . . 10
SECTION 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
CLAIMS PROCEDURE. . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 7. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
REVIEW PROCEDURE. . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 8. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
LIFE INSURANCE AND FUNDING. . . . . . . . . . . . . . . . . . . . . 12
SECTION 9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ASSIGNMENT OF BENEFITS. . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
EMPLOYMENT NOT GUARANTEED BY AGREEMENT. . . . . . . . . . . . . . . 13
SECTION 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
AMENDMENT AND TERMINATION . . . . . . . . . . . . . . . . . . . . . 13
SECTION 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
CONSTRUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
FORM OF COMMUNICATION . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
CAPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
BINDING EFFECT. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
BENEFICIARY DESIGNATION. . . . . . . . . . . . . . . . . . . . . . . . . 16
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EXHIBIT 10.8
EXECUTIVE EMPLOYEE SALARY CONTINUATION AGREEMENT
FOR
(i)
THIS AGREEMENT is made this 21st day of January, 1998, effective
January 1, 1997, between Valley Ridge Bank, a Michigan corporation (the
"Company") and (i) (the "Participant").
WHEREAS, the Participant is an executive employee of the Company and
as such has materially contributed to the Company's position, and
WHEREAS the Company wishes to establish this Agreement for purposes of
promoting in the Participant the strongest interest in the successful
operation of the Company and increased efficiency in his work and to
provide the Participant benefits upon retirement, death, disability or
other termination of employment, in consideration of services to be
performed after the date of this agreement but prior to his retirement; and
WHEREAS, the Company also wishes to establish this Agreement to
enhance its abilities to attract and retain highly qualified executives and
to enable those executives to perform their duties in the best interests of
the Company and its shareholders in the event of possible or threatened
Change in Control of the Company without undue concern regarding the
personal, financial interests of such executives.
NOW THEREFORE, in consideration of the premises, the parties hereto
agree as follows:
SECTION 1
DEFINITIONS
1.1 ADMINISTRATIVE COMMITTEE - "Administrative Committee" shall
consist of all outside directors of the Bank's Personnel Committee.
1.2 AGE - "Age" shall mean the age of the person as of the date of
his last birthday.
1.3 CHANGE IN CONTROL - For purposes of this Agreement, a Change in
Control of the Company shall have occurred (i) on the fifth day preceding
the scheduled expiration date of a tender offer by, or exchange offer by
any corporation, person, other entity or group (other than the Company or
any of its wholly owned subsidiaries), to acquire Voting Stock of the
Company if (a) after giving effect to such offer such corporation, person,
other entity or group would own twenty-five percent (25%) or more of the
Voting Stock of the Company, (b) there shall have been filed documents with
the Securities and Exchange Commission ("SEC") in connection therewith (or,
if no such filling is required, public evidence that the offer has already
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<PAGE>
commenced), and (c) such corporation, person, other entity or group has
secured all required regulatory approvals to own or control twenty-five
percent (25%) or more of the Voting Stock of the Company, (ii) if the
shareholders of the Company approve a definitive agreement to merge or
consolidate the Company with or into another corporation in a transaction
in which neither the Company nor any of its wholly owned subsidiaries will
be the surviving corporation, or to sell or otherwise dispose of all or
substantially all of the Company's assets to any corporation, person, other
entity or group (other than the Company or any of its wholly owned
subsidiaries), and such definitive agreement is consummated; (iii) if any
corporation, person, other entity or group (other than the Company of any
of its wholly owned subsidiaries) becomes the Beneficial Owner of stock
representing twenty-five percent (25%) or more of the Voting Stock of the
Company, or (iv) if during any period of two (2) consecutive years
Continuing Directors cease to comprise a majority of the Company's Board of
Directors. The term "Continuing Director" means (i) any member of the
Board of Directors of the Company who was a member of the Board of
Directors of the Company at the beginning of any period of two (2)
consecutive years, and (ii) any person who subsequently becomes a member of
the Board of Directors of the Company, if (a) such person's nomination for
election or election to the Board of Directors of the Company is
recommended or approved by resolution of a majority of the Continuing
Directors, or (b) such person is included as a nominee in a proxy statement
of the Company distributed when a majority of the Board of Directors of the
Company consists of Continuing Directors. For purposes of this Agreement,
"Voting Stock" shall mean those shares of the Company entitled to vote
generally in the election of directors.
1.4 CREDITING RATE - "Crediting Rate" shall mean an annual rate of
interest equal to 7.5%.
1.5 DISABILITY - "Disability" shall mean, if the Participant is
insured under the company long term disability policy, the definition of
total disability contained in the long term disability insurance policy.
If the Participant is not insured under such a policy, the board shall, in
its complete and sole discretion, determine whether the Participant is
disabled for the purposes of this Agreement.
1.6 DISCHARGE FOR CAUSE - The Company may terminate the Participant's
employment under this Agreement for "Cause." A termination for Cause is a
termination by reason of the Board's good faith determination that the
Participant (i) is incompetent or acted dishonestly or engaged in willful
misconduct in the performance of his duties, (ii) breached a fiduciary duty
to the Company for personal profit to himself, (iii) intentionally failed
to perform reasonably assigned duties, (iv) willfully violated any law,
rule or regulation (other than traffic violations or similar offenses) or
any final cease and desist order, or (v) materially breached this
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Agreement. No act, or failure to act, on the Participant's part shall be
considered "willful" unless he has acted, or failed to act, with an absence
of good faith and without a reasonable belief that his action or failure to
act was in the best interest of the Company. Notwithstanding the
foregoing, (i) the Participant shall not be deemed to have been terminated
for Cause unless there shall have been delivered to the Participant a copy
of a resolution duly adopted by the affirmative vote of not less than a
majority of the entire membership of the Board at a meeting of the Board
called and held for the purpose (after reasonable notice to the Participant
and an opportunity for the Participant, together with his counsel, to be
heard before the Board), finding that in the good faith opinion of the
Board the Participant was guilty of conduct set forth above in the second
sentence of this Section and specifying the particulars thereof in detail,
and (ii) in no event will the Participant be subject to termination for
Cause pursuant to clause (v) above unless the Participant shall have failed
to cure, correct or prevent the alleged breach within thirty days after
such resolution has been delivered to the Participant.
1.7 EARLY RETIREMENT DATE - "Early Retirement Date" shall mean the
first day of the month following the month in which a Participant reaches
age 60.
1.8 MORTALITY ASSUMPTIONS - "Mortality Assumptions" shall mean the
life expectancy of a Participant, determined by applying Commissioners
Standard Ordinary Mortality Table 1980CSO.
1.9 NORMAL RETIREMENT DATE - "Normal Retirement Date" shall mean the
first day of the month following the month in which a Participant reaches
age 65.
1.10 TERMINATION OF EMPLOYMENT - "Termination of Employment" shall
mean the Participant's ceasing to be employed by the Company for any reason
whatsoever, voluntary or involuntary, including by reason of death or
disability.
1.11 VESTING - For the purpose of this Agreement, vesting shall accrue
to the Participant on a pro rata annual basis commencing January 1, 1997.
The Participant shall earn 20 percent vesting for each complete year under
the Agreement. Regardless of the number of years completed by the
Participant, upon a Change in Control, the Participant shall become 100%
vested in all benefits under this Agreement.
SECTION 2
ELIGIBILITY
The Participant is eligible for the benefits provided herein in
accordance with the terms of this Agreement upon the execution hereof.
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A Participant shall cease to be a Participant at Termination of
Employment. However, the employment of a Participant shall not be deemed
to be terminated by reason of an approved leave of absence granted in
accordance with uniform rules applied in a non-discriminatory manner.
SECTION 3
PAYMENT OF BENEFITS
3.1 BENEFITS UPON NORMAL RETIREMENT.
Upon a Participant's Termination of Employment on or after the
Normal Retirement Date, the Company shall pay to the Participant the sum of
$(ii) per year, payable in monthly installments of $(iii) each,
commencing on the first day of the month coincident with or next following
the date of Termination of Employment and continuing on the first day of
each month thereafter for a period of 15 years, but in any event until a
minimum of 180 total monthly payments are made to the Participant or the
Participant's beneficiary per Section 3.6(b). At the sole discretion of
the board of directors, the initial benefit may be increased in subsequent
years to offset the effect of inflation.
3.2 BENEFITS UPON EARLY RETIREMENT.
Upon a Participant's Termination of Employment on or after
reaching the Early Retirement Date but prior to the Normal Retirement Date,
the Company shall pay to the Participant, monthly payments equal to the
benefit described in Schedule A, attached. Such payments shall commence on
the first day of the month coincident with or next following the date of
Termination of Employment and shall continue on the first day of each month
thereafter for a period of fifteen years, but in any event until a minimum
of 180 total monthly payments are made to the Participant or the
Participant's Beneficiary per Section 3.6(b).
The Participant may elect, on or before the earlier of a)
December 31 of the year prior to Termination of Employment; or b) 90 days
prior to Termination of Employment, to defer commencement of payment of the
retirement benefit to a date not later than the Normal Retirement Date.
Such election shall be in writing and submitted to the Company. If a
Participant elects to defer payment of the benefit until his Normal
Retirement Date, the Company shall pay to the Participant the normal
retirement benefit described in Section 3.1 above. If a Participant elects
to defer payment of the benefit to a date prior to the Normal Retirement
Date, the Company shall pay to the Participant a benefit calculated in
accordance with the first sentence of this Section 3.2, but using the date
selected by the Participant for the commencement of this benefit as his
"Termination of Employment" date instead of his actual termination date.
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3.3 BENEFITS UPON LATE RETIREMENT.
Upon a Participant's Termination of Employment after the Normal
Retirement Date, the Company shall pay to the Participant the normal
retirement benefit described in Section 3.1 above, increased by .05 per
year or .00416 for each month that the Participant's Termination of
Employment is deferred beyond the Normal Retirement Date, in equal monthly
installments commencing on the first day of the month coincident with or
next following the date of Termination of Employment and continuing on the
first day of each month thereafter for the periods specified in Section
3.1.
3.4 BENEFITS UPON DISABILITY.
Upon a Participant's Termination of Employment prior to the
Normal Retirement Date due to Disability, no separate provision is made for
a disability benefit under this Agreement. However, any such Participant
shall be considered, notwithstanding such Termination of Employment, to
continue to be a Participant while disabled and for so long as the
disability continues prior to reaching the Early Retirement Date, such
Participant's beneficiary shall receive the survivor's benefits described
in Section 3.6(a). In the event the Participant lives to the Early
Retirement Date, the Participant shall be entitled to receive the early
retirement benefit described in Section 3.2.
3.5 OTHER TERMINATIONS OF EMPLOYMENT.
(a) VOLUNTARY TERMINATION OF EMPLOYMENT PRIOR TO THE EARLY
RETIREMENT DATE OR DISCHARGE FOR CAUSE AT ANY TIME. Upon a
Participant's voluntary Termination of Employment prior to reaching
the Early Retirement Date, for reasons other than death or Disability,
or upon the Participant's Discharge for Cause at any time, the Company
shall pay the vested benefit to the Participant pursuant to Schedule A
attached to this Agreement in the form of an "immediate Lump Sum
Benefit", and the Participant shall have no further right to receive
any additional benefit hereunder.
(b) INVOLUNTARY TERMINATION OF EMPLOYMENT PRIOR TO THE EARLY
RETIREMENT DATE OTHER THAN BECAUSE OF DEATH, DISABILITY OR DISCHARGE
FOR CAUSE. Upon a Participant's involuntary Termination of Employment
prior to reaching the Early Retirement Date, for reasons other than
death, disability or discharge for cause, the Participant shall become
100% vested and the Company shall pay to the Participant as
compensation for services rendered prior to such Termination of
Employment the "Immediate Lump Sum Benefit" as defined in Schedule A.
For purposes of this subsection 3.5(b), the Participant shall be
deemed to have incurred an Involuntary Termination of Employment
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covered by this subsection if he quits employment as a result of the
Company's significantly lessening either his title, duties,
responsibilities, compensation or altering his situs of employment,
without his consent. His compensation shall be deemed to be
significantly lessened if any cutback is imposed except as a part of
an overall cutback applied proportionately to all of the Company's
management employees or if the Participant fails to receive periodic
increases substantially proportionate to and coincident with the
increase granted to management employees.
(c) TERMINATION OF EMPLOYMENT AT OR AFTER A CHANGE IN OWNERSHIP
OF CONTROL. If a Participant incurs an involuntary Termination of
Employment prior to reaching the Early Retirement Date, for reasons
other than death, disability, or discharge for cause, but on or after
the occurrence of a Change in Control, or if in connection with such
change in control, the Participant's title, duties, responsibilities,
or compensation is significantly lessened or his situs of employment
is changed, without his consent, the Company shall immediately pay to
the Participant an amount equal to the sum of a) 100% of the
Participant's gross annual salary for the twelve-month period prior to
Termination, and b) the "Immediate Lump Sum Benefit" on Schedule A.
For purposes hereof, the standards set forth in subparagraph (b) above
with respect to what constitutes a significant lessening of
compensation shall apply.
3.6 SURVIVORSHIP BENEFITS.
(a) PRIOR TO COMMENCEMENT OF NORMAL OR EARLY RETIREMENT
BENEFITS. If a Participant dies while in the service of the Company
or after a Termination of Employment due to Disability and while
Disabled or after a Termination of Employment on or after the Early
Retirement Date, but prior to commencement of any benefit payments
under this Agreement, the Company shall pay to the Participant's
beneficiary a survivor's benefit of 180 equal monthly installments of
$(iii) commencing on the first day of the month after the
Participant's death and continuing on the first day of each month
thereafter until all such payments are completed. In the event a
beneficiary dies before receiving all the survivor's benefit payments,
the remaining payments shall be paid to the legal representatives of
the beneficiary's estate. Payment of the survivor's benefit shall
relieve the Company of the obligation to pay any other benefit which
the Participant would have otherwise received, under the terms of this
Agreement.
(b) AFTER COMMENCEMENT OF BENEFITS. If a Participant dies after
any benefit payments have commenced, but prior to receiving all of the
scheduled minimum number of monthly payments, the company shall pay
-6-
<PAGE>
the remaining monthly payment to the Participant's beneficiary. In
the event a beneficiary dies before receiving all of the remaining
payments, the remaining payments shall be paid to the legal
representatives of the beneficiary's estate.
3.7 RECIPIENTS OF PAYMENTS: DESIGNATION OF BENEFICIARY.
All payments to be made by the Company shall be made to the
Participant, if living. In the event of a Participant's death prior to the
receipt of all benefit payments, all subsequent payments to be made under
this Agreement shall be to the beneficiary or beneficiaries of the
Participant. The Participant shall designate a beneficiary by filing a
written notice of such designation with the Company in such form as the
Company may prescribe. The Participant may revoke or modify said
designation at any time by a further written designation. The
Participant's beneficiary designation shall be deemed automatically revoked
in the event of the death of the beneficiary, or if the beneficiary is the
Participant's spouse, in the event of dissolution of marriage. If no
designation shall be in effect at the time of any benefits payable under
this Agreement shall become due, the beneficiary shall be the spouse of the
Participant, or if no spouse is then living, the legal representatives of
the Participant's estate.
3.8 ACCELERATION OF BENEFITS.
At any time after the Participant or the Participant's
beneficiary becomes entitled to a payment of benefits under this Agreement,
the Participant, or the Participant's beneficiary, may elect to accelerate
the payment of benefits to the payment of a lump-sum payment. Such payment
shall equal ninety percent (90%) of the present value of the remaining
payments payable assuming a discount rate equal to the Crediting Rate, and
in the case of payments that are payable over the life of the Participant
or the Participant's beneficiary, assuming the Mortality Assumptions.
SECTION 4
ADDITIONAL CHANGE IN CONTROL PROVISIONS
4.1 APPLICATION OF SECTION.
If the Participant receives payments under this Agreement that
are contingent upon a Change in Control, as determined under Section 280G
of the Internal Revenue Code of 1986 (the "Code") and the regulations
thereunder, then the provisions of this Section 4 shall apply.
4.2 LIMIT ON PAYMENTS.
If payments or benefits under this Agreement, after taking into
account all other payments or benefits to which the Participant is entitled
-7-
<PAGE>
from the Company, are expected to result in an excise tax on the
Participant or the loss of certain tax deductions by the Company by reason
of Code Section 280G and 4999, then payments under this Agreement shall be
reduced to an amount such that all payments to the Participant from the
Company, which are considered contingent upon the Change in Control, shall
not exceed 2.99 times the Participant's Base Amount as defined in Code
Section 280G.
4.3 DETERMINATION BY EXPERTS.
If the Participant and the Company shall disagree as to whether a
payment under this Agreement could result in the loss of a deduction, the
matter shall be resolved by an opinion of [the Company's law firm], or if
[Company's law firm] is unable to provide such an opinion, counsel selected
by the Company, and agreed to by the Officer. Counsel's opinion need not
be unqualified. Counsel's opinion shall be based on determinations of the
Base Amount and Excess Parachute Payments, as such terms are defined by
Section 280G of the Code or its successor, by [Consulting Firm], or if
[Consulting Firm] is unable to make such determinations, a consulting firm
chosen by the Company and agreed to by the Officer. The Company shall pay
the fees and expenses of such counsel and consulting firm, and shall make
available such information as may be reasonably requested by such counsel
and consulting firm to prepare the opinion. If the maximum amount payable
to the Officer pursuant to this Section cannot be determined prior to the
due date for such payment, the Company shall pay on the due date the
minimum amount which it in good faith determines to be payable, and shall
pay the remaining amount as soon as practicable after such remaining amount
is determined.
4.4 PARTICIPANT'S COSTS OF ENFORCEMENT.
Following a Change in Control, the company shall pay all expenses
of the Participant, including but not limited to attorney fees incurred in
enforcing payments by the Company pursuant to this Agreement.
SECTION 5
ADMINISTRATION AND INTERPRETATION OF THIS AGREEMENT
The Board of Directors shall appoint an Administrative Committee
consisting of three (3) or more persons to administer and interpret this
Agreement. Interpretation by the Administrative Committee shall be final
and binding upon a Participant. The Administrative Committee may adopt
rules and regulations relating to this Agreement as it may deem necessary
or advisable for the administration thereof.
-8-
<PAGE>
SECTION 6
CLAIMS PROCEDURE
If the Participant or the Participant's beneficiary (hereinafter
referred to as a "Claimant") is denied all or a portion of an expected
benefit under this Plan for any reason, he or she may file a claim with the
Administrative Committee. The Administrative Committee shall notify the
Claimant within sixty (60) days of allowance or denial of the claim, unless
the Claimant receives written notice from the Administrative Committee
prior to the end of the sixty (60) day period stating that special
circumstances requires an extension of the time for decision. The notice
of the Administrative Committee's decision shall be in writing, sent by
mail to Claimant's last known address, and, if a denial of the claim, must
contain the following information:
(a) the specific reasons for the denial;
(b) specific reference to pertinent provisions of the Plan on
which the denial is based; and
(c) if applicable, a description of any additional information
or material necessary to perfect the claim, an explanation
of why such information or material is necessary, and an
explanation of the claims review procedure.
SECTION 7
REVIEW PROCEDURE
7.1 A Claimant is entitled to request a review of any denial of his
claim by the Administrative Committee. The request for review must be
submitted in writing within a sixty (60) day period, the claim will be
deemed to be conclusively denied. The Claimant or his representative shall
be entitled to review all pertinent documents, and to submit issues and
comments orally and in writing.
7.2 If the request for review by a Claimant concerns the
interpretation and application of the provisions of the Agreement and the
Company's obligations, then the review shall be conducted by a separate
committee consisting of three persons designated or appointed by the
Administrative Committee. The separate committee shall afford the Claimant
a hearing and the opportunity to review all pertinent documents and submit
issues and comments orally and in writing and shall render a review
decision in writing, all within sixty (60) days after receipt of a request
for a review, provided that, in special circumstances (such as the
necessity of holding a hearing) the committee may extend the time for
decision by not more than sixty (60) days upon written notice to the
-9-
<PAGE>
Claimant. The Claimant shall receive written notice of the separate
committee's review decision, together with specific reasons for the
decision and reference to the pertinent provisions of this Agreement.
SECTION 8
LIFE INSURANCE AND FUNDING
The Company in its discretion may apply for and procure as owner and
for its own benefit, insurance on the life of the Participant, in such
amounts and in such forms as the Company may choose. The Participant shall
have no interest whatsoever in any such policy or policies, but at the
request of the Company he shall submit to medical examinations and supply
such information and execute such documents as may be required by the
insurance company or companies to whom the Company has applied for
insurance.
The rights of the Participant, or his beneficiary, or estate, to
benefits under the Plan shall be solely those of an unsecured creditor of
the Company. Any insurance policy or other assets acquired by or held by
the Company in connection with the liabilities assumed by it pursuant to
the Plan shall not be deemed to be held under any trust for the benefit of
the Participant, his beneficiary, or his estate, or to be security for the
performance of the obligations of the Company but shall be, and remain, a
general, unpledged, and unrestricted asset of the Company.
If this Agreement is funded through insurance on the life of the
Participant, then in the event of such Participant's death during the first
two (2) years after the effective date of this Agreement, and if such
Participant's death was a result of suicide or if such Participant made any
material misstatement or failed to make a material disclosure of
information in any documentation which the Participant is requested to
complete in connection with this Agreement, then no death benefits under
the terms of this Agreement will be payable, unless and to the extent that
the Board of Directors of Company, in their absolute discretion, may
otherwise determine.
SECTION 9
ASSIGNMENT OF BENEFITS
Neither the Participant nor any other beneficiary under the Plan shall
have any right to assign the right to receive any benefits hereunder, and
in the event of any attempted assignment or transfer, the Company shall
have no further liability hereunder.
-10-
<PAGE>
SECTION 10
EMPLOYMENT NOT GUARANTEED BY AGREEMENT
Neither this Agreement nor any action taken hereunder shall be
construed as giving the Participant the right to be retained as an
Executive Employee or as an employee of the Company for any period.
SECTION 11
TAXES
The Company shall deduct from all payments made hereunder all
applicable federal or state taxes required by law to be withheld from such
payments. In the event that the Company determines that benefits under the
Plan are subject to FICA currently, the Company shall withhold the
Participant's portion of FICA from such other amounts payable to the
Participant as the Company deems appropriate.
SECTION 12
AMENDMENT AND TERMINATION
The Board of Directors may, at any time, amend or terminate this
Agreement, provided that the Board may not reduce or modify any benefit in
pay status to the Participant or beneficiary hereunder or any benefit that
would become payable hereunder if the Participant was involuntarily
terminated under Section 3.5(b) hereof on the day prior to such action by
the Board, without the prior written consent of the Participant.
SECTION 13
CONSTRUCTION
This Agreement shall be construed according to the laws of the State
of Michigan.
SECTION 14
FORM OF COMMUNICATION
Any election, application, claim, notice or other communication
required or permitted to be made by the Participant to the Company shall be
made in writing and in such form as the Company shall prescribe. Such
communication shall be effective upon mailing, if sent by first-class mail,
postage prepaid, and addressed to the Company's office at 6 Main Street,
Kent City, Michigan 49330.
-11-
<PAGE>
SECTION 15
CAPTIONS
The captions at the head of a section or a paragraph of this Agreement
are designed for convenience of reference only and are not to be resorted
to for the purpose of interpreting any provision of this Agreement.
SECTION 16
SEVERABILITY
The invalidity of any portion of this Agreement shall not invalidate
the remainder thereof, and said remainder shall continue in full force and
effect.
SECTION 17
BINDING EFFECT
This Agreement shall be binding upon and shall inure to the benefit of
the Company and the Participant, and each of their successors, heirs,
personal representatives and permitted assigns. No sale of substantially
all of the Company's assets shall be made without the buyer expressly
assuming the obligation of this Agreement. The Company further agrees that
it will not be a party to any merger, consolidation or reorganization
unless and until its obligations hereunder are expressly assumed by the
successor or successors.
IN WITNESS WHEREOF, this Agreement has been executed by the parties as
of the date first set forth above.
BY:/s/ ROBERT C. HUMPHREYS
ITS:CHAIRMAN
/s/ (I)
-12-
<PAGE>
BENEFICIARY DESIGNATION NOTICE
VALLEY RIDGE BANK
To the Plan Administrator of _______ Executive Salary Continuation Agreement:
Pursuant to the Provisions of my Executive Salary Continuation Agreement
with ____________________________________ permitting the designation of a
beneficiary or beneficiaries by the participant, I hereby designate the
following persons and entities as primary and secondary beneficiaries of
any benefit under said Agreement payable by reason of my death.
PRIMARY BENEFICIARY:
Name Address Relationship
__________________________________________________________________________
__________________________________________________________________________
SECONDARY (CONTINGENT) BENEFICIARY:
Name Address Relationship
__________________________________________________________________________
__________________________________________________________________________
THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY
RESERVED. ALL PRIOR DESIGNATIONS, IF ANY, OF BENEFICIARIES AND SECONDARY
BENEFICIARIES ARE HEREBY REVOKED.
The Plan Administrator shall pay all sums payable under this Agreement by
reason of my death to the Primary Beneficiary, if he or she survives me,
and if no Primary Beneficiary shall survive me, then to the Secondary
Beneficiary, and if no named beneficiary survives me, then the Plan
Administrator shall pay all amounts in accordance with the terms of the
Executive Salary Continuation Agreement. In the event that a named
beneficiary survives me and dies prior to receiving the entire benefit
payable under said Agreement, then and in that event, the remaining unpaid
benefit, payable according to the terms of the Agreement, shall be payable
to the personal representatives of the estate of said deceased beneficiary,
who survives me, but die prior to receiving the total benefit.
____________________________ __________________________________
Date of Designation Signature of Executive
-13-
EXHIBIT 21
SUBSIDIARIES OF VALLEY RIDGE FINANCIAL CORP.
The following lists the subsidiaries of the Registrant and the state or
jurisdiction of incorporation.
NAME OF SUBSIDIARY INCORPORATED
Valley Ridge Bank Michigan
Valley Ridge Investments, Inc. Michigan
<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, with full power of
substitution, 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, 1997, 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 21, 1998 S/DONALD SWANSON
(signature)
DONALD SWANSON
(please type or print name)
VALLEY RIDGE BANK DIRECTOR
(please type or print title)
-1-
<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, with full power of
substitution, 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, 1997, 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 21, 1998 S/DON VAN SINGEL
(signature)
DON VAN SINGEL
(please type or print name)
VALLEY RIDGE BANK DIRECTOR
(please type or print title)
-2-
<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, with full power of
substitution, 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, 1997, 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 21, 1998 S/PAUL K. SPOELMAN
(signature)
PAUL K. SPOELMAN
(please type or print name)
VALLEY RIDGE BANK DIRECTOR
(please type or print title)
-3-
<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, with full power of
substitution, 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, 1997, 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 21, 1998 S/JOHN NIEDERER
(signature)
JOHN NIEDERER
(please type or print name)
VALLEY RIDGE BANK DIRECTOR
(please type or print title)
-4-
<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, with full power of
substitution, 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, 1997, 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 21, 1998 S/DENNIS NELSON
(signature)
DENNIS NELSON
(please type or print name)
VALLEY RIDGE BANK DIRECTOR
(please type or print title)
-5-
<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, with full power of
substitution, 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, 1997, 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 21, 1998 S/BEN LANDHEER
(signature)
BEN LANDHEER
(please type or print name)
VALLEY RIDGE BANK DIRECTOR
(please type or print title)
-6-
<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, with full power of
substitution, 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, 1997, 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 21, 1998 S/ROBERT C. HUMPHREYS
(signature)
ROBERT C. HUMPHREYS
(please type or print name)
CHAIRMAN BOARD
(please type or print title)
-7-
<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, with full power of
substitution, 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, 1997, 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 21, 1998 S/RONALD HANSEN
(signature)
RONALD HANSEN
(please type or print name)
VALLEY RIDGE BANK DIRECTOR
(please type or print title)
-8-
<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, with full power of
substitution, 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, 1997, 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 21, 1998 S/GARY GUST
(signature)
GARY GUST
(please type or print name)
DIRECTOR
(please type or print title)
-9-
<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, with full power of
substitution, 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, 1997, 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 21, 1998 S/FRED FINKBEINER
(signature)
FRED FINKBEINER
(please type or print name)
VALLEY RIDGE BANK DIRECTOR
(please type or print title)
-10-
<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, with full power of
substitution, 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, 1997, 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 21, 1998 S/JERRY ARENDS
(signature)
JERRY ARENDS
(please type or print name)
VALLEY RIDGE BANK DIRECTOR
(please type or print title)
-11-
<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, with full power of
substitution, 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, 1997, 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 21, 1998 S/K. TIM BULL
(signature)
K. TIM BULL
(please type or print name)
DIRECTOR
(please type or print title)
-12-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED AUDITED FINANCIAL STATEMENTS OF VALLEY RIDGE FINANICAL
CORP. AND ITS SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,503
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,300
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 92,417
<ALLOWANCE> 1,187
<TOTAL-ASSETS> 130,875
<DEPOSITS> 105,175
<SHORT-TERM> 284
<LIABILITIES-OTHER> 1,118
<LONG-TERM> 11,000
<COMMON> 6,200
0
0
<OTHER-SE> 7,098
<TOTAL-LIABILITIES-AND-EQUITY> 130,875
<INTEREST-LOAN> 8,615
<INTEREST-INVEST> 1,208
<INTEREST-OTHER> 113
<INTEREST-TOTAL> 9,937
<INTEREST-DEPOSIT> 3,501
<INTEREST-EXPENSE> 4,016
<INTEREST-INCOME-NET> 5,921
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<EXPENSE-OTHER> 4,921
<INCOME-PRETAX> 1,895
<INCOME-PRE-EXTRAORDINARY> 1,895
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<CHANGES> 0
<NET-INCOME> 1,482
<EPS-PRIMARY> 2.39
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 107
<LOANS-PAST> 2,090
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<RECOVERIES> 43
<ALLOWANCE-CLOSE> 1,187
<ALLOWANCE-DOMESTIC> 706
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 481
</TABLE>
