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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10
GENERAL FORM FOR
REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934
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VALLEY COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1913479
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1307 EAST MAIN, PUYALLUP, WASHINGTON 98372
(Address of principal executive offices) (Zip Code)
(253) 848-2316
(Registrant's telephone number, including area code)
Securities to be registered pursuant to Section 12(b) of the Act:
NONE
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
(Title of Class)
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TABLE OF CONTENTS PAGE
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ITEM 1. BUSINESS 3
ITEM 2. FINANCIAL INFORMATION 12
ITEM 3. PROPERTIES 27
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 27
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS 28
ITEM 6. EXECUTIVE COMPENSATION 30
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 31
ITEM 8. LEGAL PROCEEDINGS 31
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 32
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES 32
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED 33
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS 35
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 36
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 59
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS 59
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VALLEY COMMUNITY BANCSHARES, INC.
FORM 10 REGISTRATION STATEMENT
ITEM 1. BUSINESS OF VALLEY COMMUNITY BANCSHARES, INC., AND THE BANKS
GENERAL
Valley Community Bancshares, Inc. (the "Company") is a bank holding
company registered under the Bank Holding Company Act of 1956, as amended. The
administrative offices of the Company are located at 1307 East Main Avenue,
Puyallup, Washington 98372, and its telephone number is (253) 848-2316.
The Company was organized and incorporated under the laws of the State
of Washington as a holding company for its principal banking subsidiary,
Puyallup Valley Bank, a state chartered, FDIC insured commercial bank, through a
reorganization completed on July 1, 1998. The Company conducts its business
primarily through Puyallup Valley Bank, but has recently completed the
acquisition of Valley Bank, a newly organized state chartered FDIC insured
commercial bank subsidiary located in Auburn, Washington. Puyallup Valley Bank
and Valley Bank are referred to as the "Banks" in this Registration Statement.
The principal source of the Company's revenue are (i) interest and fees
on loans; (ii) deposit service charges; (iii) merchant credit card processing
fees; (iv) federal funds sold (funds loaned on a short-term basis to other
banks); and (v) interest on investments (principally government securities). The
Bank's lending activity consists of short-to-medium-term commercial and consumer
loans, including operating loans and lines of credit, equipment loans,
automobile loans, recreational vehicle and truck loans, personal loans or lines
of credit, home improvement loans and rehabilitation loans. The Banks also offer
cash management services, merchant credit card processing, safe deposit boxes,
wire transfers, direct deposit or payroll and social security checks, automated
teller machine access, and automatic drafts for various accounts.
PUYALLUP VALLEY BANK
Puyallup Valley Bank is a Washington state-charted commercial bank that
provides full-service banking to businesses and residents within the Puyallup
community and its surrounding area. Puyallup Valley Bank places particular
emphasis on serving the small to medium sized business segment of the market by
making available a line of banking products tailored to their needs, with those
services delivered by experienced professionals concerned with building
long-term relationships. Puyallup Valley Bank conducts business out of six
full-service offices and one drive-up facility.
The organizers of Puyallup Valley Bank commenced formation efforts in
1972. Puyallup Valley Bank was formally incorporated on January 9, 1973, under
the laws of the State of Washington after having received approval to organize
from the Division and the FDIC, and commenced operations during October, 1973.
Puyallup Valley Bank was organized with capital of $400,000 through the sale of
20,000 shares of Common Stock at a sales price of $20 per share.
Puyallup Valley Bank had net income of $1,520,000 in 1999, $1,568,000
in 1998, and $1,592,000 in 1997. Total Assets at December 31, 1999 and 1998 were
$124,909,000 and $125,189,000, respectively.
VALLEY BANK
Valley Bank is a newly organized commercial bank that commenced
operations on January 11, 1999. Valley Bank was formally incorporated
December 3, 1998, under the laws of the State of Washington after having
received approval to organize from the Division of Banks of the Washington
Department of Financial Institutions (the "Division") and the FDIC. Valley
Bank was founded by a group of business and professional individuals in the
King County area as a commercial bank subsidiary of the Company to serve the
needs of the community in and around the city Auburn. Valley Bank engages in
a general commercial banking business in the Auburn area of King County and
offers commercial banking services to small and medium size businesses,
professionals and retail customers in the bank's market area.
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Valley Bank is a solely-owned subsidiary of the Company and with
initial capital of $4,025,000, the minimum amount required to capitalize a
bank in the Auburn community under federal and state law.
Valley Bank had net loss of approximately $125,000 in 1999 and total
assets at December 31, 1999 of approximately $8,002,000. It is anticipated
that Valley Bank will continue to incur operating losses in the next year(s)
of operation. It is anticipated that such losses will not have a significant
impact on the Company.
BUSINESS STRATEGY
As a locally owned financial institution, the Company emphasizes local
banking needs. The Company seeks to achieve growth and maintain a strong return
on equity. The strategy to accomplish these goals is to focus on small
businesses that traditionally develop an exclusive relationship with a single
bank. The Banks also have the size to give personal attention required by
business people and significant credit expertise to help these businesses meet
their goals.
The Banks offer to its customers a full range of deposit services that
are typically available in most banks and savings and loan associations,
including checking accounts, savings accounts and other time deposits of various
types, ranging from money market accounts to longer term certificates of
deposit. One major goal in developing the Bank's product mix is to keep the
product offerings as simple as possible, both in terms of the number of products
and the features and benefits of the individual services. The transaction
accounts and time certificates are tailored to the principal market areas at
rates competitive in the area. In addition, retirement accounts such as IRAs
(Individual Retirement Accounts) are available. The FDIC up to the maximum
amount insures all deposit accounts. The Banks solicit these accounts from
small-to-medium sized businesses in their respective primary trade areas, and
from individuals who live and/or work within these areas.
The Banks offer loans to their diverse markets and communities. The
market consists of south King County and east Pierce County in general and the
areas in and around Puyallup and Auburn in particular. Loans are provided to
creditworthy borrowers regardless of their race, color, national origin,
religion, sex, age, marital status, sexual orientation, disability, receipt of
public assistance, or any basis prohibited by law. The Banks intend to fulfill
this commitment while maintaining prudent credit practices. In the course of
fulfilling its obligation to meet the credit needs of the communities which they
serve, the Banks give consideration to each credit application regardless of the
fact that the applicant may reside in a low to moderate income neighborhood, and
without regard to the geographic location of the residence, property or business
within their market areas.
The Banks provide innovative, quality, financial products that meet the
banking needs of their customers and communities. The loan programs and
acceptance of certain loans may vary from time-to-time depending upon funds
available and regulations governing the banking industry. The Banks offer all
basic types of credit to their local communities including commercial and
consumer loans. The types of loans within these categories are as follows:
COMMERCIAL LOANS. Commercial loans are typically made to sole
proprietorships, partnerships, corporations, and other business entities,
municipalities, and individuals, where the loan is to be used primarily for
business purposes. The types of loans the Banks offer include:
- Small Business Administration financing programs
- operating and working capital loans
- loans to finance capital purchases
- commercial real estate loans
- business lines of credit
- term loans
- loans to professionals
- letters of credit
CONSUMER LOANS. Consumer loans are typically available to finance
consumer purchases, such as automobiles, household furnishings, boats, and
education. Loans are available on both a secured and an unsecured basis. The
following types of consumer loans are available:
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- automobiles and trucks
- boats and recreational vehicles
- personal loans and lines of credit
- home equity lines of credit
- home improvement and rehabilitation loans
- credit card services
- consumer real estate loans
Other types of credit programs, such as loans to nonprofit
organizations, public entities, for community development, and other
governmental offered programs also are available.
The Banks offer traditional banking services, such as safe deposit
boxes, wire transfers, direct deposit of payroll and social security checks,
automated teller machine access, and automatic drafts for various accounts. The
Banks do not offer trust services.
EMPLOYEES
At December 31, 1999, the Banks had 49 full and 19 part time employees.
The Company does not have any employees. Management considers its relations with
employees to be satisfactory.
COMPETITION
The geographic market area served by the Banks is highly competitive
with respect to both loans and deposits. The Banks compete principally with
commercial banks, savings and loan associations, credit unions, mortgage
companies, and other financial institutions. The major commercial bank
competitors are the regional banks (Columbia State Bank and Frontier Bank) and
national banks (Key Bank National Association, Bank of America National Trust
and Savings Association, U.S. Bank National Association and Wells Fargo Bank)
that have a branch or branches within the Bank's primary trade areas. Among the
advantages such larger banks have are their ability to finance wide-ranging
advertising campaigns and to allocate their investment assets to geographic
regions of higher yield and demand. Such banks offer certain services which are
not offered directly by the Bank (but are offered indirectly through
correspondent institutions); and, by virtue of their greater total
capitalization (legal lending limits to an individual customer are based upon a
percentage of a bank's total shareholder equity accounts), such banks have
substantially higher lending limits than the Banks.
The Banks also compete with the financial markets for funds. For
instance, yields on corporate and government debt securities and other
commercial paper affect the ability of commercial banks to attract and hold
deposits. Further, commercial banks compete for available funds with money
market instruments and similar investment vehicles offered by institutions such
as brokerage firms, credit card companies, and retailers (e.g., Sears, Roebuck &
Co.). In periods of high interest rates, such money market funds have provided
substantial competition to banks for deposits, and it is anticipated that they
may continue to do so in the future.
In order to compete with the other financial institutions in their
primary trade areas, the Banks use, to the fullest extent possible, the
flexibility which is accorded by independent status. This includes an emphasis
on specialized services, local promotional activity, and personal contacts by
the Banks' officers, directors and employees. The Banks also provide special
services and programs for individuals in their primary trade areas who are
employed in the business and professional fields.
The Company anticipates bank competition will continue to change
dramatically over the next several years as the major regional and national
banks continue to consolidate. These larger financial institutions will continue
the trend of consolidating their branch systems and providing incentives to
their customers to use electronic banking instead of visiting branches. It is
anticipated that credit unions, because of their tax benefits, will also
continue to show growth.
SUPERVISION AND REGULATION
The following generally refers to certain statutes and regulations
affecting the banking industry. These references provide brief summaries and
therefore are not complete and are qualified by the statutes and regulations
referenced. In
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addition, due to the numerous statutes and regulations that apply to and
regulate the operation of the banking industry, many are not referenced below.
The Company and the Banks are subject to extensive federal and
Washington state legislation, regulation and supervision. These laws and
regulations are primarily intended to protect depositors and the FDIC rather
than shareholders of the Company. The laws and regulations affecting banks and
bank holding companies have changed significantly over recent years, and there
is reason to expect that similar changes will continue in the future. Any change
in applicable laws, regulations or regulatory policies may have a material
effect on the business, operations and prospects of the Company. The Company is
unable to predict the nature or the extent of the effects on its business and
earnings that any fiscal or monetary policies or new federal or state
legislation may have in the future.
THE COMPANY
The Company is a bank holding company by virtue of its ownership of the
Banks, and is registered as such with the Federal Reserve. The Company is
subject to regulation under the Bank Holding Company Act of 1956, as amended
(the "BHCA"), which subjects the Company and the Banks to supervision and
examination by the Federal Reserve. Under the BHCA, the Company files with the
Federal Reserve annual reports of its operations and such additional information
as the Federal Reserve may require. The Federal Reserve Board may examine a bank
holding company and any of its subsidiaries and charge the company for the cost
of such an examination.
SOURCE OF STRENGTH TO THE BANKS. The Federal Reserve Board takes the
position that a bank holding company is required to serve as a source of
financial and managerial strength to its subsidiary banks and may not conduct
its operations in an unsafe or unsound manner. In addition, it is the Board's
position that in serving as a source of strength to its subsidiary banks, bank
holding companies should use available resources to provide adequate capital
funds to its subsidiary banks during periods of financial stress or adversity
and should maintain the financial flexibility and capital raising capacity to
obtain additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Board to be an unsafe
and unsound banking practice or a violation of the Board's regulations or both.
FEDERAL RESERVE APPROVAL. Bank holding companies must obtain the
Federal Reserve's approval before they: (1) acquire direct or indirect ownership
or control of any voting shares of any bank if, after such acquisition, they
would own or control, directly or indirectly, more than 5% of the voting shares
of such bank; (2) merge or consolidate with another bank holding company; and
(3) acquire substantially all of the assets of any additional banks. Until
September 1995, the BHCA also prohibited bank holding companies from acquiring
any such interest in any bank or bank holding company located in a state other
than the state in which the bank holding company was located, unless the laws of
both states expressly authorized the acquisition. Now, subject to certain state
restrictions, such as age and contingency laws, a bank holding company that is
adequately capitalized and adequately managed may acquire the assets of an
out-of-state bank.
CONTROL OF NONBANKS. With certain exceptions, the BHCA also prohibits
bank holding company from acquiring direct or indirect ownership or control of
voting shares in any company other than a bank or a bank holding company unless
the Federal Reserve finds the company's business to be incidental to the
business of banking. When making this determination, the Federal Reserve in part
considers whether allowing a bank holding company to engage in those activies
would offer advantages to the public that would outweigh possible adverse
effects.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996
("Economic Growth Act") amended the BHCA to eliminate the requirement that a
bank holding company seek Federal Reserve approval before engaging de novo in
permissible nonbanking activities, if the holding company is well capitalized
and meets certain other criteria specified in the same statute. A bank holding
company meeting the specifications is now required only to notify the Federal
Reserve within 10 business days after the activity has begun.
CONTROL TRANSACTIONS. The Change in Bank Control Act of 1978, as
amended, requires a person or group of persons acquiring "control" of a bank
holding company to provide the FRB with at least 60 days' prior written notice
of the proposed acquisition. Following receipt of this notice, the Federal
Reserve has 60 days to issue a notice disapproving the proposed acquisition, but
the Federal Reserve may extend this time period for up to another 30 days. An
acquisition may be completed before the disapproval period expires if the
Federal Reserve issues written notice of its intent not to disapprove the
action.
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Under a rebuttable presumption established by the Federal Reserve, the
acquisition of 10% or more of a class of voting stock of a bank holding company
with a class of securities registered under Section 12 of the Securities
Exchange Act of 1934, as amended ("Exchange Act") would, under the circumstances
set forth in the presumption, constitute the acquisition of control. In
addition, any "company" would be required to obtain the approval of the Federal
Reserve under the BHCA before acquiring 25% (5% if the "company" is a bank
holding company) or more of the outstanding shares of Frontier, or otherwise
obtain control over Frontier.
AFFILIATE TRANSACTIONS. The Company and the Banks are deemed affiliates
within the meaning of the Federal Reserve Act, and transactions between
affiliates are subject to certain restrictions. Generally, Sections 23A and 23B
of the Federal Reserve Act: (1) limit the extent to which the financial
institution or its subsidiaires may engage in "covered transactions" with an
affiliate, as defined, to an amount equal to 10% of such institution's capital
and surplus and an aggregate limit on all such transactions with all affiliates
to an amount equal to 20% of such capital and surplus, and (2) require all
transactions with an affiliate, whether or not "covered transactions," to be on
terms substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar type of transactions.
MANAGEMENT REGULATION. Federal law: (1) sets forth the circumstances
under which officers or directors of a financial institution may be removed by
the institution's federal supervisory agency; (2) places restraints on lending
by an institution to its executive oficers, directors, principal stockholders,
and their related insterests; and (3) prohibits management personnel from
serving as a director or in other management positions of another financial
institution whose assets exceed a specified amount or which has an office within
a specified geographic area.
TIE-IN LIMITATIONS. The Company and the Banks are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, sale or lease of property or furnishing of services. For example, with
certain exceptions, neither the Company nor the Banks may condition an extension
of credit on either (1) a requirement that the customer obtain additional
services provided by it or (2) an agreement by the customer to refrain from
obtaining other services from a competitor. Effective April 1997, the Federal
Reserve has adopted significant amendments to its anti-tying rules that:
(1) remove Federal Reserve-imposed anti-tying restrictions on bank holding
companies and their non-bank subsidiaries; (2) create exemptions from the
statutory restriction on bank tying arrangements to allow banks greater
flexibility to package products with their affiliates; and (3) establish a
safe harbor from the tying restrictions for certain foreign transactions.
BANKING SUBSIDIARIES
Applicable federal and state statutes and regulations governing a
bank's operations relate, among other matters, to capital requirements, required
reserves against deposits, investments, loans, legal lending limits, certain
interest rates payable, mergers and consolidations, borrowings, issuance of
securities, payment of dividends (see below), establishment of branches, and
dealings with affiliated persons. The FDIC has authority to prohibit banks under
their supervision from engaging in what they consider to be an unsafe and
unsound practice in conducting their business.
The Banks are state-chartered commercial banks subject to extensive
regulation and supervision by the Washington Department of Financial
Institutions Division of Banks ("DFI"). The Banks are also subject to regulation
and examination by the FDIC, which insures their respective deposits to the
maximum extent permitted by law. The federal laws that apply to the Banks
regulate, among other things, the scope of their business, their investments,
their reserves against deposits, the timing of the availability of deposited
funds and the nature and amount of and collateral for loans. The laws and
regulations governing the Banks generally have been promulgated to protect
depositors and not to protect stockholders of such institutions or their holding
companies.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal banking regulators to adopt regulations or
guidelines in a number of areas to ensure bank safety and soundness, including:
internal controls; credit underwriting; asset growth; management compensation;
ratios of classified assets to capital; and earnings. FDICIA also contains
provisions which are intended to change independent auditing requirements;
restrict the activities of state-chartered insured banks; amend various consumer
banking laws; limit the ability of "undercapitalized banks" to borrow from the
Federal Reserve's discount window; and require regulators to perform periodic
on-site bank examinations and set standards for real estate lending.
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LOANS-TO-ONE BORROWER. Each of the Banks is subject to limitations on
the aggregate amount of loans that it can make to any one borrower, including
related entities. Applicable regulations generally limit loans-to-one borrower
to 20% of unimpaired capital. Each of the Banks is in compliance with applicable
loans-to-one borrower requirements.
FDIC INSURANCE. Generally, customer deposit accounts in banks are
insured by the FDIC for up to a maximum amount of $100,000. The FDIC has adopted
a risk-based insurance assessment system under which depository institutions
contribute funds to the BIF and/or the SAIF, as applicable, based on their risk
classification.
In September of 1996, the Deposit Insurance Funds Act of 1996 ("Funds
Act") was enacted. The Funds Act provided, among other things, for the
recapitalization of the SAIF through a special assessment on all depository
institutions that hold SAIF insured deposits. The one-time assessment was
designed to place the SAIF at its 1.25 reserve ratio goal.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law. The insurance may be
terminated permanently, if the institution has no tangible capital. If deposit
insurance is terminated, the accounts at the institution at the time of the
termination, less subsequent withdrawals, will continue to be insured for a
period of six months to two years, as determined by the FDIC.
CAPITAL ADEQUACY REQUIREMENTS. The Federal Reserve and the FDIC
(collectively, the "Agencies") have adopted risk-based capital guidelines for
banks and bank holding companies that are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies and account for off-balance sheet items. The guidelines are
minimums, and the federal regulators have noted that banks and bank holding
companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios in excess
of the minimums. Failure to achieve and maintain adequate capital levels may
give rise to supervisory action through the issuance of a capital directive to
ensure the maintenance of required capital levels.
The current guidelines require all federally-regulated banks to
maintain a minimum risk-based total capital ratio equal to 8%, of which at least
4% must be Tier 1 capital. Tier 1 capital includes common shareholders' equity,
qualifying perpetual preferred stock, and minority interests in equity accounts
of consolidated subsidiaries, but excludes goodwill and most other intangibles
and the allowance for loan and lease losses. Tier 2 capital includes the excess
of any preferred stock not included in Tier 1 capital, mandatory convertible
securities, hybrid capital instruments, subordinated debt and intermediate
term-preferred stock, 20% of unrealized gain of equity securities, and general
reserves for loan and lease losses up to 1.25% of risk-weighted assets. Neither
of the Banks have received any notice indicating that it will be subject to
higher capital requirements.
Under these guidelines, banks' assets are given risk-weights of 0%,
20%, 50% or 100%. Most loans are assigned to the 100% risk category, except for
first mortgage loans fully secured by residential property and, under certain
circumstances, residential construction loans (both carry a 50% rating). Most
investment securities are assigned to the 20% category, except for municipal or
state revenue bonds (which have a 50% rating) and direct obligations of or
obligations guaranteed by the United States Treasury or United States Government
Agencies (which have a 0% rating).
The Agencies have also implemented a leverage ratio, which is equal to
Tier 1 capital as a percentage of average total assets less intangibles, to be
used as a supplement to the risk-based guidelines. The principal objective of
the leverage ratio is to limit the maximum degree to which a bank may leverage
its equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an additional
cushion of at least 100 to 200 basis points. Any institution operating at or
near the 3% level is expected to be a strong banking organization without any
supervisory, financial or operational weaknesses or deficiencies. Any
institutions experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions, well above the
minimum levels.
PROMPT CORRECTIVE ACTION. Regulations adopted by the Agencies as
required by FDICIA impose even more stringent capital requirements. The FDIC and
other Agencies must take certain "prompt corrective action" when a bank fails to
meet capital requirements. The regulations establish and define five capital
levels: (1) "well-capitalized," (2) "adequately capitalized," (3)
"undercapitalized," (4) "significantly undercapitalized" and (5) "critically
undercapitalized." To qualify as "well-capitalized," an institution must
maintain at least 10% total risk-based capital, 6% Tier 1 risk-based capital,
and a leverage ratio of no less than 5%. Increasingly severe restrictions are
imposed on the payment of dividends and management fees, asset growth and other
aspects of the operations of institutions that fall below the category of being
"adequately
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capitalized" (which requires at least 8% total risk-based capital, 4% Tier 1
risk-based capital, and a leverage ratio of at least 4%). Undercapitalized
institutions are required to develop and implement capital plans acceptable to
the appropriate federal regulatory agency. Such plans must require that any
company that controls the undercapitalized institution must provide certain
guarantees that the institution will comply with the plan until it is adequately
capitalized. As of the date of this Prospectus/Proxy statement, neither
Frontier, Valley, nor their respective subsidiaries were subject to any
regulatory order, agreement, or directive to meet and maintain a specific
capital level for any capital measure.
RESTRICTIONS ON DIVIDENDS. Dividends paid to the Company by Puyallup
Valley Bank is the material source of the Company's cash flow. Various federal
and state statutory provisions limit the amount of dividends banking
subsidiaries are permitted to pay to their holding companies without regulatory
approval. Federal Reserve policy further limits the circumstances under which
bank holding companies may declare dividends. For example, a bank holding
company should not continue its existing rate of cash dividends on its common
stock unless its net income is sufficient to fully fund each dividend and its
prospective rate of earnings retention appears consistent with its capital
needs, asset qualify, and overall financial condition.
If, in the opinion of the applicable federal banking agency, a
depository institution under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the institution, could include the payment of dividends), the
agency may require, after notice and hearing, that such institution cease and
desist from such practice. In addition, the Federal Reserve and the FDIC have
issued policy statements which provide that insured banks and bank holding
companies should generally pay dividends only out of current operating earnings.
Under Washington law, the Banks may not declare or pay a cash dividend
on their capital stock if it would cause its net worth to be reduced below (1)
the amounts required for liquidation accounts or (2) the net worth requirements,
if any, imposed by the Director of DFI. Dividends on Frontier Bank's capital
stock may not be paid in an aggregate amount greater than the aggregate retained
earnings of Frontier Bank, without the approval of DFI.
FEDERAL RESERVE SYSTEM. The Federal Reserve requires all depository
institutions to maintain reserves against their transaction accounts (primarily
checking accounts) and non-personal time deposits. Currently, reserves of 3%
must be maintained against total transaction accounts of $49.8 million or less
(after a $4.2 million exemption), and an initial reserve of 10% (subject to
adjustment by the Federal Reserve to a level between 8% and 14%) must be
maintained against that portion of total transaction accounts in excess of such
amount. Both of the Banks are in compliance with applicable requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve may be used to satisfy applicable liquidity requirements.
Because required reserves must be maintained in the form of vault cash or a
non-interest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the earning assets of Frontier and Valley's
banking subsidiaries.
REGULATORY DEVELOPMENTS
Congress has enacted significant federal banking legislation in recent
years. Included in this legislation have been the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). FIRREA, among other
things, (i) created two deposit insurance funds administered by the FDIC, the
Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"),
(ii) permitted commercial banks that meet certain housing-related asset
requirements to secure advances and other financial services from local FHLBs,
(iii) restructured the federal regulatory agencies for savings associations, and
(iv) enhanced the regulators' enforcement powers over financial institutions and
their affiliates.
FDICIA went substantially farther than FIRREA in establishing a more
rigorous regulatory environment. Under FDICIA. regulatory authorities are
required to enact a number of new regulations, substantially all of which are
now effective. These regulations include among other things, (i) a new method
for calculating deposit insurance premiums based on risk, (ii) restrictions on
acceptance of brokered deposits except by well-capitalized institutions, (iii)
additional limitations on loans to executive officers and directors of banks,
(iv) the employment of interest rate risk in the calculation of risk-based
capital, (v) safety and soundness standards that take into consideration, among
other things, management, operations, asset quality, earnings and compensation,
(vi) a five-tiered rating system from well-capitalized to critically
undercapitalized, along with the
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prompt corrective action the agencies may take depending on the category, and
(vii) new disclosure and advertising requirements with respect to interest paid
on savings accounts.
FDICIA and regulations adopted by the FDIC impose additional
requirements for annual independent audits and reporting when a bank begins a
fiscal year with assets of $500 million or more. Such banks, or their holding
companies, are also required to establish audit committees consisting of
directors who are independent of management.
INTERSTATE BANKING AND BRANCHING: The Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 ("Interstate Act") generally permits
nationwide interstate banking and branching by relaxing federal law restrictions
on interstate banking and providing general authorization for interstate
branching. Subject to certain state laws, such as age and contingency laws, the
Interstate Act allows adequately capitalized and adequately managed bank holding
companies to purchase the assets of out-of-state banks). Additionally, since
June 1, 1997, the Interstate Act permits interstate bank mergers, subject to
these state laws, unless the home state of either merging bank has "opted-out"
of these provisions by enacting "opt-out" legislation. The Interstate Act does
allow states to impose certain conditions on interstate bank mergers within
their borders; for example, states may require that the in-state merging bank
exist for up to five years before the interstate merger. Under the Interstate
Act, states may also "opt-in" to de novo branching, allowing out-of-state banks
to establish de novo branches within the state.
In 1996, Washington enacted "opting in" legislation authorizing
interstate mergers pursuant to the Interstate Act. Accordingly, as of June 6,
1996, an out-of-state bank holding company may now acquire more than 5% of the
voting shares of a Washington-based bank, regardless of reciprocity, provided
such bank or its predecessor has been doing business for at least five years
prior to the acquisition. Further, an out-of-state bank may engage in banking in
Washington if the requirements of Washington's interstate banking statute are
met, and the bank either (1) was lawfully engaged in banking in Washington on
June 6, 1996, (2) resulted from an interstate combination pursuant to Washington
law, (3) resulted from a relocation of a head office of a state bank or a main
office of a national bank pursuant to federal law, or (4) resulted from the
establishment of a savings bank branch in compliance with applicable Washington
law. Additionally, the Director of the Division may approve interstate
combinations if the basis for such approval does not discriminate against
out-of-state banks, out-of-state holding companies, or their subsidiaries.
The Agencies recently adopted regulations, under which banks are
prohibited from using their interstate branches primarily for deposit
production. The Agencies have accordingly implemented a loan-to-deposit ratio
screen to ensure compliance with this prohibition.
Further effects on the Company and the Banks may result from the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Community
Development Act"). The Community Development Act (i) establishes and funds
institutions that are focused on investing in economically distressed areas and
(ii) streamlines the procedures for certain transactions by financial
institutions with federal banking agencies.
Among other things, the Community Development Act requires the federal
banking agencies to (i) consider the burdens that are imposed on financial
institutions when new regulations are issued or new compliance burdens are
created and (ii) coordinate their examinations of financial institutions when
more than one agency is involved. The Community Development Act also streamlines
the procedures for forming certain one-bank holding companies and engaging in
authorized non-banking activities.
Various regulatory relief provisions were also enacted by recent
legislation. The new legislation includes, among other things, changes to (i)
the Truth in Lending Act and the Real Estate Settlement Procedures Act to
coordinate and simplify the two laws' disclosure requirements, (ii) eliminate
civil liability for violations of the Truth in Savings Act after five years,
(iii) streamline the application process for a number of bank holding company
and bank applications, (iv) establish a privilege from discovery in any civil or
administrative proceeding or bank examination for any fair lending self-trust
results conducted by, or on behalf of, a financial institution in certain
circumstances, (v) repeal the FDICIA requirement that independent public
accountants attest to compliance with designated safety and soundness
regulations, (vi) impose a continuous regulatory review of regulations to
identify and eliminate outdated and unnecessary rules, and (vii) various other
miscellaneous provisions to reduce regulatory burdens.
10
<PAGE>
In 1999, the Financial Services Modernization Act was enacted which:
(1) repealed historical restrictions on preventing banks from affiliating with
securities firms, (2) broadens the activities that may be conducted by national
banks and banking subsidiaries of holding companies, and (3) provides an
enhanced framework for protecting the privacy of consumers' information. In
addition, bank holding companies may be owned, controlled or acquired by any
company engaged in financially related activities, as long as such company meets
regulatory requirements. To the extent that this legislation permits banks to
affiliate with financial services companies, the banking industry may experience
further consolidation, although the impact of this legislation on the Company
and the Banks is unclear at this time.
REGULATORY ENFORCEMENT AUTHORITY
The enforcement powers available to federal banking regulators are
substantial and include, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, enforcement actions must be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions, or inactions, may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities. Applicable law
also requires public disclosure of final enforcement actions by the federal
banking agencies.
NATIONAL MONETARY POLICIES
In addition to being affected by general economic conditions, the
earnings and growth of the Banks are affected by the policies of regulatory
authorities, including the Board of Governors of the Federal Reserve System. An
important function of the Federal Reserve System is to regulate the money
supply, credit conditions and interest rates. Among the instruments used to
implement these objectives are open market operations in U.S. Government
securities, changes in reserve requirements against bank deposits and the
Federal Reserve Discount Rate, which is the rate charged member banks to borrow
from the Federal Reserve Bank. These instruments are used in varying
combinations to influence overall growth and distribution of credit, bank loans,
investments and deposits, and their use may also affect interest rates charged
on loans or paid on deposits.
The monetary policies of the Federal Reserve Board have had a
significant effect on the operating results of commercial banks in the past and
are expected to do so in the future. Also important in terms of effect on banks
are controls on interest rates paid by banks on deposits and types of deposits
that may be offered by banks. The Depository Institutions Deregulation
Committee, created by Congress in 1980, phased out ceilings on the rate of
interest that may be paid on deposits by commercial banks and savings and loan
associations, with the result that the differentials between the maximum rates
banks and savings and loans can pay on deposit accounts have been eliminated.
The effect of deregulation of deposit interest rates has been to increase banks'
cost of funds and to make banks more sensitive to fluctuation in market rates.
FORWARD-LOOKING STATEMENTS
Except for historical financial information contained herein, certain
matters discussed in this registration statement of Valley Community Bancshares,
Inc. constitute "forward-looking statements" within the meaning of the
Securities Exchange Act of 1934, as amended. Forward-looking statements are
subject to risks and uncertainties that may cause actual future results to
differ materially. Such risks and uncertainties with respect to Valley Community
Bancshares, Inc., Puyallup Valley Bank and Valley Bank include those related to
the economic environment, particularly in the areas in which the Company and the
Bank's operates, competitive products and pricing, fiscal and monetary policies
of the U.S. government, changes in governmental regulations affecting financial
institutions, including regulatory fees and capital requirements, changes in
prevailing interest rates, acquisitions and the integration of acquired
businesses, credit risk management and asset/liability management, the financial
and securities markets, and the availability of and costs associated with
sources of liquidity
ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The following financial data of the Company are derived from the
Company's historical audited financial statements and related footnotes. The
information set forth below should be read in conjunction with the "Management's
Discussion and Analysis of Financial Condition and Results of Operation" and the
Financial Statements and related Notes contained elsewhere in this Registration
Statement.
11
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
(dollars in thousands, except per share amounts)
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Interest Income $ 8,958 $ 8,694 $ 8,291 $ 7,516 $ 7,285
Interest expense 2,973 3,139 3,079 2,939 2,666
----------- ----------- ----------- ----------- ---------
Net interest income 5,985 5,555 5,212 4,577 4,619
Provision for loan losses 84 9 66 24 39
----------- ----------- ----------- ----------- ---------
Net interest income after provision for
loan losses 5,901 5,546 5,146 4,553 4,580
Noninterest income 589 662 647 696 648
Noninterest expense 4,516 4,111 3,604 3,367 3,323
----------- ----------- ----------- ----------- ---------
Income before provision for income tax 1,974 2,097 2,189 1,882 1,905
Provision for income tax 580 616 597 517 510
----------- ----------- ----------- ----------- ---------
Net Income $ 1,394 $ 1,481 $ 1,592 $ 1,365 $ 1,395
=========== =========== =========== =========== =========
PER SHARE DATA
Cash Dividends $ 135 $ 871 $ 457 $ 429 $ 425
Cash Dividends per weighted average shares
outstanding $ 0.12 $ 0.86 $ 0.46 $ 0.43 $ 0.43
Basic earnings per share $ 1.24 $ 1.46 $ 1.59 $ 1.38 $ 1.40
Diluted earnings per share $ 1.21 $ 1.41 $ 1.53 $ 1.34 $ 1.40
Weighted average shares outstanding 1,119,780 1,012,844 1,001,013 987,192 995,401
Weighted average diluted shares outstanding 1,152,576 1,047,745 1,038,599 1,021,198 998,287
BALANCE SHEET DATA
Total Assets $133,837 $125,329 $112,994 $106,897 $97,316
Net loans 77,675 66,841 63,740 57,582 57,505
Deposits 113,809 110,283 98,150 93,488 85,389
Stockholders' equity 18,724 14,078 13,436 12,240 11,184
Equity to assets ratio 13.99% 11.23% 11.89% 11.45% 11.49%
</TABLE>
VALLEY COMMUNITY BANCSHARES, INC.
Selected Financial Data (continued)
<TABLE>
<CAPTION>
Year Ended December 31,
(dollars in thousands, except per share amounts)
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
FIVE YEAR FINANCIAL PERFORMANCE
Net Income $ 1,394 $ 1,481 $ 1,592 $ 1,365 $1,395
Average Assets 132,945 118,960 111,302 102,331 96,259
Average Stockholders' Equity 17,862 13,742 12,632 11,483 10,338
Return on Assets (net income divided by average
assets) 1.05% 1.24% 1.43% 1.33% 1.45%
Return on Equity (net income divided by
average equity) 7.80% 10.78% 12.60% 11.89% 13.49%
Efficiency Ratio (noninterest expense
divided by noninterest income plus net
interest income) 68.69% 66.13% 61.51% 63.85% 63.09%
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion is provided for the consolidated operations
of the Company, which include its wholly owned subsidiaries, Puyallup Valley
Bank and Valley Bank. The purpose of this discussion is to focus on
significant factors affecting the Company's financial condition and results
of operations.
12
<PAGE>
The Company earned net income of $1,394,000 in 1999, compared to net
income of $1,481,000 in 1998 and net income of $1,592,000 in 1997. The
decrease in operating income is the result of the expansion strategy embarked
by the Company in 1998, when the Company organized as a holding company for
its principal banking subsidiary, Puyallup Valley Bank, through
reorganization completed on July 1, 1998. Subsequently, the Company completed
a new branch facility in Graham, Washington, and completed the organization
of Valley Bank on January 11, 1999. This expansion is primarily responsible
for the $87,000 decrease in net income reported in 1999 and the $111,000
decrease in net income reported in 1998.
The Company's net income is derived principally from the operating
results of its banking subsidiaries, namely Puyallup Valley Bank and Valley
Bank. Puyallup Valley Bank is a well-established commercial bank and
generates the Company's operating income. Puyallup Valley Bank had net income
of $1,520.000 in 1999, $1,568,000 in 1998, and $1,592,000 in 1997. The
decrease in Puyallup Valley Bank's net income, during 1998 and 1999, is
related to the opening of a new branch facility in Graham, Washington during
the fourth quarter of 1998. Valley Bank, which incurred losses of $125,000 in
1999, is anticipated to continue to incur operating losses during the early
years of its operation. It is anticipated that the losses incurred by Valley
Bank during its initial years will not have a significant impact on the
company. However, there can be no assurance that Valley Bank will not incur
more significant losses, which could have an adverse impact on the Company's
earnings, dividend payments or future growth.
NET INTEREST INCOME
The Company's largest component contributing to net income is net
interest income, which is the difference between interest earned on earning
assets (primarily loans and investments) and interest paid on interest
bearing liabilities (deposits and borrowings). The volume of and yields
earned on earning assets and the volume of and the rates paid on interest
bearing liabilities determine net interest income. Interest earned and
interest paid is also affected by general economic conditions, particularly
changes in market interest rates, and by government policies and the action
of regulatory authorities. Net interest income divided by average earning
assets is referred to net interest margin. For the years December 31, 1999,
1998, and 1997, the Company's net interest margin was 4.99 percent, 5.18
percent, and 5.23 percent, respectively.
Net interest income during 1999, 1998, and 1997 totaled $5,985,000,
$5,555,000 and $5,212,000, respectively, representing a 7.7 percent increases
in 1999 over 1998 and a 6.6 percent in 1998 over 1997. The increase resulted
from an increase in average earning assets, partially offset by a decrease in
the Company's net interest margin.
PROVISION FOR LOAN LOSSES
Provisions for loan losses reduce net interest income. The Company
provided $84,000 for loan losses during 1999 compared to $9,000 in 1998 and
$66,000 in 1997. The provision is characterized as a general provision, and
not related to any specific or impaired loans.
As a result of the increase in the provision for loan losses
management believes the allowance for loan losses to be adequate to absorb
potential losses in the current portfolio. This statement is based upon
management's continuing evaluation of inherent risks in the current loan
portfolio, current levels of classified assets, and economic factors. The
Company will continue to monitor the allowance and make future adjustments to
the allowance as conditions dictate.
NONINTEREST INCOME AND EXPENSE
Net income is also effected by noninterest income (primarily service
charges, and other operating income) and noninterest expenses (primarily
salaries and employee benefits, occupancy, equipment, and other operating
expenses.
Noninterest income during 1999, 1998, and 1997 totaled $589,000,
$662,000 and $647,000, respectively, representing a 11.0 percent decrease in
1999 over 1998 and a 2.3 percent increase in 1998 over 1997. The decrease in
1999 was primarily related to lower origination fees on mortgage loans
brokered which decreased as a result of higher mortgage interest rates in
1999 and a lower volume of loan applications processed. Noninterest income
during 1998 was favorably impacted by a significant increase in origination
fees on mortgage loans brokered which increased as a result of lower mortgage
interest rates in 1998 and a higher volume of loan applications processed.
Noninterest income during 1997 was favorably impacted by a significant gain
on sale of available for sale investments.
13
<PAGE>
Noninterest expense during 1999, 1998, and 1997 totaled $4,516,000,
$4,111,000 and $3,604,000, respectively, representing a 9.9 percent increase
in 1999 over 1998 and a 14.1 percent increase in 1998 over 1997. The increase
in 1999 was primarily related to higher salary and employee benefits,
occupancy and equipment, and other operating expenses associated with the
operation of the new Graham branch facility and Valley Bank. The increase in
1998 was related primarily related to Organizational costs associated with
the formation of the holding company and Valley Bank. The increase in salary
and employee benefits, occupancy and equipment during 1998 was related to the
opening of a loan production office in Auburn, Washington during the year and
the opening of the Graham branch in November 1998. The percentage of
noninterest expense to average assets was 3.37 percent in 1999, compared to
3.28 percent and 3.24 percent during 1998 and 1997, respectively.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes is a significant reduction
of operating income. The provision for 1999, 1998, and 1997 was $580,000,
$616,000, and $597,000, respectively. This amount represents an effective
taxing rate of 29 percent during 1999 and 1998, compared to 27 percent during
1997. The Company's marginal tax rate is currently 34 percent. The difference
between the Company's effective and marginal tax rate is primarily related to
investments made in tax exempt securities.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES;
AND INTEREST DIFFERENTIAL
AVERAGE BALANCES AND AN ANALYSIS OF AVERAGE RATES EARNED AND PAID.
The following tables show average balances and interest income or interest
expense, with the resulting average yield of rate by category of average
earning asset or interest bearing liability.
14
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
Distribution of Assets, Liabilities and Stockholders' Equity
INTEREST RATES AND INTEREST DIFFERENTIAL
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
balance expense rate balance expense rate balance expense rate
------- -------- ------ ------- ------- ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS Interest-earning assets
Loans
Commercial $ 17,607 $1,559 8.85% $ 16,678 $1,550 9.29% $ 17,586 $1,666 9.47%
Real Estate 47,601 4,044 8.50% 41,439 3,687 8.90% 38,887 3,501 9.00%
Installment 5,642 477 8.45% 5,800 503 8.67% 6,030 526 8.72%
Other 1,285 116 9.03% 1,414 131 9.26% 1,307 128 9.79%
Fees on loans - 54 - 250 - 186
---------- --------- ------ ---------- --------- ------ ---------- --------- ------
Total loans (including $ 72,135 $6,250 8.66% $ 65,331 $6,121 9.37% $ 63,810 $6,007 9.41%
fees)
Investment securities
Taxable $ 29,255 $1,608 5.50% $ 21,149 $1,238 5.85% $ 18,395 $1,103 6.00%
Tax-exempt 6,350 439 6.92% 7,265 550 7.57% 8,027 605 7.53%
---------- --------- ------ ---------- --------- ------ ---------- --------- ------
Total investment $ 35,605 $2,047 5.75% $ 28,414 $1,788 6.29% $ 26,422 $1,708 6.46%
securities
Interest bearing deposits $ 13,669 $ 722 5.28% $ 13,347 $ 765 5.73% $ 10,456 $ 619 5.92%
with banks
Federal funds sold 1,229 59 4.80% 3,665 197 5.38% 2,943 163 5.54%
Federal Home Loan Bank 392 29 7.40% 135 10 7.41% - - 0.00%
Stock
---------- --------- ------ ---------- --------- ------ ---------- --------- ------
Total Interest-earning $123,030 $9,107 7.40% $110,892 $8,881 8.01% $103,631 $8,497 8.20%
assets
Noninterest-earning assets
Cash and due from banks $ 5,187 $ 4,158 $ 3,844
Premises and equipment, 4,478 3,496 3,431
net
Other, less allowance for loan 250 414 396
losses
---------- ---------- ----------
Total $ 9,915 $ 8,068 $ 7,671
noninterest-earning
assets
---------- ---------- ----------
TOTAL ASSETS $132,945 $118,960 $111,302
========== ========== ==========
</TABLE>
1 Average loan balance include nonaccrual loans, if any. Interest income
on nonaccrual loans has been included.
2 Tax-exempt income has been adjusted to a tax-equivalent basis using an
incremental rate of 34%.
15
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
Distribution of Assets, Liabilities and Stockholders' Equity
INTEREST RATES AND INTEREST DIFFERENTIAL
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
balance expense rate balance expense rate balance expense rate
------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits
Savings, NOW accounts, and
money markets $ 57,634 $1,396 2.42% $ 52,797 $1,466 2.78% $ 48,705 $1,420 2.92%
Time deposits
< $100,000 21,019 981 4.67% 21,284 1,122 5.27% 22,141 1,145 5.17%
Time deposits
> $100,000 12,582 578 4.59% 10,212 517 5.06% 9,727 483 4.97%
---------- --------- ------ ---------- --------- ------ ---------- --------- ------
Total deposits $ 91,235 $2,955 3.24% $ 84,293 $3,105 3.68% $ 80,573 $3,048 3.78%
Other borrowed funds 414 18 4.35% 691 34 4.92% 648 31 4.78%
---------- --------- ------ ---------- --------- ------ ---------- --------- ------
Total Interest-bearing $ 91,649 $2,973 3.24% $ 84,984 $3,139 3.69% $ 81,221 $3,079 3.79%
liabilities --------- --------- ---------
Noninterest-bearing liabilities
Demand deposits $ 22,737 $ 19,492 $ 16,832
Other liabilities 697 742 617
---------- ---------- ----------
$ 23,434 $ 20,234 $ 17,449
Stockholders' equity 17,862 13,742 12,632
---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $132,945 $118,960 $111,302
========== ========== ==========
Net interest income $6,134 4.99% $5,742 5.18% $5,418 5.23%
========= ========= =========
Margin Analysis
Interest income/ earning $9,107 7.40% $8,881 8.01% $8,497 8.20%
assets
Interest expense/earning 2,973 2.42% 3,139 2.83% 3,079 2.97%
assets
Net interest income/earning assets 6,134 4.99% 5,742 5.18% 5,418 5.23%
</TABLE>
16
<PAGE>
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL. The following table sets forth, on
a tax-equivalent basis, a summary of the changes in net interest income
resulting from changes in volume and rates.
VALLEY COMMUNITY BANCSHARES, INC.
Distribution of Assets, Liabilities and Stockholders' Equity
VOLUME AND YIELD/RATE VARIANCE
(in thousands and in tax equivalent basis)
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
------------------------------------- -------------------------------------
Volume Rate Net Volume Rate Net
---------- --------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans
Commercial $ 84 $ (75) $ 9 $(85) $(31) $(116)
Real Estate 529 (172) 357 227 (41) 186
Installment (14) (12) (26) (20) (3) (23)
Other (12) (3) (15) 10 (7) 3
Fees on loans - (196) (196) - 64 64
------------ ----------- ------------ ------------ ------------ -----------
Total loans (including
fees) $ 587 $(458) $ 129 $ 132 $(18) $ 114
Investment securities
Taxable $ 450 $ (80) $ 370 $ 162 $(27) $ 135
Tax-exempt (66) (45) (111) (58) 3 (55)
------------ ----------- ------------ ------------ ------------ -----------
Total investment
securities $ 384 $(125) $ 259 $ 104 $(24) $ 80
Interest bearing deposits with
banks $ 18 $ (61) $ (43) $ 166 $(20) $ 146
Federal funds sold (119) (19) (138) 39 (5) 34
Federal Home Loan Bank Stock 19 - 19 10 - 10
------------ ----------- ------------ ------------ ------------ -----------
Total Interest-earning
assets $ 889 $(663) $ 226 $ 451 $(67) $ 384
Interest-bearing liabilities
Deposits
Savings, NOW accounts, and
money markets $ 127 $(197) (70) $ 116 $(70) 46
Time deposits < $100,000 (14) (127) (141) (45) 22 (23)
Time deposits > $100,000 112 (51) 61 24 10 34
------------ ----------- ------------ ------------ ------------ -----------
Total deposits $ 225 $(375) $(150) $ 95 $(38) $ 57
Other borrowed funds (12) (4) (16) 2 1 3
------------ ----------- ------------ ------------ ------------ -----------
Total Interest-bearing
liabilities $ 213 $(379) $(166) $ 97 $(37) $ 60
------------ ----------- ------------ ------------ ------------ -----------
Net interest income/earning
assets $ 676 $(284) $ 392 $ 354 $(30) $ 324
============ =========== ============ ============ ============ ===========
</TABLE>
1 The change in interest due to both volume and yield/rate has been
allocated to change due to volume and change due to yield/rate in
proportion to the absolute value of the change in each.
2 Balances of nonaccrual loans, if any, and related income recognized
have been included for computational purposes.
3 Tax-exempt income has been converted to a tax-equivalent basis using
an incremental rate of 34%.
17
<PAGE>
INVESTMENT PORTFOLIO
The following table sets forth the carrying values, by type, of the
securities in the Company's portfolio:
VALLEY COMMUNITY BANCSHARES, INC.
Investment Portfolio (Dollars in thousands)
<TABLE>
<CAPTION>
Outstanding Balance at December 31,
----------- ----------- ------------
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
U.S. Treasury and U.S. Government
corporations and agencies $27,901 $26,449 $18,198
States of the United States and political 5,121 6,640 7,576
subdivisions
Other securities 1,481 528 -
----------- ----------- ------------
Total $34,503 $33,617 $25,774
=========== =========== ============
</TABLE>
Investments in States of the United States and political subdivisions
represent purchases of municipal bonds located in Washington State.
Investment in other securities includes corporate debt obligations made in
companies located and doing business throughout the United States. The debt
obligations were all within the credit ratings acceptable under the Company's
investment policy.
The investments below are reported by contractual maturity. Expected
maturities may differ from contractual maturities because borrows may have
the right to call or prepay obligations with or without prepayment penalties.
VALLEY COMMUNITY BANCSHARES, INC.
Investments as of December 31, 1999 (in thousands)
<TABLE>
<CAPTION>
After one After five
year but years but
Within within within After
One Year five years ten years ten years Total
----------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and U.S. Government
corporations and agencies $6,342 $17,392 $880 $3,287 $27,901
States of the United States and political
subdivisions 1,597 3,524 5,121
Other securities 1,481 1,481
----------- ----------- ------------ ----------- ----------
Total $7,939 $22,397 $880 $3,287 $34,503
=========== =========== ============ =========== ==========
Weighted average yield *
U.S. Treasury and U.S. Government
corporations and agencies 5.49% 5.92% 5.87% 6.06% 5.84%
States of the United States and political
subdivisions 4.90% 4.43% 4.57%
Other securities 5.73% 5.73%
----------- ----------- ------------ ----------- ----------
Total 5.37% 5.67% 5.87% 6.06% 5.64%
=========== =========== ============ =========== ==========
</TABLE>
Yields on tax-exempt obligations have not been computed on a tax-equivalent
basis.
LOAN PORTFOLIO
TYPES OF LOANS
The following table sets forth the composition of the Company's loan
portfolio for the past five years ending at December 31, 1999 (dollars in
thousands).
18
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
Loan Portfolio
<TABLE>
<CAPTION>
Outstanding Balance at December 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Real Estate
Construction $ 7,384 $ 4,890 $ 1,282 $ 5,796 $ 4,837
Mortgage 15,867 13,788 15,087 12,602 12,586
Commercial 40,254 34,696 33,132 26,999 28,528
Commercial 12,892 12,496 11,694 10,858 9,004
Consumer and other 1,864 1,854 2,274 2,103 3,303
Lease financing 377 - - - -
------------- ------------- ------------- ------------- -------------
Total loans 78,638 67,724 63,469 58,358 58,258
Deferred loan fees, net (4) - - - -
------------- ------------- ------------- ------------- -------------
Net loans $78,634 $67,724 $63,469 $58,358 $58,258
============= ============= ============= ============= =============
</TABLE>
The Company's loan portfolio primarily consists of commercial loans,
residential real estate loans, and commercial real estate loans. At
December 31, 1999, loans totaled approximately $78.634 million, which equals
approximately 69 percent of total deposits and 59 percent of total assets. At
December 31, 1999, the majority of the loans were originated directly by the
Company to borrowers within the Company's principal market area. There are no
foreign loans outstanding during the years presented.
Commercial loans consist primarily of loans to business for various
purposes, including, revolving lines of credit, equipment loans, and letters
of credit. These loans generally have short maturities, have either
adjustable or fixed rates and are unsecured or secured by inventory, accounts
receivable, equipment and/or real estate.
Real estate loans include various types of loans for which the
Company holds real property as collateral and consist of loans primarily on
single family residences and commercial properties. These loans generally are
secured by a first priority lien but may also be secured by a second priority
lien. Real estate loans typically have maturities extending to five years and
have fixed or adjustable rate features. Construction loans are typically made
to contractors to construct single-family residences and commercial buildings
and generally have maturities to 18 months. Currently, the Company does not
originate real estate for sale to the secondary market, however, the Company
brokers real estate loans to other financial institutions for a fee.
The interest rates charged on loans vary with the degree of risk,
the amount of the loan, and the maturity of the loan. Competitive pressures,
market interest rates, the availability of funds, and government regulation
further influence them.
The Company follows loan policies, which have been approved by the
Banks' Board of Directors and are overseen by the Executive Loan Committee
and Management. These policies establish lending limits, review and grading
criteria and other guidelines such as loan administration, and the allowance
for loan losses. Loan applications are approved by the Banks' Board of
Directors and/or designated officers in accordance with respective guidelines
and underwriting policies of the Company. Loans to one borrower are limited
by applicable state and federal banking laws and are further limited by
internal limits. Credit limits generally vary according to the type of loan
and the individual loan officer's experience.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The contractual maturities of the Company's loan portfolio are as
shown below. Actual maturities may differ from contractual maturities because
individual borrowers may have the right to prepay loans with or without
prepayment penalties.
19
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
Loans as of December 31, 1999 (in thousands)
<TABLE>
<CAPTION>
After one
year but
Within within After
One Year five years five years Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Real Estate
Construction $ 6,863 $ 521 $ - $ 7,384
Mortgage 2,665 12,096 1,106 15,867
Commercial 6,575 33,538 141 40,254
Commercial 8,859 3,219 814 12,892
Consumer and other 728 933 203 1,864
Lease financing 69 308 - 377
------------- ------------- ------------- -------------
Total loans $25,759 $50,615 $2,264 $78,638
============= ============= ============= =============
Loan maturities after one year with:
Fixed rates $44,169 $ 864
Variable rates 6,446 1,400
------------- -------------
$50,615 $2,264
============= =============
</TABLE>
RISK ELEMENTS
The following table sets forth information concerning the Company's
non-performing assets for the year ended December 31, 1999 (dollars in
thousands).
VALLEY COMMUNITY BANCSHARES, INC.
on-performing Assets
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
on-performing assets:
Nonaccrual loans $ - $ - $ - $509 $ -
Loans 90 days or more past - 507 - -
due
Restructured loans
------------- ------------- ------------- ------------- -------------
- - 507 509 -
Other real estate owned - - - - -
------------- ------------- ------------- ------------- -------------
Total non-performing
assets $ - 0 - $ - 0 - $507 $509 $ - 0 -
============= ============= ============= ============= =============
</TABLE>
The accrual of interest on nonaccrual and other impaired loans is
discontinued at 90 days or when, in the opinion of management, the borrower
may be unable to meet payments as they become due. When interest accrual is
discontinued, all unpaid accrued interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received.
Interest income on restructured loans is recognized pursuant to the terms of
the new loan agreement. Interest income on other impaired loans is monitored
and based upon the terms of the underlying loan agreement. However, the
recorded net investment in impaired loans, including accrued interest, is
limited to the present value of the expected cash flows of the impaired loan
or the observable fair market value of the loans collateral.
During 1999 and 1998 there were no loans placed on nonaccrual status
and, therefore, there was no impact to interest income during those periods
presented.
20
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
The following table sets forth information regarding changes in the
Company's allowance for loan losses for the most recent five years (dollars in
thousands):
VALLEY COMMUNITY BANCSHARES, INC.
Loan Loss Experience
<TABLE>
<CAPTION>
Analysis of the Allowance for Loan Losses
Year ended December 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $883 $840 $776 $752 $731
Charge-offs:
Real Estate
Construction
Mortgage
Commercial
Commercial
Consumer and other 8 11 3 1 19
Lease financing
------------- ------------- ------------- ------------- -------------
8 11 3 1 19
Recoveries:
Real Estate
Construction
Mortgage
Commercial 42
Commercial 3
Consumer and other 1 1 1
Lease financing
------------- ------------- ------------- ------------- -------------
- 45 1 1 1
Net charge-offs 8 (34) 2 18
Additions charged to
operations 84 9 66 24 39
------------- ------------- ------------- ------------- -------------
Balance at end of period $959 $883 $840 $776 $752
============= ============= ============= ============= =============
Average Loans Outstanding $72,135 $65,331 $63,810 $58,586 $56,988
Ratio of net charge-offs during the
period to average loans
outstanding 0.01% -0.05% 0.00% 0.00% 0.03%
Ratio of allowance for loan losses
to average loans outstanding 1.33% 1.35% 1.32% 1.32% 1.32%
</TABLE>
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries), and established through a
provision for credit losses charged to expense. Loans are charged against the
allowance for credit losses when management believes that the collectability of
the principal is unlikely. The allowance is an amount that management believes
will be adequate to absorb losses inherent in existing loans, commitments to
extend credit and standby letters of credit based on evaluations of
collectability and prior loss experience of loans, commitments to extend credit
and standby letters of credit. The evaluations take into consideration such
factors as changes in the nature and volume of the portfolio, overall
21
<PAGE>
portfolio quality, loan concentrations, specific problem loans, commitments,
standby letters of credit and current economic conditions that may affect the
borrowers' ability to pay.
A material estimate that is particularly susceptible to significant
change relates to the determination of the allowance for losses on loans and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the estimated
losses on loans and foreclosed assets held for sale, management obtains
independent appraisals for significant properties.
The majority of the Company's loan portfolio consists of commercial
loans and single-family residential loans secured by real estate in the
Puyallup and Pierce County areas and also in the Auburn and King County area.
Real estate prices in this market are stable at this time. However, the
ultimate collectability of a substantial portion of the Company's loan
portfolio may be susceptible to change in local market conditions in the
future.
While management uses available information to recognize losses on
loans, further reductions in the carrying amounts of loans may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the estimated losses on loans. Such agencies may require the Company
to recognize additional losses based on their judgment about information
available to them at the time of their examination.
BREAKDOWN OF ALLOWANCE FOR LOAN LOSSES BY CATEGORY
The following table sets forth information concerning the Company's
allocation of the allowance for loan losses (dollars in thousands).
<TABLE>
<CAPTION>
Allocation of the Allowance for Loan Losses
Year ended December 31,
------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- --------------
Amount % * Amount % * Amount % * Amount % * Amount % *
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Real Estate
Construction $55 9% $37 7% $10 2% $43 10% $36 8%
Mortgage 16 20% 14 20% 15 24% 13 22% 13 22%
Commercial 141 51% 121 51% 116 52% 94 46% 100 49%
Commercial 129 16% 125 18% 117 18% 109 19% 90 15%
Consumer and other 37 2% 37 3% 45 4% 42 4% 66 6%
Lease financing 4 0% - 0% - 0% - 0% - 0%
Unallocated 577 NA 549 NA 537 NA 475 NA 447 NA
---------------- ---------------- ---------------- ---------------- ----------------
$959 100% $883 100% $840 100% $776 100% $752 100%
================ ================ ================ ================ ================
</TABLE>
* Percent of loans in each category to total loans
The Company uses the experience method in conjunction with the
specific identification method for calculation of the adequacy of allowance
for loan losses. A six-year average loss rate is calculated. This experience
loss rate is applied to loans that are not identified as problems for a
subtotal of needed allowance for non-problem loans. Potential problem loans
are specifically identified and analyzed for potential loss on an individual
basis. This subtotal is added to the experience subtotal and the total is
compared to the allowance for loan losses. In addition, the Company uses
other calculations to compare with the allowance for loan losses. These
include (1) loss estimates by FDIC Ratio Analysis, which calculates a
percentage of the Company's classified loans added to the six-year loss
coverage and, (2) loss estimate by specific loan classifications.
In addition, to the above method, the Company assesses the adequacy
of the allowance for loan losses by comparing the Company's ratio of the
allowance for loan losses to the loan portfolio to like peer group ratios.
This method is relevant given the Company's minimal history of loan losses
over the past six years, and therefore the limited amount of quantitative
analysis that can be conducted. The limited quantitative analysis is
compensated by maintaining a high reserve level, typically 1.3 percent of
average loans, which compares to the fifty-percentile rank within national
and state asset size peer groups.
22
<PAGE>
The Company also evaluates current conditions and may adjust the
historical loss estimate by qualitative factors that effect loan repayment.
These factors may include levels of, and trends in, delinquencies and
non-accruals; trends in volume and terms of loans; effects of any changes in
lending policies; experience, ability and depth of management and lending staff;
national and local economic trends; concentrations of credit; and any legal and
regulatory requirements.
DEPOSITS
TYPES OF DEPOSITS
The Company's primary source of funds is customer deposits. The Company
attempts to maintain a high percentage of noninterest-bearing deposits, which
are low cost funding source. In addition, the Company offers a variety of
interest-bearing accounts designed to attract both short-term and longer-term
deposits from customers. Interest-bearing accounts earn interest at rates
established by Bank Management based on competitive market factors and the
Company's need for funds. The Company traditionally has not purchased brokered
deposits and does not intend to do so in the future.
The following table sets forth the average balances for each major
category of deposit and the weighted average interest rate paid for deposits
during the year ended December 31, (dollars in thousands).
VALLEY COMMUNITY BANCSHARES, INC.
Deposits
<TABLE>
<CAPTION>
Average Deposits by Type
---------------- ---------------- --------------- ---------------- ---------------
1999 1998 1997 1996 1995
---------------- ---------------- --------------- ---------------- ---------------
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
---------------- ---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand $22,737 $19,492 $16,832 $15,157 $15,321
deposits
Interest bearing demand 16,279 1.19% 14,143 1.51% 13,395 1.61% 11,697 1.60% 11,851 1.60%
deposits
Money market deposit 28,963 3.26% 27,806 3.58% 24,979 3.81% 18,822 3.77% 15,244 3.89%
Savings deposits 12,392 2.08% 10,848 2.36% 10,331 2.45% 10,425 2.45% 11,895 2.51%
Time certificates < $100,000 21,019 4.67% 21,284 5.27% 22,141 5.17% 23,569 5.28% 20,843 5.16%
Time certificates > $100,000 12,582 4.59% 10,212 5.06% 9,727 4.97% 10,021 5.15% 9,834 4.97%
-------- --------- -------- -------- ---------
$113,972 $103,785 $97,405 $89,691 $84,988
========= ========== ========= ========= =========
</TABLE>
CERTIFICATES OF DEPOSIT AND TIME DEPOSITS
The following table shows the amounts and remaining maturities of time
certificates of deposit that had balances of more than $100,000 at December 31,
(in thousands).
VALLEY COMMUNITY BANCSHARES, INC.
Deposit Maturity
<TABLE>
<CAPTION>
Outstanding Balance at December 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
3 months or less $7,235 $5,997 $4,668 $6,024 $6,669
Over 3 through 12 months 6,820 4,368 4,076 3,644 3,367
Over 12 through 36 months 500 327 606 427 157
Over 36 months 182 172 - -
------------- ------------- ------------- ------------- -------------
Total $14,555 $10,874 $9,522 $10,095 $10,193
============= ============= ============= ============= =============
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table shows the various performance ratios for the
Company for the past five years:
23
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
Return on Equity and Assets
<TABLE>
<CAPTION>
For the Year Ended December 31,
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Return on average assets (net income divided
by average assets) 1.05% 1.24% 1.43% 1.33% 1.45%
Return on equity (net income divided by
average equity) 7.80% 10.78% 12.60% 11.89% 13.49%
Dividend payout ratio (dividends per share
divided by net income per share) 9.64% 60.18% 31.71% 36.16% 35.68%
Equity to assets ratio (Average equity divided
by average assets) 13.44% 11.55% 11.35% 11.22% 10.74%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for profitable business expansion. Cash flows from operations
contribute significantly to liquidity. Net cash from operating activities for
1999 contributed $2.0 million to liquidity and in 1998 contributed $1.9 million
to liquidity and $2.1 million to liquidity in 1997. Borrowing represents an
important and manageable source of liquidity based on the Company's ability to
raise new funds and renew maturing liabilities in a variety of markets.
Liquidity is also obtained by maintaining assets that are readily convertible to
cash at minimal cost through maturities and sales. Management believes that the
Company's cash flow will be sufficient to support its existing operations for
the foreseeable future.
The Company's total stockholder's equity increased to $18.7 million at
December 31, 1999, from $14.1 million at December 31, 1998. At December 31,
1999, stockholders' equity was 13.99 percent of total assets, compared to 11.23
percent at December 31, 1998. At December 31, 1999, the bank held cash and due
from banks, Interest-bearing deposits with banks, and federal funds sold of
approximately $14.8 million. In addition, at such date $33.3 million of the
Company's investments were classified as available for sale.
The market value of available for sale securities was less than book
value at year end, primarily as a result of increasing interest rates, which
resulted in an unrealized loss in the investment portfolio. Management does not
believe the sale of the Company's securities would materially effect the overall
condition of the Company.
The capital levels of the Company currently exceed applicable
regulatory guidelines at December 31, 1999. Management believes the Company's
capital will be adequate to fund the start up and related costs associated with
any new branches and Valley bank until it can achieve the deposit and loan
levels necessary to be profitable. The Company has commitments to construct a $2
million permanent facility at 10th and D Street in Auburn, WA. It is anticipated
the building will be completed in June 2000.
The primary impact of inflation on the Company's operations is
increased asset yields, deposit costs and operating overhead. Unlike most
industries, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than they would
on non-financial companies. Although interest rates do not necessarily move in
the same direction or to the same extent as the prices of goods and services,
increases in inflation generally have resulted in increased interest rates. The
effects of inflation can magnify the growth of assets and if significant,
require that equity capital increase at a faster rate than would be otherwise
necessary.
INTEREST RATE RISK
Interest rate risk refers to the exposure of earnings and capital
arising from changes in interest rates. Management's objectives are to control
interest rate risk and to ensure predictable and consistent growth of earnings
and capital. Interest rate
24
<PAGE>
risk management focuses on fluctuations in net interest income identified
through computer simulations to evaluate volatility varying interest rate,
spread and volume assumptions. The risk is quantified and compared against
tolerance levels.
The simulation model used by the Company combines the significant
factors that affect interest rate sensitivity into a comprehensive earnings
simulation. Earning assets and interest-bearing liabilities with longer lives
may be subject to more volatility than those with shorter lives. The model
accounts for these differences in its simulations. At December 31, 1999, the
simulation modeled the impact of assumptions that interest rates would increase
or decrease 200 basis points. Results indicated the Company was positioned so
equity would not drop below that point where the Company, for regulatory
purposes, would continue to be classified "well capitalized". It should be
emphasized that the model is static in nature and does not take into
consideration possible management actions to minimize the impact on equity.
Management also matches assets and liabilities on a maturity gap analysis and
repricing gap analysis to assist in interest rate sensitivity measurement.
Interest rate sensitivity is closely related to liquidity because each
is directly affected by the maturity of assets and liabilities. Management
considers any asset or liability, which matures, or is subject to repricing over
one year, to be interest sensitive, although continual monitoring is also
performed for other time intervals. The difference between interest-sensitive
assets and liabilities for a defined period of time is known as the
interest-sensitive "gap" and may be either positive or negative. If positive,
more assets reprice before liabilities; if negative, the reverse is true. In
theory, if the gap is positive, a decrease in general interest rates might have
an adverse impact on earnings as interest income decreases faster than interest
expense. This assumes that management adjusts rates equally as general interest
rates fall. Conversely, an increase in interest rates would increase net
interest income as interest income increases faster than interest expense.
However, the exact impact of the gap on future income is uncertain both in
timing and amount because interest rates for the Company`s assets and
liabilities can change rapidly as a result of market conditions and customer
patterns.
The simulation model process provides a dynamic assessment of interest
rate sensitivity, whereas a static interest rate gap table is compiled as of a
point in time. The model simulations differ from a traditional gap analysis
because a traditional gap analysis does not reflect the multiple effects of
interest rate movement on the entire range of assets, liabilities and ignores
the future impact of new business strategies.
IMPACT OF THE YEAR 2000 ISSUE
The Company did not experience any difficulties as a result of the
rollover into the Year 2000 nor does it anticipate any problems during 2000.
However, the Company continues to be vigilant monitoring its systems, loan
portfolio and customer base for potential problems.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's results of operations are largely dependent upon its
ability to manage market risks. Changes in interest rates can have a significant
effect on the Company's financial condition and results of operation. Other
types of market risk such as foreign currency exchange rate risk and commodity
price risk do not arise in the normal course of the Bank's business activities.
The Company does not use interest rate risk management products such as interest
rate swaps, hedges or derivatives, nor does management intend to use such
products in the future. All of the Company's transactions are denominated in
U.S. Dollars. Approximately 35% of the Company's loan portfolio has interest
rates which are variable. Fixed rate loans are generally made with a term of
five years or less.
The following table sets forth the estimated maturity or repricing and
the resulting interest sensitivity gap, of the Company's interest-earning assets
and interest-bearing liabilities and the cumulative interest sensitivity gap at
December 31, 1999. The expected maturities are presented on a contractual basis.
Actual maturities may differ from contractual maturities because of prepayment
assumptions, early withdrawal of deposits and competition.
25
<PAGE>
<TABLE>
<CAPTION>
VALLEY COMMUNITY BANCSHARES, INC.
Contractual Maturity or Repricing Outstanding Balance at December 31, 1999
Less than Three One to Over
three months to five five Cumulative
months one year years years Total
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Interest - earning assets
Interest-bearing deposits with $9,293 $199 $200 $ - $9,692
banks
Investments 4,251 8,638 21,157 457 34,503
Loans 21,404 8,808 47,642 780 78,634
Other 420 - - - 420
------------ ------------- ------------- ------------- -------------
Total interest - earning
assets $35,368 $17,645 $68,999 $1,237 $123,249
============ ============= ============= ============= =============
Interest - bearing liabilities
Interest bearing demand $15,926 $ - $ - $ - $15,926
deposits
Money market deposit and Savings 40,605 - - - 40,605
Time certificates < $100,000 7,000 13,234 1,140 - 21,374
Time certificates > $100,000 7,232 6,823 500 - 14,555
Other borrowed funds 539 539
------------- ------------- ------------- ------------- -------------
Total interest - bearing $71,302 $20,057 $1,640 $ - $92,999
liabilities
Interest sensitivity gap $(35,934) $(2,412) $67,359 $1,237 $30,250
============= ============= ============= ============= =============
Cumulative interest sensitivity
gap $(35,934) $(38,346) $29,013 $30,250
============= ============= ============= =============
Cumulative interest sensitivity
gap as a percent of total assets -26.85% -28.65% 21.68% 22.60%
============= ============= ============= =============
</TABLE>
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example although certain assets and liabilities may
have similar maturities and periods to repricing, they may react differently to
changes in market interest rates. Also, interest rates on assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest
rates on other assets and liabilities may follow changes in market interest
rates. Additionally, certain assets have features that restrict changes in the
interest rates of such assets, both on a short-term basis and over the lives of
such assets.
According to the traditional banking industry static gap table set
forth above, the Company was liability sensitive with a negative cumulative
one-year gap of $38.3 million or -28.6 percent of total assets at December 31,
1999. In general, based upon the Company's mix of deposits, loans and
investments, increases in interest rates would be expected to result in a
decrease in the Company's net interest margin, and a decrease in interest rates
would be expected to result in an increase in the Company's net interest margin.
As noted above, the static gap report is subject to inherent
limitations. To more accurately predict the Company's interest rate exposure, a
financial analysis (dynamic gap) to analyze the change in the net interest
margin from a changing rate environment is provided below. This estimate of
interest rate sensitivity takes into account the differing time intervals and
rate change increments of each type of interest-sensitive asset and liability.
It then measures the projected impact of changes in market interest rates on the
Company's net interest income, net interest income and return on equity.
Based on a financial analysis performed as of December 31, 1999, which
takes into account how the specific interest rate scenario would be expected to
affect each interest earning asset and each interest bearing liability, the
company estimates that changes in the federal fund interest rate would affect
the Company's performance as follows.
26
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
Financial Analysis
<TABLE>
<CAPTION>
Increase (Decrease) In
Net Net Return on
Interest Interest
Income Margin Equity
------------- ------------- -------------
(dollars in thousands
<S> <C> <C> <C>
(Current federal fund rate is 5.50%)
Federal fund rate increase of:
100 basis points to 6.50% $(403) -0.32% -1.31%
200 basis points to 7.50% $(726) -0.58% -2.42%
Federal fund rate decrease of:
100 basis points to 4.50% $332 0.23% 1.15%
200 basis points to 3.50% $507 0.33% 1.73%
</TABLE>
No assurances can be given that the actual net interest margin
(percentage) or net interest income would increase or decrease by such amounts
in a 100 or 200 basis point increase or decrease in the federal fund rate.
ITEM 3. PROPERTIES
The Company's main office is located in Puyallup, Washington and also
serves as the main office for Puyallup Valley Bank. Puyallup Valley Bank
conducts its business through six full-service offices and one drive-up
facility. All but three of Puyallup Valley Bank's premises are owned by Puyallup
Valley Bank with options to extend existing leases on the leased facilities. The
facilities are: Main office, 1307 East Main, Puyallup WA; Downtown Branch, 209
South Meridian Avenue, Puyallup WA; Downtown Drive-Up, 112 E. Main Avenue,
Puyallup WA; Summit Branch, 10413 Canyon Road East, Puyallup WA; South Hill
Branch, 15815 Meridian Avenue East, Puyallup WA; Canyon Road Branch, 12803
Canyon Road, Puyallup WA; and Graham Branch, 9921 224th St. SE, Graham WA.
Valley Bank has entered into a lease for its initial facility located
at 1525 A Street, Suites 106 and 107, in Auburn. The lease term is for three
years with an optional two-year extension. Valley Bank makes lease payments of
$2,812 per month. Valley Bank plans to ultimately build a permanent facility on
a site, owned by the Company, that is located at 10th and D Street in Auburn,
Washington.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the shares of Valley Community
Bancshares Common Stock beneficially owned as of March 15, 2000 by each Director
and each named Executive Officer, and the Directors and Officers as a group. As
of that date, the Company is not aware of anyone who owns more than five percent
of its shares either beneficially or of record, except as listed below.
DIRECTORS AND EXECUTIVE OFFICER
<TABLE>
<CAPTION>
Shares Beneficially % of Total
Name Owned(1) Shares Outstanding(2)
---- ------------------- ---------------------
<S> <C> <C>
Thomas R. Absher 56,703 5.04%
David H. Brown(3) 62,830 5.48%
William E. Fitchitt 1,427 *
David K. Hamry 3,303 *
A. Eugene Hammermaster 26,490 2.35%
Steven M. Harris 5,030 *
Warren D. Hunt 17,506 1.56%
Roger L. Knutson 47,455 4.22%
Directors and Executive 260,654 22.51%*
Officers (12) as a group(4)
</TABLE>
* Less than 1%.
27
<PAGE>
OTHER BENEFICIAL OWNERS
<TABLE>
<CAPTION>
SHARES BENEFICIALLY % OF TOTAL
NAME OWNED(1) SHARES OUTSTANDING
---- ------------------- ------------------
<S> <C> <C>
Charles R. Wadsworth 57,220 5.08%
P.O. Box 578
Puyallup, WA 98371
</TABLE>
- ------------------
(1) The shares "beneficially owned" include shares owned by or for, among
others, the spouse and/or minor children of the individual and any other
relative who has the same home as such individual, as well as other shares
with respect to which the individual has or shares voting or investment
power, or has the right to acquire within 60 days under outstanding stock
options. Beneficial ownership may be disclaimed as to certain of the
shares.
(2) Any securities not outstanding but which are subject to options and
presently exercisable by the named person within 60 days, are deemed to be
outstanding for computing the percentage of outstanding securities owned by
such person, but are not deemed to be outstanding for the purposes of
computing the percentage of the class owned by any other person.
(3) Includes 21,428 shares subject to stock options granted pursuant to the
Puyallup Valley Bank Employee Stock Option Plan and presently exercisable.
(4) Does not include 3,733 shares held in a testamentary trust for which
Mr. Hammermaster serves as trustee. Mr. Hammermaster disclaims any
beneficial ownership of these shares.
(5) Includes 10,721 shares subject to stock options granted pursuant to the
Puyallup Valley Bank Employee Stock Option Plan and presently exercisable.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
VALLEY COMMUNITY BANCSHARES. The following table sets forth summary information
about the Directors and Executive Officers of Valley Community Bancshares. All
of the persons named hold the same position with Puyallup Valley Bank as they do
with the Company, with the exception of William E. Fitchitt and Steven M.
Harris, who are not members of the Board of Directors of Puyallup Valley
Bank, and Richard D. Pickett who is not an Executive Officer of Puyallup
Valley Bank.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY YEAR ELECTED OR APPOINTED
- ---- --- ------------------------- -------------------------
<S> <C> <C>
Thomas R. Absher 68 Chairman 1998
David H. Brown 54 Director, President and CEO 1998
Warren D. Hunt 67 Vice-Chairman 1998
A. Eugene Hammermaster 65 Secretary 1998
William E. Fitchitt 57 Director 1998
David K. Hamry 59 Director 1998
Steven M. Harris 54 Director 1998
Roger L. Knutson 55 Director 1999
Joseph E. Riordan 46 Senior Vice President and CFO 1997
Roy W. Thompson 57 Senior Vice President and 1989
Credit Administrator
Richard D. Pickett 50 President and CEO of Valley Bank 1999
</TABLE>
The Board of Directors of the Company consists of eight members. The Board of
Directors is divided into three groups for the purpose of defining terms of
office. All Directors serve three-year terms; one-third of the Directors are
elected annually. The Company's Articles of Incorporation provide that a
director may only be removed for cause, and vacancies will be filled by the
Board of Directors.
The principal occupation or business and experience of the Directors and
Executive Officers of the Company for the past five years is set forth below.
28
<PAGE>
THOMAS R. ABSHER is the Chairman of the Board of Directors of the Company and a
Partner of Morningview Development, Morningside Development, Northwest Care
Development, TJC Partnership, Terrace Ventures, Poulsbo Development, and Madison
Hotel. Mr. Absher was the former President of Absher Construction Company. Mr.
Absher is also a director of Valley Bank.
DAVID H. BROWN has been the President and Chief Executive Officer of the Company
since its formation and the President and Chief Executive Officer of Puyallup
Valley Bank since 1989. Prior to joining Puyallup Valley Bank, Mr. Brown was an
executive officer with Seafirst Bank for twenty years, beginning as a Management
Trainee and concluding his tenure at Seafirst as Manager of Southwest Corporate
Banking. Mr. Brown is a graduate of Pacific Coast Banking School and holds a BA
from Washington State University.
WARREN D. HUNT is the Vice Chairman of the Board of Directors of the Company and
co-owner of Newell Hunt Furniture, Inc.
EUGENE HAMMERMASTER is Secretary to the Board of Directors of the Company, and
attorney and senior member in the Hammermaster Law Firm, and a Municipal Court
Judge in Pierce County.
WILLIAM E. FITCHITT is the Vice-Chairman of Valley Bank, a Certified Public
Accountant and President of Fitchitt & Benedict, P.S., Inc.
DAVID K. HAMRY is the CEO and Director of Good Samaritan Hospital, and Good
Samaritan Community Health Care. He is a Director of WA Casualty Company and
Northwest Healthcare.
STEVEN M. HARRIS is the Chairman of the Board of Directors of Valley Bank and is
President and Designated Broker of Northwest Corporate Real Estate, Inc., a
commercial real estate sales and leasing company.
ROGER L. KNUTSON is the President of Knutson Farms, Inc., Knutson Equipment &
Supply, Puyallup Valley Rhubarb Company, Puyallup Valley Flower Exchange and
Puget Sound Bulb Exchange.
JOSEPH E. RIORDAN has been Senior Vice President and Chief Financial Officer of
the Company since its formation and Senior Vice President and Chief Financial
Officer of Puyallup Valley Bank since 1997. Prior to joining the Company and
Puyallup Valley Bank, Mr. Riordan was Vice President of Finance InterWest
Bancorp, Inc. From 1985 through 1996, Mr. Riordan was Vice President and
Secretary-Treasurer of Central Bancorporation. Mr. Riordan's career in the
banking industry spans over twenty years. Mr. Riordan is a Certified Public
Accountant, a Certified Management Accountant, and holds a BA in Business
Administration from Central Washington University. Mr. Riordan is the Senior
Vice President and Chief Financial Officer of Valley Bank.
ROY W. THOMPSON has been Senior Vice President of the Company since its
formation and Senior Vice President and Credit Administrator of Puyallup Valley
Bank since 1989. Prior to joining Puyallup Valley Bank, Mr. Thompson was Vice
President and Account Officer of U.S. Bank of Washington in Private Banking.
From 1983 through 1988, Mr. Thompson was Vice President and Credit Administrator
of Seattle-First National Bank. Mr. Thompson's career in the banking industry
spans over twenty years. Mr. Thompson is a graduate of Pacific Coast Banking
School, holds an MBA in Finance from the United States International University
and a BS in Business from the University of Southern California. Mr. Thompson is
the Senior Vice President and Credit Administrator of Valley Bank.
RICHARD D. PICKETT is President and CEO of Valley Bank. Prior to joining Valley
Bank, Mr. Pickett was an officer with Seafirst Bank for over twenty five years,
beginning as a Management Trainee and concluding his tenure at Seafirst as
Commercial Banking Team Leader. Mr. Pickett is a graduate of Pacific Coast
Banking School, University of Southern California Executive Leadership School
and holds a BA from Washington State University.
29
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation paid by the Company for
services rendered in all capacities paid or accrued for the fiscal years ended
December 31, 1999, 1998 and 1997, to the Chief Executive Officer. No other
Executive officer of the Company received annual compensation in excess of
$100,000 for such years.
<TABLE>
<CAPTION>
NAME AND POSITION YEAR SALARY BONUS OTHER (1)(2)(3) TOTAL
- ----------------- ---- ------ ----- --------------- --------
<S> <C> <C> <C> <C> <C>
David H. Brown 1997 $123,520 $12,250 $53,674 $189,444
President and CEO 1998 $128,000 $30,000 $53,798 $211,798
1999 $133,000 $22,770 $53,198 $208,968
</TABLE>
(1) Includes $9,000 paid to Mr. Brown by Puyallup Valley Bank for director's
fees in 1997, 1998,and 1999.
(2) Includes profit sharing pursuant to The Company's 401(k) Plan and Profit
Sharing Plan.
(3) Includes $35,000 accrued by Puyallup Valley Bank each year for Mr. Brown's
Deferred Compensation Plan.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Board of Directors of the Company, acting as a committee of the
whole, serves as the Compensation Committee. The Committee is responsible for
establishing and implementing all compensation policies of the Company and its
subsidiaries, as well as setting the compensation for the executive officers of
the Company and its subsidiaries. The Committee evaluates the performance of the
Chief Executive Officer and approves an appropriate compensation level. The
Chief Executive Officer evaluates the performance of all other executive
officers and recommends to the Committee individual compensation levels for
approval by the Committee.
The Committee believes that a compensation plan for executive officers
should take into account management skills, long-term performance results and
shareholder returns. The principles underlying compensation policies are: (i) to
attract and retain highly talented and productive executives; (ii) to provide
levels of compensation competitive with those offered throughout the banking
industry; (iii) to motivate executive officers to enhance long-term shareholder
value by helping them build their own ownership in the Company; and (iv) to
integrate the compensation program with the Company's long-term strategic
planning and measurement processes.
The current compensation plan involves a combination of salary,
bonuses, profit sharing and grants of stock options to encourage long-term
performance. The salary levels of executive officers are designed to be
competitive within the banking and financial services industries. The Committee
annually reviews industry peer group and the Washington Financial Industry
Survey and America's Community Bankers Survey of Salaries to determine
competitive salary levels. Individual annual performance is reviewed to
determined appropriate salary adjustments.
The Company's bonus plan is based on a review of the salary surveys,
the performance of the Company and the subjective evaluation of the performance
of each executive officer.
The Committee awards stock options to employees as a long-range
compensation program designed to reward performance and benefit shareholders.
Awards of stock options are intended to provide employees with increased
motivation and incentive to exert their best efforts on behalf of the Company by
enlarging their personal stake in its success through the opportunity to
increase the value of their stock ownership. Options are issued at the fair
market price on the date of the grant, in order to insure that any value derived
from the grant is realized by shareholders generally. The number of options
granted to any employee is based on the employee's performance and relative
responsibility within the Company. Options may have a deferred vesting and are
not exercisable prior to vesting. During the fiscal year ended December 31,
1999, the Committee granted stock options totaling 14,500 shares to employees of
the Company and its subsidiaries.
During the fiscal year ended December 31, 1999, the base salary of
David H. Brown, President and Chief Executive Officer of the Company, was
$133,000. In addition, Mr. Brown received a performance bonus of $22,770, a
profit sharing allocation of $9,198, and was credited with $35,000 in a Deferred
Compensation Plan adopted effective January 1, 1997, which
30
<PAGE>
provides for the accrual of $245,000 plus interest over a ten-year period to be
paid to Mr. Brown upon his retirement (see Deferred Compensation Plan below) and
$9,000 in Director's fees. This resulted in total compensation of $208,968,
which represents a 1.34 percent decrease from the previous year. In determining
his compensation, special consideration was given to the efforts Mr. Brown had
put forth to integrate Valley Bank as a wholly-owned subsidiary of the Company.
The Committee believes the increase in compensation is appropriate based on
competitive salary surveys and the performance of the Company. Mr. Brown did not
participate in deliberations of the Committee relating to his compensation.
Submitted by Members of the Committee:
Thomas R. Absher
David H. Brown
Eugene Hammermaster
Warren D. Hunt
Roger L. Knutson
William E. Fitchitt
Steven M. Harris
David K. Hamry
SEVERANCE AND CHANGE IN CONTROL AGREEMENTS
In addition to regular compensation, the Company has agreed to pay
Messrs. Brown, Thompson, Riordan, and Pickett additional compensation should
their employment terminate with the Company under certain conditions. The
severance Agreements are effective only if Messrs. Brown, Thompson, Riordan, and
Pickett employment is terminated within three years after a change in control;
or employment is terminated on or after the date that any party announces (or
should announce) any prospective change in control transaction, if a change in
control occurs with twelve months of termination. Change in control means a
change in the ownership or effective control, or in the ownership of a
substantial portion of, the assets of the Company as used in section 280G of the
Internal Revenue Code of 1986, as amended. Changes in control as includes any
change within a twelve-month period in the composition of the Board of Directors
whereby the individuals serving as directors at the beginning of such period
cease to constitute at least a majority of the Board at any time during such
period. The amount of the severance payment equals the highest compensation (as
reportable on the executive's IRS W-2 form) during one of the most recent three
calendar years ending before, or simultaneous with, the date on which the change
in control occurs.
DEFERRED COMPENSATION PLAN
In addition to regular compensation, the Company, on April 21, 1999 to
be effective January 1, 1997, agreed to provide Mr. Brown with deferred
compensation under the terms of an Supplemental Retirement Benefits Agreement.
The Agreement provides for the accrual of $245,000 plus interest to an account
over a ten-year period. The account is to be distributed to Mr. Brown on the
last day of the contract period, to Mr. Brown or his Beneficiary upon total
disability or death, to Mr. Brown upon the termination of service within a
period of twelve months following a change of control. Change in control means
(a) the purchase or other acquisition by any person, entity, or group of persons
as defined under the provisions of Section 13(d) or 14(d) of the Securities
Exchange Act of 1934 of more than fifty percent of either the outstanding shares
of common stock or the combined voting power of the Company's then outstanding
voting securities; (b) the approval by the stockholders of the Company of a
reorganization, merger of consolidation with respect to which persons who were
stockholders of the Company immediately prior to such reorganization, merger or
consolidation do not, immediately thereafter, own more than fifty percent of the
combined voting power of the Company's then outstanding securities entitled to
vote generally; (c) a liquidation or dissolution of the Company; (d) a change in
the membership of the Board of Directors such that those individuals who at the
beginning of any twelve consecutive month period cease to constitute at a
majority thereof for any reason within that twelve month period.
EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Profit Sharing plan for all eligible
employees. Contributions to the plan adopted in December 1998 are at the
discretion of the Board of Directors. Participants may contribute up to 12
percent of compensation. The Company made no contributions to the plan in 1999,
1998, or 1997. The Company also has a noncontributory profit
31
<PAGE>
sharing plan covering substantially all employees. Contributions to the plan are
at the discretion of the Board of Directors and totaled $83,500, $94,000, and
$95,500 in 1999, 1998, and 1997, respectively.
STOCK OPTION PLANS
The Company has two stock option plans that were approved by the
shareholders. One stock option plan was approved by the shareholders on April
22, 1986, and extended until March 20, 2006, at a meeting of shareholders held
in April 1996 (the "1996 Plan"). There are presently 159,070 shares authorized
for issuance under the 1996 Plan, of which 156,518 have been issued, 109,227
have been exercised, 47,241 are outstanding. No additional options will be
granted under the 1996 Plan. On April 23, 1998, the shareholders adopted the
1998 Employee Stock Option Plan (the "1998 Plan). There are presently 100,000
shares authorized for issuance under the 1998 Plan, of which 17,500 have been
issued and none exercised.
The purpose of the 1996 Plan and 1998 Plan is to provide additional
incentives to key employees of Bancshares and to help attract and retain quality
personnel and to enhance shareholder value aligning employee interest with those
of the shareholders. The grant of options is at the discretion of the Company's
Board of Directors or such other committee as it may designate. The 1998 Plan is
very similar to the 1986 Plan, except that it: (i) is updated to correct
references to the Internal Revenue Code which have been changed, (ii) permits an
employee to exercise options by surrendering already-owned shares, and (iii)
permits the grant of nonqualified stock options.
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table summarizes option exercises during the 1999 fiscal
year by each of the Named Executives and the 1999 fiscal year-end value of
unexercised options granted to the Named Executives:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-
Shares Underlying Unexercised the-money Options at
Acquired on Value Options at December 31, 1999 December 31, 1999(1)
Name Exercise Realized Exercisable/unexercisable) (Exercisable/unexercisable)
- ---- ----------- -------- ---------------------------- ---------------------------
<S> <C> <C> <C> <C>
David H. Brown 2,031 $49,930 21,428 / -0- $469,374 / -0-
Roy W. Thompson -0- -0- 10,721 / -0- $217,630 / -0-
Joseph E. Riordan -0- -0- -0- / 5,250 -0- / $32,500
Richard D. Pickett -0- -0- -0- / 10,000 -0- / -0-
</TABLE>
(1) Values are calculated by subtracting the exercise price from the fair
market value of the underlying stock. For purposes of this table, fair
market value is deemed to be $30.00, the last known sale price of
Bancshares common stock on December 31, 1999.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the Directors and Officers of the Company, Puyallup Valley
Bank, and Valley Bank and the firms and corporations with which they are
associated, have transactions with the Puyallup Valley Bank and Valley Bank,
including borrowings and investments in time deposits. All such loans and
investments in time deposits have been made in the ordinary course of business,
have been made on substantially the same terms (including interest rates paid or
charged and collateral required) as those prevailing at the time for comparable
transactions with unaffiliated persons, and did not involve more than the normal
risk of collectability or present other unfavorable features. As of December 31,
1999, the aggregate outstanding amount of all loans to Directors and Officers
was approximately $2,139,000.
ITEM 8. LEGAL PROCEEDINGS
The Banks are from time to time parties to various legal actions
arising in the normal course of business. The Company believes that there is no
threatened or pending proceeding against the Company or the Banks, which, if
determined adversely, would have a material effect on the business or financial
position of the Company or the Banks.
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<PAGE>
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
NATURE OF TRADING MARKET
At March 15, 2000, the Company had approximately 688 shareholders of
record. The stock is not traded on any exchange or automated quotation system,
and there is no firm which makes a market in the stock. The stock has been held
by shareholders who typically have held the stock for investment. Therefore,
there is no active trading market for the stock and no assurance can be given
that an active trading market for the stock will develop. During 1999, there
were 141 transfers known to the Company. These transfers involved a total of
60,731 shares. Sales prices have ranged from $30 to $35, to the Company's best
knowledge. The last trade occurred on February 29, 2000, and was for 1,000
shares of Common Stock at a price of $30 per share. These prices are not
necessarily indicative of the fair market value of the stock, nor is the Company
necessarily aware of all transfers or the price of those transfers.
DIVIDEND HISTORY
The Company (Puyallup Valley Bank prior to July 1, 1998) has paid,
since Puyallup Valley Bank's inception in 1973, a combination of stock and cash
dividends to its shareholders. Since 1993, Puyallup Valley Bank has paid a stock
dividend of 5 percent per year and a cash dividend of 50CENTS per share per
year. Since July 1, 1998, the Company paid a cash dividend of 38CENTS during
1998 and a 12CENTS dividend during 1999. On January 26, 2000, the Board of
Directors of the Company declared a cash dividend of $.50 per share, which was
paid during February 2000 to those shareholders of record on December 31, 1999.
Although the Company intends to continue its policy of paying cash
dividends on its Common Stock in amounts not less than those paid in recent
periods, the ability of the Company to continue to pay such dividends will
depend primarily upon the earnings of Puyallup Valley Bank and Valley Bank and
their ability to pay dividends to the Company, as to which there can be no
assurance. For the foreseeable future, none of the earnings of Valley Bank will
be dividends to the Company as the capital will be retained at Valley Bank to
promote its growth.
The ability of the banks to pay dividends is governed by various
statutes. These statutes provide that no bank shall declare or pay any dividend
in an amount greater than its retained earnings, without approval from the
Director. The Director shall, in his or her discretion, have the power to
require any bank to suspend the payment of any and all dividends until all
requirements that may have been made by the Director shall have been complied
with, and upon such notice to suspend dividends, no bank shall thereafter
declare or pay any dividends until such notice has been rescinded in writing.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth information as to all securities of registrant
sold by the registrant within the past three years, which were not registered
under the Securities Act of 1933.
(a) SECURITIES SOLD
(i) Public Offerings
<TABLE>
<CAPTION>
Date of Sale Title of Securities Amount Sold
------------ ------------------- -----------
<S> <C> <C>
January 31, 1999 Common Stock 104,439 shares
$1 par value
March 15, 1999 Common Stock 3,570 shares
$1 par value
</TABLE>
(ii) Exercise of Stock Options
<TABLE>
<CAPTION>
Date of Sale Title of Securities Amount Sold
------------ ------------------- -----------
<S> <C> <C>
Between April 1, 1997 Common Stock 20,143 shares
and April 1, 2000 $1 par value
</TABLE>
33
<PAGE>
(b) UNDERWRITERS AND OTHER PURCHASERS. The shares sold in the
offering listed under Item 10(a)(i) were sold in public
offerings without the use of underwriters. The shares sold in
the transactions listed under Item 10(a)(ii) above were sold
to employees of the registrant upon the exercise of stock
options within the past three years.
(c) CONSIDERATION. The consideration received for the 104,439
share offering completed on January 31, 1999 was $3,655,365.
The Company received land valued at $124,950 for the 3,570
shares issued on March 15, 1999. The land is being used for
Valley Bank's permanent facility being constructed at 10th and
D Street in Auburn, Washington. The total consideration for
the sale of the 20,143 shares sold upon the exercise of stock
options granted by the registrant under the 1996 Plan was
approximately $142,000.
(d) EXEMPTION FROM REGISTRATION CLAIMED. The sales of common stock
by the registrant described herein have not been registered
with the SEC in reliance on an exemption from such
registration. Because the securities have not been registered,
they are deemed "restricted securities" and can only be resold
in compliance with certain exemptions from registration.
(e) STOCK DIVIDENDS. Between April 1, 1997 and April 1, 2000, the
registrant issued 93,175 shares of registrants Common Stock,
$1 par value, as stock dividends. The value of the securities
issued at the time of issuance was $2,194,000 and have not
been registered under the Securities Act of 1933.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
GENERAL
The Company's Common Stock consists of 5,000,000 shares of Common
Stock, par value $1.00 per share, of which 1,125,561 are presently issued and
outstanding. Each share of Common Stock has the same relative rights as, and is
identical in all respects with, each other share of Common Stock. No shares of
preferred stock are authorized for issuance. In addition, up to 100,000 shares
of the Company's Common Stock are available for grant to employees of the
Company and the banks pursuant to the Valley Community Bancshares 1998 Stock
Option Plan.
NO CUMULATIVE VOTING
Holders of Common Stock will be entitled to one vote per share on all
matters submitted to a vote of the shareholders, including election of
Directors. Article VII of the Articles of Incorporation of the Company provides
that shareholders may not cumulate their votes in the election of Directors.
Cumulative voting means the ability to vote, in person or by proxy, the number
of shares owned by the shareholder for as many persons as there are Directors to
be elected and for whose election the shareholder has a right to vote, or to
cumulate votes by giving one candidate as many votes as are determined by the
number of such Directors to be elected multiplied by the total number of shares
the shareholder has the right to vote, or distributing such votes on the same
principle among any number of candidates.
DIVIDEND RIGHTS
The Company may pay dividends as declared from time to time by the
Board of Directors out of funds legally available for the payment of dividends.
The ability of the Company to pay dividends will initially and for the
foreseeable future depend on the amount of dividends paid to it by the banks.
The dividend restrictions imposed on subsidiaries by statue and regulation may
effectively limit the amount of dividends the Company can pay. See "SUPERVISION
AND REGULATION--Banking Subsidiaries" and "DIVIDEND HISTORY." Under Washington
corporate law, the Board of Directors is barred from making any dividend payment
if, after giving effect to such payment, the Company is either unable to pay its
debts as they become due in the normal course of business, or the Company's
total assets would be less than the sum of its total liabilities. The holders of
Common Stock will be entitled to receive and share equally in such dividends as
may be declared by the Board of Directors. See "DIVIDEND HISTORY."
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<PAGE>
LIQUIDATION/DISSOLUTION
In the event of any liquidation, dissolution or winding up of the
Company, the holders of the Common Stock would be entitled to receive, on a
pro-rata basis, after payment of all debts and liabilities of the Company
(including all deposit accounts and accrued interest thereon), all assets of the
Company available for distribution.
MERGER, ACQUISITION AND "ANTI-TAKEOVER" PROVISION
Article X of the Company's Articles of Incorporation provides that in
the event of a merger or consolidation of the Company or a sale of substantially
all of its assets, the Board of Directors must consider all relevant factors in
addition to the amount of consideration, including, without limitation, the
social and economic effects on its community and its depositors, borrowers,
employees, suppliers and other constituents. This provision might discourage a
tender offer for the Company's stock, which might be at a price above the
prevailing market rate.
The Company's Articles of Incorporation also require the approval of
the holders of: (i) at least 66-2/3 percent of the Company's outstanding shares
of voting stock, and (ii) at least a majority of the Company's outstanding
shares of voting stock, not including shares held by an "interested
shareholder," to approve certain "transactions." However, the preceding shall
not apply in cases where the proposed transaction has been: (i) approved by a
majority of the Board of Directors, excluding Directors who have a material
financial interest in the transaction or who were nominated and elected as a
result of an arrangement with the "interested shareholder" within 24 months of
the proposed transaction, or (ii) a majority of the Board of Directors, whose
votes are entitled to be counted under clause: (i) determines that the fair
market value of the consideration to be received by non-interested shareholders
for shares of any class of which shares are owned by any interested shareholder
is not less than the highest fair market value of the consideration paid by any
interested shareholder in acquiring shares of the same class within 24 months of
the proposed transaction. The term "interested shareholder" is defined to
include any person or group of affiliated persons who beneficially owns 20
percent or more of the outstanding voting shares of a corporation. An affiliated
person is any person who either acts jointly or in concert with, or directly or
indirectly controls, is controlled by, or is under common control with another
person. The provisions of Article XI apply to any transaction between a
corporation, or any subsidiary thereof, and an interested shareholder of such
corporation or an affiliated person to an interested shareholder, that must be
authorized pursuant to applicable law by a vote of the shareholders.
The increased stockholder vote required to approve a transaction with
an interested shareholder has the effect of foreclosing mergers and other
business combinations that a majority of stockholders deem desirable and places
the power to prevent such a merger or combination in the hands of a minority of
stockholders.
NO PREEMPTIVE RIGHTS
Article III of the Articles of Incorporation of the Company provides
that holders of Common Stock will not have any preemptive rights with respect to
any shares issued by the Company in the future; the Company may therefore sell
shares without first offering them to the then shareholders of the Company.
CERTAIN REQUIRED VOTES; AMENDMENT TO ARTICLES OF INCORPORATION
Article VIII of the Articles of Incorporation of the Company provides
that the Company reserves the right to amend the Articles of Incorporation in
any manner now or hereafter permitted by law. Under present Washington law, the
Articles of Incorporation may be amended by a vote of a majority of the members
of the Board of Directors without the requirement of shareholder approval, if
such amendment applies only to: (i) deletion of the name and address of the
initial Directors; (ii) a change of the name of the Company, and if the Company
has only one class of shares outstanding; (iii) to change or eliminate any
provision with respect to the par value of any class of shares; and (iv) to
change the number of authorized shares to effectuate a split of, or stock
dividend in, the Company's own shares. Other amendments to the Articles of
Incorporation of the Company require the affirmative vote of the shareholders
representing two-thirds of the outstanding shares of stock.
LIMITATION OF LIABILITY
Article VI of the Company's Articles of Incorporation limits the
liability of Directors, in their capacity as Directors, to the full extent
permitted by Washington law. Accordingly, Directors shall not be liable to the
Company and its shareholders for
35
<PAGE>
monetary damage except for acts or omissions that: (i) involve intentional
misconduct or a knowing violation of law by the director; (ii) involve
conduct which violates RCW 23B.08.310 of the Washington Business Corporation
Act, pertaining to unpermitted distributions to shareholders or loans to
directors, or (iii) involve any transaction from which the director will
personally receive a benefit in money, property or services to which the
director is not legally entitled. This provision does not affect the
availability of equitable remedies such as an action to enjoin or rescind a
transaction involving a breach of fiduciary duty. The above limitation of
liability also may not limit Director liability for violations of, or relieve
them from the necessity of complying with, federal securities laws.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article IX of the Company's Articles of Incorporation permits the
Company to indemnify and hold each Director and Officer ("Indemnitee") harmless
against all liability, provided that: (i) the Indemnitee acted in good faith;
(ii) in the case of official conduct, he reasonably believed that he was acting
in the Company's best interests, or in all other cases, that his action was not
opposed to the Company's best interests; (iii) in the case of a criminal
proceeding, he had no reasonable cause to believe his conduct was unlawful; and
provided further, that (iv) the Indemnitee did not engage in the conduct
described in RCW 30.12.240.
Notwithstanding the preceding, no Indemnitee shall be indemnified in
connection with: (i) a proceeding by or in the right of the Company or another
enterprise in which he was adjudged liable to the Company or other enterprise;
or (ii) any other proceeding charging improper personal benefit to himself,
whether or not involving action in his official capacity, in which he was
adjudged liable on the basis that personal benefit was improperly received by
him. Additionally, no Indemnitee shall be indemnified for any civil money
penalty or judgment resulting from any administrative or civil action instituted
by a federal banking agency, or any other liability or legal expense with regard
to any administrative proceeding or civil action instituted by any federal
banking agency which results in a final order or settlement pursuant to which
such person is: (i) assessed a civil money penalty; (ii) removed from office or
prohibited from participating in the conduct of the affairs of the Company or
other enterprise; or (iii) is required to cease and desist from or to take any
affirmative action described in Section 8(b) of the Federal Deposit Insurance
Act, as amended (12 U.S.C. 1811, ET SEQ.). However, permissible indemnification
payments may be made as permitted by 12 C.F.R. Section 359, ET SEQ., as amended
from time to time.
36
<PAGE>
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Valley Community Bancshares, Inc.
We have audited the accompanying consolidated balance sheet of Valley
Community Bancshares, Inc. and subsidiaries (the Company) as of December 31,
1999 and 1998, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The financial statements of Puyallup Valley
Bank as of December 31, 1997 were audited by other auditors whose report
dated January 9, 1998, except for Note 15 as to which the date is August 24,
1998, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Valley
Community Bancshares, Inc. and subsidiaries as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
Everett, Washington
February 1, 2000
37
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
---------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,127 $ 5,630
Interest-bearing deposits with banks 9,692 11,270
Federal funds sold 2,530
Securities available-for-sale 33,262 31,282
Securities held-to-maturity 1,241 2,335
Federal Home Loan Bank stock 420 355
---------- -----------
49,742 53,402
Loans 78,634 67,724
Less allowance for loan losses 959 883
---------- -----------
Loans, net 77,675 66,841
Accrued interest receivable 851 772
Premises and equipment, net 4,717 3,543
Real estate held for investment 224 256
Other assets 628 515
---------- -----------
Total assets $ 133,837 $ 125,329
========== ===========
LIABILITIES
Deposits
Noninterest-bearing $ 21,349 $ 20,806
Interest-bearing 92,460 89,477
---------- -----------
Total deposits 113,809 110,283
Other borrowed funds 539 234
Accrued interest payable 347 340
Other liabilities 418 394
---------- -----------
Total liabilities 115,113 111,251
---------- -----------
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share; 5,000,000 shares authorized;
1,125,561 and 1,014,982 shares issued and outstanding in 1999
and 1998, respectively 1,126 1,015
Additional paid-in capital 16,286 12,642
Retained earnings 1,569 310
Accumulated other comprehensive income (loss), net of tax (257) 111
---------- -----------
Total stockholders' equity 18,724 14,078
---------- -----------
Total liabilities and stockholders' equity $ 133,837 $ 125,329
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands except for per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 6247 $ 6,121 $ 6007
Interest on federal funds sold and deposits in banks 784 972 782
Securities available-for-sale 1,837 1,437 1,188
Securities held-to-maturity 90 164 314
------------- ----------- -----------
Total interest income 8,958 8,694 8,291
------------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 2,955 3,105 3,048
Interest on federal funds and other short-term borrowings 18 34 31
------------- ----------- -----------
Total interest expense 2,973 3,139 3,079
------------- ----------- -----------
Net interest income 5,985 5,555 5,212
PROVISION FOR LOAN LOSSES 84 9 66
------------- ----------- -----------
Net interest income after provision for loan losses 5,901 5,546 5,146
------------- ----------- -----------
NONINTEREST INCOME
Service charges 329 318 315
Gain on sale of investment securities, net 1 2 85
Origination fees on mortgage loans brokered 47 139 61
Other operating income 212 203 186
------------- ----------- -----------
Total noninterest income 589 662 647
------------- ----------- -----------
NONINTEREST EXPENSE
Salaries 1,849 1,741 1,552
Employee benefits 385 340 327
Occupancy 449 341 334
Equipment 471 389 358
Organizational costs 131
Other operating expenses 1,362 1,169 1,033
------------- ----------- -----------
Total noninterest expense 4,516 4,111 3,604
------------- ----------- -----------
INCOME BEFORE INCOME TAX 1,974 2,097 2,189
PROVISION FOR INCOME TAX 580 616 597
------------- ----------- -----------
NET INCOME $ 1,394 $ 1,481 $ 1,592
============= =========== ===========
EARNINGS PER SHARE
Basic $ 1.24 $ 1.46 $ 1.59
Diluted $ 1.21 $ 1.41 $ 1.53
Weighted average shares outstanding 1,119,780 1,012,844 1,001,013
Weighted average diluted shares outstanding 1,152,576 1,047,745 1,038,599
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
39
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
------------------ Paid-In Comprehensive Retained Comprehensive Stockholders'
Shares Amount Capital Income Earnings Income (Loss), net Equity
------ ------ ---------- ------------- -------- ------------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1996 906,054 $ 906 $ 9,561 $ 1,652 $ 123 $ 12,242
Net income $ 1,592 1,592 1,592
Other comprehensive
income, net of $16 tax
Unrealized loss
on securities (31) (31) (31)
-----------
Comprehensive income $ 1,561
===========
Cash dividend (457) (457)
Stock dividend 45,132 45 948 (993)
Common stock exercised
under stock option plan 13,500 14 76 90
------------ ----------- ----------- -------- ------------------ -------------
BALANCE,
December 31, 1997 964,686 965 10,585 1,794 92 13,436
Net income $ 1,481 1,481 1,481
Other comprehensive
income, net of $10 tax
Unrealized gains
on securities 19 19 19
-----------
Comprehensive income $ 1,500
===========
Holding company reorganization 893 (893)
Cash dividend (871) (871)
Stock dividend 48,043 48 1,153 (1,201)
Common stock exercised
under stock option plan 2,253 2 11 13
------------ ----------- ----------- ----------- ------------ -----------
BALANCE,
December 31, 1998 1,014,982 1,015 12,642 310 111 14,078
Net income $ 1,394 1,394 1,394
Other comprehensive
income, net of $190 tax
Unrealized loss
on securities (368) (368) (368)
-----------
Comprehensive income $ 1,026
===========
Common stock issued 106,189 106 3,610 3,716
Cash dividend (135) (135)
Common stock exercised
under stock option plan 4,390 5 34 39
------------ ----------- ----------- ----------- ------------ -----------
BALANCE,
December 31, 1999 1,125,561 $ 1,126 $ 16,286 $ 1,569 $ (257) $ 18,724
============ =========== =========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,394 $ 1,481 $ 1,592
Adjustments to reconcile net income to net cash
from operating activities
Provisions for loan losses 84 9 66
Depreciation 415 307 303
Deferred income tax (8) (33) (49)
Net amortization on securities 70 62 97
FHLB stock dividends (29) (10)
Gain on sale of securities available-for-sale (1) (2) (85)
Loss on sale of premises and equipment 4
Increase in accrued interest receivable (79) (103) (38)
Increase (decrease) in other assets 85 (74) 108
Increase (decrease) in accrued interest payable 7 21 (1)
Increase in other liabilities 24 188 72
----------- ----------- -----------
Net cash from operating activities 1,962 1,846 2,069
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold 2,530 (530) 200
Net (increase) decrease in interest-bearing deposits with banks 1,578 1,600 (6,411)
Purchase of securities (17,919) (26,432) (12,715)
Proceeds from sales of securities available-for-sale 1,001 2,377 11,329
Proceeds from maturities of securities 15,405 16,181 7,215
Purchase stock in FHLB (36) (345)
Net increase in loans (10,918) (3,110) (6,223)
Additions to premises and equipment (1,464) (796) (128)
Additions to real estate held for investment (1) (24)
Reduction to real estate held for investment 32
----------- ----------- -----------
Net cash from investing activities (9,791) (11,056) (6,757)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 3,526 12,133 4,662
Net increase (decrease) in other borrowed funds 305 (649) 168
Cash dividends paid (135) (871) (457)
Common stock issued 3,591
Stock options exercised 39 13 90
----------- ----------- -----------
Net cash from financing activities 7,326 10,626 4,463
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (503) 1,416 (225)
CASH AND DUE FROM BANKS, beginning of year 5,630 4,214 4,439
----------- ----------- -----------
CASH AND DUE FROM BANKS, end of year $ 5,127 $ 5,630 $ 4,214
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for
Interest $ 2,966 $ 3,118 $ 3,080
=========== =========== ===========
Income taxes $ 563 $ 655 $ 642
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Unrealized gains (losses) on securities available-for-sale $ (558) $ 29 $ (46)
=========== =========== ===========
Common stock issued for land $ 125
=========== =========== ===========
Deferred tax on unrealized gains (losses) on securities
available-for-sale $ 189 $ 10 $ (15)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE>
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include
the accounts of Valley Community Bancshares, Inc. (the Company) and its
wholly-owned subsidiaries Puyallup Valley Bank and Valley Bank (collectively,
the "Bank"). All significant intercompany transactions and balances have been
eliminated in consolidation.
DESCRIPTION OF BUSINESS - The Company is a Washington State bank
holding company headquartered in Puyallup, Washington. The Company was organized
as a holding company for its principal bank subsidiary, Puyallup Valley Bank,
through a reorganization completed on July 1, 1998. The Company conducts its
business primarily through the Bank. The Company recently became a multi-bank
holding company by assisting in the formation of Valley Bank, a wholly-owned
subsidiary of the Company, beginning January 11, 1999.
The Company's main office is located in Puyallup, Washington, which
also serves as the main office of Puyallup Valley Bank. Valley Bank is located
in Auburn, Washington. The Company provides a full range of commercial banking
services to small and medium-sized businesses, professionals and other
individuals through banking offices located in Puyallup and Auburn, Washington,
and their environs.
USE OF ESTIMATES - The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions. These assumptions and estimates
affect the reported amounts of assets and liabilities, and disclosures of
contingent assets and liabilities at the date of the consolidated financial
statements. They also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS - For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, and amounts due from banks. Cash and cash
equivalents have an original maturity of three months or less.
INTEREST BEARING DEPOSITS WITH BANKS - Interest bearing deposits with
banks include interest bearing deposits at the Federal Home Loan Bank and
certificates of deposit in financial institutions located throughout the United
States. All certificates of deposit are under the FDIC insurance limit.
INVESTMENT SECURITIES - Investment securities are classified into one
of three categories: (1) held-to-maturity, (2) available-for-sale, or (3)
trading. Investment securities are categorized as held-to-maturity when the
Company has the positive intent and ability to hold those securities to
maturity. Securities which are held-to-maturity are stated at cost and adjusted
for amortization of premiums and accretion of discounts, which are recognized as
adjustments to interest income.
Investment securities categorized as available-for-sale are generally
held for investment purposes (to maturity), although unanticipated future events
may result in the sale of some securities. Available-for-sale securities are
recorded at estimated fair value, with the net unrealized gain or loss included
in comprehensive income, net of the related tax effect. Realized gains or losses
on dispositions are based on the net proceeds and the adjusted carrying amount
of securities sold, using the specific identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary are
recognized by write-downs of the individual securities to their fair value. Such
write-downs would be included in earnings as realized losses.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity. The Company had no trading
securities at December 31, 1999 and 1998.
42
<PAGE>
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
FEDERAL HOME LOAN BANK STOCK - The Company's investment in Federal Home
Loan Bank (the FHLB) stock is carried at par value ($100 per share), which
reasonably approximates its fair value. As a member of the FHLB system, the
Company is required to maintain a minimum level of investment in FHLB stock
based on specified percentages of its outstanding FHLB advances. The Company may
request redemption at par value of any stock in excess of the amount the Company
is required to hold. Stock redemptions are at the discretion of the FHLB.
LOANS - Loans that management has the intent and ability to hold for
the foreseeable future, or until maturity or pay-off are reported at their
outstanding principal, are adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans. Loan origination fees and certain
direct origination costs are capitalized and recognized as an adjustment of the
yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received. Interest income on restructured loans is recognized
pursuant to the terms of the new loan agreement. Interest income on other
impaired loans is monitored and based upon the terms of the underlying loan
agreement. However, the recorded net investment in impaired loans, including
accrued interest, is limited to the present value of the expected cash flows of
the impaired loan or the observable fair market value of the loan, or the fair
market value of the loan's collateral.
ALLOWANCE FOR LOAN LOSS - The allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries), and
established through a provision for credit losses charged to expense. Loans are
charged against the allowance for credit losses when management believes that
the collectability of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb losses inherent in existing
loans, commitments to extend credit and standby letters of credit based on
evaluations of collectability and prior loss experience of loans, commitments to
extend credit and standby letters of credit. The evaluations take into
consideration such factors as changes in the nature and volume of the portfolio,
overall portfolio quality, loan concentrations, specific problem loans,
commitments, standby letters of credit and current economic conditions that may
affect the borrowers' ability to pay.
A material estimate that is particularly susceptible to significant
change relates to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the estimated
losses on loans and foreclosed assets held for sale, management obtains
independent appraisals for significant properties.
The majority of the Company's loan portfolio consists of commercial
loans and single-family residential loans secured by real estate in the Puyallup
and Pierce County areas and also in the Auburn and King County area. Real estate
prices in this market are stable at this time. However, the ultimate
collectability of a substantial portion of the Company's loan portfolio may be
susceptible to change in local market conditions in the future.
While management uses available information to recognize losses on
loans, further reductions in the carrying amounts of loans may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the
estimated losses on loans. Such agencies may require the Company to recognize
additional losses based on their judgment about information available to them at
the time of their examination.
43
<PAGE>
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost,
less accumulated amortization and depreciation. Leasehold improvements are
amortized on a straight-line basis over the lives of the respective leases.
Depreciation is computed on the straight-line method over the following
estimated useful lives:
Building and improvements 10 - 40 years
Furniture, fixtures and equipment 3 - 10 years
REAL ESTATE HELD FOR INVESTMENT - Real estate held for investment is
property that was acquired for resale. The property is recorded at the lower of
cost or fair value and is periodically evaluated to determine that the carrying
value does not exceed the fair value of the property. The amount the Company
will ultimately recover may differ from the carrying value of the asset because
of future market factors beyond the Company's control.
INCOME TAX - The Company records its provision for income taxes using
the liability method. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
RESTRICTED ASSETS - Federal Reserve Board Regulations require
maintenance of certain minimum reserve balances on deposit with the Federal
Reserve Bank. The amounts of such balances on deposit were approximately
$868,000 and $874,000 at December 31, 1999 and 1998, respectively.
STOCK OPTION PLAN - The Company recognizes the financial effects of
stock options in accordance with Accounting Principles Board (APB) Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Stock options are issued at a
price that approximates the fair value of the Bank's stock as of the grant date.
Under APB 25, options issued in this manner do not result in the recognition of
employee compensation in the Company's financial statements.
FINANCIAL INSTRUMENTS - In the ordinary course of business, the Company
has entered into off-balance sheet financial instruments consisting of
commitments to extend credit, commitments under credit card arrangements,
commercial letters of credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they are funded, or
related fees are incurred or received.
EARNINGS PER SHARE - Basic earnings per share amounts are computed
based on the weighted average number of shares outstanding during the period
after giving retroactive effect to stock dividends and stock splits. Diluted
earnings per share amounts are computed by determining the number of additional
shares that are deemed outstanding due to stock options under the treasury stock
method.
ADVERTISING COSTS - The Company expenses advertising costs as they are
incurred and are not considered to be material.
IMPACT OF NEW ACCOUNTING ISSUES - In June 1999, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 137 entitled ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES DEFERRAL OF THE EFFECTIVE DATE OF SFAS STATEMENT NO.133. The
statement amends SFAS No. 133 to defer its effective date to all fiscal quarters
of all fiscal years beginning after June 15, 2000. Management does not believe
the adoption of this statement will have a material effect on its financial
condition or results of operation.
44
<PAGE>
NOTE 2 - INVESTMENT SECURITIES
Investment securities have been classified according to management's
intent. The carrying amount of securities and their estimated fair values are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
SECURITIES AVAILABLE-FOR-SALE Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government
corporations and agencies $ 18,630 $ 23 $ 224 $ 18,429
State and political subdivisions 4,233 7 39 4,201
Mortgage-backed securities 9,269 14 132 9,151
Other 1,520 39 1,481
----------- ----------- ---------- -----------
33,652 44 434 33,262
----------- ----------- ---------- -----------
SECURITIES HELD-TO-MATURITY
U.S. Treasury and U.S. Government
corporations and agencies 321 2 323
State and political subdivisions 920 4 924
-------------------------------------------------------
1,241 6 1,247
----------- ----------- ---------- -----------
$ 34,893 $ 50 $ 434 $ 34,509
=========== =========== ========== ===========
DECEMBER 31, 1998
SECURITIES AVAILABLE-FOR-SALE Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ---------- -----------
U.S. Treasury and U.S. Government
corporations and agencies $ 15,867 $ 92 $ 60 $ 15,899
State and political subdivisions 4,658 85 2 4,741
Mortgage-backed securities 10,056 65 7 10,114
Other 533 5 528
----------- ----------- ---------- -----------
31,114 242 74 31,282
----------- ----------- ---------- -----------
SECURITIES HELD-TO-MATURITY
U.S. Treasury and U.S. Government
corporations and agencies 436 2 438
State and political subdivisions 1,899 25 1,924
-------------------------------------------------------
2,335 27 2,362
----------- ----------- ---------- -----------
$ 33,449 $ 269 $ 74 $ 33,644
=========== =========== ========== ===========
</TABLE>
45
<PAGE>
NOTE 2 - INVESTMENT SECURITIES (continued)
The amortized cost and estimated market value of securities
available-for-sale and securities held-to-maturity, at December 31, 1999, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
Available-For-Sale Held-to-Maturity
-------------------------- -------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 7,099 $ 7,054 $ 885 $ 889
Due from one to five years 22,698 22,362 35 35
Due from five to ten years 913 880
Due after ten years 2,942 2,966 321 323
----------- ----------- ---------- -----------
Totals $ 33,652 $ 33,262 $ 1,241 $ 1,247
=========== =========== ========== ===========
</TABLE>
Proceeds from sales of available-for-sale investment securities were
$1,001,000, $2,377,000 and $11,329,000 in 1999, 1998 and 1997, respectively.
Gross gains from the sales of available-for-sale investment securities
were $1,000, $5,000 and $87,000 in 1999, 1998 and 1997, respectively. The
Company incurred gross losses of $0 in 1999, $3,000 in 1998, and $2,000 in 1997.
Investments in State and political subdivisions represent purchases of
municipal bonds located in Washington State. Investments in corporate debt
obligations are made in companies located and doing business throughout the
United States. The debt obligations were all within the credit ratings
acceptable under the Company's investment policy.
Investment securities with a book value of $3,864,000 and $2,370,000 at
1999 and 1998, respectively, have been pledged to secure public deposits, as
required by law, and other purposes. The estimated fair value of these pledged
securities is $3,829,000 and $2,370,000 at December 31, 1999 and 1998,
respectively.
NOTE 3 - LOANS
The major classifications of loans at December 31 are summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Real Estate
Construction $ 7,384 $ 4,890
Mortgage 15,867 13,788
Commercial 40,254 34,696
Commercial 12,892 12,496
Consumer and other 1,864 1,854
Lease 377
----------- -----------
78,638 67,724
Less deferred loan fees, net (3)
----------- -----------
$ 78,634 $ 67,724
=========== ===========
</TABLE>
46
<PAGE>
NOTE 3 - LOANS (continued)
Contractual maturities of loans as of December 31, 1999 are as shown
below. Actual maturities may differ from contractual maturities because
individual borrowers may have the right to prepay loans with or without
prepayment penalties.
<TABLE>
<CAPTION>
Within 1 Year 1 - 5 Years After 5 Years Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Commercial $ 8,859 $ 3,219 $ 814 $ 12,892
Real Estate, commercial 6,575 33,538 141 40,254
Real Estate, construction 6,863 521 7,384
Real Estate, mortgage 2,665 12,096 1,106 15,867
Consumer and other 724 933 203 1,860
Lease 69 308 377
------------- ------------- ------------- -------------
$ 25,755 $ 50,615 $ 2,264 $ 78,634
============= ============= ============= =============
1 - 5 After
Years 5 Years
------------- -------------
Loans maturing after one year with:
Fixed rates $ 44,169 $ 864
Variable rates 6,446 1,400
------------- -------------
$ 50,615 $ 2,264
============= =============
</TABLE>
At December 31, 1999 and 1998, the Company had no loans that were
specifically classified as impaired and therefore, no allocation of the
allowance for possible credit losses was considered necessary at December 31,
1999 and 1998.
The effects of troubled debt restructurings are not considered material
to the Company's financial position and results of operations.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year $ 883 $ 840 $ 776
Provision for loan losses 84 9 66
Additions from recoveries 45
Loans charged off (8) (11) (2)
----------- ----------- -----------
Balance, end of year $ 959 $ 883 $ 840
=========== =========== ===========
</TABLE>
47
<PAGE>
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Equipment, furniture and fixtures $ 3,205 $ 2,644
Land and buildings 3,748 3,695
Construction in progress 950
----------- -----------
7,903 6,339
Less: accumulated depreciation (3,186) (2,796)
----------- -----------
$ 4,717 $ 3,543
=========== ===========
</TABLE>
Depreciation expense on premises and equipment totaled $415,000 in
1999, $307,000 in 1998, and $303,000 in 1997.
The Company began construction on the future headquarters of Valley
Bank. Estimated cost to complete construction in progress at December 31, 1999
is $1,050,000.
NOTE 6 - DEPOSITS
Interest-bearing deposits at December 31 consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Demand accounts $ 15,926 $ 16,185
Money market accounts 28,603 29,040
Savings accounts 12,002 12,101
Certificates of deposit over $100,000 14,555 10,874
Other certificates of deposit 21,374 21,277
----------- -----------
$ 92,460 $ 89,477
=========== ===========
</TABLE>
At December 31, 1999, the scheduled maturities of certificates of
deposit are as follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
2000 $ 34,289
2001 1,339
2002 265
2003 36
-----------
$ 35,929
===========
</TABLE>
48
<PAGE>
NOTE 7 - CREDIT ARRANGEMENTS
The Banks are members of the Federal Home Loan Bank of Seattle. As a
member, Puyallup Valley Bank has a committed line of credit up to 10 percent of
total assets. Valley Bank's credit line is on a case-by-case basis. Borrowings
generally provide for interest at the then current published rates. There were
no borrowings outstanding at December 31, 1999 or 1998.
At December 31, 1999, committed line of credit agreements totaling
approximately $6,750,000 were available to the Company from unaffiliated banks
with maturities that range from April 2000 to June 2000. Such lines generally
provide for interest at the then existing federal funds rate. There were no
borrowings outstanding under these credit arrangements at December 31, 1999 and
1998.
NOTE 8 - INCOME TAXES
The components of the provision for federal income tax expense for the
years ended December 31, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Current $ 588 $ 649 $ 646
Deferred (8) (33) (49)
----------- ----------- ----------
$ 580 $ 616 $ 597
=========== =========== ==========
</TABLE>
A reconciliation of the effective income tax rate with the federal
statutory rate is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- -------------------------
Amount Rate Amount Rate Amount Rate
----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C>
Federal income tax at
statutory rates $ 671 34% $ 713 34% $ 744 34%
Effect of tax-exempt
interest income (96) (5)% (108) (5)% (136) (6)%
Other 5 11 (11) (1)%
----------- ----------- ----------- ----------- ----------- ----------
$ 580 29% $ 616 29% $ 597 27%
=========== =========== =========== =========== =========== ==========
</TABLE>
49
<PAGE>
NOTE 8 - INCOME TAXES (continued)
The following are the significant components of deferred tax assets and
liabilities at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 270 $ 232
Unrealized loss on securities available-for-sale 132
Deferred compensation 36
Other 31 73
----------- -----------
469 305
----------- -----------
Deferred tax liabilities
Accumulated depreciation 32 70
Unrealized gain on securities available-for-sale 57
Other 65 3
----------- -----------
97 130
----------- -----------
Net deferred tax asset $ 372 $ 175
=========== ===========
</TABLE>
The Bank believes, based on available information, all deferred assets
will be realized in the normal course of business, therefore, these assets have
not been reduced by a valuation allowance.
NOTE 9 - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
In January 1998 and 1997, the Company distributed, 48,043 shares and
45,132 shares, respectively, of common stock in connection with 5 percent stock
dividends. All references in the accompanying consolidated financial statements
to the average number of shares of common stock and per share amounts have been
restated to reflect these stock dividends.
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly, additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the Company's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios (set forth
in the following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1999, that the Company meets all capital adequacy requirements to which it is
subject.
As of November 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Banks as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company must maintain minimum total risk-based, Tier I
risk-based, Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
50
<PAGE>
NOTE 9 - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)
The Company's actual capital amounts and ratios are also presented in
the table (dollars in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ ----------------------------- -----------------------
AS OF DECEMBER 31, 1999: Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 19,940 21.7% > $ 7,357 > 8.0% > $ 9,196 > 10.0%
Puyallup Valley Bank $ 13,867 16.3% > $ 6,814 > 8.0% > $ 8,518 > 10.0%
Valley Bank $ 3,962 68.0% > $ 466 > 8.0% > $ 583 > 10.0%
Tier I Capital
(to Risk-Weighted Assets)
Consolidated $ 18,981 20.6% > $ 3,678 > 4.0% > $ 5,518 > 6.0%
Puyallup Valley Bank $ 12,970 15.2% > $ 3,407 > 4.0% > $ 5,111 > 6.0%
Valley Bank $ 3,900 66.9% > $ 233 > 4.0% > $ 350 > 6.0%
Tier I Capital
(to Average Assets)
Consolidated $ 18,981 13.8% > $ 5,522 > 4.0% > $ 6,903 > 5.0%
Puyallup Valley Bank $ 12,970 10.0% > $ 5,194 > 4.0% > $ 6,492 > 5.0%
Valley Bank $ 3,900 53.4% > $ 292 > 4.0% > $ 365 > 5.0%
AS OF DECEMBER 31, 1998:
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 14,850 19.2% > $ 6,198 > 8.0% > $ 7,747 > 10.0%
Puyallup Valley Bank $ 13,233 17.1% > $ 6,187 > 8.0% > $ 7,733 > 10.0%
Tier I Capital
(to Risk-Weighted Assets)
Consolidated $ 13,967 18.0% > $ 3,099 > 4.0% > $ 4,648 > 6.0%
Puyallup Valley Bank $ 12,350 16.0% > $ 3,093 > 4.0% > $ 4,640 > 6.0%
Tier I Capital
(to Average Assets)
Consolidated $ 13,967 11.0% > $ 5,065 > 4.0% > $ 6,331 > 5.0%
Puyallup Valley Bank $ 12,350 9.8% > $ 5,061 > 4.0% > $ 6,326 > 5.0%
</TABLE>
51
<PAGE>
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
(a) FINANCIAL INSTRUMENTS - The Company is party to financial
instruments with off-balance sheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheets.
The Company's exposure to credit loss, in the event of nonperformance by
the other party to the financial instruments for commitments to extend credit
and standby letters of credit, is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. A summary of commitments at December 31 is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Commitments to extend credit $ 13,910 $ 8,513
Standby letters of credit 343 391
------------ ------------
$ 14,253 $ 8,904
============ ============
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company's experience has been that
approximately 75% of loan commitments are drawn upon by customers. While
approximately all of commercial letters of credit are utilized, a significant
portion of such utilization is on an immediate payment basis. The Company
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if it is deemed necessary by the Company upon extension
of credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory, property
and equipment, and income producing properties.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. Collateral held varies as specified above, and is required in
instances where the Company deemed necessary.
(b) OPERATING LEASE COMMITMENTS - The Company leases its operating
facilities under agreements which expire between 2000 and 2004. The agreements
require the Company to pay certain operating expenses. The approximate annual
commitment for rental space under these operating leases is summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
2000 $ 102
2001 93
2002 65
2003 27
------------
$ 287
============
</TABLE>
52
<PAGE>
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Rental expense charged to operations was $109,000, $74,000 and $75,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
NOTE 11 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers, principal stockholders and
companies in which they have a beneficial interest, are loan customers of the
Company. All loans and loan commitments were made in compliance with applicable
laws and regulations on substantially the same terms (including interest rates
and collateral) as those prevailing at the time for comparable transactions
with other persons and do not involve more than the normal risk of
collectability or present any other unfavorable features.
Such loans had aggregate balances and activity during 1999, 1998 and
1997 as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 550 $ 500 $ 435
New loans or advances 2,378 50 2,165
Repayments (789) (2,100)
------------ ----------- -----------
Balance at end of year $ 2,139 $ 550 $ 500
============ =========== ===========
</TABLE>
Deposits from related parties totaled approximately $5,175,000 and
$4,677,000 at December 31, 1999 and 1998, respectively.
NOTE 12 - EMPLOYEE BENEFITS
The Company has a 401(k) defined contribution plan for those employees
who meet the eligibility requirements set forth in the plan. Contributions to
the plan, adopted in January 1987, are at the discretion of the Company's Board
of Directors. Eligible employees can contribute up to 12% of compensation. The
Company made no contributions to the plan in 1999, 1998 or 1997.
The Company also has a noncontributory profit sharing plan covering
substantially all employees. Contributions to the plan are at the discretion of
the Company's Board of Directors, and totaled $84,000, $94,000 and $96,000 in
1999, 1998 and 1997, respectively.
NOTE 13 - STOCK OPTION PLAN
The Company has a qualified incentive stock option plan that provides
for the awarding of stock options to certain officers and employees of the
Company. The awarding of stock options is at the discretion of the Board of
Directors. Options granted under the plan vest under a schedule determined by
the Board of Directors and expire ten years from the date of the grant. The
exercise price of all options granted under the plan is equal to the fair value
of the common stock on the date of the grant. Average exercise price per share,
number of shares authorized, available for grant, granted, exercised,
outstanding and currently exercisable reflect the dilutive effect of stock
dividends and stock splits.
53
<PAGE>
NOTE 13 - STOCK OPTION PLAN (continued)
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. The pro forma recognizes, as compensation, the
estimated present value of stock options granted using an option valuation
model known as the Black-Scholes model. Pro forma earnings per share amounts
reflect an adjustment as if the present value of the options were recognized as
compensation for the period.
For the most part, variables and assumptions are used in the model.
For the periods 1999, 1998 and 1997, respectively, the risk-free interest rate
is 5.75%, 5.75% and 5.90%, the dividend yield rate is 1.4%, 1.7% and 1.9%, the
price volatility is not meaningful, and the weighted average expected life of
the options has been measured at 7 years.
The fair value of options issued in 1999 and 1998 were estimated at
$24,000 and $21,000, respectively. The remaining unrecognized compensation for
fair value of stock options was approximately $25,000 as of December 31, 1999.
Management believes that the variables and assumptions used in the
options pricing model are subjective and represent only one estimate of
possible value. The fair value of options granted, that are recognized in pro
forma earnings, is shown below:
<TABLE>
<CAPTION>
in thousands, except for per share amounts 1999 1998 1997
------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Pro forma disclosures
Net income as reported $ 1,394 $ 1,481 $ 1,592
Additional compensation for fair value of
stock options (3) (2)
----------- ----------- -----------
Pro forma net income $ 1,391 $ 1,479 $ 1,592
=========== =========== ===========
Earnings per share
Basic
As reported $ 1.24 $ 1.46 $ 1.59
=========== =========== ===========
Pro forma $ 1.24 $ 1.46 $ 1.59
=========== =========== ===========
Diluted
As reported $ 1.21 $ 1.41 $ 1.53
=========== =========== ===========
Pro forma $ 1.21 $ 1.41 $ 1.53
=========== =========== ===========
</TABLE>
54
<PAGE>
NOTE 13 - STOCK OPTION PLAN (continued)
Information with respect to option transactions is summarized as
follows:
<TABLE>
<CAPTION>
Average
Exercise Currently Options
Authorized Price Exercised Outstanding Exercisable
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 159,070 $ 9.45 89,134 65,634 27,558
Granted 25.00 5,000
Exercised 6.70 13,500 (13,500) (13,500)
Expired and forfeitures 19.05 (5,250)
Vested 24,130
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 159,070 10.69 102,634 51,884 38,188
1998 Option plan 100,000
Granted 33.00 13,750
Exercised 5.99 2,253 (2,253) (2,253)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 259,070 15.70 104,887 63,381 35,935
Granted 35.00 14,500
Exercised 8.68 4,390 (4,390) (4,390)
Expired and forfeitures 34.14 (8,750)
Vested 5,464
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 259,070 $ 18.00 109,277 64,741 37,009
=========== =========== =========== =========== ===========
</TABLE>
Additional financial data pertaining to outstanding stock options is
as follows:
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Remaining Weighted Average Number Exercise Price of
Range of Number of Contractual Exercise Price Exercisable Exercisable
Exercise Prices Option Shares Life (In Years) Option Shares Option Shares Option Shares
----------------- --------------- ----------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
$5.42 8,027 0.27 $5.42 8,027 $5.42
$9.70 - $12.36 30,806 3.16 $10.27 28,982 $10.14
$15.54 1,158 5.46 $15.54 - -
$23.81 5,250 7.89 $5.25 - -
$25 2,000 8.22 $25.00 - -
$35 17,500 9.26 $35.00 - -
</TABLE>
55
<PAGE>
NOTE 14 - EARNINGS PER SHARE
The numerators and denominators of basic and fully diluted earnings
per share are as follows:
<TABLE>
<CAPTION>
in thousands, except for per share amounts 1999 1998 1997
------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Net income (numerator) $ 1,394 $ 1,481 $ 1,592
============ ============ ============
Shares used in the calculation (denominator)
Weighted average shares outstanding 1,119,780 1,012,844 1,001,013
Effect of dilutive stock options 32,796 34,901 37,586
Fully diluted shares 1,152,576 1,047,745 1,038,599
============ ============ ============
Basic earnings per share $1.24 $1.46 $1.59
============ ============ ============
Fully diluted earnings per share $1.21 $1.41 $1.53
============ ============ ============
</TABLE>
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methodologies. However, considerable judgment is
necessary to interpret market data in the development of the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The fair value of commitments to customers is not considered material since
they are for relatively short periods of time and subject to customary credit
terms. The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
(a) CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS WITH BANKS,
OTHER BORROWED FUNDS AND FEDERAL FUNDS SOLD - For these short-term instruments,
the carrying amount is a reasonable estimate of fair value.
(b) SECURITIES - For securities, fair values are based on quoted
market prices or dealer quotes, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
(c) LOANS - The fair value of loans generally is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities. For certain homogeneous categories of loans, such as
Small Business Administration guaranteed loans, fair value is estimated using
the quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics.
(d) DEPOSITS - The fair value of demand deposits, savings accounts
and certain money market deposits, is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated by discounting the future cash flows using the rates currently
offered for deposits of similar remaining maturities.
(e) LIMITATIONS - The fair value estimates presented herein are
based on pertinent information available to management as of the applicable
date.
56
<PAGE>
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The estimated fair values of the Company's financial instruments at
December 31, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks, interest-
bearing deposits with banks,
and federal funds sold $ 14,819 $ 14,819 $ 19,430 $ 19,430
Securities $ 34,503 $ 34,509 $ 33,617 $ 33,644
Federal Home Loan Bank stock $ 420 $ 420 $ 355 $ 355
Loans $ 78,634 $ 77,667 $ 67,724 $ 68,408
Financial Liabilities:
Deposits $ 113,809 $ 113,725 $ 110,283 $ 110,339
Other borrowed funds $ 539 $ 539 $ 234 $ 234
</TABLE>
NOTE 16 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION
Condensed balance sheet at December 31, 1999 and 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from bank $ 1,131 $ 1,592
Investment in Banks 16,613 12,461
Other assets 980 145
-------------- ---------------
Total assets $ 18,724 $ 14,198
============== ===============
LIABILITIES
Accounts payable $ 120
---------------
Total liabilities 120
---------------
TOTAL STOCKHOLDERS' EQUITY $ 18,724 14,078
-------------- ---------------
Total liabilities and stockholders' equity $ 18,724 $ 14,198
============== ===============
</TABLE>
57
<PAGE>
NOTE 16 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION (continued)
Condensed statement of income for the year ended December 31, 1999 and
for the period from inception (July 1, 1998) to December 31, 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
INCOME
Dividend from Bank $ 900 $ 2,075
Other income 27
-------------- --------------
Total income 927 2,075
-------------- --------------
EXPENSES
Other expenses 15 131
-------------- --------------
Total expenses 15 131
-------------- --------------
NET INCOME BEFORE FEDERAL INCOME TAX AND
EQUITY IN UNDISTRIBUTED INCOME OF BANK 912 1,944
INCOME TAX (13) 44
-------------- --------------
NET INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF BANK 899 1,988
EQUITY IN UNDISTRIBUTED INCOME OF BANK 495
DISTRIBUTIONS RECEIVED IN EXCESS OF BANK INCOME (1,294)
-------------- --------------
NET INCOME $ 1,394 $ 694
============== ==============
</TABLE>
58
<PAGE>
NOTE 16 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION (continued)
Condensed statement of cash flows for the year ended December 31, 1999
and for the period from inception (July 1, 1998) to December 31, 1998 (dollars
in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,394 $ 694
Adjustments to reconcile net income to net cash
from operating activities
Distributions received in excess of subsidiary bank income (495) 1,294
Other operating activities (54) 26
-------------- --------------
Net cash from operating activities 845 2,014
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of real estate (776) (50)
Investment in Valley Bank (4,025)
-------------- --------------
Net cash from investing activities (4,801) (50)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of Common Stock 3,630 13
Dividend (135) (385)
-------------- --------------
Net cash from financing activities 3,495 (372)
NET INCREASE (DECREASE) IN CASH (461) 1,592
CASH, beginning of year 1,592
-------------- --------------
CASH, end of year $ 1,131 $ 1,592
============== ==============
</TABLE>
NOTE 17 - SUBSEQUENT EVENT
(a) DIVIDENDS - On January 26, 2000, the Board of Directors of the
Company declared a cash dividend of $.50 per share. The dividend was paid
during February 2000 to those shareholders of record on December 31, 1999. The
dividend was approximately $563,000.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(1) Independent Auditor's Report
(2) Consolidated Balance Sheet at December 31, 1999 and December
31,1998
(3) Consolidated Statement of Income for the years ended December
31, 1999, December 31, 1998 and December 31, 1997
(4) Consolidated Statement of Cash Flows for the years ended
December 31, 1999, December 31, 1998 and December 31, 1997
59
<PAGE>
(5) Consolidated Statement of Changes in Stockholders' Equity for
the years ended December 31, 1999, December 31, 1998 and
December 31, 1997
(6) Notes to Consolidated Financial Statements
The Exhibits are described in the Exhibit Index immediately following the
signature page filed as a part of this Registration Statement.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
VALLEY COMMUNITY BANCSHARES, INC.
(Registrant)
Date April 19, 2000 By: /S/ David H. Brown
----------------------- -------------------------------------
David H Brown
President and Chief Executive Officer
60
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of Valley Community
Bancshares, Inc., do hereby severally constitute and appoint David H. Brown our
true and lawful attorney and agent to do any and all things and acts in our
names in the capacities indicated below and to execute all instruments for us
on our names in the capacities indicated below which said David H. Brown may
deem necessary or advisable to enable Valley Community Bancshares, Inc., to
comply with any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with the Registration Statement on Form 10
relating to the registering of Valley Community Bancshares, Inc.'s Common
Stock, including specifically but not limited to, power and authority to sign
for us or any of us in our names in the capacities indicated below the
Registration Statement and any and all amendments (including post-effective
amendments) thereto; and we hereby ratify and confirm all that David H. Brown
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/S/ Thomas R. Absher Chairman of the Board April 19, 2000
-------------------------------------
Thomas R. Absher
/S/ David H. Brown Director, President and CEO April 19, 2000
-------------------------------------
David H. Brown
/S/ Warren D. Hunt Director April 19, 2000
-------------------------------------
Warren D. Hunt
/S/ A. Eugene Hammermaster Director April 19, 2000
-------------------------------------
A. Eugene Hammermaster
/S/ William E. Fitchett Director April 19, 2000
-------------------------------------
William E. Fitchett
/S/ David K. Hamry Director April 19, 2000
-------------------------------------
David K. Hamry
/S/ Steven M. Harris Director April 19, 2000
-------------------------------------
Steven M. Harris
/S/ Roger L. Knutson Director April 19, 2000
-------------------------------------
Roger L. Knutson
/S/ Joseph E. Riordan Senior Vice President and CFO April 19, 2000
-------------------------------------
Joseph E. Riordan
/S/ Roy W. Thompson Senior Vice President April 19, 2000
-------------------------------------
Roy W. Thompson
/S/ Richard D. Pickett President of Valley Bank April 19, 2000
-------------------------------------
Richard D. Pickett
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S> <C>
3.1 Articles of Incorporation of the Company
3.2 Bylaws of the Company
4.1 Specimen Stock Certificate
4.2 Reference is made to Exhibits 3.1 and 3.2
10.1 Severance agreement for Mr. Brown
10.2 Severance agreement for Mr. Thompson
10.3 Severance agreement for Mr. Riordan
10.4 Severance agreement for Mr. Pickett
10.5 Deferred Compensation Agreement for Mr. Brown
10.6 1998 Stock Option Plan
10.7 Valley Bank Construction Agreement dated November 18, 1999
11 Statement re: computation of per share earnings
21 Subsidiaries of the Company
24 Power of Attorney is set forth on the signature page of this Registration Statement
27 Financial Data Schedule
</TABLE>
62
<PAGE>
EXHIBIT 3.1
<PAGE>
ARTICLES OF INCORPORATION
OF
VALLEY COMMUNITY BANCSHARES, INC.
The undersigned hereby executes the following Articles of Incorporation
for the purpose of forming a corporation under the Washington Business
Corporation Act (Revised Code of Washington, Title 23B).
ARTICLE I
NAME
The name of this corporation is VALLEY COMMUNITY BANCSHARES, INC.
ARTICLE II
AUTHORIZED CAPITAL STOCK
This corporation is authorized to issue, in the aggregate,
5,000,000 shares, $1.00 par value, of a single class of stock.
ARTICLE III
NO PREEMPTIVE RIGHTS
Unless otherwise determined by the Board of Directors, no
shareholder of the Corporation shall be entitled as such, as a matter of
right, to preemptive rights to purchase, subscribe for, or otherwise acquire
any stock which the Corporation may issue or sell, including unissued shares
of stock of the said Corporation.
ARTICLE IV
NOMINATION OF DIRECTORS
Nominations for the election of directors may be made by the Board of
Directors or by any shareholder entitled to vote for the election of directors.
Such nominations other than by the Board of Directors shall be made by notice in
writing, delivered or mailed by first class United States mail, postage prepaid,
to the Secretary of the Corporation not less than sixty (60) days prior to the
first anniversary of the date of the last meeting of shareholders of the
Corporation called for the election of directors.
Each notice shall set forth (i) the name, age, business address and, if
known, residence address of each nominee proposed in such notice; (ii) the
principal occupation or employment of each such nominee; (iii) the number of
shares of stock of the Corporation which are beneficially owned by each such
nominee; and (iv) such other information as would be required by the Federal
Securities Laws and the Rules and Regulations promulgated thereunder in respect
to any individual nominated as a director of the Corporation and for whom
proxies are solicited by the Board of Directors of the Corporation.
<PAGE>
The Chairman of any meeting of shareholders may, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the foregoing procedure, and if he should so determine, he shall
so declare to the meeting and the defective nomination shall be disregarded.
ARTICLE V
DIRECTORS
The number of directors of the Corporation shall not be less than five
(5), nor more than fifteen (15), the exact number of directors to be fixed from
time to time in the manner provided in the Bylaws, provided that no action shall
be taken by the directors (whether through amendment of the Bylaws or otherwise)
to increase the number of directors as provided in the Bylaws from time to time
unless at least seventy five percent (75%) of the directors then in office shall
concur in said action. The directors shall be divided into three classes: Class
I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the whole number of the Board of Directors. At the
first annual meeting of shareholders, the Class I directors shall be elected to
hold office for a term expiring at the next succeeding annual meeting of
shareholders; the Class II directors shall be elected to hold office for a term
expiring at the second succeeding annual meeting of shareholders; and the Class
III directors shall be elected to hold office for a term expiring at the third
succeeding annual meeting of shareholders, and in the case of each class, until
their respective successors are elected and qualified. At each annual election
held after the initial election of directors according to classes, the directors
chosen to succeed those whose terms have expired shall be identified as being of
the same class as the directors they succeed and shall be elected to hold office
for a term expiring at the third succeeding annual meeting after their election,
and until their respective successors are elected and qualified.
The initial Board of Directors of the Corporation shall be composed of
eight (8) members. The persons who as directors are to manage the Corporation
until the first annual meeting of its shareholders or until their successors are
elected and shall qualify are:
Charles R. Wadsworth
David H. Brown
A. Eugene Hammermaster
Thomas R. Absher
David K. Hamry
Dexter Silver
Warren D. Hunt
Roger L. Knutson
In the event of any increase or decrease in the authorized number of
directors (1) each director then serving as such shall nevertheless continue as
a director of the class in which he is a member until the expiration of his
current term or his earlier resignation, removal from office or death, and (2)
the newly created or eliminated directorships resulting from such increase or
decrease shall be apportioned
<PAGE>
by the Board of Directors among the three classes of directors so as to
maintain such classes as nearly equal as possible.
ARTICLE VI
DIRECTOR LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for conduct as a director,
except for liability of the director for (i) acts or omissions that involve
intentional misconduct or a knowing violation of law by the director, (ii)
conduct which violates RCW 23B.08.310 of the Washington Business Corporation
Act, pertaining to unpermitted distributions to shareholders or loans to
directors, or (iii) any transaction from which the director will personally
receive a benefit in money, property or services to which the director is not
legally entitled. If the Washington Business Corporation Act is amended to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Washington
Business Corporation Act, as so amended. Any repeal or modification of the
foregoing paragraph by the shareholders of the Corporation shall not adversely
affect any right or protection of a director of the Corporation existing at the
time of such repeal or modification.
ARTICLE VII
NO CUMULATIVE VOTING
At each election of directors, every shareholder entitled to vote at
such election has the right to vote in person or by proxy the number of shares
of stock held by such shareholder for as many persons as there are directors to
be elected. No cumulative voting for directors will be permitted.
ARTICLE VIII
AMENDMENT
This Corporation reserves the right to amend or repeal any provisions
contained in these Articles of Incorporation in any manner now or hereafter
permitted by law. All rights of shareholders of the Corporation and all powers
of directors of the Corporation are granted subject to this reservation.
ARTICLE IX
INDEMNIFICATION
1. DEFINITIONS. As used in this Article IX:
a. "Proceeding" means any actual or threatened action,
suit or proceeding, whether civil, criminal, administrative or investigative.
b. "Enterprise" means a corporation (other than the
Corporation), partnership, joint venture, trust, association, committee,
employee benefit plan, or other group or entity.
<PAGE>
c. "Corporation" means VALLEY COMMUNITY BANCSHARES, INC., and
any predecessor to it and any constituent corporation (including any constituent
of a constituent) absorbed by the Corporation in a consolidation or merger.
d. "Director or Officer" means each person who is serving or
who has served as a Director or Officer of the Corporation or, at the request of
the Corporation, as a Director, Officer, employee, or agent of another
Enterprise.
e. "Indemnitee" means each person who was, is or is threatened
to be made a party to or is involved (including without limitation, as a
witness) in a Proceeding because the person is or was a Director or Officer.
f. "Liability" means loss, liability, expenses (including
attorneys' fees), judgments, fines, ERISA excise taxes or penalties, and amounts
to be paid in settlement, actually and reasonably incurred or suffered by an
Indemnitee in connection with a Proceeding.
2. RIGHT TO INDEMNIFICATION.
a. The Corporation shall indemnify and hold each Indemnitee
harmless against all Liability, provided that (i) the Indemnitee acted in good
faith; (ii) in the case of official conduct, he reasonably believed that he was
acting in the Corporation's best interests, or in all other cases, that his
action was not opposed to its best interests; (iii) in the case of a criminal
proceeding, he had no reasonable cause to believe his conduct was unlawful; and
provided further, that (iv) the Indemnitee did not engage in the conduct
described in R.C.W. 30.12.240. Except as provided in Section 4 below, the
Corporation shall not indemnify an Indemnitee in connection with a Proceeding
(or part thereof) initiated by the Indemnitee unless such Proceeding (or part
thereof) was authorized by the Board of the Corporation. If, after the effective
date of this Article IX, the Washington Business Corporation Act is amended to
authorize further indemnification of Directors or Officers, then Directors and
Officers of this Corporation shall be indemnified to the fullest extent
permitted by the Washington Business Corporation Act, as so amended, to the
extent consistent with Title 30 of the Revised Code of Washington.
b. Section 2(a) notwithstanding, no Indemnitee shall be
indemnified in connection with (i) a proceeding by or in the right of the
Corporation or another Enterprise in which he was adjudged liable to the
Corporation or other Enterprise; or (ii) any other proceeding charging improper
personal benefit to himself, whether or not involving action in his official
capacity, in which he was adjudged liable on the basis that personal benefit was
improperly received by him. Further, indemnification in connection with a
proceeding by or in the right of the Corporation or another Enterprise is
limited to reasonable expenses incurred in connection with the proceeding.
c. The provisions of Section 2(a) notwithstanding, no
Indemnitee shall be indemnified for any civil money penalty or judgment
resulting from any administrative or civil action instituted by a federal
banking agency, or any other liability or legal expense with regard to any
administrative proceeding or civil action instituted by any federal banking
agency which results in a final order or settlement pursuant to which such
person is (i) assessed a civil money penalty; (ii) removed from office or
prohibited from participating in the conduct of the affairs of the Corporation
or other Enterprise; or (iii) is required to cease and desist from or to take
any affirmative action described in Section 8(b) of the Federal Deposit
Insurance Act, as amended (12 U.S.C. 1811, ET SEQ.). However, permissible
indemnification payments may be made as permitted by 12 C.F.R. Section 359, ET
SEQ., as amended from time-to-time.
<PAGE>
3. BURDEN OF PROOF AND PROCEDURE FOR PAYMENT.
a. The Indemnitee shall initially be entitled to
indemnification under this Article IX upon submission of a written claim only if
the Board of Directors first makes a good faith determination that the
Indemnitee has met the standard of conduct required by Section 2.
b. Section 3(a) notwithstanding, the Indemnitee shall be
entitled to indemnification under this Article IX for reasonable expenses
(including attorneys' fees) incurred in advance of final disposition of the
Proceeding if the (i) Indemnitee furnishes the Corporation a written affirmation
of his good faith belief that he has the standard of conduct required in Section
2(a)(i) - (iii); and (ii) the Indemnitee first delivers to the Corporation a
written undertaking, executed by or on behalf of such Director or Officer, to
repay all amounts so advanced if it shall ultimately be determined that such
Director or Officer is not entitled to be indemnified under this Article IX or
otherwise by law. This undertaking must be an unlimited general obligation of
the Director or officer.
4. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under this Article IX
is not paid in full by the Corporation within sixty (60) days after a written
claim has been received by the Corporation, except in the case of a claim for
expenses incurred in defending a proceeding in advance of its final disposition,
in which case the applicable period shall be twenty (20) days, the claimant may
at any time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim and, to the extent successful in whole or in part, the
Indemnitee shall be entitled to be paid also the expense of prosecuting such
claim. Neither the failure of the Corporation (including its Board, its
shareholders, or independent legal counsel) to have made a determination prior
to the commencement of such action that indemnification of or reimbursement or
advancement of expenses to the claimant is proper in the circumstances, nor an
actual determination by the Corporation (including its Board, its shareholders,
or independent legal counsel) that the Indemnitee is not entitled to
indemnification or to the reimbursement or advancement of expenses, shall be a
defense to the action or create a presumption that the Indemnitee is not so
entitled.
5. NON-EXCLUSIVITY OF RIGHTS. The right to indemnification and the
payment of expenses incurred in defending a Proceeding in advance of its final
disposition conferred in this Article IX shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the Articles of Incorporation, Bylaws, agreement, vote of
shareholders or disinterested Directors, or otherwise.
6. INSURANCE, CONTRACTS, AND FUNDING. The Corporation may maintain
insurance, at its expense, to protect itself and any Director, Officer, employee
or agent of the Corporation or Enterprise against any expense, liability, or
loss under the Washington Business Corporation Act. The Corporation may, without
further shareholder action, enter into contracts with any Director or Officer of
the Corporation in furtherance of the provisions of this Article IX and may
create a trust fund, grant a security interest, or use other means (including,
without limitation, a letter of credit) to ensure the payment of such amounts as
may be necessary to effect indemnification as provided in this Article IX.
7. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The
Corporation may, by action of its Board from time to time, provide
indemnification and pay expenses in advance of the final disposition of a
Proceeding to employees and agents of the Corporation with the same scope and
effect as the provisions of this Article with respect to the indemnification and
advancement of expenses of Directors
<PAGE>
and Officers of the Corporation or pursuant to rights granted pursuant to, or
provided by, the Washington Business Corporation Act or otherwise.
8. CONTRACT RIGHT. Rights of indemnification under this Article IX
shall continue as to an Indemnitee who has ceased to be a Director or Officer
and shall inure to the benefit of his or her heirs, executors and
administrators. The right to indemnification conferred in this Article IX shall
be a contract right upon which each Director or Officer shall be presumed to
have relied on in determining to serve or to continue to serve as such. Any
amendment to or repeal of this Article IX shall not adversely affect any right
or protection of a Director or Officer of the Corporation for or with respect to
any acts or omissions of such Director or Officer occurring prior to such
amendment or repeal.
9. SEVERABILITY. If any provision of this Article IX or any application
thereof shall be invalid, unenforceable or contrary to applicable law, the
remainder of this Article IX, or the application of such provisions to persons
or circumstances other than those as to which it is held invalid, unenforceable
or contrary to applicable law, shall not be affected thereby and shall continue
in full force and effect.
ARTICLE X
FACTORS TO BE CONSIDERED BY DIRECTORS
REGARDING CERTAIN TRANSACTIONS
The Board of Directors of the Corporation, when evaluating any offer of
any other party to:
(a) make a tender or exchange offer to acquire any
equity security of the Corporation;
(b) merge or consolidate the Corporation with another
corporation; or
(c) purchase or otherwise acquire all or substantially
all of the properties and assets of the Corporation;
shall, in connection with the exercising of its judgment in determining what is
in the best interests of the Corporation and its stockholders, give due
consideration to all relevant factors, including, without limitation, the social
and economic effects on its community and its depositors, borrowers, employees,
suppliers and other constituents.
ARTICLE XI
INTERESTED SHAREHOLDER TRANSACTION
1. For purposes of this Article:
(a) An interested shareholder transaction means any
transaction between a corporation, or any subsidiary thereof, and an
interested shareholder of such corporation or an affiliated person to an
interested shareholder, that must be authorized pursuant to applicable law by
a vote of the shareholders.
(b) An interested shareholder:
<PAGE>
(1) Includes any person or group of affiliated persons
who beneficially own 20 percent or more of the outstanding
voting shares of a corporation. An affiliated person is any
person who either acts jointly or in concert with, or directly
or indirectly controls, is controlled by, or is under common
control with another person; and
(2) Excludes any person who, in good faith and not for
the purpose of circumventing this Article, is an agent,
custodial bank, broker, nominee, or trustee for another
person, if such other person is not an interested shareholder
under Section 1(b)(1) of this Article.
2. Except as provided in Section 3 of this Article, an
interested shareholder transaction must be approved by the affirmative vote
of the holders of two-thirds of the shares entitled to be counted under this
Section 2, or if any class of shares is entitled to vote thereon as a class,
then by the affirmative vote of two-thirds of the shares of each class
entitled to be counted under this Section 2 and of the total shares entitled
to be counted under this section 2. All outstanding shares entitled to vote
under applicable law or the Articles of Incorporation shall be entitled to be
counted under this Section 2, except shares owned by or voted under the
control of an interested shareholder may not be counted to determine whether
shareholders have approved a transaction for purposes of this Section 2. The
vote of the shares owned by or voted under the control of an interested
shareholder, however, shall be counted in determining whether a transaction
is approved under other provisions of applicable law and for purposes of
determining a quorum.
3. This Article shall not apply to a transaction:
(a) Approved by a majority vote of the Board of
Directors. For such purpose, the vote of directors whose votes are otherwise
entitled to be counted under the Articles of Incorporation and applicable law
who are directors or officers of, or have a material financial interest in,
an interested shareholder, or who were nominated for election as a director
as a result of an arrangement with an interested shareholder and first
elected as a director within 24 months of the proposed transaction shall not
be counted in determining whether the transaction is approved by such
directors; or
(b) In which a majority of directors whose votes are
entitled to be counted under Section 3(a) determines that the fair market
value of the consideration to be received by noninterested shareholders for
shares of any class of which shares are owned by any interested shareholder
is not less than the highest fair market value of the consideration paid by
any interested shareholder in acquiring shares of the same class within 24
months of the proposed transaction.
4. This Article may be amended or repealed only by the
affirmative vote of the holders of two-thirds of the shares entitled to be
counted under this Section 4. All outstanding shares entitled to vote under
applicable law or the Articles of Incorporation shall be entitled to be
counted under this Section 4, except shares owned by or voted under the
control of an interested shareholder may not be counted to determine whether
shareholders have voted to approved the amendment or repeal. The vote of the
shares owned by or voted under the control of an interested shareholder,
however, shall be counted in determining whether the amendment or repeal is
approved under other provisions of applicable law and for purposes of
determining a quorum.
<PAGE>
5. The requirements imposed by this Article are to be in
addition to, and not in lieu of, requirements imposed on any transaction by
any provision of applicable law, or any other provision of the Articles of
Incorporation, or the Bylaws or otherwise.
ARTICLE XII
INCORPORATOR
The name and address of the incorporator is Glen P. Garrison, 1201
Third Avenue, Suite 3200, Seattle, Washington 98101-3052.
ARTICLE XII
REGISTERED OFFICE AND AGENT
The street address of this Corporation's initial registered office is
1201 Third Avenue, Suite 3200, Seattle, Washington 98101-3052. Glen P. Garrison
is the Corporation's initial registered agent at such office.
DATED this _______ day of ____________________, 1998.
--------------------------------------
GLEN P. GARRISON, Incorporator
<PAGE>
CONSENT TO APPOINTMENT AS REGISTERED AGENT
I, GLEN P. GARRISON, hereby consent to serve as registered agent, in
the State of Washington, for VALLEY COMMUNITY BANCSHARES, INC. I understand that
as agent for the Corporation, it will be my responsibility to accept service of
process in the name of the Corporation; to forward all mail and license renewals
to the appropriate officer(s) of the Corporation; and to immediately notify the
Office of the Secretary of State of my resignation or of any changes in the
address of the registered office of the Corporation for which I am agent.
DATED this _____ day of ______________, 1998.
-------------------------------------
Glen P. Garrison
1201 Third Avenue, Suite 3200
Seattle, WA 98101-3052
<PAGE>
EXHIBIT 3.2
<PAGE>
BYLAWS
OF
VALLEY COMMUNITY BANCSHARES, INC.
ARTICLE I
OFFICES
The principal office and place of business of the Corporation shall be
located at the principal place of business or such other place as the Board of
Directors ("Board") may designate. The corporation may have such other offices,
either within or without the State of Washington, as the Board may designate or
as the business of the corporation may require from time to time.
ARTICLE II
SHAREHOLDERS
1. ANNUAL MEETING. An annual meeting of the shareholders
shall be held each year on a date and at a time set by the Board.
2. SPECIAL MEETINGS. Special meetings of the shareholders for any
purpose or purposes unless otherwise prescribed by statute may be called by the
President, the Board, or holders of not less than 25 percent of all the shares
of the Corporation entitled to vote at the meeting.
3. PLACE OF MEETING. All meetings of the shareholders shall be held in
the county in which the main office or any branch of the Corporation is located,
as may be designated by the person or persons calling the meeting.
4. NOTICE OF MEETINGS. Written or printed notice stating the place, day
and hour of a meeting of shareholders and, in case of a special meeting of
shareholders, the purpose or purposes for which the meeting is called shall be
delivered to each shareholder entitled to vote at such meeting, not less than
ten (10) days and not more than sixty (60) days before the meeting, either
personally or by mail, by the secretary at the direction of, the person or
persons calling the meeting. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail addressed to the shareholder.
5. CLOSING OF TRANSFER BOOKS FOR FIXING OF RECORD DATE. For the purpose
of determining shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or shareholders entitled to receive
payment of any dividend, or in order to make a determination of shareholders for
any other proper purpose, the Board may provide that the stock transfer books
shall be closed for a stated period but not to exceed in any case fifty (50)
days. If the stock transfer books shall be closed for the purpose of determining
shareholders entitled to notice of or to vote at a meeting of shareholders, such
books shall be closed for at least ten (10) days immediately preceding such
meeting. In lieu of closing the stock transfer books, the Board may fix in
advance a date as the record date for any such determination of shareholders,
which date in any case shall not be more than fifty (50) days, and in case of a
meeting of shareholders, not less than ten (10) days prior to the date on which
the particular action requiring such determination of shareholders is to be
taken. If the stock transfer books are not closed and no record date is fixed
for the determination of shareholders entitled to notice of or to vote at a
meeting of shareholders, or shareholders entitled to receive payment of a
dividend, the date on which notice of the meeting is mailed or the date on which
the resolution of the Board declaring such dividend is adopted, as the case may
be, shall be the record
<PAGE>
date for such determination of shareholders. When a determination of
shareholders entitled to vote at a meeting has been made as provided in this
section, such determination shall apply to any adjournment thereof.
6. QUORUM. A majority of the outstanding shares of the Corporation
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. The shareholders present at a duly organized
meeting may continue to transact business until adjournment notwithstanding the
withdrawal of enough shareholders to leave less than a quorum. If less than a
majority of the outstanding shares attend a meeting, a majority of those present
may adjourn the meeting to such time and place as they may determine, without
further notice, except that any meeting at which Directors are to be elected
shall be adjourned only from day to day until such Directors have been elected.
At the adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified, and in the case of any adjourned meeting called for the
election of Directors, those who attend the second of the adjourned meetings,
although less than a quorum, shall nevertheless constitute a quorum for the
purpose of electing Directors.
7. PROXIES. A shareholder may vote either in person or by proxy
executed in writing by the shareholder or by his duly authorized
attorney-in-fact. All proxies shall be filed with the Secretary of the
Corporation before or at the commencement of meetings. No unrevoked proxy shall
be valid after eleven (11) months from the date of its execution unless
otherwise expressly provided in the proxy. No proxy may be effectively revoked
until notice of such revocation has been given to the Secretary of the
Corporation by the shareholder granting the proxy.
8. VOTING OF SHARES. Each outstanding share entitled to vote, shall be
entitled to one vote on each matter submitted to a vote at a meeting of
shareholders.
9. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the name of
another corporation, domestic or foreign, may be voted by such Officer, agent or
proxy as the bylaws of such corporation may prescribe, or in the absence of such
provision, as the board of directors of such corporation may determine.
Shares held by an administrator, executor, guardian or conservator may
be voted by him, either in person or by proxy, without a transfer of such shares
into his name. Shares standing in the name of a trustee may be voted by him
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him without a transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
the receiver without the transfer thereof into his name if authority so to do be
contained in an appropriate order of the court by which such receiver was
appointed.
If shares are held jointly by three or more fiduciaries, the will of
the majority of the fiduciaries shall control the manner of voting or giving of
a proxy, unless the instrument or order appointing such fiduciaries otherwise
directs.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
<PAGE>
Treasury shares shall not be voted at any meeting or counted in
determining the total number of outstanding shares entitled to vote at any given
time.
10. ACTION BY SHAREHOLDERS WITHOUT A MEETING. Any action permitted or
required to be taken at a meeting of the shareholders of the Corporation, or any
action that may be taken at a meeting of the shareholders, may be taken without
a meeting if a consent in writing, setting forth the action so taken, is signed
by all the shareholders entitled to vote with respect to the subject matter
thereof.
ARTICLE III
BOARD OF DIRECTORS
1. GENERAL Powers. The business and affairs of the Corporation
shall be managed by its Board.
2. NUMBER, TENURE AND QUALIFICATIONS. The Board shall be composed of
not less than five (5) nor more than fifteen (15) directors who need not be
residents of the State of Washington. The specific number of Directors shall be
set from time to time by resolution of the Board. No person shall serve as a
Board member beyond his 72nd birthday and he shall tender his resignation at the
Board of Directors meeting following his 72nd birthday.
3. VACANCIES. Any vacancy occurring in the Board may be filled by the
affirmative vote of sixty percent (60%) of the remaining Directors. A Director
elected to fill a vacancy shall be elected for the unexpired term of his
predecessor in office. Any directorship to be filled by reason of an increase in
the number of Directors shall be filled by the Board for a term of office
continuing only until the next election of Directors by shareholders.
4. RESIGNATION. Any Director may resign at any time by delivering
written notice to the Chairman of the Board, the President, the Secretary or the
Board. Any such resignation is effective upon delivery thereof unless the notice
of resignation specifies a later effective date and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
5. REMOVAL. At a meeting of shareholders called expressly for that
purpose, one or more members of the Board, including the entire Board, may be
removed with or without cause by the affirmative vote of the holders of at least
sixty percent (60%) of the Corporation's outstanding shares of common stock.
6. MEETINGS. A meeting of the Board shall be held at least quarterly
and whenever required by the Director of Financial Institutions for the State of
Washington, or the Federal Reserve Board. By resolution, the Board may specify
the time and place, either within or without the state of Washington, for
holding such meeting(s) without other notice than such resolution.
7. SPECIAL MEETINGS. Special Board meetings may be called by or at the
request of the Chairman of the Board, the President, or any two Directors.
8. NOTICE. Written notice of meetings of the Board stating the time and
place thereof shall be delivered at least seven (7) days prior to the date set
for such meeting by the person or persons authorized to call such meeting or by
the Secretary at the direction of the person or persons authorized to call the
meeting either by personal delivery to each Director or by mail addressed to
each Director or by telegram. If mailed, notice shall be deemed to be delivered
when deposited in the United States mail, postage prepaid, addressed to the
Director. If notice is by telegram, notice shall be deemed delivered when the
telegram is delivered to
<PAGE>
the telegraph company for transmission. If no place for such meeting is
designated in the notice thereof, the meeting shall be held at the principal
office of the Corporation. Any Director may waive notice of any meeting at
any time. The attendance of a Director or a committee member at a meeting
shall constitute a waiver of notice of the meeting except where a Director or
a committee member attends a meeting for the express purpose of objecting to
the transaction of any business because the meeting is not lawfully convened.
Unless otherwise required by law, neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the Board or any
committee designated by the Board need be specified in the notice or waiver
of notice of such meeting.
9. QUORUM. A majority of the then serving Board of Directors shall
constitute a quorum for the transaction of any business at any meeting of the
Board of Directors or committee thereof. If less than such majority shall attend
a meeting, a majority of the Directors present may adjourn the meeting from time
to time without further notice, and a quorum present at such adjourned meeting
may transact business.
10. MANNER OF ACTING. The act of the majority of the Directors present
at a meeting or adjourned meeting at which a quorum is present shall be the act
of the Board. Members of the Board or any committee designated by the Board may
participate in a meeting of such board or committee by means of a conference
telephone or similar communications equipment by which all persons participating
in the meeting can hear all others at the same time. Participation by such means
shall constitute presence, in person, at a meeting.
11. ACTION OF DIRECTORS WITHOUT A MEETING. Any action permitted or
required to be taken at a meeting of the Directors or permitted to be taken at a
meeting of a committee of Directors may be taken without a meeting if a consent
in writing, setting forth the action so taken, shall be signed by all the
Directors, or all the members of the committee, as the case may be.
12. BOARD COMMITTEES. The Board may designate, by resolution adopted by
a majority of the full Board of the Corporation, from among its members an
executive committee and one or more other committees, each of which, to the
extent provided in such resolution, shall have and may exercise the authority of
the Board, except as limited by law. The designation of any such committee and
the delegation thereto of authority shall not relieve the Board, or any member
thereof, of any responsibility imposed by law.
13. COMPENSATION. By resolution of the Board, the Directors may be paid
a fixed sum or other form of compensation for attendance and their expenses, if
any, of attendance at meetings of the Board or committee thereof. No such
payment shall preclude any Director from serving the Corporation in any other
capacity and receiving compensation therefor.
14. PRESUMPTION OF ASSENT. A Director of the Corporation who is present
at a meeting of the Board at which action on any corporate matter is taken shall
be presumed to have assented to the action taken unless his dissent shall be
entered in the minutes of the meeting or unless he shall file his written
dissent to such action with the person acting as secretary of the meeting before
the adjournment thereof or shall forward such dissent by registered mail to the
Secretary of the Corporation immediately after adjournment of the meeting. Such
right to dissent shall not apply to a Director who voted in favor of such
action.
ARTICLE IV
OFFICERS
1. NUMBER. The Officers of the Corporation shall be a President, one or
more Vice Presidents, and a Secretary, each of whom shall be elected by the
Board. Such other Officers and assistant Officers,
<PAGE>
including a Chairman of the Board and Secretary to the Board, as may be
deemed necessary or appropriate may be elected or appointed by the Board.
Except for the offices of President and Secretary, any two or more offices
may be held by the same person, provided that when all of the issued and
outstanding stock of the Corporation is owned of record by one shareholder,
one person may hold all or any combination of offices.
2. ELECTION AND TERM OF OFFICE. The Officers of the Corporation to be
elected by the Board may be elected for such term as the Board may deem
advisable or may be elected to serve for an indefinite term at the pleasure of
the Board.
3. REMOVAL. Any Officer or agent elected or appointed by the Board may
be removed by the Board whenever in its judgment the best interests of the
Corporation would be served thereby, but such removal shall be without prejudice
to the contract rights, if any, of the person so removed. Election or
appointment of an Officer or agent shall not of itself create contract rights.
4. VACANCIES. A vacancy in any office because of death, resignation,
removal, disqualification or otherwise, may be filled by the Board for the
unexpired portion of the term.
5. CHAIRMAN OF THE BOARD. The Chairman of the Board shall, if present,
preside at all meetings of the Board, and exercise and perform such other powers
and duties as may be determined from time to time by resolution of the Board;
provided, however, that the Chairman of the Board shall not, by reason of his
office, be considered an executive officer of the Corporation or be assigned
executive responsibilities or participate in the operational management of the
Corporation.
6. PRESIDENT. The President shall be the Chief Executive Officer of the
Corporation and, subject to the control of the Board, shall generally supervise
and control the business and affairs of the Corporation. When present he shall
preside at all meetings of the shareholders and in the absence of the chairman
of the Board, or if there be none, at all meetings of the Board. He may sign
with the Secretary or any other proper Officer of the Corporation thereunto
authorized by law, certificates for shares of the Corporation, and may sign
deeds, mortgages, bonds, contracts, or other instruments which the Board has
authorized to be executed, except in cases where the signing and execution
thereof shall be expressly delegated by the Board or by these Bylaws to some
other Officer or agent of the Corporation or shall be required by law to be
otherwise signed or executed. In general, he shall perform all duties incident
to the office of President and such other duties as may be prescribed by
resolution of the Board from time to time.
7. VICE PRESIDENTS. In the absence of the President or in the event of
his death, disability or refusal to act, the Vice President, or in the event
there shall be more than one Vice President, the Vice Presidents in the order
designated at the time of their election, or in the absence of any designation
then in the order of their election shall perform the duties of the President.
When so acting the Vice President shall have all the powers of, and be subject
to all the restrictions upon, the President and shall perform such other duties
as from time to time may be assigned to him by resolution of the Board.
8. SECRETARY. The Secretary shall keep the minutes of the proceedings
of the shareholder and Board meetings, and shall give notices in accordance with
the provisions of these Bylaws and, as required by law, shall be custodian of
the corporate records and of the seal of the Corporation, shall keep a record of
the names and addresses of all shareholders and the number of shares held by
each, have general charge of the stock transfer books of the Corporation, may
sign with the President or a Vice President certificates for shares of the
Corporation, deeds, mortgages, bonds, contracts, or other instruments which
shall have been
<PAGE>
authorized by resolution of the Board, and in general shall perform all
duties incident to the office of Secretary and such other duties as from time
to time may be assigned to him by resolution of the Board.
9. SECRETARY TO THE BOARD. If appointed, the Secretary to the Board
shall keep the minutes of the proceedings of the shareholder and Board meetings,
and shall exercise and perform all other powers and duties as may be determined
from time to time by resolution of the Board.
10. COMPENSATION OF OFFICERS. Compensation of Officers shall be fixed
from time to time by the Board. No Officer shall be prevented from receiving a
salary by reason of the fact that he is also a Director of the Corporation.
ARTICLE V
CONTRACTS, CHECKS, DEPOSITS
1. CONTRACTS. The Board may authorize any Officer or Officers, agent or
agents, to enter into any contract or execute and deliver any instrument in the
name of and on behalf of the Corporation, and that authority may be general or
confined to specific instances.
2. CHECKS, DRAFTS, ETC.. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Corporation shall be signed by the Officer or Officers, agent or agents of
the Corporation and in the manner as shall from time to time be determined by
resolution of the Board.
3. DEPOSITS. All funds of the Corporation not otherwise employed shall
be deposited from time to time to the credit of the Corporation in the banks,
trust companies or other depositories as the Board may select.
ARTICLE VI
SHARES
1. CERTIFICATES FOR SHARES. The shares of the Corporation shall be
represented by certificates in such form as may be required by law and signed by
the President or a Vice President and by the Secretary or Assistant Secretary
and may be sealed with the seal of the Corporation or a facsimile thereof. The
signatures of the corporate officers on the certificate may be facsimiles if the
certificate is manually signed on behalf of a transfer agent, or registered by a
registrar, other than the Corporation itself or an employee of the Corporation.
2. TRANSFER OF SHARES. Transfer of shares of the Corporation shall be
made on the stock transfer books of the Corporation by the holder of record
thereof or by his legal representative who shall furnish proper evidence of
authority to transfer. The person in whose name shares stand on the books of the
Corporation shall be deemed by the Corporation to be the owner thereof for all
purposes. All certificates surrendered to the Corporation for transfer shall be
canceled and no new certificate shall be issued until the former certificate for
a like number of shares shall have been surrendered and canceled except that in
case of a lost, destroyed or mutilated certificate a new one may be issued
therefor upon the terms and indemnity to the Corporation as the Board may
prescribe.
<PAGE>
3. LOST OR DESTROYED CERTIFICATES. In the case of a lost, destroyed or
mutilated certificate, a new certificate may be issued therefor upon such terms
and indemnity to the Corporation as the Board may prescribe.
ARTICLE VII
BOOKS AND RECORDS
The Corporation shall:
(a) keep as permanent records, minutes of all meetings of its
shareholders and Board, record of all actions taken by the shareholders or the
Board without a meeting, and a record of all actions taken by a committee of the
Board exercising the authority of the Board on behalf of the Corporation;
(b) maintain appropriate accounting records;
(c) maintain a record of the names and residences of the
shareholders of the Corporation, the number of shares held by each, and also the
transfer of stock, showing the time when made, the number of shares transferred
and by whom transferred;
(d) maintain its records in written form or in another form
capable to being converted to written form within a reasonable time;
(e) keep a copy of the following records at its principal
office:
(i) the Articles of Incorporation and all
amendments thereto as currently in effect;
(ii) the Bylaws and all amendments thereto as
currently in effect;
(iii) the minutes of all meetings of shareholders and
records of all action taken by shareholders without a meeting
for the past three (3) years;
(iv) the financial statements described in Section
23B.16.200(1) of the Washington Business Corporation Act, for
the past three (3) years;
(v) all written communications to shareholders
generally within the past three (3) years;
(vi) a list of the names and business addresses of
the current Directors and Officers; and
(vii) the most recent annual report delivered to the
Secretary of State for the State of Washington.
<PAGE>
ARTICLE VIII
SEAL
The seal of this Corporation, if any, shall be circular in form and
consist of the name of the Corporation, the state and year of incorporation and
the words "Corporate Seal." The President, the Secretary or any Assistant
Secretary, or other Officer designated by the Board, shall have authority to
affix the corporate seal to any document requiring such seal, and to attest the
same.
ARTICLE IX
WAIVER OF NOTICE
Whenever any notice is required to be given to any shareholder or
Director of the Corporation under the provisions of these Bylaws, the Articles
of Incorporation or law, a waiver thereof in writing, signed by the person or
persons entitled to notice, whether before or after the fact, shall be deemed
equivalent to the giving of notice.
ARTICLE X
AMENDMENTS
These Bylaws may be altered, amended or repealed and new Bylaws may be
adopted by the affirmative vote of sixty percent (60%) of the Board Members or
by the affirmative vote of holders of a majority of shares. Any Bylaw adopted,
amended or repealed by the Directors may be repealed, amended or reinstated by
an affirmative vote of holders of a majority of the shares entitled to vote and
present, in person or by proxy, at the next meeting of shareholders following
such action without further notice other than this Bylaw. A copy of the Bylaws,
with all amendments thereto, shall at all times be kept in a convenient place at
the Corporation offices, and shall be open for inspection by any shareholder
during business hours.
The undersigned, being the President of the Corporation, hereby
certifies that these Bylaws have been properly adopted as the Bylaws of this
Corporation.
DATED the day of , 1998.
------- -----------------------
VALLEY COMMUNITY BANCSHARES, INC.
By:
----------------------------------
A. Eugene Hammermaster
Secretary
<PAGE>
EXHIBIT 4.1
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
PUYALLUP, WASHINGTON 98372
Incorporated under the laws of the State of Washington
- ------------------ ------------------
CERTIFICATE NUMBER SHARES
- ------------------ ------------------
- ------------------ ------------------
THIS SEE REVERSE FOR
CERTIFIES CERTAIN DEFINITIONS
THAT
IS THE
OWNER OF
COMMON
FULLY PAID $1.00 PAR VALUE SHARES OF THE COMMON STOCK OF VALLEY
COMMUNITY BANCSHARES, INC., Transfereable only on the books of the
Corporation by the holder hereof or by duly authorized attorney upon
surrender of this certificate properly endorsed.
IN WITNESS WHEREOF, the Corporation has caused this certificate to
be signed by its duly authorized officers and its corporate seal to be
hereunto affixed.
DATED: [SEAL]
- -------------------------------- ----------------------------
SECRETARY/ASSISTANT SECRETARY PRESIDENT/VICE PRESIDENT
<PAGE>
EXHIBIT 10.1
<PAGE>
EXECUTIVE SEVERANCE AGREEMENT
This Agreement is made and entered into by and between PUYALLUP VALLEY
BANK, a Washington banking corporation, (hereinafter called "Bank") and David H.
Brown (hereinafter called the ("Executive").
WHEREAS, Executive was recently employed by the Bank in a key managerial
capacity, presently holding the position(s) of President and Chief Executive
Officer of the Bank; and,
WHEREAS, the Bank wishes to ensure that the Executive will be available to
assist the Board of Directors of the Bank in evaluating and responding to, and
if deemed appropriate by the Board, completing any actual or threatened change
in control of the Bank; and,
WHEREAS, the Bank wishes to provide additional comfort to both itself and
the Executive as to continuity of management in the event of any actual or
threatened change in control of the Bank;
NOW, THEREFORE, the Bank and the Executive agree to the following
provisions:
1. CHANGE IN CONTROL For purposes of this Agreement, the term "Change in
Control" shall mean a change "in the ownership or effective control" or "in the
ownership of a substantial portion of the assets" of the Bank, with the quoted
phrases of this sentence having the same meaning as when used in Section 280G
(b) (2) (A) of the Internal Revenue Code. "Change in Control" shall include any
change within a twelve-month period in the composition of the Board of Directors
of the Bank whereby the individuals serving as directors at the beginning of
such period cease to constitute at least a majority of the board at any time
during such period.
2. COMMITMENT OF EXECUTIVE In the event that any person extends any
proposal or offer which could result in a Change in Control, the Executive will
help evaluate such proposal or offer and present his evaluation to the Board of
Directors of the Bank. Further, the Executive specifically agrees that he will
not resign his position(s) with the Bank during any period from the receipt of a
specific change in control proposal up to the closing or termination of the
transaction contemplated by the proposal.
<PAGE>
Severance Agreement - David H. Brown
3. SEVERANCE PAYMENT EVENTS In the event of --
(i) the voluntary or involuntary termination, excluding termination due to
death, disability or commission of a crime, of the Executive's employment with
the Bank within three (3) years after a Change in Control; or
(ii) the involuntary termination, excluding termination due to death,
disability, or commission of a crime, by the Bank of the Executive's employment
with the Bank on or after the date that any party announces (or should announce)
any prospective Change in Control transaction, if a Change in Control does occur
within twelve (12) months of such termination,
then the Bank shall pay to Executive a severance payment, in the amount
determined pursuant to the next paragraph, payable on the later of the date of
termination or the date of the Change in Control.
4. AMOUNT OF THE SEVERANCE PAYMENT The severance payment shall be an amount
equal to the highest compensation (as reportable on the Executive's IRS W-2
form) received by the Executive from the Bank during any one of the most recent
three (3) calendar years ending before, or simultaneously with, the date on
which the Change in Control occurs; provided, however, that the severance
payment shall be less than the amount which would cause the payment to be a
"parachute payment" as defined in Section 280G (b) (2) (A) of the Internal
Revenue Code; and provided, further, that such severance payment shall be
reduced by any compensation (as reportable on the Executive's IRS W-2 form)
received from the Bank or its successor in interest after the Change in Control.
5. REVOCABILITY This Agreement may be terminated unilaterally by the Bank,
but (i) only as of a prospective effective date which follows by at least 12
months the date that written notice is given to Executive that the Bank, by a
vote of at least a majority of its directors, has determined to terminate the
Agreement, and (ii) only if no Change in Control occurs prior to such effective
date. If not earlier terminated, this Agreement will terminate three (3) years
after any Change in Control occurs.
IN WITNESS WHEREOF, the parties have executed this Agreement this 16th day
of October, 1991.
PUYALLUP VALLEY BANK: EXECUTIVE
<PAGE>
By:___________________ By:___________________
David H. Brown
Its:
__________________
<PAGE>
EXHIBIT 10.2
<PAGE>
EXECUTIVE SEVERANCE AGREEMENT
This Agreement is made and entered into by and between PUYALLUP VALLEY
BANK, a Washington banking corporation, (hereinafter called "Bank") and Roy
Thompson (hereinafter called the ("Executive").
WHEREAS, Executive was recently employed by the Bank in a key managerial
capacity, presently holding the position(s) of Senior Vice President and Loan
Administrator of the Bank; and,
WHEREAS, the Bank wishes to ensure that the Executive will be available to
assist the Board of Directors of the Bank in evaluating and responding to, and
if deemed appropriate by the Board, completing any actual or threatened change
in control of the Bank; and,
WHEREAS, the Bank wishes to provide additional comfort to both itself and
the Executive as to continuity of management in the event of any actual or
threatened change in control of the Bank;
NOW, THEREFORE, the Bank and the Executive agree to the following
provisions:
1. CHANGE IN CONTROL For purposes of this Agreement, the term "Change in
Control" shall mean a change "in the ownership or effective control" or "in the
ownership of a substantial portion of the assets" of the Bank, with the quoted
phrases of this sentence having the same meaning as when used in Section 280G
(b) (2) (A) of the Internal Revenue Code. "Change in Control" shall include any
change within a twelve-month period in the composition of the Board of Directors
of the Bank whereby the individuals serving as directors at the beginning of
such period cease to constitute at least a majority of the board at any time
during such period.
2. COMMITMENT OF EXECUTIVE In the event that any person extends any
proposal or offer which could result in a Change in Control, the Executive will
help evaluate such proposal or offer and present his evaluation to the Board of
Directors of the Bank. Further, the Executive specifically agrees that he will
not resign his position(s) with the Bank during any period from the receipt of a
specific change in control proposal up to the closing or termination of the
transaction contemplated by the proposal.
<PAGE>
3. SEVERANCE PAYMENT EVENTS In the event of --
(i) the voluntary or involuntary termination, excluding termination due to
death, disability or commission of a crime, of the Executive's employment with
the Bank within three (3) years after a Change in Control; or
(ii) the involuntary termination, excluding termination due to death,
disability, or commission of a crime, by the Bank of the Executive's employment
with the Bank on or after the date that any party announces (or should announce)
any prospective Change in Control transaction, if a Change in Control does occur
within twelve (12) months of such termination,
then the Bank shall pay to Executive a severance payment, in the amount
determined pursuant to the next paragraph, payable on the later of the date of
termination or the date of the Change in Control.
4. AMOUNT OF THE SEVERANCE PAYMENT The severance payment shall be an amount
equal to the highest compensation (as reportable on the Executive's IRS W-2
form) received by the Executive from the Bank during any one of the most recent
three (3) calendar years ending before, or simultaneously with, the date on
which the Change in Control occurs; provided, however, that the severance
payment shall be less than the amount which would cause the payment to be a
"parachute payment" as defined in Section 280G (b) (2) (A) of the Internal
Revenue Code; and provided, further, that such severance payment shall be
reduced by any compensation (as reportable on the Executive's IRS W-2 form)
received from the Bank or its successor in interest after the Change in Control.
5. REVOCABILITY This Agreement may be terminated unilaterally by the Bank,
but (i) only as of a prospective effective date which follows by at least 12
months the date that written notice is given to Executive that the Bank, by a
vote of at least a majority of its directors, has determined to terminate the
Agreement, and (ii) only if no Change in Control occurs prior to such effective
date. If not earlier terminated, this Agreement will terminate three (3) years
after any Change in Control occurs.
IN WITNESS WHEREOF, the parties have executed this Agreement this 18th
day of April, 1991.
PUYALLUP VALLEY BANK: EXECUTIVE
<PAGE>
By:___________________ By:___________________
Roy Thompson
Its:__________________
<PAGE>
EXHIBIT 10.3
<PAGE>
EXECUTIVE SEVERANCE AGREEMENT
This Agreement is made and entered into by and between PUYALLUP VALLEY
BANK, a Washington banking corporation, (hereinafter called "Bank") and Joseph
E. Riordan, (hereinafter called the ("Executive").
WHEREAS, Executive was recently employed by the Bank in a key managerial
capacity, presently holding the position(s) of Senior Vice President and Chief
Financial Officer of the Bank; and,
WHEREAS, the Bank wishes to ensure that the Executive will be available to
assist the Board of Directors of the Bank in evaluating and responding to, and
if deemed appropriate by the Board, completing any actual or threatened change
in control of the Bank; and,
WHEREAS, the Bank wishes to provide additional comfort to both itself and
the Executive as to continuity of management in the event of any actual or
threatened change in control of the Bank;
NOW, THEREFORE, the Bank and the Executive agree to the following
provisions:
1. CHANGE IN CONTROL For purposes of this Agreement, the term
"Change in Control" shall mean a change "in the ownership or
effective control" or "in the ownership of a substantial
portion of the assets" of the Bank, with the quoted phrases of
this sentence having the same meaning as when used in Section
280G (b) (2) (A) of the Internal Revenue Code. "Change in
Control" shall include any change within a twelve-month period
in the composition of the Board of Directors of the Bank
whereby the individuals serving as directors at the beginning
of such period cease to constitute at least a majority of the
board at any time during such period.
2. COMMITMENT OF EXECUTIVE In the event that any person extends
any proposal or offer which could result in a Change in
Control, the Executive will help evaluate such proposal or
offer and present his evaluation to the Board of Directors of
the Bank. Further, the Executive specifically agrees that he
will not resign his position(s) with the Bank during any
period from the receipt of a specific change in control
proposal up to the closing or termination of the transaction
contemplated by the proposal.
3. SEVERANCE PAYMENT EVENTS In the event of --
(i) the voluntary or involuntary termination, excluding
termination due to death, disability or commission of a crime,
of the Executive's employment with the Bank within three (3)
years after a Change in Control; or
<PAGE>
(ii) the involuntary termination, excluding termination due to
death, disability, or commission of a crime, by the Bank of
the Executive's employment with the Bank on or after the date
that any party announces (or should announce) any prospective
Change in Control transaction, if a Change in Control does
occur within twelve (12) months of such termination,
then the Bank shall pay to Executive a severance payment, in
the amount determined pursuant to the next paragraph, payable
on the later of the date of termination or the date of the
Change in Control.
4. AMOUNT OF THE SEVERANCE PAYMENT The severance payment shall
be an amount equal to the highest compensation (as
reportable on the Executive's IRS W-2 form) received by the
Executive from the Bank during any one of the most recent
three (3) calendar years ending before, or simultaneously
with, the date on which the Change in Control occurs;
provided, however, that the severance payment shall be less
than the amount which would cause the payment to be a
"parachute payment" as defined in Section 280G (b) (2) (A)
of the Internal Revenue Code; and provided, further, that
such severance payment shall be reduced by any compensation
(as reportable on the Executive's IRS W-2 form) received
from the Bank or its successor in interest after the Change
in Control.
5. REVOCABILITY This Agreement may be terminated unilaterally by
the Bank, but (i) only as of a prospective effective date
which follows by at least 12 months the date that written
notice is given to Executive that the Bank, by a vote of at
least a majority of its directors, has determined to terminate
the Agreement, and (ii) only if no Change in Control occurs
prior to such effective date. If not earlier terminated, this
Agreement will terminate three (3) years after any Change in
Control occurs.
IN WITNESS WHEREOF, the parties have executed this Agreement this _____ day
of ____________________, 1997.
PUYALLUP VALLEY BANK: EXECUTIVE
By:________________________ _________________________
David H. Brown Joseph E. Riordan
President/CEO
<PAGE>
EXHIBIT 10.4
<PAGE>
EXECUTIVE SERVERANCE AGREEMENT
This agreement is made and entered into by and between VALLEY BANK, a
Washington banking corporation, (hereinafter called "Bank") and Richard D.
Pickett, (hereinafter called the ("Executive").
WHEREAS, Executive was recently employed by the Bank in a key
managerial capacity, presently holding the position(s) of President of the Bank;
and,
WHEREAS, the Bank wishes to ensure that the Executive will be available
to assist the Board of Directors of the Bank in evaluating and responding to,
and if deemed appropriate by the Board, completing any actual or threatened
change in control of the Bank; and,
WHEREAS, the Bank wishes to provide additional comfort to both itself
and the Executive as to continuity of management in the event of any actual or
threatened change in control of the Bank;
NOW, THEREFORE, the Bank and the Executive agree to the following
provisions:
1. CHANGE IN CONTROL For purposes of this Agreement, the term "Change in
Control" shall mean a change "in the ownership or effective control" or
"in the ownership of a substantial portion of the assets" of the Bank,
with the quoted phrases of this sentence having the same meaning as
when used in Section 280G (b) (2) (A) of the Internal Revenue Code.
"Change in Control" shall include any change within a twelve-month
period in the composition of the Board of Directors of the Bank whereby
the individuals serving as directors at the beginning of such period
cease to constitute at least a majority of the board at any time during
such period.
2. COMMITMENT OF EXECUTIVE In the event that any person extends any
proposal or offer which could result in a Change in Control, the
Executive will help evaluate such proposal or offer and present his
evaluation to the Board of Directors of the Bank. Further, the
Executive specifically agrees that he will not resign his
position(s) with the Bank during any period from the receipt of a
specific change in control proposal up to the closing or termination
of the transaction contemplated by the proposal.
<PAGE>
3. SEVERANCE PAYMENT EVENTS In the event of --
(i) the voluntary or involuntary termination, excluding
termination due to death, disability or commission of a crime,
of the Executive's employment with the Bank within three (3)
years after a Change in Control; or
(ii) the involuntary termination, excluding termination due to
death, disability, or commission of a crime, by the Bank of
the Executive's employment with the Bank on or after the date
that any party announces (or should announce) any prospective
Change in Control transaction, if a Change in Control does
occur within twelve (12) months of such termination, then the
Bank shall pay to Executive a severance payment, in the amount
determined pursuant to the next paragraph, payable on the
later of the date of termination or the date of the Change in
Control.
3. AMOUNT OF THE SEVERANCE PAYMENT The severance payment shall be an
amount equal to the highest compensation (as reportable on the
Executive's IRS W-2 form) received by the Executive from the Bank
during any one of the most recent three (3) calendar years ending
before, or simultaneously with, the date on which the Change in
Control occurs; provided, however, that the severance payment shall
be less than the amount which would cause the payment to be a
"parachute payment" as defined in Section 280G (b) (2) (A) of the
Internal Revenue Code; and provided, further, that such severance
payment shall be reduced by any compensation (as reportable on the
Executive's IRS W-2 form) received from the Bank or its successor in
interest after the Change in Control.
4. REVOCABILITY This Agreement may be terminated unilaterally by the
Bank, but (i) only as of a prospective effective date which follows
by at least 12 months the date that written notice is given to
Executive that the Bank, by a vote of at least a majority of its
directors, has determined to terminate the Agreement, and (ii) only
if no Change in Control occurs prior to such effective date. If not
earlier terminated, this Agreement will terminate three (3) years
after any Change in Control occurs.
IN WITNESS WHEREOF, the parties have executed this Agreement this
______ day of ___________________, 1999.
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC. EXECUTIVE
By:____________________________ ________________________
<PAGE>
EXHIBIT 10.5
<PAGE>
PUYALLUP VALLEY BANK
SUPPLEMENTAL RETIREMENT BENEFIT AGREEMENT
THIS AGREEMENT is dated to be effective as of the 1st day of
January, 1997, by PUYALLUP VALLEY BANK (hereinafter referred to as the
"Employer") and DAVID H. BROWN (hereinafter referred to as the "Employee").
In consideration of the mutual benefits set forth herein, it is hereby agreed
as follows:
I. PURPOSE
The Employer desires to retain the services of the Employee as
President of Puyallup Valley Bank. In order to provide an incentive for the
Employee's continued employment, the Employer has agreed to provide the
Employee with the supplemental retirement benefits set forth under the terms
of this Agreement. All such benefits set forth herein are in addition to any
other retirement benefits that are not specifically included herein.
II. DEFINITIONS
The principle definitions to apply in construing this Agreement are
as follows:
2.01 AGREEMENT: This plan of deferred compensation and other
benefits as set forth under the terms of this document.
2.02 BENEFICIARY: The Employee's surviving spouse or, if no spouse
is surviving, the Employee's designee or designees.
2.03 BOARD: The Board of Directors of the Employer.
2.04 CAUSE: As referred to herein, the term "termination for cause"
shall be limited to the termination of the Employee's employment with the
Employer as a result of the Employee's:
(a) Failure to diligently perform the duties of employment
or directions of the Employer's Board after written notice specifying the
exact nature of the failure being given to the Employee with the Employee
failing to correct the failure within a period of thirty (30) days following
the Employee's receipt of that written notice; provided, however, that the
Board may not, in the event of a Change of Control, materially alter the
Employee's present duties without the consent of the Employee; and, provided
further, that failure to diligently perform duties or
-1-
<PAGE>
directions as set forth in this Section 2.04(a) shall not constitute "cause"
for a period of twelve (12) months following the effective date of any Change
of Control;
(b) Conviction of or entry of a plea of guilty to any crime
involving a breach of any fiduciary obligation that the Employee may owe to
the Employer or its shareholders by virtue of the Employee's position as an
employee of the Employer or a failure to comply with any law, rule or
regulation related to the operations of the Employer's business or order of
any governmental agency having jurisdiction over the Employer without having
a reasonable basis for contesting or opposing such law, rule, regulation or
order; or
(c) Commission of any act Constituting misrepresentation,
fraud, deception, immorality, breach of ethics or other act tending to injure
the Employer's business, reputation or good will and including, but not
limited to, the use of illegal drugs or abuse of alcohol.
2.05 CHANGE OF CONTROL: (a) The purchase or other acquisition by any
person, entity or group of persons as defined under the provisions of
Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Act"
herein), or any comparable successor provisions thereof, of beneficial
ownership within the meaning of Rule 13d-3 promulgated under the Act of more
that fifty percent (50%) of either the outstanding shares of common stock or
the combined voting power of the Employer's then outstanding voting
securities entitled to vote generally; (b) the approval by the stockholders
of the Employer of a reorganization, merger or consolidation with respect to
which persons who were stockholders of the Employer immediately prior to such
reorganization, merger or consolidation do not, immediately thereafter, own
more than fifty percent (50%) of tile combined voting power of the Employer's
then outstanding securities entitled to vote generally; (c) a liquidation or
dissolution of the Employer; (d) the sale of all or substantially all of the
Employer's assets or (e) a change in the membership of the Board such that
those individuals who at the beginning of any twelve (12) consecutive month
period cease to constitute a majority thereof for any reason within that
twelve (12) month period.
2.06 CONTRACT PERIOD: The period of the Employee's employment with
the Employer from the effective date of this Agreement through the date
on which the Employee's service with the Employer terminates.
2.07 EMPLOYEE: DAVID H. BROWN, President of the Employer.
2.08 EMPLOYER: PUYALLUP VALLEY BANK.
2.09 TOTAL DISABILITY: The term "total disability" shall be defined
as a medically determinable physical or mental impairment which, in the
Employer's determination after consultation with at least two (2) physicians
licensed to practice medicine in the state of Washington, results in the
Employee's inability to perform the substantial and material duties of his
position with the Employer.
-2-
<PAGE>
III. BENEFITS
3.01 DEFERRED COMPENSATION: The Employer shall create a special
account on its books and records and shall credit the sum of **Thirty-Five
Thousand** Dollars ($**35,000.00**) per YEAR to that account by notation for
a period of ten (10) years. The sums deemed to be so contributed shall be
invested in notational form in securities or other investments that are
consistent with the manner in which the Employer invests its deposits and
other properties in the normal course of its business.
3.02 NO FUNDING: The Employer intends to make payments to this
account by notation only for purposes of calculating the amount of the
benefit to be paid hereunder, neither the Employee nor the Beneficiary has
any right against any such account nor with respect to any asset or assets in
which the account is theoretically invested. All such accounts or assets are
theoretical in nature only and do not constitute general assets of the
Employer. The benefits payable to the Employee and the Beneficiary hereunder
do, however, constitute an unsecured claim against the general assets of the
Employer.
3.03 DISTRIBUTION OF ACCOUNT: Distributions of the account
maintained for the Employee under this Agreement shall be made in accordance
with the following:
(a) FULL DISTRIBUTION OF ACCOUNT BALANCE: The Employer
shall pay to the Employee, or to the Beneficiary if the Employee is disabled
or not then living, the full amount of the account balance held hereunder for
the benefit of the Employee as valued on the last date of the Contract Period
as a result of:
(i) The Employee's total disability or death;
(ii) The Employee's termination of service within
a period of twelve (12) months following a Change of Control. If the Employee
terminates service after the lapse of a period of twelve (12) months
following a Change of Control, the provisions of Paragraph 3.03(b)(ii) shall
control to require a forfeiture of the account balance;
(iii) In the event of a Change of Control, a
material change in the scope of the Employee's duties with diminished
responsibility;
(iv) In the event of a Change of Control, a
relocation or transfer of the Employer's principal place of business that is
more than thirty (30) miles from the Employee's principal place of residence
unless the Employee consents to such relocation; or
(v) The Employer's termination of the Employee's
service without cause at any time.
(vi) Completion of the ten (10) year term
following the date of this Agreement.
-3-
<PAGE>
(b) FORFEITURE OF ACCOUNT BALANCE: The Employee and the
Beneficiary shall completely forfeit the full amount of the account balance
held hereunder for the benefit of the Employee as valued on the last date of
the Contract Period as a result of:
(i) The Employer's termination of the Employee's
service for cause prior to the tenth anniversary date of this Agreement. If
the Employer terminates the Employee's service for cause after the tenth
anniversary date of this Agreement, the Employee shall be entitled to receive
the full amount of the account balance maintained for the Employee under this
Agreement; or
(ii) The Employee's termination of service with
the Employer prior to the tenth anniversary date of this Agreement unless
such termination is within a period of twelve (12) months following a Change
of Control. In that latter event, the Employee shall receive a full
distribution of the entire amount that would have been credited to the
account referred to in Paragraph 3.01 had the Employee's employment with the
Employer continued for the ten (10) year term specified under that Paragraph
together with all earnings and accruals related thereto through the date on
which the termination of service occurs.
3.04 NOT SALARY: Any sums accounted for as being set aside for
purposes of providing benefits hereunder shall not be deemed to be salary or
other compensation paid to the Employee for purposes of computing benefits to
which the Employee may be entitled under any other pension, profit sharing or
other benefit arrangement maintained by the Employer for the benefit of its
employees.
IV. MISCELLANEOUS PROVISIONS
4.01 NO AMENDMENT: This Agreement may not be amended, in whole or in
part, without the prior written consent of all of the parties hereto nor
without the prior written consent of the Beneficiary if the Beneficiary is
then receiving benefits under the terms of this Agreement.
4.02 NO ASSIGNMENT: Neither the Employee nor the Beneficiary may
assign, transfer or pledge any benefits under the terms of this Agreement.
Any attempt to so assign, transfer or pledge any benefits hereunder is void.
4.03 BINDING EFFECT: This Agreement is binding upon and shall inure
to the benefit of the parties hereto, the Beneficiary and their respective
successors, heirs and legal representatives.
4.04 GOVERNING LAW: The laws of the State of Washington shall
determine all questions arising with respect to the interpretation of the
provisions of this Agreement except to the extent that such laws are
superseded by federal law.
4.05 NO GUARANTEE OF EMPLOYMENT: Nothing contained in this
Agreement, nor the obtaining of any asset or assets by the Employer for
purposes of providing benefits hereunder, nor the payment of any benefit due
hereunder, shall give the Employee or the Beneficiary any
-4-
<PAGE>
right to continued employment with the Employer except as may otherwise be
expressly provided by separate agreement.
4.06 SEVERABILITY: If any provision of this Agreement is deemed to
be null and void by a court of competent jurisdiction, the remaining
provisions shall nevertheless remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
PUYALLUP VALLEY BANK
By /s/ Thomas R. Absher /s/ David H. Brown
------------------------- --------------------------------
Its Chairman of Board DAVID H. BROWN
------------------------
"Employer" "Employee"
CONSENT OF SPOUSE
I, the undersigned spouse of the Employee hereby affirms that I have
read and understand the terms and conditions of the Agreement as set forth above
and further agree to be bound by the terms thereof.
/s/ Susan K. Brown
--------------------------------
SUSAN K. BROWN
-5-
<PAGE>
EXHIBIT 10.6
<PAGE>
1998 EMPLOYEE STOCK OPTION PLAN
OF
VALLEY COMMUNITY BANCSHARES, INC.
RECITALS
1. On April 23, 1998, the shareholders of Puyallup Valley Bank adopted
the 1998 Employee Stock Option Plan of Puyallup Valley Bank. On the same
date, the shareholders approved a Plan of Reorganization ("Reorganization")
whereby Puyallup Valley Bank became a wholly-owned subsidiary of Valley
Community Bancshares, Inc. In approving the Reorganization, the shareholders
approved the conversion of the 1998 Employee Stock Option Plan of Puyallup
Valley Bank to the 1998 Employee Stock Option Plan of Valley Community
Bancshares, Inc.
2. The 1998 Employee Stock Option Plan has been modified to reflect
this change in name but has not been otherwise altered as a result of the
Reorganization. In particular, employees have not been granted additional
benefits, and the fair market value of granted stock options has not been
changed as a result of the Reorganization.
PLAN
1. PURPOSE OF THE PLAN. The purpose of this Plan is to provide
additional incentives to Employees of Valley Community Bancshares, Inc. and
its present and future subsidiaries, thereby helping to attract and retain
the best available personnel for positions of responsibility with the
Corporation and otherwise promoting the success of the business activities of
the Corporation. It is intended that Options issued pursuant to this Plan
shall constitute either "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code or nonqualified stock options.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Board of Directors of the Corporation.
(b) "Common Stock" shall mean the Corporation's common stock.
(c) "Committee" shall mean the Board or the Committee appointed by
the Board in accordance with subsection 4(a) of the Plan
(d) "Continuous Status as an Employee" shall mean the absence of
any interruption or termination of service as an Employee. Continuous
Status as an Employee shall not be considered interrupted in the case of
sick leave, military leave, or any other approved leave of absence.
(e) "Corporation" shall mean Valley Community Bancshares, Inc., a
bank holding company.
<PAGE>
(f) "Employee" shall mean any person employed by the Corporation,
or any Subsidiary which now exist or are hereafter organized or are
acquired by the Corporation.
(g) "Nonqualified Stock Option" shall mean an Option other than
an Incentive Stock Option.
(h) "Option" shall mean a stock option granted pursuant to the
Plan. Options shall include both Incentive Stock Options under Section 422
of the Internal Revenue Code and Nonqualified Stock Options, as the context
requires.
(i) "Optioned Stock" shall mean the Common Stock subject to an
Option.
(j) "Optionee" shall mean an Employee who receives an Option.
(k) "Plan" shall mean this 1998 Employee Stock Option Plan.
(l) "Parent" shall mean any corporation having a relationship
with the Corporation as described in Section 424(e) of the Internal
Revenue Code.
(m) "Shareholder-Employee" shall mean an Employee who owns stock
representing more than 10 percent of the total combined voting power of
all classes of stock of the Corporation. For this purpose, the
attribution of stock ownership rules provided in Section 424(d) of the
Internal Revenue Code shall apply.
(n) "Subsidiary" shall mean any corporation having a relationship
with the Corporation as described in Section 424(f) of the Internal Revenue
Code.
3. STOCK SUBJECT TO OPTIONS.
(a) NUMBER OF SHARES RESERVED. The maximum number of shares
available pursuant to the Plan is 100,000 shares of the Common Stock of
the Corporation (subject to adjustment as provided in subsection 6(i) of
the Plan). During the term of this Plan, the Corporation will at all
times reserve and keep available a sufficient number of shares of its
Common Stock to satisfy the requirements of the Plan.
(b) EXPIRED OPTIONS. If any outstanding Option expires or
becomes unexercisable for any reason without having been exercised in
full, the shares of Common Stock allocable to the unexercised portion of
such Option shall again become available for other Options.
4. ADMINISTRATION OF THE PLAN.
(a) THE COMMITTEE. The Plan shall be administered by the Board
directly, acting as a Committee of the whole, or if the Board elects, by
a separate Committee appointed by the Board for that purpose and
consisting of at least three Board members. All references in the Plan
to the "Committee" shall refer to such separate committee, if any is
established, or if none is then in existence, shall refer to the Board
as a whole.
<PAGE>
Once appointed, any such Committee shall continue to serve until
otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members
thereof, remove members (with or without cause), appoint new members in
substitution therefor, and fill vacancies however caused.
(1) The Committee shall select one of its members as chairman,
and shall hold meetings at such times and places as the chairman or a
majority of the Committee may determine.
(2) At least annually, the Committee shall present a written
report to the Board indicating the persons to whom Options have been
granted since the date of the last such report, and in each case the
date or dates of Options granted, the number of shares optioned, and
the Option price per share.
(3) At all times, the Board shall have the power to remove all
members of the Committee and thereafter to directly administer the Plan
as a Committee of the whole.
(b) POWERS OF THE COMMITTEE. Except for the terms and conditions
explicitly set forth in the Plan, the Committee shall have the authority
and discretion:
(1) To determine the persons to whom Options are to
be granted, the times of grant and the number of shares to be
represented by each Option;
(2) To determine the Option price for the shares of
Common Stock to be issued pursuant to each Option, subject to the
provisions of subsection 6(b) of the Plan;
(3) To determine all other terms and conditions of each
Option granted under the Plan, which need not be identical;
(4) To modify or amend the terms of any Option previously
granted, or to grant substitute Options, subject to the provisions of
subsections 6(l) and 6(m) of the Plan;
(5) To interpret the Plan;
(6) To authorize any person or persons to execute and
deliver Option agreements or to take any other actions deemed by the
Committee to be necessary or appropriate to effectuate the grant of
Options;
(7) To make all other determinations and take all other
actions which the Committee deems necessary or appropriate to
administer the Plan in accordance with its terms and conditions.
<PAGE>
All actions of the Committee shall be either by (i) a majority
vote of the members of the full Committee at a meeting of the
Committee, or (ii) by unanimous written consent of all members of the
full Committee without a meeting thereof.
All decisions, determinations and interpretations of the
Committee shall be final and binding upon all persons, including all
Optionees and any other holders or persons interested in any Options,
unless otherwise expressly determined by a vote of the majority of the
entire Board. No member of the Committee or of the Board shall be
liable for any action or determination made in good faith with respect
to the Plan or any Option.
5. ELIGIBILITY. Options may be granted only to Employees who the
Committee, in its discretion, from time to time selects.
Granting of Options pursuant to the Plan shall be entirely discretionary
with the Committee, and the adoption of this Plan shall not confer upon any
person any right to receive any Option or Options pursuant to the Plan unless
and until said Options are granted by the Committee, in its sole discretion.
Neither the adoption of the Plan nor the granting of any Options pursuant to
the Plan shall confer upon any Employee any right with respect to
continuation of employment, nor shall the same interfere in any way with the
Employee's right or with the right of the Corporation or any Subsidiary to
terminate the employment relationship at any time.
6. TERMS AND CONDITIONS OF OPTIONS. All Options granted pursuant to
the Plan must be authorized by the Committee, and must be documented in
written agreements in such form as the Committee shall from time to time
approve, which agreements shall comply with and be subject to all of the
following terms and conditions, unless waived or modified by the Committee.
(a) NUMBER OF SHARES; ANNUAL LIMITATION. Each Option agreement
shall state whether the Option is an Incentive Stock Option or a
Nonqualified Stock Option and the number of shares subject to Option.
Any number of Options may be granted to a single eligible person at any
time and from time to time, except that in the case of Incentive Stock
Options, the aggregate fair market value (determined as of the time each
Option is granted) of all shares of Common Stock with respect to which
Incentive Stock Options become exercisable for the first time by an
Employee in any one calendar year (under all incentive stock option
plans of the Corporation shall not exceed $100,000.
(b) OPTION PRICE AND CONSIDERATION. The Option price for the
shares of Common Stock to be issued pursuant to the Option shall be such
price as is determined by the Committee, but shall in no event be less
than the fair market value of the Common Stock on the date of grant of
the Option. In the case of an Incentive Stock Option granted to an
Employee who, immediately before the grant of such Incentive Stock
Option, is a Shareholder-Employee, the Incentive Stock Option price
shall be at least 110 percent of the fair market value of the Common
Stock on the date of grant of the Incentive Stock Option. The fair
market value shall be determined by the Committee in its discretion;
<PAGE>
PROVIDED, HOWEVER, that in the event there is a public market for the
Common Stock, the fair market value shall be the mean of the bid and
asked prices of the Common Stock as of the date of grant as reported on
the National Association of Securities Dealers Automatic Quotation
System (NASDAQ), or, in the event the Common Stock is listed on a stock
exchange, the fair market value shall be the closing price on the
exchange as of the date of grant of the Option.
The Option price shall be payable either (i) in United States
dollars upon exercise of the Option, or (ii) such other consideration of
comparable value deemed to be acceptable by the Committee, including
without limitation Common Stock of the Corporation, services or other
property.
(c) TERM OF OPTION. No Incentive Stock Option granted pursuant
to the Plan shall in any event be exercisable after the expiration of 10
years from the date such Option is granted, except that the term of an
Incentive Stock Option granted to an Employee who, immediately before
such Incentive Stock Option is granted, is a Shareholder-Employee shall
be for not more than 5 years from the date of grant thereof. Subject to
the foregoing and other applicable provisions of the Plan including but
not limited to subsection 6(e) herein, the term of each Option shall be
determined by the Committee in its discretion.
(d) MANNER OF EXERCISE. An Option shall be deemed to be
exercised when written notice of exercise has been given to the
Corporation in accordance with the terms of the Option by the person
entitled to exercise the Option, together with full payment for the
shares of Common Stock subject to said notice.
(e) DEATH OF OPTIONEE. In the event of the death of an
Optionee who at the time of his death was an Employee and who had been
in Continuous Status as an Employee since the date of grant of the
Option, the Option shall terminate on the earlier of (i) one year after
the date of death of the Optionee or such later date as may be set in
the discretion of the Committee; or (ii) the expiration date otherwise
provided in the Option Agreement, except that if the expiration date of
an Option should occur during the 90-day period immediately following
the Optionee's death, such Option shall terminate at the end of such
90-day period. The Option shall be exercisable at any time prior to such
termination by the Optionee's estate, or by such person or persons who
have acquired the right to exercise the Option by bequest or by
inheritance or by reason of the death of the Optionee.
(f) DISABILITY OF OPTIONEE. If an Optionee's status as an
Employee is terminated at any time during the Option period by reason of
a disability (within the meaning of Section 22(e)(3) of the Internal
Revenue Code) and if said Optionee had been in Continuous Status as an
Employee at all times between the date of grant of the Option and the
termination of his status as an Employee, his Incentive Stock Option
shall terminate on the earlier of (i) one year after the date of
termination of his status as an Employee, or (ii) the expiration date
otherwise provided in his Option Agreement.
<PAGE>
(g) TERMINATION OF STATUS AS AN EMPLOYEE. If an Optionee's
status as an Employee is terminated at any time after the grant of his
Option for any reason other than death or disability, as provided in
subparagraphs (e) and (f), above, and not by reason of fraud or willful
misconduct, as provided below:
(1) His Incentive Stock Option shall terminate on the
earlier of (i) the same day of the third month after the date of
termination of his status as an Employee, or (ii) the expiration
date otherwise provided in his Option Agreement.
(2) If an Optionee's status as an Employee is terminated
at any time after the grant of his Option by reason of fraud or
willful misconduct, then his Option shall terminate on the date of
termination of his status as an Employee.
(h) NON-TRANSFERABILITY OF OPTIONS. No Option granted pursuant
to the Plan may be sold, pledged, assigned, hypothecated, transferred,
or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised during the lifetime of the
Optionee, only by the Optionee.
(i) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any
required action by the shareholders of the Corporation, the number of
shares of Common Stock covered by each outstanding Option, the number of
shares of Common Stock available for grant of additional Options, and
the price per share of Common Stock specified in each outstanding
Option, shall be proportionately adjusted for any increase or decrease
in the number of issued shares of Common Stock resulting from any stock
split or other subdivision or consolidation of shares, the payment of
any stock dividend (but only on the Common Stock) or any other increase
or decrease in the number of such shares of Common Stock effected
without receipt of consideration by the Corporation; PROVIDED, HOWEVER,
that conversion of any convertible securities of the Corporation shall
not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Committee, whose determination in
that respect shall be final, binding and conclusive.
No Incentive Stock Option shall be adjusted by the Committee
pursuant to this subparagraph 6(i) in a manner which causes the
Incentive Stock Option to fail to continue to qualify as an incentive
stock option within the meaning of Section 422 of the Internal Revenue
Code.
Except as otherwise expressly provided in this subsection 6(i), no
Optionee shall have any rights by reason of any stock split or the
payment of any stock dividend or any other increase or decrease in the
number of shares of Common Stock. Except as otherwise expressly provided
in this subsection 6(i), any issue by the Corporation of shares of stock
of any class, or securities convertible into shares of stock of any
class, shall not affect the number of shares or price of Common Stock
subject to any Options, and no adjustments in Options shall be made by
reason thereof. The grant of an Option pursuant to the Plan shall not
affect in any way the right or power of the Corporation to
<PAGE>
make adjustments, reclassifications, reorganizations or changes of its
capital or business structure.
(j) DATE OF GRANT OF OPTION. The date of grant of an Option
shall, for all purposes, be the date on which the Committee makes the
determination granting such Option. Said date of grant shall be
specified in the Option Agreement.
(k) CONDITIONS UPON ISSUANCE OF SHARES. Shares of Common Stock
shall not be issued with respect to an Option granted under the Plan
unless the exercise of such Option and the issuance and delivery of such
shares pursuant thereto shall comply with all relevant provisions of
law, including applicable federal and state securities laws.
As a condition to the exercise of an Option, the Corporation may
require the person exercising such Option to represent and warrant at
the time of exercise that the shares of Common Stock are being purchased
only for investment and without any present intention to sell or
distribute such Common Stock if, in the opinion of counsel for the
Corporation, such a representation is required by any of the
aforementioned relevant provisions of law.
(l) MERGER, SALE OF ASSETS, ETC. In the event of the merger or
other reorganization of the Corporation with or into any other
corporation, or in the event of a proposed sale of substantially all of
the assets of the Corporation, or in the event of a proposed dissolution
or liquidation of the Corporation, (i) all outstanding and unexercised
Options shall become immediately exercisable, and (ii) such Options
shall either be assumed by the successor corporation, or parent thereof,
in the reorganization transaction described above or be replaced with a
comparable award for the purchase of shares of the capital stock of the
successor corporation, except that if such Options are not so assumed or
replaced, then (iii) the Committee may, in the exercise of its sole
discretion, terminate all outstanding Options as of a date fixed by the
Committee which may be sooner than the originally stated option term.
The Committee shall notify each Optionee of such action in writing not
less than 60 days prior to the termination date fixed by the Committee,
and each Optionee shall have the right to exercise his Option to and
including said termination date.
(m) SUBSTITUTE STOCK OPTIONS. In connection with the
acquisition or proposed acquisition by the Corporation or any
Subsidiary, whether by merger, acquisition of stock or assets, or other
reorganization transaction, of a business, any employees of which have
been granted Incentive Stock Options, the Committee is authorized to
issue, in substitution of any such unexercised stock option, a new
Option under this Plan which confers upon the Optionee substantially the
same benefits as the old option; PROVIDED, HOWEVER, that the issuance of
any new Option for an old Incentive Stock Option shall satisfy the
requirements of Section 424(a) of the Internal Revenue Code.
(n) TAX COMPLIANCE. The Corporation, in its sole discretion,
may take any actions reasonable believed by it to be required to comply
with any local, state or federal tax laws relating to the reporting or
withholding of taxes attributable to the grant or
<PAGE>
exercise of any Option or the disposition of any shares of Common Stock
issued upon exercise of an Option, including, but not limited to, (i)
withholding from any person exercising an Option a number of shares of
Common Stock having a fair market value equal to the amount required to
be withhold by the Corporation under applicable tax laws, and (ii)
withholding from any form of compensation or other amount due an
Optionee or holder of shares of Common Stock issued upon exercise of an
Option any amount required to be withheld by the Corporation under
applicable tax laws. Withholding or reporting shall be considered
required for purposes of this subparagraph if any tax deduction or other
favorable tax treatment available to the Corporation is conditioned upon
such reporting or withholding.
(o) OTHER PROVISIONS. Option Agreements exercised pursuant to
the Plan may contain such other provisions as the Committee shall deem
advisable, provided in the case of Incentive Stock Options the
provisions are not inconsistent with the provisions of Section 422(b) of
the Internal Revenue Code or with any of the other terms and conditions
of this Plan.
7. TERM OF THE PLAN. The Plan shall become effective on the earlier of
(a) the date of adoption of the Plan by the Board; or (b) the date of
shareholder approval of the Plan as provided in section 9 of the Plan. Unless
sooner terminated as provided in subsection 8(a) of the Plan, the Plan shall
terminate on the tenth anniversary of its effective date. Options may be granted
at any time after the effective date and prior to the date of termination of
the Plan.
8. AMENDMENT OR EARLY TERMINATION OF THE PLAN.
(a) AMENDMENT OR EARLY TERMINATION. The Board may terminate
the Plan at any time. The Board may amend the Plan at any time and from
time to time in such respects as the Board may deem advisable, except
that, without approval of the holders of a majority of the outstanding
shares of the Common Stock, no such revision or amendment shall:
(1) Increase the number of shares of Common Stock subject
to the Plan other than in connection with an adjustment under
subsection 6(i) of the Plan; or
(2) Change the designation of the class of persons eligible
to be granted Options, as provided in section 5 of the Plan; or
(3) Make any amendments to the Plan which would require
shareholder approval under any applicable law or regulation.
(b) EFFECT OF AMENDMENT OR TERMINATION. No amendment or
termination of the Plan shall affect Options granted prior to such
amendment or termination, and all such Options shall remain in full force
and effect notwithstanding such amendment or termination.
<PAGE>
9. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by a
majority of the outstanding shares of Common Stock of the Corporation present
and entitled to vote at a duly convened meeting of the shareholders of the
Corporation.
CERTIFICATE OF ADOPTION
I certify that the foregoing Plan was approved by the shareholders of
Valley Community Bancshares, Inc., on April 23, 1998.
--------------------------------------
Secretary
<PAGE>
EXHIBIT 10.7
<PAGE>
STANDARD FORM OF AGREEMENT BETWEEN OWNER AND
CONTRACTOR WHERE THE BASIS OF PAYMENT IS A STIPULATED SUM
AIA DOCUMENT A101-1997
1997 EDITION-ELECTRONIC FORMAT
- --------------------------------------------------------------------------------
THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES. CONSULTATION WITH AN ATTORNEY IS
ENCOURAGED WITH RESPECT TO ITS COMPLETION OR MODIFICATION. AUTHENTICATION OF
THIS ELECTRONICALLY DRAFTED AIA DOCUMENT MAY BE MADE BY USING AIA DOCUMENT D401
AIA Document A201-1997, General Conditions of the Contract for Construction, is
adopted in this document by reference. Do not use with other general conditions
unless this document is modified.
This document has been approved and endorsed by The Associated General
Contractors of America.
Copyright 1915, 1918, 1925, 1937, 1951, 1958, 1961, 1963, 1967, 1974, 1977,
1987, 0 1997 by The American Institute of Architects. Reproduction of the
material herein or substantial quotation of its provisions without written
permission of the AIA violates the copyright laws of the United States and will
subject the violator to legal prosecution.
- --------------------------------------------------------------------------------
AGREEMENT made as of the 10th day of December in the year of Nineteen
Ninety-Nine (IN WORDS, INDICATE DAY, MONTH AND YEAR)
BETWEEN the Owner: VALLEY COMMUNITY BANCSHARES, INC.
(NAME, ADDRESS AND OTHER INFORMATION) 1307 EAST MAIN
PUYALLUP, WA 98372
and the Contractor BOB PEARSON CONSTRUCTION, INC.
(NAME, ADDRESS AND OTHER INFORMATION) 1407 Willow Road East
Tacoma, WA 98424
The Project is: Valley Bank
(NAME AND LOCATION) AUBURN MARKETPLACE PAD "L" AND BANK PAD
"D" STREET NORTHEAST AND TENTH STREET
NORTHEAST
AUBURN, WA
The Architect is: AUSTIN CINA
(NAME, ADDRESS AND OTHER INFO.) 12202 PACIFIC AVE., SUITE C
Tacoma, WA 98444
The Owner and Contractor agree as follows.
ARTICLE 1 THE CONTRACT DOCUMENTS
The Contract Documents consist of this Agreement, Conditions of the
Contract (General, Supplementary and other Conditions), Drawings,
Specifications, Addenda issued prior to execution of this Agreement,
other documents listed in this Agreement and Modifications issued after
execution of this Agreement; these form the Contract, and are as fully a
part of the Contract as if attached to this Agreement or repeated
herein. The Contract represents the entire and integrated agreement
between the parties hereto and supersedes prior negotiations,
representations or agreements, either written or oral. An enumeration of
the Contract Documents, other than Modifications, appears in Article 8.
- --------------------------------------------------------------------------------
AIA DOCUMENT A101 - OWNER - CONTRACTOR AGREEMENT - 1997 EDITION - AIA -
COPYRIGHT 1997 - THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE
N.W., WASHINGTON, D.C. 20006-5292. WARNING: Unlicensed photocopying violates
U.S. copyright laws and will subject the violator to legal prosecution. This
document was electronically produced with permission of the AIA and can be
reproduced without violation until the date of expiration as noted below.
Electronic Format AIO1-1997
User Document: 97AIOLCON -- 11/18/1998. AIA License Number 109607, which
expires on 6/30/1999 -- Page #1
<PAGE>
STANDARD FORM OF AGREEMENT BETWEEN OWNER AND
CONTRACTOR WHERE THE BASIS OF PAYMENT IS A STIPULATED SUM
AIA DOCUMENT A101 01-1997
1997 EDITION-ELECTRONIC, FORMAT
- -------------------------------------------------------------------------------
THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES, CONSULTATION WITH AN ATTORNEY
IS ENCOURAGED WITH RESPECT TO ITS COMPLETION OR MODIFICATION. AUTHENTICATION
OF THIS ELECTRONICALLY DRAFTED AIA DOCUMENT MAY BE MADE BY USING AIA DOCUMENT
D401
AIA Document A201-1997, General Conditions of the Contract for Construction, is
adopted in this document by reference. Do not use with other general conditions
unless this document is modified.
This document has been approved and endorsed by The Associated General
Contractors of America
Copyright 1915, 1918, 1925, 1937, 1951, 1958, 1961, 1963, 1967, 1974, 1977,
1987, 0 1997 by The American Institute of Architects. Reproduction of the
material herein or substantial quotation of its provisions without written
permission of the AIA violates the copyright laws of the United States and will
subject the violator to legal prosecution.
- --------------------------------------------------------------------------------
AGREEMENT MADE AS of the 10th day of December in the year of Nineteen
Ninety-Nine (IN WORDS, INDICATE DAY, MONTH AND YEAR)
BETWEEN the Owner: PUYALLUP VALLEY BANK
(NAME, ADDRESS AND OTHER INFORMATION) 1525 "A" STREET NE
AUBURN, WA 98071-1816
and the Contractor BOB PEARSON CONSTRUCTION, INC.
(NAME, ADDRESS AND OTHER INFORMATION) 1407 Willow Road East
Tacoma, WA 98424
The Project is: Valley Bank
(NAME AND LOCATION) AUBURN MARKETPLACE PAD "L" AND BANK PAD
"D" STREET NORTHEAST AND TENTH STREET
NORTHEAST
AUBURN, WA
The Architect is: AUSTIN CINA
(NAME, ADDRESS AND OTHER INFO.) 12202 PACIFIC AVE., SUITE C
Tacoma, WA 98444
The Owner and Contractor agree as follows.
ARTICLE I THE CONTRACT DOCUMENTS
The Contract Documents consist of this Agreement, Conditions of the
Contract (General, Supplementary and other Conditions), Drawings,
Specifications, Addenda issued prior to execution of this Agreement,
other documents listed in this Agreement and Modifications issued after
execution of this Agreement; these form the Contract, and are as fully a
part of the Contract as if attached to this Agreement or repeated
herein. The Contract represents the entire and integrated agreement
between the parties hereto and supersedes prior negotiations,
representations or agreements, either written or oral. An enumeration of
the Contract Documents, other than Modifications, appears in Article 8.
- -------------------------------------------------------------------------------
AIA DOCUMENT A101 - OWNER - CONTRACTOR AGREEMENT - 1997 EDITION - AIA -
COPYRIGHT 1997 - THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE
N.W., WASHINGTON, D.C. 20006-5292. WARNING: Unlicensed photocopying violates
U.S. copyright laws and will subject the violator to legal prosecution. This
document was electronically produced with permission of the AIA and can be
reproduced without violation until the date of expiration as noted below.
Electronic Format AIO1-1997
User Document: 97AIOLCON -- 11/18/1998. AIA License Number 109607, which
expires on 6/30/1999 -- Page #1
<PAGE>
ARTICLE 2 THE WORK OF THIS CONTRACT
The Contractor shall fully execute the Work described in the Contract
Documents, except to the extent specifically indicated in the Contract
Documents to be the responsibility of others.
ARTICLE 3 DATE OF COMMENCEMENT AND SUBSTANTIAL COMPLETION
3.1 The date of commencement of the Work shall be the date of this
Agreement unless a different date is stated below or provision is made for
the date to be fixed in a notice to proceed issued by the Owner. (INSERT
THE DATE OF COMMENCEMENT IF IT DIFFERS FROM THE DATE OF THIS AGREEMENT OR,
INAPPLICABLE, STATE THAT THE DATE WILL BE FIXED IN A NOTICE TO PROCEED.)
If, prior to the commencement of the Work, the Owner requires time to file
mortgages, mechanic's liens and other security interests, the Owner's time
requirement shall be as follows:
3.2 The Contract Time shall be measured from the date of commencement.
3.3 The Contractor shall achieve Substantial Completion of the entire Work
not later than One hundred fifty days (150) days from the date of
commencement, or as follows:
(INSERT NUMBER OF CALENDAR DAYS. ALTERNATIVELY, A CALENDAR DATE MAY BE
USED WHEN COORDINATED WITH THE DATE OF COMMENCEMENT. UNLESS STATED
ELSEWHERE IN THE CONTRACT DOCUMENTS, INSERT ANY REQUIREMENTS FOR EARLIER
SUBSTANTIAL COMPLETION OF CERTAIN PORTIONS OF THE WORK.)
From date of pre-construction meeting with City of Auburn, subject to
adjustments of this Contract Time as provided in the Contract Documents.
(INSERT PROVISIONS, IF ANY, FOR LIQUIDATED DAMAGES RELATING TO FAILURE
TO COMPLETE ON TIME OR FOR BONUS PAYMENTS FOR EARLY COMPLETION OF THE
WORK.)
ARTICLE 4 CONTRACT SUM
4.1 The Owner shall pay the Contractor the Contract Sum in current funds
for the Contractor's performance of the Contract. The Contract Sum shall be
Eight Hundred Ninety Two Thousand Four Hundred Fifty Dollars ($892,450.00),
subject to additions and deductions as provided in the Contract Documents.
4.2 The Contract Sum is based upon the following alternates, if any, which
are described in the Contract Documents and are hereby accepted by the
Owner:
(STATE THE NUMBERS OR OTHER IDENTIFICATION OF ACCEPTED ALTERNATES. IF
DECISIONS ON OTHER ALTERNATES ARE TO BE MADE BY THE OWNER SUBSEQUENT TO THE
EXECUTION of THIS AGREEMENT, ATTACH A SCHEDULE OF SUCH OTHER ALTERNATES
SHOWING THE AMOUNT FOR EACH AND THE DATE WHEN THAT AMOUNT EXPIRES)
Alternate HVAC system (See attached Exhibit "B")
4.3 Unit prices, if any, are as follows
ARTICLE 5 PAYMENTS
5.1 PROGRESS PAYMENTS
5.1.1 Based upon Applications for Payment submitted to the Architect by
the Contractor and Certificates for Payment issued by the Architect,
the Owner shall make progress payments on account of the Contract Sum
to the Contractor as provided below and elsewhere in the Contract
Documents.
5.1.2 The period covered by each Application for Payment shall be one
calendar month ending on the last day of the month, or as follows:
5.1.3 Provided that an Application for Payment is received by the
Architect not later than the last day of a month, the Owner shall make
payment to the Contractor not later than the 10th day of the
following month. If an Application for Payment is received by the
Architect after the application date fixed above, payment shall be made
by the Owner not later than 10 days after the Architect receives the
Application for Payment.
- -------------------------------------------------------------------------------
AIA DOCUMENT A101 - OWNER - CONTRACTOR AGREEMENT - 1997 EDITION - AIA -
COPYRIGHT 1997 - THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE
N.W., WASHINGTON, D.C. 20006-5292. WARNING: Unlicensed photocopying violates
U.S. copyright laws and will subject the violator to legal prosecution. This
document was electronically produced with permission of the AIA and can be
reproduced without violation until the date of expiration as noted below.
Electronic Format AIO1-1997
User Document: 97AIOLCON -- 11/18/1998. AIA License Number 109607, which
expires on 6/30/1999 -- Page #2
<PAGE>
5.1.4 Each Application for Payment shall be based on the most recent
schedule of values submitted by the Contractor in accordance with the
Contract Documents. The schedule of values shall allocate the entire
Contract Sum among the various portions of the Work. The schedule of
values shall be prepared in such for in and supported by such data to
substantiate its accuracy as the Architect may require. This schedule,
unless objected to by the Architect, shall be used as a basis for
reviewing the Contractor's Applications for Payment.
5.1.5 Applications for Payment shall indicate the percentage of
completion of each portion of the Work as of the end of the period
covered by the Application for Payment.
5.1.6 Subject to other provisions of the Contract Documents, the amount
of each progress payment shall be computed as follows:
.1 Take that portion of the Contract Sum properly
allocable to completed Work as determined by
multiplying the percentage completion of each portion
of the Work by the share of the Contract Sum
allocated to that portion of the Work in the schedule
of values, less retainage of percent (5%). Pending
final determination of cost to the Owner of changes
in the Work, amounts not in dispute shall be included
as provided in Subparagraph 7.3.8 of AIA Document
A201-1997;
.2 Add that portion of the Contract Sum properly
allocable to materials and equipment delivered and
suitably stored at the site for subsequent
incorporation in the completed construction (or, if
approved in advance by the Owner, suitably stored off
the site at a location agreed upon in writing), less
retainage of Five percent (5%);
.3 Subtract the aggregate of previous payments made by
the Owner; and
.4 Subtract amounts, if any, for which the Architect has
withheld or nullified a Certificate for Payment as
provided in Paragraph 9.5 of AIA Document A201-1997.
5.1.7 The progress payment amount determined in accordance with
Subparagraph 5.1.6 shall be further modified under the following
circumstances:
.1 Add, upon Substantial Completion of the Work, a sum
sufficient to increase the total payments to the full
amount of the Contract Sum, less such amounts as the
Architect shall determine for incomplete Work,
retainage applicable to such work and unsettled
claims; and
(SUBPARAGRAPH 9.8.5 of AIA DOCUMENT A201-1997
REQUIRES RELEASE OF APPLICABLE RETAINAGE UPON
SUBSTANTIAL COMPLETION OF WORK WITH CONSENT OF
SURETY, IF ANY.)
.2 Add, if final completion of the Work is thereafter
materially delayed through no fault of the
Contractor, any additional amounts payable in
accordance with Subparagraph 9.10.3 of AIA Document
A201-1997.
5.1.8 Reduction or limitation of retainage, if any, shall be as follows:
(IF IT IS INTENDED, PRIOR TO SUBSTANTIAL COMPLETION OF THE ENTIRE WORK, TO
REDUCE OR LIMIT THE RETAINAGE RESULTING FROM THE PERCENTAGES INSERTED IN
CLAUSES 5.1.6.1 AND 5.1.6.2 ABOVE, AND THIS IS NOT EXPLAINED ELSEWHERE IN
THE CONTRACT DOCUMENTS, INSERT HERE THE PROVISIONS FOR SUCH REDUCTION OR
LIMITATION.)
5.1.9 Except with the Owner's prior approval, the Contractor shall not make
advance payments to suppliers for materials or equipment which have not
been delivered and stored at the site.
5.2 FINAL PAYMENT
5.2.1 Final payment, constituting the entire unpaid balance of the Contract
Sum, shall be made by the Owner to the Contractor when:
.1 the Contractor has fully performed the Contract
except for the Contractor's responsibility to correct
Work as provided in Subparagraph 12.2.2 of AIA
Document A201-1997, and to satisfy other
requirements, if any, which extend beyond final
payment; and
- -------------------------------------------------------------------------------
AIA DOCUMENT A101 - OWNER - CONTRACTOR AGREEMENT - 1997 EDITION - AIA -
COPYRIGHT 1997 - THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE
N.W., WASHINGTON, D.C. 20006-5292. WARNING: Unlicensed photocopying violates
U.S. copyright laws and will subject the violator to legal prosecution. This
document was electronically produced with permission of the AIA and can be
reproduced without violation until the date of expiration as noted below.
Electronic Format AIO1-1997
User Document: 97AIOLCON -- 11/18/1998. AIA License Number 109607, which
expires on 6/30/1999 -- Page #3
<PAGE>
.2 a final Certificate for Payment has been issued by
the Architect.
5.2.2 The Owner's final payment to the Contractor shall be made no later
than 30 days after the issuance of the Architect's final Certificate for
Payment, or as follows:
ARTICLE 6 TERMINATION OR SUSPENSION
6.1 The Contract may be terminated by the Owner or the Contractor as
provided in Article 14 of AIA Document A201-1997.
6.2 The Work may be suspended by the Owner as provided in Article 14 of AIA
Document A201-1997.
ARTICLE 7 MISCELLANEOUS PROVISIONS
7.1 Where reference is made in this Agreement to a provision of AIA
Document A201-1997 or another Contract Document, the reference refers to
that provision as amended or supplemented by other provisions of the
Contract Documents.
7.2 Payments due and unpaid under the Contract shall bear interest from the
date payment is due at the rate stated below, or in the absence thereof, at
the legal rate prevailing from time to time at the place where the Project
is located.
(INSERT RATE OF INTEREST AGREED UPON, IF ANY.)
(USURY LAWS AND REQUIREMENTS UNDER THE FEDERAL TRUTH IN LENDING ACT,
SIMILAR STATE AND LOCAL CONSUMER CREDIT LAWS AND OTHER REGULATIONS AT THE
OWNER'S AND CONTRACTOR'S PRINCIPAL PLACES OF BUSINESS, THE LOCATION OF THE
PROJECT AND ELSEWHERE MAY AFFECT THE VALIDITY OF THIS PROVISION. LEGAL
ADVICE SHOULD BE OBTAINED WITH RESPECT TO DELETIONS OR MODIFICATIONS, AND
ALSO REGARDING REQUIREMENTS SUCH AS WRITTEN DISCLOSURES OR WAIVERS.)
7.3 The Owner's representative is: Dave Brown
(NAME, ADDRESS AND OTHER INFORMATION) Puyallup Valley Bank
1307 East Main
Puyallup, WA 98372
7.4 The Contractor's representative is: Cathy Bordeaux
(NAME, ADDRESS AND OTHER INFORMATION) BOB PEARSON CONSTRUCTION,
INC
1407 Willow Road East
Tacoma, WA 98424
7.5 Neither the Owner's nor the Contractor's representative shall be
changed without ten days written notice to the other party.
7.6 Other provisions:
ARTICLE 8 ENUMERATION OF CONTRACT DOCUMENTS
8.1 The Contract Documents, except for Modifications issued after execution
of this Agreement, are enumerated as follows:
8.1.1 The Agreement is this executed 1997 edition of the Standard Form of
Agreement Between Owner and Contractor, AIA Document A101-1997.
8.1.2 The General Conditions arc the 1997 edition of the General Conditions
of the Contract for Construction, AIA Document A201-1997.
8.1.3 The Supplementary and other Conditions of the Contract are those
contained in the Project Manual dated October 15, 1999, and are as follows:
Document Title Pages
00800 Supplementary Conditions 1 thru 3
- --------------------------------------------------------------------------------
AIA DOCUMENT A101 - OWNER - CONTRACTOR AGREEMENT - 1997 EDITION - AIA -
COPYRIGHT 1997 - THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE
N.W., WASHINGTON, D.C. 20006-5292. WARNING: Unlicensed photocopying violates
U.S. copyright laws and will subject the violator to legal prosecution. This
document was electronically produced with permission of the AIA and can be
reproduced without violation until the date of expiration as noted below.
Electronic Format AIO1-1997
User Document: 97AIOLCON -- 11/18/1998. AIA License Number 109607, which
expires on 6/30/1999 -- Page #4
<PAGE>
8.1.4 The Specifications are those contained in the Project Manual dated as
in Subparagraph 8.1.3, and are as follows:
(EITHER LIST THE SPECIFICATIONS HERE OR REFER TO AN EXHIBIT ATTACHED TO
THIS AGREEMENT.)
Section Title Pages
See Exhibit "C"
8.1.5 The Drawings are as follows, and are dated unless a different date is
shown below:
(EITHER LIST THE DRAWINGS HERE OR REFER TO AN EXHIBIT ATTACHED TO THIS
AGREEMENT.)
<TABLE>
<CAPTION>
Number Title Date
<S> <C> <C>
AO.0 Title Sheet 9-08-99
C1 Cover Sheet 7-26-99
C2 Grading and Storm Drainage Plan 7-26-99
C3 Water and Sanitary Sewer Plan 7-26-99
C4 Sections and Details 7-26-99
L1 Landscape Planting Plan 8-2-99
L2 Planting Notes and Details 8-2-99
L3 Landscape Irrigation Plan 8-2-99
L4 Irrigation Notes and Details 7-26-99
A1.0 Site Pan 8-11-99
A2.0 Main Floor Plan 8-11-99
A2.1 Upper Floor Plan 8-11-99
A2.2 Reflected Ceiling Plans 8-11-99
A2.3 Roof Plan & Details 8-11-99
A3.0 Elevations 8-11-99
A4.0 Building Sections 8-11-99
A4.1 Wall Sections 8-11-99
A4.2 Details 8-11-99
A4.3 Details 8-30-99
A5.0 Schedules 8-11-99
A6.0 Interior Elevations 8-24-99
A6.1 Interior Elevations & Details 8-24-99
S1.0 General Notes Standard Details 8-11-99
S2.0 Foundation Plan 8-11-99
S2.1 Second Floor Framing Plan 8-11-99
S2.2 Roof Framing Plan 8-11-99
S3.0 Foundation and Floor Frmg Details 8-11-99
S4.0 Roof Framing Details 8-11-99
M1.1 Legend, Notes, and Abbreviation 10-11-99
M2.1 Main Floor HVAC Plan 10-11-99
M2.2 Upper Floor HVAC Plan 10-11-99
M3.1 Main Floor Plumbing Plan 10-11-99
M3.2 Upper Floor Plumbing Plan 10-11-99
E1.1 One-Lien Diagram and Lighting Control Diagram 10-11-99
E1.2 Electrical Schedule 09-01-99
E2.0 Site Power and Lighting Plan 9-01-99
E2.1 Main Floor Lighting Plan 10-11-99
E2.2 Upper Floor Lighting Plan 09-01-99
E3.1 Main Floor Power Plan 10-11-99
E3.2 Upper Floor Power Plan 10-11-99
</TABLE>
- -------------------------------------------------------------------------------
AIA DOCUMENT A101 - OWNER - CONTRACTOR AGREEMENT - 1997 EDITION - AIA -
COPYRIGHT 1997 - THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE
N.W., WASHINGTON, D.C. 20006-5292. WARNING: Unlicensed photocopying violates
U.S. copyright laws and will subject the violator to legal prosecution. This
document was electronically produced with permission of the AIA and can be
reproduced without violation until the date of expiration as noted below.
Electronic Format AIO1-1997
User Document: 97AIOLCON -- 11/18/1998. AIA License Number 109607, which
expires on 6/30/1999 -- Page #5
<PAGE>
8.1.6 The Addenda, if any, are as follows:
<TABLE>
<CAPTION>
Number Date Pages
<S> <C> <C>
Addendum No 1 11-1-99 16
Addendum No 2 11-05-99 1
</TABLE>
Portions of Addenda relating to bidding requirements are not part of the
Contract Documents unless the bidding requirements are also enumerated
in this Article 8.
8.1.7 Other documents, if any, forming part of the Contract Documents are
as follows:
(LIST HERE ANY ADDITIONAL DOCUMENTS THAT ARE INTENDED TO FORM PART OF THE
CONTRACT DOCUMENTS. AIA DOCUMENT A201-1997 PROVIDES THAT BIDDING
REQUIREMENTS SUCH AS ADVERTISEMENT OR INVITATION TO BID, INSTRUCTIONS TO
BIDDERS, SAMPLE FORMS AND THE CONTRACTOR'S BID ARE NOT PART OF THE CONTRACT
DOCUMENTS UNLESS ENUMERATED IN THIS AGREEMENT. THEY SHOULD BE LISTED HERE
ONLY IF INTENDED TO BE PART OF THE CONTRACT DOCUMENTS.)
Exhibit "A" - Exclusions
Exhibit "B" - Alternate HVAC Design
Exhibit "C" - Specifications to
This Agreement is entered into as of the day and year first written above
and is executed in at least three original copies, of which one is to be
delivered to the Contractor, one to the Architect for use in the
administration of the Contract, and the remainder to the Owner.
/s/ [ILLEGIBLE] /s/ Cathy Bordeaux, PM
- ------------------------------------------ ---------------------------------
OWNER (SIGNATURE) CONTRACTOR (SIGNATURE)
CEO CATHY BORDEAUX, Proj. Mgr.
- ------------------------------------------ ---------------------------------
(PRINTED NAME AND TITLE) (PRINTED NAME AND TITLE)
Valley Community Bancshares Inc
- --------------------------------------------------------------------------------
AIA DOCUMENT A101 - OWNER - CONTRACTOR AGREEMENT - 1997 EDITION - AIA -
COPYRIGHT 1997 - THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE
N.W., WASHINGTON, D.C. 20006-5292. WARNING: Unlicensed photocopying violates
U.S. copyright laws and will subject the violator to legal prosecution. This
document was electronically produced with permission of the AIA and can be
reproduced without violation until the date of expiration as noted below.
Electronic Format AIO1-1997
User Document: 97AIOLCON -- 11/18/1998. AIA License Number 109607, which
expires on 6/30/1999 -- Page #6
<PAGE>
EXHIBIT "A"
EXCLUSIONS: State Tax, building permits, plan design, soil testing, soil
engineering, staking, any special inspections, and locating services.
Removing or disposing of any hazardous waste material. We have excluded all
engineering and design fees, hookup fees, assessments, meters, permits,
inspection fees, and etc., charged by any utility company or department such
as, gas, electric, water, sewer, storm, telephone, television, etc.
DISCLOSURE STATEMENT
NOTICE TO CUSTOMER
This contractor, BOB PEARSON CONSTRUCTION, INC. is registered with the State
of Washington, registration no. BOBPECI*093C6, as a general contractor and
has posted with the state a bond or cash deposit of $6,000 for the purpose of
satisfying claims against the contractor for negligent or improper work or
breach of contract in the conduct of contractor's business. This bond or cash
deposit may not be sufficient to cover a claim which might arise from the
work done under your contract. If any supplier of material used in your
construction project or any employee of the contractor or subcontractor is
not paid by the contractor or sub-contractor on your job, your property may
be liened to force payment. If you wish additional protection, you may
request the contractor to provide you with original "lien release" documents
from each supplier or subcontractor on your project. The contractor is
required to provide you with further information about lien release documents
if you request it. General information is also available from the Department
of Labor and Industries.
<PAGE>
EXHIBIT "B" Page 1 of
[LETTERHEAD]
To: Cathy Bordeaux
Bob Pearson Construction
From: Kevin Wilder
Heritage Heating Enterprises
Commercial Operations Manager
RE: VALLEY BANK, AUBURN, WA
Dear Cathy:
After careful review of the requested scope of work, I am providing an estimate
for the follow:
Inclusions:
1) Provide and Install (1) Carrier 48EKDO24. (Note there are some specific
differences to the specifications, such as drive manufacturer, compressor
type, stages of heat, 20 tons of cooling vs. 15tons, however inspite of
these differences we feel that the desired scope of operation can be met.
There were substantial savings in changing the exhaust fans, the Air
handling Unit, as well as the overall control work that interfaces with
the unit operation.
2) (2) Greenheck Exhaust Fans to be Model CSP, approx. same performance only
quieter and less expensive.
3) All associated ductwork, grilles, registers and diffusers. All outdoor
ductwork is based on Washington State Energy Code.
4) (11) ENVIRO-TEC fan powered VAV boxes.
5) Controls based on the AHU being provided with factory controls that have
generic interfaces to external building automation systems. Control scope
has been coordinated with Carrier unit to insure a complete scope of work.
System provides a simple, basic user interface software package installed
on a PC for the operator to run his building. (Very powerful, yet is more
basic than the specified software package)
6) Air Balance per section 15990.
7) Complete commissioning of equipment.
8) Gas Piping to new rooftop unit from meter.
9) Warranty
<PAGE>
EXHIBIT "B" Page 2 of
CATHY BORDEAUX/VALLEY BANK 2 DECEMBER 8, 1999
NOTE: IT IS OUR GOAL TO PROVIDE YOU THE CUSTOMER WITH SYSTEM THAT PERFORMS, AS
YOU DESIRE, YET IS COST EFFECTIVE. IF THE SAVINGS SHOWN IN THIS PROPOSAL ARE OF
INTEREST, WE FEEL IT WOULD BE IN THE BEST INTEREST OF ALL, TO REVIEW IN MORE
DETAIL THE CHANGES WE'VE PROPOSED.
Exclusions:
1) Washington State Sales Tax
2) Overtime/Night work
3) Cutting, Painting, Patching, Roofing
4) Electrical power wiring or disconnects
5) Sound Attenuators per 11/5/99 conversations with Andrew Szleper of Richmond
Engineering.
If you have any questions or require further information, please feel free to
call. Thanks again for the opportunity to quote this project for your firm.
Sincerely,
/s/ Kevin Wilder
Kevin Wilder
Commercial Operations Manager
<PAGE>
EXHIBIT "C" Page 1 of 3
AUBURN BRANCH 00003-1
VALLEY BANK TABLE OF CONTENTS
===============================================================================
<TABLE>
<CAPTION>
DIVISION SECTION NO. OF PAGES
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DIVISION 0: BIDDING REQUIREMENTS
00020 INVITATION TO BID 2
00200 INFORMATION AVAILABLE TO BIDDERS 21
00300 BID FORM 2
00440 SUBSTITUTION REQUEST FORM 2
00700 GENERAL CONDITIONS 1
00800 SUPPLEMENTARY CONDITIONS 3
DIVISION 1: GENERAL REQUIREMENTS
01010 SUMMARY OF WORK 2
01025 MEASUREMENT AND PAYMENT 1
01040 COORDINATION 3
01200 PROJECT MEETINGS 2
01300 SUBMITTALS 5
01400 QUALITY CONTROL 2
01500 CONSTRUCTION FACILITIES AND
TEMPORARY CONTROLS 2
01600 MATERIALS AND EQUIPMENT 3
01700 CONTRACT CLOSEOUT 3
DIVISION 2: SITEWORK
02210 SITE CLEARING 2
02211 SITE GRADING 4
02221 EXCAVATING, BACKFILLING, & COMPACTING
FOR UTILITIES 8
02222 EXCAVATION 3
02223 BACKFILLING 5
02510 ASPHALT CONCRETE PAVING 4
02520 PAVEMENT MARKING 1
02530 CEMENT CONCRETE SIDEWALK, DRIVEWAYS
AND CURBS 5
02667 SITE WATER LINES 10
02711 FOUNDATION DRAINAGE SYSTEMS 1
02722 SITE STORM DRAINAGE SYSTEM 4
02732 SITE SANITARY SEWAGE SYSTEMS 5
02760 SITE FURNISHINGS 2
02810 IRRIGATION SPECIFICATIONS 12
02900 LANDSCAPE SPECIFICATIONS 13
DIVISION 3: CONCRETE
03100 CONCRETE FORMWORK 3
03200 CONCRETE REINFORCEMENT 2
03300 CAST IN PLACE CONCRETE 5
03540 CEMENTIOUS UNDERLAYMENT 2
03600 GROUT 2
=======================================================================================================================
<PAGE>
EXHIBIT "C" Page 2 of 3
AUBURN BRANCH 00003-2
VALLEY BANK TABLE OF CONTENTS
===============================================================================
<CAPTION>
DIVISION SECTION NO. OF PAGES
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DIVISION 4: MASONRY
04200 UNIT MASONRY 6
DIVISION 5: METALS
05500 METAL FABRICATIONS 5
DIVISION 6: WOOD AND PLASTICS
06110 WOOD FRAMING 5
06115 SHEATHING 3
06190 FABRICATED WOOD TRUSSES 2
DIVISION 7: THERMAL AND MOISTURE PROTECTION
07150 BITUMINOUS DAMPPROOFING 1
07210 BUILDING INSULATION 3
07241 EXTERIOR INSULATION & FINISH SYSTEM 6
07410 PREFORMED METAL ROOFING 3
07535 MODIFIED BITUMEN ROOFING SYSTEM 7
07600 FLASHING AND SHEET METAL 4
07900 JOINT SEALERS 4
DIVISION 8: DOORS AND WINDOWS
08110 STEEL DOORS AND FRAMES 3
08211 FLUSH WOOD DOORS 3
08410 ALUMINUM ENTRANCES AND
STOREFRONTS 4
08710 FINISH HARDWARE 8
08800 GLAZING 5
DIVISION 9: FINISHES
09260 GYPSUM BOARD 4
09290 GLASS FIBER/REINFORCED GYPSUM 3
09300 TILE 2
09510 ACOUSTICAL CEILINGS 5
09650 RESILIENT FLOORING 4
09680 CARPET 3
09900 PAINTING 7
DIVISION 10: SPECIALTIES
10520 FIRE PROTECTION SPECIALTIES 2
10810 TOILET ACCESSORIES 2
DIVISION 11: EQUIPMENT
NO WORK IN THIS DIVISION
DIVISION 12: FURNISHINGS
12300 MANUFACTURED CASEWORK 4
12500 HORIZONTAL LOUVER BLINDS 4
=======================================================================================================================
<PAGE>
EXHIBIT "C" Page 3 of 3
AUBURN BRANCH 00003-3
VALLEY BANK TABLE OF CONTENTS
===============================================================================
<CAPTION>
DIVISION SECTION NO. OF PAGES
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DIVISION 13: SPECIAL CONSTRUCTION
NO WORK IN THIS DIVISION
DIVISION 14: CONVEYING SYSTEMS
NO WORK IN THIS DIVISION
DIVISION 15: MECHANICAL
15010 MECHANICAL PROVISIONS 5
15030 PAINTING AND IDENTIFICATION 2
15060 PIPES AND FITTINGS 4
15090 SUPPORTING DEVICES 3
15100 VALVES 3
15170 MOTORS 3
15250 MECHANICAL INSULATION 6
15260 PIPING INSULATION 4
15400 PLUMBING FIXTURES AND TRIM 3
15410 DOMESTIC WATER PIPING SYSTEM 2
15420 SOIL, WASTE, AND VENT SYSTEM 3
15430 PLUMBING SPECIALTIES 4
15453 PLUMBING LOOP EQUIPMENT 3
15625 GAS-FIRED UNIT HEATERS 4
15850 AIR FILTRATION 2
15855 AIR HANDLING UNIT SPECIFICATION 4
15870 HVAC AND EXHAUST SPECIALTIES 2
15900 AUTOMATIC TEMPERATURE CONTROLS 15
15930 AIR TERMINAL UNITS 3
15940 AIR INLETS AND OUTLETS 2
15990 TESTING, ADJUSTING, AND BALANCING 10
DIVISION 16: ELECTRICAL
16000 GENERAL ELECTRICAL SPECIFICATIONS 8
16111 CONDUIT 5
16120 WIRE & CABLE 4
16130 OUTLETS, JUNCTION & PULLBOXES 4
16141 WIRING DEVICES 3
16170 GROUNDING AND BONDING 1
16195 ELECTRICAL IDENTIFICATION 2
16200 LIGHTING FIXTURES 3
16426 SWITCHBOARDS 5
16440 DISCONNECT SWITCHES 2
16470 PANELBOARDS 9
=======================================================================================================================
</TABLE>
<PAGE>
CHANGE ORDER
[LETTERHEAD]
Date: 1-31-00
CO Number: 1
Job: 554-004
Customer: Job:
Puyallup Valley Bank VALLEY BANK - AUBURN
1301 East Main Street Auburn, WA 98002-4000
Puyallup WA 98372
253-848-2316
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Original contract 885,557.00
Previous approved change orders
Revised contract before this change 885,557.00
I HEREBY AUTHORIZE BOB PEARSON CONSTRUCTION, INC. to make the
following change from the work as originally set forth in the
plans and specifications:
This change: Add 6" concrete slab and reinforcing steel 5,542.00
three matts #5.
Revised contract with this proposed change 891,099.00
PRICE OF THIS REQUEST FOR PRICE: $5,542.00
Five thousand five hundred forty-two dollars and
no cents
</TABLE>
EXCLUSIONS: As shown on exhibit "A" of the Standard Form of Agreement Between
Owner and Contractor:
Submitted By: /s/ Cathy Bordeaux 1/31/00
--------------------------------------------
Cathy Bordeaux
Approved By: /s/ [ILLEGIBLE]
---------------------------------------------
Puyallup Valley Bank
<PAGE>
CHANGE REQUEST #1
SK1 THRU Sk-5.1 DRAWINGS
BOB PEARSON CONSTRUCTION, INC.
<TABLE>
<S> <C>
PROJECT NAME 55400401 - Change #1
1001 "D" Street NE
Auburn
King
WA 98071
CLIENT Valley Community Bancshar
1307 East Main
Puyallup
WA 98372
253-288-2101
ARCHITECT Austin Cina Architects
253-531-4300
ESTIMATOR Cathy Bordeaux
LABOR RATE TABLE Wa. Work
EQUIPMENT RATE TABLE Wa. Work
JOB SIZE 328 sf
AUDIT Dimensional
REPORT FORMAT Sorted by 'Phase'
'Detail' summary
Allocate addons
Combine items
</TABLE>
<PAGE>
BOB PEARSON CONST. INC. STANDARD ESTIMATE REPORT PAGE 2
55400401 - CHANGE #1 1/31/00 6:43 PM
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LABOR MATERIAL SUBCONTRACT EQUIPMENT OTHER TOTAL
------ -------- --------------- --------- ------ ------
ITEM DESCRIPTION TAKEOFF QTY AMOUNT AMOUNT AMOUNT NAME AMOUNT AMOUNT AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3001 DIG & GRADE CONC
20 Fine Grade Hand 328.000 sf 106 - - - - 106
------ ------
DIG & GRADE CONC 106 106
4.373 Labor hours
3261 CONCRET ALL
c30 Conc 3,000 psi 6.074 cuyd - 336 - - - 336
------ ------
CONCRET ALL 336 336
3780 REBAR - L&M
r56 Rebar #5, Grd 60 4,488.000 Inft 1,857 2,636 - - - 4,493
------ ------ ------
REBAR - L&M 1,857 2,636 4,493
59.84 Labor hours
3810 PLACE & SCREEDS
10 Place & Screeds 328.000 sf 93 - - - - 93
------ ------
PLACE & SCREEDS 93 93
2.982 Labor hours
</TABLE>
<PAGE>
BOB PEARSON CONST. INC. STANDARD ESTIMATE REPORT PAGE 3
55400401 - CHANGE #1 1/31/00 6:43 PM
- -------------------------------------------------------------------------------
ESTIMATE TOTALS
<TABLE>
<S> <C> <C> <C> <C>
Labor 2,055 67.195 hrs
Material 2,971
-------
5,026 5,026
Overhead* 251 5.000 % T
Profit* 264 5.000 % T
TOTAL 5,541 16.893 /sf
</TABLE>
<PAGE>
EXHIBIT 11
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
Computation of Earnings per share:
The numerators and denominators of basic and fully diluted earnings per share
are as follows:
<TABLE>
<CAPTION>
In thousands, except for per share amounts
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income (numerator) $ 1,394 $ 1,481 $ 1,592
============= ============= =============
Shares used in the calculation (denominator)
Weighted average shares outstanding 1,119,780 1,012,844 1,001,013
Effect of dilutive stock options 32,796 34,901 37,586
Fully diluted shares 1,152,576 1,047,745 1,038,599
============= ============= =============
Basic earnings per share $ 1.24 $ 1.46 $ 1.59
============= ============= =============
Fully diluted earnings per share $ 1.21 $ 1.41 $ 1.53
============= ============= =============
</TABLE>
<PAGE>
EXHIBIT 21
<PAGE>
SUBSIDIARIES OF COMPANY
<TABLE>
<CAPTION>
Parent
- ------
<S> <C>
Valley Community Bancshares, Inc.
<CAPTION>
Subsidiaries (a) Percentage of Ownership
- ---------------- -----------------------
<S> <C>
Puyallup Valley Bank, a Washington State Bank 100%
Valley Bank, a Washington State Bank 100%
</TABLE>
(a) The operation of Valley Community Bancshares, Inc.'s two wholly owned
subsidiaries are included in the financial statements set forth in this
Registration Statement.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VALLEY
COMMUNITY BANCSHARES, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,127
<INT-BEARING-DEPOSITS> 9,692
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,262
<INVESTMENTS-CARRYING> 1,241
<INVESTMENTS-MARKET> 1,247
<LOANS> 78,634
<ALLOWANCE> 959
<TOTAL-ASSETS> 133,837
<DEPOSITS> 113,809
<SHORT-TERM> 539
<LIABILITIES-OTHER> 765
<LONG-TERM> 0
0
0
<COMMON> 1,126
<OTHER-SE> 17,598
<TOTAL-LIABILITIES-AND-EQUITY> 133,837
<INTEREST-LOAN> 6,247
<INTEREST-INVEST> 1,927
<INTEREST-OTHER> 784
<INTEREST-TOTAL> 8,958
<INTEREST-DEPOSIT> 2,955
<INTEREST-EXPENSE> 2,973
<INTEREST-INCOME-NET> 5,985
<LOAN-LOSSES> 84
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 4,516
<INCOME-PRETAX> 1,974
<INCOME-PRE-EXTRAORDINARY> 1,394
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,394
<EPS-BASIC> 1.24
<EPS-DILUTED> 1.21
<YIELD-ACTUAL> 4.99
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 883
<CHARGE-OFFS> 8
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 959
<ALLOWANCE-DOMESTIC> 959
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 577
</TABLE>
