<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarter ended June 30, 2000
OR
( ) Transition report pursuant to Section 13 or 15(d) ) of the Securities
Exchange Act of 1934 For Transition Period from ________________ to
_______________
Commission File Number 000-30447
---------
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)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
The number of shares of the issuer's Common Stock, $1.00 par value,
outstanding at August 1, 2000 was 1,133,588.
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
Item 1. Financial Statements
Independent Accountant's Report 1
Condensed Consolidated Balance Sheet - June 30, 2000 and December 31, 1999 2
Condensed Consolidated Statement of Income - Three Months and Six Months
Ended June 30, 2000 and 1999 3
Condensed Consolidated Statement of Cash Flows - Three Months and Six Months
Ended June 30, 2000 and 1999 4
Notes to condensed consolidated financial statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operation 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
PART II OTHER INFORMATION 22
Signatures 23
</TABLE>
i
<PAGE>
Item 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANT'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
VALLEY COMMUNITY BANCSHARES, INC.
We have reviewed the accompanying condensed consolidated balance sheet of Valley
Community Bancshares, Inc. and subsidiaries (the "Company"), and the related
condensed consolidated statements of income and cash flows for the three and six
month periods ended June 30, 2000. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Valley Community Bancshares, Inc
and subsidiaries as of December 31, 1999, and the related consolidated
statements of income, stockholders' equity and cash flows for the year then
ended (which are not presented herein), and in our report dated February 1,
2000, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1999, is fairly
presented, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ Moss Adams LLP
Everett Washington
July 28, 2000
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<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
---------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,428 $ 5,127
Interest-bearing deposits with banks 8,825 9,692
Securities available-for-sale 31,022 33,262
Securities held-to-maturity 1,077 1,241
Federal Home Loan Bank stock 434 420
--------------- ---------------
48,786 49,742
Loans 88,727 78,634
Less allowance for loan losses 1,018 959
--------------- ---------------
Loans, net 87,709 77,675
Accrued interest receivable 852 851
Premises and equipment, net 5,670 4,717
Real estate held for investment 224 224
Other assets 664 628
--------------- ---------------
Total assets $ 143,905 $ 133,837
=============== ===============
LIABILITIES
Deposits
Noninterest-bearing $ 24,009 $ 21,349
Interest-bearing 98,615 92,460
--------------- ---------------
Total deposits 122,624 113,809
Other borrowed funds 1,521 539
Accrued interest payable 383 347
Other liabilities 420 418
--------------- ---------------
Total liabilities 124,948 115,113
--------------- ---------------
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share; 5,000,000 shares authorized; 1,133,588
and 1,125,561 shares issued and outstanding in 2000 and 1999, respectively. 1,134 1,126
Additional paid-in capital 16,322 16,286
Retained earnings 1,787 1,569
Accumulated other comprehensive income (loss), net of tax (286) (257)
--------------- ---------------
Total stockholders' equity 18,957 18,724
--------------- ---------------
Total liabilities and stockholders' equity $ 143,905 $ 133,837
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
-2-
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(unaudited)
(dollars in thousands, except for per share amounts)
VALLEY COMMUNITY BANCSHARES, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 1,965 $ 1,521 $ 3,777 $ 2,995
Interest on federal funds sold and deposits in banks 151 187 254 402
Interest on securities 452 465 937 910
------------ ------------ ------------- ------------
Total interest income 2,568 2,173 4,968 4,307
------------ ------------ ------------- ------------
INTEREST EXPENSE
Interest on deposits 870 712 1,638 1,438
Interest on federal funds and other short-term borrowings 26 4 31 8
------------ ------------ ------------- ------------
Total interest expense 896 716 1,669 1,446
------------ ------------ ------------- ------------
Net interest income 1,672 1,457 3,299 2,861
PROVISION FOR LOAN LOSSES 32 16 59 31
------------ ------------ ------------- ------------
Net interest income after provision
for loan losses 1,640 1,441 3,240 2,830
------------ ------------ ------------- ------------
NONINTEREST INCOME
Service charges 80 82 154 162
Gain on sale of investment securities, net - 1 - 1
Origination fees on mortgage loans brokered 2 10 5 33
Other operating income 65 45 130 96
------------ ------------ ------------- ------------
Total noninterest income 147 138 289 292
------------ ------------ ------------- ------------
NONINTEREST EXPENSE
Salaries 482 451 976 905
Employee benefits 109 95 226 201
Occupancy 110 112 229 224
Equipment 119 109 229 222
Other operating expenses 393 327 756 684
------------ ------------ ------------- ------------
Total noninterest expense 1,213 1,094 2,416 2,236
------------ ------------ ------------- ------------
INCOME BEFORE INCOME TAX 574 485 1,113 886
PROVISION FOR INCOME TAX 169 145 331 262
------------ ------------ ------------- ------------
NET INCOME $ 405 $ 340 $ 782 $ 624
============ ============ ============= ============
EARNINGS PER SHARE
Basic $ 0.36 $ 0.30 $ 0.69 $ 0.56
Diluted $ 0.35 $ 0.29 $ 0.68 $ 0.54
Weighted average shares outstanding 1,133,148 1,123,699 1,129,355 1,115,963
Weighted average diluted shares outstanding 1,155,785 1,156,635 1,154,897 1,149,541
</TABLE>
The accompanying notes are an integral part of these financial statements
-3-
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(dollars in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 782 $ 624
Adjustments to reconcile net income to net cash
from operating activities
Provisions for loan losses 59 31
Depreciation 200 199
Deferred income tax (1) (13)
Net amortization on securities 18 43
FHLB stock dividends (14) (13)
Increase (decrease) in accrued interest receivable (1) 69
Increase (decrease) in other assets (20) 67
Increase (decrease) in accrued interest payable 36 (37)
Increase (decrease) in other liabilities 2 (140)
--------------- --------------
Net cash from operating activities 1,061 830
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in federal funds sold - 980
Net decrease in interest-bearing deposits with banks 867 (5,503)
Purchase of securities available-for-sale (1,506) (9,334)
Proceeds from sales of securities available-for-sale - 1,001
Proceeds from maturities of securities available-for-sale 3,685 7,318
Proceeds from maturities of securities held-to-maturity 163 560
Purchase stock in FHLB - (37)
Net increase in loans (10,093) (2,248)
Additions to premises and equipment (1,153) (862)
Net cash from investing activities (8,037) (8,125)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 8,815 2,425
Net increase in other borrowed funds 982 300
Cash dividends paid (564) (134)
Common stock issued - 3,591
Stock options exercised 44 28
--------------- --------------
Net cash from financing activities 9,277 6,210
--------------- --------------
NET INCREASE (DECREASE) IN CASH AND DUE 2,301 (1,085)
FROM BANKS
CASH AND DUE FROM BANKS, beginning of year 5,127 5,630
--------------- --------------
CASH AND DUE FROM BANKS, at end of period $ 7,428 $ 4,545
=============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for
Interest $ 1,633 $ 1,483
Income taxes 356 263
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Unrealized gains (losses) on securities available-for-sale $ (44) $ (391)
Deferred tax on unrealized gains (losses) on securities
available-for-sale 15 133
Common stock issued for land - 125
</TABLE>
The accompanying notes are an integral part of these financial statements
-4-
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
Valley Community Bancshares, Inc. (the "Company") has prepared the condensed
consolidated financial statements of the Company for the three-month and
six-month periods ended June 30, 2000 and June 30, 1999 without audit by the
Company's independent auditors. However, the financial statements have been
prepared in accordance with generally accepted accounting principals for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. In the opinion of the Company's management, all adjustments
consisting of normal recurring accruals necessary for a fair presentation of the
financial condition and results of operations for the interim periods included
herein have been made. The consolidated balance sheet of the Company as of
December 31, 1999 has been derived from the audited consolidated balance sheet
of the Company as of that date. The results of operations for the three- months
and six-months ended June 30, 2000, are not necessarily indicative of the
results to be anticipated for the year ending December 31, 2000. The report of
Moss Adams LLP commenting upon their review accompanies the consolidated
financial statements included in Item 1 of Part 1.
Certain information and note disclosures normally included in the Company's
annual financial statement prepared in accordance with generally accepted
accounting principals have been condensed or omitted. Therefore, these
consolidated financial statements and notes thereto should be read in
conjunction with a reading of the financial statements and notes thereto
included in the Company's Form 10 for the year ended December 31, 1999 filed
with the Securities and Exchange Commission. Certain amounts in the 1999
financial statements have been reclassified to conform to the 2000 presentation.
Note 2. 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.
The following table sets forth the computation of basic and diluted earnings per
share for the three-months and six- months ended June 30, 2000 and 1999 (dollars
in thousands, except per share amounts).
<TABLE>
<CAPTION>
VALLEY COMMUNITY BANCSHARES, INC. Three Months Ended Six Months Ended
Earnings Per Share June 30, June 30,
------------------------------ -----------------------------
2000 1999 2000 1999
-------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income $ 405 $ 340 $ 782 $ 624
DENOMINATOR:
Denominator for basic earnings per share:
Weighted average shares 1,133,148 1,123,699 1,129,355 1,115,963
Effect of Diluted securities - stock options 22,637 32,936 25,542 33,578
Denominator for diluted earnings per share:
Weighted average shares and assumed
conversion of Diluted stock options 1,155,785 1,156,635 1,154,897 1,149,541
Basic earnings per share $ 0.36 $ 0.30 $ 0.69 $ 0.56
Diluted earnings per share $ 0.35 $ 0.29 $ 0.68 $ 0.54
</TABLE>
-5-
<PAGE>
Note 3. 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>
June 30, 2000
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 $ 16,844 $ 28 $ 220 $ 16,652
State and political subdivisions 4,429 5 42 4,392
Mortgage-backed securities 8,671 - 163 8,508
Other 1,512 - 42 1,470
--------------- -------------- --------------- ---------------
31,456 33 467 31,022
--------------- -------------- --------------- ---------------
Securities Held-to-Maturity
U.S. Treasury and U.S. Government
corporations and agencies 292 14 - 306
State and political subdivisions 785 - - 785
--------------- -------------- --------------- ---------------
1,077 14 - 1,091
--------------- -------------- --------------- ---------------
$ 32,533 $ 47 $ 467 $ 32,113
=============== ============== =============== ===============
<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
=============== ============== =============== ===============
</TABLE>
-6-
<PAGE>
Note 4 - Loans
The major classifications of loans at June 30, 2000 and December 31, 1999 are
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
------------- -------------
2000 1999
------------- -------------
Amount Amount
------------- -------------
<S> <C> <C>
Real Estate
Construction $ 7,743 $ 7,384
Mortgage 17,783 15,867
Commercial 46,827 40,254
Commercial 13,463 12,892
Consumer and other 2,408 1,864
Lease financing 519 377
------------- -------------
Total loans 88,743 78,638
Deferred loan fees (16) (4)
------------- -------------
Net loans $ 88,727 $ 78,634
============= =============
</TABLE>
Note 5 - Allowance for Loan Losses
Management analyzes the loan portfolio to determine the adequacy of the
allowance for loan losses and the appropriate provision required to maintain an
adequate allowance. In assessing the adequacy of the allowance, management
reviews the size, quality and risks of loans in the portfolio and considers
factors such as specific known risks, past experience, the status and amount of
nonperforming assets and economic conditions. A specific percentage is allocated
to each major classification and not specifically reserved while additional
amounts are added for individual loans considered to have specific loss
potential. Loans identified as losses are charged-off. Based on total
allocations, the provision is recorded to maintain the allowance at a level
deemed appropriate by management. While management uses available information to
recognize losses on loans, there can be no assurance that future additions to
the allowance will not be necessary.
The allowance for loan losses at June 30, 2000 totaled $1.018,000 representing a
net increase of $59,000 or 6% compared to $959,000 at December 31, 1999. The
increase is primarily due to an increase in loans by 13% since December 31,
1999. Management believes that the allowance for loan losses at June 30, 2000
adequately reflects the risks in the loan portfolio. Various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments of information
available to them at the time of their examination.
The following table summarizes the activity in the allowance for loan losses
(dollars in thousands):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------ ------------- ------------- ------------
2000 1999 2000 1999
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 986 $ 959 $ 959 $ 883
Charge-offs - - - -
Recoveries: - - - -
Net charge-offs - - - -
Additions charged to operations 32 16 59 15
------------ ------------- ------------- ------------
Balance at end of period $ 1,018 $ 975 $ 1,018 $ 898
============ ============= ============= ============
</TABLE>
-7-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
VALLEY COMMUNITY BANCSHARES, INC.
This Management's Discussion and Analysis includes forward-looking statements.
These forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from those in the
forward-looking statements. Such risks and uncertainties include, but are not
limited to, the following factors: competitive pressure in the banking industry
significantly increasing; changes in the interest rate environment reducing
margins; general economic conditions, either nationally or regionally, are less
favorable than expected, resulting in, among other things, a deterioration in
credit quality and an increase in the provision for possible loan losses;
changes in the regulatory environment; changes in business conditions;
volatility of rate sensitive deposits; operational risks including data
processing system failures or fraud; asset/liability matching risks and
liquidity risks; and changes in the securities markets. Because of these
uncertainties, actual future results may be materially different from the
results indicated by these forward-looking statements. In addition, the
Company's past results do not necessarily indicate its future results.
OVERVIEW
Valley Community Bancshares, Inc. (the "Company") is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended. 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 recently (January 1999) 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 Form 10-Q.
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.
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) interest bearing deposits with 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 of
payroll and social security checks, automated teller machine access, and
automatic drafts for various accounts.
PUYALLUP VALLEY BANK
Puyallup Valley Bank is a Washington state-charted commercial bank that provides
full-service banking to businesses and residents within the Puyallup community
and its surrounding area. Puyallup Valley Bank places particular emphasis on
serving the small to medium sized business segment of the market by making
available a line of banking products tailored to their needs, with those
services delivered by experienced professionals concerned with building
long-term relationships. Puyallup Valley Bank conducts business out of six
full-service offices and one drive-up facility.
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
-8-
<PAGE>
organize from the Division of Banks of the Washington Department of Financial
Institutions 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.
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.
RESULTS OF OPERATION
The Company earned net income of $405,000, or $0.35 per diluted share for the
three months ended June 30, 2000, compared to net income of $340,000, or $0.29
per diluted share, for the three months ended June 30, 1999, an increase of 19
percent. The Company's return on average assets was 1.16 percent for the three
months ended June 30, 2000, compared to 1.04 percent for the three months ended
June 30, 1999.
Net income was $782,000, or $0.68 per diluted share for the six months ended
June 30, 2000, compared to net income of $624,000, or $0.54 per diluted share,
for the six months ended June 30, 1999, an increase of 25 percent. The Company's
return on average assets was 1.14 percent for the six months ended June 30,
2000, compared to .97 percent for the six months ended June 30, 1999.
The increase in net income for both the three and six month periods ended June
30, 2000 was primarily the result of an increase in net interest income that
reflects an improvement in the Company's net interest margin and from a growth
in earning assets, primarily loans. Earnings were negatively impacted by higher
operating costs associated with the holding company and Valley Bank, and lower
origination fees on mortgage loans brokered.
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 earned net income of $437,000 and
$842,000 for the three and six months ended June 30, 2000, respectively,
compared to $369,000 and $708,000 for the three and six months ended June 30,
1999, respectively. Valley Bank, incurred losses of $23,000 and $42,000 for the
three and six months ended June 30, 2000, respectively, compared to losses of
$27,000 and $84,000 for the three and six months ended June 30, 1999,
respectively. Valley Bank is anticipated to continue to incur operating losses
during its early years of operation and it is anticipated that the losses will
continue to 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.
The following table shows the various performance ratios for the Company for the
three and six months ended June 30, 2000 and 1999, respectively.
VALLEY COMMUNITY BANCSHARES, INC.
Selected Financial Data
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
------------ ------------- ------------ ----------------
<S> <C> <C> <C> <C>
FINANCIAL PERFORMANCE
Net Income $ 405 $ 340 $ 782 $ 624
Average Assets 140,086 130,829 137,128 129,552
Average Stockholders' Equity 18,762 18,119 18,642 17,929
Return on Assets (net income divided by average assets) 1.16% 1.04% 1.14% 0.97%
Return on Equity (net income divided by average equity) 8.66% 7.53% 8.41% 7.02%
Net Interest Margin (net interest income (tax adjusted)
divided by earning assets) 5.29% 4.96% 5.32% 4.94%
Efficiency Ratio (noninterest expense divided by
noninterest income plus net interest income) 66.68% 68.59% 67.34% 70.92%
</TABLE>
-9-
<PAGE>
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, with tax-exempt income adjusted to a
tax-equivalent basis, divided by average earning assets is referred to net
interest margin. For the three months ended June 30, 2000, the Company's net
interest margin was 5.29 percent compared to 4.96 percent for the three months
ended June 30, 1999. For the six months ended June 30, 2000, the Company's net
interest margin was 5.32 percent compared to 4.94 percent for the six months
ended June 30, 1999.
Net interest income for the three months ended June 30, 2000 totaled $1,672,000
compared to $1,457,000 for the three months ended June 30, 1999, a 15 percent
increase. Net interest income for the six months ended June 30, 2000 totaled
$3,299,000 compared to $2,861,000 for the six months ended June 30, 1999, a 15
percent increase. The increase in net interest resulted from an increase in the
volume of interest earning assets, primarily loans, and an increase in the
Company's net interest margin.
Interest income was $2,568,000 for the three months ended June 30, 2000 compared
to $2,173,000 for the three months ended June 30, 1999. Interest income was
$4,968,000 for the six months ended June 30, 2000 compared to $4,307,000 for the
six months ended June 30, 1999. The increase was due to an increase in the yield
earned and growth in interest earning assets. The yield on interest-earning
assets increased to 8.07 percent for the three months ended June 30, 2000
compared to 7.33 percent during the same period a year ago. The yield on
interest-earning assets increased to 7.97 percent for the six months ended June
30, 2000 compared to 7.37 percent during the same period a year ago. The yield
increase was primarily as a result of a greater percentage of the Company's
earning assets concentrated in loans and from an overall increase in interest
rates and the resulting impact on adjustable rate loans and securities.
Interest expense was $896,000 for the three months ended June 30, 2000 compared
to $716,000 for the three months ended June 30, 1999. Interest expense was
$1,669,000 for the six months ended June 30, 2000 compared to $1,446,000 for the
six months ended June 30, 1999. The increase was due to a increase in the cost
of funds and growth in interest bearing liabilities. The cost of funds increased
to 3.69 percent for the three months ended June 30, 2000 compared to 3.19
percent during the same period a year ago. The cost of funds increased to 3.54
percent for the six months ended June 30, 2000 compared to 3.27 percent during
the same period a year ago. The cost of fund increase was primarily related to a
higher concentration in certificate of deposits greater than $100,000 and an
overall increase in market interest rates. In addition, as a result of higher
market interest rates, the Company experienced a trend of deposit customers
transferring funds from non-interest bearing or low-interest bearing deposit to
higher interest paying certificates of deposit. In the event this trend
continues, the Company may continue to experience an increase in the cost of
funds and potentially a lower net interest margin, and lower profitability.
During the three and six months ended June 30, 2000, market interest rates
increased and may increase further during the balance of the year. In periods of
rising interest rates, the Company's net interest income and margin may decrease
because the Company has a greater amount of interest-bearing liabilities subject
to more rapid repricing than interest earning assets. The Company strategy to
offset rising rates is to increase commercial and commercial real estate lending
as a percentage of interest earning assets while continuing its emphasis on
non-interest bearing deposits and other deposits with administered interest
rates such as NOW, savings and money market accounts to fund such assets.
-10-
<PAGE>
The following table sets forth information concerning the Company's average
balance and average interest rates earned or paid, interest rate spread and net
interest margin for the three months ended June 30:
VALLEY COMMUNITY BANCSHARES, INC.
AVERAGE BALANCES AND INTEREST RATES EARNED/PAID
(dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
2000 1999
-------------------------------- --------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
ASSETS balance 1 expense 2 rate balance 1 expense 2 rate
------------ ---------- -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans (including fees) $ 87,122 $ 1,965 9.05% $ 70,940 $ 1,521 8.60%
Investment securities 32,956 489 5.96% 35,049 495 5.67%
Interest bearing deposits with banks 8,628 137 6.37% 12,960 168 5.20%
Federal funds sold - - 0.00% 1,639 20 0.00%
Federal Home Loan Bank Stock 426 7 6.59% 391 7 7.18%
------------ ---------- -------- ------------ ---------- --------
Total Interest-earning assets 129,132 $ 2,598 8.07% 120,979 $ 2,211 7.33%
Total noninterest-earning assets 10,954 9,849
------------ ------------
TOTAL ASSETS $ 140,086 $ 130,828
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits $ 95,982 $ 870 3.64% $ 89,479 $ 712 3.19%
Other borrowed funds 1,376 26 7.58% 425 4 3.78%
------------ ---------- -------- ------------ -------------------
Total Interest-bearing liabilities 97,358 $ 896 3.69% 89,904 $ 716 3.19%
Noninterest-bearing liabilities 23,966 22,805
Stockholders' equity 18,762 18,119
TOTAL LIABILITIES AND
------------ ------------
STOCKHOLDERS' EQUITY $ 140,086 $ 130,828
============ ============
---------- -------- -------------------
Net interest spread $ 1,702 4.38% $ 1,495 4.14%
Margin Analysis
Interest income/ earning assets $ 2,598 8.07% $ 2,211 7.33%
Interest expense/earning assets 896 2.78% 716 2.37%
---------- -------- -------------------
Net interest margin 1,702 5.29% 1,495 4.96%
</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%.
-11-
<PAGE>
The following table sets forth information concerning the Company's average
balance and average interest rates earned or paid, interest rate spread and net
interest margin for the six months ended June 30:
VALLEY COMMUNITY BANCSHARES, INC.
AVERAGE BALANCES AND INTEREST RATES EARNED/PAID
(dollars in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
2000 1999
-------------------------------- --------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
ASSETS balance 1 expense 2 rate balance 1 expense 2 rate
------------ ---------- -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans (including fees) $ 84,581 $ 3,777 8.96% $ 69,737 $ 2,995 8.66%
Investment securities 33,755 998 5.93% 34,126 971 5.74%
Interest bearing deposits with banks 7,802 240 6.17% 13,504 352 5.26%
Federal funds sold - - 0.00% 2,117 51 4.86%
Federal Home Loan Bank Stock 423 14 6.64% 375 14 7.53%
------------ ---------- -------- ------------ ---------- --------
Total Interest-earning assets 126,561 $ 5,029 7.97% 119,859 $ 4,383 7.37%
Total noninterest-earning assets 10,567 9,693
------------ ------------
TOTAL ASSETS $ 137,128 $ 129,552
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits $ 93,641 $ 1,638 3.51% $ 89,012 $ 1,438 3.26%
Other borrowed funds 898 31 6.92% 236 8 6.84%
------------ ---------- -------- ------------ -------------------
Total Interest-bearing liabilities 94,539 $ 1,669 3.54% 89,248 $ 1,446 3.27%
Noninterest-bearing liabilities 23,947 22,375
Stockholders' equity 18,642 17,929
TOTAL LIABILITIES AND
------------ ------------
STOCKHOLDERS' EQUITY $ 137,128 $ 129,552
============ ============
---------- -------- -------------------
Net interest spread $ 3,360 4.43% $ 2,937 4.11%
Margin Analysis
Interest income/ earning assets $ 5,029 7.97% $ 4,383 7.37%
Interest expense/earning assets 1,669 2.64% 1,446 2.43%
---------- -------- -------------------
Net interest margin 3,360 5.32% 2,937 4.94%
</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%.
-12-
<PAGE>
The following tables sets forth information concerning the Company's change in
net interest income for the periods that are attributable to changes in interest
rate and changes in volume for the three month period ended June 30, 2000
compared to the three months ended June 30, 1999 and for the six month period
ended June 30, 2000 compared to the six months ended June 30, 1999.
VALLEY COMMUNITY BANCSHARES, INC.
Volume/Rate Analysis - For the Three Months ended June 30,
(dollars in thousands)
<TABLE>
<CAPTION>
2000 Compared to 1999
-----------------------------------------
Volume Rate Net
<S> <C> <C> <C>
Interest income
Loans (including fees) $ 383 $ 61 $ 444
Investment securities (34) 28 (6)
Interest bearing deposits with banks (64) 33 (31)
Federal funds sold (20) - (20)
Federal Home Loan Bank Stock 1 (1) -
------------ ------------- ------------
Total Interest-earning assets 266 121 387
Interest-bearing liabilities
Total deposits 89 69 158
Other borrowed funds 15 7 22
------------ ------------- ------------
Total Interest-bearing liabilities 104 76 180
------------ ------------- ------------
Net interest income $ 162 $ 45 $ 207
============ ============= ============
</TABLE>
VALLEY COMMUNITY BANCSHARES, INC.
Volume/Rate Analysis - For the Six Months ended June 30,
(dollars in thousands)
<TABLE>
<CAPTION>
2000 Compared to 1999
-----------------------------------------
Volume Rate Net
<S> <C> <C> <C>
Interest income
Loans (including fees) $ 717 $ 65 $ 782
Investment securities 29 (2) 27
Interest bearing deposits with banks (119) 7 (112)
Federal funds sold (51) - (51)
Federal Home Loan Bank Stock 3 (3) -
------------ ------------- ------------
Total Interest-earning assets 579 67 646
Interest-bearing liabilities
Total deposits 206 (6) 200
Other borrowed funds 23 - 23
------------ ------------- ------------
Total Interest-bearing liabilities 229 (6) 223
------------ ------------- ------------
Net interest income $ 350 $ 73 $ 423
============ ============= ============
</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%
-13-
<PAGE>
PROVISION FOR LOAN LOSSES
Provisions for loan losses reduce net interest income. The Company provided
$32,000 for loan losses for the three months ended June 30, 2000 compared to
$16,000 during the same three-month period last year. The Company provided
$59,000 for loan losses for the six months ended June 30, 2000 compared to
$31,000 during the same six-month period last year. The provision was made as a
result of increasing loans and is 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 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. For further
discussion regarding the allowance for loan losses, see the discussion on
allowance for loan losses under Risk Elements.
NONINTEREST INCOME AND EXPENSE
Net income is also affected by noninterest income (primarily service charges,
and other operating income) and noninterest expenses (primarily salaries and
employee benefits, occupancy, equipment, and other operating expenses).
Noninterest income was $147,000 for the three months ended June 30, 2000, a
slight increase from $138.000 for the three months ended June 30, 1999.
Noninterest income was $289,000 for the six months ended June 30, 2000, a
decrease from $292,000 for the six months ended June 30, 1999. The decrease in
noninterest income was primarily related to lower service charges on deposit
accounts, NSF charges, and lower origination fees on mortgage loans brokered.
Origination fees decreased as a result of higher mortgage interest rates in 2000
and a lower volume of loan applications processed. Based on the current interest
rate environment, the Company anticipates that mortgage loans brokered will
remain at a low level during the remainder of the year 2000 compared to the
levels realized in 1999.
Noninterest expense was $1,213,000 for the three months ended June 30, 2000,
compared to $1,094,000 for the three months ended June 30, 1999, an 11 percent
increase. Noninterest expense was $2,416,000 for the six months ended June 30,
2000, compared to $2,236,000 for the six months ended June 30, 1999, an 8
percent increase. Noninterest expense continues to be impacted by higher salary
and employee benefits, occupancy and equipment, and other operating expenses
associated with the operation of the holding company and Valley Bank. The
percentage of noninterest expense to average assets was 3.47 percent for the
three months ended June 30, 2000, compared to 3.35 percent during the same
period last year. The percentage of noninterest expense to average assets was
3.53 percent for the six months ended June 30, 2000, compared to 3.48 percent
during the same period last year.
The Company's efficiency ratio, which is the ratio of noninterest expense to net
interest income plus noninterest income, was 66.7 percent for the three months
ended June 30, 2000 compared to 68.6 percent for the three months ended June 30,
1999. The Company's efficiency ratio was 67.3 percent for the six months ended
June 30, 2000 compared to 70.9 percent for the six months ended June 30, 1999.
The improvement in the ratio was primarily due to a greater increase in net
interest income, resulting from the increase in loans, when compared to the
increase in noninterest expense.
PROVISION FOR INCOME TAX
The Company's provision for income tax is a significant reduction of operating
income. The provision for the three months ended June 30, 2000, was $169,000
compared to $145,000 for the three months ended June 30, 1999. The provision for
the six months ended June 30, 2000, was $331,000 compared to $262,000 for the
six months ended June 30, 1999. The provision represents an effective taxing
rate of approximately 30 percent during 2000 and 1999, respectively. 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.
-14-
<PAGE>
FINANCIAL CONDITION
The Company's total consolidated assets were $143.9 million as of June 30, 2000,
compared to $133.8 million as of December 31, 1999. The 7.5 percent increase in
assets was primarily in loans, funded by increasing deposits and maturing
securities. The growth in deposits was impacted by the new Graham Branch and
Valley Bank.
INVESTMENT PORTFOLIO
As of June 30, 2000, the Company had $31.0 million of securities
available-for-sale, compared to $33.3 million as of December 31, 1999. The
decrease resulted from maturities and principal repayments on amortizing
securities. As of June 30, 2000, approximately 97 percent of the Company's
securities were classified as available for sale. Management believes that a
high percentage of securities classified as available for sale provides greater
flexibility to respond to interest rate changes and liquidity needs to fund loan
growth.
LOAN PORTFOLIO
Loans were $88.7 million as of June 30, 2000, compared to $78.6 million as of
December 31, 1999. The 13 percent increase was primarily in commercial real
estate loans. The percentage of loans to total assets increased to 62 percent at
June 30, 2000, compared to 59 percent at December 31, 1999. It is management's
intent to grow the loan portfolio and to increase the percent of loans to
assets, which potentially could improve the Company's net interest margin.
The following table sets forth the composition of the Company's loan portfolio
as of the dates indicated.
VALLEY COMMUNITY BANCSHARES, INC.
Loan Portfolio
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
--------------------------- ---------------------------
2000 1999
------------ ------------- ------------- ------------
Amount Percent Amount Percent
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Real Estate
Construction $ 7,743 8.7% $ 7,384 9.4%
Mortgage 17,783 20.0% 15,867 20.2%
Commercial 46,827 52.8% 40,254 51.2%
Commercial 13,463 15.2% 12,892 16.4%
Consumer and other 2,408 2.7% 1,864 2.4%
Lease financing 519 0.6% 377 0.5%
------------ ------------- ------------- ------------
Total loans 88,743 100.0% 78,638 100.0%
============= ============
Deferred loan fees (16) (4)
============ =============
------------ -------------
Net loans $ 88,727 $ 78,634
============ =============
</TABLE>
RISK ELEMENTS
The following table sets forth information concerning the Company's
non-performing assets as of the dates indicated (dollars in thousands).
VALLEY COMMUNITY BANCSHARES, INC.
Non-performing Assets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
Non-performing assets:
Nonaccrual loans $ 14 $ -
Loans 90 days or more past due -
-
Restructured loans - -
-------------- --------------
14 -
Other real estate owned
- -
-------------- --------------
Total non-performing assets $ 14 $ - 0 -
============== ==============
</TABLE>
-15-
<PAGE>
As of June 30, 2000, the Company had $14,000 in nonperforming assets, which
include nonaccrual loans, loans 90 days or more past due and still accruing
interest, and restructured loans. The Company had no nonperforming assets as of
December 31, 1999.
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 the three-month and six-month period ended June 30, 2000 there was one
mortgage loan placed on nonaccrual status in the amount of $14,000. The gross
income that would have been recorded for the six months ended June 30, 2000 if
the nonaccrual loan had been current and in accordance with its original term
approximates $1,000. Interest recognized on the loan for the year was
insignificant. There were no nonaccrual loans during the three-month and
six-months ended June 30, 1999 and therefore, there was no impact to interest
income during that period.
SUMMARY OF LOAN LOSS EXPERIENCE
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
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 loan
losses charged to expense. Loans are charged against the allowance for credit
losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb losses inherent in existing loans, commitments to extend credit and
standby letters of credit based on evaluations of collectibility and prior loss
experience of loans, 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.
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
collectibility of a substantial portion of the Company's loan portfolio may be
susceptible to change in local market conditions in the future.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Company to recognize additional
losses based on their judgment about information available to them at the time
of their examination.
-16-
<PAGE>
The following table sets forth information regarding changes in the Company's
allowance for loan losses for the dates indicated (dollars in thousands):
VALLEY COMMUNITY BANCSHARES, INC.
Loan Loss Experience
<TABLE>
<CAPTION>
Analysis of the Allowance for Loan Losses
Three months ended June 30, Six months ended June 30,
------------ ------------- ------------- ------------
2000 1999 2000 1999
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 986 $ 959 $ 959 $ 883
Charge-offs - - - -
Recoveries: - - - -
Net charge-offs - - - -
Additions charged to operations 32 16 59 15
------------ ------------- ------------- ------------
Balance at end of period $ 1,018 $ 975 $ 1,018 $ 898
============ ============= ============= ============
Average Loans Outstanding $ 87,122 $ 70,940 $ 84,581 $ 69,737
Ratio of net charge-off during the
period to average loans outstanding 0.00% 0.00% 0.00% 0.00%
Ratio of allowance for loan losses
to average loans outstanding 1.17% 1.37% 1.20% 1.29%
</TABLE>
There were no charge-offs or recoveries of loans during the three months and six
ended June 30, 2000 and 1999, respectively. However, the ratio of the allowance
for loan losses to average loans outstanding decreased from 1.29 percent at
December 31, 1999 to 1.20% at June 30, 2000. The decrease was the result of loan
growth exceeding the growth in the allowance for loan losses. The ratio is
anticipated to increase during the balance of the year 2000, as a result of
increased provisions to the allowance for loan losses.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The Allowance for loan losses is maintained at a level considered adequate by
management to provide for loan losses inherent in the loan portfolio based on
management's assessment of various factors affecting the loan portfolio
including, local economic conditions, growth of the loan portfolio and its
composition. Non-performing loans and net charge offs during the periods
presented have been minimal demonstrating strong credit quality. Increases in
the allowance for loan losses made though provisions were primarily a result of
loan growth.
Management determines the adequacy of the allowance for loan losses by utilizing
a loan grading system to determine risk in the loan portfolio and by considering
the results of credit reviews. The loan portfolio is separated by quality and
then by loan type. Loans of acceptable quality are evaluated as a group, by loan
type, with a specific loss rate assigned to the total loans in each type, but
unallocated to any individual loan. Conversely, each adversely classified loan
is individually analyzed, to determine an estimated loss amount. A valuation
allowance is also assigned to these adversely classified loans, but at a higher
loss rate due to the greater risk of loss. For those loans where the estimated
loss is greater than the background percentage, the estimated loss amount is
considered specifically allocated to the allowance.
Although management has allocated a portion of the allowance to the loan
categories using the method described above, the adequacy of the allowance must
be considered as a whole. To mitigate the imprecision in most estimates of
expected loan losses, the allocated component of the allowance is supplemented
by an unallocated component. The unallocated portion includes management's
judgmental determination of the amounts necessary for qualitative factors such
as the consideration of new products and policies, economic conditions,
concentrations of credit risk, and the experience and abilities of lending
personnel. Loan concentrations, quality, terms and basic underlying assumptions
remained substantially unchanged during the period.
The Company uses the historical loss experience method in conjunction with the
specific identification method for calculation of the adequacy of allowance for
loan losses. A six-year average historical loan loss rate is calculated. This
experience loss rate is applied to graded loans that are not adversely
classified for a subtotal of needed allowance.
-17-
<PAGE>
Loans adversely classified are analyzed for potential loss on an individual
basis. This subtotal is added to the experience subtotal and the total is
compared to the allowance for loan losses.
The Company also evaluates current conditions and may adjust the historical loss
estimate by qualitative factors that 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
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 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.
Deposits increased to $122.6 million as of June 30, 2000, compared to
$113.8 million as of December 31, 1999. Time certificates in excess of $100,000
increased to $19.4 million as of June 30, 2000, compared to $14.6 million as of
December 31, 1999.
The following table sets forth the balances for each major category of deposit
by amount and percent during the periods indicated.
VALLEY COMMUNITY BANCSHARES, INC.
Deposits
(dollars in thousands)
<TABLE>
<CAPTION>
Period ended,
------------------------- -------------------------
June 30, 2000 December 31, 1999
------------------------- -------------------------
Amount Percent Amount Rate
------------------------- -------------------------
<S> <C> <C> <C> <C>
Noninterest bearing demand deposits $ 24,009 19.58% $ 21,349 18.76%
Interest bearing demand deposits 16,442 13.41% 15,926 13.99%
Money market deposits 28,043 22.87% 28,603 25.13%
Savings deposits 11,253 9.18% 12,002 10.55%
Time certificates < $100,000 23,509 19.17% 21,374 18.78%
Time certificates > $100,000 19,368 15.79% 14,555 12.79%
------------------------- -------------------------
$122,624 100.00% $113,809 100.00%
========================= =========================
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Management actively analyzes and manages the Company's liquidity position. The
objective of liquidity management is to ensure the availability of sufficient
cash flows to meet all financial commitments and to capitalize on opportunities
for profitable business expansion. Management believes that the Company's cash
flow will be sufficient to support its existing operations for the foreseeable
future.
Cash flows from operations contribute significantly to liquidity as well as
proceeds from maturities of securities and increasing customer deposits. As
indicated on the Company's Consolidated Statement of Cash Flows, net cash from
operating activities for the six months ended June 30, 2000 contributed $1.1
million to liquidity compared to $.8 million for the six months ended June 30,
1999. The majority of the Company's funding comes from customer deposits within
its operating region. Customer deposits provided $8.8 million for the six months
ended June 30, 2000 compared to $2.4 million for the six months ended June 30,
1999. For the first six months ended June 30, 2000, noninterest bearing demand
deposits and certificates of deposit over $100,000 provided the majority of the
deposit growth. The majority of the $19.4 million of certificates of deposit
over $100,000 is from local bank customers and are not solicited from brokers or
municipalities. The Company considers these deposits a stable source of funds.
-18-
<PAGE>
Another important source of liquidity is investments in federal funds and
interest-bearing deposits with banks and the Company's security portfolio. The
Company maintains a ladder of securities that provides prepayments and payments
at maturity and a portfolio of available-for-sale securities that could be
converted to cash quickly. Proceeds from maturities of securities provided $3.7
million for the six months ended June 30, 2000 compared to $7.3 million for the
six months ended June 30, 1999.
At June 30, 2000, the bank held cash and due from banks and Interest bearing
deposits with banks of approximately $16.3 million. In addition, at such date
$31.0 million of the Company's investments were classified as available for
sale.
The Banks have capacity to borrow funds, up to ten percent of assets, from the
Federal Home Loan Bank of Seattle ("FHLB") through pre-approved credit lines as
a secondary source of liquidity. However, these credit lines have pledge
requirements whereby the Banks must maintain unencumbered collateral with a
value at least equal to the outstanding balance. At June 30, 2000, the bank had
$1 million in advances outstanding to the FHLB scheduled to mature during the
third quarter of the Year 2000. The Banks also have committed line of credit
agreements totaling approximately $6.75 million from unaffiliated banks.
The Company's total stockholders' equity increased to $19.0 million at June 30,
2000, from $18.7 million at December 31, 1999. The increase was the result of
net income earned during the six months ended June 30, 2000 partially offset by
an increase in unrealized losses recorded on securities available for sale, net
of income tax and a $.50 dividend paid to stockholders of record on December 31,
1999. At June 30, 2000, stockholders' equity was 13.2 percent of total assets,
compared to 14.0 percent at December 31, 1999.
The market value of available for sale securities was less than book value at
both June 30, 2000 and December 31, 1999, primarily as a result of increasing
interest rates, which resulted in an unrealized loss in the investment
portfolio. Management currently does not anticipate selling the Company's
securities but if required for liquidity or any other purpose, management does
not believe the resulting sale would materially affect the overall condition of
the Company.
CAPITAL ADEQUACY REQUIREMENTS.
The Federal Reserve and the FDIC 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
-19-
<PAGE>
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.
The capital levels of the Company currently exceed applicable regulatory
guidelines, and the Bank's are qualified as "well-capitalized" at June 30, 2000.
Management believes that under the current regulations the Bank's will continue
to meet well-capitalized capital requirements in the foreseeable future.
However, events beyond the control of the Bank's such as a downturn in the
economy where the Banks have most of their loans, could adversely affect future
earnings and, consequently, the ability of the banks to meet future
well-capitalized capital requirements.
The capital amounts and ratios for the Company and the Bank's as of June 30,
2000, are presented in the following table (dollars in thousands):
VALLEY COMMUNITY BANCSHARES, INC.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
---------------------------------------- -------------------------------------------------------
AS OF JUNE 30, 2000 Amount Ratio Amount Ratio
----------- ---------------------------- ---------------------------- --------------------------
<S> <C> <C> <C> <C>
<C> <C>
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 20,261 20.3% MORE THAN OR EQUAL TO $ 8,188 MORE THAN OR EQUAL TO 8.0% MORE THAN OR EQUAL TO
Puyallup Valley Bank $ 13,986 15.5% MORE THAN OR EQUAL TO $ 7,419 MORE THAN OR EQUAL TO 8.0% MORE THAN OR EQUAL TO
Valley Bank $ 3,952 60.6% MORE THAN OR EQUAL TO $ 613 MORE THAN OR EQUAL TO 8.0% MORE THAN OR EQUAL TO
Tier I Capital
(to Risk-Weighted Assets)
Consolidated $ 19,243 19.3% MORE THAN OR EQUAL TO $ 4,094 MORE THAN OR EQUAL TO 4.0% MORE THAN OR EQUAL TO
Puyallup Valley Bank $ 13,062 14.5% MORE THAN OR EQUAL TO $ 3,709 MORE THAN OR EQUAL TO 4.0% MORE THAN OR EQUAL TO
Valley Bank $ 3,858 59.4% MORE THAN OR EQUAL TO $ 307 MORE THAN OR EQUAL TO 4.0% MORE THAN OR EQUAL TO
Tier I Capital
(to Average Assets)
Consolidated $ 19,243 14.0% MORE THAN OR EQUAL TO $ 5,603 MORE THAN OR EQUAL TO 4.0% MORE THAN OR EQUAL TO
Puyallup Valley Bank $ 13,062 10.4% MORE THAN OR EQUAL TO $ 5,188 MORE THAN OR EQUAL TO 4.0% MORE THAN OR EQUAL TO
Valley Bank $ 3,858 49.1% MORE THAN OR EQUAL TO $ 363 MORE THAN OR EQUAL TO 4.0% MORE THAN OR EQUAL TO
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capital Capitalized Under
Prompt Corrective
Action Provisions
------------------------------------------
AS OF JUNE 30, 2000 Amount Ratio
-------------------------------- -------
<S> <C> <C>
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 10,235 MORE THAN OR EQUAL TO 10.0%
Puyallup Valley Bank $ 9,273 MORE THAN OR EQUAL TO 10.0%
Valley Bank $ 766 MORE THAN OR EQUAL TO 10.0%
Tier I Capital
(to Risk-Weighted Assets)
Consolidated $ 6,141 MORE THAN OR EQUAL TO 6.0%
Puyallup Valley Bank $ 5,564 MORE THAN OR EQUAL TO 6.0%
Valley Bank $ 460 MORE THAN OR EQUAL TO 6.0%
Tier I Capital
(to Average Assets)
Consolidated $ 7,004 MORE THAN OR EQUAL TO 5.0%
Puyallup Valley Bank $ 6,485 MORE THAN OR EQUAL TO 5.0%
Valley Bank $ 454 MORE THAN OR EQUAL TO 5.0%
</TABLE>
YEAR 2000
Problems associated with computer system hardware and software and the use of
two digits to define the year, referred to as Year 2000 issue, could affect the
Company's business. To date the Company is not aware of any significant Year
2000 issue relating to internally developed programs and systems, or systems
provided by others. Although January 1, 2000 is past, it is possible that
problems have gone undetected, or that other dates in the year 2000 may further
affect computer software and systems.
These problems could disrupt business and require the Company to incur
significant, unanticipated expenses to remedy them. They could also result in
claims and litigation against the Company, which could subject the Company to
significant costs and could require substantial attention from management.
Similarly, the Company's business could be severely affected if vendors of
critical software and systems, third-party service providers, and customers
encounter Year 2000 issues. Based on the Company's Year 2000 efforts, management
does not believe the Year 2000 will result in significant operational problems.
-20-
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's results of operation are dependent upon its ability to manage
interest rate risk. Management considers interest rate risk to be a significant
risk that could have a material effect on the Company's financial condition and
results of operations. The Company does not currently use derivatives to manage
market and interest rate risk.
A number of measures are used to monitor and manage interest rate risk,
including income simulations and interest sensitivity (gap) analyses. An income
simulation model is the primary tool used to assess the direction and magnitude
of changes in net interest income resulting from changes in interest rates. Key
assumptions in the model include repayment speeds on certain assets, cash flows
and maturities of other investment securities, loan and deposit volumes and
pricing. These assumptions are inherently uncertain and, as a result, the model
cannot precisely estimate net interest income or precisely predict the impact of
higher or lower interest rates on net interest income.
Actual results will differ from simulated results due to timing, magnitude and
frequency of interest rate changes and changes in market conditions and
management strategies, among other factors. At June 30, 2000, based on the
measures used to monitor and manage interest rate risk, there has not been a
material change in the Company's interest rate risk since December 31, 1999. For
additional information, refer to the Company's initial report on Form 10 for the
year ended December 31, 1999.
-21-
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company faces ordinary routine litigation arising in the normal course of
business. In the opinion of management, liabilities (if any) arising from such
claims will not have a material adverse effect upon the business, results of
operations or financial condition of the Company.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Valley Community Bancshares, Inc.
("Meeting") was held on April 27, 2000. The results of the vote on the matters
presented at the Meeting are as follows:
The following individuals were elected as directors:
Term to Expire Vote For Vote Withheld
Thomas R. Absher 2003 816,538 None
David H. Brown 2003 816,538 None
The terms of Directors William E. Fitchett, A. Eugene Hammermaster, David K.
Hamry, Steven M. Harris, Warren D Hunt, and Roger L. Knutson continued after the
meeting.
Item 5. OTHER INFORMATION
(a) 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 amount
of the dividend was $562,780.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b )Reports on Form 8-K
No report on Form 8-K was filed by Valley Community Bancshares, Inc.
during the three months ending June 30, 2000.
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VALLEY COMMUNITY BANCSHARES, INC.
(Registrant)
Date August 3, 2000 /s/ David H. Brown
---------------------- -----------------------
David H. Brown
President and
Chief Executive Officer
Date August 3, 2000 /s/ Joseph E. Riordan
---------------------- -----------------------
Joseph E. Riordan
Senior Vice President and
Chief Financial Officer
-23-
