<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 September 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 November 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
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<S> <C>
Item 1. Financial Statements
Independent Accountant's Report 1
Condensed Consolidated Balance Sheet - September 30, 2000 and December 31, 1999 2
Condensed Consolidated Statement of Income - Three Months and Nine Months
Ended September 30, 2000 and 1999 3
Condensed Consolidated Statement of Cash Flows - Nine Months Ended
September 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 20
PART II OTHER INFORMATION 21
Signatures 22
</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") as of September 30,
2000, and the related condensed consolidated statements of income for the three
and nine month periods ended September 30, 2000 and cash flows for the
nine-month period ended September 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
October 25, 2000
-1-
<PAGE>
VALLEY COMMUNITY BANCSHARES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,914 $ 5,127
Interest-bearing deposits with banks 18,154 9,692
Securities available-for-sale 32,111 33,262
Securities held-to-maturity 1,035 1,241
Federal Home Loan Bank stock 441 420
----------- -----------
56,655 49,742
Loans 90,616 78,634
Less allowance for loan losses 1,040 959
----------- -----------
Loans, net 89,576 77,675
Accrued interest receivable 871 851
Premises and equipment, net 5,656 4,717
Real estate held for investment 224 224
Other assets 587 628
----------- -----------
Total assets $ 153,569 $ 133,837
=========== ===========
LIABILITIES
Deposits
Noninterest-bearing $ 24,316 $ 21,349
Interest-bearing 108,182 92,460
----------- -----------
Total deposits 132,498 113,809
Other borrowed funds 509 539
Accrued interest payable 580 347
Other liabilities 446 418
----------- -----------
Total liabilities 134,033 115,113
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share; 5,000,000 shares
authorized; 1,133,588 and 1,125,561 shares issued
and outstanding in 2000 and 1999, respectively 1,134 1,126
Additional paid-in capital 16,322 16,286
Retained earnings 2,222 1,569
Accumulated other comprehensive income (loss), net of tax (142) (257)
----------- -----------
Total stockholders' equity 19,536 18,724
----------- -----------
Total liabilities and stockholders' equity $ 153,569 $ 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)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 2,039 $ 1,580 $ 5,816 $ 4,575
Interest on federal funds sold and deposits in banks 226 195 480 597
Interest on securities 475 508 1,412 1,418
------------ ------------ ------------- ------------
Total interest income 2,740 2,283 7,708 6,590
------------ ------------ ------------- ------------
INTEREST EXPENSE
Interest on deposits 1,006 747 2,644 2,185
Interest on federal funds and other short-term
borrowings 8 6 39 14
------------ ------------ ------------- ------------
Total interest expense 1,014 753 2,683 2,199
------------ ------------ ------------- ------------
Net interest income 1,726 1,530 5,025 4,391
PROVISION FOR LOAN LOSSES 43 21 102 52
------------ ------------ ------------- ------------
Net interest income after provision
for loan losses 1,683 1,509 4,923 4,339
------------ ------------ ------------- ------------
NONINTEREST INCOME
Service charges 87 85 241 247
Gain on sale of investment securities, net - - - 1
Origination fees on mortgage loans brokered 20 12 25 45
Other operating income 84 54 214 150
------------ ------------ ------------- ------------
Total noninterest income 191 151 480 443
------------ ------------ ------------- ------------
NONINTEREST EXPENSE
Salaries 500 463 1,476 1,368
Employee benefits 126 99 377 318
Occupancy 120 116 349 340
Equipment 128 121 357 343
Other operating expenses 364 347 1,095 1,013
------------ ------------ ------------- ------------
Total noninterest expense 1,238 1,146 3,654 3,382
------------ ------------ ------------- ------------
INCOME BEFORE INCOME TAX 636 514 1,749 1,400
PROVISION FOR INCOME TAX 202 136 533 398
------------ ------------ ------------- ------------
NET INCOME $ 434 $ 378 $ 1,216 $ 1,002
============ ============ ============= ============
EARNINGS PER SHARE
Basic $ 0.38 $ 0.34 $ 1.08 $ 0.90
Diluted $ 0.38 $ 0.33 $ 1.05 $ 0.87
Weighted average shares outstanding 1,133,588 1,123,586 1,130,777 1,118,504
Weighted average diluted shares outstanding 1,153,049 1,156,741 1,154,281 1,151,941
</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>
Nine Months Ended
September 30,
-----------------------------
2000 1999
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,216 $ 1,002
Adjustments to reconcile net income to net cash
from operating activities
Provisions for loan losses 102 52
Depreciation 317 305
Deferred income tax (9) -
Net amortization on securities 25 58
FHLB stock dividends (21) (22)
Gain on sale of securities available-for-sale - (1)
Decrease in accrued interest receivable (20) (6)
Increase (decrease) in other assets (8) 71
Increase in accrued interest payable 234 32
Increase (decrease) in other liabilities 28 (61)
----------- ----------
Net cash from operating activities 1,864 1,430
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold - 2,530
Net increase in interest-bearing deposits with banks (8,462) (4,030)
Purchase of securities available-for-sale (4,273) (16,536)
Proceeds from sales of securities available-for-sale - 1,001
Proceeds from maturities of securities available-for-sale 5,571 9,516
Proceeds from maturities of securities held-to-maturity 206 662
Purchase stock in FHLB - (35)
Net increase in loans (12,003) (7,407)
Additions to premises and equipment (1,256) (1,033)
----------- ----------
Net cash from investing activities (20,217) (15,332)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 18,689 8,598
Net increase (decrease) in other borrowed funds (30) 271
Cash dividends paid (563) (134)
Common stock issued - 3,591
Stock options exercised 44 28
----------- ----------
Net cash from financing activities 18,140 12,354
----------- ----------
NET DECREASE IN CASH AND DUE (213) (1,548)
FROM BANKS
CASH AND DUE FROM BANKS, beginning of year 5,127 5,630
----------- ----------
CASH AND DUE FROM BANKS, at end of period $ 4,914 $ 4,082
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for
Interest $ 2,450 $ 2,167
Income taxes 562 406
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Unrealized gains (losses) on securities available-for-sale $ 173 $ (456)
Deferred tax on unrealized (gains) losses on securities
available-for-sale (58) 155
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
nine-month periods ended September 30, 2000 and September 30, 1999 without audit
by the Company's independent auditors. However, the financial statements have
been prepared in accordance with generally accepted accounting principles 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 nine-months ended September 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 principles 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 for the year ended
December 31, 1999 and notes thereto included in the Company's Form 10 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 nine months ended September 30, 2000 and 1999
(dollars in thousands, except per share amounts).
<TABLE>
<CAPTION>
VALLEY COMMUNITY BANCSHARES, INC. Three Months Ended Nine Months Ended
Earnings Per Share September 30, September 30,
------------------------------ -----------------------------
2000 1999 2000 1999
-------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income $ 434 $ 378 $ 1,216 $ 1,002
DENOMINATOR:
Denominator for basic earnings per share:
Weighted average shares 1,133,588 1,123,586 1,130,777 1,118,504
Effect of diluted securities - stock options 19,461 33,155 23,504 33,437
Denominator for diluted earnings per share:
Weighted average shares and assumed
conversion of diluted stock options 1,153,049 1,156,741 1,154,281 1,151,941
Basic earnings per share $ 0.38 $ 0.34 $ 1.08 $ 0.90
Diluted earnings per share $ 0.38 $ 0.33 $ 1.05 $ 0.87
</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>
September 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 $ 17,687 $ 39 $ 122 $ 17,604
State and political subdivisions 4,426 7 24 4,409
Mortgage-backed securities 8,707 14 106 8,615
Other 1,508 - 25 1,483
------------- ------------ ------------- -------------
32,328 60 277 32,111
------------- ------------ ------------- -------------
Securities Held-to-Maturity
U.S. Treasury and U.S. Government
corporations and agencies 250 15 - 265
State and political subdivisions 785 - - 785
------------- ------------ ------------- -------------
1,035 15 - 1,050
------------- ------------ ------------- -------------
$ 33,363 $ 75 $ 277 $ 33,161
============= ============ ============= =============
</TABLE>
<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
============= ============ ============= =============
</TABLE>
-6-
<PAGE>
Note 4 - Loans
The major classifications of loans at September 30, 2000 and December 31, 1999
are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
----------- -----------
2000 1999
----------- -----------
Amount Amount
----------- -----------
<S> <C> <C>
Real Estate
Construction $ 6,303 $ 7,384
Mortgage 17,487 15,867
Commercial 49,755 40,254
Commercial 13,961 12,892
Consumer and other 2,621 1,864
Lease financing 493 377
----------- -----------
Total loans 90,620 78,638
Deferred loan fees (4) (4)
----------- -----------
Net loans $ 90,616 $ 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 September 30, 2000 totaled $1,040,000
representing a net increase of $81,000 or 8% compared to $959,000 at December
31, 1999. The increase is primarily due to an increase in loans by 15% since
December 31, 1999. Management believes that the allowance for loan losses at
September 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 changes 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 September 30, Nine months ended September 30,
------------ ------------- ------------ ------------
2000 1999 2000 1999
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 1,018 $ 914 $ 959 $ 883
Charge-offs 21 7 21 7
Recoveries: - - - -
Net charge-offs 21 7 21 7
Additions charged to operations 43 21 102 52
------------ ------------- ------------ ------------
Balance at end of period $ 1,040 $ 928 $ 1,040 $ 928
============ ============= ============ ============
</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 in January 1999 the Company 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 Banks provide 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 sources 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 Banks' lending activity consists of
short-to-medium-term commercial and consumer loans, including operating loans
and lines of credit, equipment loans, automobile loans, recreational vehicle and
truck loans, personal loans or lines of credit, home improvement loans and
rehabilitation loans. The Banks also offer cash management services, merchant
credit card processing, safe deposit boxes, wire transfers, direct deposit of
payroll and social security checks, automated teller machine access, and
automatic drafts for various accounts.
PUYALLUP VALLEY BANK
Puyallup Valley Bank is a Washington state-chartered commercial bank which
commenced operations in October, 1973. The Bank 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.
-8-
<PAGE>
VALLEY BANK
Valley Bank is a Washington state-chartered commercial bank which commenced
operations in January, 1999. The Bank provides full-service banking to
businesses and residents within the Auburn community and its surrounding area.
Valley Bank offers commercial banking services to small and medium size
businesses, professionals and retail customers in the Bank's market area.
Both Puyallup Valley Bank and Valley Bank are solely owned subsidiaries of the
Company.
RESULTS OF OPERATION
The Company earned net income of $434,000 or $0.38 per diluted share for the
three months ended September 30, 2000, compared to net income of $378,000, or
$0.33 per diluted share, for the three months ended September 30, 1999, an
increase of 14.8 percent. The Company's return on average assets was 1.16
percent for the three months ended September 30, 2000, compared to 1.11 percent
for the three months ended September 30, 1999.
Net income was $1,216,000, or $1.05 per diluted share for the nine months ended
September 30, 2000, compared to net income of $1,002,000, or $0.87 per diluted
share, for the nine months ended September 30, 1999, an increase of 21.4
percent. The Company's return on average assets was 1.15 percent for the nine
months ended September 30, 2000, compared to 1.02 percent for the nine months
ended September 30, 1999.
The increase in net income for both the three and nine month periods ended
September 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.
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 $470,000 and
$1,312,000 for the three and nine months ended September 30, 2000, respectively,
compared to $405,000 and $1,113,000 for the three and nine months ended
September 30, 1999, respectively. Valley Bank, incurred losses of $33,000 and
$75,000 for the three and nine months ended September 30, 2000, respectively,
compared to losses of $19,000 and $104,000 for the three and nine months ended
September 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 nine months ended September 30, 2000 and 1999, respectively.
<TABLE>
<CAPTION>
VALLEY COMMUNITY BANCSHARES, INC.
Selected Financial Data
(dollars in thousands, except per share amounts) THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FINANCIAL PERFORMANCE
Net Income $ 434 $ 378 $ 1,216 $ 1,002
Average Assets 148,080 134,950 140,791 131,349
Average Stockholders' Equity 19,323 18,280 18,821 18,039
Return on Assets (net income divided by average assets) 1.16% 1.11% 1.15% 1.02%
Return on Equity (net income divided by average equity) 8.91% 8.20% 8.61% 7.43%
Net Interest Margin (net interest income (tax adjusted)
divided by earning assets) 5.10% 4.97% 5.25% 4.95%
Efficiency Ratio (noninterest expense divided by
noninterest income plus net interest income) 64.58% 68.17% 66.38% 69.96%
</TABLE>
-9-
<PAGE>
NET INTEREST INCOME
The component contributing most significantly to the Company's 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 September 30, 2000, the Company's
net interest margin was 5.10 percent compared to 4.97 percent for the three
months ended September 30, 1999. For the nine months ended September 30, 2000,
the Company's net interest margin was 5.25 percent compared to 4.95 percent for
the nine months ended September 30, 1999.
Net interest income for the three months ended September 30, 2000 totaled
$1,726,000 compared to $1,530,000 for the three months ended September 30, 1999,
a 12.8 percent increase. Net interest income for the nine months ended September
30, 2000 totaled $5,025,000 compared to $4,391,000 for the nine months ended
September 30, 1999, a 14.4 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 $2,740,000 for the three months ended September 30, 2000
compared to $2,283,000 for the three months ended September 30, 1999. Interest
income was $7,708,000 for the nine months ended September 30, 2000 compared to
$6,590,000 for the nine months ended September 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 8.05 percent for the three months ended
September 30, 2000 compared to 7.36 percent during the same period a year ago.
The yield on interest-earning assets increased to 8.00 percent for the nine
months ended September 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 $1,014,000 for the three months ended September 30, 2000
compared to $753,000 for the three months ended September 30, 1999. Interest
expense was $2,683,000 for the nine months ended September 30, 2000 compared to
$2,199,000 for the nine months ended September 30, 1999. The increase was due to
an increase in the cost of funds and growth in interest bearing liabilities. The
cost of funds increased to 3.86 percent for the three months ended September 30,
2000 compared to 3.21 percent during the same period a year ago. The cost of
funds increased to 3.65 percent for the nine months ended September 30, 2000
compared to 3.25 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 nine months ended September 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 September 30:
VALLEY COMMUNITY BANCSHARES, INC.
AVERAGE BALANCES AND INTEREST RATES EARNED/PAID
(dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
2000 1999
-------------------------------- --------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
balance 1 expense 2 rate balance 1 expense 2 rate
--------- --------- ---- --------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Loans (including fees) $ 89,601 $ 2,039 9.03% $ 72,659 $ 1,580 8.63%
Investment securities 32,381 484 5.93% 37,376 540 5.73%
Interest bearing deposits with banks 14,171 240 6.72% 14,018 185 5.24%
Federal funds sold - - 0.00% 683 9 5.23%
Federal Home Loan Bank Stock 433 7 6.41% 405 7 6.86%
-------------------------------- --------------------------------
Total Interest-earning assets 136,586 $ 2,770 8.05% 125,141 $ 2,321 7.36%
Total noninterest-earning assets 11,494 9,809
------------ ------------
TOTAL ASSETS $ 148,080 $ 134,950
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits $ 103,458 $ 1,006 3.86% $ 92,649 $ 747 3.20%
Other borrowed funds 768 8 4.13% 411 6 5.79%
-------------------------------- --------------------------------
Total Interest-bearing
liabilities 104,226 $ 1,014 3.86% 93,060 $ 753 3.21%
Noninterest-bearing liabilities 24,531 23,610
Stockholders' equity 19,323 18,280
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 148,080 $ 134,950
============ ============
------------------ ------------------
Net interest spread $ 1,756 4.19% $ 1,568 4.15%
Margin Analysis
Interest income/earning assets $ 2,770 8.05% $ 2,321 7.36%
Interest expense/earning assets 1,014 2.95% 753 2.39%
------------------ ------------------
Net interest margin $ 1,756 5.10% $ 1,568 4.97%
</TABLE>
1 Average loan balance includes 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 nine months ended September 30:
VALLEY COMMUNITY BANCSHARES, INC.
AVERAGE BALANCES AND INTEREST RATES EARNED/PAID
(dollars in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended September 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) $ 86,254 $ 5,816 8.98% $ 70,711 $ 4,575 8.65%
Investment securities 33,297 1,482 5.93% 35,209 1,511 5.74%
Interest bearing deposits with banks 9,937 480 6.43% 13,676 537 5.25%
Federal funds sold - - 0.00% 1,639 60 4.89%
Federal Home Loan Bank Stock 427 21 6.55% 385 21 7.29%
------------ ---------- -------- ------------ -------------------
Total Interest-earning assets 129,915 $ 7,799 8.00% 121,620 $ 6,704 7.37%
Total noninterest-earning assets 10,876 9,729
------------ ------------
TOTAL ASSETS $ 140,791 $ 131,349
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits $ 96,989 $ 2,644 3.63% $ 90,258 $ 2,185 3.24%
Other borrowed funds 853 39 6.09% 295 14 6.35%
------------ ---------- -------- ------------ -------------------
Total Interest-bearing
liabilities 97,842 $ 2,683 3.65% 90,553 $ 2,199 3.25%
Noninterest-bearing liabilities 24,128 22,757
Stockholders' equity 18,821 18,039
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 140,791 $ 131,349
============ ============
---------- -------- -------------------
Net interest spread $ 5,116 4.34% $ 4,505 4.12%
Margin Analysis
Interest income/ earning assets $ 7,799 8.00% $ 6,704 7.37%
Interest expense/earning assets 2,683 2.75% 2,199 2.42%
---------- -------- -------------------
Net interest margin $ 5,116 5.25% $ 4,505 4.95%
</TABLE>
1 Average loan balance includes 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 September 30, 2000
compared to the three months ended September 30, 1999 and for the nine month
period ended September 30, 2000 compared to the nine months ended September 30,
1999.
VALLEY COMMUNITY BANCSHARES, INC.
Volume/Rate Analysis - For the Three Months ended September 30,
(dollars in thousands)
<TABLE>
<CAPTION>
2000 Compared to 1999
-----------------------------------------
Volume Rate Net
------ ---- ---
<S> <C> <C> <C>
Interest income
Loans (including fees) $ 376 $ 83 $ 459
Investment securities (75) 19 (56)
Interest bearing deposits with banks 2 53 55
Federal funds sold (5) (5) (10)
Federal Home Loan Bank Stock - - -
------------ ------------- ------------
Total Interest-earning assets 298 150 448
Interest-bearing liabilities
Total deposits 127 132 259
Other borrowed funds 4 (2) 2
------------ ------------- ------------
Total Interest-bearing
liabilities 131 130 261
------------ ------------- ------------
Net interest income $ 167 $ 20 $ 187
============ ============= ============
</TABLE>
VALLEY COMMUNITY BANCSHARES, INC.
Volume/Rate Analysis - For the Nine Months ended September 30,
(dollars in thousands)
<TABLE>
<CAPTION>
2000 Compared to 1999
-----------------------------------------
Volume Rate Net
------ ---- ---
<S> <C> <C> <C>
Interest income
Loans (including fees) $ 1,119 $ 122 $ 1,241
Investment securities (26) (3) (29)
Interest bearing deposits with banks (78) 21 (57)
Federal funds sold (52) (8) (60)
Federal Home Loan Bank Stock 4 (4) -
------------ ------------- ------------
Total Interest-earning assets 967 128 1,095
Interest-bearing liabilities
Total deposits 454 5 459
Other borrowed funds 27 (2) 25
------------ ------------- ------------
Total Interest-bearing
liabilities 481 3 484
------------ ------------- ------------
Net interest income $ 486 $ 125 $ 611
============ ============= ============
</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
$43,000 for loan losses for the three months ended September 30, 2000 compared
to $21,000 during the same three-month period last year. The Company provided
$102,000 for loan losses for the nine months ended September 30, 2000 compared
to $52,000 during the same nine month period last year. The provision was made
as a result of increasing loans.
As a result of the increase in the provision for loan losses management believes
the amount of 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 $191,000 for the three months ended September 30, 2000, a
26 percent increase from $151,000 for the three months ended September 30, 1999.
Noninterest income was $480,000 for the nine months ended September 30, 2000, a
8 percent increase from $443,000 for the nine months ended September 30, 1999.
The increase in noninterest income for the third quarter was primarily the
result of higher origination fees on mortgage loans brokered, commissions earned
on annuity and mutual fund sales, and income received on newly issued bank debit
cards. Origination fees on mortgage loans brokered decreased for the nine months
ended September 30, 2000 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 $1,238,000 for the three months ended September 30,
2000, compared to $1,146,000 for the three months ended September 30, 1999, an 8
percent increase. Noninterest expense was $3,654,000 for the nine months ended
September 30, 2000, compared to $3,382,000 for the nine months ended September
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 3.32
percent for the three months ended September 30, 2000, compared to 3.37 percent
during the same period last year. The percentage of noninterest expense to
average assets was 3.46 percent for the nine months ended September 30, 2000,
compared to 3.44 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 64.6 percent for the three months
ended September 30, 2000 compared to 68.2 percent for the three months ended
September 30, 1999. The Company's efficiency ratio was 66.4 percent for the nine
months ended September 30, 2000 compared to 70.0 percent for the nine months
ended September 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 September 30, 2000, was
$202,000 compared to $136,000 for the three months ended September 30, 1999. The
provision for the nine months ended September 30, 2000, was $533,000 compared to
$398,000 for the nine months ended September 30, 1999. The provision represents
an effective taxing rate of approximately 30 percent during 2000 and 28 percent
during 1999. The Company's marginal tax rate is currently 34 percent. The
difference between the Company's effective and marginal tax rate is primarily
related to investments made in tax-exempt securities. The increase in the
Company's effective taxing rate results from a decrease in the amount of tax
exempt securities held for the nine months ended September 30, 2000, compared to
the same period a year ago.
-14-
<PAGE>
FINANCIAL CONDITION
The Company's total consolidated assets were $153.6 million as of September 30,
2000, compared to $133.8 million as of December 31, 1999. The 14.8 percent
increase in assets was primarily in interest bearing deposits with banks and
loans, funded by increasing deposits and maturing securities. The increase in
interest bearing deposits with banks represents the temporary investment of
funds received from several larger money market depositors, which are
anticipated to be withdrawn during the fourth quarter of 2000. The Graham
Branch, established November 1998, and Valley Bank also impacted the growth in
deposits.
INVESTMENT PORTFOLIO
As of September 30, 2000, the Company had $32.1 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 September 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 $90.6 million as of September 30, 2000, compared to $78.6 million as
of December 31, 1999. The 15.3 percent increase was primarily in commercial real
estate loans. The percentage of loans to total assets was 59 percent at
September 30, 2000 and 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.
<TABLE>
<CAPTION>
Loan Portfolio
(dollars in thousands) September 30, December 31,
--------------------------- ---------------------------
2000 1999
------------ ------------- ------------- ------------
Amount Percent Amount Percent
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Real Estate
Construction $ 6,303 7.0% $ 7,384 9.4%
Mortgage 17,487 19.3% 15,867 20.2%
Commercial 49,755 54.9% 40,254 51.2%
Commercial 13,961 15.4% 12,892 16.4%
Consumer and other 2,621 2.9% 1,864 2.4%
Lease financing 493 0.5% 377 0.5%
------------ ------------- ------------- ------------
Total loans 90,620 100.0% 78,638 100.0%
============= ============
Deferred loan fees (4) (4)
------------ -------------
Net loans $ 90,616 $ 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>
September 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
Non-performing assets:
Nonaccrual loans $ - $ -
Loans 90 days or more past due -
-
Restructured loans - -
-------------- --------------
- -
Other real estate owned
- -
============== ==============
Total non-performing assets $ - $ -
============== ==============
</TABLE>
-15-
<PAGE>
As of September 30, 2000, the Company had no 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 nine-month period ended September 30, 2000 there was
two loans placed on nonaccrual status, and subsequently charged-off in the
amount of $21,000. The gross income that would have been recorded for the nine
months ended September 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 nine-months ended September 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 Nine months ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 1,018 $ 914 $ 959 $ 883
Charge-offs 21 7 21 7
Recoveries: - - - -
Net charge-offs 21 7 21 7
Additions charged to operations 43 21 102 52
------------- ------------ ------------ -------------
Balance at end of period $ 1,040 $ 928 $ 1,040 $ 928
============= ============ ============ =============
Average Loans Outstanding $ 89,601 $ 72,659 $ 86,254 $ 70,711
Ratio of net charge-off during the
period to average loans outstanding 0.02% 0.01% 0.02% 0.01%
Ratio of allowance for loan losses
to average loans outstanding 1.16% 1.28% 1.21% 1.31%
</TABLE>
There were $21,000 in charge-offs loans during the three months and nine months
ended September 30, 2000 and $7,000 in charge-offs of loans in 1999. The ratio
of the allowance for loan losses to average loans outstanding decreased from
1.29 percent at December 31, 1999 to 1.16 percent during the three months ended
September 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 amount of the allowance for loan losses by utilizing a
loan grading system to determine risk in the loan portfolio and by considering
the results of credit reviews. The loan portfolio is separated by quality and
then by loan type. Loans of acceptable quality are evaluated as a group, by loan
type, with a specific loss rate assigned to the total loans in each type, but
unallocated to any individual loan. Conversely, each adversely classified loan
is individually analyzed, to determine an estimated loss amount. A valuation
allowance is also assigned to these adversely classified loans, but at a higher
loss rate due to the greater risk of loss. For those loans where the estimated
loss is greater than the background percentage, the estimated loss amount is
considered specifically allocated to the allowance.
Although management has allocated a portion of the allowance to the loan
categories using the method described above, the adequacy of the allowance must
be considered as a whole. To mitigate the imprecision in most estimates of
expected loan losses, the allocated component of the allowance is supplemented
by an unallocated component. The unallocated portion includes management's
judgmental determination of the amounts necessary for qualitative factors such
as the consideration of new products and policies, economic conditions,
concentrations of credit risk, and the experience and abilities of lending
personnel. Loan concentrations, quality, terms and basic underlying assumptions
remained substantially unchanged during the period.
The Company uses the historical loss experience method in conjunction with the
specific identification method for calculation of the amount of allowance for
loan losses. A six-year average historical loan loss rate is calculated. This
-17-
<PAGE>
experience loss rate is applied to graded loans that are not adversely
classified for a subtotal of needed allowance. Loans adversely classified are
analyzed for potential loss on an individual basis. This subtotal is added to
the experience subtotal and the total is compared to the allowance for loan
losses.
The Company also evaluates current conditions and may adjust the historical loss
estimate by qualitative factors that 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 a low
cost funding source. In addition, the Company offers a variety of
interest-bearing accounts designed to attract both short-term and longer-term
deposits from customers. Interest-bearing accounts earn interest at rates
established by 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 balances for each major category of deposit
by amount and percent during the periods indicated.
VALLEY COMMUNITY BANCSHARES, INC.
<TABLE>
<CAPTION>
Deposits
(dollars in thousands) Period ended,
------------------------- -------------------------
September 30, 2000 December 31, 1999
------------------------- -------------------------
Amount Percent Amount Rate
------------------------- -------------------------
<S> <C> <C> <C> <C>
Noninterest bearing demand deposits $ 24,316 18.35% $ 21,349 18.76%
Interest bearing demand deposits 16,641 12.56% 15,926 13.99%
Money market deposits 38,213 28.84% 28,603 25.13%
Savings deposits 10,852 8.19% 12,002 10.55%
Time certificates < $100,000 23,554 17.78% 21,374 18.78%
Time certificates > $100,000 18,922 14.28% 14,555 12.79%
------------------------- -------------------------
$132,498 100.00% $113,809 100.00%
========================= =========================
</TABLE>
Deposits increased to $132.5 million as of September 30, 2000, compared to
$113.8 million as of December 31, 1999. Time certificates in excess of $100,000
increased to $18.9 million as of September 30, 2000, compared to $14.6 million
as of December 31, 1999. The $9.6 million increase in money market deposits was
the result of large deposits by several commercial customers. These funds are
considered temporary and are anticipated to be withdrawn during the fourth
quarter of 2000.
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 Condensed Consolidated Statement of Cash Flows, net
cash from operating activities for the nine months ended September 30, 2000
contributed $1.9 million to liquidity compared to $1.4 million for the nine
months ended September 30, 1999. The majority of the Company's funding comes
from customer deposits within its operating region. Customer deposits provided
$18.7 million for the nine months ended September 30, 2000 compared to $8.6
million for the nine months ended September 30, 1999. For the first nine months
ended September 30, 2000, noninterest bearing demand deposits, money market
deposits, and
-18-
<PAGE>
certificates of deposit over $100,000 provided the majority of the deposit
growth. The majority of the $18.9 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.
The increase in money market deposit is considered temporary and is invested in
short-term interest bearing deposits with banks pending withdrawal.
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 $5.8
million for the nine months ended September 30, 2000 compared to $10.2 million
for the nine months ended September 30, 1999.
At September 30, 2000, the bank held cash and due from banks and interest
bearing deposits with banks of approximately $23.1 million. In addition, at such
date $32.1 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 September 30, 2000, the bank
had no advances outstanding to the FHLB. In addition, to the FHLB credit line,
the Banks have committed line of credit agreements totaling approximately $6.75
million from unaffiliated banks.
The Company's total stockholders' equity increased to $19.5 million at September
30, 2000, from $18.7 million at December 31, 1999. The increase was the result
of net income earned during the nine months ended September 30, 2000 and an
decrease in unrealized losses recorded on securities available for sale, net of
income tax, partially offset by a $.50 dividend paid to stockholders of record
on December 31, 1999. At September 30, 2000, stockholders' equity was 12.7
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 September 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
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<PAGE>
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.
The capital levels of the Company currently exceed applicable regulatory
guidelines, and the Bank's are qualified as "well-capitalized" at September 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 September
30, 2000, are presented in the following table (dollars in thousands):
VALLEY COMMUNITY BANCSHARES, INC.
<TABLE>
<CAPTION>
To Be Well
Capital Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ---------------------- ----------------------
AS OF SEPTEMBER 30, 2000 Amount Ratio Amount Ratio Amount Ratio
------------ -------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 20,717 19.6% > $ 8,440 > 8.0% > $ 10,551 > 10.0%
- - - -
Puyallup Valley Bank $ 14,138 15.0% > $ 7,557 > 8.0% > $ 9,446 > 10.0%
- - - -
Valley Bank $ 3,934 43.5% > $ 723 > 8.0% > $ 904 > 10.0%
- - - -
Tier I Capital
(to Risk-Weighted Assets)
Consolidated $ 19,677 18.7% > $ 4,220 > 4.0% > $ 6,330 > 6.0%
- - - -
Puyallup Valley Bank $ 13,207 14.0% > $ 3,779 > 4.0% > $ 5,668 > 6.0%
- - - -
Valley Bank $ 3,825 42.3% > $ 362 > 4.0% > $ 543 > 6.0%
- - - -
Tier I Capital
(to Average Assets)
Consolidated $ 19,677 13.3% > $ 5,905 > 4.0% > $ 7,381 > 5.0%
- - - -
Puyallup Valley Bank $ 13,207 9.9% > $ 5,344 > 4.0% > $ 6,679 > 5.0%
- - - -
Valley Bank $ 3,825 30.2% > $ 507 > 4.0% > $ 634 > 5.0%
- - - -
</TABLE>
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 September 30, 2000, based on the
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<PAGE>
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.
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
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Valley Community Bancshares, Inc. filed no report on Form 8-K during
the three months ending September 30, 2000.
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<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 NOVEMBER 3, 2000 /s/
-------------------
David H. Brown
President and
Chief Executive Officer
DATE NOVEMBER 3, 2000 /s/
------------------
Joseph E. Riordan
Senior Vice President and
Chief Financial Officer
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