Valley Ridge Financial 10QSB 2002 Q1 Quarterly report (small business)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-QSB


[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2002

OR

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number:333-00724

VALLEY RIDGE FINANCIAL CORP.
(Exact Name of Small Business Issuer as Specified in its Charter)

Michigan (State or Other Jurisdiction of Incorporation or Organization)	38-2888214 (I.R.S. Employer Identification No.)
450 W. Muskegon Kent City, Michigan  49330 (Address of Principal Executive Offices)	(616) 678-5911 (Issuer's Telephone Number, Including Area Code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   X      No _____

There were 950,027 shares of Common Stock (no par value) outstanding as of March 31, 2002.

Transitional Small Business Disclosure Format (check one):  Yes           No    X    

VALLEY RIDGE FINANCIAL CORP.
INDEX

PART I.	FINANCIAL INFORMATION	Page No.
	Item 1.  Financial Statements
	Condensed Consolidated Balance Sheets -
	March 31, 2002 (Unaudited) and December 31, 2001	3
	Condensed Consolidated Statements of Income and Comprehensive
	Income - Three Months Ended March 31, 2002 (Unaudited)
	and March 31, 2001 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows -
	Three Months Ended March 31, 2002 (Unaudited) and
	March 31, 2001 (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
	Item 2.  Management's Discussion and Analysis or Plan of Operation	7
PART II.	OTHER INFORMATION
	Item 6.  Exhibits and Reports on Form 8-K	12
SIGNATURES		13

2

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

VALLEY RIDGE FINANCIAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2002			December 31, 2001
	(Unaudited)
ASSETS
Cash and due from banks	$	5,736,737		$	8,130,078
Federal funds sold		4,400,000			0
Cash and cash equivalents		10,136,737			8,130,078
Securities available for sale		29,989,558			27,444,295
Other securities		1,502,368			1,502,368
Loans held for sale		638,925			933,150
Loans		121,942,004			122,581,155
Allowance for loan losses		(1,364,355	)		(1,239,093	)
		120,577,649			121,342,062
Accrued interest receivable		1,146,423			972,535
Premises and equipment, net		5,457,332			5,423,504
Cash surrender value of life insurance policies		2,745,328			2,725,529
Other assets		1,125,293			1,337,063
Total assets	$	173,319,613		$	169,810,584
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing	$	21,707,003		$	22,990,091
Interest-bearing		106,281,919			100,595,152
Total		127,988,922			123,585,243
Federal funds purchased		0			1,000,000
Securities sold under agreement to repurchase		3,395,752			3,352,630
Federal Home Loan Bank advances		22,000,000			22,000,000
Accrued expenses and other liabilities		2,226,530			2,329,881
Total liabilities		155,611,204			152,267,754
Shareholders' equity
Common stock, no par value: 2,000,000 shares
authorized and 950,027 and 949,565 shares outstanding
at March 31, 2002 and December 31, 2001		8,043,580			8,034,990
Retained earnings		9,588,845			9,293,474
Unearned restricted stock		(145,062	)		(145,062	)
Accumulated other comprehensive income		221,046			359,428
Total shareholders' equity		17,708,409			17,542,830
Total liabilities and shareholders' equity	$	173,319,613		$	169,810,584

See accompanying notes to condensed consolidated financial statements.

3

VALLEY RIDGE FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)

	Three Months Ended
	March 31, 2002		March 31, 2001
Interest income
Loans, including fees	$	2,486,069	$	2,700,423
Federal funds sold		22,601		50,317
Securities		380,351		476,372
Total interest income		2,889,021		3,227,112
Interest expense
Deposits		684,208		1,146,165
Other		270,155		373,798
Total interest expense		954,363		1,519,963
Net interest income		1,934,658		1,707,149
Provision for loan losses		45,000		45,000
Net interest income after provision for loan losses		1,889,658		1,662,149
Noninterest income
Service charges		219,723		223,517
Net gain on sales of securities		34,147		108,881
Net gain (loss) on sales of loans		58,760		(1,115	)
Income earned on life insurance policies		39,900		39,900
Other income		226,269		218,401
Total noninterest income		578,799		589,584
Noninterest expense
Salaries and benefits		960,481		867,649
Occupancy		128,546		127,043
Furniture and fixtures		140,900		129,989
Other expense		571,528		585,233
Total noninterest expense		1,801,455		1,709,914
Income before federal income tax		667,002		541,819
Federal income tax expense		181,626		116,902
Net income	$	485,376	$	424,917
Comprehensive income	$	346,994	$	643,734
Basic and diluted earnings per share	$	.51	$	.45

See accompanying notes to condensed consolidated financial statements.

4

VALLEY RIDGE FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Three Months Ended
	March 31, 2002			March 31, 2001
Cash flows from operating activities
Net income	$	485,376		$	424,917
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization		140,715			131,160
Amortization of premiums and discounts on securities, net		9,267			6,339
Provision for loan losses		45,000			45,000
Net gain on sales of securities		(34,147	)		(108,881	)
Net (gain) loss on sales of loans		(58,760	)		1,115
Loans originated for sale		(8,328,681	)		(1,438,776	)
Proceeds from loans sold		8,681,666			1,601,861
Net change in:
Accrued interest receivable and other assets		16,890			(42,960	)
Accrued interest payable and other liabilities		(32,063	)		17,498
Net cash from operating activities		925,263			637,273
Cash flows from investing activities
Loan originations and payments, net		719,413			2,068,585
Proceeds from:
Sales of securities available for sale		5,227,018			9,083,727
Repayments and maturities of securities available for sale		2,042,501			2,188,242
Purchase of:
Securities available for sale		(9,999,572	)		(7,417,130	)
Premises and equipment		(174,689	)		(204,610	)
Net cash from investing activities		(2,183,990	)		5,718,814
Cash flows from financing activities
Net increase in deposits		4,403,679			1,608,162
Net increase in securities sold under agreements
to repurchase		43,122			369,401
Net decrease in federal funds purchased		(1,000,000	)		(1,600,000	)
Advances from Federal Home Loan Bank		0			5,000,000
Repayments of Federal Home Loan Bank advances		0			(5,000,000	)
Stock options exercised		8,590			34,343
Dividends paid		(190,005	)		(170,456	)
Net cash from financing activities		3,265,386			241,450
Net change in cash and cash equivalents		2,006,659			6,597,537
Cash and cash equivalents at beginning of year		8,130,078			7,265,136
Cash and cash equivalents at end of period	$	10,136,737		$	13,862,673

See accompanying notes to condensed consolidated financial statements.

5

VALLEY RIDGE FINANCIAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.	BASIS OF PRESENTATION:
	The unaudited financial statements as of March 31, 2002 and for the three months ended March 31, 2002 and March 31, 2001 include the consolidated results of operations of Valley Ridge Financial Corp. (the "Corporation") and its wholly-owned subsidiary, Valley Ridge Bank (the "Bank") and its wholly-owned subsidiaries, Valley Ridge Realty, Inc., Valley Ridge Mortgage Company, Inc., and Valley Ridge Financial Services, Inc. These consolidated financial statements have been prepared in accordance with the Instructions for Form 10-QSB and Item 310(b) of Regulation S-B and do not include all disclosures required by accounting principles generally accepted in the United States of America for a complete presentation of the Corporation's financial condition and results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair presentation of the results of operations for such periods. The results for the period ended March 31, 2002 should not be considered as indicative of results for a full year. For further information, refer to the consolidated financial statements and footnotes included in the Corporation's Annual Report on Form 10-KSB for the year ended December 31, 2001.
2.	EARNINGS PER COMMON SHARE:
	Basic earnings per share is based on weighted-average common shares outstanding. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings per share amounts are based on 949,919 and 945,496 shares outstanding for the three months ended March 31, 2002 and 2001, respectively. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements.
3.	NEW ACCOUNTING PRONOUNCEMENTS:
	Effective January 1, 2002, the Corporation adopted a new standard issued by the FASB on impairment and disposal of long-lived assets. The effect of this on the financial position and results of operations of the Corporation was not material. A new accounting standard dealing with asset retirement obligations will apply for 2003. The Corporation does not believe this standard will have a material effect on its financial position or results of operations.

6

Item 2.  Management's Discussion and Analysis or Plan of Operation

The following discussion is designed to provide a review of the consolidated financial condition and results of operations of Valley Ridge Financial Corp. (the "Corporation"). This discussion should be read in conjunction with the consolidated financial statements and related notes.

Forward-Looking Statements

This discussion and analysis of financial condition and results of operations, and other sections of this report, contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and the Corporation itself. Words such as "anticipates," "believes," "estimates," "judgment," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements.

Future Factors include, but are not limited to, changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulations; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances and issues; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national economy. In addition, events relating to the terrorist attacks of September 11, 2001 and other terrorist activities have created significant global economic and political uncertainties that may have material and adverse effects on financial markets, the economy, and demand for financial services and products. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. The Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

Results of Operations

Net Income:The Corporation reported net income of $485,376 or $0.51 per share for the first quarter of 2002 compared to $424,917 or $0.45 per share for the first quarter of 2001. The change was primarily a result of an improved net interest margin compared to the first quarter of 2001. Management is not aware of any existing trends, events, uncertainties or current recommendations by regulatory authorities that are expected to have a material impact on the Corporation's future operating results.

7

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the related yields, as well as the interest expense on average interest-bearing liabilities. For tax-exempt securities and loans, interest income and yield have been computed on a tax equivalent basis using a marginal tax rate of 34%.

	Three-Month Periods ended March 31,
	2002							2001
	Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate
Securities	$	18,838,613		$	232,222	4.93	%	$	13,513,299		$	223,852	6.63	%
Tax-exempt securities		10,706,065			224,433	8.39			14,639,407			340,042	9.29
Loans(1) (2)		121,440,904			2,494,449	8.22			118,275,145			2,700,423	9.13
Federal funds sold		4,966,667			22,601	1.82			4,092,222			50,317	4.92
Total earning assets		155,952,249			2,973,705	7.63			150,520,073			3,314,634	8.81
Nonaccrual loans		433,598							1,256,000
Less allowance for
loan losses		(1,330,974	)						(1,648,597	)
Cash and due from banks		4,639,269							5,437,999
Other nonearning assets		10,451,092							11,903,927
Total assets	$	170,145,234						$	167,469,402
Interest-bearing deposits	$	104,143,122		$	684,208	2.63	%	$	104,725,482		$	1,146,165	4.38	%
Other borrowings		24,689,391			270,155	4.38			27,325,923			373,798	5.47
Total interest-bearing
liabilities		128,832,513			954,363	2.96			132,051,405			1,519,963	4.60
Demand deposits		21,499,124							18,685,302
Other liabilities		2,181,631							1,157,268
Total liabilities		152,513,268							151,893,975
Average equity		17,631,966							15,575,427
Total liabilities and
equity	$	170,145,234						$	167,469,402
Net interest income				$	2,019,342						$	1,794,671
Rate spread						4.67	%						4.21	%
Net interest margin						5.18	%						4.77	%

_____________________

(1)	Average outstanding balances exclude non-accruing loans.
(2)	Includes loans held for sale.

The following table presents the dollar amount of change in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and change due to rate.

8

	For the Three Months ended March 31, 2002 over 2001
	Total			Volume			Rate
Increase (decrease) in interest income
Taxable investment securities	$	8,373		$	298,122		$	(289,749	)
Tax-exempt securities		(115,609	)		(339,308	)		223,699
Loans (including loans held for sale)		(205,977	)		283,010			(488,987	)
Federal funds sold		(27,716	)		36,146			(63,862	)
Net change in tax-equivalent income		(340,929	)		277,970			(618,899	)
Increase (decrease) in interest expense
Interest-bearing deposits		(461,957	)		(25,355	)		(436,602	)
Other borrowings		(103,643	)		(134,872	)		31,229
Net change in interest expense		(565,600	)		(160,227	)		(405,373	)
Net change in net interest income (tax-equivalent)	$	224,671		$	438,197		$	(213,526	)

Net Interest Income: Net interest income increased $227,509 or 13.3% to $1,934,658 for the three-month period ended March 31, 2002 compared to the same period in 2001. The increase in net interest income is primarily attributable to decreases in rates over the past twelve months, which has favorably affected the Corporation's net interest income.

Provision for Loan Losses: The provision for loan losses represents the adjustment to the allowance for loan losses needed to maintain the allowance at a level determined by management to cover inherent losses within the Corporation's loan portfolio. The allowance for loan losses is based on the application of projected loss ratios to the risk-ratings of loans, both individually and by category. Projected loss ratios incorporate such factors as recent loss experience, current economic conditions and trends, trends in past due and impaired loans, and risk characteristics of various categories and concentrations of loans. The provision remained consistent at $45,000 for the three months ended March 31, 2002 and 2001. Net recoveries were approximately $80,000 for the first quarter of 2002 compared to net charge-offs of approximately $34,000 for the first quarter of 2001. The Corporation has recovered approximately $100,000 in 2002 relating to a large commercial loan charged-off during the fourth quart er of 2001. Management will continue to monitor the allowance for loan losses and make additions to the allowance through the provision for loan losses as economic conditions dictate.

9

	As of and for the three- month periods ended March 31,
	2002			2001
Balance at beginning of period	$	1,239,093		$	1,619,688
Provision for loan losses		45,000			45,000
Recoveries on loans charged-off		113,355			11,844
Loans charged-off		(33,093	)		(45,999	)
Net (charge-offs) recoveries		80,262			(34,155	)
Balance at end of period	$	1,364,355		$	1,630,533
Allowance for loan losses as a percentage of
total loans at end of period		1.1%			1.4%
Ratio of net (charge offs) recoveries to average total loans
outstanding during the period		.0007			(.0003	)

Noninterest Income:Noninterest income for the three months ended March 31, 2002 was approximately $579,000 as compared to approximately $590,000 for the same period in 2001. Net gains on sales of securities has decreased by approximately $75,000 for the three months ended March 31, 2002 compared to the same period in 2001. Net gains on sales of loans has increased by approximately $60,000 for the three months ended March 31, 2002 compared to the same period in 2001. All other components of noninterest income remained consistent over prior year first quarter results.

Noninterest Expense: Noninterest expense increased by approximately $91,000 for the three months ended March 31, 2002 compared to the same period in 2001. Salaries and benefits, the largest component of noninterest expense, increased 11% to $960,481 for the three months ended March 31, 2002 compared to $867,649 for the same period in 2001. The increase in salaries and benefits reflects annual salary increases and additional employees. Occupancy and furniture and fixture expenses increased approximately $12,000 to $269,446, due to increases in repairs and maintenance expense. Other expenses have remained consistent for the three months ended March 31, 2002 compared to the same period in 2001.

Financial Condition, Liquidity, and Capital Resources

Total assets increased approximately 2.1% or by $3.5 million to $173.3 million at March 31, 2002 compared to $169.8 million at December 31, 2001. Total liabilities increased by 2.2% or by $3.3 million to $155.6 million at March 31, 2002 compared to $152.3 million at December 31, 2001. Total shareholders' equity increased by approximately $166,000 to $17.7 million at March 31, 2002. The increase in shareholders' equity is primarily related to the retention of earnings after dividend payouts offset by a decrease in the unrealized gain on securities available for sale.

Total loans remained relatively stable at $121.9 million. Deposits increased by approximately $4.4 million or 3.6% to $128.0 million. The net loan to deposit ratio has decreased slightly to 94.2% for the period ended March 31, 2002 from 98.2% for the period ended December 31, 2001. The allowance for loan losses has remained at a consistent level while maintaining a reserve of 1.1% of total loans.

10

The Corporation paid a dividend of $190,005 in the first quarter of 2002, compared to $170,456 in the first quarter of 2001.

Shareholders' equity as a percent of total assets was 10.2% at March 31, 2002 compared to 10.3% at December 31, 2001. The Corporation's capital ratios continue to exceed the minimum regulatory levels prescribed by the Federal Reserve Board.

Total cash, cash equivalents and investment securities totaled approximately $41.6 million at March 31, 2002 or approximately 24.0% of total assets. The principal source of funding for the Corporation continues to come from its deposit customers, which have historically been a stable source of funds. Other sources of funding include normal loan repayments, sales and maturities of securities, federal funds available from correspondent banks, and additional advances available from the Federal Home Loan Bank. Management believes that the current level of liquidity is sufficient to meet the normal operating needs of the Bank.

Securities sold under agreements to repurchase generally mature within one to three days from the transaction date. The Corporation has pledged certain investment securities, which are held in safekeeping, as collateral against these borrowings. Repurchase agreements totaled approximately $3.4 million at March 31, 2002 and December 31, 2001.

The Corporation had $22,000,000 in advances from the Federal Home Loan Bank at March 31, 2001 and December 31, 2001. Each advance requires monthly interest payments at either fixed or adjustable rates. These borrowings are collateralized by nonspecific loans within the mortgage portfolio up to the principal outstanding and specific qualifying securities within the securities portfolio.

Impact of Inflation and Changing Prices: Most assets and liabilities of a financial institution are monetary in nature. This differs from most commercial and industrial companies that have significant investments in fixed assets or inventories. The effect of inflation on financial institutions is to a large extent indirect and the measure of such impact is largely subjective.

Noninterest expenses tend to rise during periods of general inflation. Inflation levels are to some degree reflected in interest rates. Changes in interest rates, which are to some extent attributable to changes in inflation rates or uncertainty concerning changes in inflation rates, do affect the earnings of the Corporation. The Corporation seeks to protect net interest income from the adverse effects of interest rate fluctuations through its asset/liability management program.

The Corporation's management believes that increases in financial institution assets and deposits result in part from monetary inflation. As assets increase, the financial institution must increase equity capital proportionately to maintain appropriate relationships between assets and equity.

11

PART II.  OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

          (a)         Exhibits.  The following documents are filed as exhibits to this report on Form 10-QSB:

Exhibit No.	Document
3.1	Restated Articles of Incorporation. Previously filed as an exhibit to the Corporation's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1998. Here incorporated by reference.
3.2	Bylaws. Previously filed as Exhibit 3(b) to the Corporation's Registration Statement on Form S-4 (Registration Statement No. 333-00724) filed January 30, 1996. Here incorporated by reference.

          (b)         Reports on Form 8-K.  No reports on Form 8-K were filed during the quarter covered by this Form 10-QSB.

12

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:  May 14, 2002	VALLEY RIDGE FINANCIAL CORP. (Registrant) s/Richard L. Edgar Richard L. Edgar, President and Chief   Executive Officer (Principal Executive Officer)
Date:  May 14, 2002	s/Michael McHugh Michael McHugh, Secretary and Treasurer   (Principal Financial and Accounting Officer)

13

EXHIBIT INDEX

Exhibit No.	Document
3.1	Restated Articles of Incorporation. Previously filed as an exhibit to the Corporation's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1998. Here incorporated by reference.
3.2	Bylaws. Previously filed as Exhibit 3(b) to the Corporation's Registration Statement on Form S-4 (Registration Statement No. 333-00724) filed January 30, 1996. Here incorporated by reference.