-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J7Di5xm0XSkUE7X/yt3WCM88fzYGc536fukD3aoU0xdt66u3uIxMQMCFuZW9kaVc G2S+EzTc/RushmH9lnQ/cw== 0000891020-00-000625.txt : 20000411 0000891020-00-000625.hdr.sgml : 20000411 ACCESSION NUMBER: 0000891020-00-000625 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VRB BANCORP CENTRAL INDEX KEY: 0000944541 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 930892559 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-25932 FILM NUMBER: 581828 BUSINESS ADDRESS: STREET 1: 110 PINE ST STREET 2: PO BOX 1046 CITY: ROGUE RIVER STATE: OR ZIP: 97537 BUSINESS PHONE: 5415823216 MAIL ADDRESS: STREET 1: P O BOX 1046 STREET 2: PO BOX 1046 CITY: ROGUE RIVER STATE: OR ZIP: 97537 10-K405 1 FORM 10-K FOR PERIOD ENDED DECEMBER 31, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 Commission file number: 0-25932 VRB Bancorp (Exact name of Registrant as specified in its charter) Oregon 93-0892559 (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 110 Pine St., P.O. Box 1046, Rogue River, Oregon 97537 (Address of principal executive offices) (Zip Code) (541) 582-4554 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act None Securities registered pursuant to Section 12(g) of the Act: Common Stock (Title of Class) 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 [ ] Indicate by check mark if disclosure of delinquent filing pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant was $42,527,000 at March 16, 2000. As of March 16, 2000, there were 8,297,979 shares of the Registrant's Common Stock outstanding. Documents Incorporated by Reference: Portions of the Registrant's 1999 Annual Report to Shareholders is incorporated by reference in Part II hereof. Portions of the Registrant's proxy statement dated March 27, 2000 for the 2000 annual meeting of shareholders is incorporated by reference in Part III hereof. 2 INDEX
PAGE ---- PART I Item 1. Description of business Introduction 3 Business 3 Market area 4 Competition 4 Employees 5 Risk Factors 5 Supervision and regulation 6 Item 2. Properties 9 Item 3. Legal proceedings 11 Item 4. Submission of matters to vote on security issues 11 PART II Item 5. Market for registrant's common equity and related shareholder matters 12 Item 6. Selected financial data 12 Item 7. Management's discussion and analysis of financial condition and results of operation 12 Item 8. Financial statements and supplementary data 12 Item 9. Changes in and disagreements with accountants on accounting and financial disclosure 12 PART III Item 10. Directors and executive officers of the registrant 13 Item 11. Executive compensation 13 Item 12. Security ownership of certain beneficial owners and management 13 Item 13. Certain relationships and related transactions 13 PART IV Item 14. Exhibits, financial statement schedules and reports on Form 8-K 14 SIGNATURES 15 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES 16 EXHIBIT INDEX 17
3 Disclosure Regarding Forward-Looking Statements The following discussion includes forward-looking statements within the meaning of the "safe-harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on the beliefs of the Company's management and on assumptions made by and information currently available to management. All statements other than statements of historical fact, regarding the Company's financial position, business strategy and plans and objectives of management for future operations of the Company are forward-looking statements. When used herein, the words "anticipate," "believe," "estimate," "expect," and "intend" and words or phrases of similar meaning, as they relate to the Company or management, are intended to identify forward-looking statements. The Company can give no assurance that such expectations will prove to be correct. Forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward-looking statements. These risks and uncertainties include the Company's ability to maintain or expand its market share or net interest margins, or to implement its marketing and growth strategies. Further, actual results may be affected by the Company's ability to compete on price and other factors with other financial institutions; customer acceptance of new products and services; and, general trends in the banking industry and the regulatory environment, as they relate to the Company's cost of funds and returns on assets. In addition, there are risks inherent in the banking industry relating to collectibility of loans and changes in interest rates. The reader is advised that this list of risks is not exhaustive and should not be construed as any prediction by the Company as to which risks would cause actual results to differ materially from those indicated by the forward-looking statements. These and other risk factors may be discussed more fully in the Company's annual and quarterly reports filed with the Securities and Exchange Commission. PART I ITEM 1. DESCRIPTION OF BUSINESS INTRODUCTION VRB Bancorp was organized in 1983 under Oregon law for the purpose of becoming a holding company of Valley of the Rogue Bank, an Oregon state-chartered bank organized in 1967. The Company conducts its business through, and has no material operations outside of, Valley of the Rogue Bank. Accordingly, reference to "VRB", "the Company", and "the Bank" are intended to denote VRB Bancorp and Valley of the Rogue Bank as a consolidated entity, except as the context may otherwise indicate. BUSINESS VRB is the largest community bank in Southern Oregon, currently operating fourteen full service branches. The Bank has prospered by emphasizing relationship banking and excellent customer service to consumers and small to medium sized businesses across southern Oregon. Earnings growth and consistent returns on shareholders' equity are fundamental to the bank's business strategies. Over the last five years, earnings have grown by 68% and the return to shareholders has consistently exceeded 14%. Other traditional indicators of financial strength such as the underlying quality of the loan portfolio and the Bank's capital position remain very strong, and are core to the bank's increasing prosperity. VRB's business strategy is to appropriately blend customer relationship management with the benefits of technology. VRB emphasizes a personalized approach to banking, and targets those customers that utilize traditional products and services as an essential part of their day to day activities. VRB operates in an area that has a strong sense of community, and is a vested participant in improving the economic strength of the area it serves. The technological sophistication of the region is growing, and use of VRB's atm network, debit cards and 24 hour telephone banking is now routine for most customers. VRB has renewed its commitment to technology as expectations for PC banking and other technological conveniences are now visible. VRB believes future investment in technology is vital and intends to move VRB to an increasingly paperless system which has shown to be less costly to the 3 4 bank than traditional banking practices. VRB continues to seek branch expansion where financially beneficial, and its branch network remains the primary place of business, as well as a portal to other community activities. For those areas that geographic dominance becomes less of a competitive advantage, the bank will consider closure of those branches that are in close proximity to each other. VRB is evolving into a small business bank, and is therefore very visible in commercial and construction lending circles. Such loans are typically characterized by innovative or flexible terms, and collateralized by commercial, residential owner-occupied or rental properties. Other lending products available to local business and commercial customers include equipment and inventory financing, revolving lines of credit, and other small business loans. VRB's business strategies have also targeted the professional services market, providing easy access to credit with products such as revolving executive lines of credit. In 1999, commercial, commercial real estate and construction lending increased by $27 million, an increase of 25% over prior year balances. Because a significant portion of the bank's business lending activity is supported by consumer deposits, VRB also provides consumer loans for a variety of purposes, including secured and unsecured personal loans, home equity and personal lines of credit, vehicle loans and student loans. For all loans, VRB maintains sound loan underwriting standards with written loan policies, conservative individual and branch lending limits, and supervisory oversight by Board designated loan committees. VRB offers a broad array of core deposit products and services, including non-interest bearing and interest bearing checking accounts, savings accounts, money market accounts and certificates of deposit. The Bank promotes deposit growth by emphasizing relationship banking, and deposit products are often packaged with commercial lending activities. This strategy was reasonably successful in 1999. Average non-interest dda and money market accounts, staple deposit products for small and medium commercial business, grew 13.7% and 12.0%, respectively. Similar to many banks, loan demand has outpaced deposit growth, and future deposit growth on the part of VRB may require more aggressive pricing strategies. In addition, the bank will most likely utilize alternative funding sources, such as Federal Home Loan Bank advances, to supplement deposit growth (if needed). MARKET AREA The Company primarily conducts its business in Jackson and Josephine Counties (the Rogue Valley) in southern Oregon. The two counties have experienced an estimated 17.5% increase in population from 1990 to 1998. The area continues to experience an influx of out of state retirees who are attracted to the beauty of the area, and more importantly, the low cost of living relative to neighboring states. This is reflective in the area's demographics, for which an estimated 22% of the population base is 60 years or older. The Rogue Valley continues to become increasingly urbanized and infrastructure growth has been robust, including both residential and commercial development. The region's dependence on wood products has declined significantly, with timber manufacturing jobs now accounting for less than half of all manufacturing jobs in the Rogue Valley. Despite historical job losses in wood products, the region has seen relatively steady job growth over the last decade. Since 1990, the region has added almost 19,000 jobs, and service industry sectors such as retail trade, higher education and medical services have experienced strong growth. Non-farm payroll jobs are predicted to grow 23% from 1996 through 2006, outpacing the 21% expected average for the state of Oregon. COMPETITION Within the Company's geographic market, VRB's competes with commercial banks, savings and loan associations, and credit unions, some of which may offer lending and/or deposit products with rates that VRB cannot or is not willing to offer. Major commercial bank competitors, or super-regional institutions headquartered outside of the state of Oregon command approximately 75% of the traditional deposits in the Rogue Valley. These institutions have the advantage of offering their customers services and statewide banking facilities that VRB does not offer. In addition, such institutions have high public visibility and are able to maintain advertising and marketing activity on a much larger scale than the Company can economically 4 5 maintain. In 1999, competition for deposits intensified. Despite aggressive pricing strategies, heady stock market returns, and strong consumer spending are influencing deposit levels on an industry wide basis. Investment brokerage accounts are increasingly popular and offer an array of investment products as well as flexible cash management services. For example, mutual funds now make up 22% of the average household's liquid assets, verses just 6% in the early 90's. VRB currently holds approximately 15% of the total market measured as a percentage of total deposits then held by financial institutions operating in Jackson and Josephine County. Management believes that its emphasis in customer relationship management and local decision-making will continue to provide VRB with a hometown advantage. However, management expects competition to continue, and that future pricing strategies will most likely be more aggressive than seen in the past. EMPLOYEES As of December 31, 1999, the Bank employed a total of 177 full time equivalent employees. A number of benefit plans are available to eligible employees, including paid sick leave and vacation, group medical plans, a 401(k) plan, and a discretionary stock option plan. None of the employees are subject to a collective bargaining agreement and the Bank considers its relationships with its employees to be favorable. RISK FACTORS Ownership of VRB Bancorp stock involves certain risks. Current and prospective investors should carefully consider and evaluate all of the Risk Factors as set forth below. The Company cautions the reader that this list of risk factors may not be exhaustive. EXPOSURE TO LOCAL ECONOMY The Company's performance is dependent upon and sensitive to the economy of its market area. An economic downturn could affect overall loan demand. Such a downturn could also affect borrowers' ability to repay loans, or reduce the value of collateral securing such loans. Particularly in the 1980's, the Company's market area experienced high unemployment as a result of the reduction in forest products manufacturing jobs. Subsequent developments have reduced the dependence of the local economy on forest products manufacturing and have increased the number of non-manufacturing jobs. Nonetheless, the loss of forest industry jobs is projected to continue (but at a lower rate) and there can be no assurance that new jobs will replace those lost. Nor are there any guarantees that future economic changes will not have a significant adverse effect on the Company. CREDIT RISK The Company, like other lenders, is subject to credit risk, which is the risk of losing principal and interest due to a customer's failure to repay loans in accordance with their terms. Although the Company has an established lending criteria and most loans are secured with collateral, a downturn in the economy or the real estate market in the Rogue Valley or a rapid increase in interest rates could have a negative effect on collateral values and borrowers' ability to repay. INTEREST RATE RISK VRB's earnings are largely derived from net interest income, which is interest income and fees earned on loans and investments, less interest expense paid on deposits and other borrowings. Interest rates are highly sensitive to many factors typically beyond the control of the Company's management. These factors include general economic conditions and the policies of various governmental and regulatory authorities. As interest rates change, net interest income is affected. Although interest rates have remained relatively stable in recent periods, an unanticipated decrease or increase in interest rates could have an adverse effect on the Bank's financial performance. DEPENDENCE ON KEY PERSONNEL 5 6 VRB's success is dependent on the services of William A. Haden, President and Chief Executive Officer, and Brad Copeland, Executive Vice President and Credit Administration. The loss of services of either of these executives, or of certain other key officers, could adversely affect the Company. No assurance can be given that replacement officers of comparable abilities could be found. The Company does not maintain key person life insurance on these individuals. REGULATION VRB is subject to extensive regulations under federal and state laws. These laws and regulations are intended to protect depositors, not shareholders. As a state chartered bank, the Bank is subject to regulation and supervision by the FDIC which insures the deposits of the Bank, and the Director of the Oregon Department of Consumer and Business Services ("Oregon Director"). As a bank holding company, VRB is subject to regulation and supervision by the Board of Governors of the Federal Reserve and the Oregon Director. Federal and state regulation puts banks at a competitive disadvantage compared to less regulated competitors such as finance companies, credit unions, mortgage banking companies, and leasing companies. Although the Company has been able to compete effectively in its market area in the past, there can be no assurance that it will be able to continue to do so. Future changes in federal and state banking regulations could adversely affect the Bank's operating results and ability to continue to effectively compete. See "Supervision and Regulation." SUPERVISION AND REGULATION GENERAL VRB Bancorp and Valley of the Rogue Bank are extensively regulated under federal and state law. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory or regulatory provisions. FEDERAL BANK HOLDING COMPANY REGULATION VRB Bancorp is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended ("BHCA"), and as such, it is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). VRB Bancorp is required to file financial reports with the Federal Reserve, as well as respond to any other inquiries made by the Federal Reserve. Valley of the Rogue Bank is subject to certain restrictions imposed by the Federal Reserve Act on (1) extensions of credit to VRB Bancorp, (2) investments in VRB Bancorp stock and (3) the use VRB Bancorp stock as collateral for loans to any borrower. These regulations and restrictions may limit VRB Bancorp's ability to obtain funds from Valley of the Rogue Bank for its cash needs, including funds for payment of dividends, interest and operating expenses. Further, under the Federal Reserve Act and certain regulations of the Federal Reserve, VRB Bancorp and its subsidiary is prohibited from engaging in certain tying arrangements which involve any extension of credit, lease or sale of property or furnishing of services. For example, Valley of the Rogue Bank may not generally require a customer to obtain other services from it or VRB Bancorp as a condition to an extension of credit to the customer. FEDERAL AND STATE BANK REGULATION Valley of the Rogue Bank, as a state chartered bank with deposits insured by the FDIC, is subject to the supervision and regulation of the Oregon Director and of the FDIC. These agencies may prohibit the bank from engaging in what they believe constitute unsafe or unsound banking practices. The Community Reinvestment Act ("CRA") requires that Valley of the Rogue Bank is evaluated based upon its ability to meet the credit needs of its local community. This includes providing service to low and moderate income neighborhoods, consistent 6 7 the safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. The Bank's current CRA rating is "Satisfactory". Valley of the Rogue Bank is also subject to certain restrictions imposed by the Federal Reserve Act on loans to executive officers, directors, principal shareholders or any related interest of such persons. Extensions of credit must meet the following criteria: (i) must be made on substantially the same terms, including interest rates and collateral, roughly equivalent to those offered in the marketplace (ii) follow credit underwriting procedures that are not less stringent than those existing bank customers (iii) must not involve more than the normal risk of repayment or present other unfavorable features. Valley of the Rogue Bank is also subject to certain lending limits and restrictions on overdrafts to such individuals. A violation of these restrictions may result in severe financial consequences for the Bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of the Bank. Under the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), each federal banking agency has prescribed, by regulation, non-capital safety and soundness standards for institutions under its authority. These standards cover internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. If Valley of the Rogue Bank fails to meet these standards, it must develop a plan acceptable to the agency, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. Valley of the Rogue Bank believes that it meets all these standards as outlined above. DEPOSIT INSURANCE As a FDIC member institution, deposits of Valley of the Rogue Bank are currently insured to a maximum of $100,000 per depositor through the Bank Insurance Fund ("BIF"), administered by the FDIC. The Bank is required to pay semiannual deposit insurance premium assessments to the FDIC. Generally, banks are assessed insurance premiums according to how much risk they are deemed to present to BIF. Banks with higher levels of capital and a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or involving a higher degree of supervisory concern. The premium range is from $.00, for the highest-rated institutions (subject to a statutory minimum assessment of $2,000) to $.27 per $100 of domestic deposits. Valley of the Rogue Bank qualifies for the highest rating and therefore, has a current FDIC premium rate of $.00 per $100 of domestic deposits. On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act") was enacted. The Funds Act, subjects BIF insured deposits to a Financing Corporation ("FICO") premium assessment. The FICO assessment is not tied to the FDIC risk classification and is re-determined quarterly. VRB's most recent premium assessment was $.0053 per $100 of domestic deposits. 7 8 DIVIDENDS Under the Oregon Bank Act, Valley of the Rogue Bank is subject to restrictions covering the payment of cash dividends to its shareholder, VRB Bancorp. The bank may not pay cash dividends if that payment would reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. In addition, the amount of the dividend may not be greater than its net unreserved retained earnings, less (i) certain bad debts (ii) all other assets charged off as required by the Oregon Director or state or federal examiner; and, (iii) all accrued expenses, interest and taxes of the bank. Valley of the Rogue Bank has been paying regular dividends to VRB Bancorp, although no assurances can be given that dividends will continue to be paid. In addition, the appropriate regulatory authorities are authorized to prohibit VRB Bancorp from paying dividends that would be considered unsafe or unsound banking practice. VRB Bancorp is not currently subject to any regulatory restrictions on their dividends other than those noted above. CAPITAL ADEQUACY The federal bank regulatory agencies use capital adequacy guidelines in their examination and regulation of bank holding companies and banks. If the capital falls below the minimum levels established by these guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open facilities, and maybe subject to certain mandatory supervisory corrective actions. VRB believes that it meets all capital adequacy requirements to which it is subject. EFFECTS OF GOVERNMENT MONETARY POLICY The earnings and growth of VRB are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve can and does implement national monetary policy for such purposes as curbing inflation and combating recession. However, more importantly, the Federal Reserve's open market operations in U.S. government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits, can influence growth of bank loans, investments and deposits, and can also affect interest rates charged on loans or paid on deposits. The nature and impact of 8 9 future changes in monetary policies and their impact on VRB or the Bank cannot be predicted with certainty. CHANGING REGULATORY STRUCTURE OF THE BANKING INDUSTRY The laws and regulations affecting banks and bank holding companies have undergone significant changes. Of particular note is legislation enacted by Congress in 1995, permitting interstate banking and branching, which allows banks to expand nationwide through acquisition, consolidation or merger. Under this law, an adequately capitalized bank holding company may acquire banks in any state if permitted by state law. In addition, banks may merge across state lines if permitted by state law. Further, banks may establish and operate branches in any state subject to the restrictions of applicable state law. Under Oregon law, an out-of-state bank or bank holding company may merge with or acquire an Oregon state chartered bank or bank holding company if the Oregon bank, or in the case of a bank holding company, the subsidiary bank, has been in existence for a minimum of three years, and the law of the state in which the acquiring bank is located permits such merger. Branches may not be acquired or opened separately, but once an out-of-state bank has acquired branches in Oregon, either through a merger with or acquisition of substantially all the assets of an Oregon bank, the bank may open additional branches. Early 2000 marked the effective date of the Gramm-Leach-Bliley Financial Services Modernization Act, which repeals provisions of prior legislation that have historically separated banking, insurance, and securities activities. The law creates a new financial services structure, the financial holding company, under the Bank Holding Company Act. Banks are now able to engage in any activity that is deemed "financial in nature" and affiliate with securities firms and insurance companies all within, and through, a single financial holding company. The legislation will most likely impact the competitive balance among banks and other financial services providers, and encourage mergers between banks, insurance companies and brokerage firms. However, whether and in what form the legislation may effect the business of VRB cannot be predicted with certainty. ITEM 2. PROPERTIES The Company maintains its principal offices at the main office of its subsidiary bank, Valley of the Rogue Bank, in Rogue River, Oregon, and conducts its business through thirteen branch offices of the Bank throughout the Rogue Valley, all of which are in good repair and are adequate for carrying on the business of the Bank. All of the branches have drive-up facilities and automated teller machines. In addition, the Bank maintains a satellite ATM in Medford, Oregon. The Bank leases bank premises for the Talent, Stewart, and East Medford branches. In addition, the Bank leases land for the Merlin, North Operations Center, Downtown Grants Pass and Poplar locations. The following sets forth all properties of the Bank. Main Office Ashland Branch 110 Pine St. 250 Pioneer St. Rogue River, Oregon Ashland, Oregon Fruitdale Branch Medford Branch 1040 Rogue River Highway 220 E. 10th St. Grants Pass, Oregon Medford, Oregon Poplar Drive Branch Stewart Avenue Branch 2400 Poplar Drive 809 Stewart Ave. Medford, Oregon Medford, Oregon Phoenix Branch Talent Branch 4000 S. Pacific Highway 201 N. Pacific Highway Phoenix, Oregon Talent, Oregon Seventh & Midland Branch Merlin Branch 100 N.E. Midland 3600 Merlin Rd. Grants Pass, Oregon Merlin, Oregon Downtown GP Branch Williams Hwy. Branch 117 N.E. "F" St. 1670 Williams Hwy.
9 10 Grants Pass, Oregon Grants Pass, Oregon East Medford Branch North Operations Center 701 East Jackson 8991 Rogue River Hwy Medford, Oregon Rogue River, Oregon Central Point Branch 1800 E. Pine St. Central Point, Oregon
10 11 ITEM 3. LEGAL PROCEEDINGS No material legal proceedings, to which the Company is a party or which involve any of its properties, was pending as of the date of this report on Form 10-K. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES HOLDERS No matters were submitted to a vote of securities holders of the Registrant during the quarter ended December 31, 1999. 11 12 PART II ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS VRB Bancorp common stock trades on The Nasdaq Stock Market(R) under the symbol VRBA. Prior to November 5, 1997, VRB Bancorp's common stock was traded over-the-counter through the Bulletin Board Service of the Nasdaq Stock Market(R). The following table lists the high and low bid quotations obtained from the Nasdaq Stock Market(R), as adjusted for subsequent stock dividends and stock splits. Prices do not include retail mark-ups, mark-downs or commissions and may not represent actual transactions.
1999 1998 ------------------------------ ------------------------------ Cash Cash High Low Dividend High Low Dividend ----- ------ -------- ------ ------ -------- 1st Quarter $ 9.50 $ 7.00 $ - $11.78 $ 9.62 $ - 2nd Quarter 8.63 7.03 0.12 11.54 9.38 - 3rd Quarter 8.44 6.50 - 10.00 7.33 0.19 4th Quarter 7.38 5.75 0.12 10.13 7.00 -
As of December 31, 1999, there were 8,303,596 shares of common stock outstanding, held by approximately 2,100 shareholders. VRB Bancorp's ability to pay expenses and make cash dividend payments to shareholders is dependent on earnings generated by its subsidiary, Valley of the Rogue Bank. Oregon and federal banking laws and regulations place restrictions on the payment of dividends by a bank to its shareholders. See "Supervision and Regulations - Dividends". The Board of Directors' dividend policy is to review VRB's financial performance, capital adequacy, regulatory compliance and cash resources and, if such review is favorable, to declare and pay a cash dividend to shareholders annually. Although VRB expects to continue to pay cash dividends, future dividends are subject to these limitations and to the discretion of the Board of Directors, and could be reduced or eliminated. ITEM 6. SELECTED FINANCIAL DATA The response to this item is incorporated by reference to the information under the caption "Selected Financial Data" set forth on page 6 of the Company's 1999 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The response to this item is incorporated by reference to the section entitled "Selected Financial Data and Results of Operation" on pages 6-12 of the Company's 1999 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements called for by this item are incorporated by reference to the Company's 1999 Annual Report to Shareholders. Such statements are listed in the Index to Consolidated Financial Statements set forth on page 16 herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS None 12 13 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The response to this item is incorporated by reference to the sections entitled "Election of Directors" and "Executive Officers" on pages 3-4 and page 7, respectively, of the Company's Proxy Statement for the 2000 annual meeting of shareholders. ITEM 11. EXECUTIVE COMPENSATION The response to this item is incorporated by reference to the section entitled "Executive Compensation" on pages 7-8 of the Company's Proxy Statement for the 2000 annual meeting of shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The response to this item is incorporated by reference to the section entitled "Security Ownership of Management and Others" on pages 10-11 of the Company's Proxy Statement for the 2000 annual meeting of shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The response to this item is incorporated by reference to the section entitled "Transactions with Management" on page 11 of the Company's Proxy Statement for the 2000 annual meeting of shareholders. 13 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements: None (2) Financial Statement Schedules: See the Index to Financial Statements and Schedules on page 15. (3) The exhibits filed herewith are listed in the Index to Exhibits on page 16 herein. (b) There were no current reports on Form 8-K filed by the Registrant during the last quarter of the year ended December 31, 1999. 14 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. VRB BANCORP (Registrant) By: /S/ Felice Belfiore Date: March 27, 2000 ------------------------------------------- Felice Belfiore, Senior Vice President & Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /S/ James D. Coleman Date: March 27, 2000 ------------------------------------------- James D. Coleman, Chairman, Director By: /S/ John O. Dunkin Date: March 27, 2000 ------------------------------------------- John O. Dunkin, Vice Chairman, Director By: /S/ Gary Lundberg Date: March 27, 2000 ------------------------------------------- Gary Lundberg, Director By: /S/ Robert J. DeArmond Date: March 27, 2000 ------------------------------------------- Robert J. DeArmond, Director By: /S/ Larry L Parducci Date: March 27, 2000 ------------------------------------------- Larry L. Parducci, Director By: /S/ Tom Anderson Date: March 27, 2000 ------------------------------------------- Tom Anderson, Director By: /S/ William A. Haden Date: March 27, 2000 ------------------------------------------- William A. Haden, President, Director (Principal Executive Officer) By: /S/ April Sevcik Date: March 27, 2000 ------------------------------------------- April Sevcik, Director By: /S/ Michael Donovan Date: March 27, 2000 ------------------------------------------- Michael Donovan, Director By: /S/ Felice Belfiore Date: March 27, 2000 ------------------------------------------- Felice Belfiore, Senior Vice President (Principal Accounting Officer)
15 16 INDEX TO FINANCIAL CONSOLIDATED STATEMENTS AND SCHEDULES Financial Statements The following consolidated financial statements and Report of Independent Public Accountants, included in the 1999 Annual Report to Shareholders at the pages indicated, are incorporated herein by reference:
Page of 1999 Annual Report to Shareholders ---------------------- VRB Bancorp and subsidiaries Consolidated Balance Sheets at December 31, 1999 and 1998 13 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 14 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 15 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 16 Notes to Consolidated Financial Statements 17 Report of Independent Public Accountants 32 Financial Statement Schedules None
16 17 INDEX TO EXHIBITS 3.1 Articles of Incorporation of VRB Bancorp* 3.2 Bylaws of VRB Bancorp* 4.0 Specimen stock certificate* 10.1 Stock Option Agreement, dated July 24, 1997, between Valley of the Rogue Bank and the shareholders of Investors Banking Corporation** 10.2 Plan of Merger, dated September 30, 1997, between Valley of the Rogue Bank and Colonial Banking Company** 10.3 Ground Lease Agreement dated June 1, 1988, relating to lease of parking area of Poplar Drive Branch Office* 10.4 Lease Agreement and Memorandum of Agreement dated August 15, 1989 relating to lease of Stewart Avenue Branch Office* 10.5 Lease Agreement dated December 27, 1979, and related agreements for the Talent Branch Office* 10.6 Employment Agreement dated April 10, 1992, by and between Valley of the Rogue Bank and Tom Anderson* 10.7 Employment Agreement dated January 11, 1993, and Amendment to Employment Agreement, dated September 26, 1994, by and between Valley of the Rogue Bank and William A. Haden* 10.8 1994 Amended Non-Discretionary Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 4.3 of the Registrant's registration statement on Form S-8 filed with the Commission on October 3, 1995) 10.9 1994 Amended Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 4.3 of the Registrant's registration statement on Form S-8 filed with the Commission on October 3, 1995) 10.10 Employment Agreement dated February 27, 1997 by and among Valley of the Rogue Bank, VRB Bancorp and Felice Belfiore** 10.11 Employment Agreement dated May 1, 1996 by and between Valley of the Rogue Bank and Brad Copeland** 13.0 1999 Annual Report to Shareholders 23.0 Consent of Moss Adams, LLP 27.0 Financial Data Schedule
- --------------------------- * Incorporated by reference to the Company's registration statement on Form 10 (Commission file number 0-25932) filed April 26, 1995 pursuant to Section 12(g) of the Securities Exchange Act of 1934. ** Incorporated by reference to the Company's registration statement on Form S-1 (Commission File number 333-37167) declared effective November 5, 1997. 17 EX-13 2 1999 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 Forward Looking Statements: The following narrative includes a discussion of certain significant business trends and uncertainties as well as other forward looking statements and is intended to be read in conjunction with and is qualified in its entirety by reference to the consolidated financial statements and accompanying notes included elsewhere in the annual report. This report contains certain "forward-looking statements" that are based on the current beliefs of the Company's management as well as assumptions made by and information currently available to the Company's management. All statements other than statements of historical facts regarding the Company's financial position, business strategy and plans and objectives of future operations, are forward looking statements. When used in this report, the words "estimate", "believes", "project", "goal", "objective", or similar expressions are intended to identify forward looking statements. Although the company believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Based upon changing conditions, the occurrence of certain risks or uncertainties, or if any of the underlying assumptions prove incorrect, actual results may vary materially from those described herein. MANAGEMENTS DISCUSSION AND ANALYSIS Financial Overview VRB Bancorp and its subsidiary, Valley of the Rogue Bank (collectively VRB or the Bank), operates 14 banking offices along the I-5 corridor in southern Oregon. The Bank has prospered by emphasizing relationship banking and excellent customer service to small and medium size businesses in specific commercial niches. VRB will continue to emphasize personal service balanced with a more recent commitment toward providing new means of product delivery, and electronic banking services. In 1999, net income totaled $4.9 million, virtually unchanged from that in 1998. Earnings per share for each period was also consistent at $.57 per average share outstanding. Internal departmental restructuring, and pressure on interest margins influenced earnings growth. Costs to establish a brand image, and strengthen the lending and technological capabilities of the Bank also lead to higher costs. It is management's belief that these costs will be recovered in the form of future efficiencies and profitability. VRB operated under a relatively low interest rate environment until after the third quarter of 1999 when interest rates increased by .75%, in three successive increases of .25% each. The effect of rising rates had a minor impact on VRB in 1999. Gains as a result of variable loans re-pricing at higher rates were offset by strong competition that served to limit rate increases on new and renewed loans. Future growth in both loans and deposits may require more aggressive pricing strategies and management expects pressure on interest margins to continue unabated. SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------- Years ended December 31 (in thousands, except per share data) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS Interest income $ 22,693 $ 23,912 $ 14,955 $ 13,188 $ 11,973 Interest expense 6,413 7,671 4,062 3,627 2,989 - ------------------------------------------------------------------------------------------------------------------- Net interest income 16,280 16,241 10,893 9,561 8,984 - ------------------------------------------------------------------------------------------------------------------- Provision for credit losses -- -- 250 250 -- Noninterest income 2,055 2,141 1,671 1,370 1,380 Noninterest expense 10,564 10,489 6,873 5,828 6,061 Income before income taxes 7,771 7,893 5,441 4,853 4,303 Provision for income taxes 2,883 2,966 1,737 1,602 1,395 - ------------------------------------------------------------------------------------------------------------------- Net income $ 4,888 $ 4,927 $ 3,704 $ 3,251 $ 2,908 - ------------------------------------------------------------------------------------------------------------------- Return on average equity 14.17% 14.60% 15.60% 17.30% 17.80% Return on average assets 1.57% 1.60% 2.00% 1.99% 2.02% PER SHARE DATA(1) - ------------------------------------------------------------------------------------------------------------------- Earnings per common share $ 0.57 $ 0.57 $ 0.48 $ 0.44 $ 0.40 - ------------------------------------------------------------------------------------------------------------------- Diluted earnings per share 0.57 0.56 0.48 0.43 0.39 Dividends declared per common share 0.24 0.19 0.13 0.13 0.08 Ratio of dividends declared to net income 42.1% 33.7% 28.0% 28.3% 19.0% BALANCE SHEET DATA AT YEAR END Loans $198,001 $175,188 $115,414 $ 99,776 $ 88,972 - ------------------------------------------------------------------------------------------------------------------- Total assets 311,504 311,217 177,107 151,485 141,537 - ------------------------------------------------------------------------------------------------------------------- Total deposits 276,366 274,122 173,176 155,568 132,744 - ------------------------------------------------------------------------------------------------------------------- Total equity 33,609 35,235 31,861 20,188 17,470 - -------------------------------------------------------------------------------------------------------------------
(1) Adjusted to reflect all stock dividends and stock splits through December 31, 1999. 1 2 AVERAGE BALANCES & AVERAGE RATES EARNED & PAID
Years Ended December 31 (in thousands) 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- Balance Interest Rate Balance Interest Rate - --------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS Federal funds sold $ 18,792 $ 936 4.98% $ 38,206 $ 2,053 5.37% Held to maturity securities(1) 18,004 1,382 7.68 18,432 1,410 7.65 Available for sale securities 57,340 3,483 6.07 28,573 1,814 6.35 Commercial Loans(2) 149,589 13,845 9.26 156,049 15,261 9.78 Consumer Loans(2) 36,226 3,501 9.66 37,397 3,852 10.27 - --------------------------------------------------------------------------------------------------------------------------------- Total earning assets 279,951 23,147 8.27 278,657 24,390 8.75 - --------------------------------------------------------------------------------------------------------------------------------- Nonearning assets 35,947 33,161 Less: Loan loss reserve (3,835) (4,062) - --------------------------------------------------------------------------------------------------------------------------------- Total assets $ 312,063 $ 307,756 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Interest-bearing checking $ 32,813 $ 321 0.98% $ 33,188 $ 446 1.34% Money market 84,549 2,774 3.28 75,519 2,764 3.66 Savings 24,764 486 1.96 24,336 523 2.15 Time 59,252 2,832 4.78 73,627 3,932 5.34 - --------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 201,378 6,413 3.18 206,670 7,665 3.71 - --------------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing deposits 73,610 64,733 - --------------------------------------------------------------------------------------------------------------------------------- Total deposits 274,988 271,403 - --------------------------------------------------------------------------------------------------------------------------------- Other liabilities 2,588 2,571 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities 277,576 273,974 - --------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity 34,487 33,782 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 312,063 $ 307,756 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income(1) $ 16,734 $ 16,725 Interest Income as a percentage of average earning assets 8.27% 8.75% Interest expense as a percentage of average earning assets 2.29 2.75 - --------------------------------------------------------------------------------------------------------------------------------- Net interest margin 5.98% 6.00% - ---------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31 (in thousands) 1997 - -------------------------------------------------------------------------------------- Balance Interest Rate - -------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS Federal funds sold $ 19,556 $ 1,063 5.44% Held to maturity securities(1) 18,480 1,431 7.74 Available for sale securities 22,486 1,504 6.69 Commercial Loans(2) 71,016 7,531 10.60 Consumer Loans(2) 38,565 3,913 10.15 - -------------------------------------------------------------------------------------- Total earning assets 170,103 15,442 9.08 - -------------------------------------------------------------------------------------- Nonearning assets 17,056 Less: Loan loss reserve (1,597) - -------------------------------------------------------------------------------------- Total assets $ 185,562 - -------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Interest-bearing checking $ 20,256 $ 299 1.48% Money market 53,036 2,116 3.99 Savings 15,358 337 2.19 Time 26,285 1,310 4.98 - -------------------------------------------------------------------------------------- Total interest-bearing deposits 114,935 4,062 3.53 - -------------------------------------------------------------------------------------- Noninterest-bearing deposits 45,552 - -------------------------------------------------------------------------------------- Total deposits 160,487 - -------------------------------------------------------------------------------------- Other liabilities 1,415 - -------------------------------------------------------------------------------------- Total liabilities 161,902 - -------------------------------------------------------------------------------------- Shareholders' equity 23,660 - -------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 185,562 - -------------------------------------------------------------------------------------- Net interest income(1) $ 11,380 Interest Income as a percentage of average earning assets 9.08% Interest expense as a percentage of average earning assets 2.39 - -------------------------------------------------------------------------------------- Net interest margin 6.69% - --------------------------------------------------------------------------------------
(1) Tax exempt income has been adjusted to a tax equivalent basis at a 37% effective rate. (2) Nonaccrual loans are included in average balances. Net Interest Income For financial institutions, the primary component of earnings is net interest income, which is the difference between interest income, from loans and investment securities, and interest expense on deposits. In 1999, VRB sustained net interest income levels while experiencing changing interest rates and increased competitive pressures by investing excess liquidity in securities, expanding the loan portfolio, and reducing the rates paid on deposits. A key financial benchmark for all financial institutions is the interest margin, which is net interest income divided by average interest earning assets. In 1999, VRB's interest margin of 5.98% declined by .02%, virtually unchanged from the prior year. During 1999, the average yield on interest earning assets declined by .48%, reflecting the low interest rate environment in effect for most of the year. To offset the decline in asset yields, select deposit rates were reduced. These pricing decisions influenced the bank's deposit mix, and $14.3 million in certificates of deposit were replaced by less expensive funding such as interest-bearing demand deposits. Overall, VRB's average cost of funds declined from 3.71% to 3.18%. 2 3 ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL
- ------------------------------------------------------------------------------------------------------------------------------------ December 99 compared to December 98 December 99 compared to December 97 Increase (decrease) in Increase (decrease) in interest due to changes in interest due to changes in - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) Average Volume Average Rate Net Effect Average Volume Average Rate Net Effect - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST-EARNING ASSETS Federal funds sold $ (967) $ (150) $(1,117) $ 1,002 $ (12) $ 990 Held-to-maturity securities (33) 5 (28) (4) (17) (21) Available-for-sale securities 1,747 (78) 1,669 386 (76) 310 Commercial loans (598) (818) (1,416) 8,316 (586) 7,730 Consumer loans (113) (238) (351) (107) 46 (61) - ------------------------------------------------------------------------------------------------------------------------------------ Total 36 (1,279) (1,243) 9,593 (645) 8,948 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST-BEARING LIABILITIES Interest-bearing checking (4) (121) (125) 174 (27) 147 Money market 296 (286) 10 823 (175) 648 Savings 8 (45) (37) 193 (7) 186 Time deposits (687) (413) (1,100) 2,528 94 2,622 - ------------------------------------------------------------------------------------------------------------------------------------ Total (387) (865) (1,252) 3,718 (115) 3,603 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Net increase in net interest income $ 423 $ (414) $ 9 $ 5,875 $ (530) $ 5,345 - ------------------------------------------------------------------------------------------------------------------------------------
Fee Income Fee income, or noninterest income, totaled $2.1 million, a 4% decline when compared to the prior year. As a percent of total revenues, fee income equaled 8.3% in 1999, virtually unchanged from 1998. The decline in noninterest income is due to the decrease in residential mortgage loans originated through the Bank's mortgage lending department. In the third quarter, the mortgage lending department was restructured and moved in-house to include local processing, underwriting and closing of residential real estate loans. In connection with the restructure, the department introduced new products and expanded its mortgage services. Management believes the department is now positioned to capture a much larger share of the market; however, the origination and refinance of mortgage loans and related fees are dependent on the general level and direction of interest rates. Accordingly, there can be no assurance that such income will improve in the future. Cost of Operations Cost of operations, or noninterest expense, grew to $10.6 million, a small increase of less than one percent. VRB hired a number of senior lending and calling officers in 1999 to generate loan growth. As a result, salaries and benefits rose from $6.0 million to $6.3 million, a 5.6% increase. VRB had 177 full time equivalent employees at December 31, 1999 compared to 167 full time equivalent employees at December 31, 1998. Occupancy costs, including depreciation, rent and small equipment, increased by 12.9% to $1.2 million. In 1999, VRB embarked on a campaign to upgrade operating equipment and streamline data and voice communications, investing $1.1 million into capital projects and company infrastructure. With the exception of communication expense (primarily postage and phone service), other administrative expenses declined slightly, centered around reductions in professional fees and other one-time expenses related to the acquisition of Colonial Banking Company in 1998 (see Note 2 in Notes to Consolidated Financial Statements). One measure of VRB's ability to contain noninterest expenses is the efficiency ratio. It is calculated by dividing total noninterest expense by the sum of net interest income and noninterest income. In 1999, VRB maintained an efficiency margin of 57.6%, slightly higher than 1998's efficiency margin of 57.1%. Excluding the amortization of goodwill from the measurement, the efficiency margin drops to 53.5% and 52.8% for 1999 and 1998, respectively. 3 4 Income Taxes The income tax provision was $2.9 million in 1999, compared to $3.0 in 1998. VRB's effective tax rate declined slightly to 37% in 1999, and differs from federal and state statutory rates due to nondeductible goodwill (see Note 8 in Notes to Consolidated Financial Statements). Comparison of Results of Operations for the Years Ended December 31, 1998 and December 31, 1997 In the first quarter of 1998, VRB acquired Colonial Banking Company ("CBC"). CBC was a state charted bank owned by Investors Banking Corporation, with approximately $116 million in total assets. CBC added four branches to VRB's existing branch network in Southern Oregon. VRB paid $15.7 million in cash, which was approximately 2.5 times book value. The acquisition of CBC brought increased market share to the Bank and preempted the acquisition of CBC by potential competitors looking to enter the Rogue Valley market. Earnings grew to $4.9 million in 1998, up $1.2 million or 33% when compared to 1997. Diluted earnings per share grew to $.57, an increase of 19% from $.48 in 1997. Earnings accretion from the CBC acquisition was partially diluted by the sale of 1.2 million shares of VRB common stock, the proceeds of which were used to finance the CBC acquisition. The acquisition of CBC altered VRB's deposit structure with a new emphasis in certificates of deposit (27% of total deposits vs. 16% pre-acquisition). CBC also brought an unusually large concentration of out-of- area commercial loans with very low interest rates. The net portfolio return on CBC loans was approximately 70 basis points lower than VRB's then present average. While net interest income grew by $1.3 million, VRB's interest margin declined from 6.69% to 6.01%. Noninterest income and expenses also reflected the acquisition, growing 28% and 53%, respectively. Lending and Credit Management Loans: As of December 31, 1999, loans outstanding totaled $201.7 (not including mortgage loans held for sale). This is a 13% increase over 1998, when loans totaled $179.1. Loan growth was diversified across all categories, with the biggest gains in commercial real estate, term debt and lines of credit. Loan growth is the result of aggressive calling strategies, innovative terms and favorable economic conditions. LOAN PORTFOLIO MIX
1999 1998 - --------------------------------------------------------------------------------------------------------------- (in thousands) Amount Percent Amount Percent - --------------------------------------------------------------------------------------------------------------- Real estate mortgage - commercial and residential $134,765 67% $126,675 71% Real estate - construction 29,034 14% 23,552 13% Commercial 23,940 12% 16,418 9% Installment 13,997 7% 12,425 7% - --------------------------------------------------------------------------------------------------------------- $201,736 100% $179,070 100% - --------------------------------------------------------------------------------------------------------------- Loans at fixed rates $ 53,440 26% $ 56,775 32% Loans at variable rates 148,296 74% 122,295 68% - --------------------------------------------------------------------------------------------------------------- $201,736 100% $179,070 100% - ---------------------------------------------------------------------------------------------------------------
4 5 LOAN LOSS EXPERIENCE
- ----------------------------------------------------------------------------------------------------------------- (in thousands) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Balance, beginning of year $3,539 $1,780 $1,632 $1,407 $1,414 LOAN LOSSES Commercial -- 21 48 29 31 Real Estate 28 95 -- -- -- Consumer 58 73 93 9 14 - ----------------------------------------------------------------------------------------------------------------- Total 86 189 141 38 45 - ----------------------------------------------------------------------------------------------------------------- RECOVERIES Commercial 38 36 22 10 20 Real Estate -- -- -- -- -- Consumer 12 14 17 3 18 - ----------------------------------------------------------------------------------------------------------------- Total 50 50 39 13 38 - ----------------------------------------------------------------------------------------------------------------- Net loan losses 36 139 102 25 7 Provision of loan losses -- -- 250 250 -- Changes incidental to merger -- 1,898 -- -- -- - ----------------------------------------------------------------------------------------------------------------- Balance, end of year $3,503 $3,539 $1,780 $1,632 $1,407 - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Loan loss reserve / total loans 1.74% 1.98% 1.52% 1.61% 1.56% - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Net loan losses / average loans outstanding 0.02% 0.07% 0.09% 0.03% 0.01% - -----------------------------------------------------------------------------------------------------------------
Loan loss reserve: Risk of nonpayment exists for all types of loans, with certain types of risk associated with different loans. VRB's loan portfolio is focused on real estate mortgage and construction loans, with 81% of the portfolio collateralized by some sort of real estate. The expected source of repayment on these loans is generally the operations of the borrowers' business or personal income, with real estate providing additional security. Risks associated with real estate loans include the current economic climate, fluctuating land values, and geographic and industry concentrations.
- ------------------------------------------------------------------------------------------------------------------ Nonperforming assets (in thousands) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Loans on nonaccrual status $551 $262 $372 $ 58 $ 53 Loans past due greater than 90 days -- 4 -- 12 48 - ------------------------------------------------------------------------------------------------------------------ Total nonperforming loans 551 266 372 70 101 - ------------------------------------------------------------------------------------------------------------------ Other real estate owned -- 51 -- -- -- - ------------------------------------------------------------------------------------------------------------------ Total nonperforming assets $551 $317 $372 $ 70 $101 - ------------------------------------------------------------------------------------------------------------------ Allowance for loan losses / nonperforming loans 636% 1330% 477% 2331% 1393% Nonperforming loans / total loans 0.27% 0.15% 0.32% 0.06% 0.11% Nonperforming assets / total assets 0.18% 0.10% 0.18% 0.04% 0.07% - ------------------------------------------------------------------------------------------------------------------
VRB has established credit policies and guidelines that control and monitor credit risk on an ongoing basis. Managing credit risk is the responsibility of all loan officers. Each credit is evaluated as to the likelihood that a borrower will repay a loan from expected sources. When collateral is involved, this includes ensuring that sufficient collateral is obtained at the outset, and that the value of the collateral remains sufficient to support the credit. Nonperforming assets include assets that are on nonaccrual status, loans past due greater than 90 days but not on nonaccrual status, and other real estate owned (OREO). Nonperforming assets have consistently averaged less than a quarter of one percentage point of total assets over the last 5 years. 5 6 Liquidity Liquidity enables VRB to meet the borrowing needs of its customers and deposit withdrawals of its depositors. VRB manages its liquidity through a mature and stable base of customer deposits, various lines of credit with other financial institutions and cash flows from continuing operations. VRB's investment portfolio remains a potential source of liquidity, however, in 1999, the portfolio remained unchanged, due to the overall interest rate conditions and the depreciated value of securities available-for-sale. In 1999, liquidity was influenced by the following events: o Lending efforts gained momentum and VRB funded net loan growth of $23 million. o Capital expenditures grew in 1999, with cash outlays of $1.8 million for the new Central Point site ($500,000), building remodel ($300,000), and communication and data equipment upgrades ($1,000,000). o Deposit growth remained low, growing to $276.4 million as of December 31, 1999, an increase of $2.2 million over the prior year. Ongoing business development strategies fostered higher growth in non interest and interest bearing demand for total growth of $11.3 million. This growth was offset by a decline in time certificates of deposit. o Cash outlays increased to accommodate record dividend payments ($2.1 million) and the repurchase of common stock ($3.1 million). Management anticipates that the bank will continue to rely upon customer deposits, maturities of investments, loan repayments, income from continuing operations and short-term borrowings to provide liquidity. Deposit strategies have been designed to promote growth. However, such strategies may be influenced by changes in general economic conditions, the banking industry, and competition from banks and non-bank financial corporations. Short-term borrowings may be used to compensate for reductions in other sources of funds. VRB maintains a cash management credit facility with the Federal Home Loan Bank. The credit facility is limited to 10% of total assets, (approximately $30 million at December 31, 1999) measured on a quarterly basis. The credit facility is collateralized by FHLB stock owned by VRB and by all its other assets. In addition, VRB maintains federal funds lines with correspondent banks as an alternative source of temporary liquidity. At December 31, 1999, VRB had federal funds lines totaling $8 million. No advances were outstanding at year-end. Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will have an adverse impact on VRB's earnings. The greatest source of interest rate risk results from the mismatch of maturities and repricing intervals for rate sensitive assets, liabilities and off balance sheet commitments. To further illustrate, if VRB makes long term fixed rate loans and finances them with floating-rate deposits, a gap mismatch is created because the repricing period for loans and deposits are different. If interest rates were to rise in this scenario, VRB may be obligated to pay more interest on deposits while receiving the same amount of interest on loans. VRB measures its interest rate risk using asset/liability simulation modeling which quantifies variations in net interest income due to changes in the interest rate environment. The analysis incorporates the maturity and repricing characteristics of VRB's current configuration of interest bearing assets and liabilities. By adjusting interest rates up or down in even increments of 100 and 200 basis points in a series of "rate shocks", VRB can develop a range of possible outcomes. The following table sets forth the estimated changes in VRB's net interest income over a period of one year under the scenarios set forth.
- -------------------------------------------------------------------------------------------------------------------------------- Rate Shock Analysis - -------------------------------------------------------------------------------------------------------------------------------- Change in the prime rate Increase (decrease) Adjusted net interest margin Adjusted return on equity CURRENT: 8.50% in net interest income 5.98% 14.17% 2.00% $ (66) 5.95% 14.05% 1.00% $ (33) 5.97% 14.11% -- -- -- -- -1.00% $ 81 6.01% 14.32% -2.00% $(827) 5.68% 12.66% - --------------------------------------------------------------------------------------------------------------------------------
6 7 Certain shortcomings are inherent in this analysis. Broad assumptions have been made regarding customer behavior in periods of changing interest rates, including the prepayment characteristics of loans and the repricing and withdrawal of deposits. Additionally, certain assets, such as adjustable rate loans have features, which restrict changes in interest rates. The interest rate sensitivity of VRB's net interest income could vary significantly if different assumptions were used, or if actual experience differs from the assumptions used. Capital Management VRB and its wholly owned subsidiary, Valley of the Rogue Bank, are subject to risk-based capital guidelines. Bank regulatory authorities use these guidelines to evaluate capital adequacy based upon an institutions asset risk profile and off balance sheet exposures, such as unused loan commitments, and standby letters of credit. Institutions are required to maintain a minimum 8 percent total risk-based capital ratio, the ratio of total capital divided by risk-weighted assets, and a Tier 1 capital ratio of at least 4 percent. In addition, institutions are required to exceed a minimum 4% leverage ratio, which is Tier 1 capital divided by total average assets. At December 31, 1999, VRB maintained capital well above required regulatory levels. (See Note 18 of Notes to Consolidated Statements) Management strives to sustain capital levels that assure financial soundness while at the same time employs leverage to achieve increasing profitability. Market for Common Stock VRB's common stock is listed on the Nasdaq Stock Market()and trades under the symbol VRBA. As of February 15, 2000, VRB had approximately 2,100 shareholders of record. Dividends VRB paid a cash dividend of $.12 per share for shareholders of record on March 31, 1999 and paid a second cash dividend of equal amount to shareholders of record on September 15, 1999. Combined, the two dividends represented 42% of the bank's net income. VRB anticipates that cash dividends will continue to be paid on a regular basis. However, the amount paid will depend on the bank's overall financial condition and liquidity. MARKET FOR COMMON STOCK
- ---------------------------------------------------------------------------------------------------------------------------- The reported high and low closing stock prices were as follows: 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- High Low High Low - ---------------------------------------------------------------------------------------------------------------------------- 1st quarter 9.50 7.00 11.78 9.62 2nd quarter 8.63 7.03 11.54 9.38 3rd quarter 8.44 6.50 10.00 7.33 4th quarter 7.38 5.75 10.23 7.00 - ---------------------------------------------------------------------------------------------------------------------------- Stock Data 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Book value per common share at year-end 4.05 4.05 3.66 Closing common stock price 6.06 7.75 9.25 Number of common shares outstanding 8,303,596 8,694,286 8,674,374 P/E Ratio 10.6 13.6 19.3 - ----------------------------------------------------------------------------------------------------------------------------
7 8 CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------------- ASSETS - ----------------------------------------------------------------------------------------------------------------------------- DECEMBER 31 1999 1998 Cash and due from banks $ 17,086,676 $ 14,513,570 Interest-bearing deposits with other banks 1,600,000 3,100,000 Federal funds sold -- 23,000,000 - ----------------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 18,686,676 40,613,570 - ----------------------------------------------------------------------------------------------------------------------------- Held-to-maturity securities: State and municipal subdivisions 18,010,109 17,454,188 Available-for-sale securities: U.S. Treasuries and agencies 54,755,835 57,070,000 Collateralized mortgage obligations and other investments 134,146 193,631 Federal Home Loan Bank stock 1,898,800 1,765,220 Loans held-for-sale 1,182,951 -- Loans, net of allowance for loan losses and unearned income 196,818,024 175,188,200 Premises and equipment, net of accumulated depreciation and amortization 7,797,420 6,499,131 Goodwill, net of amortization 8,798,661 9,511,831 Other real estate owned -- 51,161 Accrued interest and other assets 3,421,075 2,870,121 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $ 311,503,697 $ 311,217,053 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------------------------------- DECEMBER 31 1999 1998 DEPOSITS Demand deposits $ 74,804,533 $ 72,134,186 Interest-bearing demand deposits 119,569,318 110,900,199 Savings deposits 23,512,119 24,269,197 Time deposits 58,479,936 66,818,719 - ----------------------------------------------------------------------------------------------------------------------------- Total deposits 276,365,906 274,122,301 - ----------------------------------------------------------------------------------------------------------------------------- Accrued interest and other liabilities 1,528,447 1,859,297 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities 277,894,353 275,981,598 - ----------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (Note 12) SHAREHOLDERS' EQUITY Preferred stock, voting, $5 par value; 5,000,000 shares authorized and unissued -- -- Preferred stock, nonvoting, $5 par value; 5,000,000 shares authorized and unissued -- -- Common stock, no par value, 30,000,000 shares authorized with 8,303,596 and 8,694,286 issued and outstanding at December 31, 1999 and 1998, respectively 18,699,060 21,583,869 Retained earnings 16,428,287 13,590,957 Accumulated other comprehensive (loss) income, net of taxes (1,518,003) 60,629 - ----------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 33,609,344 35,235,455 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 311,503,697 $ 311,217,053 - -----------------------------------------------------------------------------------------------------------------------------
- ---------- See accompanying notes. The Financial Statements on Pages 13-32 have not been reviewed, or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation. 8 9 CONSOLIDATED STATEMENTS OF INCOME & COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 17,345,427 $ 19,099,960 $ 11,443,683 Interest on investment securities held-to-maturity: State and municipal subdivisions 929,551 945,018 944,226 Interest on investment securities available-for-sale: U.S. Treasuries and agencies 3,340,584 1,648,543 1,336,882 Collateralized mortgage obligations and other investments 8,721 27,624 78,310 Federal Home Loan Bank stock dividends 133,792 137,720 88,500 Federal funds sold 683,822 1,537,913 655,746 Interest on deposits in banks 251,678 514,895 407,337 - ------------------------------------------------------------------------------------------------------------------------------- Total interest income 22,693,575 23,911,673 14,954,684 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest-bearing demand deposits 3,095,169 3,210,401 2,414,951 Savings deposits 486,210 523,341 336,830 Time deposits 2,831,771 3,932,290 1,309,999 Other borrowings -- 4,490 -- - ------------------------------------------------------------------------------------------------------------------------------- Total interest expense 6,413,150 7,670,522 4,061,780 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 16,280,425 16,241,151 10,892,904 - ------------------------------------------------------------------------------------------------------------------------------- PROVISION FOR LOAN LOSSES -- -- 250,000 - ------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 16,280,425 16,241,151 10,642,904 - ------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Service charges on deposit accounts 1,300,921 1,294,878 1,019,786 Other operating income 754,731 846,102 650,853 - ------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 2,055,652 2,140,980 1,670,639 - ------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSES Salaries and benefits 6,317,618 5,984,912 4,120,469 Net occupancy 1,157,013 1,024,860 813,915 Amortization of goodwill 713,170 739,616 110,299 Communications 452,014 386,461 239,721 Data processing 325,376 306,499 181,460 Supplies 267,454 289,675 230,255 Professional fees 192,401 266,446 180,658 FDIC insurance premium 30,603 47,270 18,201 Other real estate expense 14,970 25,486 -- Other expenses 1,093,825 1,418,223 977,946 - ------------------------------------------------------------------------------------------------------------------------------- Total noninterest expenses 10,564,444 10,489,448 6,872,924 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 7,771,633 7,892,683 5,440,619 - ------------------------------------------------------------------------------------------------------------------------------- PROVISION FOR INCOME TAXES 2,883,250 2,966,000 1,737,000 - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 4,888,383 $ 4,926,683 $ 3,703,619 - ------------------------------------------------------------------------------------------------------------------------------- OTHER COMPREHENSIVE INCOME Unrealized gain (loss) on securities, net of tax: Unrealized holding gain (loss) arising during period (1,578,632) 12,087 (2,964) Reclassification adjustment for gain included in net income -- -- (4,283) - ------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) (1,578,632) 12,087 (7,247) - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME $ 3,309,751 $ 4,938,770 $ 3,696,372 - ------------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $ 0.57 $ 0.57 $ 0.48 DILUTED EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $ 0.57 $ 0.56 $ 0.48 - -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes. 9 10 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED OTHER TOTAL COMMON STOCK RETAINED COMPREHENSIVE SHAREHOLDERS' SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1996 3,574,682 $ 9,480,330 $ 10,652,015 $ 55,789 20,188,134 - ---------------------------------------------------------------------------------------------------------------------------------- Stock options exercised (February to August 1997) 17,475 85,230 -- -- 85,230 2 for 1 stock split (September 10, 1997) 3,592,157 -- -- -- -- Stock options exercised (September to October 1997 6,430 26,152 -- -- 26,152 Income tax benefit from stock options exercised -- 86,896 -- -- 86,896 Cash dividend ($.14 per share, paid October 31, 1997) -- -- (1,006,333) -- (1,006,333) Stock offering (November 1997) 1,150,000 8,784,104 -- -- 8,784,104 - ---------------------------------------------------------------------------------------------------------------------------------- Net income and comprehensive loss -- -- 3,703,619 (7,247) 3,696,372 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1997 8,340,744 18,462,712 13,349,301 48,542 31,860,555 - ---------------------------------------------------------------------------------------------------------------------------------- Stock options exercised (March to September 1998) 19,410 50,128 -- -- 50,128 Income tax benefit from stock options exercised -- 60,500 -- -- 60,500 Cash dividend ($.20 per share, paid October 1, 1998) -- -- (1,672,031) -- 1,672,031) 4% stock dividend (October 1, 1998) 334,132 3,010,529 (3,010,529) -- -- Payments for fractional shares related to stock dividend -- -- (2,467) -- (2,467) - ---------------------------------------------------------------------------------------------------------------------------------- Net income and comprehensive income -- -- 4,926,683 12,087 4,938,770 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1998 8,694,286 21,583,869 13,590,957 60,629 35,235,455 - ---------------------------------------------------------------------------------------------------------------------------------- Stock options exercised March to December 1999 36,179 219,126 -- -- 219,126 Cash dividend ($0.12 per share, paid May 21 and October 15, 1999) -- -- (2,051,053) -- (2,051,053) Stock repurchased (April to December 1999) (426,869) (3,103,935) -- -- (3,103,935) - ---------------------------------------------------------------------------------------------------------------------------------- Net income and comprehensive loss -- -- 4,888,383 (1,578,632) 3,309,751 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1999 8,303,596 $ 18,699,060 $ 16,428,287 $ (1,518,003) $ 33,609,344 - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes. 10 11 CONSOLIDATED STATEMENTS OF CASH FLOW
- ----------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 4,888,383 $ 4,926,683 $ 3,703,619 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES: Depreciation and amortization 1,220,546 1,134,242 392,547 Loss (gain) on sales of assets 18,423 (18,931) (8,429) Provision for loan losses -- -- 250,000 FHLB stock dividend (133,580) (137,720) (88,500) Deferred taxes (167,988) 89,269 22,684 Compensation expense - stock options 89,763 93,340 57,312 CHANGE IN CASH DUE TO CHANGES IN CERTAIN ASSETS AND LIABILITIES: Net change in accrued interest and other assets 324,277 410,555 215,220 Net change in accrued interest and other liabilities (313,041) (1,292,613) 323,300 - ----------------------------------------------------------------------------------------------------------------------------- Net cash from operating activities 5,926,783 5,204,825 4,867,753 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from the maturity of held-to-maturity securities 575,000 3,425,000 215,000 Purchases of held-to-maturity securities (1,125,587) (2,371,411) -- Proceeds from maturity of available-for-sale securities -- -- 446,971 Proceeds from sales of available-for-sale securities 10,559,844 33,611,023 3,008,437 Purchases of available-for-sale securities (10,500,000) (64,980,969) (3,000,000) Net (increase) decrease in loans (22,963,084) 31,608,420 (15,888,096) Cash paid, net of cash acquired from acquisition -- (1,644,499) -- Sale of credit card portfolio obtained in acquisition -- 939,583 -- Purchase of premises and equipment (1,795,106) (675,541) (699,013) Proceeds from the sale of other real estate 186,500 420,850 -- Proceeds from the sale of premises and equipment 8,585 -- 2,600 - ----------------------------------------------------------------------------------------------------------------------------- Net cash from investing activities (25,053,848) 332,456 (15,914,101) - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 2,243,605 (6,930,019) 17,607,889 Proceeds from public stock offering, net of expenses -- -- 8,784,104 Cash dividends and fractional share payments (2,051,053) (1,674,498) (1,006,333) Cash received from exercise of common stock options 111,554 36,517 88,068 Repurchase of common stock (3,103,935) -- -- - ----------------------------------------------------------------------------------------------------------------------------- Net cash from financing activities (2,799,829) (8,568,000) 25,473,728 - ----------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (21,926,894) (3,030,719) 14,427,380 CASH AND CASH EQUIVALENTS, beginning of year 40,613,570 43,644,289 29,216,909 - ----------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, end of year $ 18,686,676 $ 40,613,570 $ 43,644,289 - ----------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid for interest $ 6,486,065 $ 7,464,255 $ 4,048,741 Cash paid for taxes 2,944,100 2,805,000 1,320,994 SCHEDULE OF NONCASH ACTIVITIES Stock dividends declared $- $ 3,010,529 $- Transfer of loan balances to other real estate 150,309 453,079 -- Unrealized gain (loss) on available-for-sale securities, net of tax (1,578,632) 12,087 (7,247) Income tax benefit of stock options exercised -- 60,500 86,896 - -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes. 11 12 Note 1: Organization and Summary of Significant Accounting Policies Basis of presentation - The accompanying consolidated financial statements include the accounts of VRB Bancorp (VRB), a bank holding company, and its wholly-owned subsidiary, Valley of the Rogue Bank (the Bank). Substantially all activity of VRB is conducted through its subsidiary bank and all significant intercompany accounts and transactions have been eliminated in the preparation of the consolidated financial statements. Notes to Consolidated Statements Description of business - The Bank is a state-chartered institution authorized to provide banking services by the State of Oregon. With its headquarters in Rogue River, Oregon, it also has branch operations in Josephine and Jackson County, Oregon. The Bank conducts a general banking business. Its activities include the usual deposit functions of a commercial bank: commercial, real estate, installment, and mortgage loans; checking and savings accounts; automated teller machines (ATM's); collection services; and, safe deposit facilities. Both VRB Bancorp and Valley of the Rogue Bank are subject to the regulations of certain Federal and State agencies and undergo periodic examinations by those regulatory authorities. Management's estimates and assumptions - In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Investment securities - The Bank is required to specifically identify under generally accepted accounting principles its investment securities as "held-to-maturity," "available-for-sale," or "trading accounts." Accordingly, management has determined that all investment securities held at December 31, 1999 and 1998, are either "available-for-sale" or "held-to-maturity" and conform to the following accounting policies: Securities held-to-maturity - Bonds, notes, and debentures for which the Bank has the intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Securities available-for-sale - Available-for-sale securities consist of bonds, notes, debentures, and certain equity securities not classified as held-to-maturity securities. Securities are generally classified as available-for-sale if the instrument may be sold in response to such factors as: (1) changes in market interest rates and related changes in the security's prepayment risk, (2) needs for liquidity, (3) changes in the availability of and the yield on alternative instruments, and (4) changes in funding sources and terms. Unrealized holding gains and losses, net of tax, on available-for-sale securities are reported as a net amount in a separate component of equity until realized. Fair values for investment securities are based on quoted market prices. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary, result in write-downs of the individual securities to their fair value. The related write-downs would be included in earnings as realized losses. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Loans, net of allowance for loan losses and unearned income - Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses and unearned income. Interest on loans is calculated by using the simple-interest method on daily balances of the principal amount outstanding. The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for loan 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 possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to pay. Various regulatory agencies, as an 12 13 integral part of their examination process, periodically review the Bank's reserve for loan losses. Such agencies may require the Bank to recognize additions to the reserve based on their judgment of information available to them at the time of their examinations. Loans receivable that will not be repaid in accordance with their contractual terms are measured using a discounted cash flow methodology or the fair value of the collateral for certain loans. Accrual of interest is discontinued on impaired loans when management believes, after considering economic and business conditions, collection efforts, and collateral position that the borrower's financial condition is such that collection of interest is doubtful. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment to the yield of the related loan. Premises and equipment - Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. Depreciation is based on useful lives of 3 to 25 years on furniture and equipment; 15 to 40 years for buildings and components; and, 15 to 20 years on leasehold improvements. Other real estate - Real estate acquired by the Bank in satisfaction of debt is carried at the lower of cost or estimated net realizable value. When property is acquired, any excess of the loan balance over its estimated net realizable value is charged to the allowance for loan losses. Subsequent write-downs to net realizable value, if any, or any disposition gains or losses are included in noninterest income and expense. Goodwill - Goodwill represents the costs in excess of net assets acquired arising principally from the purchase of Colonial Banking Company (see Note 2), and is being amortized over 15 years. Income taxes - Deferred income tax assets and liabilities are determined based on the tax effects of differences between the book and tax bases of the various balance sheet assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Statement of cash flows - Cash equivalents are generally all short-term investments with a maturity of three months or less. Cash and cash equivalents normally include cash on hand, amounts due from banks, and federal funds sold. Off-balance-sheet financial instruments - The Bank holds no derivative financial instruments. However, in the ordinary course of business, the Bank enters into off-balance-sheet financial instruments consisting of commitments to extend credit as well as commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. Fair value of financial instruments - The following methods and assumptions were used by the Bank in estimating fair values of financial instruments as disclosed herein: Cash and cash equivalents - The carrying amounts of cash and short-term instruments approximate their fair value. Held-to-maturity and available-for-sale securities - Fair values for investment securities, excluding restricted equity securities, are based on quoted market prices. The carrying values of restricted equity securities approximate fair values. Loans receivable - For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteris- 13 14 tics. Fair values for commercial real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Deposit liabilities - The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit (CDs) approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Short-term borrowings - The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Bank's current incremental borrowing rates for similar types of borrowing arrangements. Long-term debt - The fair values of the Bank's long-term debt are estimated using discounted cash flow analyses based on the Bank's current incremental borrowing rates for similar types of borrowing arrangements. Accrued interest - The carrying amounts of accrued interest approximate their fair values. Off-balance-sheet instruments - The Bank's off-balance-sheet instruments include unfunded commitments to extend credit and standby letters of credit. The fair value of these instruments is not considered practicable to estimate because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs. Advertising - Advertising costs are charged to expense during the year in which they are incurred. Advertising expenses were $137,276, $169,524, and $114,670 for the years ended December 31, 1999, 1998, and 1997, respectively. Stock options - VRB applies Accounting Principles Board Opinion 25 and related interpretations in accounting for its stock option plans. Accordingly, compensation costs are recognized as the difference between the exercise price of each option and the market price of VRB's stock at the date each grant becomes further vested. Accordingly, compensation costs charged to income were $89,673, $93,340, and $57,312 in 1999, 1998, and 1997, respectively. Had compensation for VRB's stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Statement of Financial Accounting Standards No. 123, the Bank's net income would have been affected as described in Note 14. Recently issued accounting standards - In June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that VRB recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. SFAS No. 133, as amended by SFAS No. 137, shall be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. However, management of VRB believes this accounting standard will have no material effect on the financial condition and results of operation of the Bank. 14 15 Other issued but not yet required FASB statements are not currently applicable to the Bank's operations. Management believes these pronouncements will also have no material effect upon VRB's financial position or results of operation. Reclassifications - Certain reclassifications have been made to the 1998 and 1997 consolidated financial statements to conform with current year presentations. Note 2: Acquisition Of Colonial Banking Company VRB Bancorp completed its acquisition of Colonial Banking Company (CBC) effective January 5, 1998. VRB paid former stockholders of CBC $15.7 million in cash for the common and preferred stock of CBC. This acquisition was treated as a purchase for accounting purposes. Accordingly, under generally accepted accounting principles, the assets and liabilities of CBC have been recorded on the books of the Bank at their respective fair market values at the effective date the acquisition was consummated. Goodwill, the excess of the purchase price over the net fair value of the assets and liabilities acquired, was recorded at $9.5 million. Amortization of goodwill over a 15-year period will result in a charge to earnings of approximately $635,000 per year. The financial statements for the year ended December 31, 1998, include the operations of CBC from January 6, 1998 to December 31, 1998. Actual results of operations for the year ended December 31, 1998, would not have been materially different had the acquisition occurred on January 1, 1998. The following information presents unaudited pro forma results of operations for the year ended December 31, 1997, as though the acquisition had occurred on January 1, 1997. The pro forma results do not necessarily indicate the actual result that would have been obtained had the acquisition of CBC actually occurred on January 1, 1997.
- ----------------------------------------------------------------------------------------- NOTE 2: The following are the fair values of assets acquired and liabilities assumed as of the January 5, 1998, acquisition date (in thousands): - ----------------------------------------------------------------------------------------- Investment securities $ 4,797 Federal Home Loan Bank stock 420 Loans, net 92,775 Premises and equipment, net 1,802 Goodwill 9,526 Accrued interest and other assets 1,710 - ----------------------------------------------------------------------------------------- Total assets 111,030 - ----------------------------------------------------------------------------------------- Deposits 107,876 Accrued interest and other liabilities 1,510 Cash paid for acquisition, net of cash acquired 1,644 - ----------------------------------------------------------------------------------------- Total liabilities $111,030 - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Pro forma results of operation for the year ended December 31, 1997 - ----------------------------------------------------------------------------------------- Net interest income before provision for loan loss $ 16,404 Net income 3,713 Earnings per common share: Basic 0.51 Diluted 0.50 - -----------------------------------------------------------------------------------------
15 16
- --------------------------------------------------------------------------------------------------------- NOTE 3: Investment Securities. The amortized cost and estimated market values of investment securities at December 31, 1999 and 1998, are as follows (in thousands): - --------------------------------------------------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE - --------------------------------------------------------------------------------------------------------- DECEMBER 31, 1999 HELD-TO-MATURITY SECURITIES: - --------------------------------------------------------------------------------------------------------- State and municipal subdivisions $ 18,010 $ 137 $ (249) $ 17,898 - --------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES: U.S. Treasuries and agencies $ 56,990 $- $ (2,234) $ 54,756 Collateralized mortgage obligations 132 2 -- 134 - --------------------------------------------------------------------------------------------------------- $ 57,122 $ 2 $ (2,234) $ 54,890 - --------------------------------------------------------------------------------------------------------- DECEMBER 31, 1998 HELD-TO-MATURITY SECURITIES: - --------------------------------------------------------------------------------------------------------- State and municipal subdivisions $ 17,454 $ 793 $- $ 18,247 - --------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES: U.S. Treasuries and agencies $ 56,977 $ 177 $ (84) $ 57,070 Collateralized mortgage obligations 195 -- (1) 194 - --------------------------------------------------------------------------------------------------------- $ 57,172 $ 177 $ (85) $ 57,264 - ---------------------------------------------------------------------------------------------------------
Note 3: Investment Securities The amortized cost and estimated market value of investment securities at December 31, 1999, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. For purposes of the maturity table, collateralized mortgage obligations, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. Collateralized mortgage obligations may mature earlier than their weighted-average contractual maturities because of principal prepayments. At December 31, 1999 and 1998, investment securities with an amortized cost of $6,185,993 and $8,168,284, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is required to maintain an investment in capital stock of the FHLB. The FHLB stock is not actively traded but is redeemable by FHLB at its current book value.
- ---------------------------------------------------------------------------------------------------------------------------- NOTE 3: Maturity Table - ---------------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY AVAILABLE-FOR-SALE SECURITIES SECURITIES - ---------------------------------------------------------------------------------------------------------------------------- ESTIMATED ESTIMATED AMORTIZED COST MARKET VALUE AMORTIZED COST MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------------- Due in one year or less $ 205 $ 206 $ 2,572 $ 2,549 Due after one year through five years 3,394 3,418 38,050 36,672 Due after five years through ten years 3,089 3,108 15,500 14,756 Due after ten years 11,322 11,166 1,000 913 - ---------------------------------------------------------------------------------------------------------------------------- $18,010 $17,898 $57,122 $54,890 - ----------------------------------------------------------------------------------------------------------------------------
16 17 Note 4: Loans and Allowance for Loan Losses The Bank's recorded investment in impaired loans was $523,857 and $262,456 at December 31, 1999 and 1998, respectively. The average recorded investment in impaired loans approximates their recorded investment at December 31, 1999 and 1998. The total allowance for loan losses related to these loans at December 31, 1999 and 1998, was approximately $70,000 and $42,000, respectively. Interest income recognized on impaired loans during the years ended December 31, 1999, 1998, and 1997, was not significant. Management estimates that in 1999, approximately $42,600 of interest income was not recognized on impaired loans on nonaccrual status, compared with approximately $35,300 in 1998 and $29,600 in 1997.
- ---------------------------------------------------------------------------------------------------------- NOTE 4: The loan portfolio, including loans held-for-sale, consisted of the following (in thousands): - ---------------------------------------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------------------------------------- Real estate - construction $ 29,034 $ 23,552 Real estate - residential and commercial 134,765 126,675 Commercial 23,940 16,418 Installment 13,946 12,327 Other loans 51 98 - ---------------------------------------------------------------------------------------------------------- 201,736 179,070 - ---------------------------------------------------------------------------------------------------------- Allowance for loan losses (3,503) (3,539) Unearned loan fee income (232) (343) - ---------------------------------------------------------------------------------------------------------- $ 198,001 $ 175,188 - ----------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------- The following is an analysis of the changes in the allowance for loan losses (in thousands): - -------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Beginning balance $ 3,539 $ 1,780 $ 1,632 Acquired upon CBC acquisition (Note 2) -- 1,898 -- Provision for possible loan losses -- -- 250 Loans charged-off (86) (189) (141) Recoveries 50 50 39 - -------------------------------------------------------------------------------------------------------------------- Ending balance $ 3,503 $ 3,539 $ 1,780 - --------------------------------------------------------------------------------------------------------------------
Note 5: Bank Premises and Equipment
- --------------------------------------------------------------------------------------------------- NOTE 5: Bank premises, furniture, and equipment consisted of the following (in thousands): - --------------------------------------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------------------------------------- Land $ 2,069 $ 1,613 Buildings 6,001 5,375 Furniture and equipment 4,268 4,136 - --------------------------------------------------------------------------------------------------- 12,338 11,124 - --------------------------------------------------------------------------------------------------- Less: accumulated depreciation (4,541) (4,625) - --------------------------------------------------------------------------------------------------- $ 7,797 $ 6,499 - ---------------------------------------------------------------------------------------------------
17 18 Note 6: Accrued Interest and Other Assets
- --------------------------------------------------------------------------------------------------------- NOTE 6: Accrued interest and other assets consisted of the following (in thousands): - --------------------------------------------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------------------------------------------- Accrued interest receivable $1,925 $1,931 Prepaid expenses 272 234 Deferred taxes 1,099 553 Other assets 125 152 - --------------------------------------------------------------------------------------------------------- $3,421 $2,870 - ---------------------------------------------------------------------------------------------------------
Note 7: Time Deposits Time certificates of deposit of $100,000 and over aggregated $8,574,472 and $8,089,537 at December 31, 1999 and 1998, respectively.
- ---------------------------------------------------------------------------------------------- NOTE 7: At December 31, 1999, the scheduled maturities for time deposits is as follows (in thousands): - ---------------------------------------------------------------------------------------------- 2000 $52,802 2001 2,459 2002 2,774 2003 222 2004 and thereafter 223 - ---------------------------------------------------------------------------------------------- $58,480 - ----------------------------------------------------------------------------------------------
Note 8: Income Taxes
- ----------------------------------------------------------------------------------------------------------------- NOTE 8: The income tax provision consisted of the following (in thousands): - ----------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Currently payable $2,665 $2,877 $1,715 Deferred 168 89 22 - ----------------------------------------------------------------------------------------------------------------- Provision for income taxes $2,833 $2,966 $1,737 - -----------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------- Deferred income taxes represent the tax effect of differences in timing between financial income and taxable income. Deferred income taxes, according to the timing differences, which caused them, were as follows (in thousands): - ---------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Accounting loan loss provision less than (in excess of) tax provision $ 14 $ 69 $ (58) Accounting depreciation less than tax depreciation 42 46 3 Deferred compensation 15 9 (6) Accounting loan fees in excess of tax loan fees 178 67 66 Federal Home Loan Bank stock dividends 54 52 28 Cash to accrual adjustment -- (72) -- Option compensation expense (36) (72) -- Other differences (99) (10) (11) - ---------------------------------------------------------------------------------------------------------------------------- $ 168 $ 89 $ 22 - ----------------------------------------------------------------------------------------------------------------------------
18 19
- -------------------------------------------------------------------------------------------------------- The net deferred tax benefits included in other assets in the accompanying consolidated balance sheets include the following components (in thousands): - -------------------------------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------------------------------- DEFERRED TAX ASSETS: Loan loss reserve $ 1,062 $ 1,076 Deferred compensation 64 100 Other 242 86 - -------------------------------------------------------------------------------------------------------- 1,368 1,262 - -------------------------------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES: Accumulated depreciation (193) (151) Deferred loan fees (543) (365) Federal Home Loan Bank stock dividends (247) (193) (983) (709) - -------------------------------------------------------------------------------------------------------- Net deferred tax asset $ 385 $ 553 - --------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------- A reconciliation between the statutory federal income tax rate and the effective tax rate is as follows (in thousands): - ------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Federal income taxes at statutory rate $ 2,647 $ 2,684 $ 1,850 State income tax expense, net of federal income tax benefit 370 344 237 Effect of nontaxable interest income (389) (321) (294) Non-deductible goodwill 275 219 -- Other (70) 40 (56) - ------------------------------------------------------------------------------------------------------------------------- $ 2,833 $ 2,966 $ 1,737 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Effective tax rate 37% 38% 32% - -------------------------------------------------------------------------------------------------------------------------
The exercise of stock options which have been granted under VRB Bancorp's stock option plans give rise to compensation which is includable in the taxable income of the participant and deductible by the Bank for federal and state income tax purposes. Such compensation results from increases in the fair market value of VRB Bancorp's common stock subsequent to the date of grant of the applicable exercised stock options and, accordingly, in accordance with APB Opinion No. 25, such compensation is not recognized as an expense for financial accounting purposes and the related tax benefits are taken directly to common stock. For the years ended December 31, 1998 and 1997, these transactions resulted in federal and state tax deductions and benefits, which have increased common stock. Management believes, based upon the Bank's historical performance, that net deferred tax assets will be realized in the normal course of operations and, accordingly, management has not reduced net deferred tax assets by a valuation allowance. The tax provision differs from the federal statutory rate of 34% due principally to tax exemptions for interest received on municipal investments and nondeductible goodwill expense amortization. The 1997 provision for income taxes reflects a reduction in the state income tax rate from 6.6% to 3.8%. Note 9: Financial Instruments with Off-Balance-Sheet Risk The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and financial guarantees. Those instruments involve elements of credit and interest-rate risk similar to the amounts recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, and financial guarantees written, is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to 19 20 expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank's experience has been that a majority of loan commitments are drawn upon by customers. While most commercial letters of credit are not utilized, a significant portion of such utilization is on an immediate payment basis. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral varies but may include cash, accounts receivable, inventory, premises and equipment, and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third-party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds cash, marketable securities, or real estate as collateral supporting those commitments for which collateral is deemed necessary. The Bank has not been required to perform on any financial guarantees during the past two years. The Bank has not incurred any losses on its commitments in either 1999, 1998, or 1997.
- ------------------------------------------------------------------------------------------------------------- NOTE 9: A summary of the notional amounts of the Bank's financial instruments with off-balance-sheet risk at December 31, 1999 and 1998, follows: - ------------------------------------------------------------------------------------------------------------- 1999 1998 Commitments to extend credit $32,106,632 $21,165,221 Commercial and standby letters of credit $ 1,113,024 $ 1,090,009 - -------------------------------------------------------------------------------------------------------------
Note 10: Fair Values of Financial Instruments While estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that were the Bank to have disposed of such assets or liabilities at December 31, 1999 and 1998, the estimated fair values would necessarily have been realized at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 1999 and 1998, should not necessarily be considered to apply at subsequent dates. 25 In addition, other assets and liabilities of the Bank that are not defined as financial instruments are not included in the above disclosures, such as premises and equipment. Also, nonfinancial instruments typically not recognized in the financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the earnings potential of loan servicing rights, the trained work force, customer goodwill, and similar items.
- ---------------------------------------------------------------------------------------------------------------------------- NOTE 10: The following table estimates fair value and the related carrying values of the Bank's financial instruments (in thousands): - ---------------------------------------------------------------------------------------------------------------------------- 1999 1998 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - ---------------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and due from banks $ 17,087 $ 17,087 $ 14,514 $ 14,514 Interest-bearing deposits with other banks 1,600 1,600 3,100 3,100 Federal funds sold -- -- 23,000 23,000 Securities held-to-maturity 18,010 17,898 17,454 18,247 Securities available-for-sale 54,890 54,890 57,264 57,264 Federal Home Loan Bank stock 1,899 1,899 1,765 1,765 Loans held-for-sale 1,183 1,183 -- -- Loans, net of allowance for loan losses and unearned income 196,818 196,208 175,188 175,233 Accrued interest 1,925 1,925 1,931 1,931 FINANCIAL LIABILITIES: Demand and savings deposits 217,886 217,886 207,304 207,304 Time deposits 58,480 58,355 66,819 67,196 Accrued interest $ 275 $ 275 $ 348 $ 348 - ----------------------------------------------------------------------------------------------------------------------------
20 21 Note 11: Concentrations of Credit Risk All of the Bank's loans, commitments, and commercial and standby letters of credit have been granted to customers in the Bank's market area. Investments in state and municipal securities are not significantly concentrated within any one region of the United States. The concentrations of credit by type of loan are set forth in Note 4. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Commercial and standby letters of credit were granted primarily to commercial borrowers as of December 31, 1999. The Bank's loan policy does not allow the extension of credit to any single borrower or group of related borrowers in excess of a total of $1,250,000 without approval from the Board of Directors. Note 12: Commitments and Contingencies Litigation - In the ordinary course of business, the Bank becomes involved in various litigation arising from normal banking activities. In the opinion of management, the ultimate disposition of these actions will not have a material adverse effect on the consolidated financial position or results of operations. Operating leases - The Bank leases certain branch premises and equipment.
- --------------------------------------------------------------------------------------------- NOTE 12: The following is a schedule of future minimum lease payments under operating leases in effect as of December 31, 1999: - --------------------------------------------------------------------------------------------- YEARS ENDING DECEMBER 31 2000 $ 249,453 2001 244,031 2002 241,065 2003 177,844 2004 161,646 Thereafter 361,598 - --------------------------------------------------------------------------------------------- Total minimum payments required $1,435,637 - ---------------------------------------------------------------------------------------------
Total rental expense was $239,785, $226,920, and $94,350 in 1999, 1998, and 1997, respectively. Year 2000 - Because of the unprecedented nature of the Year 2000 issue, its effects, if any, may not be identified until a future date. Management cannot assure that VRB or the Bank have has identified all Year 2000 issues, that VRB's or the Bank's remediation efforts has been successful in whole or in part, or that parties with whom VRB or the Bank does business will not be significantly impacted by Year 2000 issues. Note 13: Borrowing Agreements The Bank has federal fund borrowing agreements with Bank of America and Wells Fargo Bank for $5,000,000 and $3,000,000, respectively. There is no stated rate of interest on these borrowings. As of December 31, 1999, there were no borrowings outstanding under these agreements. The Bank also participates in the Cash Management Advance Program with the Federal Home Loan Bank of Seattle (FHLB). Under the program, the Bank may borrow to a maximum of 10% of total assets (approximately $30 million at December 31, 1999 and 1998) with interest at the FHLB's cash management rate. There were no borrowings outstanding at December 31, 1999 and 1998. 21 22 Note 14: Stock Option Plans The Bank has two stock option plans, which were approved by the shareholders during 1991 and amended in 1994. The plans provide for an aggregate of 754,514 shares of the Bank's unissued common stock to be granted to key employees and nonemployee directors. The 1994 amendment removed the requirement for a five-year vesting schedule for any future grants from the Employees' Plan, thus leaving the setting of any vesting schedule to the discretion of the Board of Directors. The Directors' Plan was amended to extend the time in which options may be exercised following resignation or retirement. With the exception of certain options granted to nonemployee directors, all options granted and outstanding under both the Directors' and Employees' Plans are noncompensatory and exercisable at purchase prices which approximate fair value on the date of grant. Because certain options granted to the Bank's directors were based on purchase prices below the fair value of the stock as of the grant date, they are considered compensatory transactions and give rise to the recognition of compensation expense. Accordingly, the Bank has recognized $89,763, $93,340, and $57,312 as compensation expense relating to 15,695, 16,851, and 18,790 shares of common stock optioned to its directors during 1999, 1998, and 1997, respectively. Had compensation cost for the Bank's 1999, 1998, and 1997, grants for stock-based compensation plans been determined consistent with the fair value provisions of SFAS No. 123, the Bank's net income, and net income per common share for December 31, 1999, 1998, and 1997, would approximate the pro forma amounts below (in thousands except per share data):
- ------------------------------------------------------------------------------------------------- NOTE 14: Stock Option Plans - ------------------------------------------------------------------------------------------------- 1999 AS REPORTED PRO FORMA - ------------------------------------------------------------------------------------------------- Net income $ 4,888 $ 4,788 Basic earnings per common and common equivalent share 0.57 0.56 Diluted earnings per common and common equivalent share 0.57 0.56 1998 AS REPORTED PRO FORMA - ------------------------------------------------------------------------------------------------- Net income $ 4,927 $ 4,735 Basic earnings per common and common equivalent share 0.58 0.56 Diluted earnings per common and common equivalent share 0.58 0.56 1997 AS REPORTED PRO FORMA - ------------------------------------------------------------------------------------------------- Net income $ 3,704 $ 3,497 Basic earnings per common and common equivalent share 0.48 0.46 Diluted earnings per common and common equivalent share 0.48 0.46 - -------------------------------------------------------------------------------------------------
22 23
- ----------------------------------------------------------------------------------------------------------------------------------- NOTE 14: The following summarizes options available and outstanding under both the Directors' and Employees' Plans as of December 31, 1999, after the effect of the current year's stock dividend (in thousands with the exception of the exercise price): - ----------------------------------------------------------------------------------------------------------------------------------- DIRECTORS' PLAN EMPLOYEES' PLAN WEIGHTED AVERAGE WEIGHTED AVERAGE COMBINED PLANS SHARES OPTION PRICE SHARES OPTION PRICE SHARES - ----------------------------------------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1996 37 $ 1.75 123 $ 2.78 160 Options exercisable at December 31, 1996 37 1.75 35 1.62 72 Options reserved at December 31, 1996 165 197 362 - ----------------------------------------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1996 37 $ 1.75 123 $ 2.78 160 - ----------------------------------------------------------------------------------------------------------------------------------- Options granted in 1997 19 2.72 147 8.59 166 Options exercised in 1997 (9) 2.46 (33) 1.93 (42) Options forfeited -- -- (5) 3.47 (5) - ----------------------------------------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1997 47 2.01 232 $ 5.81 279 - ----------------------------------------------------------------------------------------------------------------------------------- Options exercisable at December 31, 1997 47 2.01 14 1.96 61 Options reserved at December 31, 1997 146 55 201 - ----------------------------------------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1997 47 $ 2.01 232 $ 5.81 279 - ----------------------------------------------------------------------------------------------------------------------------------- Options granted in 1998 17 3.67 18 10.62 35 Options exercised in 1998 (13) 1.89 (8) 1.67 (21) Options forfeited -- -- (5) 8.14 (5) - ----------------------------------------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1998 51 $ 2.58 237 $ 6.28 288 - ----------------------------------------------------------------------------------------------------------------------------------- Options exercisable at December 31, 1998 51 2.58 40 5.40 91 Options reserved at December 31, 1998 129 42 171 - ----------------------------------------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1998 51 $ 2.58 237 $ 6.28 288 - ----------------------------------------------------------------------------------------------------------------------------------- Options granted in 1999 16 4.05 5 7.17 21 Options exercised in 1999 (25) 3.09 (11) 3.06 (36) Options forfeited -- -- (32) 8.12 (32) - ----------------------------------------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1999 42 $ 2.82 199 $ 6.18 241 - ----------------------------------------------------------------------------------------------------------------------------------- Options exercisable at December 31, 1999 42 2.82 52 5.54 94 Options reserved at December 31, 1999 113 69 182 - -----------------------------------------------------------------------------------------------------------------------------------
The fair value of options granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) dividend yields of 3.24% in 1999, 5.75% in 1998, and 1.52% in 1997; (2) expected volatility of 28.57% in 1999, 18.35% in 1998, and 28.00% in 1997; (3) risk-free rates of 6.50% in 1999, 4.75% in 1998; and 6.50% in 1997; and, (4) expected life of one to ten years for all three years. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. Note 15: Employee Benefit Plans The Bank has a defined contribution profit sharing plan. All permanent employees are eligible to participate once they meet the age and length of employment requirements. Contributions are determined annually by the Board of Directors and were $337,418, $313,562, and $168,557 in 1999, 1998, and 1997, respectively, excluding additional amounts set aside for funding through the Bank's bonus program. Voluntary employee contributions are required to share in Bank contributions. Employee contributions were $222,313, $226,381, and $189,640 in 1999, 1998, and 1997, respectively. 23 24 The Bank has established a bonus program as part of the compensation package it provides to employees. At December 31, 1999, the Bank employed approximately 190 individuals eligible to participate in this program. Under the program, a bonus pool for nonexecutives is established and funded based on net profits of the current and immediately preceding year. An executive bonus program is similarly funded and is based on current year profits with payments measured on the basis of return on assets. For the years ending December 31, 1999, 1998, and 1997, $660,000, $620,000, and $542,400, respectively, was expensed to fund these programs with their related payroll and benefit costs. The Bank has also established supplemental retirement agreements with certain executive officers. The agreements provide for established post-retirement payments to covered executives for up to ten years after their retirement. The supplemental programs are self-funded by the Bank through the setting aside of funds into a bank-controlled deposit account. As of December 31, 1999, a liability for the supplemental retirement plans was recognized and funded in the amount of $225,736. During 1999, 1998, and 1997, the Bank recorded Plan expenses of $38,600, $38,600, and $21,000, respectively. Note 16: Earnings Per Common and Common Equivalent Shares Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the year. Diluted earnings per share reflect the potential dilution that could occur if common shares were issued pursuant to the exercise of options under the Bank's stock option plans. Comparative earnings per share data for the years ended December 31, 1998 and 1997, have been restated to conform with the current year presentation.
- ------------------------------------------------------------------------------------------------------------------- NOTE 16: The following table illustrates the computations of basic and diluted earnings per share for the years ended December 31, 1999, 1998, and 1997 (dollars in thousands except per share amounts): - ------------------------------------------------------------------------------------------------------------------- INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT - ------------------------------------------------------------------------------------------------------------------- 1999 - ------------------------------------------------------------------------------------------------------------------- Basic earnings per share Income available to common shareholders $4,888 8,579 $ 0.57 Effect of dilutive securities Outstanding common stock options -- 43 Income available to common shareholders plus assumed conversions $4,888 8,622 $ 0.57 - ------------------------------------------------------------------------------------------------------------------- 1998 - ------------------------------------------------------------------------------------------------------------------- Basic earnings per share Income available to common shareholders $4,927 8,685 $ 0.57 Effect of dilutive securities Outstanding common stock options -- 77 Income available to common shareholders plus assumed conversions $4,927 8,762 $ 0.56 - ------------------------------------------------------------------------------------------------------------------- 1997 - ------------------------------------------------------------------------------------------------------------------- Basic earnings per share Income available to common shareholders $3,704 7,639 $ 0.48 Effect of dilutive securities -- 21 Income available to common share- holders plus assumed conversions $3,704 7,660 $ 0.48 - -------------------------------------------------------------------------------------------------------------------
24 25 Note 17: Transactions with Related Parties Certain directors, executive officers, and principal stockholders are customers of and have had banking transactions with the Bank in the ordinary course of business, and the Bank expects to have such transactions in the future. All loans and commitments to loan included in such transactions were made in compliance with applicable laws on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons and, in the opinion of the management of the Bank, do not involve more than the normal risk of collectibility or present any other unfavorable features.
- --------------------------------------------------------------------------------------- NOTE 17: The amount of loans outstanding to directors, executive officers, principal stockholders, and companies with which they are associated was as follows: - --------------------------------------------------------------------------------------- 1999 1998 Beginning balance $ 1,946,548 $ 1,354,803 Loans made 4,194,000 891,665 Loans paid (584,600) (299,920) - --------------------------------------------------------------------------------------- Ending balance $ 5,555,948 $ 1,946,548 - ---------------------------------------------------------------------------------------
Note 18: Regulatory Matters VRB Bancorp and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on VRB Bancorp and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, VRB Bancorp and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require VRB Bancorp and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 1999, that VRB Bancorp and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1999, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. VRB Bancorp's capital ratios are not significantly different from those of the Bank.
- ------------------------------------------------------------------------------------------------------------------------------ NOTE 18: Regulatory capital (in thousands) - ------------------------------------------------------------------------------------------------------------------------------ TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS: - ------------------------------------------------------------------------------------------------------------------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ------------------------------------------------------------------------------------------------------------------------------ As of December 31, 1999 Total capital to risk weighted assets $28,728 12.7% $18,080 >=8.0% $22,601 >=10.0% Tier 1 capital to risk weighted assets 25,895 11.5% 9,040 >=4.0% 13,560 >=6.0% Tier 1 capital to average assets 25,895 8.3% 12,442 >=4.0% 15,553 >=5.0% As of December 31, 1998 Total capital to risk weighted assets 28,019 14.0% 16,011 >=8.0% 20,013 >=10.0% Tier 1 capital to risk weighted assets 25,509 12.7% 8,034 >=4.0% 12,051 >=6.0% Tier 1 capital to average assets $25,509 8.5% $12,004 >=4.0% $15,005 >=5.0% - ------------------------------------------------------------------------------------------------------------------------------
25 26 PARENT COMPANY FINANCIAL INFORMATION
- ------------------------------------------------------------------------------------------------------------- NOTE 19: Condensed financial information for VRB Bancorp (unconsolidated parent company only) is as follows: - ------------------------------------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------------------- ASSETS Cash $ 387,667 $ 49,986 Investment in subsidiary 33,239,060 35,126,747 Goodwill 51,675 58,722 - ------------------------------------------------------------------------------------------------------------- Total assets 33,678,402 35,235,455 - ------------------------------------------------------------------------------------------------------------- LIABILITIES 69,058 -- SHAREHOLDERS' EQUITY Common stock 8,699,060 21,583,869 Retained earnings 16,428,287 13,590,957 Accumulated other comprehensive income (loss), net of taxes (1,518,003) 60,629 - ------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 33,678,402 $ 35,235,455 - -------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME Equity in undistributed (excess distribution of) earnings of subsidiary bank $ (416,627) $ 4,133,730 $ 2,810,666 Dividends 5,320,000 800,000 900,000 Other income 57 -- -- EXPENSES Goodwill and other administrative expenses (7,047) (7,047) (7,047) Professional fees (8,000) -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 4,888,383 $ 4,926,683 $ 3,703,619 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Adjustments to reconcile net income to net cash from operating activities: Net income $ 4,888,383 $ 4,926,683 $ 3,703,619 Equity in undistributed (excess distribution of) earnings of subsidiary bank 416,627 (4,133,730) (2,810,666) Amortization 7,047 7,047 7,047 Increase in liabilities 69,058 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net cash from operating activities 5,381,115 800,000 900,000 - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Cash investment in subsidiary -- -- (8,000,000) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from public stock offering, net of costs -- -- 8,784,104 Cash dividends and fractional share payments (2,051,053) (1,674,498) (1,006,333) Repurchase of common stock (3,103,935) -- -- Cash received from exercise of common stock options 111,554 36,517 88,068 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash from financing activities (5,043,434) (1,637,981) 7,865,839 - ----------------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 337,681 (837,981) 765,839 CASH AND CASH EQUIVALENTS, beginning of year 49,986 887,967 122,128 - ----------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, end of year $ 387,667 $ 49,986 $ 887,967 - -----------------------------------------------------------------------------------------------------------------------------------
26 27 Note 20: Stock Offering During November 1997, the Bank registered 1,150,000 shares of common stock for sale to the public at a price of $8.50 per share, for an aggregate offering price of $9,775,000. All shares were sold, resulting in net proceeds of $8,784,104, after deducting $990,896 for underwriting discounts and commissions, legal, accounting and printing fees, and other offering expenses. Net proceeds to the Bank were used in connection with the acquisition of Colonial Banking Company in early January 1998 (see Note 2). Pending such use, the net proceeds were invested in short-term, investment-grade securities. Note 21: Quarterly Financial Information (Unaudited)
- --------------------------------------------------------------------------------------------------------------------- NOTE 21: Quarterly financial information (in thousands): - --------------------------------------------------------------------------------------------------------------------- 1999 QUARTER ENDED DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 Results of operations Interest income $5,914 $5,886 $6,009 $6,103 Interest expense 1,733 1,941 1,953 2,043 - --------------------------------------------------------------------------------------------------------------------- Net interest income 4,181 3,945 4,056 4,060 - --------------------------------------------------------------------------------------------------------------------- Provision for credit losses -- -- Noninterest income 573 535 522 510 Noninterest expense 2,717 2,599 2,565 2,608 Income before income taxes 2,037 1,881 2,013 1,962 Provision for income taxes 780 701 765 720 - --------------------------------------------------------------------------------------------------------------------- Net income $1,257 $1,180 $1,248 $1,242 - --------------------------------------------------------------------------------------------------------------------- Basic earnings per common share $ 0.14 $ 0.14 $ 0.14 $ 0.15 Diluted earnings per common share $ 0.14 $ 0.13 $ 0.14 $ 0.15 - ---------------------------------------------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders of VRB Bancorp We have audited the accompanying consolidated balance sheets of VRB Bancorp as of December 31, 1999 and 1998, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity, and cash flows for the years ended December 31, 1999, 1998, and 1997. These financial statements are the responsibility of VRB Bancorp's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of VRB Bancorp as of December 31, 1999 and 1998, and the results of its operations and cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ [SIGNATURE ELIGIBLE] Portland, Oregon January 14, 2000 27 EX-23.0 3 CONSENT OF MOSS ADAMS, LLP 1 EXHIBIT 23.0 CONSENT AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT We hereby consent to the use on Form 10-K dated March 27, 2000, of our report dated January 14, 2000, relating to the financial statements of VRB Bancorp. /s/ Moss Adams, LLP - ------------------------------ Portland, Oregon March 23, 2000 EX-27.0 4 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR VRB BANCORP AND SUBSIDIARY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 17,087 1,600 0 0 54,890 18,010 17,898 201,504 3,503 311,504 276,366 0 1,528 0 0 0 18,699 14,910 311,504 17,345 5,348 0 22,694 6,413 0 16,280 0 0 10,564 7,772 7,772 0 0 4,888 .57 .57 .083 551 0 0 0 3,539 86 50 3,503 3,503 0 0
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