-----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, ODOayksO55E2DnHZnl8Owgi4/ABMMUSNtyi4kGL6DLvxgvI52M+nyAELpXtJmMOj gaw66tBl0vSYvh+pfh3E0Q== 0000891020-98-000419.txt : 19980327 0000891020-98-000419.hdr.sgml : 19980327 ACCESSION NUMBER: 0000891020-98-000419 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 SROS: NONE 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: 98574453 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-K405 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, 1997 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 Name of exchange on which registered 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 $90,082,000 at March 1, 1998. As of March 1, 1998, there were 8,340,744 shares of the Registrant's Common Stock outstanding. Documents Incorporated by Reference: Portions of the Registrant's 1997 Annual Report to Shareholders is incorporated by reference in Part II hereof. Portions of the Registrant's proxy statement dated March 8, 1998, for the 1998 annual meeting of shareholders in incorporated by reference in Part III hereof. 2 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. 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. 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. 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 nine full service branches in the Rogue Valley, and seeks significant growth in its earning assets while maintaining a high return on shareholders' equity. The Company believes that this objective can be achieved by continuing to provide personalized, quality banking products and services to its customers. The Company operates under the conviction that services that are specifically designed to satisfy the needs of individual customers will enable the Bank to retain and expand existing market share. The Company complements this strategy by distinguishing its interactive services from those of the larger regional and national banks, all of which are headquartered in other states and have transferred lending decisions away from local branches. VRB is principally a commercial lender with loan products tailored to meet the banking requirements of targeted customers in its market area. Products available to business and commercial customers include equipment and inventory financing, operating lines of credit, SBA loans for qualified businesses, and accounts receivable financing. The Company is also an active construction lender and frequently underwrites the purchase and refinance of commercial, residential owner-occupied, and rental properties. 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. VRB attempts to maintain sound loan underwriting standards with written loan policies, conservative individual and branch lending limits and oversight by Board designated loan committees. 2 3 The Company offers a broad array of traditional deposit products and services, including non-interest bearing and interest bearing checking accounts, savings accounts, money market accounts and certificates of deposit. These products generally earn interest at rates established by management based upon competitive market factors and management's desire to increase certain types or maturities of deposit liabilities. VRB strives to develop customer relations to attract core deposits in non-interest bearing transactional accounts and thus maintain a low cost of funds. While the Company recognizes that the majority of its customers have come to expect traditional personal banking products and services, VRB has also made the commitment to provide new technology-based products, including a 24-hour telephone account access system, a debit card program and an expanded ATM network. MARKET AREA AND COMPETITION The Company primarily accepts deposits and makes loans in Jackson and Josephine Counties (the Rogue Valley) in southern Oregon. VRB's geographic market area has undergone significant change in the last several years. Southern Oregon has become increasingly popular as a family community and retirement area, and has seen an increase in population of approximately 14.5% from 1990 to 1996. The region's employment base has diversified away from timber related manufacturing to encompass growing industry sectors in non-timber manufacturing, municipality, higher education and medical services. Within the Company's geographic market, VRB's primary competition for deposits comes from commercial banks, savings and loan associations, and credit unions, some of which may offer higher interest rates than VRB can or is 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 maintain. Secondary competition for funds comes from issuers of corporate and government securities, insurance companies, mutual funds and other financial intermediaries. See "Risk Factors" VRB's competition for loans comes from commercial banks, savings and loan associations, mortgage companies, finance companies, and other institutional lenders. Many of its competitors have substantially higher single borrower lending limits than those of VRB. The Company competes for loan originations through the level of interest rates and loan fees, the variety of commercial and mortgage loan products, and the efficiency and quality of services provided to borrowers. Lending activity can also be affected by the availability of lendable funds, local and national economic conditions, current interest rates, and loan demand. See "Risk Factors". COLONIAL BANKING COMPANY ACQUISITION On July 24, 1997, the Bank entered into a Stock Option Agreement with the shareholders of Investor Banking Corporation ("IBC") which owned approximately 81% of the outstanding stock of Colonial Banking Company ("CBC"). Pursuant to the Stock Option Agreement, the Bank was given the right to acquire all of the outstanding shares of IBC for an aggregate purchase price equal to the number of Colonial shares held by IBC at a price of $41 per share. In addition, as of September 30, 1997, the Bank entered into a Plan of Merger with CBC. Effective January 5, 1998, VRB executed the Stock Option Agreement and Plan of Merger which resulted in the acquisition of CBC (referred to herein as the "Acquisition). The aggregate purchase price paid to the shareholders of IBC and CBC was $15.7 million. CBC, previously headquartered in Grants Pass, Oregon, had $113.1 million in total assets as of December 31, 1997 and operated five banking offices throughout the Rogue Valley. In addition to these banking offices, Colonial had a loan production office located in Portland, Oregon. The loans generated by this office were geographically dispersed throughout the Portland metropolitan area and the state of Oregon. Upon closing, CBC began operating under the name Valley of the Rogue Bank. With the exception of the Rogue River Branch of CBC, which was consolidated with the head office of the Bank, the Bank retained all of the 3 4 branches of CBC. CBC's loan production office in Portland, Oregon, was closed, and loans originated in that market are now serviced by existing Bank credit administrators. Following the merger, the Bank instituted its pricing policies for deposits and loans and introduced the Bank's products to all CBC customers while endeavoring to provide the same services throughout its entire branch network. By mid January 1998, CBC's data processing system had been discontinued and converted into a data format compatible with VRB's data processing system, allowing the two systems to merge. EMPLOYEES As of December 31, 1997, the Bank employed a total of 124 full time equivalent employees. Upon the Acquisition, the Bank increased its staffing to 170 full time equivalent employees. 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 materially dependent upon and sensitive to the economy of its market area in Southern Oregon consisting of the Rogue Valley in Jackson and Josephine Counties. Adverse economic developments can affect loan demand and the collectibility of existing loans and have a negative effect on the Company's earnings and financial condition. The economy of the Rogue Valley depends primarily on retail trade, tourism, government, services, agriculture, forest products and other manufacturing industries. 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, or that future economic changes will not have a significant adverse effect on the Company. Further, a decline in economic activity in the Company's market area could adversely affect its borrowers' ability to repay loans, and the value of collateral securing such loans. COMPETITION In recent years, competition for deposits and loans has intensified. New community banks have opened in Grants Pass and in Medford. In addition, two super-regional banks in the Company's market area have been acquired by even larger banks. Furthermore, pressure from outside the traditional banking system, from credit unions, investment banking firms, insurance companies and related industries offering bank-like products, has increased the competition for deposits and loans. The banking industry in the Company's primary market area is characterized by well-established branches of large banks which hold approximately 75% of local deposits. These institutions have competitive advantages over the Company in that they have higher public visibility and are able to maintain advertising and marketing activity on a much larger scale than the Company can economically sustain. Because single-borrower lending limits imposed by law are dependent on the capital of the institution, the branches of larger financial institutions also have a competitive advantage with respect to loan applications which are in excess of the Company's legal lending limits. See "Business - Competition." 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 4 5 repay. INTEREST RATE RISK VRB's earnings are largely derived from net interest income, which is interest income and fees earned on loans and investment income, less interest expense paid on deposits and other borrowings. Interest rates are highly sensitive to many factors which are beyond the control of the Company's management, including general economic conditions and the policies of various governmental and regulatory authorities. As interest rates change, net interest income is affected. With fixed rate assets (such as fixed rate loans) and liabilities (such as certificates of deposit), the effect on net interest income depends on the maturity of the asset or liability. Although the Company strives to minimize interest rate risk through asset/liability management policies, from time to time maturities are not balanced. Although rates have remained stable in recent periods, an unanticipated decrease or increase in interest rates could have an adverse effect on the spreads between the interest rates earned on assets and the rates of interest paid on liabilities, and therefore on the level of net interest income. DEPENDENCE ON KEY PERSONNEL VRB's success is dependent on the services of William A. Haden, President and Chief Executive Officer, and Tom Anderson, Executive Vice President and Chief Operating Officer. 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 and the Bank are 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. Further, future changes in federal and state banking regulations could adversely affect VRB's and the Bank's operating results and ability to continue to effectively compete. See "Supervision and Regulation." ANTI-TAKEOVER PROVISIONS As a bank holding company, the acquisition of the Company or the Bank would be subject to approval of banking regulators. These limitations and requirements may serve to delay or prevent an acquisition of VRB by another financial institution without the consent and cooperation of the Board of Directors. Moreover, certain provisions of Oregon law limit the ability of persons or entities to acquire control of VRB or to effect certain corporate transactions without the consent of the Board of Directors or the shareholders. These provisions are intended to discourage hostile corporate acquisitions. In addition, VRB's articles of incorporation authorize the Board of Directors to issue additional shares of authorized but unissued shares of VRB's stock, including the Common Stock, voting preferred stock, and warrants, options or other rights to acquire shares of stock. While this authority is intended to give the Board of Directors the ability to raise capital and to provide flexibility in financing corporate transactions, the issuance of additional securities of VRB could have the effect of diluting the ownership interest of a substantial shareholder or increasing the consideration necessary to acquire control of VRB. The shareholders, therefore, may not benefit from a rise in the price of the Common Stock that a takeover could cause. SUPERVISION AND REGULATION GENERAL 5 6 VRB and the Bank are extensively regulated under federal and state law. These laws and regulations are intended to protect depositors, not shareholders. 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. Any change in applicable laws or regulations may have a material effect on the business and prospects of VRB and the Bank. The operations of VRB may be affected by legislative changes and by the policies of various regulatory authorities. The Company cannot accurately predict the nature or the extent of the effects on its business and earnings that fiscal or monetary policies, or new federal or state legislation may have in the future. FEDERAL BANK HOLDING COMPANY REGULATION VRB 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 is required to file annual reports with the Federal Reserve and to provide the Federal Reserve such additional information as the Federal Reserve may require. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to the bank holding company or its subsidiaries, on investments in their securities and on the use of their securities as collateral for loans to any borrower. These regulations and restrictions may limit VRB's ability to obtain funds from its subsidiary banks 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, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. For example, the Bank may not generally require a customer to obtain other services from it or VRB, and may not require that the customer promise not to obtain other services from a competitor, as a condition to an extension of credit to the customer. FEDERAL AND STATE BANK REGULATION The 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, in connection with examinations of financial institutions within their jurisdiction, the Federal Reserve or the FDIC evaluates the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with 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". Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interest of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting procedures that are not less stringent than those prevailing at the time for comparable transactions with persons not covered above and who are not employees, and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the affected bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of that bank, the imposition of a cease and desist order, and other regulatory sanctions. 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. An institution which fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that 6 7 the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. VRB believes that the Bank meets all the standards, and therefore does not believe that these regulatory standards materially affect VRB's business operations. DEPOSIT INSURANCE As a FDIC member institution, deposits of the 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. The FDICIA included provisions to reform the Federal deposit insurance system, including the implementation of risk-based deposit insurance premiums. The FDICIA also permits the FDIC to make special assessments on insured depository institutions in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury and other sources or for any other purpose the FDIC deems necessary. Pursuant to the FDICIA, the FDIC implemented a transitional risk-based insurance premium system on January 1, 1993. Generally, under this system, 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. The Bank has a current FDIC premium rate of $.00 per $100 of domestic deposits. DIVIDENDS The principal source of VRB's cash revenues is dividends received from the Bank. Under the Oregon Bank Act, the Bank is subject to restrictions on the payment of cash dividends to its shareholders. A 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, after first deducting (i) to the extent not already charged against earnings or reflected in a reserve, all bad debts, which are debts on which interest is unpaid and past due at least six months; (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. The Bank has been paying regular dividends to shareholders, although no assurances can be given that dividends will continue to be paid. See "Market Price of and Dividends on Registrant's Common Equity and Related Stockholder Matters." In addition, the appropriate regulatory authorities are authorized to prohibit banks and bank holding companies from paying dividends which would constitute an unsafe or unsound banking practice. VRB 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. The FDIC and Federal Reserve have adopted risk-based capital guidelines for banks and bank holding companies. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the Federal Reserve has noted that bank holding companies contemplating significant expansion programs should not allow expansion to diminish their 7 8 capital ratios and should maintain ratios well in excess of the minimum. The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. The Federal Reserve also has implemented a leverage ratio, which is Tier 1 capital as a percentage of total assets less intangibles, to be used as a supplement to risk-based guidelines. The principal objective of the leverage ratio is to place a constraint on the maximum degree to which a bank holding company may leverage its equity capital base. The Federal Reserve requires a minimum leverage ratio of 3%. However, for all but the most highly rated bank holding companies and for bank holding companies seeking to expand, the Federal Reserve expects an additional cushion of at least 1% to 2%. The FDICIA created a statutory framework of supervisory actions indexed to the capital level of the individual institution. Under regulations adopted by the FDIC, an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio, together with certain subjective factors. Institutions which are deemed to be "undercapitalized" depending on the category to which they are assigned are subject to certain mandatory supervisory corrective actions. VRB does not believe that these regulations have any material effect on its operations. 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, but its 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, influence growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of 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 are currently undergoing significant changes. Bills are now pending or expected to be introduced in the United States Congress that contain proposals for altering the structure, regulation, and competitive relationships of the nation's financial institutions. If enacted into law, these bills could have the effect of increasing or decreasing the cost of doing business, limiting or expanding permissible activities (including activities in the insurance and securities fields), or affecting the competitive balance among banks, savings associations, and other financial institutions. Whether or in what form any such legislation may be adopted or the extent to which the business of VRB might be affected thereby cannot be predicted with certainty. 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. 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 and the 8 9 Company. 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 branches. The following sets forth all branch offices 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. Grants Pass, Oregon Grants Pass, Oregon East Medford Branch North Operations Center 701 East Jackson 8991 Rogue River Hwy Medford, Oregon Rogue River, Oregon 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, 1997. 9 10 PART II ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Effective November 5, 1997, VRB Bancorp stock began trading on the Nasdaq National Market under the symbol "VRBA". Prior to that date, the stock was traded over-the-counter through the Bulletin Board Service of the Nasdaq Stock Market. The following table lists the high and low bid quotations obtained from the Nasdaq Stock Market, and more recently, the Nasdaq National Market, 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.
High Bid Low Bid Cash Stock Price Price Dividends Splits for Period for Period Declared Declared ---------- ---------- -------- -------- 1996 First Quarter $ 4.33 $ 4.33 Second Quarter 4.67 4.33 Third Quarter 5.00 4.33 Fourth Quarter 5.50 5.50 $ 0.13 50% 1997 First Quarter $ 7.50 $ 5.50 Second Quarter 8.00 7.50 Third Quarter 10.00 8.25 $ 0.14 100% Fourth Quarter 10.00 7.50
As of December 31, 1997, there were 8,340,744 shares of common stock outstanding, held by approximately 2,400 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 3 of the Company's 1997 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 " Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 6-14 of the Company's 1997 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 1997 Annual Report to Shareholders. Such statements are listed in the Index to Consolidated Financial Statements set forth on page 13 herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 10 11 None 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 3-5 and page 7, respectively, of the Company's Proxy Statement for the 1998 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 7-9 of the Company's Proxy Statement for the 1998 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 11-12 of the Company's Proxy Statement for the 1998 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 12 of the Company's Proxy Statement for the 1998 annual meeting of shareholders. 11 12 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 13. (3) The exhibits filed herewith are listed in the Index to Exhibits on page 14 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, 1997. 12 13 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/ Tom Anderson Date: 03/26/98 Tom Anderson, Executive Vice President 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: 03/26/98 James D. Coleman, Chairman, Director By: /s/ John O. Dunkin Date: 03/26/98 John O. Dunkin, Vice Chairman, Director By: /s/ Gary Lundberg Date: 03/26/98 Gary Lundberg, Director By: /s/ Robert J. DeArmond Date: 03/26/98 Robert J. DeArmond, Director By: /s/ Larry L. Parducci Date: 03/26/98 Larry L. Parducci, Director By: /s/ William A. Haden Date: 03/26/98 William A. Haden, President, Director (Principal Executive Officer) By: /s/ Tom Anderson Date: 03/26/98 Tom Anderson, Executive Vice President, Director By: /s/ Felice Belfiore Date: 03/26/98 Felice Belfiore, Senior Vice President (Principal Accounting Officer) By: /s/ April Sevcik Date: 03/26/98 April Sevcik, Director By: /s/ Michael Donovan Date: 03/26/98 Michael Donovan, Director 13 14 INDEX TO FINANCIAL CONSOLIDATED STATEMENTS AND SCHEDULES Financial Statements The following consolidated financial statements and Report of Independent Public Accountants, included in the 1997 Annual Report to Shareholders at the pages indicated, are incorporated herein by reference:
Page of 1997 Annual Report to Shareholders ---------------------- VRB Bancorp and subsidiaries Consolidated Balance Sheets at December 31, 1997 and 1996 20 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 21 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 22-23 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 24-25 Notes to Consolidated Financial Statements 42 Report of Independent Public Accountants 43
Financial Statement Schedules None 14 15 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 1997 Annual Report to Shareholders 23.0 Consent of Moss Adams, LLP 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedule, December 31, 1996. 27.3 Restated Financial Data Schedule, June 30, 1997. 27.4 Restated Financial Data Schedule, September 30, 1996.
- ---------- * 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. 15 EX-13 2 1997 ANNUAL REPORT TO SHAREHOLDERS 1 Exhibit 13.0 TABLE OF CONTENTS Letter to Shareholders........................... 2 Financial Highlights............................. 3 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 5 Consolidated Balance Sheets...................... 16 Consolidated Statements of Income................ 17 Consolidated Statements of Shareholders' Equity......................................... 18 Consolidated Statements of Cash Flows............ 19 Notes to Consolidated Financial Statements....... 20 Report of Independent Public Accountants......... 35 Directors and Executive Officers................. 37 Staff and Branch Locations....................... 39
These statement have not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 2 A Letter to VRB Shareholders, Customers, and Friends, It is our pleasure to report that 1997 was another record year in the successful history of VRB Bancorp. We are very proud of the fact that our Bank has celebrated 29 consecutive years of profitability. An important part of our tradition is meeting the financial needs of the communities we serve while providing our shareholders with outstanding operating results. This past year was consistent with that proud tradition. 1997 was filled with a number of significant historic events for our company. In November, we successfully subscribed over one million new shares of stock and joined the NASDAQ National Market System. In addition, the Bank negotiated and signed a merger agreement to acquire Colonial Banking Company in 1998. We anticipate that both of these projects should have a very favorable impact on the future success of our Bank and will enhance shareholder value. Earnings for 1997 exceeded $3.7 million, providing a return on average equity of 15.7% and a return on average assets of 2.0%. Our results improved by 13.9% over the previous year. Earnings are both strong and consistent when compared with the last several years of our operating results. While our earnings improved, we were also able to increase total loans from $99.8 million in 1996 to $115.4 million in 1997, representing growth of $15.6 million or 15.6%. The Bank captured a larger share of the Rogue Valley market as total deposits grew from $155.6 million in 1996 to $173.2 million in 1997, a 11.3% increase. The past year was also marked by the retirement of our Credit Administrator, Virgil Syverson, and two of our most senior board members, Gene Morris and Larry Horton. These three individuals have made significant contributions to the past success of our company. While their insight and experience will be missed, we are pleased to welcome Brad Copeland as our new Credit Administrator along with April Sevcik and Michael Donovan, our two newest board members. We look forward to serving with these three new and key members of our team. It is also our pleasure to welcome Felice Belfiore, Chief Financial Officer, Owen Atkinson, Director of Information Services, and Carrie Brownell, Human Resources Director. These three individuals filled needed positions created in 1997 and have already helped to strengthen our company. Thanks Virgil, Gene, and Larry for your past service. Welcome Brad, April, Michael, Felice, Owen, and Carrie for the knowledge and strength you bring to our financial institution. We know that the long-term success of any company is driven by the quality and dedication of its people. VRB Bancorp is no exception to that rule. We are very fortunate to have an outstanding professional team of men and women guiding the success of our Bank. It is through their hard work and knowledge that we grow deposits, loans, and corporate profits. We commend them for their outstanding effort and thank them for their significant contribution for yet another record year. We are very pleased to announce the completion of our merger with Colonial Banking Company which was effective January 5, 1998. The acquisition of over $100 million in assets and addition of four new offices makes us the largest community bank in the Rogue Valley, the third largest community bank in Oregon, and the seventh largest bank in the state. The staff at Colonial has proven to be well trained as well as dedicated to providing outstanding customer service. Their addition to the VRB team strengthens our company and positions us for future growth and success. With combined assets over $300 million, we are large enough to provide our customers with convenient access at over thirteen traditional banking locations, yet small enough to provide the personalized responsive service our customers deserve. We have great expectations in the coming year. It is our plan to continue the profitable growth and improvement of VRB Bancorp. Our goal to reach $500 million in assets by the year 2001 is within our grasp. Thank you for your continued support as shareholders, customers, and friends. Best wishes to each of you in 1998. We look forward to serving your financial needs and making you proud of VRB Bancorp. /s/ WILLIAM A. HADEN /s/ JAMES D. COLEMAN William A. Haden James D. Coleman President/C.E.O. Chairman
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 3 SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, -------------------------------------------------------- 1997 1996 1995 1994 1993 (in thousands except per share data) -------- -------- -------- -------- -------- Income Statement Data Interest Income.............................. $ 14,955 $ 13,188 $ 11,973 $ 10,551 $ 8,768 Interest Expense............................. 4,062 3,627 2,989 2,196 2,264 -------- -------- -------- -------- -------- Net interest income.......................... 10,893 9,561 8,984 8,355 6,504 Provision for loan losses.................... 250 250 - - - -------- -------- -------- -------- -------- Net interest income after provision for loan losses..................................... 10,643 9,311 8,984 8,355 6,504 Non-interest income.......................... 1,671 1,370 1,380 1,512 1,632 Non-interest expense......................... 6,873 5,828 6,061 6,022 4,978 -------- -------- -------- -------- -------- Income before provision for income taxes..... 5,441 4,853 4,303 3,845 3,158 Provision for income taxes................... 1,737 1,602 1,395 1,335 1,104 -------- -------- -------- -------- -------- Net income................................... $ 3,704 $ 3,251 $ 2,908 $ 2,510 $ 2,054 ======== ======== ======== ======== ======== Dividends Cash......................................... $ 1,006 $ 953 $ 559 $ 473 $ 412 Ratio of dividends declared to net income.... 27.16% 29.31% 19.22% 18.84% 20.06% Per Share Data(1) Basic earnings per share..................... $ 0.50 $ 0.46 $ 0.42 $ 0.36 $ 0.29 Cash dividends per common share.............. $ 0.14 $ 0.13 $ 0.08 $ 0.07 $ 0.06 Weighted average shares outstanding.......... 7,345 7,072 6,976 6,953 6,933 Balance Sheet Data (at period end) Investment securities........................ $ 40,806 $ 41,404 $ 38,117 $ 34,589 $ 38,824 Loans, net................................... 115,414 99,776 88,972 88,441 78,583 Total assets................................. 206,654 177,107 151,485 141,537 141,970 Total deposits............................... 173,176 155,568 132,744 125,472 127,998 Total shareholders' equity................... $ 31,861 $ 20,188 $ 17,470 $ 15,000 $ 12,973 Selected Ratios Return on average total assets............... 2.00% 1.99% 2.02% 1.74% 1.62% Return on average total shareholders' equity..................................... 15.65 17.26 17.75 17.69 16.97 Average equity to assets..................... 12.75 11.52 11.37 9.83 9.54 Net interest margin.......................... 6.69 6.73 7.13 6.67 5.99 Efficiency ratio (2)......................... 56.18% 53.32% 58.49% 61.03% 61.18%
- --------------- (1) Per share data has been adjusted to reflect all stock dividends and stock splits through December 31, 1997. (2) Efficiency ratio is noninterest expense divided by the sum of net interest income plus noninterest income. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 3 4 This page intentionally left blank - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 4 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 5 6 MANAGEMENT'S DISCUSSION - -------------------------------------------------------------------------------- The following Management's Discussion and Analysis of Financial Condition and Results of Operations includes a discussion of certain significant business trends and uncertainties, and is intended to be read in conjunction with and is qualified in its entirety by reference to the consolidated financial statements of VRB Bancorp ("VRB") and accompanying notes beginning on page 16 of this report. FINANCIAL HIGHLIGHTS VRB is the largest community bank in southern Oregon, currently operating nine full service branches. VRB has had 29 consecutive years of profitability. During the most recent five years, it has increased earnings by an average of 17% per year and increased its return on average assets from 1.62% in 1993 to 2.00% in 1997. During the same period, VRB has achieved a return on average equity greater than 15% while sustaining high asset quality. VRB has consistently performed in the top quartile when comparing its return on average equity to its bank peers. [VRB BANCORP NET INCOME] [GRAPH] Net income for 1997 was $3.7 million, an increase of 13.9% over net income of $3.3 million reported in 1996. The return on total average assets was 2.00% and net interest margin was 6.69%, continuing VRB's history of strong financial results. Effective September 30, 1997, VRB's wholly-owned subsidiary, Valley of the Rogue Bank ("the Bank"), signed a definitive merger agreement with Colonial Banking Company ("CBC") pursuant to which CBC will be merged with and into the Bank, with the resulting bank continuing under the name and charter of Valley of the Rogue Bank. The Bank agreed to purchase all of the outstanding shares of CBC stock for a cash price of approximately $17.3 million. The Bank anticipates the merger to take place effective on January 5, 1998. As of December 31, 1997, CBC has $116.4 million in total assets, of which $92.8 million represent outstanding loans. CBC has five full service branches in Southern Oregon, as well as a loan production office in Portland, Oregon. Following the merger, four of CBC's branches will become branch offices of the Bank, and a fifth branch will be consolidated into the Bank's main office in Rogue River, Oregon. The Portland loan production office will be closed, and existing loans based out of that market will be serviced by local VRB management. On November 6, 1997, VRB commenced an offering of 1,150,000 shares of its common stock pursuant to a registration statement on Form S-1 that was declared effective by the Securities and Exchange Commission ("SEC") on November 5, 1997. The shares were sold by VRB at a price to the public of $8.50 per share, for an aggregate offering price of $9,775,000. Fees and expenses payable by VRB in connection with the offering totaled $991,000, including $684,000 in underwriting discounts and commissions, $45,000 for SEC and NASDAQ Stock Market filing fees, $250,000 for legal, accounting and printing fees, and $12,000 for other expenses. The offering resulted in net proceeds of $8,784,000, which will be used in connection with the acquisition of CBC. RESULTS OF OPERATIONS Net Interest Income. For financial institutions, the primary component of earnings is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities portfolios, and interest expense, principally on customer deposits. Changes in net interest income result from changes in "volume", "spread" and "margin." Volume refers to the dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. Margin refers to net interest income divided by interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 6 7 MANAGEMENT'S DISCUSSION - -------------------------------------------------------------------------------- Average Balances and Average Rates Earned and Paid. The following table shows average balances and interest income or interest expense, with the resulting average yield or rates by category of earning assets or interest- bearing liabilities:
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995 ------------------------------- ------------------------------- ------------------------------- INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME OR YIELDS AVERAGE INCOME OR YIELDS AVERAGE INCOME OR YIELDS BALANCE EXPENSE OR RATES BALANCE EXPENSE OR RATES BALANCE EXPENSE OR RATES -------- --------- -------- -------- --------- -------- -------- --------- -------- (in thousands) Interest-earning assets: Loans*................... $109,581 $11,444 10.44% $94,907 $10,122 10.67% $92,268 $9,893 10.72% Investment securities.... Taxable securities...... 22,486 1,504 6.69 22,328 1,411 6.32 18,275 1,055 5.77 Nontaxable securities**.......... 18,480 1,431 7.74 19,080 1,461 7.66 12,818 936 7.30 Federal funds sold....... 19,556 1,063 5.44 13,102 691 5.27 7,142 409 5.73 -------- ------- ----- -------- ------- ----- -------- ------ ----- Total interest earning assets.............. 170,103 15,442 9.08 149,417 13,685 9.16 130,503 12,293 9.42 Cash and due from banks.................. 10,222 9,105 8,685 Fixed assets............. 4,403 3,957 3,900 Loan loss allowance...... (1,597) (1,397) (1,423) Other assets............. 2,431 2,444 2,425 -------- -------- -------- Total assets.......... $185,562 $163,526 $144,090 ======== ======== ======== Interest-bearing liabilities: Interest-bearing checking accounts............... $73,292 2,415 3.30 $62,238 2,005 3.22 $48,997 1,520 3.10 Savings accounts......... 15,358 337 2.19 17,017 376 2.21 21,170 463 2.19 Time deposits............ 26,285 1,310 4.98 24,435 1,246 5.10 19,043 938 4.93 Borrowed funds........... - - - - - - 1,091 69 6.32 -------- ------- ----- -------- ------- ----- -------- ------ ----- Total interest-bearing liabilities......... 114,935 4,062 3.53 103,690 3,627 3.50 90,301 2,990 3.31 Noninterest bearing deposits............... 45,552 39,836 36,310 -------- -------- -------- Total deposits and borrowed funds...... 160,487 143,526 126,611 Other liabilities........ 1,415 1,168 1,092 -------- -------- -------- Total Liabilities..... 161,902 144,694 127,703 Shareholders' equity..... 23,660 18,832 16,387 -------- -------- -------- Total liabilities and shareholders' equity.............. $185,562 $163,526 $144,090 ======== ======== ======== Net interest income...... $11,380 $10,058 $9,303 ======= ======= ====== Net interest spread...... 5.55% 5.66% 6.11% ===== ===== ===== Average yield on earning assets................. 9.08% 9.16% 9.42% ===== ===== ===== Interest expense to earning assets......... 2.39% 2.43% 2.29% ===== ===== ===== Net interest margin...... 6.69% 6.73% 7.13% ===== ===== =====
- --------------- * Nonaccrual loans are included in the average balance. ** Tax-exempt income has been adjusted to a tax equivalent basis at 34%. - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 7 8 MANAGEMENT'S DISCUSSION - -------------------------------------------------------------------------------- Analysis of Changes in Interest Differential. The following table shows the dollar amount of the increase (decrease) in VRB's net interest income and expense and attributes such dollar amounts to changes in volume as well as changes in rates. Rate/volume variances have been allocated proportionally between rate and volume changes:
1997 OVER 1996 1996 OVER 1995 ---------------------- ---------------------- INCREASE INCREASE (DECREASE) (DECREASE) DUE TO DUE TO ------------- NET ------------- NET VOLUME RATE CHANGE VOLUME RATE CHANGE ------ ---- ------ ------ ---- ------ (in thousands) Interest-earning assets: Loans............................ $1,532 $(210) $1,322 $283 $(53) $230 Investment securities Taxable securities.............. 11 83 94 279 153 432 Nontaxable securities* ......... (46) 16 (30) 457 45 502 Federal funds sold............... 351 21 372 217 (16) 201 ------ ----- ------- ----- ---- ----- Total...................... 1,848 (90) 1,758 1,236 129 1,365 ------ ----- ------- ----- ---- ----- Interest-bearing liabilities: Interest bearing checking and savings accounts................ 328 45 373 257 112 369 Time deposits.................... 92 (29) 63 266 44 310 Borrowed funds................... - - - (69) - (69) ------ ----- ------- ----- ---- ----- Total...................... 420 16 436 454 156 610 ------ ----- ------- ----- ---- ----- Net increase (decrease) in net interest income................ $1,428 $(106) $ 1,322 $ 782 $(27) $755 ====== ===== ======= ===== ==== =====
------------------ * Tax-exempt income has been adjusted to a tax equivalent basis at 34%. Net interest income for the year ended December 31, 1997, was $10,893,000 an increase of $1,332,000 or 13.9% compared to net interest income of $9,561,000 in 1996, which was $577,000, or 6.4% higher than the $8,984,000 reported in 1995. The overall tax equivalent earning asset yield declined slightly to 9.08% in 1997 compared to 9.16% in 1996, and 9.42% in 1995. In recent years, interest rates have declined and the lending market in the Rogue Valley has tightened in response to competitive pressures. As a result, low yielding assets such as federal funds sold grew at a faster pace than assets with typically higher yields such as loans. These factors contributed to a decline in average asset yield over the last three years. Loans, which generally carry a higher yield than investment securities and other earning assets, comprised 64.4% of average earning assets in 1997, compared with 63.5% in 1996 and 70.7% in 1995. For the same periods, average yields on loans were 10.44% in 1997, 10.67% in 1996, and 10.72% in 1995. Investment securities comprised 24.1% of average interest-earning assets in 1997, which was down from 27.7% in 1996 after an increase from 23.8% in 1995. Reflecting VRB's investment in high grade nontaxable securities, the tax equivalent yield of the investment portfolio increased to 7.16%, an improvement of 22 basis points when compared to 6.94% in 1996 which was a 54 basis point improvement over VRB's investment yield of 6.40% in 1995. VRB's investment in federal funds sold increased to 11.5% of average interest-earning assets in 1997, up from 8.7% and 5.5% in 1996 and 1995, respectively. Particularly in the third and fourth quarter of 1997, management deliberately began accumulating federal funds sold in preparation for the cash acquisition of CBC sched- - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 8 9 MANAGEMENT'S DISCUSSION - -------------------------------------------------------------------------------- uled in January 1998. Interest cost as a percentage of earning assets decreased to 2.39% in 1997 compared to 2.43% in 1996 after an increase from 2.29% in 1995. VRB's deposit mix shifted in 1997, as VRB continued to expand non-interest and interest-bearing checking balances, in response to a stabilizing demand for savings and time certificates of deposits. Provision for Loan Losses. In 1997, VRB recorded a $250,000 loan loss provision which was based upon past charge-off experience, a careful analysis of the current portfolio, and an evaluation of the loan portfolio over the last year. The increase is in line with the 15.7% growth in VRB's loans. Net loan charge-offs for 1997 were approximately $102,000 which compares to net charge-offs of approximately $25,000 and $7,000 in 1996 and 1995, respectively. Loans on non-accrual have grown to $372,000, up from $58,000 and $53,000 as of December 31, 1996 and 1995, respectively. Management believes this modest loan loss experience is a result of the stringent underwriting and collection practices employed by VRB, the strength of the local economy, and the underlying quality of the loan portfolio. Non-Interest Income. Non-interest income increased approximately $301,000, or 21.9% in 1997, the balance of which increased from $1,370,000 in 1996 to $1,671,000 in 1997. Non-interest income in 1995 totaled $1,380,000. Customer deposits, which grew 11.3% in 1997, generated additional service revenue when compared to the previous year. In addition, the growth in VRB's real estate mortgage processing department generated additional fee income over the last 12 months. With the entrance of Wells Fargo into the Rogue Valley market, VRB redesigned its logo as both banks used a similar stagecoach logo. In 1996, VRB received a one time benefit of $225,000 from Wells Fargo, to assist in the purchase of new signs, stationery, and other supplies resulting from the logo change. Non-interest income has been recognized as the funds were applied. Non-Interest Expense. Non-interest expense totaled $6,873,000 in 1997, a 17.9% or $1,045,000 increase over total non-interest expense of $5,828,000 recognized in 1996. During 1997, VRB experienced a period of deposit growth and increased market share within the Rogue Valley. VRB's infrastructure was expanded and the costs of supporting VRB's growth can be seen in the following categories. Salaries and benefits: Salaries and benefits increased by $428,000, or 11.6% in 1997. With the addition of several administrative and managerial positions, and increasing wages due to the State of Oregon's rising minimum wage, as well as normal salary adjustments, salaries and benefits increased to $4,120,000 in 1997 compared to $3,693,000 in 1996 and $3,841,000 in 1995. As of December 31, 1997, VRB had 126 full time equivalent employees which compares to 116 and 107 as of December 31, 1996 and 1995, respectively. Occupancy: Net occupancy expenses include depreciation, repairs and maintenance, utilities, and other related costs. In 1997, VRB invested significant funds for the improvement of several branches in connection with the Bank's logo change, driving net occupancy to $814,000 in 1997, up $184,000, or 29.2% when compared to total net occupancy costs of $630,000 and $608,000 recognized in 1996 and 1995. Data processing: 1997 marked the third year of VRB's three year technology plan. The bank's data processing system was upgraded in anticipation of future growth. Maintenance and support for the new system saw data processing expense increase to $181,000 in 1997 up from $148,000 and $97,000 in 1996 and 1995, respectively. FDIC premiums: FDIC premiums are a function of outstanding deposit liabilities. Premiums have ranged from $143,000 in 1995, to $2,000 in 1996 and $18,000 in 1997. In 1996, VRB received a premium refund from the FDIC after the Bank Insurance Fund was recapitalized. This also allowed VRB to pay a nominal insurance premium in 1997. Other non-interest expenses: Principal components of other non-interest expenses include advertising, business development, dues and publications, and amortization of goodwill. VRB embarked on a new advertising campaign in late 1997, the results of which will be seen in upcoming years. Overall, other non-interest expenses represented 8.7%, 7.5%, and 8.0% of total net revenues for the years ended December 31, 1997, 1996 and 1995. Careful management of expenses have contributed to controlled growth in this category. Income Taxes. The provision for federal and state income taxes in 1997 totaled $1,737,000, which approximates an effective tax rate of 32%. The in- - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 9 10 MANAGEMENT'S DISCUSSION - -------------------------------------------------------------------------------- come tax provision for 1996 and 1995 totaled $1,602,000 and $1,395,000 for effective rates of 33% and 32%, respectively. Effective tax rates differ from combined estimated statutory rates due to the effects of nontaxable interest income which is recognized for book purposes but not tax purposes. In addition, in compliance with State tax law, VRB's state income tax rate was reduced in 1997 and 1995 from 6.6%, to 3.8% and 3.3%, respectively. FINANCIAL CONDITION Asset -- Liability Management/Interest Rate Sensitivity. The principal purpose of asset-liability management is to manage VRB's resources and uses of funds while maximizing net interest income under different interest rate conditions with minimal risk. A key component of asset-liability management is the measurement of interest-rate sensitivity. Interest-rate sensitivity refers to the volatility in earnings resulting from fluctuations in interest rates, variability in spread relationships, and the mismatch of repricing intervals between assets and liabilities. Interest-rate sensitivity management attempts to maximize earnings growth by minimizing the effects of changing market rates, asset and liability mix, and prepayment trends, as well as estimate VRB's earnings risk when assuming future interest rate changes. Management reviews VRB's interest-rate sensitivity position, or market risk, on an ongoing basis, and prepares strategies to adjust that sensitivity, as appropriate. Financial instruments whose earnings may be affected by a change in interest rates include variable and fixed rate loans, investment securities, federal funds sold, and interest-bearing deposits. Other types of market risk, including foreign exchange risk and commodities price risk, do not materially impact VRB financial instruments. VRB's sensitivity to the potential loss of future earnings due to a hypothetical drop in interest rates is as follows:
FINANCIAL DECLINE IMPACT ON IN INTEREST NET INTEREST RATES MARGIN - ----------- ------------ 1% $(313,000) 2% $(626,000)
The analysis presents the impact of a reasonably possible near-term decline in interest rates. Near-term means a period going forward through one year. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented. For example, although certain assets and liabilities may have similar maturities, or periods of repricing, they may react in different degrees to changes in market interest rates. Additionally, certain assets, such as ARM loans, have features which restrict changes in interest rates on a short-term basis. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from time certificates could likely deviate significantly from those assumed in the table's calculations. Liquidity. Liquidity represents the ability to meet cash flow requirements and financial commitments at a reasonable cost, while retaining the flexibility to take advantage of business opportunities. Management has always placed a high priority on maintaining a high liquidity through a moderate loan-to-deposit ratio and a conservative investment portfolio. As of December 31, 1997, VRB's loan to deposit ratio was 66%. Approximately $2.8 million or 7% of VRB's securities portfolio matures within one year. This excludes approximately $10 million in agency securities that will most likely be called within 1998 assuming a stable interest rate environment over the next 12 months. Additionally, although no balances were outstanding at December 31, 1997, VRB has borrowing arrangements with the Federal Home Loan Bank of Seattle for cash advances of $8.9 million as well as approximately $8 million in credit agreements with various correspondent banks. The acquisition of CBC is expected to have a modest impact on VRB's liquidity. As of December 31, 1997, VRB has $22.5 million in federal funds sold. Approximately $17.3 million will be used to fund the acquisition. In addition, CBC has historically had a higher cost of funds than VRB, resulting from a higher proportion of deposits held in interest-bearing accounts with higher rates. VRB's management anticipates that as the interest rates paid on CBC deposits are reduced to mirror VRB's pricing strategy, some depositors will likely withdraw their funds, decreasing - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 10 11 MANAGEMENT'S DISCUSSION - -------------------------------------------------------------------------------- VRB's liquidity. This is especially relevant for the $35.6 million in CBC time certificates of deposit that mature in 1998. Despite this, VRB management believes that VRB has ample cash and cash equivalent resources to fund the CBC acquisition and anticipated deposit run-off without restricting VRB's growth or materially compromising its liquidity. Capital Adequacy. The primary source of VRB's capital has historically been from the retention of net profits. VRB's profitability has allowed it to enjoy a strong capital position and to consistently pay dividends to its shareholders, as evidenced by the cash dividend payout ratio of 27.2%, 29.3%, and 19.2% for the years ended December 31, 1997, 1996 and 1995. In 1989, banking regulators adopted risk-based capital guidelines under which one of four risk weights is applied to balance sheet assets, each with different capital requirements based on the credit risk of the asset. VRB is required to maintain minimum amounts of capital to "risk weighted" assets, as defined by banking regulators. As of December 31, 1997, VRB was required to have Tier 1 and Total Capital Ratio's of 4.0% and 8.0%, respectively. VRB's actual ratio's at that date were 21.3% and 22.5%. The acquisition of CBC will significantly reduce VRB's capital ratios, particularly its Tier 1 capital ratio, as goodwill incurred as a result of the acquisition is deducted from VRB's capital for purposes of this calculation. However, in November of 1997, VRB raised an additional $8,784,000 in capital which will serve to mitigate the risk that VRB would not qualify as "well-capitalized" under applicable regulatory guidelines in the future. Impact of Year 2000 Issue. Based upon recent assessment, VRB has significant portions of its data processing software that are date sensitive and may be adversely effected by the software's inability to recognize the Year 2000. VRB presently believes that with modifications to existing software, the Year 2000 issue can be mitigated using existing internal and external resources. At this time, VRB estimates that the total cost of the Year 2000 issue will be less than $25,000. VRB plans to complete the Year 2000 reprogramming, and testing by the first quarter of 1999. In addition, VRB has initiated communications with the Bank's principal borrowers to determine the extent that VRB is vulnerable to those parties' failure to remediate their own Year 2000 issue. Investment Securities and Other Investments. VRB's principal investment objectives are to manage liquidity and generate after tax profits consistent with the risk guidelines established by the Board of Directors. Changes in VRB's investment portfolio are primarily a function of loan demand and adjustments within the Bank's deposit structure. As of December 31, 1997, VRB's investment portfolio of $39,598,000 is relatively consistent when compared to 1996's investment portfolio which totaled $40,285,000. VRB follows financial accounting principles which require the identification of investment securities as held-to-maturity or available-for- sale. Securities designated as held-to-maturity are those that VRB has the intent and ability to hold until they mature or are called rather than those that management may sell if liquidity requirements dictate. The mix of available-for-sale and held-to-maturity investment securities is considered in context with VRB's overall asset-liability policy and illustrates management's assessment of the relative liquidity of the Bank. At December 31, 1997, 53.5% of VRB's investment portfolio was comprised of available-for-sale securities and 46.5% was comprised of held-to-maturity securities, virtually unchanged when compared to 1996. - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 11 12 MANAGEMENT'S DISCUSSION - -------------------------------------------------------------------------------- The following table sets forth the composition and relative maturities within VRB's investment portfolio at the dates indicated.
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ---------------------------- ---------------------------- ---------------------------- AMORTIZED MARKET % AMORTIZED MARKET % AMORTIZED MARKET % COST VALUE YIELD* COST VALUE YIELD* COST VALUE YIELD* (in thousands) --------- ------- ------ --------- ------- ------ --------- ------- ------ U.S. Treasuries and agencies: One year or less.... $ - $ - -% $10,002 $9,942 6.16% $ 7,847 $7,749 5.70% One to five years... 17,998 18,062 6.59 9,993 10,150 7.12 12,008 12,075 6.14 Five to ten years... 2,000 2,013 7.50 - - - - - - Over ten years...... - - - - - - - - - Obligations of states and political subdivisions: One year or less.... 2,337 2,344 5.86 215 216 7.05 1,906 1,916 6.03 One to five years... 550 565 7.29 6,106 6,169 7.33 3,036 3,050 6.12 Five to ten years... 5,364 5,521 7.40 11,749 11,848 8.08 4,351 4,402 7.13 Over ten years...... 10,163 10,593 7.93 566 589 8.41 6,551 6,712 8.09 Corporate and other: One year or less.... 430 428 5.35 1,569 1,555 6.04 128 126 5.35 One to five years... 682 681 6.49 - - - 1,570 1,557 6.04 Five to ten years... - - - - - - - - - Over ten years...... - - - - - - - - - ------- ------- ----- ------- ------- ----- ------- ------- ----- $39,524 $40,207 7.04% $40,200 $40,469 7.17% $37,397 $37,587 6.50% ======= ======= ===== ======= ======= ===== ======= ======= =====
- --------------- * Weighted average yields are stated on a federal tax equivalent basis at a 34%. Loans: Outstanding loans totaled $115,414,000 at December 31, 1997, representing a $15,638,000, or 15.7% growth rate over outstanding loans as of December 31, 1996. The growth, which is in part the result of VRB's focus on construction lending and home equity credit loans, exceeds growth rates of prior years. Loan growth totaled 12.1% and .6% in 1996 and 1995, respectively. VRB's loan portfolio continues to primarily involve real estate secured transactions, with 80% and 76% of VRB's portfolio within this category as of December 31, 1997 and 1996, respectively. Loans secured by real estate includes loans made for purposes other than financing the purchase of real property, such as commercial and home equity lines of credit. However, real estate is invariably the collateral securing these loans. Although real estate loans constitute a significant portion of the total loan portfolio, this portfolio has performed well and, management believes, represents low risk of loss. VRB's normal lending criteria requires a loan-to-value ratio on commercial real estate not to exceed 75%, and a loan-to-value ratio on residential real estate not to exceed 80%. Consequently, the Bank's loans secured by real estate have a lower delinquency rate than the balance of its loan portfolio. As of December 31, 1997 and 1996, the - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 12 13 MANAGEMENT'S DISCUSSION - -------------------------------------------------------------------------------- Bank had no material investment in other real estate owned. The composition, interest sensitivity, and maturity distribution of the loan portfolio as of the noted dates, is illustrated as follows:
1997 1996 1995 1994 1993 -------- -------- ------- ------- ------- (in thousands) Commercial........... $ 12,720 $ 13,181 $ 9,440 $10,619 $10,719 Real estate construction........ 15,476 9,112 8,225 16,930 11,659 Real estate mortgage............ 77,049 66,209 59,804 49,882 46,511 Consumer and other... 11,949 12,906 12,910 12,424 11,147 -------- -------- ------- ------- ------- 117,194 101,408 90,379 89,855 80,036 Allowance for loan losses.............. (1,780) (1,632) (1,407) (1,414) (1,453) -------- -------- ------- ------- ------- Net loans............ $115,414 $ 99,776 $88,972 $88,441 $78,583 ======== ======== ======= ======= =======
DECEMBER 31, 1997 --------------------------------------------- DUE AFTER DUE DUE IN ONE YEAR AFTER ONE YEAR THROUGH FIVE TOTAL OR LESS FIVE YEARS YEARS LOANS -------- ---------- ---------- -------- (in thousands) Commercial........... $ 4,123 $ 6,348 $ 2,248 $ 12,719 Real estate construction........ 7,740 2,297 5,439 15,476 Real estate mortgage............ 4,893 14,536 57,620 77,049 Consumer and other... 1,508 6,761 3,681 11,950 ------- ------- ------- -------- $18,264 $29,942 $68,988 $117,194 ======= ======= ======= ======== Loans with fixed interest rates...... $ 40,824 Loans with floating interest rates...... 76,370 -------- $117,194 ========
Reserve for Loan Losses and Nonperforming Loans. The allowance for loan losses is evaluated by management on a monthly basis to ensure that it is sufficient to cover potential future loan losses. The reserve balance and amount of provision charged to operations is based primarily on management's evaluation of the entire portfolio. This analysis includes review of the following factors: (a) the volume and mix of the existing loan portfolio, including the volume and severity of nonperforming loans and adversely classified credits, as well as analysis of net charge-offs experienced on previously classified loans; (b) the extent to which loan renewals and extensions are used to maintain loans on a current basis and the degree of risk associated with such loans; (c) the trend in loan growth, including any rapid increase in loan volume within a relatively short period of time; (d) general and local economic conditions; (e) the relationship and trend over the past several years of recoveries as a percentage of previous years' charge-offs; and, (f) available outside information of a comparable nature regarding the loan portfolios of other banks, including peer group banks. The reserve for loan losses was $1,780,000 as of December 31, 1997, as compared to $1,632,000 at December 31, 1996 and $1,407,000 at December 31, 1995. VRB's loan loss reserve as a percentage of total loans was 1.52% at December 31, 1997, compared to 1.61% in 1996 and 1.56% in 1995.
LOAN LOSS EXPERIENCE -------------------- 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ (in thousands) Reserve balance, beginning of year............... $1,632 $1,407 $1,414 $1,453 $ 941 Loans charged-off: Commercial.......... 48 29 31 24 35 Real Estate......... - - - - - Consumer............ 87 9 14 66 23 ------ ------ ------ ------ ------ Total loans charged-off...... 135 38 45 90 58 Recoveries: Commercial.......... 22 10 20 31 156 Real Estate......... - - - - - Consumer............ 11 3 18 20 53 ------ ------ ------ ------ ------ Total recoveries... 33 13 38 51 209 Net Charge-offs...... 102 25 7 39 (151) ------ ------ ------ ------ ------ Provision charged to operations......... 250 250 - - - ------ ------ ------ ------ ------ Changes incidental to merger............. - - - - 361 ------ ------ ------ ------ ------ Reserve balance, end of year............ $1,780 $1,632 $1,407 $1,414 $1,453 ====== ====== ====== ====== ====== Ratio of net charge-offs during the period to average loans outstanding during the period......... 0.09% 0.03% 0.01% 0.05% (0.22%) ====== ====== ====== ====== ======
- -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 13 14 MANAGEMENT'S DISCUSSION - -------------------------------------------------------------------------------- The following table presents information with respect to VRB's allowance for loan losses and nonperforming assets for the dates specified:
DECEMBER 31, ---------------------------------------------------- 1997 1996 1995 1994 1993 (in thousands) -------- ------- ------- ------- ------- Loans on nonaccrual status.................................. $ 372 $ 58 $ 53 $ 7 $ 171 Loans past due greater than 90 days but not on nonaccrual status.................................................... - 12 48 108 117 ------- ------ ------ ------ ------ Total nonperforming loans............................... 372 70 101 115 288 Other nonperforming assets.................................. - - - - 146 ------- ------ ------ ------ ------ Total nonperforming assets.............................. $ 372 $ 70 $ 101 $ 115 $ 434 ======= ====== ====== ====== ====== Percentage of nonperforming loans to total loans............ 0.32% 0.06% 0.11% 0.13% 0.36 Percentage of nonperforming assets to total assets.......... 0.18% 0.04% 0.07% 0.08% 0.31 Allowance for loan losses as a percentage of non performing loans..................................................... 477% 2331% 1393% 1230% 505
No interest income was accrued on nonaccrual loans or included in the results of operations for the years ended December 31, 1997, 1996 and 1995. The Bank's policy is to place a loan on nonaccrual status when there is significant question as to the collectibility of the interest. Normally if the loan is past due 90 days or more, it is placed in nonaccrual status unless well secured and in the process of collection. Deposits. Deposit growth in 1997 was $17,608,000 or 11.3%, and can be attributed to management's decision to promote an attractive pricing strategy, increased marketing, and an increased emphasis on implementing a sales culture within the branches. By their nature, interest-bearing account balances will tend to grow or decline as the Bank reacts to changes in competitor pricing and interest paying strategies. In 1997, VRB realized substantial growth in its money market accounts. Money market deposits increased by $13.8 million in 1997, from $47.2 million as of December 31, 1996 to $61.0 million as of December 31, 1997. In addition, non-interest bearing demand deposits continue to represent a significant percentage of VRB's deposit base. To the extent that VRB can continue to funds operations with non-interest-bearing deposits, the Bank's net interest margin will improve. At December 31, 1997, demand deposits accounted for 28.9% of total deposits which is up from 26.8 % as of December 31, 1996. This is further illustrated at right: [DEPOSIT MIX CHART] The Bank, by policy, does not depend on brokered deposits nor high priced time deposits. At December 31, 1997, time certificates of deposits in excess of $100,000 totaled $5,259,000 or 18.6% of total outstanding time deposits. This compares to 24.1% as of December 31, 1996. The following table sets forth by time remaining to maturity, all time certificate of deposit accounts outstanding at December 31, 1997.
IN EXCESS OF $100,000 ALL OTHER TOTAL (in thousands) ----------- --------- ------- Three months or less............... $2,608 $ 7,684 $10,292 Three through twelve months............. 2,233 13,219 15,452 One year through five years.............. 418 1,821 2,239 Over five years...... - 234 234 ------ ------- ------- $5,259 $22,958 $28,217 ====== ======= =======
- -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 14 15 - -------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 15 16 FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- VRB BANCORP CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------------- 1997 1996 ------------ ------------ ASSETS Cash and due from banks..................................... $ 21,144,289 $ 17,916,909 Federal funds sold.......................................... 22,500,000 11,300,000 ------------ ------------ Total cash and cash equivalents......................... 43,644,289 29,216,909 ------------ ------------ Held-to-maturity securities: State and municipal subdivisions........................... 18,415,049 18,635,932 ------------ ------------ Available-for-sale securities: U.S. Treasuries and agencies............................... 20,074,686 20,092,813 Collateralized mortgage obligations and other investments.............................................. 1,108,163 1,555,949 ------------ ------------ 21,182,849 21,648,762 ------------ ------------ Federal Home Loan Bank stock................................ 1,208,000 1,119,500 ------------ ------------ Loans, net of allowance for loan losses and unearned income.................................................... 115,413,898 99,775,802 Premises and equipment, net................................. 4,411,372 4,093,669 Accrued interest and other assets........................... 2,378,189 2,616,093 ------------ ------------ Total assets............................................ $206,653,646 $177,106,667 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Demand deposits............................................ $ 49,998,132 $ 41,746,175 Interest bearing demand deposits........................... 80,334,130 69,082,274 Savings deposits........................................... 14,626,880 15,447,644 Time deposits.............................................. 28,217,204 29,292,364 ------------ ------------ Total deposits.......................................... 173,176,346 155,568,457 Accrued interest and other liabilities...................... 1,616,745 1,350,076 ------------ ------------ Total liabilities....................................... 174,793,091 156,918,533 ------------ ------------ 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, 10,000,000 shares authorized with 8,340,744 and 3,574,682, issued and outstanding at December 31, 1997 and 1996, respectively................. 18,462,712 9,480,330 Retained earnings........................................... 13,349,301 10,652,015 Unrealized gain on available-for-sale securities, net of taxes..................................................... 48,542 55,789 ------------ ------------ Total shareholders' equity.............................. 31,860,555 20,188,134 ------------ ------------ Total liabilities and shareholders' equity.............. $206,653,646 $177,106,667 ============ ============
The accompanying notes are an integral part of these consolidated financial statements - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 16 17 FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- VRB BANCORP CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- INTEREST INCOME Interest and fees on loans................................. $11,443,683 $10,122,237 $ 9,892,695 Interest on investment securities held-to-maturity: State and municipal subdivisions.......................... 944,226 964,043 617,886 Interest on investment securities available-for-sale: U.S. Treasuries and agencies.............................. 1,336,882 1,229,046 891,985 Collateralized mortgage obligations and other investments............................................. 78,310 98,314 106,291 Federal Home Loan Bank stock dividends..................... 88,500 83,300 55,128 Federal funds sold......................................... 1,063,088 691,092 429,224 ----------- ----------- ----------- Total interest income................................... 14,954,684 13,188,032 11,973,209 ----------- ----------- ----------- INTEREST EXPENSE Interest-bearing demand deposits........................... 2,414,951 1,990,377 1,519,257 Savings deposits........................................... 336,830 376,290 463,435 Time deposits.............................................. 1,309,999 1,260,728 938,197 Other borrowings........................................... - - 68,658 ----------- ----------- ----------- Total interest expense.................................. 4,061,780 3,627,395 2,989,547 ----------- ----------- ----------- NET INTEREST INCOME......................................... 10,892,904 9,560,637 8,983,662 PROVISION FOR LOAN LOSSES................................... 250,000 250,000 - ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 10,642,904 9,310,637 8,983,662 ----------- ----------- ----------- NONINTEREST INCOME Service charges on deposit accounts........................ 1,019,786 978,739 1,006,765 Other operating income..................................... 650,853 391,896 373,722 ----------- ----------- ----------- Total noninterest income................................ 1,670,639 1,370,635 1,380,487 ----------- ----------- ----------- NONINTEREST EXPENSES Salaries and benefits...................................... 4,120,469 3,692,594 3,841,055 Net occupancy.............................................. 813,915 629,642 607,739 Communications............................................. 239,721 226,390 204,323 Data processing............................................ 181,460 147,844 97,339 FDIC insurance premium..................................... 18,201 2,000 142,633 Supplies................................................... 230,255 170,948 158,648 Professional fees.......................................... 180,658 143,817 179,686 Other expenses............................................. 1,088,245 814,767 829,635 ----------- ----------- ----------- Total noninterest expenses.............................. 6,872,924 5,828,002 6,061,058 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES.................................. 5,440,619 4,853,270 4,303,091 PROVISION FOR INCOME TAXES.................................. 1,737,000 1,602,000 1,395,000 ----------- ----------- ----------- NET INCOME.................................................. $ 3,703,619 $ 3,251,270 $ 2,908,091 =========== =========== =========== BASIC EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE....... $ 0.50 $ 0.46 $ 0.42 =========== =========== =========== DILUTED EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE..... $ 0.50 $ 0.45 $ 0.41 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 17 18 FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- VRB BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NET UNREALIZED GAIN (LOSS) ON COMMON STOCK AVAILABLE- TOTAL ----------------------- RETAINED FOR-SALE SHAREHOLDERS' SHARES AMOUNT EARNINGS SECURITIES EQUITY --------- ----------- ----------- ----------- ---------------- BALANCE, December 31, 1994................... 2,235,686 $ 7,916,059 $ 7,146,252 $ (61,706) $ 15,000,605 Stock options exercised (August 11, 1995).... 143 581 - - 581 Cash dividend ($.25 per share, paid November 10, 1995).................................. - - (558,957) - (558,957) 4% stock dividend (November 10, 1995)........ 89,190 1,137,173 (1,137,173) - - Payments for fractional shares related to stock dividend ($12.75 per share).......... - - (3,100) - (3,100) Stock options exercised (December 28, 1995)...................................... 8,000 31,200 - - 31,200 Net income................................... - - 2,908,091 - 2,908,091 Changes in net unrealized gain on available-for-sale securities, net of taxes...................................... - - - 91,325 91,325 --------- ----------- ----------- ----------- ---------------- BALANCE, December 31, 1995................... 2,333,019 9,085,013 8,355,113 29,619 17,469,745 Stock options exercised (January to October 1996)...................................... 50,180 304,054 - - 304,054 Income tax benefit from exercise of stock options.................................... - 91,263 - - 91,263 Cash dividend ($.40 per share, paid November 20, 1996).................................. - - (953,280) - (953,280) 3 for 2 stock split (November 20, 1996)......................... 1,191,483 - - - - Payments for fractional shares related to stock split ($9.33 per share)............ - - (1,088) - (1,088) Net income................................... - - 3,251,270 - 3,251,270 Change in net unrealized gain on available-for-sale securities, net of taxes....................................... - - - 26,170 26,170 --------- ----------- ----------- ----------- ---------------- BALANCE, December 31, 1996................... 3,574,682 9,480,330 10,652,015 55,789 20,188,134 Stock options exercised (February to August 1997)................... 17,475 85,230 - - 85,230 2 for 1 stock split (September 10, 1997)........................ 3,592,157 - - - - Stock options exercised (September to October 1997)................. 6,430 26,152 - - 26,152 Income tax benefit from stock options exercised................................... - 86,896 - - 86,896 Cash dividend ($.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................................... - - 3,703,619 - 3,703,619 Change in net unrealized gain on available-for-sale securities, net of taxes....................................... - - - (7,247) (7,247) --------- ----------- ----------- ----------- ---------------- BALANCE, December 31, 1997................... 8,340,744 $18,462,712 $13,349,301 $ 48,542 $ 31,860,555 ========= =========== =========== =========== ================
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 18 19 FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- VRB BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------------- 1997 1996 1995 ------------ ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................. $ 3,703,619 $ 3,251,270 $ 2,908,091 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization............................. 392,547 432,815 430,123 Loss (gain) on sales of assets............................ (8,429) 1,493 - Provision for loan losses................................. 250,000 250,000 - FHLB stock dividend....................................... (88,500) (83,300) (55,128) Deferred taxes............................................ 22,684 6,451 13,118 Change in cash due to changes in certain assets and liabilities: (Increase) decrease in accrued interest and other assets.................................................. 215,220 (226,911) (90,327) Increase in accrued interest and other liabilities........ 357,298 125,871 192,234 ------------ ------------ ----------- Net cash from operating activities...................... 4,844,439 3,757,689 3,398,111 ------------ ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from the maturity of held-to-maturity securities............................................... 215,000 5,390,000 7,895,537 Purchases of held-to-maturity securities................... - (8,204,586) (3,686,000) Proceeds from maturity of available-for-sale securities.... 446,971 6,118,455 2,000,000 Proceeds from sales of available-for-sale securities....... 3,008,437 - - Purchases of available-for-sale securities................. (3,000,000) (6,490,627) (9,034,989) Purchases of Federal Home Loan Bank stock.................. - - (544,472) Net increase in loans...................................... (15,888,096) (11,053,321) (530,996) Purchase of premises and equipment......................... (699,013) (513,479) (249,433) Sale of premises and equipment............................. 2,600 - 4,010 ------------ ------------ ----------- Net cash from investing activities...................... (15,914,101) (14,753,558) (4,146,343) ------------ ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits................................... 17,607,889 22,823,910 7,272,231 Proceeds from public stock offering, net of expenses....... 8,784,104 - - Cash dividends and fractional share payments............... (1,006,333) (954,368) (562,057) Cash received from exercise of common stock options........ 111,382 243,616 31,781 ------------ ------------ ----------- Net cash from financing activities...................... 25,497,042 22,113,158 6,741,955 ------------ ------------ ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 14,427,380 11,117,289 5,993,723 CASH AND CASH EQUIVALENTS, beginning of year................ 29,216,909 18,099,620 12,105,897 ------------ ------------ ----------- CASH AND CASH EQUIVALENTS, end of year...................... $ 43,644,289 $ 29,216,909 $18,099,620 ============ ============ =========== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid for interest..................................... $ 4,048,741 $ 3,635,185 $ 2,919,329 ============ ============ =========== Cash paid for taxes........................................ $ 1,320,994 $ 1,607,300 $ 1,456,256 ============ ============ =========== SCHEDULE OF NONCASH ACTIVITIES Stock dividends declared................................... $ - $ - $ 1,137,173 ============ ============ =========== Unrealized gain (loss) on available-for-sale securities, net of tax............................................... $ (7,247) $ 26,170 $ 91,325 ============ ============ =========== Income tax benefit of stock options exercised.............. $ 86,896 $ 91,263 $ - ============ ============ ===========
The accompanying notes are an integral part of these consolidated financial statements - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 19 20 FINANCIAL NOTES - -------------------------------------------------------------------------------- VRB BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS - 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 Bancorp is conducted through its subsidiary bank and all significant intercompany accounts and transactions have been eliminated in the preparation of the consolidated financial statements. 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, 1997 and 1996, 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 - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 20 21 FINANCIAL NOTES - -------------------------------------------------------------------------------- NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued) 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 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. Impaired loans are carried at the present value of expected future cash flows discounted at the loan's effective interest rate, the loans market price or the fair value of the collateral if the loan is collateral dependent. 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 - Other real estate, acquired through foreclosure or deeds in lieu of foreclosure, 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 reserve 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. The Bank had no other real estate at December 31, 1997 and 1996. INTANGIBLE ASSETS - Intangible assets consist of purchased goodwill arising from the previous acquisition of financial institutions. These assets are being amortized over periods which do not exceed 15 years. INCOME TAXES - 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 - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 21 22 FINANCIAL NOTES - -------------------------------------------------------------------------------- NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued) loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. 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. STOCK OPTIONS - In October 1995 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." This new standard defines a fair value based method of accounting for an employee stock option or similar equity instrument. This statement gives entities a choice of recognizing related compensation expense by adopting the new fair value method or to continue to measure compensation using the intrinsic value approach under Accounting Principles Board (APB) Opinion No. 25, the former standard. If the former standard for measurement were elected, SFAS No. 123 requires supplemental disclosure to show the effects of using the new measurement criteria. The Bank has elected to continue using the measurement prescribed by APB Opinion No. 25, and accordingly, this pronouncement has had no affect on the Bank's financial position or results of operations. RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income" which the Bank is required to adopt for years beginning after December 15, 1997, This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general purpose financial statements. When adopted, the unrealized gain or loss on available-for-sale securities will be recognized as a component of comprehensive income. Other issued but not yet required FASB statements are not currently applicable to the Bank's operations. RECLASSIFICATIONS - Certain reclassifications have been made to the 1996 and 1995 consolidated financial statements to conform with current year presentations. - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 22 23 FINANCIAL NOTES - -------------------------------------------------------------------------------- NOTE 2 - INVESTMENT SECURITIES The amortized cost and estimated market values of investment securities at December 31, 1997 and 1996, are as follows (in thousands):
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- DECEMBER 31, 1997 Held-to-maturity securities: State and municipal subdivisions....... $18,415 $ 609 $ - $19,024 ======= ======= ======= ======= Available-for-sale securities: U.S. Treasuries and agencies........... $19,998 $ 77 $ - $20,075 Collateralized mortgage obligations.... 1,111 - (3) 1,108 ------- ------- ------- ------- $21,109 $ 77 $ (3) $21,183 ======= ======= ======= ======= DECEMBER 31, 1996 Held-to-maturity securities: State and municipal subdivisions....... $18,636 $ 227 $ (43) $18,820 ======= ======= ======= ======= Available-for-sale securities: U.S. Treasuries and agencies........... $19,995 $ 167 $ (69) $20,093 Collateralized mortgage obligations.... 1,569 - (13) 1,556 ------- ------- ------- ------- $21,564 $ 167 $ (82) $21,649 ======= ======= ======= =======
The amortized cost and estimated market value of investment securities at December 31, 1997, 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 call or prepayment penalties.
HELD-TO-MATURITY AVAILABLE-FOR-SALE SECURITIES SECURITIES ----------------------- ----------------------- ESTIMATED ESTIMATED AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE --------- ---------- ---------- --------- Due in one year or less................. $ 2,338 $ 2,344 $ 429 $ 427 Due after one year through five years... 550 565 18,680 18,743 Due after five years through ten years................................. 5,364 5,521 2,000 2,013 Due after ten years..................... 10,163 10,594 - - ------- ------- ------- ------- $18,415 $19,024 $21,109 $21,183 ======= ======= ======= =======
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 payments. At December 31, 1997 and 1996, investment securities with an amortized cost of $5,186,574 and $5,188,961, 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. - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 23 24 FINANCIAL NOTES - -------------------------------------------------------------------------------- NOTE 3 - LOANS AND RESERVE FOR LOAN LOSSES The loan portfolio consisted of the following (in thousands):
1997 1996 -------- -------- Real estate -- construction................................ $ 15,476 $ 9,112 Real estate -- mortgage.................................... 77,049 66,209 Commercial................................................. 12,720 13,181 Installment................................................ 11,850 12,808 Other loans................................................ 99 98 -------- -------- 117,194 101,408 (1,780) (1,632) -------- -------- $115,414 $ 99,776 ======== ========
The following is an analysis of the changes in the reserve for possible loan losses (in thousands);
1997 1996 1995 ------ ------ ------ Beginning balance..................................... $1,632 $1,407 $1,414 Provision for possible loan losses.................... 250 250 - Losses................................................ (141) (38) (45) Recoveries............................................ 39 13 38 ------ ------ ------ Ending balance........................................ $1,780 $1,632 $1,407 ====== ====== ======
Impairment of loans having recorded investments of $371,820 and $58,166 at December 31, 1997 and 1996, respectively, has been recognized in conformity with SFAS Statement No. 114, as amended by SFAS Statement No. 118. The average recorded investment and total allowance for loan losses related to impaired loans was equal to their recorded investment at December 31, 1997 and 1996. Interest income recognized on impaired loans during the years ended December 31, 1997, 1996, and 1995, was not significant. Management estimates that in 1997, approximately $29,590 of interest income was not recognized on impaired loans on nonaccrual status, compared with approximately $3,788 in 1996 and $2,868 in 1995. NOTE 4 - BANK PREMISES AND EQUIPMENT Bank premises, furniture, and equipment consisted of the following (in thousands):
1997 1996 ------- ------- Land........................................................ $ 1,323 $ 1,323 Buildings................................................... 3,248 3,147 Furniture and equipment..................................... 3,035 2,545 ------- ------- 7,606 7,015 Less: accumulated depreciation.............................. (3,195) (2,921) ------- ------- $ 4,411 $ 4,094 ======= =======
NOTE 5 - ACCRUED INTEREST AND OTHER ASSETS Accrued interest and other assets consisted of the following (in thousands):
1997 1996 ------- ------- Accrued interest receivable................................. $ 1,240 $ 1,162 Prepaid expenses............................................ 137 136 Deferred taxes.............................................. 104 126 Intangible and other assets................................. 897 1,192 ------- ------- $ 2,378 $ 2,616 ======= =======
- -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 24 25 FINANCIAL NOTES - -------------------------------------------------------------------------------- NOTE 6 - TIME DEPOSITS Time certificates of deposit of $100,000 and over, aggregated $5,258,874 and $8,151,302 at December 31, 1997 and 1996, respectively. At December 31, 1997, the scheduled maturities for time deposits is as follows (in thousands): 1998........................................................ $25,744 1999........................................................ 1,234 2000........................................................ 890 2001........................................................ 115 2002 and thereafter......................................... 234 ------- $28,217 =======
NOTE 7 - INCOME TAXES The income tax provision consisted of the following (in thousands):
1997 1996 1995 ------ ------ ------ Currently payable..................................... $1,715 $1,596 $1,382 Deferred.............................................. 22 6 13 ------ ------ ------ Provision for income taxes............................ $1,737 $1,602 $1,395 ====== ====== ======
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):
1997 1996 1995 ---- ----- ---- Accounting loan loss provision in excess of tax provision... $(58) $(100) $ - Accounting depreciation less than (in excess of) tax depreciation.............................................. 3 19 (6) Deferred compensation....................................... (6) (8) (14) Accounting loan fees in excess of tax loan fees............. 66 56 17 Federal Home Loan Bank stock dividends...................... 28 24 19 Other differences........................................... (11) 15 (3) ---- ----- ---- $ 22 $ 6 $ 13 ==== ===== ====
The net deferred tax benefits included in other assets in the accompanying consolidated balance sheets include the following components (in thousands):
1997 1996 ----- ----- Deferred tax assets: Loan loss reserve.......................................... $ 392 $ 334 Deferred compensation...................................... 88 82 Other...................................................... 25 14 ----- ----- 505 430 ----- ----- Deferred tax liabilities: Accumulated depreciation................................... (100) (97) Deferred loan fees......................................... (225) (159) Federal Home Loan Bank stock dividends..................... (76) (48) ----- ----- (401) (304) ----- ----- Net deferred tax asset...................................... $ 104 $ 126 ===== =====
- -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 25 26 FINANCIAL NOTES - -------------------------------------------------------------------------------- NOTE 7 - INCOME TAXES - (continued) The exercise of stock options which have been granted under VRB Bancorp's stock option plan for directors give rise to compensation which is includable in the taxable income of the applicable employees 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 Accounting Principles Board 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, 1997 and 1996, such deductions resulted in federal and state tax deductions increasing common stock. The compensation deductions arising from the exercise of stock options were not material in 1995. Management believes, based upon the Bank's historical performance, 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 the effect of tax exemptions for interest received on municipal investments. The 1997 and 1995 provision for income taxes reflects a reduction in the state income tax rate from 6.6% to 3.8%, and 3.3%, respectively. A reconciliation between the statutory federal income tax rate and the effective tax rate is as follows (in thousands):
1997 1996 1995 ------ ------ ------ Federal income taxes at statutory rate...................... $1,850 $1,650 $1,463 State income tax expense, net of federal income tax benefit................................................... 237 211 94 Effect of nontaxable interest income........................ (294) (298) (191) Other....................................................... (56) 39 29 ------ ------ ------ $1,737 $1,602 $1,395 ====== ====== ======
NOTE 8 - 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 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 held varies but may include cash, accounts receivable, inventory, premises and equipment, and income-producing commercial properties. - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 26 27 FINANCIAL NOTES - -------------------------------------------------------------------------------- NOTE 8 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - (continued) 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 1997, 1996, or 1995. A summary of the notional amounts of the Bank's financial instruments with off-balance-sheet risk at December 31, 1997 and 1996, follows:
1997 1996 ----------- ----------- Commitments to extend credit.......................... $22,106,031 $16,013,904 Commercial and standby letters of credit.............. $ 630,611 $ 479,328
NOTE 9 - FAIR VALUES OF FINANCIAL INSTRUMENTS The following table estimates fair value and the related carrying values of the Bank's financial instruments (in thousands):
1997 1996 -------------------- -------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Financial assets: Cash and due from banks.......................... $21,144 $ 21,144 $17,917 $ 17,917 Federal funds sold............................... $22,500 $ 22,500 $11,300 $ 11,300 Securities available-for-sale.................... $21,183 $ 21,183 $21,649 $ 21,649 Securities held-to-maturity...................... $18,415 $ 19,024 $18,636 $ 18,820 Federal Home Loan Bank stock..................... $ 1,208 $ 1,208 $ 1,120 $ 1,120 Loans, net of allowance for loan losses.......... $115,414 $112,722 $99,776 $ 99,544 Financial liabilities: Demand and savings deposits...................... $144,959 $144,959 $126,276 $126,276 Time deposits.................................... $28,217 $ 27,604 $29,292 $ 29,373
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 items at December 31, 1997 and 1996, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 1997 and 1996, should not necessarily be considered to apply at subsequent dates. 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 - 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 3. The distribution of commitments to extend credit approximates the distribution of loans outstanding. - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 27 28 FINANCIAL NOTES - -------------------------------------------------------------------------------- NOTE 10 - CONCENTRATIONS OF CREDIT RISK - (continued) Commercial and standby letters of credit were granted primarily to commercial borrowers as of December 31, 1997. 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 $200,000 without approval from the Board of Directors. NOTE 11 - COMMITMENTS AND CONTINGENCIES 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. The Bank leases certain branch premises and equipment. The following is a schedule of future minimum lease payments under operating leases in effect as of December 31, 1997:
YEARS ENDING DECEMBER 31, ------------------------- 1998....................................................... $ 92,272 1999....................................................... 78,255 2000....................................................... 8,959 -------- Total minimum payments required............................. $179,486 ========
Total rental expense was $94,350, $94,413, and $92,059 in 1997, 1996, and 1995, respectively. NOTE 12 - BORROWING AGREEMENTS The Bank has 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, 1997, 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 $8,850,000 with interest at the FHLB's cash management rate. There were no borrowings outstanding at December 31, 1997. NOTE 13 - 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 725,492 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 $57,312, $44,564, and $39,151 as compensation expense relating to 18,790, 21,262, and 20,910 shares of common stock optioned to its directors during 1997, 1996, and 1995, respectively. - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 28 29 FINANCIAL NOTES - -------------------------------------------------------------------------------- NOTE 13 - STOCK OPTION PLANS - (continued) The following summarizes options available and outstanding under both the Directors' and Employees' Plans as of December 31, 1997, after the effect of the current year's stock split (in thousands with the exception of the exercise price):
COMBINED DIRECTOR'S PLAN EMPLOYEE'S PLAN PLANS ----------------- ----------------- -------- WEIGHTED WEIGHTED AVERAGE AVERAGE OPTION OPTION SHARES PRICE SHARES PRICE SHARES ------ -------- ------ -------- -------- Options outstanding at December 31, 1994........ 34 $1.65 216 $1.83 250 Options granted in 1995......................... 22 $2.24 66 $2.97 88 Options exercised in 1995....................... - $- (24) $ 1.3 (24) Options forfeited............................... - $- (18) $ 2.6 (18) --- ---- ---- Options outstanding at December 31, 1995........ 56 $1.80 240 $2.08 296 === ===== ==== ===== ==== Options exercisable at December 31, 1995........ 56 $1.80 120 $1.52 176 === ===== ==== ===== ==== Options reserved at December 31, 1995........... 180 176 356 === ==== ==== Options outstanding at December 31, 1995........ 56 $1.80 240 $2.08 296 Options granted in 1996......................... 22 $2.50 - $- 22 Options exercised in 1996....................... (42) $2.20 (108) $1.71 (150) Options forfeited............................... - $- (14) $3.39 (14) --- ---- ---- Options outstanding at December 31, 1996........ 36 $1.82 118 $2.90 154 === ===== ==== ===== ==== Options exercisable at December 31, 1996........ 36 $1.82 34 $1.69 70 === ===== ==== ===== ==== Options reserved at December 31, 1996........... 158 190 348 === ==== ==== Options outstanding at December 31, 1996........ 36 $1.82 118 $2.90 154 Options granted in 1997......................... 18 $2.83 142 $8.95 160 Options exercised in 1997....................... (9) $2.56 (32) $2.01 (41) Options forfeited............................... - $- (5) $3.61 (5) --- ---- ---- Options outstanding at December 31, 1997........ 45 $2.09 223 $6.05 268 === ===== ==== ===== ==== Options exercisable at December 31, 1997........ 45 $2.09 13 $2.04 58 === ===== ==== ===== ==== Options reserved at December 31, 1997........... 140 53 193 === ==== ====
Had compensation cost for the Bank's 1997 and 1996 grants for stock-based compensation plans been determined consistent with SFAS No. 123, the Bank's net income, and net income per common share for December 31, 1997 and 1996, would approximate the pro forma amounts below (in thousands except per share data):
1997 ------------------ AS PRO REPORTED FORMA -------- ------ Net income................................................. $3,704 $3,504 Basic earnings per common and common equivalent share...... $ 0.50 $ 0.48 Diluted earnings per common and common equivalent share.... $ 0.50 $ 0.48
- -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 29 30 FINANCIAL NOTES - -------------------------------------------------------------------------------- NOTE 13 - STOCK OPTION PLANS - (continued)
1996 ------------------ AS PRO REPORTED FORMA -------- ------ Net income................................................. $3,251 $3,227 Basic earnings per common and common equivalent share...... $ 0.46 $ 0.45 Diluted earnings per common and common equivalent share.... $ 0.45 $ 0.44
The fair value of each option granted during 1997 and 1996, is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) dividend yields of 1.52% in 1997 and 4.25% in 1996, (2) expected volatility of 28% in 1997 and 23% in 1996, (3) risk-free rates of 6.5% in 1997 and 7.5% in 1996; and, (4) expected life of five to ten in both 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 14 - 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 $168,557, $162,210, and $172,401 in 1997, 1996, and 1995, 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 $189,640, $185,861, and $170,582 in 1997, 1996, and 1995, respectively. The Bank has established a bonus program as part of the compensation package it provides to employees. At December 31, 1997, the Bank employed approximately 120 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 proceeding year. An executives bonus program is similarly funded and based on current year profits with payments measured on the basis of return on assets on after-tax income. For the years ending December 31, 1997, 1996, and 1995, $542,400, $510,000, and $600,000, respectively, was expensed to fund these programs with their related payroll and benefit costs. The Bank has also established supplemental retirement agreements with certain of its 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, 1997, a liability for the supplemental retirement plans was recognized and funded in the amount of $274,635. During 1997, 1996, and 1995, the Bank recorded Plan expenses of $21,000, $28,000, and $42,000, respectively. NOTE 15 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES In 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which is effective for financial statements issued for periods ending after December 15, 1997. SFAS No. 128 replaced standards for computing and presenting earnings per share and requires a dual presentation of basic and diluted earnings per share. 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 Company's stock option plans. Comparative earnings per share data for the years ended December 31, 1997, 1996, and 1995, have been restated to conform with the current year presentation. The following table illustrates the computations of basic and - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 30 31 FINANCIAL NOTES - -------------------------------------------------------------------------------- NOTE 15 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES - (continued) diluted earnings per share for the years ended December 31, 1997, 1996, and 1995 (dollars in thousands except per share amounts):
INCOME SHARES PER SHARE 1997 (NUMERATOR) (DENOMINATOR) AMOUNT ---- ------------ ------------- --------- Basic earnings per share Income available to common shareholders......... $3,704 $7,345 $0.50 ===== Effect of dilutive securities Outstanding common stock options................ - 28 ------ ------ Income available to common shareholders plus assumed conversions........................... $3,704 $7,373 $0.50 ====== ====== ===== 1996 - ---- Basic earnings per share Income available to common shareholders......... $3,251 $7,072 $0.46 ===== Effect of dilutive securities Outstanding common stock options................ - 74 ------ ------ Income available to common shareholders plus assumed conversions........................... $3,251 $7,146 $0.45 ====== ====== ===== 1995 - ---- Basic earnings per share Income available to common shareholders......... $2,908 $6,976 $0.42 ===== Effect of dilutive securities Outstanding common stock options................ - 114 ------ ------ Income available to common shareholders plus assumed conversions........................... $2,908 $7,090 $0.41 ====== ====== =====
NOTE 16 - 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. The amount of loans outstanding to directors, executive officers, principal stockholders, and companies with which they are associated was as follows:
1997 1996 ---------- ---------- Beginning balance....................................... $1,447,209 $1,621,867 Loans made.............................................. - 74,000 Loans paid.............................................. (92,406) (248,658) ---------- ---------- Ending balance.......................................... $1,354,803 $1,447,209 ========== ==========
NOTE 17 - REGULATORY MATTERS The Bank is 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 the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 31 32 FINANCIAL NOTES - -------------------------------------------------------------------------------- NOTE 17 - REGULATORY MATTERS - (continued) specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios in the table below. There are no conditions or events since that notification that management believes have changed the institution's category.
TO BE WELL CAPITALIZED FOR CAPITAL UNDER PROMPT ADEQUACY CORRECTIVE ACTUAL PURPOSES: ACTION PROVISIONS: --------------- --------------- ------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ----- ------- ----- -------- ------ AS OF DECEMBER 31, 1997 (in thousands) Total capital to risk weighted assets......................... $31,815 22.5% $11,312 (M)8.0% $14,140 (M)10.0% Tier I capital to risk weighted assets......................... $30,051 21.3% $5,643 (M)4.0% $ 8,465 (M) 6.0% Tier I capital to average assets......................... $30,051 14.9% $8,067 (M)4.0% $10,084 (M) 5.0% AS OF DECEMBER 31, 1996 (in thousands) Total capital to risk weighted assets......................... $20,628 17.3% $9,539 (M)8.0% $11,924 (M)10.0% Tier I capital to risk weighted assets......................... $19,139 16.1% $4,755 (M)4.0% $ 7,133 (M) 6.0% Tier I capital to average assets......................... $19,139 11.1% $6,897 (M)4.0% $ 8,622 (M) 5.0%
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for VRB Bancorp (unconsolidated parent company only) is as follows:
1997 1996 ----------- ----------- ASSETS Cash....................................................... $ 887,967 $ 122,128 Investment in subsidiary................................... 30,906,820 19,993,191 Goodwill................................................... 65,768 72,815 ----------- ----------- $31,860,555 $20,188,134 =========== =========== SHAREHOLDERS' EQUITY Common stock............................................... $18,462,712 $ 9,480,330 Retained earnings.......................................... 13,349,301 10,652,015 Market value adjustment, available-for-sale securities, net of taxes................................................. 48,542 55,789 ----------- ----------- $31,860,555 $20,188,134 =========== ===========
- -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 32 33 FINANCIAL NOTES - -------------------------------------------------------------------------------- NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION - (continued)
1997 1996 1995 ---------- ---------- ---------- REVENUES Equity in undistributed earnings of subsidiary bank........ $2,810,666 $2,456,348 $2,390,137 Dividends.................................................. 900,000 845,000 525,000 EXPENSES Goodwill and other administrative expenses................. (7,047) (50,078) (7,046) ---------- ---------- ---------- Net income.................................................. $3,703,619 $3,251,270 $2,908,091 ========== ========== ========== CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................. $3,703,619 $3,251,270 $2,908,091 Adjustments to reconcile net income to net cash from operating activities: Equity in undistributed earnings of subsidiary bank....... (2,810,666) (2,456,348) (2,390,137) Amortization.............................................. 7,047 7,046 7,046 ---------- ---------- ---------- Net cash from operating activities...................... 900,000 801,968 525,000 ---------- ---------- ---------- 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............... (1,006,333) (954,368) (562,057) Cash received from exercise of common stock options........ 88,068 243,616 31,781 ---------- ---------- ---------- Net cash from financing activities...................... 7,865,839 (710,752) (530,276) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 765,839 91,216 (5,276) CASH AND CASH EQUIVALENTS, beginning of year................ 122,128 30,912 36,188 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, end of year...................... $ 887,967 $ 122,128 $ 30,912 ========== ========== ==========
NOTE 19 - 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. Pending such use, the net proceeds were invested in short-term, investment-grade securities. NOTE 20 - SUBSEQUENT EVENT Effective September 1997, the Company's wholly-owned subsidiary, Valley of the Rogue Bank ("the Bank"), signed a definitive merger agreement with Colonial Banking Company ("CBC") pursuant to which CBC would be merged with and into the Bank, with the resulting bank continuing under the name and charter of Valley of the Rogue Bank. The merger was subject to satisfaction of certain conditions of closing, including regulatory and shareholder approval. The Bank agreed to purchase all of the outstanding shares of CBC stock for a cash price of approximately $17.3 million. This merger took place effective early in January 1998. CBC had five full service branches in southern Oregon, as well as a loan production office in Portland, Oregon. Following the merger, four of CBC's branches became branch offices of the Bank, and the fifth branch was consolidated into the Bank's main office in Rogue River, Oregon. - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 33 34 FINANCIAL NOTES - -------------------------------------------------------------------------------- NOTE 20 - SUBSEQUENT EVENT - (continued) Following is a summary of assets acquired and liabilities assumed in the Bank's acquisition of Colonial Banking Company (dollars in thousands): Cash and due from banks..................................... $ 5,934 Investment securities....................................... 13,319 Loans, net.................................................. 92,774 Goodwill.................................................... 10,198 Other assets................................................ 4,330 Deposit liabilities......................................... (107,876) Other liabilities........................................... (1,412) --------- Purchase price paid......................................... $ 17,267 =========
- -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 34 35 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, 1997 and 1996, and the related statements of income, changes in shareholders' equity, and cash flows for the years ended December 31, 1997, 1996, and 1995. 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 audit 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, 1997 and 1996, and the results of its operations and cash flows for the years ended December 31, 1997, 1996, and 1995, in conformity with generally accepted accounting principles. [Moss Adams Signature] Portland, Oregon January 9, 1998 35 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 36 This page intentionally left blank 36 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 37 BOARD OF DIRECTORS AND EXECUTIVE OFFICERS James D. Coleman photo John O. Dunkin photo Robert J. DeArmond photo JAMES D. COLEMAN JOHN O. DUNKIN ROBERT J. DEARMOND Board of Directors Board of Directors Board of Directors Chairman Vice Chairman Member since 1987 Member since 1986 Member since 1990 Gary Lundberg photo Larry Parducci photo April Sevcik photo Michael Donovan photo GARY LUNDBERG LARRY PARDUCCI APRIL SEVCIK MICHAEL DONOVAN Board of Directors Board of Directors Board of Directors Board of Directors Member since 1993 Member since 1994 Member since 1997 Member since 1997 William A. Haden photo Tom Anderson photo Brad Copeland photo Felice Belfiore photo WILLIAM A. HADEN TOM ANDERSON BRAD COPELAND FELICE BELFIORE President Executive Vice President Executive Vice President Senior Vice President Chief Executive Officer Chief Operating Officer Credit Administer Chief Financial Officer Board of Directors Board of Directors Joined Bank in 1993 Joined Bank in 1977 Joined Bank in 1996 Joined Bank in 1997
37 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 38 [INSERT VRB MAP] 38 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT 39 STAFF AND LOCATIONS VRB BANCORP AND VALLEY OF THE ROGUE BANK ADMINISTRATIVE OFFICES 110 Pine Street P. O. Box 1046 Rogue River, Oregon 97537 (541) 582-4561 William A. Haden President Chief Executive Officer Tom Anderson Executive Vice President Chief Operating Officer Brad Copeland Executive Vice President Credit Administrator Felice Belfiore Senior Vice President Chief Financial Officer Sharon Warburton Vice President Operations Helen Smith Vice President Operations Scott Hall Vice President Credit Administration Kathy Peckham Vice President Corporate Sales Manager Carrie Brownell Vice President Human Resources Jean J. Mickson Compliance Officer Owen Atkinson Vice President Information Technology Sharon Duff Vice President Manager, EDP Services Johnna Sharpe Assistant Manager EDP Services FRUITDALE OFFICE Larry G. Stewart Vice President Manager Jodi MacDonald Assistant Vice President Loan Officer Shirley Murschall Assistant Vice President Operations 7TH & MIDLAND OFFICE Don Myrick, Jr. Vice President Manager Terrell A. Bergmann Assistant Vice President Operations James Hamilton Assistant Vice President Loan Officer Linda Deba Loan Officer ROGUE RIVER OFFICE Jerry L. Cole Vice President Manager Ruth M. Bailey Assistant Vice President Operations Bob Murphy Vice President Loan Officer TALENT OFFICE Ellen Ashbaugh Assistant Vice President Manager Deanna Grimes Operations Officer MEDFORD OFFICE Fred Moran Vice President Manager Sandy Antich Operations Officer Wayne Thompson Assistant Vice President Loan Officer STEWART AVENUE OFFICE Peggy Bennett Manager POPLAR DRIVE OFFICE Janice Brigham Vice President Manager Carla Cartwright Operations Officer Trish Andrews Assistant Vice President Loan Officer PHOENIX OFFICE Mike Bingaman Vice President Manager Alice Orcutt Operations Officer ASHLAND OFFICE Frank Billovits Vice President Manager Susan Eichler Assistant Vice President Loan Officer Heidi Carson Operations Officer MERLIN OFFICE* Jerry Herbold Vice President Manager Ellen Cobb-deGraaf Operations Officer DOWNTOWN GRANTS PASS OFFICE* Harold "Bud" Bebeau Vice President Manager Karen Collins Operations Officer Sue Ann King Loan Officer WILLIAMS HIGHWAY OFFICE* Sharon Johnson Operations Officer E. JACKSON STREET OFFICE* Noland Alston Assistant Vice President Manager Cathy Fuller Operations Officer *Former branch of Colonial Banking Company acquired 1/5/98 39 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- VRB BANCORP 1997 ANNUAL REPORT EX-23 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 1, 1998, of our report dated January 9, 1998, relating to the financial statements of VRB Bancorp. /s/ Moss Adams LLP Portland, Oregon March 26, 1998 EX-27.1 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. 1000 12-MOS DEC-31-1997 DEC-31-1997 21,144 0 22,500 0 21,183 18,415 19,024 117,194 1,780 206,654 173,176 0 1,617 0 0 0 18,463 13,349 206,654 11,444 2,448 1,063 14,955 4,062 4,062 10,893 250 7 1,088 5,441 3,710 0 0 3,710 0.50 0.50 6.69 373 0 0 0 1,633 135 32 1,780 1,780 0 0
EX-27.2 5 FINANCIAL DATA SCHEDULE, YEAR ENDED 12/31/97
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-31-1996 DEC-31-1996 17,917 0 11,300 0 21,649 18,636 18,820 101,408 1,632 177,107 155,568 0 1,350 0 0 0 9,480 10,652 177,107 10,122 2,675 390 13,188 3,627 3,627 9,561 250 0 5,828 4,853 3,251 0 0 3,251 0.46 0.45 6.73 58 0 0 0 1,407 38 13 1,632 0 0 0
EX-27.3 6 FINANCIAL DATA SCHEDULE, QUARTER ENDED 6/30/97
9 6-MOS DEC-31-1997 JUN-30-1997 11,527,435 0 12,400,000 0 21,340,861 18,468,014 18,668,660 109,530,749 1,601,858 179,580,349 156,447,756 0 1,252,685 0 0 0 9,516,396 12,428,714 179,580,349 5,520,607 1,218,237 412,994 7,151,838 1,908,422 1,908,422 5,243,416 0 7,139 3,279,995 2,692,699 1,776,699 0 0 1,776,669 .25 .24 6.68 46,280 2,549 0 0 1,632,531 49,464 18,791 1,601,858 0 0 0
EX-27.4 7 FINANCIAL DATA SCHEDULE, QUARTER ENDED 9/30/97
9 9-MOS DEC-31-1996 SEP-30-1996 9,853,620 0 8,000,000 0 25,287,610 19,590,196 19,444,066 97,918,270 1,392,808 166,949,161 146,156,437 0 1,068,971 0 0 0 9,238,479 10,800,860 166,949,161 7,481,408 1,738,225 464,259 9,683,892 2,682,687 2,682,687 7,001,205 0 0 4,375,760 3,665,750 2,445,750 0 0 2,445,750 .35 .34 6.76 14,218 0 0 0 1,407,084 25,543 11,267 1,392,808 0 0 0
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