-----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, ByMbysh1mQ7JkvNoFOywQ85sALsbV0zr5M7fw1tU+t6L7YSJMi+Oc/TJ5uAMEFNo koja3JWz8QLBOp6OrHoIQQ== 0000944541-97-000003.txt : 19970329 0000944541-97-000003.hdr.sgml : 19970329 ACCESSION NUMBER: 0000944541-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25932 FILM NUMBER: 97566852 BUSINESS ADDRESS: STREET 1: 110 PINE ST CITY: ROGUE RIVER STATE: OR ZIP: 97537 BUSINESS PHONE: 5415823216 MAIL ADDRESS: STREET 1: P O BOX 1046 CITY: ROGUE RIVER STATE: OR ZIP: 97537 10-K 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, 1996 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) 582-3216 Registrant's telephone number, including area code Securities registered pursuant to Section 12(b) of the Act None Name of exchange on which registered None Securities registered pursuant to Section 12(g) of the Act: Common Stock (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filing pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant was $48,308,049 at March 8, 1997. As of March 8, 1997, there were 3,578,374 shares of the Registrant's Common Stock outstanding. Documents Incorporated by Reference: Portions of the Registrant's proxy statement dated March 8, 1997, for the 1997 annual meeting of shareholders ("Proxy Statement"), and the 1996 Annual Report to Shareholders are incorporated by reference in Part III hereof. Part I Item 1. Business General VRB Bancorp (the "Company"), was organized in 1983 under Oregon law for the purpose of becoming a holding company of Valley of the Rogue Bank (the "Bank"), an Oregon state-chartered bank organized in 1967. The Company conducts its business through the Bank, and has no material operations outside of those of the Bank. The Bank has nine offices, all of which are located in southern Oregon, including its main office in Rogue River and branch offices in Ashland, Medford, Talent, Phoenix and Grants Pass, Oregon. The Bank offers a broad variety of commercial banking services, primarily to small and medium-sized businesses, professionals, farmers and retail customers, including commercial and agricultural loans, accounts receivable and inventory financing, consumer installment loans, acceptance of deposits, and personal savings and checking accounts. The Bank's accounts are insured by the Federal Deposit Insurance Corporation. As of December 31, 1996, the Bank had assets of approximately $177.1 million and deposits of approximately $155.6 million. The Company's trade area has become increasingly popular as a retirement area, and has seen an increase in the population of approximately 12% during the period from 1983 to 1993. Over the past 10 years, the economic base of southern Oregon has undergone significant change. While agriculture and timber remain the area's largest economic sector, income and employment has become less dependent on logging and wood products manufacturing, a generally declining industry, with the growth of retirement services, tourism, retail trade and technology-related manufacturing. Competition Competition for deposits and loans has intensified with the consolidation of larger banks in the Bank's market area. Furthermore, competition from outside the traditional banking system from investment banking firms, insurance companies and related industries offering bank-like products has widened the competition for deposits and loans. The banking industry in the Bank's primary market area is characterized by well-established branches of large banks with headquarters located out of the trade area and, in many cases, outside the state. Although these branch networks are controlled from outside the area, and many lending and other decisions are not made locally, these institutions have competitive advantages over the Bank in that they have high public visibility and are able to maintain advertising and marketing activity on a much larger scale than the Bank can economically maintain. Because single borrower lending limits imposed by law are dependent on the capital of the institution, the branches of larger insti- tutions with substantial capital bases have some degree of competitive advantage with respect to loan applications which are in excess of the Bank's legal lending limits. Supervision and Regulation The Company General Regulatory and Supervisory Program For Bank Holding Companies. The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and is registered as such with the Federal Reserve Board. Under the terms of that Act, the activities of a bank holding company, and those of companies which it controls or in which it holds more than 5% of the voting stock, are limited to banking or managing or controlling banks or furnishing services to or performing services for its subsidiaries, or any other activity which the Federal Reserve Board determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Federal Reserve Board has adopted regulations (Regulation Y, as amended) that specify various permitted activities, including the ownership of shares of companies engaged in such permitted activities. Bank holding companies are required to obtain prior approval of the Federal Reserve Board to engage in any new activity or to acquire more than 5% of any class of voting stock of any company. As a bank holding company, the Company is subject to supervisory authority of the Federal Reserve. A bank holding company must file periodic reports of its financial condition, and must seek approval prior to acquiring control of any bank, bank holding company or other permissible non-banking business. Under Federal Reserve policy, bank holding companies are expected to act as a source of financial strength to, and commit resources to support, their subsidiary banks. In addition, a bank holding company and any subsidiaries it may control are deemed to be affiliates of the Bank, and transactions between a subsidiary bank and its affiliates are subject to restrictions. Such transactions include loans to the affiliates, investment by the bank in securities of affiliates, or taking such securities as collateral. A bank holding company and its subsidiary banks are subject to restrictions on engaging in the underwriting, public sale and distribution of securities, and is prohibited from engaging in certain tying arrangements in connection with the extension of credit, sale or lease of property or provision of services. The Federal Reserve Board is authorized to adopt regulations affecting various aspects of bank holding companies. Pursuant to the general supervisory authority of the Bank Holding Company Act and directives set forth in the International Lending Supervision Act of 1983, the Federal Reserve Board has adopted capital adequacy guidelines prescribing both risk-based capital and leverage ratios. Regulatory Capital Requirements Risk-Based Capital Guidelines. The Federal Reserve Board established risk-based capital guidelines for bank holding companies effective March 15, 1989. The guidelines define Tier 1 Capital and Total capital. Tier 1 Capital consists of common and qualifying preferred shareholders, equity and minority interests in equity accounts of consolidated subsidiaries, less goodwill and 50% (and in some cases up to 100%) of investment in unconsolidated subsidiaries. Total Capital consists of Tier I Capital plus qualifying mandatory convertible debt, perpetual debt, certain hybrid capital instruments, certain preferred stock not qualifying as Tier 1 Capital, subordinated and other qualifying term debt up to specified limits, and a portion of the allowance for credit losses, less investments in unconsolidated subsidiaries and in other designated subsidiaries or other associated companies at the discretion of the Federal Reserve Board, certain intangible assets, a portion of limited-life capital instruments approaching maturity and reciprocal holdings of banking organizations' capital instruments. The Tier 1 component must constitute at least 50% of qualifying Total Capital. Risk-based capital ratios are calculated with reference to risk weighted assets, which include both on-balance sheet and off balance sheet exposures. As of year-end 1992, the minimum required ratio for qualifying Total Capital became 8%, of which at least 4% must consist of Tier 1 Capital. At December 31, 1996, the Company's Tier 1 and Total Capital ratios were 16.1% and 17.3%, respectively. The current risk-based capital ratio analysis establishes minimum supervisory guidelines and standards. It does not evaluate all factors affecting an organization's financial condition. Factors which are not evaluated include (i) overall interest rate exposure; (ii) liquidity, funding and market risks; (iii) quality and level of earnings; (iv) investment or loan portfolio concentrations; (v) quality of loans and investments; (vi) the effectiveness of loan and investment policies; and (vii) management's overall ability to monitor and control other financial and operating risks. The capital adequacy assessment of federal bank regulators will, however, continue to include analyses of the foregoing considerations and in particular, the level and severity of problem and classified assets. Minimum Leverage Ratio. The Federal Reserve Board has adopted capital standards and leverage capital guidelines that include a minimum leverage ratio of 3% Tier I Capital to total assets (the "leverage ratio"). The leverage ratio is used in tandem with the final risk-based ratio of 8% that took effect at the end of 1992. The Federal Reserve Board has emphasized that the leverage ratio constitutes a minimum requirement for well-run banking organizations having well diversified risk, including no undue interest rate exposure, excellent asset quality, high liquidity, good earnings, and a composite rating of 1 under the Interagency Bank Rating System. Banking organizations experiencing or anticipating significant growth, as well as those organizations which do not exhibit the characteristics of a strong, well-run banking organization described above, will be required to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. The Company's leverage ratio at December 31, 1996, was 10.8%. The Bank The Bank is an Oregon state-chartered bank, the deposits of which are insured by the Federal Deposit Insurance Corporation ("FDIC"). Accordingly, the Bank files financial and other reports with, and is regularly examined by, the Director ("Director") of the Oregon Department of Consumer and Business Services and the FDIC. Under federal law, banks are subject to regulatory capital requirements as are bank holding companies. Pursuant to such authority and directives set forth in the International Lending Supervision Act of 1983, the FDIC and the Federal Reserve Board have issued regulations establishing the capital requirements for banks under federal law. The regulations, which apply to the Bank, establish minimum risk-based and leverage ratios which are substantially similar to those applicable to the Company. As of December 31, 1996, the risk- based and leverage ratios of the Bank exceeded the minimum requirements. Under the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), each Federal banking agency is required to prescribe, by regulation, non-capital safety and soundness standards for institutions under its authority. These standards are to cover internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such 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 the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. The Company believes that the Bank already meets substantially all the standards which are likely to be adopted, and therefore does not believe that the implementation of these regulatory standards will materially affect the Company's business operations. FDICIA also contains provisions which, among other things, restrict investments and activities as principal by state nonmember banks to those eligible for national banks, impose limitations on deposit account balance determinations for the purpose of the calculation of interest, and require the federal banking regulators to prescribe, implement or modify standards, respectively, for extensions of credit secured by liens on interests in real estate or made for the purpose of financing construction of a building or other improvements to real estate, loans to bank insiders, regulatory accounting and reports, internal control reports, independent audits, exposure on interbank liabilities, contractual arrangements under which institutions receive goods, products or services, deposit-account-related disclosures and advertising as well as to impose restrictions on federal reserve discount window advances for certain institutions and to require that insured depository institutions generally be examined on-site by federal or state personnel at least once every twelve months. 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 pending 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. Some of these bills would reduce the extent of federal deposit insurance, broaden the powers or the geographical range of operations of bank holding companies, modify interstate branching restrictions applicable to national banks, regulate bank involvement in derivative activities, and realign the structure and jurisdiction of various financial institution regulatory agencies. Whether or in what form any such legislation may be adopted or the extent to which the business of the Company might be affected thereby cannot be accurately predicted. The Bank is subject to state and federal laws and regulations governing most aspects of the banking business, including reserves against deposits, loans, investments, mergers, acquisitions, borrowings, dividends and establishment of branch offices. Among the most significant restrictions are lending limits. The amount of funds which any bank may lend to a single borrower is limited to a percentage of capital and surplus, as defined by applicable statues and regulations. In addition to the size of any loan, state law gives the Director authority to limit loan interest rates and to effect various other activities and powers. Federal banking law provides that in certain circumstances, officers or directors of a bank may be removed by the institution's federal supervisory agency, imposes restraints on lending by a bank to its executive officers, directors, or principal shareholders, and prohibits management personnel of a bank from serving as a director or in other management positions of another financial institution the assets of which exceed a specified amount or that has an office within a specified geographic area. Deposit Insurance Assessments As an FDIC member institution, the 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 includes 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 Bank's current FDIC premium rate during 1996 was $.00 per $100 of domestic deposits. 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. Monetary Policy The earnings of the Company and the Bank are directly affected by the monetary and fiscal policies of the federal government and governmental agencies. The Federal Reserve Board has broad powers to expand and constrict the supply of money and credit and to regulate the reserves which its member banks must maintain based on deposits. These broad powers are used to influence the growth of bank loans, investments and deposits, and may affect the interest rates which will prevail in the market for loans investments and deposits. Governmental and Federal Reserve Board monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to do so in the future. The future impact of such policies and practices on the growth or profitability of the Company and the Bank cannot be accurately predicted. Item 2. Properties The Company maintains its principal offices at the main office of its subsidiary bank, Valley of the Rogue Bank, at 110 Pine St., Rogue River, Oregon, and conducts its business through the branch offices of the Bank, all of which are in good repair and are adequate for carrying on the business of the Bank and the Company. All of the branches have drive-up facilities. The Bank also maintains automated teller machines located at the main office in Rogue River, the Fruitdale and 7th and Midland office in Grants Pass, and an off-site machine at 2230 Biddle Road, Medford, Oregon. The following sets forth all branch offices of the Bank. Except as otherwise indicated, all of the branch premises are owned by the Company or 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 (1) Stewart Avenue Branch (2) 2400 Poplar Drive 809 Stewart Ave. Medford, Oregon Medford, Oregon Phoenix Branch Talent Branch (3) 4000 S. Pacific Highway 201 N. Pacific Highway Phoenix, Oregon Talent, Oregon Seventh & Midland Branch 100 N.E. Midland Grants Pass, Oregon (1) A portion of the parking lot is leased for approximately $366.00 per month under a ground lease with the option to renew every five years, and final expiration in the year 2063. (2) Premises leased under a lease agreement dated August 15, 1989, renewable every five years until August 31, 2004. (3) Premises leased under a 15-year lease agreement dated December 27, 1979, renewable for three 5-year terms. The lease was renewed for the first time in 1994. 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, 1996. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters As of December 31, 1996, there were 3,574,682 shares of common stock outstanding, held by approximately 700 shareholders. As of that date, there were 34,679 shares of common stock subject to issuance upon the exercise of outstanding options pursuant to the Company's stock option plans for directors and key employees. VRB Bancorp stock is not currently quoted on NASDAQ and its trading activity is limited. The Company paid annual cash dividends of $0.27, after giving effect to stock dividends and splits, and $0.16 per share in 1995 and 1996, respectively. Item 6. Selected Financial Data The response to this item is incorporated by reference to page 3 of the company's 1996 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 5-18 of the company's 1996 Annual Report to Shareholders. Item 8. Financial Statements and Supplementary Data The financial statements called for by this item and filed herewith are listed in the Index to Consolidated Financial Statements on page 11, and are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants 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 1-3 and page 7, respectively, of the Company's Proxy Statement for the 1997 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 8-14 and the section entitled "STOCK PERFORMANCE GRAPH" on pages 4 and 5 of the Company's Proxy Statement for the 1997 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 page 6-7 of the Company's Proxy Statement for the 1997 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 OF MANAGEMENT" on page 14 of the Company's Proxy Statement for the 1997 annual meeting of shareholders. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) Financial Statements: The consolidated financial statements are listed in the Index to Financial Statements and Schedules on page 11 herein. (2) Financial Statement Schedules: See the Index to Financial Statements and Schedules on page 11. (3) The exhibits filed herewith are listed in the Exhibit Index on page 11 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, 1996. 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: March 24, 1997 -------------------------------------- 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/ R. Gene Morris Date: March 24, 1997 ----------------------------------------- R. Gene Morris, Chairman, Director By: /s/ John O. Dunkin Date: March 24, 1997 ----------------------------------------- John O. Dunkin, Director By: /s/ James D. Coleman Date: March 24, 1997 ----------------------------------------- James D. Coleman, Vice Chairman, Director By: /s/ Lawrence S. Horton Date: March 24, 1997 ------------------------------------------ Lawrence S. Horton, Director By: /s/ Gary Lundberg Date: March 24, 1997 ------------------------------------------ Gary Lundberg, Director By: /s/ Rober J. DeArmond Date: March 24, 1997 ------------------------------------------ Robert J. DeArmond, Director By: /s/ Larry L. Parducci Date: March 24, 1997 ------------------------------------------ Larry L. Parducci, Director By: /s/ William A. Haden Date: March 24, 1997 ------------------------------------------ William A. Haden, President, Director (Principal Executive Officer) By: /s/ Tom Anderson Date: March 24, 1997 ------------------------------------------ Tom Anderson, Executive Vice President, Director (Principal Accounting Officer) INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Financial Statements The following consolidated financial statements and Report of Independent Public Accountants, included in the 1996 Annual Report to Shareholders at the pages indicated, are incorporated herein by reference: Page of 1996 Annual Report to Shareholders VRB Bancorp and subsidiaries Consolidated Balance Sheets at December 31, 1996 and 1995 20 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 21 Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 1996, 1995 and 1994 22-23 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 24-25 Notes to Consolidated Financial Statements 26-42 Report of Independent Public Accountants 43 Financial Statement Schedules All schedules have been omitted because the information is either not required, not applicable, not present in amounts sufficient to require submission of the schedule, or is included in the financial statements or notes thereto. EX-13 2
SELECTED FINANCIAL INFORMATION YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992 Interest income $ 13,188 $ 11,973 $ 10,551 $ 8,768 $ 7,808 Interest expense 3,627 2,989 2,196 2,264 2,490 Net interest income 9,561 8,984 8,355 6,504 5,318 Provision for loan losses 250 - - - 165 Net interest income after provision for loan losses 9,311 8,984 8,355 6,504 5,153 Other income 1,370 1,380 1,512 1,632 1,292 Other expenses 5,828 6,061 6,022 4,978 4,003 Income before income taxes 4,853 4,303 3,845 3,158 2,442 Provision for income taxes 1,602 1,395 1,335 1,104 777 Net income $ 3,251 $ 2,908 $ 2,510 $ 2,054 $ 1,665 Per share:* Net income $ .92 $ .82 $ .71 $ .58 $ .50 Cash dividends $ .27 $ .16 $ .14 $ .12 $ .11 Year-end book value $ 5.75 $ 5.03 $ 4.32 $ 3.88 $ 3.40 Total assets $ 177,107 $ 151,485 $ 141,537 $ 141,970 $ 110,065 Total deposits $ 155,568 $ 132,745 $ 124,472 $ 127,998 $ 98,459 Net loans $ 99,776 $ 88,972 $ 88,441 $ 78,583 $ 57,376 Shareholders' equity $ 20,188 $ 17,470 $ 15,000 $ 12,973 $ 11,312 Performance ratios: Return on average assets 1.97% 2.02% 1.74% 1.62% 1.61% Return on average equity 17.26% 17.75% 17.69% 16.97% 16.44% Equity to total assets 11.40% 11.53% 10.60% 9.14% 10.28% Net loans to deposits 64.14% 67.02% 70.49% 61.39% 58.27% (*All per share data has been retroactively restated to reflect stock dividends and stock splits during 1991 through 1995.
The following discussion is intended to be read in conjunction with and is qualified in its entirety by reference to the consolidated financial statements and accompanying notes presented in Item 8 of this report. Years Ended December 31, 1996, 1995 and 1994 Financial Highlights Net income for 1996 of $3,251,270 was 11.80% higher than the $2,908,091 reported in 1995, which was 15.87% greater than the $2,509,782 reported in 1994. Return on average assets (ROA) declined slightly to 1.99% in 1996 compared to 2.02% and 1.74% in 1995 and 1994, respectively. Return on average shareholders' equity (ROE) was 17.26% in 1996, compared to 17.75% and 17.69% in 1995 and 1994, respectively. The average equity to asset ratio was 10.63% at December 31, 1996, compared to 11.37% and 9.83% at year-end 1995 and 1994, respectively. Earnings Performance 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. Net Interest Income. Net interest margin, which is tax-equivalent net interest income divided by average earning assets, decreased to 6.02% during 1996. This compares to 6.37% in 1995 and 6.02% in 1994. This statistical measurement of the primary earnings source is an important indicator of VRB Bancorp's ability to effectively manage earning assets and interest bearing liabilities. The overall tax-equivalent earning asset yield was 9.52% in 1996 compared to 9.68% and 8.37% for the same periods in 1995 and 1994, respectively, due to flat market interest rates and growth in the proportion of relatively lower- yielding investments to earning assets. Loans, which generally carry a higher yield than investment securities and other earning assets, comprised 66.0% of average earning assets during 1996, versus 72.7% in 1995 and 64.5% in 1994. During these same periods, average yields on loans also increased from 10.00% in 1994 to 10.72% in 1995, but declined to 10.67% in 1996. Investment securities comprised 28.8% of average earning assets in 1996 which was up from 24.5% in 1995 and 28.0% in 1994. The reduced portfolio of investment securities reflects the relatively stable yields realized from these investments during 1994 to 1996 and the greater yield opportunity recognized in growing the Bank's loan portfolio. Tax-equivalent interest yields on investment securities have ranged from 7.67% in 1996 to 7.05% in 1995 and 5.71% in 1994. Interest cost as a percentage of earning assets increased to 2.52% in 1996 compared to 2.35% in 1995, and 1.69% in 1994. Local competitive pricing conditions and funding needs for the Bank's investments in loans was the primary cause for increases in rates paid for deposits during 1995 and 1996. As a result, tax-equivalent net interest income for the year ended December 31, 1996, of $10,057,265 was $755,297 or 8.12% higher than the $9,301,968 in 1995, which was $655,209 or 7.58% greater than the $8,646,759 reported in 1994. 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 average earning asset or interest-bearing liability (in thousands):
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994 INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME OR YIELDS OR AVERAGE INCOME OR YIELDS OR AVERAGE INCOME OR YIELDS OR BALANCE EXPENSE RATES BALANCE EXPENSE RATES BALANCE EXPENSE RATES Interest-earning assets: Loans(1) $ 94,907 $ 10,122 10.67% $ 92,268 $ 9,893 10.72% $ 83,633 $ 8,364 10.00% Investment securities: Taxable securities 22,328 1,711 7.66 18,275 1,256 6.87 24,372 1,213 4.98 Nontaxable securities(2) 19,080 1,461 7.66 12,818 936 7.30 11,903 858 7.20 Federal funds sold 7,419 390 5.26 3,614 206 5.71 9,636 408 4.24 Total interest-earning assets 143,734 13,684 9.52 126,975 12,291 9.68% 129,544 10,843 8.37% Cash and due from banks 14,788 12,213 9,333 Fixed assets 3,957 3,900 4,064 Loan loss allowance (1,396) (1,423) (1,435) Other assets 2,444 2,425 2,873 Total assets $ 163,527 $ 144,090 $ 144,379 Interest-bearing liabilities: Interest-bearing checking and savings accounts $ 79,256 $ 2,367 2.99 $ 70,167 $ 1,983 2.83 $ 75,841 $ 1,565 2.06 Time deposits 24,436 1,261 5.16 19,043 938 4.93 17,447 631 3.60 Borrowed funds - - - 1,091 69 6.29 - - - Total interest-bearing liabilities 103,692 3,628 3.50% 90,301 2,990 3.31% 93,288 2,196 2.35% Noninterest bearing deposits 39,836 36,310 35,968 Other liabilities 1,166 1,092 933 Total liabilities 144,694 127,703 130,189 Shareholders' equity 18,833 16,387 14,190 Total liabilities and shareholders' equity $ 163,527 $ 144,090 $ 144,379 Net interest income $ 10,056 $ 9,301 $ 8,647 Net interest margin 6.02% 6.37% 6.02% Average yield on earning assets (1) (2) 9.52% 9.68% 8.37% Interest expense to earning assets (1) (2) 2.52% 2.35% 1.69% Net interest income to earning assets (1) (2) 7.00% 7.33% 6.67% (1) Nonaccrual loans are included in the average balance. (2) Tax-exempt income has been adjusted to a tax-equivalent basis at a 34 percent rate.
Analysis of Changes in Interest Differential. The following table shows the dollar amount of the increase (decrease) in Bancorp'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 (in thousands):
1996 OVER 1995 1995 OVER 1994 INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO NET NET VOLUME RATE CHANGE VOLUME RATE CHANGE Interest-earning assets: Loans $ 283 $ (53) $ 230 $ 863 $ 669 $ 1,529 Investment securities Taxable securities 279 153 432 (303) 347 44 Nontaxable securities 457 45 502 66 13 79 Federal funds sold 217 (16) 201 (255) 53 (202) Total* 1,236 129 1,365 371 1,082 1,453 Interest-bearing liabilities: Interest-bearing checking and savings accounts (257) (112) (369) 117 (535) (418) Time deposits (266) (44) (310) (58) (249) (307) Borrowed funds 69 - 69 (68) (6) (74) Total* (454) (156) (610) (9) (790) (799) Net increase (decrease) in net interest $ 782 $ (27) $ 755 $ 362 $ 292 $ 654 * Tax-exempt income has been adjusted to a tax-equivalent basis at a 34 percent rate.
Provision for Possible Loan Losses. Recoveries have been nearly equivalent to or have exceeded charge-offs over the past three year periods. Net charge- offs for 1996 were approximately $25,000 which compares to net charge-offs of approximately $7,000 in 1995 and $39,000 in 1994. Loans on nonaccrual status have been insignificant. At December 31, 1996, nonaccrual loans totaled $58,166 compared to only $52,499 at December 31, 1995 and $7,475 at the end of 1994. These factors point out the strong underwriting and collection practices employed by the Bank. As a result over the past three years, only in 1996, when an expense of $250,000 was recognized, did the Bank record a provision for loan losses. When a charge to the loan loss provision is recorded, the amount is based on past charge-off experience, a careful analysis of our current portfolio, and evaluation of future economic trends in our market area. Management continues to closely monitor the loan quality of new and existing relationships. Net loan losses or recoveries in 1997 are expected to approximate the Bank's recent historical experience. Noninterest Income and Noninterest Expense. Total noninterest income has declined from 1994 through year-end 1996. Over the three year period noninterest income has ranged from $1,511,706 in 1994 and $1,380,487 in 1995 to $1,370,635 in 1996. While service charges on deposit accounts have remained stable from 1994 through 1996, other operating income, which includes earnings from the Bank's real estate mortgage processing activities, declined after 1994. Closure of the Bank's manufactured housing lending division early in 1995 significantly impacted other operating income levels such that revenues of approximately $480,000 in 1994 declined to nearly $370,000 in 1995 and approximately $390,000 in 1996. The Bank does not actively trade or sell investment securities and, consequently, has received no material income from such transactions during the period from 1994 to 1996. Other operating expenses are comprised principally of employees' salaries and benefits but also include occupancy costs, data processing and communication expenses, FDIC insurance premiums, professional fees, and other noninterest expenses. A measure of the Bank's ability to contain noninterest expenses is the efficiency ratio. This statistic is derived by dividing total noninterest expenses by total interest and noninterest income. As of December 31, 1996, the ratio had improved to 40.03% compared to 45.38% and 49.92% at the end of 1995 and 1994, respectively. This decrease reflects management's emphasis and success in closely monitoring and controlling noninterest expenses. Salary and benefit expense of $3,692,594 in 1996 was 3.86% or $148,461 less than the $3,841,055 reported in 1995 which was $204,721 or 5.62% higher than the $3,636,334 reported in 1994. As of December 31, 1996, the Bank had 116 full-time equivalent employees which compares to 107 and 111 as of December 31, 1995 and 1994, respectively. Net occupancy expenses consist of depreciation on premises and equipment, maintenance and repair expenses, utilities and related expenses. The Bank's net occupancy expense in 1996 of $629,642 was $21,903 or 3.60% higher than the $607,739 reported in 1995, which was $78,508 or 11.44% less than the $686,247 reported in 1994. At the close of 1995, the Bank embarked upon upgrading its data processing systems. The result will increase operating efficiencies, but may also cause increases to net occupancy expenses during future years. Communications expenses have increased consistently from 1994 through 1996 as the Bank continues to promote and advertise its products and services to the communities it serves. In 1996, communication expenses of $226,390 were 10.80% higher than 1995 which were 7.30% greater than 1994. Expenditures relating to communications are important for the Bank to realize its market share and growth goals for the future. FDIC insurance premiums are a function of outstanding deposit liabilities and through 1994 increased consistent with the Bank's growth in depository relationships. However, insurance expense decreased nearly $140,000 in 1995 when the Bank received a premium refund after the Bank Insurance Fund was recapitalized. Because the Bank Insurance Fund is adequately capitalized, the Bank was required to make only nominal premium payments in 1996. For the three years ended December 31, 1996, the Bank has been rated to pay the lowest premiums available for its deposit insurance coverage. All other noninterest expenses, as a percentage of total revenues, declined in 1996 compared to both 1995 and 1994. In 1996, all other noninterest expenses were 8.8% of total revenues while in 1995 and 1994 these items were 9.5% and 10.2%, respectively, of total revenues. Cost controls and careful management of expenses have contributed to reduction in other noninterest expenses. Income Taxes. The provision for income taxes amounted to $1,602,000, $1,395,000, and $1,335,000 for 1996, 1995, and 1994, respectively. The provision resulted in effective combined federal and state tax rates of 33% in 1996 and 32% and 35% in 1995 and 1994, respectively. Effective tax rates differ from combined estimated statutory rates of 38% principally due to the effects of nontaxable interest income which is recognized for book but not for tax purposes. In addition, during 1995, Bancorp's state income tax rate was reduced 50% from 6.6% to 3.3% as a result of surplus revenues that had been received by the State of Oregon. Balance Sheet Analysis Total assets of VRB Bancorp and its wholly-owned subsidiary, Valley of the Rogue Bank, increased 16.91% when comparing balances at December 31, 1996 to 1995. At year-end 1996, total assets of $177,106,667 were $25,621,216 more than total assets of $151,485,451 reported for December 31, 1995. Similarly, the Bank's daily average outstanding total assets of $163,526,452 grew over the 1995 daily average of $144,090,446. Growth in the level of daily average outstanding assets in 1996 over 1995 illustrates the competitiveness for strong customer loan and deposit relationships. It is management's opinion that the Bank's growth in assets during 1996 illustrates its strategy to aggressively pursue opportunities and grow within existing markets. Investment Securities and other investments. Investment securities held at December 31, 1996, totaled $40,284,694, representing a $3,203,895 or 8.64% increase when compared to December 31, 1995 investment security totals of $37,080,799. Total investment securities at December 31, 1994 were 8.57% higher than those reported in 1995. Increases or decreases in our investment portfolio are primarily a function of loan demand and changes in the Bank's deposit structure. The Bank follows a financial accounting principle which requires the identification of investment securities as held-to-maturity or available- for-sale. Securities designated as held-to-maturity are those that the Bank has the intent and ability to hold until they mature or are called rather than those that management may sell if liquidity requirements dictate or alternative investment opportunities arise. The mix of available-for-sale and held-to-maturity investment securities is considered in context with the Bank's overall asset-liability policy and illustrates management's assessment of the relative liquidity of the Bank. At December 31, 1996, the investment portfolio was 53.74% comprised of available-for-sale securities and 46.26% comprised of held-to-maturity investments, compared to 57.27% comprised of available-for-sale securities and 42.73% comprised of held-to-maturity investments in 1995. This mix provides the Bank greater investment flexibility than the mix which was 15.81% comprised of available-for-sale securities and 84.19% in held-to-maturity securities at December 31, 1994. At December 31, 1996, the Bank's investment portfolio had total net unrealized gains of approximately $85,000. This compares to net unrealized gains of approximately $44,000 at the end of 1995 and unrealized losses of $1,201,000 at December 31, 1994. Unrealized gains and losses reflect changes in market conditions and do not represent the amount of actual profits or losses the Bank may ultimately realize. Actual realized gains and losses occur at the time investment securities are sold or redeemed. Federal funds sold are short term investments which often mature on a daily basis. The Bank invests in these instruments to provide for additional earnings on excess available cash balances. Because of their short maturities, the balance of federal funds sold fluctuates dramatically on a day-to-day basis. The balance on any one day is influenced by cash demands, customer deposit levels, loan activity and other investment transactions. Investments in federal funds sold totaled $11,300,000 at December 31, 1996 compared to $4,500,000 and $6,800,000 at December 31, 1995 and 1994, respectively. In 1994, the Bank became a member and stockholder in the Federal Home Loan Bank. At December 31, 1996, the Bank held $1,119,500 in Federal Home Loan Bank stock. Our relationship and stock investment with the Federal Home Loan Bank has and will afford us, in addition to dividend earnings, a borrowing source for meeting liquidity requirements. Investment securities at December 31 consisted of the following (in thousands):
December 31, 1996 December 31,1995 December 31, 1994 APPROXI- APPROXI- APPROXI- MATE MATE MATE AMORTIZED MARKET % AMORTIZED MARKET % AMORTIZED MARKET % COST VALUE YIELD COST VALUE YIELD COST VALUE YIELD U.S. Treasuries and agencies: One year or less $ 10,002 $ 9,942 6.16% $ 7,847 $ 7,749 5.70% $ 9,354 $ 9,297 5.87% One to five years 9,993 10,150 7.12 12,008 12,075 6.14 10,397 10,078 5.86 Five to ten years - - - - - - - - - Obligations of states and political subdivisions: One year or less 215 216 7.05 1,906 1,916 6.03 373 375 7.30 One to five years 6,106 6,169 7.33 3,036 3,050 6.12 4,586 4,468 6.10 Five to ten years 11,749 11,848 8.08 4,351 4,402 7.13 4,594 4,235 7.17 Over ten years 566 589 8.41 6,551 6,712 8.09 3,010 2,793 8.49 Corporate and other: One year or less 1,569 1,555 6.04 128 126 5.35 224 213 5.77 One to five years - - - 1,570 1,557 6.04 1,705 1,582 6.00 Five to ten years - - - - - - - - - Over ten years - - - - - - - - - $ 40,200 $ 40,469 7.17% $ 37,037 $ 37,317 6.50% $ 34,243 $ 33,041 6.32% * Weighted average yields are stated on a federal tax equivalent basis at a 34% rate.
Loans. Outstanding loans totaled $99,775,802 at December 31, 1996, representing a $10,803,321, or 12.14% increase when compared to December 31, 1995, loan totals of $88,972,481. Loan totals grew 0.6% in 1995 over 1994. Due to the closure of the Bank's manufactured housing department in 1995 and strong competitive pressure for loan relationships, loan portfolio growth in 1995 was below management's expectations. However, the introduction of aggressive marketing and additional incentive programs resulted in significant loan growth for 1996. The Bank's loan portfolio mix as of December 31, 1996 remained consistent with the mix reported at the end of 1995. Approximately 75% of the loan portfolio continues to involve real estate secured transactions. At December 31, 1996, real estate mortgage loans totaled $66,209,000 and construction or residential real estate loans totaled $9,112,000, or 65.28% and 8.98%, respectively, of gross outstanding loans. At the same time, other commercial loans were $13,181,000 (12.99%) and consumer loans were $12,808,000 (12.63%) of gross outstanding 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. The Bank'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, 1996 and 1995, the Bank had no investment in other real estate owned. The composition of the consolidated loan portfolio as of the end of the preceding five fiscal years, was as follows (in thousands):
DECEMBER 31, 1996 1995 1994 1993 1992 Commercial $ 13,181 $ 9,440 $ 10,619 $ 10,719 $ 9,632 Real estate - construction 9,112 8,225 16,930 11,659 8,153 Real estate - mortgage 66,209 59,804 49,882 46,511 30,019 Installment 12,808 12,806 12,274 10,933 10,373 Other 98 104 150 214 140 Total loans 101,408 90,379 89,855 80,036 58,317 Allowance for loan losses 1,632 1,407 1,414 1,453 941 Net loans $ 99,776 $ 88,972 $ 88,441 $ 78,583 $ 57,376
As of December 31, 1995 and 1994, there was no concentration of loans exceeding 10% of the total loans to a multiple number of borrowers engaged in similar activities. The maturity distribution of selected categories of VRB Bancorp's consolidated loan portfolio at December 31, 1996, and the interest sensitivity are estimated in the following table (in thousands):
COMMERCIAL LOANS SECURED LOANS BY REAL ESTATE TOTAL Due within one year $ 8,465 $ 47,674 $ 56,139 Due after one through five years 4,488 19,469 23,957 Due after five years 228 8,178 8,406 Total $ 13,181 $ 75,321 $ 88,502 Fixed-rate loans $ 5,483 $ 25,955 $ 31,438 Variable-rate loans 7,698 49,366 57,064 Total $ 13,181 $ 75,321 $ 88,502
Summary of Loan Loss Experience. Although management recorded a $250,000 provision for loan losses in 1996 to support loan portfolio growth, the quality of the Bank's loan portfolio remains strong. At December 31, 1996, the allowance for loan losses of $1,632,000 was considered sufficient to absorb possible losses on loans which may become uncollectible based on evaluations by management. The amount of the allowance for loan losses is assessed by management on a regular basis to ensure that it is sufficient to cover potential future loan losses. Management does not specifically allocate the reserve for loan losses by loan category. 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 affecting the collectibility of the Bank's loans; (e) the relationship and trend over the past several years of recoveries as a percentage of previous years' charge-offs; and, (g) available outside information of a comparable nature regarding the loan portfolios of other banks, including peer group banks. The following table shows VRB Bancorp's loan loss performance for the years ended December 31 (in thousands):
1996 1995 1994 1993 1992 Loans outstanding at end of year, net of unearned interest income $ 101,408 $ 90,379 $ 89,855 $ 80,036 $ 58,317 Average loans outstanding, net of unearned interest income 94,907 92,268 83,633 68,739 55,529 Reserve balance, beginning of year 1,407 1,414 1,453 941 754 Loans charged-off: Commercial 29 31 24 35 13 Real estate - - - - - Consumer 9 14 66 23 151 Total loans charged-off 38 45 90 58 164 Recoveries: Commercial 10 20 31 156 162 Real estate - - - - - Consumer 3 18 20 53 24 Total recoveries 13 38 51 209 186 Provision charged to operations 250 - - - 165 Changes incidental to merger - - - 361 - Reserve balance, end of year $ 1,632 $ 1,407 $ 1,414 $ 1,453 941 Ratio of net loans charged-off to average loans outstanding 0.03% 0.01% 0.05% (0.22)% (0.04)% Ratio of reserve for loan losses to loans at year-end 1.61% 1.56% 1.57% 1.82% 1.61%
As the table illustrates, during both 1996 and 1995, the Bank charged nominal amounts to losses and recovered on loans previously charged-off of nearly the same amounts. At December 31, 1996, the Bank classified $96,655 in loans as either doubtful of collection or loss. The majority of these classified loans are comprised of commercial loans with the balance consisting of consumer transactions. Management believes it is reasonable to expect a significant portion of this amount may be charged to losses in the future. Nonperforming loans. The table below shows information regarding consolidated loans as of December 31 of each year (in thousands):
1996 1995 1994 1993 1992 Loans past due 90 days or more and still accruing: Commercial $ - $ 30 $ 23 $ 76 $ - Real estate - - - - - Consumer 12 18 85 41 53 Subtotal 12 48 108 117 53 Nonaccrual loans: Commercial - 1 7 111 30 Real estate - - - - - Consumer 58 52 - 60 44 Subtotal 58 53 7 171 74 Restructured loans - - - - - Total nonperforming loans 70 101 115 288 127 Other nonperforming assets Other real estate - - - 146 120 Total nonperforming assets $ 70 $ 101 $ 115 $ 434 $ 247 Nonperforming loans as % of total loans 0.06% 0.11% 0.13% 0.36% 0.22% Nonperforming assets as % of total assets 0.04% 0.07% 0.08% 0.31% 0.22% Reserve coverage - Allowance for loan losses as a % of non- performing loans 2331.43% 1393.07% 1229.57% 504.51% 740.94%
No interest income was accrued on the nonaccrual loans or included in the results of operations for the years ended December 31, 1996, 1995 and 1994. 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. From December 31, 1995 to 1996, total deposits increased by $22,823,910, or 17.19% from $132,744,547 to $155,568,457. This represents an increase from 1995, when total deposits increased by 5.80% over 1994. Nonvolatile, noninterest bearing demand deposits, also referred to as core deposits, continued to represent a significant percentage of the Bank's deposit base. To the extent that the Bank funds operations with noninterest bearing core deposits, net interest margin, the difference between interest income and interest expense, will improve. At December 31, 1996, these demand deposits accounted for 26.83% of total deposits which was down slightly from 28.70% as of December 31, 1995. Nevertheless, average outstanding core deposit balances improved in 1996 over 1995 by approximately $3,500,000 to $39,836,439. Interest bearing deposits consist of NOW, money market, savings and time certificate accounts. 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 1996, total interest bearing deposit accounts of $113,822,282 increased $19,176,002 or 20.26% from 1995. Significant growth in interest-bearing demand deposits ($15,774,164 or 29.59%) and time deposits ($5,462,095 or 22.92%) was more than sufficient to offset a decline in savings deposits ($2,060,257 or 11.77%). Management's analysis of the shifts in interest bearing deposit mix indicates that a significant number of the Bank's savings account customers shifted into higher earning time deposit accounts during the year. In 1994 and early 1995, management of the Bank purposely held down interest paid on time deposits as it was unwilling to aggressively compete for such deposits when no need for additional liquidity existed. This allowed the Bank to improve its net interest margin by keeping down the interest paid on deposit accounts. As a result, however, increased competition from local financial institutions and other investment sources attracted depositors away from the Bank. As competition eased for time deposit accounts and interest rates paid for such accounts became more favorable in 1995 and 1996, the Bank became more aggressive in pricing its time deposit products. This resulted in the deposit growth in 1995 and 1996, and will help support management's growth expectations for the future. The Bank, by policy, does not depend on brokered deposits nor high priced time deposits. At December 31, 1996, time certificates of deposits in excess of $100,000 totaled $7,051,302 or 24.07% of total outstanding time deposits. This compares to 12.09% and 13.06% as of December 31, 1995 and 1994, respectively. The following table sets forth by time remaining to maturity, time certificates of deposit accounts in amounts of $100,000 or more at December 31, 1996 (in thousands): Less than three months $ 4,397 Three to twelve months 3,234 Over one year through five years 520 More than five years - $ 8,151 Return on Equity and Assets. Return on daily average assets and equity and certain other ratios for the years ended December 31 are presented below (in thousands except per share data):
1996 1995 1994 1993 1992 Net income $ 3,251 $ 2,908 $ 2,510 $ 2,053 $ 1,665 Average assets 163,526 144,090 144,379 126,750 103,393 RETURN ON AVERAGE ASSETS 1.99% 2.02% 1.74% 1.62% 1.61% Net income 3,251 2,908 2,509 2,053 1,665 Average equity 18,833 16,382 14,190 12,095 10,129 RETURN ON AVERAGE EQUITY 17.26% 17.75% 17.69% 16.97% 16.44% Cash dividends paid per share $ .27 $ .16 $ .14 $ .12 $ .11 Net income per share $ .92 $ .82 $ .71 $ .58 $ .50 DIVIDEND PAYOUT RATIO 29.35% 19.51% 19.72% 20.68% 22.00% Average equity 18,833 16,382 14,190 12,095 10,129 Average assets 163,526 144,090 144,379 126,750 103,393 AVERAGE EQUITY TO ASSET 11.52% 11.37% 9.83% 9.54% 9.80% RATIO
Capital Adequacy. The primary capital-to-asset leverage ratio was 11.40% at December 31, 1996, versus 11.53% at year-end 1995. The 1996 ratio was a direct result of the continuing strong profitability of the Bank and an increased cash dividend payout to existing shareholders. With a strong equity to asset ratio, the Bank enjoys greater financial flexibility and less dependence upon its deposit base to support loan and investment activities. 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. At December 31, 1996, the Bank was required to have minimum Tier 1 and total capital ratios of 4.00% and 8.00%, respectively. The Bank's actual ratios on that date substantially exceeded regulatory guidelines at 16.08% and 17.34%, respectively. Management seeks to attain a level of capital consistent with appropriate business risk and an ongoing need for financial flexibility. Adequacy of capital depends on the assessment of a number of factors such as stability of earnings, asset quality, liquidity, and economic conditions. Nevertheless, management and the Board of Directors are cognizant of the need to provide shareholders with a fair return on their investment in the Bank. With these factors in mind, the Bank's total cash dividend payout ratio to shareholders has been 29.35% and 19.51% in 1996 and 1995, respectively. Liquidity Management. 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. Our loan-to-deposit ratio was 65.19% at December 31, 1996, versus 68.08% at year-end 1995. Approximately $3,311,000 or 8.22% of our securities portfolio matures within one year. In addition, the Bank participates in the Cash Management Advance Program with the Federal Home Loan Bank of Seattle and other borrowing arrangements with Bank of America and Wells Fargo Bank. Under these programs, the Bank may borrow to a maximum of $11,900,000 although no borrowings were outstanding at December 31, 1996. Management believes these factors are indicative of the emphasis placed upon maintaining sufficient liquidity for the Bank. Asset-Liability Management. The principal purpose of asset-liability management is to manage the Bank's sources and uses of funds to maximize net interest income under different interest rate conditions with minimal risk. The Bank employs a financial model to project earnings performance under various rate scenarios and growth assumptions. A part of this financial model calculates the "GAP," the difference between repricing assets and repricing liabilities in a specific time period. This analysis provides an indication of the Bank's earnings risk due to future interest rate changes. At December 31, 1996, the analysis indicated that the earnings risk was within the Bank's policy guidelines. Interest Rate Sensitivity. A key component of the 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. Management reviews the Bank's interest-rate sensitivity position on an ongoing basis, and prepares strategies to adjust that sensitivity, as appropriate. Consideration is given and strategies are developed to minimize the effect of any compression on net interest income which may arise from earlier repricing of loans at lower rates or earlier repricing of deposits at higher rates. As of December 31, 1996, management believes its strategies are sufficient to offset any compression on net interest income that may arise from asset and liability repricing in the near term. The table below presents interest-rate sensitivity data as of December 31, 1996. The interest rate gaps reported in the table arise when assets are funded with liabilities having different repricing intervals. Since these gaps are actively managed and change daily as adjustments are made in interest rate views and market outlook, positions at the end of any period may not be reflective of the Bank's interest rate view in subsequent periods. Active management dictates that longer-term economic views are balanced against the prospects of short-term interest rate changes in all repricing intervals.
BY REPRICING INTERVAL NON INTEREST- December 31, 1996 0 - 3 3 - 6 6 - 12 1 - 5 OVER 5 BEARING (in thousands) MONTHS MONTHS MONTHS YEARS YEARS FUNDS TOTAL Assets Federal funds sold $ 11,300 $ - $ - $ - $ - $ - $ 11,300 Securities available- for-sale - 3,012 - 15,597 3,040 - 21,649 Securities held-to- maturity 150 15 50 2,809 15,612 - 18,636 Loans 50,196 2,431 4,485 30,759 11,904 - 99,775 Noninterest earning assets and allowance for credit losses - - - - - 25,747 25,747 Total $ 61,646 $ 5,458 $ 4,535 $ 49,165 $ 30,556 $ 25,747 $ 177,107 Liabilities and stock- holders' equity Interest-bearing demand deposits $ 69,082 $ - $ - $ - $ - $ - $ 69,082 Savings deposits 15,448 - - - - - 15,448 Time deposits Over $100,000 4,397 1,496 1,738 520 - - 8,151 Under $100,000 7,439 6,204 3,486 3,997 15 - 21,141 Noninterest bearing liabilities and common stock - - - - - 63,285 63,285 Total 96,366 7,700 5,224 4,517 15 63,285 177,107 Interest rate sensitivity gap - - - - - - - Cumulative interest rate sensitivity gap $ 96,366 $ 7,700 $ 5,224 $ 4,517 $ 15 $ 63,285 $ 177,107
VRB Bancorp Consolidated Balance Sheet
DECEMBER 31, 1996 1995 ASSETS Cash and due from banks $ 17,916,909 $ 13,599,620 Federal funds sold 11,300,000 4,500,000 Total cash and cash equivalents 29,216,909 18,099,620 Held-to-maturity securities: State and municipal subdivisions 18,635,932 15,843,744 18,635,932 15,843,744 Available-for-sale securities: U.S. Treasuries and agencies 20,092,813 19,554,343 Corporate and other 1,555,949 1,682,712 21,648,762 21,237,055 Federal Home Loan Bank stock 1,119,500 1,036,200 Loans, net of allowance for loan losses and unearned income 99,775,802 88,972,481 Premises and equipment, net 4,093,669 3,881,683 Accrued interest and other assets 2,616,093 2,414,668 Total assets $ 177,106,667 $ 151,485,451 LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS Demand deposits $ 41,746,175 $ 38,098,267 Interest bearing demand deposits 69,082,274 53,308,110 Savings deposits 15,447,644 17,507,901 Time deposits 29,292,364 23,830,269 Total deposits 155,568,457 132,744,547 Accrued interest and other liabilities 1,350,076 1,271,159 Total liabilities 156,918,533 134,015,706 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 3,574,682 and 2,333,019, issued and outstanding at December 31, 1996 and 1995, respectively 9,480,330 9,085,013 Retained earnings 10,652,015 8,355,113 Unrealized gain on available-for-sale securities, net of taxes 55,789 29,619 Total shareholders' equity 20,188,134 17,469,745 Total liabilities and shareholders' equity $ 177,106,667 $ 151,485,451 The accompanying notes are an integral part of these consolidated financial statements.
VRB Bancorp Consolidated Statements of Income
YEARS ENDED DECEMBER 31, 1996 1995 1994 INTEREST INCOME Interest and fees on loans $ 10,122,237 $ 9,892,695 $ 8,363,776 Interest on investment securities held-to-maturity: State and municipal subdivisions 964,043 617,886 565,982 U.S. Treasuries and agencies 1,229,046 891,985 1,152,820 Interest on investment securities available-for-sale: Corporate and other investments 482,256 364,428 60,038 Federal funds sold 390,450 206,215 408,219 Total interest income 13,188,032 11,973,209 10,550,835 INTEREST EXPENSE Interest-bearing demand deposits 1,990,377 1,519,257 1,000,647 Savings deposits 376,290 463,435 563,994 Time deposits 1,260,728 938,197 631,001 Other borrowings - 68,658 - Total interest expense 3,627,395 2,989,547 2,195,642 Net interest income 9,560,637 8,983,662 8,355,193 Provision for loan losses 250,000 - - Net interest income after provision for loan losses 9,310,637 8,983,662 8,355,193 NONINTEREST INCOME Service charges on deposit accounts 978,739 1,006,765 1,031,819 Other operating income 391,896 373,722 479,887 Total noninterest income 1,370,635 1,380,487 1,511,706 NONINTEREST EXPENSES Salaries and benefits 3,692,594 3,841,055 3,636,634 Net occupancy 629,642 607,739 686,247 Communications 226,390 204,323 190,419 Data processing 147,844 97,339 91,192 FDIC insurance premium 2,000 142,633 281,720 Supplies 170,948 158,648 145,534 Professional fees 143,817 179,686 152,844 Other real estate expense - - 8,858 Other expenses 814,767 829,635 828,969 Total noninterest expenses 5,828,002 6,061,058 6,022,117 INCOME BEFORE INCOME TAXES 4,853,270 4,303,091 3,844,782 PROVISION FOR INCOME TAXES 1,602,000 1,395,000 1,335,000 NET INCOME $ 3,251,270 $ 2,908,091 $ 2,509,782 NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ 0.92 $ 0.82 $ 0.71 The accompanying notes are an integral part of these consolidated financial statements.
VRB Bancorp Consolidated Statements of Changes in Shareholders' Equity
(LOSS) GAIN ON TOTAL COMMON STOCK RETAINED AVAILABLE-FOR- SHAREHOLDERS' SHARES AMOUNT EARNINGS SALE SECURITIES EQUITY BALANCE, December 31, 1993 1,426,482 $ 6,873,549 $ 6,099,821 $ - $12,973,370 Stock option exercised (April to September 1994) 3,825 30,380 - - 30,380 3 for 2 Stock split (September 15, 1994) 715,217 - - - - Payments for fractional shares related to 3 for 2 stock split ($12 per share) - - (1,398) - (1,398) Stock option exercised (September 30, 1994) 4,047 25,947 - - 25,947 Cash dividend ($ .22 per share paid December 1, 1994) - - (472,985) - (472,985) 4% stock dividend (85,755 shares issued, dated December 1, 1994) 85,755 986,183 (986,183) - - Payments for fractional shares related to stock dividend ($11.50 per share) - - (2,785) - (2,785) Changes in unrealized loss on available-for-sale securities, net of taxes - - - (61,706) (61,706) Net income - - 2,509,782 - 2,509,782 BALANCE, December 31, 1994 2,235,686 7,916,059 7,146,252 (61,706) 15,000,605 Stock options exercised (August 11, 1995) 143 581 - - 581 Cash dividend ($ .25 per share, paid November 10, 1995) - - (558,957) - (558,957) 4% stock dividend (89,190 shares issued, dated November 10, 1995) 89,190 1,137,173 (1,137,173) - - The accompanying notes are an integral part of these consolicated financial statements.
UNREALIZED COMMON STOCK RETAINED AVAILABLE-FOR- SHAREHOLDERS' SHARES AMOUNT EARNINGS SALE SECURITIES EQUITY 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 1995) 50,180 304,054 - - 304,054 Income tax benefit from exercised of stock option - 91,263 - - 91,263 Cash dividend ($ .40 per share, paid November 20, 1996) - - (953,280) - (953,280) 2 for 1 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 Changes 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
VRB Bancorp Consolidated Statements of Cash Flows YEARS ENDED DECEMBER 31, 1996 1995 1994 CASH FLOWS RELATING TO OPERATING ACTIVITIES Net income $ 3,251,270 $ 2,908,091 $ 2,509,782 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 432,815 430,123 505,259 Loss (gain) on sales of assets 1,493 - (9,998) Provision for loan losses 250,000 - - Write-down on other real estate owned - - (8,858) FHLB dividend (83,800) (55,128) (9,900) Deferred taxes 6,451 13,118 104,120 Change in cash due to changes in certain assets and liabilities: Increase in accrued interest and other assets (226,911) (90,327) (5,290) Decrease in accrued interest and other liabilities 125,871 192,234 64,689 Net cash provided by operating activities 3,757,689 3,398,111 3,167,520 CASH FLOWS RELATING TO INVESTING ACTIVITIES Proceeds from the maturity of held-to-maturity securities 5,390,000 7,895,537 16,937,000 Purchases of held-to-maturity securities (8,204,586) (3,686,000) (14,355,971) Proceeds from maturity of available-for-sale securities 6,118,455 2,000,000 2,000,000 Purchases of available-for-sale securities (6,490,627) (9,034,989) - Purchases of Federal Home Loan Bank stock - (544,472) (426,700) Net increase in loans (11,053,321) (530,996) (9,858,207) Purchase of premises and equipment (513,479) (249,433) (96,401) Sale of premises and equipment - 4,010 4,405 Proceeds from sale of other real estate owned - - 146,833 Net cash used in investing activities (14,753,558) (4,146,343) (5,649,041) CASH FLOWS RELATING TO FINANCING ACTIVITIES Net increase (decrease) in deposits 22,823,910 7,272,231 (2,525,281) Cash dividends and fractional share payments (954,368) (562,057) (477,168) Cash received from exercise of common stock options 243,616 31,781 56,327 Net cash provided by (used in) financing activities 22,113,158 6,741,955 (2,946,122) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,117,289 5,993,723 (5,427,643) CASH AND CASH EQUIVALENTS, beginning of year 18,099,620 12,105,897 17,533,540 CASH AND CASH EQUIVALENTS, end of year $ 29,216,909 $ 18,099,620 $ 12,105,897 The accompanying notes are an integral part of these consolidated financial statements. SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid for interest $ 3,363,185 $ 2,919,329 $ 2,205,676 Cash paid for taxes $ 1,607,300 $ 1,456,256 $ 1,441,586 SCHEDULE OF NONCASH ACTIVITIES Stock dividends declared $ - $ 1,137,173 $ 986,183 Unrealized loss (gain) on available-for-sale securities, net of tax $ 26,170 $ 91,325 $ 61,706 Income tax benefit of stock options exercised $ 91,263 $ - $ -
VRB BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995, AND 1994 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization - VRB Bancorp is the parent holding company for Valley of the Rogue 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. Nature of operations - The Bank is a state-chartered institution authorized to provide banking services by the State of Oregon. With its headquarters in Rogue River, Oregon, the Bank also has branch operations in Josephine and Jackson County, Oregon. 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, 1996 and 1995, 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. NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Loans, net of allowance for loan losses and unearned income - Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses and unearned income. Interest on loans is calculated by using the simple-interest method on daily balances of the principal amount outstanding. The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to pay. Accrual of interest is discontinued on a loan 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. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. The Bank adopted the Financial Accounting Standards Board's Statements No. 114 "Accounting by Creditors for Impairment of a Loan" and No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" as of January 1, 1995. These pronouncements require that the Bank assess loans that are considered impaired and measure this impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate. There were no loans of material value considered impaired for the years ended December 31, 1996 and 1995. 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. 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 - In the ordinary course of business, the Bank has entered 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. The Financial Accounting Standards Board issued Statement No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments" which became effective for the Bank for the year ending December 31, 1995. This pronouncement requires that banks holding derivative NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) financial instruments, disclose quantitative and qualitative information about the instruments. As of December 31, 1996 and 1995, and for the years then ended, the Bank held no derivative financial instruments. Fair value of financial instruments - The following methods and assumptions were used by the Bank in estimating fair values of financial instruments as disclosed herein: Cash and cash equivalents - The carrying amounts of cash and short-term instruments approximate their fair value. Held-to-maturity and available-for-sale securities - Fair values for investment securities, excluding restricted equity securities, are based on quoted market prices. The carrying values of restricted equity securities approximate fair values. Loans receivable - For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to- four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan 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. Reclassifications - Certain reclassifications have been made to the 1995 and 1994 consolidated financial statements to conform with current year presentations. NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Stock options - In October 1995 the Financial Accounting Standards Board 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. NOTE 2 - INVESTMENT SECURITIES The amortized cost and estimated market values of investment securities at December 31, 1996 and 1995, are as follows (in thousands):
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE December 31, 1996 Held-to-maturity securities: State and political subdivisions $ 18,636 $ 227 $ (43) $ 18,820 Available-for-sale securities: U.S. Treasuries and agencies $ 19,995 $ 167 $ (69) $ 20,093 Corporate and other 1,569 - (13) 1,556 $ 21,564 $ 167 $ (82) $ 21,649 December 31, 1995 Held-to-maturity securities: State and municipal subdivision $ 15,844 $ 262 $ (26) $ 16,080 Available-for-sale securities: U.S. Treasuries and agencies $ 19,496 $ 87 $ (28) $ 19,555 Corporate and other 1,697 - (15) 1,682 $ 21,193 $ 87 $ (43) $ 21,237
NOTE 2 - INVESTMENT SECURITIES - (Continued) The amortized cost and estimated market value of investment securities at December 31, 1996, 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 SECURIITES ESTIMATED ESTIMATED AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE Due in one year or less $ 215 $ 215 $ 3,087 $ 3,096 Due after one year through five years 2,809 2,827 16,477 16,521 Due after five years through ten years 5,453 5,533 2,000 2,032 Due after ten years 10,159 10,245 - - $ 18,636 $ 18,820 $ 21,564 $ 21,649
Proceeds from maturities of held-to-maturity investment securities during 1996 and 1995, were $5,390,000 and $7,895,537, respectively. Proceeds from the maturity of available-for-sale securities was $6,118,455 and $2,000,000 in 1996 and 1995, respectively. During 1995, pursuant to implementation guidance on accounting for certain investments in debt and equity securities issued in a Special Report by the Financial Accounting Standards Board, the Bank reassessed the appropriateness of its classifications for investment securities. Accordingly, securities with an amortized cost of $16,237,960 were transferred from the held-to-maturity category to the available-for-sale category. This resulted in the recognition of an unrealized loss on available-for-sale securities, net of tax, of $132,610 at the time of transfer. At December 31, 1996 and 1995, investment securities with an amortized cost of $5,188,961 and $4,174,355, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is required to maintain an investment in capital stock of the FHLB. The FHLB stock is not actively traded but is redeemable by FHLB at its current book value. NOTE 3 - LOANS AND RESERVE FOR LOAN LOSSES The loan portfolio consisted of the following (in thousands):
DECEMBER 31, 1996 1995 Real estate - construction $ 9,112 $ 8,225 Real estate - mortgage 66,209 59,804 Commercial 13,181 9,440 Installment 12,808 12,806 Other loans 98 104 101,408 90,379 (1,632) (1,407) $ 99,776 $ 88,972
The following is an analysis of the changes in the reserve for possible loan losses (in thousands):
YEARS ENDED DECEMBER 31, 1996 1995 1994 Beginning balance $ 1,470 $ 1,414 $ 1,453 Provision for possible loan losses 250 - - Losses (38) (45) (90) Recoveries 13 38 51 Ending balance $ 1,632 $ 1,407 $ 1,414
Impairment of loans having recorded investments of $58,166 and $52,499 at December 31, 1996 and 1995, respectively, has been recognized in conformity with FASB Statement No. 114, as amended by FASB 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, 1996 and 1995. No interest income was accrued on the impaired loans or included in the results of operations for the years ended December 31, 1996, 1995, and 1994. Management estimates that in 1996, approximately $3,788 of interest income was not recognized on impaired loans on nonaccrual status, compared with approximately $2,868 in 1995 and $543 in 1994. NOTE 4 - BANK PREMISES AND EQUIPMENT Bank premises, furniture, and equipment consisted of the following (in thousands):
DECEMBER 31, 1996 1995 Land $ 1,323 $ 1,323 Buildings 3,147 2,942 Furniture and equipment 2,545 2,300 7,015 6,565 Less: accumulated depreciation (2,921) (2,683) $ 4,094 $ 3,882
NOTE 5 - OTHER ASSETS Other assets consisted of the following (in thousands):
DECEMBER 31, 1996 1995 Accrued interest receivable $ 1,162 $ 937 Prepaid expenses 136 162 Deferred taxes 126 132 Intangible and other assets 1,192 1,184 $ 2,616 $ 2,415
NOTE 6 - TIME DEPOSITS Time certificates of deposit of $100,000 and over, aggregated $8,151,302 and $2,881,559 at December 31, 1996 and 1995, respectively. At December 31, 1996, the scheduled maturities for time deposits is as follows (in thousands):
1997 $ 25,498 1998 2,135 1999 1,064 2000 469 2001 and thereafter 126 $ 29,292
NOTE 7 - INCOME TAXES The income tax provision consisted of the following (in thousands):
YEARS ENDED DECEMBER 31, 1996 1995 1994 Currently payable $ 1,596 $ 1,382 $ 1,231 Deferred 6 13 104 Provision for income taxes $ 1,602 $ 1,395 $ 1,335
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):
YEARS ENDED DECEMBER 31, 1996 1995 1994 Accounting loan loss provision in excess of tax provision $ (100) $ - $ 43 Accounting depreciation less than (in excess of) tax depreciation 19 (6) (4) Deferred compensation (8) (14) (16) Accounting loan fees in excess of tax loan fees 56 17 86 Federal Home Loan Bank stock dividends 24 19 - Other differences 15 (3) (5) $ 6 $ 13 $ 104
NOTE 7 - INCOME TAXES - (Continued) The net deferred tax benefits included in other assets in the accompanying consolidated balance sheets include the following components (in thousands):
DECEMBER 31, 1996 1995 Deferred tax assets: Loan loss reserve $ 334 $ 234 Deferred compensation 82 74 Other 14 29 430 337 Deferred tax liabilities: Accumulated depreciation (97) (78) Deferred loan fees (159) (103) Other (48) (24) (304) (205) Net deferred tax asset $ 126 $ 132
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. In the year ended December 31, 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 and 1994. 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 1995 provision for income taxes reflects a reduction in the state income tax rate from 6.6% to 3.3%. NOTE 7 - INCOME TAXES - (Continued) A reconciliation between the statutory federal income tax rate and the effective tax rate is as follows (in thousands):
YEARS ENDED DECEMBER 31, 1996 1995 1994 Federal income taxes at statutory rate $ 1,650 $ 1,463 $ 1,307 State income tax expense, net of federal income tax benefit 211 94 167 Effect of nontaxable interest income (298) (191) (179) Other 39 29 40 $ 1,602 1,395 1,335 Effect tax rate 33% 32% 35%
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 nearly all 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. 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. NOTE 8 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - (Continued) 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 1996, 1995, or 1994. A summary of the notional amounts of the Bank's financial instruments with off-balance-sheet risk at December 31, 1996, follows: Commitments to extend credit $ 16,013,904 Commercial and standby letters of credit $ 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):
DECEMBER 31, 1996 DECEMBER 31, 1995 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE Financial assets: Cash and due from bank $ 17,917 $ 17,917 $ 13,599 $ 13,559 Federal funds sold $ 11,300 $ 11,300 $ 4,500 $ 4,500 Securities available-for-sale $ 21,649 $ 21,649 $ 21,237 $ 21,237 Securities held-to-maturity $ 18,636 $ 18,820 $ 15,843 $ 16,080 Federal Home Loan Bank stock $ 1,120 $ 1,120 $ 1,036 $ 1,036 Loans, net of allowance for loan losses $ 99,776 $ 99,544 $ 88,972 $ 87,444 Financial liabilities: Demand and savings deposits $ 126,276 $ 126,276 $ 108,914 $ 108,914 Time deposits $ 29,292 $ 29,373 $ 23,830 $ 23,090
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, 1996 and 1995, 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, 1996 and 1995, 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 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 involve government entities also within the Bank's geographical region. 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. Commercial and standby letters of credit were granted primarily to commercial borrowers as of December 31, 1996. 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, 1996: YEARS ENDING DECEMBER 31, 1997 $ 90,260 1998 90,260 1999 78,260 2000 13,940 Total minimum payments required $ 272,720 Total rental expense was $94,413, $92,059, and $79,308 in 1996, 1995, and 1994, respectively. NOTE 12 - BORROWING AGREEMENTS The Bank has borrowing agreements with the Bank of America and Wells Fargo Bank for $2,000,000 and $3,000,000, respectively. There is no stated rate of interest on these borrowings. As of December 31, 1996, 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 $6,900,000 with interest at the FHLB's cash management rate. There were no borrowings outstanding at December 31, 1996. 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 362,746 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 NOTE 13 - STOCK OPTION PLANS - (Continued) 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 $44,564, $39,151, and $20,368 as compensation expense relating to 7,087, 6,702, and 5,382 shares of common stock optioned to its directors during 1996, 1995, and 1994 respectively. The following summarizes options available and outstanding under both the Directors' and Employees' Plans as of December 31, 1996, after the effect of the current year's stock split:
COMBINED DIRECTOR'S PLAN EMPLOYEE'S PLAN PLANS AVERAGE AVERAGE OPTION OPTION SHARES PRICE SHARES PRICE SHARES Options reserved, December 31, 1995 90,233 94,765 184,998 Options granted in 1996 (10,631) - (10,631) Options reserved, December 31, 1996 79,602 94,765 174,367 Options under grant, December 31, 1995 27,963 $ 3.59 119,099 $ 4.15 147,062 Options granted in 1996 10,631 $ 4.99 - $ - 10,631 Options exercised in 1996 (20,920) $ (4.39) (54,347) $ (3.41) (75,267) Options forfeited - $ - (5,648) $ 6.77 5,648 Options under grant, December 31, 1996 17,674 $ 3.64 59,104 $ 5.79 76,778 Options vested at December 31, 1996 17,674 $ 3.64 17,005 $ 3.37 34,679
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 $162,210, $172,401, and $168,635 in 1996, 1995, and 1994, 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 $185,861, $170,582, and $153,673 in 1996, 1995, and 1994, respectively. NOTE 14 - EMPLOYEE BENEFIT PLANS - (Continued) The Bank has established a bonus program as part of the compensation package it provides to employees. At December 31, 1996, the Bank employed approximately 120 individuals eligible to participate in this program. Under the program, a bonus pool for non-executives 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, 1996, 1995, and 1994, $510,000, $600,000, and $452,500, 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, 1996, a liability for the supplemental retirement plans was recognized and funded in the amount of $255,943. During 1996, 1995, and 1994, the Bank recorded Plan expenses of $28,000, $42,000, and $42,000, respectively. NOTE 15 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES Earnings per share were computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding for the years ending December 31, 1996, 1995, and 1994. Common stock equivalents include the number of shares issuable on exercise of the outstanding options less the numbers of shares that would have been purchased with the proceeds from the exercise of the options based on the average price of common stock during the year. 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: DECEMBER 31, 1996 1995 Beginning balance $ 1,621,867 $ 2,214,833 Loans made 74,000 299,164 Loans paid (248,658) (892,130) Ending balance $ 1,447,209 $ 1,621,867 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 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, 1996, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1996, 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 as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category.
FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO As of December 31, 1996 (in thousands) Total capital to risk-weighted assets $ 20,628 17.3% $ 9,539 >8.0% $ 11,924 >10.0% - - Tier I capital to risk-weighted assets $ 19,139 16.1% $ 4,755 >4.0% $ 7,133 > 6.0% - _ Tier I capital to average assets $ 19,139 11.1% $ 6,897 >4.0% $ 8,622 >5.0% - - As of December 31, 1995 (in thousands) Total capital to risk-weighted assets $ 17,680 17.6% $ 8,036 >8.0% $ 10,045 >10.0% - - Tier I capital to risk-weighted assets $ 16,420 16.3% $ 4,029 >4.0% $ 6,043 >6.0% - Tier I capital to average assets $ 16,420 10.8% $ 6,081 >4.0% $ 7,601 >5.0% - -
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for VRB Bancorp (unconsolidated parent company only) is as follows: DECEMBER 31, 1996 1995 ASSETS Cash $ 122,128 $ 30,912 Investment in subsidiary 19,993,191 17,358,972 Goodwill 72,815 79,861 $ 20,188,134 $ 17,469,745 SHAREHOLDERS' EQUITY Common stock $ 9,480,330 $ 9,085,013 Retained earnings 10,652,015 8,355,113 Market value adjustment, available- for-sale securities, net of taxes 55,789 29,619 $ 20,188,134 $ 17,469,745
YEARS ENDED DECEMBER 31, 1996 1995 1994 REVENUES Equity in undistributed earnings of subsidiary bank $ 2,456,348 $ 2,390,137 $ 2,091,828 Dividends 845,000 525,000 425,000 EXPENSES Goodwill and other administrative expenses (50,078) (7,046) (7,046) Net income $ 3,251,270 $ 2,908,091 $ 2,509,782
NOTE 19 - PARENT COMPANY FINANCIAL INFORMATION - (Continued)
YEARS ENDED DECEMBER 31, 1996 1995 1994 CASH FLOWS RELATED TO OPERATING ACTIVITIES Net income $ 3,251,270 $ 2,908,091 $ 2,509,782 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary bank (2,456,348) (2,390,137) (2,091,828) Amortization 7,046 7,046 7,046 Net cash provided by operating activities 801,968 525,000 425,000 CASH FLOWS RELATED TO FINANCING ACTIVITIES Cash dividends and fractional share payments (954,368) (562,057) (477,168) Cash received from exercise of common stock options 243,616 31,781 56,327 Net cash used in financing activities (710,752) (530,276) (420,842) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 91,216 (5,276) 4,159 CASH AND CASH EQUIVALENTS, beginning of year 30,912 36,188 32,029 CASH AND CASH EQUIVALENTS, end of year $ 122,128 $ 30,912 $ 36,188
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, 1996 and 1995, and the related statements of income, changes in shareholders' equity, and cash flows for the years ended December 31, 1996, 1995, and 1994. 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, 1996 and 1995, and the results of its operations and cash flows for the years ended December 31, 1996, 1995, and 1994, in conformity with generally accepted accounting principles. Moss Adams LLP Portland, Oregon January 7, 1997 EX-27 3
9 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 0.92 0.92 9.52 58 0 0 0 1407 38 13 1632 0 0 0
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