<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1997.
SECURITIES ACT REGISTRATION NO. 333-37167
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
VRB BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C> <C>
OREGON 6022 93-0892559
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NO.)
</TABLE>
110 PINE ST., P.O. BOX 1046, ROGUE RIVER, OREGON 97537 541-582-4561
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
WILLIAM A. HADEN, PRESIDENT
110 PINE ST., ROGUE RIVER, OREGON 97537
541-582-4561
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C>
KENNETH E. ROBERTS, ESQ. THOMAS P. PALMER, ESQ.
FOSTER PEPPER & SHEFELMAN PLLC TONKON, TORP, GALEN,
101 S.W. MAIN ST., 15TH FLOOR MARMADUKE & BOOTH
PORTLAND, OREGON 97204 888 S.W. FIFTH AVENUE
COUNSEL FOR THE COMPANY PORTLAND, OREGON 97204
COUNSEL FOR THE UNDERWRITER
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 464(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]_________
If this Form is a post-effective amendment filed pursuant to Rule 462 under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]_________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which
specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until
the registration statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 21, 1997
PROSPECTUS
1,000,000 SHARES
[VRB BANCORP]
VRB BANCORP
COMMON STOCK
VRB Bancorp ("VRB"), a bank holding company organized under the laws of the
State of Oregon, is offering for sale 1,000,000 shares of common stock, no par
value (the "Common Stock"). Prior to this offering there has been a limited
public market for the Common Stock. The Common Stock is traded in the over-the-
counter market through the Bulletin Board Service of the Nasdaq Stock Market.
The closing bid price of the Common Stock was $9.50 on October 20, 1997, the
most recent trading date prior to the date of this Prospectus. The public
offering price of the Common Stock will be determined by negotiation between VRB
and the Representative of the Underwriters. VRB has applied for inclusion of the
Common Stock in the Nasdaq National Market System under the symbol "VRBA."
------------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS"
BEGINNING ON PAGE 8.
------------------------
THE SHARES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS OR OTHER
OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE BANK INSURANCE FUND OF THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
- -----------------------------------------------------------------------------------------------
Total (3).............................. $ $ $
===============================================================================================
</TABLE>
(1) VRB has also agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by VRB estimated at $250,000.
(3) VRB has granted to the Underwriters a 30-day option to purchase up to
150,000 additional shares of Common Stock solely to cover over-allotments,
if any. If such option is exercised, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are being offered by the several Underwriters
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including the right to reject orders in whole or in
part. It is expected that delivery of the certificates representing the Common
Stock will be made against payment therefor at the offices of the agent of Black
& Company, Inc. in New York, New York on or about , 1997.
------------------------
BLACK & COMPANY, INC.
The date of this Prospectus is , 1997.
<PAGE> 3
Map of branch locations in Southern Oregon
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
VRB, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN
SUCH SECURITY, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR
A DESCRIPTION OF THESE TRANSACTIONS, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following is a summary of information set forth in more detail
elsewhere in this Prospectus. Unless otherwise indicated, all information
contained in this Prospectus assumes that the Underwriters' over-allotment
option is not exercised. The number of shares and options outstanding and per
share amounts reflect VRB's two-for-one stock split paid on September 17, 1997.
References to "VRB" in this Prospectus mean VRB Bancorp and Valley of the Rogue
Bank, its subsidiary, and references to the "Offering" mean the offering of
1,000,000 shares of Common Stock pursuant to this Prospectus.
THE COMPANY
OVERVIEW
VRB is the largest community bank in southern Oregon, currently operating
nine full-service branches in the Rogue Valley. As of June 30, 1997, VRB had
assets of $180 million and deposits of $156 million. VRB has entered into an
agreement to acquire Colonial Banking Company ("Colonial"), which will add four
branches and $101 million in deposits, increasing VRB's market share to over 15%
of commercial bank deposits in the Rogue Valley. See "Colonial Banking Company
Acquisition."
VRB has delivered 29 consecutive years of profitability. During the most
recent five years, it has increased earnings by an average of 18% per year and
increased its return on average assets from 1.61% in 1992 to 1.99% in 1996.
During the same period, VRB has achieved a return on average equity greater than
16% while sustaining high asset quality. VRB has consistently performed in the
top quartile when comparing its return on average equity to its national peer
group comprising over 900 banks with assets of between $100 and $300 million and
multiple branches located in metropolitan areas.
The consolidation of the banking industry in Oregon has had a positive
effect on VRB. Major regional banks have chosen to focus on larger metropolitan
markets and to de-emphasize personal service to achieve efficiencies. VRB
continues to introduce new products while maintaining the personal service and
local decision-making believed to be important to its customers. Its high level
of demand deposit accounts (30% of total deposits at June 30, 1997) has
significantly contributed to its consistently low cost of funds and high net
interest margin. VRB's growing base of core deposits confirms its belief that
its product delivery approach is attractive to a significant number of customers
in its market.
VRB offers a broad range of commercial banking services, primarily to small
and medium-sized businesses, professionals, farmers and retail customers,
including commercial, real estate and agricultural loans, accounts receivable
and inventory financing, consumer installment loans, acceptance of deposits, and
personal savings and checking accounts. A majority of VRB's loans are commercial
loans collateralized with real estate.
BUSINESS STRATEGY
VRB seeks significant growth in its earning assets while maintaining a high
return on equity. VRB believes that this objective can be achieved by continuing
to emphasize personalized, quality banking products and services to its
customers. VRB intends to increase its market penetration in its existing
markets and to expand into new markets through acquisitions. VRB's strategy
consists of the following:
- Provide a full range of banking products and personalized service. VRB
believes offering products with a high level of personal service attracts
and retains customers. VRB focuses on customer care by providing
friendly, interactive service dedicated to meeting the needs of each
individual customer. Although many of its customers desire personal
banking services, VRB also has made a commitment to provide new
technology-based services to attract a broader customer base. These
products and services include 24-hour telephone account access, a
recently developed debit card program and an expanded ATM network.
3
<PAGE> 5
- Increase market share in existing markets. VRB believes there is
significant potential to increase its business with current customers and
attract new customers in its existing market. Early in 1995, VRB embarked
on a sales training program and in 1996 appointed a Corporate Sales
Officer with responsibility for improving the business development skills
of employees. VRB believes it can gain more customers within the Rogue
Valley by continuing to distinguish itself from larger banks, all of
which are headquartered in other states, have reduced personal service
and have transferred lending decisions away from local branches. As of
June 30, 1997, VRB's market share of commercial bank deposits in the
Rogue Valley was 9.3%, up from 7.7% on December 31, 1995. VRB believes
this increase of over 20% in an eighteen month period is a direct result
of its increased marketing efforts and validates VRB's belief that
personalized service is important to a significant segment of its market.
The addition of Colonial's deposits is expected to increase VRB's total
market share to over 15% of commercial bank deposits in the Rogue Valley.
- Explore opportunistic acquisitions. After the integration of Colonial,
VRB intends to explore acquisitions of other community banks in the
Pacific Northwest. Although VRB is not currently engaged in any
acquisition discussions, it believes that it will be able to supplement
internal growth with complementary acquisitions.
VRB Bancorp was organized in 1983 under Oregon law to become the holding
company for Valley of the Rogue Bank, an Oregon state-chartered bank that
commenced operations in 1968. VRB maintains its principal offices at 110 Pine
St., Rogue River, Oregon 97537, and its telephone number is 541-582-4561.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by VRB.................. 1,000,000 shares
Common Stock to be outstanding after the
Offering................................... 8,188,090 shares(1)
Use of proceeds.............................. To fund a significant portion of the purchase
price in connection with the acquisition of
Colonial. See "Use of Proceeds" and "Colonial
Banking Company Acquisition."
Proposed Nasdaq National Market symbol....... VRBA
</TABLE>
- ---------------
(1) Includes 21,960 shares issued upon exercise of stock options subsequent to
June 30, 1997. Does not include an aggregate of 463,560 shares of Common
Stock reserved for issuance under VRB's stock option plans, 162,500 of which
are subject to outstanding options as of the date hereof. VRB's Board of
Directors has approved effective with the Offering, grants of options to
certain executive officers covering an additional 100,000 shares. See
"Management -- Stock Option Plans."
4
<PAGE> 6
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents (1) summary historical financial data of VRB
as of the dates and for the periods indicated and (2) summary pro forma
financial data giving effect to the acquisition of Colonial and the Offering as
though both transactions had occurred immediately prior to January 1, 1996, with
respect to the Income Statement, and prior to June 30, 1997 with respect to the
Balance Sheet. The summary pro forma financial data are not necessarily
indicative of operating results or financial position that would have been
achieved had these events been consummated on such dates and should not be
construed as representative of future operating results or financial position.
The summary historical and pro forma financial data should be read in
conjunction with the financial statements and related notes thereto of VRB and
Colonial, and with the "Pro Forma Combined Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- ---------------------------------
PRO PRO
ACTUAL FORMA(1) ACTUAL FORMA(1)
--------------------------------- --------- --------------------- ---------
1994 1995 1996 1996 1996 1997 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE
DATA) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income............... $ 10,551 $ 11,973 $ 13,187 $ 20,381 $ 6,297 $ 7,153 $ 11,561
Interest expense.............. 2,196 2,989 3,626 7,207 1,777 1,909 3,922
--------- --------- --------- --------- --------- --------- ---------
Net interest income........... 8,355 8,984 9,561 13,174 4,520 5,244 7,639
Provision for loan losses..... -- -- 250 678 -- -- 268
--------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for loan losses... 8,355 8,984 9,311 12,496 4,520 5,244 7,371
Noninterest income............ 1,512 1,381 1,371 2,143 698 729 1,105
Noninterest expense........... 6,022 6,062 5,829 9,166 2,879 3,280 5,027
--------- --------- --------- --------- --------- --------- ---------
Income before provision for
income taxes................ 3,845 4,303 4,853 5,473 2,339 2,693 3,449
Provision for income taxes.... 1,335 1,395 1,602 2,101 772 916 1,278
--------- --------- --------- --------- --------- --------- ---------
Net income.................... $ 2,510 $ 2,908 $ 3,251 $ 3,372 $ 1,567 $ 1,777 $ 2,171
========= ========= ========= ========= ========= ========= =========
DIVIDENDS
Cash.......................... $ 473 $ 559 $ 953 $ -- $ --
Ratio of dividends declared to
net income.................. 18.84% 19.22% 29.31% --% --%
PER SHARE DATA
Net income per common share... $ 0.36 $ 0.41 $ 0.46 $ 0.42 $ 0.22 $ 0.25 $ 0.27
Cash dividends per common
share....................... $ 0.07 $ 0.08 $ 0.13 -- --
Weighted average shares
outstanding................. 6,942,201 6,942,610 7,015,780 8,015,780 6,980,599 7,023,847 8,023,847
BALANCE SHEET DATA (AT PERIOD
END)
Investment securities......... $ 34,589 $ 38,117 $ 41,404 $ 43,929 $ 40,970 $ 40,329
Loans, net.................... $ 88,441 $ 88,972 $ 99,776 $ 93,589 $ 107,929 $ 198,105
Total assets.................. $ 141,537 $ 151,485 $ 177,107 $ 160,240 $ 179,580 $ 288,592
Total deposits................ $ 125,472 $ 132,744 $ 155,569 $ 140,637 $ 156,448 $ 257,072
Total shareholders' equity.... $ 15,000 $ 17,470 $ 20,188 $ 18,656 $ 21,880 $ 29,535
SELECTED RATIOS
Return on average total
assets...................... 1.74% 2.02% 1.99% 2.01% 2.01%
Return on average total
shareholders' equity........ 17.69% 17.75% 17.26% 17.35% 17.03%
Net interest margin........... 6.67% 7.33% 7.00% 6.62% 6.80%
Efficiency ratio.............. 61.03% 58.49% 53.32% 55.17% 54.91%
</TABLE>
5
<PAGE> 7
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- ---------------------------------
PRO PRO
ACTUAL FORMA(1) ACTUAL FORMA(1)
1994 1995 1996 1996 1996 1997 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE
DATA) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSET QUALITY RATIOS
Reserve for loans losses to:
Ending total loans............ 1.57% 1.56% 1.61% 1.46% 1.46%
Nonperforming assets.......... 1229.57% 1393.07% 2331.43% 1199.32% 3280.55%
Nonperforming assets to ending
total assets................ 0.08% 0.07% 0.04% 0.07% 0.03%
Net loan charge-offs to
average loans............... 0.05% 0.01% 0.03% 0.02% 0.06%
CAPITAL RATIOS
Average shareholders' equity
to average assets........... 9.83% 11.37% 11.52% 11.58% 11.83%
Tier 1 capital ratio.......... 13.90% 16.32% 16.08% 16.78% 16.23% 15.55%
Total risk-based capital
ratio....................... 15.20% 17.57% 17.34% 18.03% 17.48% 17.21%
Leverage ratio................ 10.60% 11.53% 11.40% 11.27% 11.91% 10.76%
</TABLE>
- ---------------
(1) For information regarding the pro forma adjustments made to VRB's historical
financial data, see "Pro Forma Combined Financial Statements."
6
<PAGE> 8
VRB CURRENT SUMMARY FINANCIAL DATA
The following table presents unaudited summary financial data of VRB for
the nine-month periods ended September 30, 1996 and 1997. Such information
should be read in conjunction with "Summary Historical and Pro Forma Financial
Data," the consolidated financial statements and related notes thereto of VRB,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in the Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
(DOLLARS IN THOUSANDS) 1996 1997
---------- ----------
<S> <C> <C>
INCOME STATEMENT DATA
Interest Income................................................... $ 9,684 $ 10,924
Interest Expense.................................................. 2,683 2,942
-------- ----------
Net interest income............................................... 7,001 7,942
Provision for loan losses......................................... -- --
-------- ----------
Net interest income after provision for loan losses............... 7,001 7,942
Non-interest income............................................... 1,040 1,110
Non-interest expense.............................................. 4,376 4,990
-------- ----------
Income before provision for income taxes.......................... 3,665 4,102
Provision for income taxes........................................ 1,220 1,312
-------- ----------
Net income........................................................ $ 2,445 $ 2,790
======== ==========
PER SHARE DATA
Net income per common share....................................... $ 0.35 $ 0.39
Cash dividends per common share(1)................................ $ 0.13 $ 0.14
Weighted average shares outstanding............................... 6,992,877 7,032,377
BALANCE SHEET DATA (AT PERIOD END)
Investment securities............................................. $ 45,975 $ 40,905
Loans, net........................................................ $ 96,525 $ 113,162
Total assets...................................................... $ 166,949 $ 191,033
Total deposits.................................................... $ 146,156 $ 166,478
Total shareholders' equity........................................ $ 19,724 $ 22,048
</TABLE>
- ---------------
(1) VRB declared $0.13 and $0.14 per share cash dividends during September, 1996
and 1997, respectively.
7
<PAGE> 9
RISK FACTORS
This Prospectus contains certain forward-looking statements. Actual results
could differ materially from those projected in these forward-looking statements
as a result of certain of the risk factors set forth below and elsewhere in this
Prospectus. Prospective investors should carefully consider and evaluate all of
the information set forth in this Prospectus, including the Risk Factors set
forth below. This list of risk factors may not be exhaustive.
PENDING ACQUISITION OF COLONIAL BANKING COMPANY
Although VRB has entered into an agreement which it expects will result in
the acquisition of Colonial, closing of the acquisition, anticipated in January
1998, is subject to the satisfaction of certain conditions of closing, including
regulatory and shareholder approval, and no assurance can be given that the
acquisition will be consummated. See "Colonial Banking Company Acquisition."
VRB believes that integration of the Colonial operations promptly following
the acquisition is critical to the success of the transaction. Although VRB has
completed four acquisitions, the most recent in 1993, Colonial is by far the
largest and the first to involve more than one banking office. There can be no
assurance that the integration of Colonial will be effected without loss of loan
or deposit customers or that problems in combining the operations of the two
banks will not be encountered.
The principal use of the net proceeds from the Offering is to fund a
significant portion of the Colonial acquisition. Should the acquisition not
occur, VRB has no other current intended use or need for the offering proceeds
and, pending application of such proceeds, VRB's return on equity and earnings
per share would be adversely affected. No assurances can be given that such
funds could be efficiently deployed in the future. See "Use of Proceeds."
The acquisition of Colonial for cash, even after the application of the net
proceeds of the Offering, will significantly reduce the capital-to-asset ratio
of VRB. Had the acquisition been completed as of June 30, 1997, and based upon
the anticipated net proceeds, VRB's total regulatory leverage ratio would have
been reduced from 11.91% to 10.76%. Although the post-acquisition pro forma
ratio is substantially above the regulatory minimum of 4.0%, and VRB would still
qualify as "well capitalized," the reduction in the capital-to-asset ratio could
limit VRB's future growth or ability to pursue other acquisition opportunities.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The acquisition of Colonial will result in the recognition of a significant
amount of goodwill and a charge to operations of approximately $680,000 per year
in each of the 15 years following the acquisition. See "Colonial Banking Company
Acquisition."
EXPOSURE TO LOCAL ECONOMY
VRB's performance is materially dependent upon and sensitive to the economy
of its market area consisting of the Rogue Valley in Jackson and Josephine
Counties of southern Oregon. Adverse economic developments may affect loan
demand and the collectibility of existing loans, and have a negative effect on
VRB's earnings and financial condition. The economy of the Rogue Valley depends
primarily on retail trade, tourism, government, services, agriculture, forest
products and other manufacturing industries. Particularly in the 1980's, VRB's
market area experienced high unemployment as a result of the reduction in forest
products manufacturing jobs. Subsequent developments have reduced the dependence
of the local economy on forest products manufacturing and have increased the
number of non-manufacturing jobs. There can be no assurance that future economic
changes will not have a significant adverse effect on VRB. Although VRB has not
noticed any material decrease in lending activity, home sales in its market area
are down 26% during the first eight months of 1997 when compared to the
corresponding period in 1996. See "Business -- Market Area."
8
<PAGE> 10
COMPETITION
In recent years, competition for deposits and loans has intensified. A new
community bank has opened in Grants Pass and a second is being organized in
Medford. In addition, two super-regional banks in VRB's market area have been
acquired by even larger banks. Furthermore, competition from outside the
traditional banking system from investment banking firms, insurance companies
and related industries offering bank-like products has increased the competition
for deposits and loans. The banking industry in VRB's primary market area is
characterized by well-established branches of large banks which hold 75% of
local deposits. These institutions have competitive advantages over VRB in that
they have higher public visibility and are able to maintain advertising and
marketing activities on a much larger scale than VRB can economically sustain.
Single-borrower lending limits imposed by law are dependent on the capital of
the financial institution, giving branches of larger banks an additional
competitive advantage with respect to loan applications which are in excess of
VRB's legal lending limits. See "Business -- Competition."
CREDIT RISK
VRB, like other lenders, is subject to credit risk, which is the risk of
losing principal and interest due to customers' failure to repay loans in
accordance with their terms. Although VRB has established lending criteria and
most loans are secured by collateral, a downturn in the economy or the real
estate market in the Rogue Valley or a rapid increase in interest rates could
have a negative effect on collateral values and borrowers' ability to repay. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
INTEREST RATE RISK
VRB's earnings are largely derived from net interest income, which is
interest income and fees earned on loans and investment income, less interest
expense paid on deposits and other borrowings. Interest rates are highly
sensitive to many factors which are beyond the control of VRB's management,
including general economic conditions and the policies of various governmental
and regulatory authorities. As interest rates change, net interest income is
affected. With fixed rate assets (such as fixed rate loans) and liabilities
(such as certificates of deposit), the effect on net interest income depends on
the maturity of the asset or liability. Although VRB strives to minimize
interest rate risk through asset/liability management policies, from time to
time maturities are not balanced. Further, while rates have remained stable in
recent periods, an unanticipated rapid decrease or increase in interest rates
could have an adverse effect on the spreads between the interest rates earned on
assets and the rates of interest paid on liabilities, and therefore on the level
of net interest income. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
VRB's success is dependent on the services of William A. Haden, President
and Chief Executive Officer, and Tom Anderson, Executive Vice President and
Chief Operating Officer. The loss of the services of either of these executives,
or of certain other key officers, could adversely affect VRB. No assurance can
be given that replacement officers of comparable abilities could be found. VRB
does not maintain key person life insurance on these individuals. See
"Management."
OFFERING PRICE
The price of the shares offered hereby will be determined by negotiation
between VRB and the representative of the Underwriters. There can be no
assurance that the market will sustain the offering price or that the offering
price necessarily indicates the fair value of the Common Stock. See
"Underwriting" and "Market Price of and Dividends on the Common Stock."
LIMITED MARKET FOR THE SHARES
There is currently a limited market for VRB's shares. VRB's Common Stock
currently trades on the Bulletin Board Service of the Nasdaq Stock Market under
the symbol "VRB.A", but is not actively traded.
9
<PAGE> 11
VRB has applied for inclusion of the Common Stock in the Nasdaq National Market
System on the effective date of the Offering, but no assurances can be made that
an active public market will develop or be maintained for the shares. Moreover,
the market price could be subject to significant fluctuations in response to
variations in VRB's quarterly operating results, general conditions of the
banking industry and other factors. In addition, the price of the shares may
fluctuate substantially due to the effect of supply and demand in a limited
market. Even if an active market for the shares does develop, investors in this
Offering cannot be assured of being able to resell shares purchased in the
Offering at or above the offering price. See "Market Price of and Dividends on
the Common Stock."
REGULATION
VRB is subject to extensive regulations under federal and state laws. These
laws and regulations are intended to protect depositors, not shareholders. VRB
is subject to regulation and supervision by the Federal Deposit Insurance
Corporation (the "FDIC") which insures bank deposits, and the Director of the
Oregon Department of Consumer and Business Services (the "Oregon Director"). VRB
is also subject to regulation and supervision by the Board of Governors of the
Federal Reserve System (the "Federal Reserve"). Federal and state regulations
place banks at a competitive disadvantage compared to less regulated competitors
such as finance companies, credit unions, mortgage banking companies and leasing
companies. Although VRB has been able to compete effectively in its market area
in the past, there can be no assurance that it will be able to continue to do
so. Further, future changes in federal and state banking regulations could
adversely affect VRB's operating results and ability to continue to compete
effectively. See "Supervision and Regulation."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors has the authority to issue up to 10,000,000 shares
of Preferred Stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the shareholders. The rights of the holders of Common Stock
may be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of VRB without further action by the shareholders and may
adversely affect the voting and other rights of the holders of Common Stock. VRB
has no present plans to issue shares of Preferred Stock. See "Description of
Capital Stock."
10
<PAGE> 12
COLONIAL BANKING COMPANY ACQUISITION
On July 24, 1997, VRB entered into a Stock Option Agreement with the
shareholders of Investors Banking Corporation ("IBC") which owns approximately
81% of the outstanding stock of Colonial. Pursuant to the Stock Option
Agreement, VRB has the right to acquire all of the outstanding shares of IBC for
an aggregate purchase price equal to the number of Colonial shares held by IBC
multiplied by $41.00. In addition, VRB entered into a Plan of Merger, as of
September 30, 1997, with Colonial. Through a series of transactions (referred to
herein as the "Acquisition"), VRB intends to acquire all the banking operations
of Colonial which will be merged with those of VRB. The aggregate cash purchase
price to be paid to the shareholders of IBC and Colonial is $15.7 million.
BACKGROUND AND REASONS FOR ACQUISITION
In June 1997, conversations were held between principals of VRB and
Colonial regarding Colonial's and IBC's willingness to entertain an acquisition
proposal. Management of VRB was familiar with Colonial's operations as
Colonial's banking offices are all within VRB's market area. Management believed
that the acquisition of Colonial would substantially enhance VRB's market
presence in the Rogue Valley and enhance shareholder value. Negotiations were
commenced and a non-binding Letter of Intent with Colonial and the Stock Option
Agreement with the IBC shareholders were executed effective July 23 and July 24,
1997, respectively. In the weeks that followed, VRB conducted due diligence with
respect to the business, operations and financial condition of Colonial and
negotiated the terms of the Plan of Merger.
COLONIAL BANKING COMPANY
Colonial is an Oregon state-chartered bank organized in 1978. Colonial,
headquartered in Grants Pass, Oregon, had $107.9 million in deposits at June 30,
1997, and operates five banking offices, two in Grants Pass and one each in
Medford, Merlin and Rogue River, Oregon. In addition to these banking offices,
Colonial has a loan production office located in Portland, Oregon. The loans
generated by this office are geographically dispersed throughout the Portland
metropolitan area and the State of Oregon.
In recent years, Colonial has experienced substantial growth in deposits,
loans and income. The following table sets forth certain information regarding
Colonial at the date of or for the periods indicated.
SUMMARY FINANCIAL INFORMATION
COLONIAL BANKING COMPANY
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996 1997
------------ ------------ ------------ ------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
Assets........................................ $ 64,298 $ 83,634 $ 97,890 $107,935
Loans......................................... $ 42,150 $ 54,608 $ 73,207 $ 90,176
Deposits...................................... $ 58,090 $ 77,972 $ 91,541 $100,624
Net income.................................... $ 270 $ 860 $ 1,093 $ 880
</TABLE>
The key contribution to the recent growth in loans was the opening of the
loan production office in Portland in early 1996. This office generated
approximately 56% of Colonial's new loans in 1996 and 72% during the first six
months of 1997. In addition to substantially increasing loan totals and interest
income for Colonial, the loans have contributed significantly to Colonial's fee
income for each period. The senior loan officers that manage Colonial's Portland
loan production office are not under long term contracts and have expressed a
desire to renegotiate the terms of their employment. There can be no assurance
that VRB will be able to retain these loan officers or attract replacements.
DESCRIPTION OF PLAN OF MERGER
The Plan of Merger provides that on the effective date of the merger, each
outstanding share of Colonial preferred and common stock, other than shares held
by VRB or any dissenting shareholders, will be converted into the right to
receive $43.36 in cash. Pending closing of the Acquisition, Colonial has agreed
to continue to
11
<PAGE> 13
operate in accordance with past business practices and to preserve its business
relationships and goodwill with its customers and employees. Further, the
directors and executive officers of Colonial have agreed to not solicit or
entertain offers to enter into any transaction that would interfere with or be
inconsistent with consummation of the Acquisition.
The Acquisition will be accounted for by the purchase method of accounting.
Under the purchase method of accounting, assets and liabilities acquired or
assumed will be restated at fair value and the excess of the purchase price over
net assets will be recorded as goodwill. Anticipated goodwill of $10,202,000
will be capitalized when the transaction is completed and will be amortized over
15 years. See "Unaudited Pro Forma Combined Financial Statements."
Completion of the Acquisition is anticipated in early 1998. Closing is
conditioned upon the satisfaction of certain representations, warranties and
covenants of Colonial and the receipt of regulatory and shareholder approval.
Although all approvals are expected to be received, there can be no assurance
that the Acquisition will be consummated.
INTEGRATION OF COLONIAL OPERATIONS
Upon closing of the Acquisition, VRB will concentrate its efforts on
integrating the operations of Colonial. With the exception of the Rogue River
office of Colonial, which will be consolidated with the head office of VRB, VRB
intends to continue to operate all of the offices of Colonial after the
Acquisition. As soon as practicable, VRB will institute its pricing policies for
deposits and loans and commence offering VRB's products to all Colonial
customers and endeavor to provide the same services throughout its entire branch
network. VRB has negotiated severance arrangements with the two senior executive
officers of Colonial. It does not intend to replace these officers, but
anticipates most other employees will continue to staff the Colonial offices
after the Acquisition. However, there can be no assurance that the integration
will be achieved in a timely and efficient manner.
Colonial's cost of funds currently exceeds that of VRB. This higher cost is
a function of the mix of Colonial's deposit liabilities (which consists of a
higher percentage of interest bearing liabilities than that at VRB) and higher
rates paid on certain interest bearing deposits. As rates on deposits offered by
Colonial are reduced, it is anticipated that there will be some run-off of
deposit liabilities. VRB currently has substantial liquidity with over $40
million in investment securities at June 30, 1997, and believes that any
reduction in Colonial's deposits would be modest and would not adversely affect
either VRB's performance or materially reduce its liquidity. Further, VRB's
loan-to-deposit ratio of 69.0% at June 30, 1997, would permit an increase in
loans without causing liquidity concerns, and such increase in loans should
enhance earnings as funds currently invested in lower yielding securities are
redeployed in higher yielding loans. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
USE OF PROCEEDS
The net proceeds to VRB from the sale of the Common Stock offered, at an
assumed public offering price of $8.50 per share, are estimated to be $7,655,000
after deduction of underwriting discounts and commissions and expenses payable
by VRB. Management expects to use the net proceeds of the Offering to fund a
significant portion of the Colonial Acquisition. In the unanticipated event the
Acquisition is not consummated, the net proceeds will be used for general
corporate purposes, including other possible acquisitions. Prior to such use,
the net proceeds will be invested in short-term, investment-grade securities.
VRB has no agreements or understandings, and is not presently engaged in
discussions, relating to any other possible acquisitions. See "Colonial Banking
Company Acquisition."
VRB currently exceeds all regulatory capital requirements and therefore is
not required to raise additional capital to comply with such requirements. After
the Acquisition, VRB expects to continue to exceed all regulatory capital
requirements.
12
<PAGE> 14
MARKET PRICE OF AND DIVIDENDS ON THE COMMON STOCK
Only a limited market for the Common Stock has existed prior to this
Offering. The Common Stock has traded over-the-counter through the Bulletin
Board Service of the Nasdaq Stock Market. VRB has applied for inclusion of the
Common Stock in the Nasdaq National Market System under the symbol "VRBA." The
following table lists the bid prices at the end of each period obtained from the
Nasdaq Stock Market, as adjusted for subsequent stock dividends and stock
splits. Prices do not include retail mark-ups, mark-downs or commissions and may
not represent actual transactions.
<TABLE>
<CAPTION>
LOW BID
HIGH BID PRICE CASH STOCK
PRICE FOR DIVIDENDS DIVIDENDS/SPLITS
FOR PERIOD PERIOD DECLARED(1) DECLARED
---------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
1995
First Quarter............................. $ 4.50 $ 4.08 -- --
Second Quarter............................ 4.50 4.33 -- --
Third Quarter............................. 5.33 4.00 -- --
Fourth Quarter............................ 4.33 4.33 $ .08 4%
1996
First Quarter............................. $ 4.33 $ 4.33 -- --
Second Quarter............................ 4.67 4.33 -- --
Third Quarter............................. 5.00 4.33 -- --
Fourth Quarter............................ 5.50 5.50 $ 0.13 50%
1997
First Quarter............................. $ 7.50 $ 5.50 -- --
Second Quarter............................ 8.00 7.50 -- --
Third Quarter............................. 10.00 8.25 $ 0.14 100%
Fourth Quarter (through October 20)....... 9.50 9.00 -- --
</TABLE>
- ---------------
(1) Adjusted to reflect two-for-one stock split paid on September 17, 1997.
On October 8, 1997, the Common Stock was held of record by 648
shareholders. On October 20, 1997, the most recent trading day prior to the date
of this Prospectus, the closing bid price of the Common Stock was $9.50 per
share.
VRB Bancorp's ability to pay expenses and make cash dividend payments to
shareholders is dependent on earnings generated by its subsidiary, Valley of the
Rogue Bank. Oregon and federal banking laws and regulations place restrictions
on the payment of dividends by a bank to its shareholders. See "Supervision and
Regulation -- Dividends." The Board of Directors' dividend policy is to review
VRB's financial performance, capital adequacy, regulatory compliance and cash
resources and, if such review is favorable, to declare and pay a cash dividend
to shareholders annually. Although VRB expects to continue to pay cash
dividends, future dividends are subject to these limitations and to the
discretion of the Board of Directors, and could be reduced or eliminated.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of VRB
at June 30, 1997 ("Actual"), (ii) the consolidated capitalization of VRB as of
June 30, 1997 on a pro forma combined basis to give effect to the Colonial
Acquisition ("Pro Forma Colonial Acquisition") and (iii) the consolidated
capitalization of VRB as of June 30, 1997, on an as-adjusted basis giving effect
to the Colonial Acquisition and the Offering at an assumed public offering price
of $8.50 per share and application of net proceeds therefrom ("Pro Forma As
Adjusted"). See "Use of Proceeds." This table should be read in conjunction with
the historical and pro forma combined financial statements of VRB included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------------------------
PRO FORMA PRO FORMA
(DOLLARS IN THOUSANDS) ACTUAL COLONIAL ACQUISITION AS ADJUSTED(1)
------- -------------------- --------------
<S> <C> <C> <C>
SHAREHOLDERS' EQUITY:
Non-voting preferred stock, $5.00 par value
Authorized 5,000,000 shares, none issued.......... $ -- $ -- $ --
Voting preferred stock, $5.00 par value
Authorized 5,000,000 shares, none issued.......... -- -- --
Common Stock, no par value
Authorized 10,000,000 shares;
7,166,130 shares issued and outstanding........... 9,516 9,516 --
8,166,130 shares issued and outstanding, as
adjusted....................................... 17,171
Retained earnings................................... 12,429 12,429 12,429
Unrealized loss on investment securities available
for sale.......................................... (65) (65) (65)
------- ------- -------
Total Shareholders' Equity.......................... $21,880 $ 21,880 $ 29,535
======= ======= =======
CAPITAL RATIOS(2):
Tier 1 capital ratio.............................. 16.23% 11.88% 15.55%
(Regulatory Minimum: 4.00%)
Total risk-based capital ratio.................... 17.48% 13.59% 17.21%
(Regulatory Minimum: 8.00%)
Leverage capital ratio............................ 11.91% 8.21% 10.76%
(Regulatory Minimum: 4.00%)
</TABLE>
- ---------------
(1) Assumes the issuance of 1,000,000 shares of Common Stock in the Offering
with net proceeds of $7.66 million. See "Use of Proceeds."
(2) Minimum ratios are established by FDIC and Federal Reserve regulations. See
"Supervision and Regulation."
14
<PAGE> 16
VRB BANCORP PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited combined financial information of VRB gives effect
to the Acquisition as well as the receipt of the net proceeds from the Offering.
The pro forma combined balance sheet was prepared as if the Acquisition had
occurred prior to June 30, 1997. The pro forma statements of income were
prepared as if the Acquisition had occurred prior to the beginning of the fiscal
year presented.
The pro forma combined balance sheet and statements of income are not
necessarily indicative of the consolidated financial position or results of
operations as they might have been had the Acquisition actually occurred on the
dates indicated. The pro forma combined balance sheet and statements of income
should be read in conjunction with the financial statements of VRB and Colonial
included elsewhere in this Prospectus.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COLONIAL PRO FORMA STOCK
VRB BANKING ACQUISITION OFFERING PRO FORMA
BANCORP COMPANY ADJUSTMENTS ADJUSTMENTS COMBINED
--------- --------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE
AMOUNTS) (AUDITED) (AUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans................ $10,122 $ 6,061 $ $ $ 16,183
Interest on investment securities:
U.S. Treasury and agencies.............. 1,229 787 (550)(A) 1,466
States and political subdivisions....... 964 44 1,008
Corporate and other investments......... 482 64 546
Federal funds sold........................ 390 680 (314)(A) 422(B) 1,178
------- ------ ------- ---- ---------
Total interest income.............. 13,187 7,636 (864) 422 20,381
INTEREST EXPENSE
Interest bearing demand deposits.......... 1,990 516 2,506
Savings deposits.......................... 376 333 709
Time deposits............................. 1,260 2,715 3,975
Borrowed funds............................ -- 17 17
------- ------ ------- ---- ---------
Total interest expense............. 3,626 3,581 -- 7,207
Net interest income................ 9,561 4,055 (864) 422 13,174
------- ------ ------- ---- ---------
PROVISION FOR LOAN LOSSES................... 250 428 -- -- 678
------- ------ ------- ---- ---------
Net interest income after provision
for loan losses.................. 9,311 3,627 (864) 422 12,496
------- ------ ------- ---- ---------
NONINTEREST INCOME
Service charges on deposit accounts....... 979 386 1,365
Other operating income.................... 392 286 678
Gain on sale of mortgage loans............ -- 100 100
------- ------ ------- ---- ---------
Total noninterest income........... 1,371 772 2,143
NONINTEREST EXPENSES
Salaries and benefits..................... 3,693 1,443 5,136
Net occupancy............................. 630 509 1,139
Communications............................ 226 91 317
Data processing........................... 148 33 181
FDIC insurance premium.................... 2 40 42
Supplies.................................. 171 53 224
Professional fees......................... 144 35 179
Goodwill amortization..................... 680(C) 680
Other expense............................. 815 453 1,268
------- ------ ------- ---- ---------
Total noninterest expenses......... 5,829 2,657 680 9,166
INCOME BEFORE INCOME TAXES.................. 4,853 1,742 (1,544) 422 5,473
PROVISION FOR INCOME TAXES.................. 1,602 649 (294)(D) 144(D) 2,101
------- ------ ------- ---- ---------
NET INCOME.................................. $ 3,251 $ 1,093 $(1,250) $ 278 $ 3,372
======= ====== ======= ==== =========
NET INCOME PER COMMON AND COMMON STOCK
EQUIVALENT................................ $ 0.42
=========
WEIGHTED AVERAGE SHARES OUTSTANDING......... 8,016,000
=========
</TABLE>
15
<PAGE> 17
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
SIX MONTH PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
COLONIAL PRO FORMA STOCK PRO
VRB BANKING ACQUISITION OFFERING FORMA
BANCORP COMPANY ADJUSTMENTS ADJUSTMENTS COMBINED
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER
SHARE AMOUNTS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans........ $ 5,521 $ 4,086 $ $ $ 9,607
Interest on investment securities:
U.S. Treasury and agencies..... 663 321 (275)(A) 709
States and political
subdivisions................. 471 16 487
Corporate and other
investments.................. 85 14 99
Federal funds sold................ 413 192 (157)(A) 211(B) 659
------ ------ ----- ---- ------
Total interest income..... 7,153 4,629 (432) 211 11,561
INTEREST EXPENSE
Interest bearing demand
deposits....................... 1,104 313 1,417
Savings deposits.................. 167 150 317
Time deposits..................... 638 1,542 2,180
Borrowed funds.................... -- 8 8
------ ------ ----- ---- ------
Total interest expense.... 1,909 2,013 3,922
Net interest income....... 5,244 2,616 (432) 211 7,639
------ ------ ----- ---- ------
PROVISION FOR LOAN LOSSES........... -- 268 268
------ ------ ----- ---- ------
Net interest income after
provision for loan losses.... 5,244 2,348 (432) 211 7,371
NONINTEREST INCOME
Service charges on deposit
accounts....................... 522 135 657
Other operating income............ 200 241 441
Securities transactions........... 7 -- 7
------ ------ ----- ---- ------
Total noninterest
income.................. 729 376 -- -- 1,105
NONINTEREST EXPENSES
Salaries and benefits............. 2,032 796 2,828
Net occupancy..................... 363 254 617
Communications.................... 115 45 160
Data processing................... 88 17 105
FDIC insurance premium............ 9 19 28
Supplies.......................... 105 22 127
Professional fees................. 77 17 94
Goodwill Amortization............. -- -- 340(C) 340
Other expense..................... 491 237 728
------ ------ ----- ---- ------
Total noninterest
expenses................ 3,280 1,407 340 5,027
INCOME BEFORE INCOME TAXES.......... 2,693 1,317 (772) 211 3,449
PROVISION FOR INCOME TAXES.......... 916 437 (147)(D) 72(D) 1,278
------ ------ ----- ---- ------
NET INCOME.......................... $ 1,777 $ 880 $(625) $ 139 $ 2,171
====== ====== ===== ==== ======
NET INCOME PER COMMON AND COMMON
STOCK EQUIVALENT.................. $ 0.27
======
WEIGHTED AVERAGE SHARES
OUTSTANDING....................... 8,024,000
======
</TABLE>
16
<PAGE> 18
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
JUNE 30, 1997
<TABLE>
<CAPTION>
HISTORICAL
---------------------------
COLONIAL PRO FORMA PRO FORMA STOCK PRO
VRB BANKING ACQUISITION ACQUISITION OFFERING FORMA
BANCORP COMPANY ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
----------- ----------- ----------- ----------- ----------- --------
(IN THOUSANDS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from
banks................. $ 11,527 $ 2,876 $ $ 14,403 $ -- $14,403
Federal funds sold...... 12,400 2,550 (5,708)(E) 8,098 7,655(H) 15,753
(1,144)(F)
-------- -------- -------- -------- ------ --------
Total cash and cash
equivalents......... 23,927 5,426 (6,852) 22,501 7,655 30,156
Investments
U.S. Treasury and
agencies............ 19,965 8,317 38(G) 18,320 -- 18,320
(10,000)(E)
States and political
subdivisions........ 18,468 186 -- 18,654 -- 18,654
Corporate and other
investments......... 1,376 406 -- 1,782 -- 1,782
Federal Home Loan Bank
stock................. 1,161 404 8(G) 1,573 -- 1,573
Loans, net of allowance
for loan losses and
unearned income....... 107,929 90,176 -- 198,105 -- 198,105
Premises and equipment,
net................... 4,511 1,674 97(G) 6,282 -- 6,282
Accrued interest and
other assets.......... 2,243 1,346 (71)(G) 3,518 -- 3,518
Goodwill................ -- -- 10,285(E) 10,202 -- 10,202
(83)(G)
-------- -------- -------- -------- ------ --------
Total assets..... $ 179,580 $ 107,935 $ (6,578) $ 280,937 $ 7,655 $288,592
======== ======== ======== ======== ====== ========
LIABILITIES
Deposits
Demand deposits....... $ 46,449 $ 9,399 -- $ 55,848 -- $55,848
Interest bearing
demand deposits..... 69,637 24,703 -- 94,340 -- 94,340
Savings deposits...... 14,354 18,344 -- 32,698 -- 32,698
Time deposits......... 26,008 48,178 -- 74,186 -- 74,186
-------- -------- -------- -------- ------ --------
Total deposits... 156,448 100,624 -- 257,072 -- 257,072
Borrowed funds.......... -- 260 -- 260 -- 260
Accrued interest and
other liabilities..... 1,252 484 (11)(G) 1,725 -- 1,725
-------- -------- -------- -------- ------ --------
Total
liabilities.... 157,700 101,368 (11) 259,057 -- 259,057
SHAREHOLDERS' EQUITY
Preferred Stock......... -- 1,502 (1,502)(E) -- --
Common Stock............ 9,516 1,180 (1,180)(E) 9,516 7,655(H) 17,171
Surplus................. -- 3,402 (3,402)(E) -- -- --
Unrealized loss on
available for sale
securities............ (65) -- -- (65) -- (65)
Retained
earnings/undivided
profits............... 12,429 483 661(E) 12,429 -- 12,429
(1,144)(F)
-------- -------- -------- -------- ------ --------
Total
shareholders'
equity......... 21,880 6,567 (6,567) 21,880 7,655 29,535
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.... $ 179,580 $ 107,935 $ (6,578) $ 280,937 $ 7,655 $288,592
======== ======== ======== ======== ====== ========
</TABLE>
17
<PAGE> 19
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(A) The amount represents estimated loss of earnings from funds used to purchase
Colonial, assuming such funds would have earned a rate equivalent to the
average federal funds and investment securities rates of 5.5% earned by VRB
during the period of the pro forma income statements.
(B) The amount estimates earnings realized from the net proceeds raised from the
Offering assuming such funds will earn a rate equivalent to the average
federal funds rate of 5.5% earned by VRB during the period of the pro forma
income statements.
(C) The amount represents amortization of goodwill created as a result of the
Colonial Acquisition, assuming a 15 year amortization period.
(D) The estimated tax effect of the transactions described in Notes A and B have
been computed at VRB's effective tax rate of 34%. The amortization of
goodwill in Note C is not tax deductible.
(E) In accordance with the Plan of Merger and pursuant to the Stock Option
Agreement, VRB will exercise an option to purchase all of the shares of IBC
at an aggregate exercise price equal to $12.6 million determined by the
product of $41.00 times the number of Colonial shares held by IBC. IBC will
then liquidate into VRB and VRB will then acquire by merger the remaining
common and preferred stock owned by the minority shareholders for $43.36 per
share. The total purchase price of $15,708,000 is to be paid from the
proceeds of this Offering, the liquidation of federal funds sold, and
investment securities.
(F) In accordance with the Plan of Merger, prior to the acquisition, Colonial
will cash out 47,599 common and preferred stock options at an amount equal
to the difference between the weighted average exercise price of $10.61 and
$43.36 per share, for a total payment of $1,029,000 net of tax effects.
Colonial will also make severance payments to certain senior officers
equivalent to one year's salary, or an aggregate of $115,000 net of
estimated tax effects.
(G) The acquisition of Colonial will be accounted for using the purchase method
of accounting under generally accepted accounting principles. Accordingly,
the net assets of Colonial have been adjusted to their approximate fair
values as of June 30, 1997 for a combined increase in assets of $83,000. IBC
has no significant net assets other than its investments in Colonial.
(H) The amount represents the estimated proceeds from the sale of 1.0 million
shares of VRB Common Stock assuming an Offering price of $8.50. Total
proceeds have been reduced by 11%, representing the underwriting discounts
and commissions and the estimated Offering expenses to be paid by VRB.
18
<PAGE> 20
VRB SELECTED HISTORICAL FINANCIAL INFORMATION AND OTHER DATA
The following table sets forth certain information concerning the
consolidated financial condition, operating results, and key operating ratios
for VRB at the dates and for the periods indicated. The data for the six months
ended June 30, 1996 and 1997 are derived from unaudited consolidated financial
statements but, in the opinion of management, reflect all adjustments necessary
for a fair presentation of the data for these periods. Operating results for the
six months ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 1997. This
information does not purport to be complete, and should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the Consolidated Financial Statements of VRB and Notes thereto
included in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income.................... $ 7,808 $ 8,768 $ 10,551 $ 11,973 $ 13,187 $ 6,297 $ 7,153
Interest expense................... 2,490 2,264 2,196 2,989 3,626 1,777 1,909
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income................ 5,318 6,504 8,355 8,984 9,561 4,520 5,244
Provision for loan losses.......... 165 -- -- -- 250 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses.................. 5,153 6,504 8,355 8,984 9,311 4,520 5,244
Noninterest income................. 1,292 1,632 1,512 1,381 1,371 698 729
Noninterest expense................ 4,003 4,978 6,022 6,062 5,829 2,879 3,280
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before provision for income
taxes............................ 2,442 3,158 3,845 4,303 4,853 2,339 2,693
Provision for income taxes......... 777 1,104 1,335 1,395 1,602 772 916
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income......................... $ 1,665 $ 2,054 $ 2,510 $ 2,908 $ 3,251 $ 1,567 $ 1,777
========== ========== ========== ========== ========== ========== ==========
DIVIDENDS
Cash............................... $ 359 $ 412 $ 473 $ 559 $ 953 $ -- $ --
Ratio of dividends declared to net
income........................... 21.56% 20.06% 18.84% 19.22% 29.31% -- % -- %
PER SHARE DATA(1)
Net income per common share........ $ 0.25 $ 0.29 $ 0.36 $ 0.41 $ 0.46 $ 0.22 $ 0.25
Cash dividends per common share.... $ 0.06 $ 0.06 $ 0.07 $ 0.08 $ 0.13 -- --
Weighted average shares
outstanding...................... 6,907,025 6,932,094 6,942,201 6,942,610 7,015,780 6,980,599 7,023,847
BALANCE SHEET DATA (at period end)
Investment securities.............. $ 29,416 $ 38,824 $ 34,589 $ 38,117 $ 41,404 $ 43,929 $ 40,970
Loans, net......................... 57,376 78,583 88,441 88,972 99,776 93,589 107,929
Total assets....................... 110,212 141,970 141,537 151,485 177,107 160,240 179,580
Total deposits..................... 98,459 127,998 125,472 132,744 155,569 140,637 156,448
Total shareholders' equity......... 11,312 12,973 15,000 17,470 20,188 18,656 21,880
SELECTED RATIOS
Return on average total assets..... 1.61% 1.62% 1.74% 2.02% 1.99% 2.01% 2.01%
Return on average total
shareholders' equity............. 16.44% 16.97% 17.69% 17.75% 17.26% 17.35% 17.03%
Net interest margin................ 6.04% 5.99% 6.67% 7.33% 7.00% 6.62% 6.80%
Efficiency ratio(2)................ 60.56% 61.18% 61.03% 58.49% 53.32% 55.17% 54.91%
ASSET QUALITY RATIOS
Reserve for loans losses to:
Ending total loans................. 1.61% 1.82% 1.57% 1.56% 1.61% 1.46% 1.46%
Nonperforming assets............... 740.94% 504.51% 1229.57% 1393.07% 2331.43% 1199.32% 3280.55%
Nonperforming assets to ending
total assets(3).................. 0.22% 0.31% 0.08% 0.07% 0.04% 0.07% 0.03%
Net loan chargeoffs to average
loans............................ (0.04)% (0.22)% 0.05% 0.01% 0.03% 0.02% 0.06%
CAPITAL RATIOS
Average shareholders' equity to
average assets................... 9.80% 9.54% 9.83% 11.37% 11.52% 11.58% 11.83%
Tier 1 capital ratio(4)............ 14.49% 12.67% 13.90% 16.32% 16.08% 16.78% 16.23%
Total risk-based capital
ratio(5)......................... 15.71% 13.92% 15.20% 17.57% 17.34% 18.03% 17.48%
Leverage ratio(6).................. 10.81% 10.29% 10.60% 11.53% 11.40% 11.27% 11.91%
</TABLE>
- ---------------
(1) Per share data has been adjusted to reflect all stock dividends and stock
splits to the date of the Prospectus.
(2) Efficiency ratio is noninterest expense divided by the sum of net interest
income plus noninterest income.
(3) Nonperforming assets consist of nonaccrual loans, loans contractually past
due 90 days or more and other real estate owned.
(4) Tier 1 capital divided by risk-weighted assets.
(5) Total capital divided by risk-weighted assets.
(6) Tier 1 capital divided by average total assets.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations includes a discussion of certain significant business
trends and uncertainties as well as other forward-looking statements and is
intended to be read in conjunction with and is qualified in its entirety by
reference to the consolidated financial statements of VRB and accompanying notes
included elsewhere in this Prospectus. For a discussion of important factors
that could cause actual results to differ materially from such forward-looking
statements, see "Risk Factors."
FINANCIAL HIGHLIGHTS
VRB Bancorp and its wholly owned subsidiary, Valley of the Rogue Bank, an
Oregon state chartered bank, serve customers in the Rogue Valley, consisting of
Jackson and Josephine Counties in southern Oregon. VRB has had 29 consecutive
years of profitability, and for 13 of the last 14 years, earnings have
increased. Net income for the six months ended June 30, 1997 was $1.8 million,
compared to $1.6 million for the first six months of 1996. VRB reported net
income of $3.3 million for 1996, an increase of 11.8% over net income of $2.9
million in 1995. For the first six months of 1997, return on total average
assets was 2.01% and net interest margin was 6.80%, continuing VRB's strong
performance in a relatively stable interest rate environment.
VRB has entered into an agreement to acquire Colonial, which will add four
branches and $101 million in deposits. Completion of the Acquisition is
anticipated in early 1998. See "Colonial Banking Company Acquisition."
RESULTS OF OPERATIONS
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. Net Interest Margin is the ratio of net interest
income to total interest-earning assets and is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities.
20
<PAGE> 22
Average Balances and Average Rates Earned and Paid. The following table
shows average balances and interest income or interest expense, with the
resulting average yield or rates by category of earning assets or
interest-bearing liabilities:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1996 JUNE 30, 1997
------------------------------ ------------------------------ ------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
INCOME YIELDS INCOME YIELDS INCOME YIELDS
AVERAGE OR OR AVERAGE OR OR AVERAGE OR OR
BALANCE EXPENSE RATES BALANCE EXPENSE RATES BALANCE EXPENSE RATES
(IN THOUSANDS) -------- ------- ------- -------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.................. $ 92,268 $9,893 10.72% $ 94,907 $10,122 10.67% $104,816 $5,521 10.53%
Investment securities
Taxable securities... 18,275 1,256 6.87 22,328 1,711 7.66 22,521 748 6.64
Nontaxable
securities**....... 12,818 936 7.30 19,080 1,461 7.66 18,535 713 7.70
Federal funds sold..... 3,614 206 5.71 7,419 390 5.26 15,591 413 5.30
------- ------- ----- -------- ------- ----- -------- ------ -----
Total interest
earning assets*.... 126,975 12,291 9.68 143,734 13,684 9.52 161,462 7,394 9.16
Cash and due from
Banks................ 12,213 14,788 9,785
Fixed assets........... 3,900 3,957 4,350
Loan loss allowance.... (1,423) (1,396) (1,627)
Other assets........... 2,425 2,444 2,352
------- -------- --------
Total assets......... $144,090 $163,527 $176,324
======= ======== ========
Interest-bearing
liabilities:
Interest-bearing
checking and savings
accounts............. $ 70,167 $1,983 2.83% $ 79,256 $2,367 2.99% $ 85,544 $1,271 2.97%
Time deposits.......... 19,043 938 4.93 24,436 1,261 5.16 26,782 638 4.76
Borrowed funds......... 1,091 69 6.29 -- -- -- -- --
------- ------- ----- -------- ------- ----- -------- ------ -----
Total
interest-bearing
liabilities........ 90,301 2,990 3.31 103,692 3,628 3.50 112,326 1,908 3.40
Non-interest-bearing
deposits............. 36,310 39,836 41,937
Other liabilities...... 1,092 1,166 1,200
------- -------- --------
Total liabilities.... 127,703 144,694 155,462
Shareholders' equity..... 16,387 18,833 20,861
------- -------- --------
Total liabilities and
shareholders'
equity............. $144,090 $163,527 $176,324
======= ======== ========
Net interest income**.... $9,301 $10,056 $5,486
======= ======= ======
Net interest spread...... 6.37% 6.02% 5.76%
===== ===== =====
Average yield on earning
assets**............... 9.68% 9.52% 9.16%
===== ===== =====
Interest expense to
earning assets*........ 2.35% 2.52% 2.36%
===== ===== =====
Net interest income to
earning assets**....... 7.33% 7.00% 6.80%
===== ===== =====
</TABLE>
- ---------------
* Non-accrual loans are included in the average balance.
** Tax-exempt income has been adjusted to a tax-equivalent basis at 34%.
21
<PAGE> 23
Analysis of Changes in Interest Differential. The following table shows
the dollar amount of the increase (decrease) in VRB's net interest income and
expense and attributes such dollar amounts to changes in volume as well as
changes in rates. Rate/volume variances have been allocated proportionally
between rate and volume changes:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1995 OVER 1994 1996 OVER 1995 1997 OVER 1996
-------------------------- -------------------------- --------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- -------------------------- --------------------------
NET NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE VOLUME RATE CHANGE
------ ------ ------ ------ ----- ------ ------ ---- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.......................... $ 863 $ 669 $1,532 $ 283 $ (53) $ 230 $ 667 $(20) $ 647
Investment securities
Taxable securities........... (303) 347 44 279 153 432 29 58 87
Nontaxable securities*....... 66 13 79 457 45 502 (1) 11 10
Federal funds sold............. (255) 53 (202) 217 (16) 201 112 2 114
----- ------ ------ ------ ----- ------ ----- ---- -----
Total*................... 371 1,082 1,453 1,236 129 1,365 807 51 858
----- ------ ------ ------ ----- ------ ----- ---- -----
Interest-bearing liabilities:
Interest-bearing checking and
savings accounts............. 117 (535) (418) (257) (112) (369) (147) 22 (125)
Time deposits.................. (58) (249) (307) (266) (44) (310) (43) 37 (6)
Borrowed funds................. (68) (6) (74) 69 -- 69 -- -- --
----- ------ ------ ------ ----- ------ ----- ---- -----
Total.................... (9) (790) (799) (454) (156) (610) (190) 59 (131)
----- ------ ------ ------ ----- ------ ----- ---- -----
Net increase (decrease) in net
interest income................ $ 362 $ 292 $ 654 $ 782 $ (27) $ 755 $ 617 $110 $ 727
===== ====== ====== ====== ===== ====== ===== ==== =====
</TABLE>
- ---------------
* Tax-exempt income has been adjusted to a tax equivalent basis at a 34% rate.
NET INTEREST INCOME
For the Six Months Ended June 30, 1996 and 1997
Net interest income for the six months ended June 30, 1997 was $5,244,000,
an increase of $727,000 over the corresponding period in 1996. The increase in
net interest income is attributable to $858,000 in income earned from
interest-earning assets, offset by $131,000 additional expense from
interest-bearing liabilities. Interest expense increased 7.4% to $1.9 million
for the first six months of 1997 compared to $1.8 million for the corresponding
period in 1996. The increase in interest expense was primarily a result of the
growth of interest-bearing checking and savings accounts.
Total interest-earning assets averaged $161,462,000 for the six months
ended June 30, 1997, compared to $143,725,000 for the corresponding period in
1996. Most of the increase was due to an increase in loans. The average yield on
interest earning assets, when adjusted to reflect the tax benefits on certain
types of investments, increased to 9.16% during the first six months of 1997,
compared to 9.10% for the corresponding period 1996.
Interest bearing liabilities averaged $112,326,000 and $100,618,000 during
the first six months of 1997 and 1996, respectively. The average cost of these
liabilities decreased in the first six months of 1997 to 3.40% from 3.53% in the
first six months of 1996. The average cost of total interest bearing liabilities
and non-interest bearing deposits declined to 2.47% during the first six months
of 1997 compared to 2.57% during the first six months of 1996.
For the Years Ended December 31, 1994, 1995 and 1996
Net interest income for the year ended December 31, 1996, was $9,561,000,
an increase of $577,000 or 6.4% compared to net interest income of $8,984,000 in
1995, which was $629,000 or 7.52% higher than the $8,355,000 reported in 1994.
The overall tax-equivalent earning asset yield was 9.52% in 1996 compared to
22
<PAGE> 24
9.68% in 1995, and 8.37% in 1994. These results were primarily due to flat
market interest rates in 1996 and a modest upturn in interest rates in 1994.
Further, the decline in yield in 1996 compared to 1995 was caused by 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, compared
to 72.7% in 1995 and 64.5% in 1994. During the same periods, average yields on
loans were 10.67% in 1996, 10.72% in 1995, and 10.00% in 1994. Investment
securities comprised 28.8% of average earning assets in 1996, which was up from
24.5% in 1995, after a decrease from 28.0% in 1994. The increased portfolio of
investment securities in 1996 compared to 1995 reflects improved yields on
investments funded by an increase in deposit liabilities during a period when
loan demand had stabilized. The decrease in the portfolio of investment
securities in 1995 compared to 1994 reflects the declining yields realized from
these investments during 1994 and the greater yield opportunity recognized in
growing VRB's loan portfolio. Tax-equivalent interest yields on investment
securities have ranged from 7.66% 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 VRB's investments in loans were the primary
determinants of rates paid for deposits during 1996, 1995 and 1994.
PROVISION FOR LOAN LOSSES
For the Six Months Ended June 30, 1996 and 1997
VRB's loan loss reserve was $1,602,000 and $1,391,000 for the periods ended
June 30, 1997 and 1996. This equates to 1.46% of total loans for both periods as
management adjusts the reserve to keep pace with the growth in VRB's overall
loan portfolio. Losses on loans charged to the reserve during the first six
months of 1997 and 1996 amounted to $49,000 and $22,000, respectively. Such
charge-offs have been partially offset by loan recoveries of $19,000 and $6,000
for the same periods.
For the Years Ended December 31, 1994, 1995 and 1996
The loan loss provision increased in 1996 compared to 1995 as a result of
the increased loan volume and management's desire to maintain the reserve at an
adequate level relative to total loans. Management believes the loan loss
provision maintains the reserve for loan losses at an appropriate level. The
reserve for loan losses was $1,632,000 at December 31, 1996, as compared to
$1,407,000 at December 31, 1995 and $1,414,000 at December 31, 1994. VRB's ratio
of reserve for loan losses to total loans was 1.61% at December 31, 1996,
compared to 1.56% at December 31, 1995 and 1.57% at December 31, 1994.
Recoveries have been nearly equivalent to or have exceeded charge-offs over
the past three-year period. Net chargeoffs 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 $58,000 compared to $52,000 at December 31, 1995 and
$7,000 at the end of 1994. Management believes this loan loss experience is a
result of the stringent underwriting and collection practices employed by VRB,
the strength in the local economy and the quality of the loan portfolio. When a
charge to the loan loss provision is recorded, the amount is based on past
charge-off experience, a careful analysis of the current portfolio, and
evaluation of future economic trends in VRB's market area. Management continues
to closely monitor the loan quality of new and existing relationships. Net loan
losses and recoveries in 1997 are expected to approximate VRB's recent
historical experience.
NON-INTEREST INCOME
For the Six Months Ended June 30, 1996 and 1997
Non-interest income, primarily consisting of services charges and related
fees, increased $31,000 or 4.5% for the six-month period ended June 30, 1997
compared to the six months ended June 30, 1996. The increase was the result of
increasing deposit volumes and related service fees. Service charges were
$522,000 for the six months ended June 30, 1997 compared to $489,000 for the six
months ended June 30, 1996. VRB realized a gain of $7,000 on the sale of
investment securities for the six months ended June 30, 1997, but did not
recognize any gains on security transactions as of June 30, 1996.
23
<PAGE> 25
For the Years Ended December 31, 1994, 1995 and 1996
Total non-interest income has declined through year-end 1996 from 1994.
Over the three year period non-interest income has ranged from $1,371,000 in
1996 and $1,381,000 in 1995 to $1,512,000 in 1994. While service charges on
deposit accounts have remained stable from 1994 through 1996, other operating
income, which includes earnings from VRB's real estate mortgage processing
activities, declined after 1994. Closure of VRB's manufactured housing lending
division early in 1995 significantly affected other operating income levels.
Other operating income was approximately $392,000 in 1996 compared to nearly
$370,000 in 1995 and $480,000 in 1994. VRB 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.
NON-INTEREST EXPENSE
For the Six Months Ended June 30, 1996 and 1997
Other operating expenses consist principally of employees' salaries and
benefits, occupancy costs, data processing and communication expenses, FDIC
insurance premiums, professional fees, and other noninterest expenses. A measure
of VRB's ability to contain noninterest expenses is the efficiency ratio. This
statistic is derived by dividing total noninterest expenses by total net
interest income and noninterest income. For the six months ended June 30, 1997,
the ratio had remained steady at 55.2% compared to 54.9% for the corresponding
period of 1996. The efficiency ratio reflects management's emphasis on closely
monitoring and controlling noninterest expenses.
Non-interest expense increased $401,000 or 13.9% to $3,289,000 for the six
months ended June 30, 1997 from $2,879,000 in the corresponding period in 1996,
primarily due to an increase in staffing costs, as well as increases in other
key operating costs such as occupancy expense and supplies.
For the Years Ended December 31, 1994, 1995 and 1996
Non-interest expense decreased $233,000 or 3.8% to $5,829,000 for the year
ended December 31, 1996 from $6,062,000 for the year ended December 31, 1995.
The decline was attributed to a drop in deposit insurance premiums of $141,000
and salary expense of $148,000 partially offset by increases in occupancy,
communications and data processing expenses.
Salary and benefit expense of $3,693,000 in 1996 represented a decrease of
$148,000 from the $3,841,000 reported in 1995 which was $205,000 or 5.6% higher
than the $3,636,000 reported in 1994. As of December 31, 1996, VRB had 116
fulltime 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. VRB's net
occupancy expense in 1996 of $630,000 was $22,000 or 3.6% higher than the
$608,000 reported in 1995, which was $78,000 or 11.4% less than the $686,000
reported in 1994. At the close of 1995, VRB embarked upon a three year plan to
upgrade its data processing systems. The result will increase operating
efficiencies, but may also cause increases to net occupancy expenses during
future years.
Advertising and communication expenses have increased consistently from
1994 through 1996 as VRB continues to promote and advertise its products and
services to the communities it serves. In 1996, communication expenses of
$226,000 were 10.8% higher than 1995 which were 7.3% greater than 1994.
Expenditures relating to advertising and communication are important for VRB 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 VRB's growth in deposits. However,
insurance expense decreased nearly $139,000 in 1995 when VRB received a premium
refund from the FDIC after the Bank Insurance Fund was recapitalized. Because
the Bank Insurance Fund is adequately capitalized, VRB was required to make only
nominal
24
<PAGE> 26
premium payments in 1996. For the three years ended December 31, 1996, VRB has
been rated to pay only a nominal $2,000, the lowest premium 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 to income taxes for the six month period ended June 30, 1997
was $916,000 representing an effective tax rate of 34%, compared to $772,000 or
33% for the six month period ended June 30, 1996.
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, VRB's state income tax rate was reduced 50% from 6.6% to 3.3% as a
result of surplus revenues received by the State of Oregon.
LOAN LOSSES AND RECOVERIES
Although management recorded a $250,000 provision for loan losses in 1996
to support loan portfolio growth, the quality of the loan portfolio remains
strong. At June 30, 1997, the allowance for loan losses of $1,602,000 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
VRB's loans; (e) the relationship and trend over the past several years of
recoveries as a percentage of previous years' charge-offs; and (f) available
outside information of a comparable nature regarding the loan portfolios of
other banks, including peer group banks.
25
<PAGE> 27
The following table shows VRB's loan loss performance for the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------ JUNE 30,
1995 1996 1997
------- -------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans outstanding at end of year, net of unearned
interest income.................................... $90,379 $101,408 $109,531
Average loans outstanding, net of unearned interest
income............................................. 92,268 94,907 104,816
Reserve balance, beginning of year................... 1,414 1,407 1,632
Loans charged off:
Commercial......................................... 31 29 27
Real estate........................................ -- -- --
Consumer........................................... 14 9 22
------- -------- --------
Total loans charged-off......................... 45 38 49
Recoveries:
Commercial......................................... 20 10 13
Real estate........................................ -- -- --
Consumer........................................... 18 3 6
------- -------- --------
Total recoveries................................ 38 13 19
Provision charged to operations...................... -- 250 --
Reserve balance, end of year......................... $ 1,407 $ 1,632 $ 1,602
======= ======== ========
Ratio of net loans charged-off to average loans
outstanding........................................ 0.01% 0.03% 0.06%
Ratio of reserve for loan losses to loans at
year-end........................................... 1.56% 1.61% 1.46%
</TABLE>
As the table illustrates, during 1995 and 1996 and for the six months ended
June 30, 1997, charge-offs exceeded recoveries by a nominal amount. At June 30,
1997, VRB had nonperforming assets of $49,000 compared to $70,000 at December
31, 1996. The majority of these assets are comprised of commercial and
consumer-based transactions. Management believes it is reasonable to expect a
significant portion of such amounts may be charged against the reserve in the
future.
26
<PAGE> 28
FINANCIAL CONDITION
SUMMARY BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, INCREASE (DECREASE) INCREASE (DECREASE)
------------------------------ ----------------------------------------- JUNE 30, -------------------
1994 1995 1996 12/31/94 - 12/31/95 12/31/95 - 12/31/96 1997 12/31/96 - 6/30/97
-------- -------- -------- ------------------- ------------------- -------- -------------------
(DOLLARS IN
THOUSANDS) (DOLLARS) (PERCENT) (DOLLARS) (PERCENT) (DOLLARS) (PERCENT)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal Funds
Sold............. $ 6,800 $ 4,500 $ 11,300 $(2,300) (33.8)% $ 6,800 151.1% $ 12,400 $ 1,100 9.7%
Investments........ 34,589 38,117 41,404 3,528 10.2 % 3,287 8.6% 40,970 (434) (1.0)%
Loans.............. 88,441 88,972 99,776 531 0.6 % 10,804 12.1% 107,929 8,153 8.2%
Other Assets....... 11,707 19,896 24,627 8,189 7.0 % 4,731 23.8% 18,281 (6,346) (25.8)%
-------- -------- -------- ------- ----- ------- ----- -------- ------- -----
Total assets..... $141,537 $151,485 $177,107 $ 9,948 7.0 % $25,622 16.9% $179,580 $ 2,473 1.4%
======== ======== ======== ======= ======= ======== =======
LIABILITIES
Non-interest-bearing
deposits......... $ 38,148 $ 38,098 $ 41,746 $ (50) (0.1)% $ 3,648 9.6% $ 46,449 $ 4,703 11.3%
Interest-bearing
deposits......... 87,324 94,646 113,823 7,322 8.4 % 19,177 20.3% 109,999 (3,824) (3.4)%
-------- -------- -------- ------- ----- ------- ----- -------- ------- -----
Total deposits... 125,472 132,744 155,569 7,272 5.8 % 22,825 17.2% 156,448 879 0.6%
Other liabilities.... 1,065 1,271 1,350 207 19.5 % 79 6.2% 1,252 (98) (7.3)%
-------- -------- -------- ------- ----- ------- ----- -------- ------- -----
Total
liabilities.... 126,537 134,015 156,919 7,478 5.9 % 22,904 17.1% 157,700 781 0.5%
SHAREHOLDERS'
EQUITY............. 15,000 17,470 20,188 2,470 16.5 % 2,718 15.6% 21,880 1,692 8.4%
-------- -------- -------- ------- ----- ------- ----- -------- ------- -----
Total liabilities
and
shareholder's
equity......... $141,537 $151,485 $177,107 $ 9,948 7.0 % $25,622 16.9% $179,580 $ 2,473 1.4%
======== ======== ======== ======= ======= ======== =======
</TABLE>
Investments
At June 30, 1997, VRB's portfolio of investment securities totaled
$39,809,000, a $476,000 or 1.18% decrease when compared to a December 31, 1996
securities portfolio of $40,285,000. Investments in federal funds sold (an
overnight investment) and Federal Home Loan Bank stock were $12,400,000 and
$1,161,000, respectively at June 30, 1997. The balance of federal funds sold is
influenced by cash demands, customer deposit levels, loan activity, and other
investment transactions.
Investment securities held at December 31, 1996, totaled $40,285,000,
representing a $3,204,000 or 8.6% increase when compared to $37,081,000 at
December 31, 1995. Total investment securities at December 31, 1995 were 8.57%
lower than those reported in 1994. Increases or decreases in the investment
portfolio are primarily a function of loan demand and changes in VRB's deposit
structure.
VRB 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 VRB
has the intent and ability to hold until they mature or are called rather than
those that management may sell if liquidity requirements dictate or alternative
investment opportunities arise. The mix of available-for-sale and
held-to-maturity investment securities is considered in the context of VRB's
overall asset-liability policy and illustrates management's assessment of the
relative liquidity of VRB. At June 30, 1997, the investment portfolio consisted
of 54.0% available-for-sale securities and 46.0% held-to-maturity investments,
comparable to December 31, 1996, and 57.3% available-for-sale securities and
42.7% held-to-maturity investments at December 31, 1995. This mix provides VRB
greater investment flexibility than it had during 1994 when the portfolio was
15.8% available-for-sale securities and 84.2% in held-to-maturity securities at
December 31, 1994. See Note 2 to VRB's Consolidated Financial Statements.
At June 30, 1997, VRB's investment portfolio had total net unrealized gains
of approximately $164,000. This compares to net unrealized gains of
approximately $269,000 at December 31, 1996, $280,000 at December 31, 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 VRB may ultimately realize. Actual realized gains and
losses occur at the time investment securities are sold or redeemed.
27
<PAGE> 29
Federal funds sold are short term investments which often mature on a daily
basis. VRB 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 $12,400,000 at June 30, 1997, compared to $11,300,000 at December 31,
1996, $4,500,000 at December 31, 1995 and $6,800,000 at December 31, 1994.
In 1994, VRB became a member and stockholder in the Federal Home Loan Bank
of Seattle. At December 31, 1996, the Bank held $1,120,000 in Federal Home Loan
Bank stock. VRB's relationship and stock investment with the Federal Home Loan
Bank provides, in addition to dividend earnings, a borrowing source for meeting
liquidity requirements.
The following table provides the book value of VRB's portfolio of
investment securities as of December 31, 1996 and June 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
(IN THOUSANDS)
<S> <C> <C>
Investments available-for-sale:
U.S. Treasury and agencies.......................... $ 20,093 $ 19,965
Corporate and other investments..................... 1,556 1,376
------- -------
$ 21,649 $ 21,341
======= =======
Investments held-to-maturity:
States and political subdivisions................... $ 18,636 $ 18,468
======= =======
</TABLE>
Investment securities at the dates indicated consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996 JUNE 30, 1997
----------------------------------- ----------------------------------- -----------------------------------
AMORTIZED APPROXIMATE % AMORTIZED APPROXIMATE % AMORTIZED APPROXIMATE %
COST MARKET VALUE YIELD* COST MARKET VALUE YIELD* COST MARKET VALUE YIELD*
--------- ------------ ------ --------- ------------ ------ --------- ------------ ------
(IN
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
Treasuries
and
agencies:
One year or
less..... $ 7,487 $ 7,479 5.70% $10,002 $ 9,942 6.16% $ 9,354 $ 9,297 5.87%
One to five
years.... 12,008 12,075 6.14 9,993 10,150 7.12 10,397 10,078 5.86
Five to ten
years.... -- -- -- -- -- -- -- -- --
Obligations
of states
and
political
subdivisions:
One year or
less..... 1,906 1,916 6.03 215 216 7.05 373 375 7.30
One to five
years.... 3,036 3,050 6.12 6,106 6,169 7.33 4,586 4,468 6.10
Five to ten
years.... 4,351 4,402 7.13 11,749 11,848 8.08 4,594 4,235 7.17
Over ten
years.... 6,551 6,712 8.09 566 589 8.41 3,010 2,793 8.49
Corporate and
other:
One year or
less..... 128 126 5.35 1,569 1,555 6.04 224 213 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.... -- -- -- -- -- -- -- -- --
------- ------- ---- ------- ------- ---- ------- ------- ----
$37,037 $ 37,317 6.50% $40,200 $ 40,469 7.17% $34,243 $ 33,041 6.32%
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
* Weighted average yields are stated on a federal tax-equivalent basis at a 34%
rate.
Loans
Outstanding loans totaled $107,929,000 at June 30, 1997, representing an
increase of $8,153,000 or 8.2% compared to $99,776,000 at December 31, 1996.
Loan commitments (principally real estate construction
28
<PAGE> 30
notes) grew to $21.8 million at June 30, 1997, representing the highest level of
undisbursed loan funds for the year. Loan commitments amounted to $16.0 million
at December 31, 1996 and $9.5 million at June 30, 1996.
Reflective of VRB's customer base, as well as trends within the local
economy, 77.2% of VRB's net loan portfolio consists of loans secured by real
estate. This percentage is consistent with previous reporting periods such as
December 31, 1996 and June 30, 1996 when 75.5% and 74.5% of all loans were
within this category. Loans secured by real estate include loans made for
purposes other than financing purchases of real property, such as inventory
financing and equipment purchases, where the collateral provided to VRB is in
the form of real property.
The following table presents the composition of VRB's loan portfolio at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
----------------------- -----------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial...................................... $ 13,181 13.21% $ 13,511 12.52%
Real estate construction........................ 9,112 9.14% 13,850 12.83%
Real estate mortgage............................ 66,210 66.36% 69,423 64.32%
Consumer and other.............................. 12,906 12.93% 12,747 11.81%
-------- ------ -------- ------
101,408 101.64% 109,531 101.48%
Allowance for loan losses....................... (1,632) (1.64)% (1,602) (1.48)%
-------- ------ -------- ------
Net loans....................................... $ 99,776 100.00% $107,929 100.00%
======== ====== ======== ======
</TABLE>
The following table shows the maturities and sensitivity of VRB's loans to
changes in interest rates at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
---------------------------------------------------- ----------------------------------------------------
DUE AFTER ONE DUE AFTER ONE
DUE IN ONE YEAR THROUGH DUE AFTER TOTAL DUE IN ONE YEAR THROUGH DUE AFTER TOTAL
(IN THOUSANDS) YEAR OR LESS FIVE YEARS FIVE YEARS LOANS YEAR OR LESS FIVE YEARS FIVE YEARS LOANS
------------ ------------- ---------- -------- ------------ ------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial loans..... $ 5,122 $ 7,061 $ 998 $ 13,181 $ 3,822 $ 7,254 $ 2,435 $ 13,511
Real estate
construction....... 5,571 2,127 1,414 9,112 5,508 3,075 5,267 13,850
Real estate
mortgage........... 5,087 16,397 44,726 66,210 5,155 15,559 48,709 69,423
Consumer and other... 1,205 7,519 4,182 12,906 1,801 7,133 3,813 12,747
------- ------- ------- -------- ------- ------- ------- --------
$ 16,985 $33,104 $ 51,320 $101,409 $ 16,286 $33,021 $ 60,224 $109,531
======= ======= ======= ======== ======= ======= ======= ========
Loans with fixed
interest rates..... $ 43,104 $ 44,456
Loans with floating
interest rates..... 58,305 65,075
-------- --------
$101,409 $109,531
======== ========
</TABLE>
The following table presents information with respect to nonperforming
assets:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
(IN THOUSANDS) 1996 1997
------------ --------
<S> <C> <C>
Loans on nonaccrual status............................................. $58 $ 46
Loans past due greater than 90 days but not on nonaccrual status....... 12 3
Troubled debt restructurings........................................... -- --
---- ----
Total nonperforming assets................................... $70 $ 49
==== ====
Percentage of nonperforming assets to total assets..................... 0.04% 0.03%
</TABLE>
29
<PAGE> 31
Deposits
The following table sets forth the average balances of VRB's
interest-bearing liabilities, interest expense and average rates paid for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1995 1996 1997
---------------------------- ---------------------------- ----------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- ------- ------- -------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Interest-bearing checking.... $ 49,858 $1,520 3.05% $ 63,028 $1,991 3.16% $ 70,836 $1,104 3.12%
Savings...................... 20,309 463 2.28% 16,228 376 2.32% 14,708 166 2.27%
Time deposits................ 19,043 938 4.93% 24,436 1,261 5.16% 26,782 638 4.76%
Borrowed funds............... 1,091 69 6.29% -- -- 0.00% -- -- 0.00%
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total interest-bearing
liabilities............ 90,301 $2,990 3.31% 103,692 $3,628 3.50% 112,326 $1,908 3.40%
====== ==== ====== ==== ====== ====
Total noninterest-bearing
liabilities............ 36,310 39,836 41,937
-------- -------- --------
Total interest and
noninterest-bearing
liabilities............ $126,611 $143,528 $154,263
======== ======== ========
</TABLE>
Deposit growth has slowed from December 31, 1996 to June 30, 1997 ,
increasing by $879,000 or 0.6%. This slower growth was caused primarily by
management's decision to discontinue its competitive rates on deposits at a time
when VRB had no need for additional liquidity. Non-interest bearing deposits
continue to be a reliable and substantial portion of VRB's deposit base
accounting for 29.7% of total deposits at June 30, 1997.
At December 31, 1996, total deposits were $155,569,000, an increase of
$22,825,000, or 17.2%, from $132,744,000 at December 31, 1995. Total deposits in
1995 increased by 5.8% over 1994. Deposit growth in 1996 was due to management's
decision to promote an attractive pricing strategy, increased marketing, and
increased emphasis on implementing a sales culture within the branches. The
growth in deposit accounts has primarily been in money market checking accounts
and non-interest-bearing checking accounts. Nonvolatile, non-interest-bearing
demand deposits, also referred to as core deposits, continued to represent a
significant percentage of VRB's deposit base. To the extent that VRB is able to
fund operations with non-interest-bearing core deposits, net interest spread,
the difference between interest income and interest expense, will improve. At
December 31, 1996, these non-interest-bearing demand deposits accounted for
26.8% of total deposits which was down slightly from 28.7% as of December 31,
1995. Nevertheless, average outstanding core deposit balances improved in 1996
over 1995 by approximately $3,500,000 to $39,836,000.
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 VRB reacts to changes in competitors' pricing and
interest payment strategies. At December 31, 1996, total interest-bearing
deposit accounts of $113,823,000 increased $19,177,000 or 20.3% from December
31, 1995. Significant growth in interest-bearing demand deposits ($15,774,000 or
29.6% for the year ended December 31, 1996) and time deposits ($5,461,000 or
22.9%) was more than sufficient to offset a decline in savings deposits
($2,060,000 or 11.8%). Management's analysis of the shifts in interest bearing
deposit mix indicates that a significant number of VRB's savings account
customers shifted into higher earning time deposit accounts during the year.
In 1994 and early 1995, management 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 VRB 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 VRB. As competition
eased for time deposit accounts and interest rates paid for such accounts became
more favorable in 1995 and 1996, VRB became more aggressive in pricing its time
deposit products resulting in the deposit growth in 1995 and 1996.
30
<PAGE> 32
VRB, by policy, does not depend on brokered deposits nor high-priced time
deposits. At June 30, 1997, time certificates of deposits in excess of $100,000
totaled $5,581,000 or 21.4% of total outstanding time deposits, compared to
$7,051,000 or 24.1% of total outstanding time deposits at December 31, 1996, and
12.1% and 13.0% as of December 31, 1995 and 1994, respectively.
The following table sets forth by time remaining to maturity, all time
certificates of deposit accounts outstanding at June 30, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Three months or less............................................... $ 8,194
Three through six months........................................... 7,816
Six months through twelve months................................... 6,461
One year through five years........................................ 3,328
Over five years.................................................... 209
-------
$ 26,008
=======
</TABLE>
Asset-Liability Management/Interest Rate Sensitivity
The principal purpose of asset-liability management is to manage VRB's
sources and uses of funds to maximize net interest income under different
interest rate conditions with minimal risk. A part of asset-liability management
involves interest rate sensitivity, the difference between repricing assets and
repricing liabilities in a specific time period. This analysis provides an
indication of VRB's earnings risk due to future interest rate changes. At June
30, 1997, the analysis indicated that the earnings risk was within VRB's policy
guidelines.
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 VRB'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
June 30, 1997, 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 June 30,
1997. 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 Company'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.
31
<PAGE> 33
<TABLE>
<CAPTION>
BY REPRICING INTERVAL
-------------------------------------------------------------------------
NON-
INTEREST
0 - 3 3 - 6 6 - 12 1 - 5 OVER 5 BEARING
JUNE 30, 1997 MONTHS MONTHS MONTHS YEARS YEARS FUNDS TOTAL
- ------------------------------------ -------- -------- -------- -------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold.................. $ 12,400 $ -- $ -- $ -- $ -- $ -- $ 12,400
Securities available for sale....... -- 2,030 5,059 14,252 -- -- 21,341
Securities held to maturity......... 18 -- 870 4,405 13,175 -- 18,468
Loans............................... 27,065 3,673 37,284 26,710 13,197 -- 107,929
Non-interest earning assets and
allowance for credit losses....... -- -- -- -- -- 19,442 19,442
------- ------- ------- ------ ------ ------- --------
Total............................. 39,483 5,703 43,213 45,367 26,372 19,442 179,580
------- ------- ------- ------ ------ ------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand deposits.... 69,637 -- -- -- -- -- 69,637
Savings deposits.................... 14,354 -- -- -- -- -- 14,354
Time deposits....................... 8,194 7,816 6,461 3,328 209 -- 26,008
Non-interest bearing liabilities and
common stock...................... -- -- -- -- -- 69,581 69,581
------- ------- ------- ------ ------ ------- --------
Total........................... 92,185 7,816 6,461 3,328 209 69,581 179,580
------- ------- ------- ------ ------ ------- --------
INTEREST RATE SENSITIVITY GAP....... (52,702) (2,113) 36,752 42,039 26,163 (50,139)
------- ------- ------- ------ ------ ------- --------
CUMULATIVE INTEREST RATE SENSITIVITY
GAP............................... $(52,702) $(54,815) $(18,063) $ 23,976 $50,139 $ -- $ --
======= ======= ======= ====== ====== ======= ========
</TABLE>
The table illustrates that VRB is liability-sensitive for the 12 month
period following June 30, 1997, and asset-sensitive thereafter. In an
environment of increasing interest rates, the theoretical net interest margins
of VRB would be adversely affected for the 12 months following June 30, 1997,
and favorably affected thereafter. Conversely, in a declining interest-rate
environment, VRB's theoretical net interest margins would be favorably affected
for the 12 month period following June 30, 1997, and adversely thereafter.
Shareholders' Equity
Shareholders' equity increased $1,692,000 during the first half of 1997.
Shareholders' equity at June 30, 1997 amounted to $21,880,000 compared to
$20,188,000 at December 31, 1996. The increase in equity reflects consolidated
earnings of $1,777,000 and the proceeds from the exercise of stock options
(8,383 shares for a total of $36,000). These additions to equity were partially
offset by a change in the value of the "available for sale" portion of the
investment portfolio. The unrealized gain/loss on this portion of the portfolio
is reflected in shareholders' equity. The current value of this segment of VRB's
investment portfolio declined $121,000 when comparing June 30, 1997 to December
31, 1996.
Return on Equity and Assets
Net income for the six months ended June 30, 1997, totaled $1,777,000 for
an annualized return on average shareholders' equity of 17.03% and an annualized
return on average outstanding assets of 2.01%. These returns compare to a 17.35%
return on average equity and 2.01% return on average assets for the
corresponding period in 1996.
32
<PAGE> 34
Return on daily average assets and equity and certain other ratios for the
periods indicated are presented below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------- --------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net income............................... $ 2,510 $ 2,908 $ 3,251 $ 1,567 $ 1,777
Average assets........................... $144,379 $144,090 $163,527 $155,920 $176,324
RETURN ON AVERAGE ASSETS................. 1.74% 2.02% 1.99% 2.01% 2.01%
Net income............................... $ 2,510 $ 2,908 $ 3,251 $ 1,567 $ 1,777
Average equity........................... $ 14,190 $ 16,387 $ 18,833 $ 18,063 $ 20,861
RETURN ON AVERAGE EQUITY................. 17.69% 17.75% 17.26% 17.35% 17.03%
Cash dividends paid per share............ $ 0.07 $ 0.08 $ 0.14 $ -- $ --
Net income per share..................... $ 0.36 $ 0.41 $ 0.46 $ 0.22 $ 0.25
DIVIDEND PAYOUT RATIO.................... 18.84% 19.22% 29.31% --% --%
Average equity........................... $ 14,190 $ 16,387 $ 18,833 $ 18,063 $ 20,861
Average assets........................... $144,379 $144,090 $163,527 $155,920 $176,324
AVERAGE EQUITY TO ASSET RATIO............ 9.83% 11.37% 11.52% 11.58% 11.83%
</TABLE>
LIQUIDITY
Liquidity represents the ability to meet cash flow requirements and
financial commitments at a reasonable cost, while retaining the flexibility to
take advantage of business opportunities. Management has always placed a high
priority on maintaining a high liquidity through a moderate loan-to-deposit
ratio and a conservative investment portfolio. As of June 30, 1997, VRB's
loan-to-deposit ratio was a moderate 69.0%. Additionally, although no balances
were outstanding at June 30, 1997, VRB has borrowing agreements with the Federal
Home Loan Bank of Seattle for cash advances of $8.5 million and long-term
borrowings of up to $9.1 million, as well as approximately $12.4 million in
federal funds sold to meet potential liquidity needs. As of June 30, 1997,
approximately $9,883,000 or 24.8% of the securities portfolio matures within one
year. Management believes these factors are indicative of the emphasis placed
upon maintaining sufficient liquidity for VRB.
The Colonial Acquisition is expected to have a modest effect on VRB's
liquidity. The net proceeds of the Offering will be used to fund a significant
portion of the purchase price of approximately $15.7 million. See "Use of
Proceeds." In addition, Colonial has historically had a higher cost of funds
than VRB, resulting from a higher proportion of deposits held in
interest-bearing accounts and higher rates paid on certain of those
interest-bearing liabilities compared to VRB, which has a significant portion of
its deposit liabilities in non-interest-bearing accounts. VRB management
anticipates that as the interest rates paid on Colonial deposits are reduced,
some depositors will withdraw their funds, decreasing VRB's liquidity. VRB
management believes that VRB has ample cash and cash-equivalent resources to
fund the Colonial Acquisition and any anticipated deposit run-off without
restricting VRB's growth or materially compromising its liquidity. See "Colonial
Banking Company Acquisition."
CAPITAL
The primary source of VRB's capital has historically been from the
retention of net profits. VRB's profitability has allowed it to enjoy a strong
capital position and to consistently pay dividends to its shareholders, as
evidenced by the dividend payout ratios of 29.3%, 19.2% and 18.8% for the years
ended December 31, 1996, 1995 and 1994, respectively.
In 1989, banking regulators adopted risk-based capital guidelines under
which one of four risk weights is applied to balance sheet assets, each with
different capital requirements based on the credit risk of the asset. VRB is
required to maintain minimum amounts of capital to "risk weighted" assets, as
defined by banking
33
<PAGE> 35
regulators. At June 30, 1997, VRB was required to have Tier 1 and Total Capital
ratios of 4.0% and 8.0%, respectively. VRB's actual ratios at that date were
16.2% and 17.5%, 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. The primary capital-to-asset
leverage ratio was 11.9% at June 30, 1997. With a strong equity-to-assets ratio,
VRB enjoys greater financial flexibility and less dependence upon its deposit
base to support loan and investment activities.
The proposed cash acquisition of Colonial will significantly reduce the
capital ratios for VRB, particularly its Tier 1 capital ratio, as goodwill
incurred as a result of the acquisition is deducted from VRB's capital. As a
result of the Acquisition, VRB's management anticipates that the pro forma Tier
1 capital ratio for June 30, 1997 would drop from 16.2% to 11.9%, excluding the
effects of the proposed stock offering. Although VRB would exceed all capital
requirements, raising additional capital is deemed prudent by management and
would ensure that VRB will continue to qualify as "well-capitalized" under
applicable regulatory guidelines. See "Colonial Banking Company Acquisition."
34
<PAGE> 36
BUSINESS
INTRODUCTION
VRB is the largest community bank in southern Oregon, currently operating
nine full-service branches in the Rogue Valley. As of June 30, 1997, VRB had
assets of $180 million and deposits of $156 million. VRB has entered into an
agreement to acquire Colonial which will add four branches and $101 million in
deposits, increasing VRB's market share to over 15% of commercial bank deposits
in the Rogue Valley. See "Colonial Banking Company Acquisition."
VRB has delivered 29 consecutive years of profitability. During the most
recent five years, it has increased earnings by an average of 18% per year and
increased its return on average assets from 1.61% in 1992 to 1.99% in 1996.
During the same period, VRB has achieved a return on average equity greater than
16% while sustaining high asset quality. VRB has consistently performed in the
top quartile when comparing its return on average equity to its national peer
group comprising over 900 banks with assets of between $100 and $300 million and
multiple branches located in metropolitan areas.
The consolidation of the banking industry in Oregon has had a positive
effect on VRB. Major regional banks have chosen to focus on larger metropolitan
markets and to de-emphasize personal service to achieve efficiencies. VRB
continues to introduce new products while maintaining the personal service and
local decision-making believed to be important to its customers. Its high level
of demand deposit accounts (30% of total deposits at June 30, 1997) has
significantly contributed to its consistently low cost of funds and high net
interest margin. VRB's growing base of core deposits confirms its belief that
its product delivery approach is attractive to a significant number of customers
in its market.
VRB offers a broad range of commercial banking services, primarily to small
and medium-sized businesses, professionals, farmers and retail customers,
including commercial, real estate and agricultural loans, accounts receivable
and inventory financing, consumer installment loans, acceptance of deposits, and
personal savings and checking accounts. A majority of VRB's loans are commercial
loans collateralized with real estate.
INDUSTRY OVERVIEW
The commercial banking industry continues to undergo increased competition,
consolidation and change. Non-insured financial service companies such as mutual
funds, brokerage firms, insurance companies, mortgage companies and leasing
companies are offering alternative investment opportunities for customers' funds
and, in many cases, alternative sources from which to borrow to meet their
needs. Banks have been granted extended powers to better compete, including the
limited right to sell insurance and securities products. Despite the expanded
products and services offered by banks, the percentage of financial transactions
handled by commercial banks has dropped steadily. In addition, although the
dollar amount of bank deposits has remained steady, such deposits represent less
than 20% of household financial assets compared to over 35% 25 years ago. This
trend represents a continuing shift to investments in stocks, bonds, mutual
funds and retirement accounts. To improve competitiveness, commercial banks are
reducing costs through operating efficiencies gained by consolidation and
implementation of alternative ways of providing bank products. Although new
banks continue to be organized, bank mergers substantially outnumber new bank
formations. In the last dozen years, the number of commercial banks nationwide
has dropped from 14,000 to 9,500. However, in recent years, relatively stable
interest rates and a growing economy have permitted the remaining segments of
the banking industry to improve net interest margins and returns on assets,
resulting in stronger balance sheets and earnings.
To more effectively and efficiently deliver its products, banks are opening
branches located inside retail stores, installing more ATMs, and investing in
technology to facilitate telephone, personal computer and Internet banking.
While all banks are experiencing the effects of the changing environment, the
manner in which banks choose to compete is increasing the differences between
larger super-regional banks and community banks. The super-regional banks are
committed to becoming regional "brands" providing a broad selection of products
at low cost with advanced technology. Community banks provide most of the same
35
<PAGE> 37
products, but with a greater commitment to personal service and to maintaining
local ties to the communities they serve.
BUSINESS STRATEGY
VRB seeks significant growth in its earnings assets while maintaining a
high return on equity. VRB believes that this objective can be achieved by
continuing to emphasize personalized, quality banking products and services to
its customers. VRB intends to increase its market penetration in its existing
markets and to expand into new markets through acquisitions. VRB's strategy
consists of the following:
- Provide a full range of banking products and personalized service. VRB
believes offering products with a high level of personal service attracts
and retains customers. VRB focuses on customer care by providing
friendly, interactive service dedicated to meeting the needs of each
individual customer. Although many of its customers desire personal
banking services, VRB also has made a commitment to provide new
technology-based services to attract a broader customer base. These
products and services include 24-hour telephone account access, a
recently developed debit card program and an expanded ATM network.
- Increase market share in existing markets. VRB believes there is
significant potential to increase its business with current customers and
attract new customers in its existing market. Early in 1995, VRB embarked
on a sales training program and in 1996 appointed a Corporate Sales
Officer with responsibility for improving the business development skills
of employees. VRB also believes it can gain more customers within the
Rogue Valley by continuing to distinguish itself from larger banks, all
of which are headquartered in other states and have reduced personal
service and transferred lending decisions away from local branches. As of
June 30, 1997, VRB's market share of commercial bank deposits in the
Rogue Valley was 9.3%, up from 7.7% on December 31, 1995. VRB believes
this increase of over 20% in an eighteen month period is a direct result
of its increased marketing efforts and validates VRB's belief that
personalized service is important to a significant segment of its market.
The addition of Colonial's deposits is expected to increase VRB's total
market share to 15% of commercial bank deposits in the Rogue Valley.
- Explore opportunistic acquisitions. After the integration of Colonial,
VRB intends to explore acquisitions of other community banks in the
Pacific Northwest. Although VRB is not currently engaged in any
acquisition discussions, it believes that it will be able to supplement
internal growth with complementary acquisitions.
PRODUCTS AND SERVICES
VRB offers a broad portfolio of products and services tailored to meet the
banking requirements of targeted customers in its market area. These include:
Deposit Products. VRB has an array of deposit products for customers,
including non-interest-bearing checking accounts, interest-bearing checking and
savings accounts, money market accounts and certificates of deposit. These
accounts generally earn interest at rates established by management based on
competitive market factors and management's desire to increase certain types or
maturities of deposit liabilities. VRB does not pay brokerage commissions to
attract deposits. It strives to establish customer relations to attract core
deposits in non-interest-bearing transactional accounts and thus to reduce its
cost of funds.
Loan Products. VRB attempts to maintain sound loan underwriting standards
with written loan policies, conservative individual and branch limits and
reviews by the Loan Committee. Further, in the case of particularly large loan
commitments or loan participations, loans are reviewed by the Board of
Directors. Underwriting standards are designed to achieve a high-quality loan
portfolio, compliance with lending regulations and the desired mix of loan
maturities and industry concentrations. Management seeks to minimize credit
losses by closely monitoring the financial condition of its borrowers and the
value of collateral.
Commercial Loans. VRB offers specialized loans for its business and
commercial customers, including equipment and inventory financing operating
lines of credit, SBA loans for qualified businesses
36
<PAGE> 38
and accounts receivable financing. Commercial lending is the primary focus
of VRB's lending activities, and a significant portion of its loan
portfolio consists of commercial loans. For regulatory reporting purposes,
a substantial portion of VRB's commercial loans are designated as real
estate loans, as the loans are secured by mortgages and trust deeds on real
property, although the loans may be made for purposes of financing
commercial activities, such as accounts receivable, equipment purchases and
inventory or other working capital needs. Lending decisions are based on
careful evaluation of the financial strength, management and credit history
of the borrower, and the quality of the collateral securing the loan.
Commercial loans secured by real property are limited to 75% of the value
of the collateral. In some cases, VRB may require personal guarantees and
secondary sources of repayment.
Real Estate Loans. Real estate loans are available for construction,
purchasing and refinancing residential owner-occupied and rental
properties. Borrowers can choose from a variety of fixed and adjustable
rate options and terms. Real estate loans reflected in the loan portfolio
are in large part loans made to commercial customers that are secured by
real property. VRB provides customers access to long-term conventional real
estate loans through its mortgage loan department which processes
applications for a variety of real estate lenders.
Payments on loans are often dependent on the successful operation and
management of the properties securing the loans, and are therefore strongly
affected by the conditions of the local real estate market. Fluctuating
land values and local economic conditions make loans secured by real
property difficult to evaluate and monitor. VRB seeks to mitigate risks
associated with real estate loans by lending to customers who have been
pre-qualified for long-term financing and, in the case of construction or
development loans, are using contractors approved by VRB.
Consumer Loans. VRB provides loans to individual borrowers for a
variety of purposes, including secured and unsecured personal loans, home
equity and personal lines of credit, motor vehicle loans, and student
loans. Consumer loans can carry significantly greater risks than other loan
products, even if secured, if the collateral consists of rapidly
depreciating assets such as automobiles and equipment. Repossessed
collateral securing a defaulted consumer loan may not provide an adequate
source of repayment of the loan. Consumer loan collections are dependent on
borrowers' continuing financial stability, and are sensitive to job loss,
illness and other personal factors. VRB attempts to manage the risks
inherent in consumer lending by following strict credit guidelines and
conservative underwriting practices.
The following table sets forth certain information about VRB's loan
portfolio at September 30, 1997, classified by distribution among types of
borrowers:
<TABLE>
<CAPTION>
TOTAL PERCENT OF
BORROWER CLASSIFICATION(1) NUMBER OF LOANS LOAN BALANCE TOTAL LOANS
- ------------------------------------------------- --------------- ----------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Finance, Insurance & Real Estate................. 201 $ 26,985 23.6%
Services......................................... 378 21,326 18.7%
Construction..................................... 264 16,231 14.2%
Retail Trade..................................... 209 10,456 9.2%
Manufacturing.................................... 95 5,788 5.1%
Transportation, Communications, Electric, Gas &
Sanitary Services.............................. 113 4,574 4.0%
Agriculture, Forestry & Fishing.................. 56 1,659 1.5%
Wholesale Trade.................................. 53 1,377 1.2%
Mining........................................... 2 62 *
Personal Loans (including primary residential
mortgages)..................................... 1,610 25,801 22.5%
----- -------- -----
Total.................................. 2,981 $ 114,259 100.0%
===== ======== =====
</TABLE>
- ---------------
* Less than 1.0%
(1) Based on SIC Industry Codes
37
<PAGE> 39
Other Banking Services. In support of its focus on personalized service,
VRB offers additional products and services for the convenience of its
customers. These include a recently introduced debit card program, automated
teller machines located at each of VRB's offices, and a telephone banking
service that allows customers to speak directly with a customer service
representative during normal banking hours and 24-hour access to their accounts.
VRB does not currently charge for these services.
MARKET AREA
VRB primarily accepts deposits and makes loans in Jackson and Josephine
Counties (the Rogue Valley) in Oregon. As a community bank, VRB has certain
competitive advantages because of its local focus, but VRB is also more closely
tied to the local economy than competitors who serve a number of geographic
markets.
VRB's market area has become increasingly popular as a family community and
retirement area, and has seen an increase in the population of approximately
14.5% during the period from 1990 to 1996. The Rogue Valley had a 1996
population of approximately 240,000. About half of the population of each county
is in an urbanized area: Medford and Ashland in Jackson County and Grants Pass
in Josephine County.
Over the past 10 years, the employment base of the Rogue Valley has
undergone significant change. In an area that has previously been dependent upon
timber manufacturing, employment within this sector has dropped from 30% of
total wages in the early 1970s to just under 12% in 1995. The region's largest
employers have diversified and include in addition to timber and non-timber
manufacturers, municipalities, higher education, and medical industries.
Further, commercial development and retail growth has created approximately
3,000 jobs since 1992 as the service sector responds to the influx of new
residents into the region. Although much improved from the high unemployment
levels experienced during the recession years of 1985 through 1992, unemployment
remains above Oregon and U.S. averages in both counties. Tourism has become
increasingly important. Agriculture, although a small industry in terms of
employment, remains a significant economic factor. This diverse industry base is
strengthening the Rogue Valley economy and creating new growth opportunities.
The region's non-farm employment is anticipated to grow in excess of 20%
over the next 10 years, adding almost 20,000 jobs. The largest growth (estimated
at over 40%) is expected in the services sector. Wages, in real terms, have
declined as retail and service jobs supplant manufacturing employment. As of
September 1997, average weekly wages were 83.9% and 76.5% for Jackson and
Josephine County, respectively, of the state average.
A significant change in the makeup of the population in the two counties
has occurred with the emigration of working families and the influx of retirees.
With these population shifts, a high percentage of personal income is now
derived from sources other than wages and salaries, particularly in Josephine
County where 51% of personal income is from non-wage or salary sources, compared
to 40% in Jackson County and approximately 35% statewide. Transfer payments
account for approximately 20% of personal income in Jackson County, and
approximately 28% in Josephine. Management believes that the segments of the
population experiencing the highest growth are those that are more likely to
desire the personal services and banking conveniences offered by VRB.
MARKETING
VRB's ability to increase its share of the financial services market in the
Rogue Valley is driven by a marketing plan consisting of several key components.
A principal objective is to create and foster a sales culture in each office.
Employees are trained to cross-sell, offering appropriate products and services
to existing customers and attempting to increase the business relationships VRB
shares with these customers. VRB regularly examines the desirability and
profitability of adding new products and services to those currently offered.
VRB promotes specific products by media advertising but relies primarily on
direct contacts for new business. VRB recognizes the importance of community
service and supports employee involvement in community activities. This
participation allows VRB to make a contribution to the communities it serves as
well as to increase VRB's visibility in its market area and thereby increase
business opportunities.
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<PAGE> 40
MANAGEMENT INFORMATION SYSTEMS
VRB recently created a Director of Information Technology position to
oversee all areas of technology within VRB, such as data processing and
electronic banking. VRB hired an experienced individual with extensive
technology and operations experience in financial institutions to fill this role
on November 1, 1997.
VRB maintains an "in house" system for processing all core banking
applications. The system utilizes Information Technology Systems, Inc. ("ITI")
software and Unisys hardware. VRB converted to "in house" processing in 1991 to
gain control over quality and the cost of such services. In addition, VRB
utilizes ITI software for investment securities accounting, 24-hour telephone
banking and maintaining shareholder records.
VRB maintains a Disaster Recovery Plan for its data center operations and
network of branches, and subscribes to a service which will provide on-site
processing within 48 hours of a disaster. VRB maintains insurance to fund the
expense of the service. Management has acknowledged and is evaluating the well-
publicized potential problem relating to the impact on computer systems of the
date change on January 1, 2000, known as the "Year 2000" issue. Management
expects no difficulties or extraordinary expense in successfully addressing the
issue.
COMPETITION
The geographic market area served by VRB is highly competitive with respect
to both deposits and loans. VRB competes principally with commercial banks,
savings and loan associations, credit unions, mortgage companies, and other
financial institutions. The major commercial bank competitors are super-regional
institutions headquartered outside the state of Oregon, and their deposits
represent approximately 79% of statewide commercial bank deposits as of June 30,
1997. Within the Rogue Valley, these institutions hold approximately 75% of the
deposits. The major banks have the advantage of offering their customers
services and statewide banking facilities that VRB does not offer.
VRB's primary competition for deposits comes from commercial banks, savings
and loan associations, credit unions, and money market funds, some of which may
offer higher rates than VRB can or is willing to offer. Secondary competition
for funds comes from issuers of corporate and government securities, insurance
companies, mutual funds, and other financial intermediaries. Other than with
respect to large certificates of deposit, VRB competes for deposits by offering
a variety of deposit accounts at rates generally competitive with similar
financial institutions in the area.
VRB's competition for loans comes principally from commercial banks,
savings and loan associations, mortgage companies, finance companies, insurance
companies, and other institutional lenders. Many of its competitors have
substantially higher single borrower lending limits than those of VRB. VRB
competes for loan originations through the level of interest rates and loan fees
charged, the variety of commercial and mortgage loan products, and the
efficiency and quality of services provided to borrowers. Lending activity can
also be affected by the availability of lendable funds, local and national
economic conditions, current interest rate levels, and loan demand. As described
above, VRB competes with the larger commercial banks by emphasizing a community
bank orientation and efficient personal service to local customers. See
"-- Business Strategy."
PROPERTIES
VRB's main office is located in Rogue River, Oregon. VRB conducts its
business through nine full service branches throughout the Rogue Valley. All of
the branches have drive-up facilities and automated teller machines.
Additionally, VRB maintains a satellite automated teller machine in Medford,
Oregon. All but two premises are owned by VRB and VRB has options to extend
existing leases on the leased facilities. VRB's nine offices range in size from
approximately 1,100 square feet to slightly more than 8,000 square feet. In
three
39
<PAGE> 41
branches, excess space is leased to others. The following sets forth certain
information regarding VRB's branches as of June 30, 1997.
<TABLE>
<CAPTION>
CITY LOCATION TOTAL DEPOSITS
- -------------------- ------------------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Jackson County
Rogue River 110 Pine Street $ 31,170
Medford 2400 Poplar Drive 11,120
Medford 220 E. 10th Street 16,437
Medford 809 Steward Avenue 6,341
Ashland 250 Pioneer Street 15,903
Talent 201 S. Pacific Highway 9,129
Phoenix 4000 S. Pacific Highway 11,633
Josephine County
Grants Pass 1040 Rogue River Highway 27,506
Grants Pass 100 N.E. Midland 27,209
--------
$ 156,448
========
</TABLE>
EMPLOYEES
As of the date of this Prospectus, VRB had a total of 116 full-time
equivalent employees. None of the employees are subject to a collective
bargaining agreement. VRB considers its relationship with its employees to be
good.
LEGAL PROCEEDINGS
VRB is from time to time a party to various legal actions arising in the
normal course of business. Management believes that there is no threatened or
pending proceedings against VRB, which, if determined adversely, would have a
material effect on the business or financial position of VRB.
40
<PAGE> 42
MANAGEMENT
The following table sets forth summary information about the directors and
executive officers of VRB. Positions are held at both VRB Bancorp and Valley of
the Rogue Bank.
<TABLE>
<CAPTION>
YEAR ELECTED OR
NAME AGE POSITION WITH VRB APPOINTED
- ----------------------------------- --- ----------------------------------- ---------------
<S> <C> <C> <C>
William A. Haden................... 48 Director, President and Chief 1996
Executive Officer
Tom Anderson....................... 46 Director, Executive Vice President 1996
and Chief Operating Officer
Brad Copeland...................... 48 Senior Vice President and Credit 1997
Administrator
Felice Belfiore.................... 27 Vice President and Chief Financial 1997
Officer
James D. Coleman................... 58 Chairman of the Board 1987
John O. Dunkin..................... 58 Vice-Chairman of the Board 1986
Michael Donovan.................... 46 Director 1997
April Sevcik....................... 50 Director 1997
Gary Lundberg...................... 58 Director 1993
Robert J. DeArmond................. 66 Director 1990
Larry L. Parducci.................. 46 Director 1994
</TABLE>
The business experience of each of the directors and executive officers for
the past five years has been as follows:
WILLIAM A. HADEN has served as Director, President and Chief Executive
Officer of VRB since January, 1996. He served as Senior Vice President of VRB
from July, 1993 until he was appointed President. Prior to that time, Mr. Haden
served as President of Family Bank of Commerce from 1985 until its merger into
VRB in 1993.
TOM ANDERSON has served as Director, Executive Vice President and Chief
Operating Officer of VRB since January 1996. He served as Senior Vice President
and Cashier of VRB from 1983 to 1996, and as Vice President and Cashier of VRB
from 1979 to 1983. Prior to joining VRB in 1977 he was employed by Bank of
America in the San Francisco, California market.
BRAD COPELAND was hired in 1996 and was appointed as Senior Vice President
of VRB to succeed Virgil Syverson who retired as Senior Vice President and
Credit Administrator in June, 1997. Prior to that time, Mr. Copeland served as
Senior Vice President and Senior Credit Officer for Bank of America Alaska from
1987 to 1996.
FELICE BELFIORE was hired in June 1997 as Chief Financial Officer for VRB.
Ms. Belfiore, a Certified Public Accountant, is a 1992 graduate of Oregon State
University and holds degrees in Accounting and International Finance. Prior to
joining VRB, she was employed five years with Moss Adams LLP where she
specialized in community bank auditing.
JAMES D. COLEMAN has served as a Director of VRB since 1987 and currently
serves as the Chairman of the Board of Directors. Mr. Coleman was previously a
Director with Medford State Bank, which VRB acquired in 1987. Mr. Coleman is the
President and owner of Crater Lake Motors, a Ford and Mercedes automobile
dealership in Medford, Oregon.
JOHN O. DUNKIN has served as a Director of VRB since 1986 and currently
serves as the Vice-Chairman of the Board of Directors. Mr. Dunkin is Chief
Executive Officer of Grants Pass Moulding, Rogue Valley Sash & Door and Pacific
Lumber, all located in Grants Pass, Oregon. Mr. Dunkin served as Chairman of the
Finance Committee for Oregon Economic Development, and served as Chairman of the
Board of Directors of Josephine General Hospital in Grants Pass, Oregon.
41
<PAGE> 43
MICHAEL DONOVAN was elected a Director of VRB in 1997. He is Co-Owner of
Chateaulin Restaurant & Wine Shoppe in Ashland, Oregon. Mr. Donovan is the
current President of the Oregon Shakespeare Festival and served as a Director
and is past President of the Ashland Community Hospital Foundation.
APRIL SEVCIK was elected a Director of VRB in 1997. Ms. Sevcik is the owner
and President of General Credit Service Inc. in Medford, Oregon. She is also
currently President of the Jackson County Chamber of Commerce, President of the
Medford Rotary Foundation, and serves on the Boards of Directors of the American
Red Cross and Medford YMCA.
GARY LUNDBERG has served as a Director of VRB since 1993. Mr. Lundberg was
employed eight years with First Interstate Bank of Oregon (now Wells Fargo Bank)
in various credit positions. He is now retired and was formerly an owner of
Lundberg's Funeral Home in Grants Pass, Oregon.
ROBERT J. DEARMOND has served as a Director of VRB since 1990. Mr. DeArmond
previously served (22 years) as a Director of Mountain States Savings Bank in
Coeur d'Alene, Idaho and as Chairman of the Board of Idaho Forest Products until
his retirement in 1995. He currently serves on the Board of Directors of North
Pacific Lumber Company in Portland, Oregon.
LARRY L. PARDUCCI has served as a Director of VRB since 1994. Mr. Parducci
is the owner/operator of Holiday RV Park in Phoenix, Oregon. Mr. Parducci also
serves on the Phoenix City Council.
The Board of Directors of VRB has established the number of directors at
nine, as provided in the by-laws.
COMMITTEES OF THE BOARD OF DIRECTORS
VRB has established a Compensation Committee consisting of outside
Directors John O. Dunkin (Chairman), Michael Donovan, Robert J. DeArmond, James
D. Coleman and Larry L. Parducci.
VRB has also established an Audit Committee charged with selecting and
reviewing the reports of VRB's independent public accountants. Reports of
examinations, regulatory or otherwise, are reviewed with the entire Board of
Directors. The Audit Committee consists of directors Robert J. DeArmond
(Chairman), April Sevcik and Gary Lundberg.
DIRECTOR COMPENSATION
Effective January 1, 1997, monthly fees paid to non-employee directors were
increased to $750 ($800 for the Chairman). Non-employee directors also
participate in VRB's 1994 Amended Non-Discretionary Stock Option Plan. The Plan
provides for granting of options to directors on an annual basis. The number of
shares granted to the directors is determined by dividing the total compensation
paid each director during the year, by the most recent year-end book value per
share. Grants are made in January of each year, based on the preceding years
compensation and service. Directors are required to serve for one full calendar
year before becoming eligible to participate in the Plan.
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid by VRB during the last
three calendar years to William A. Haden and Tom Anderson. No other director or
executive officer of VRB received salary and bonuses during the year ended
December 31, 1996 in excess of $100,000.
42
<PAGE> 44
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) COMPENSATION
- -------------------------------- ----- ------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
William A. Haden................ 1996 $90,000 $67,500 -- $ 16,050(3)
President and 1995 $80,000 $66,524 -- $ 12,885(3)
Chief Executive Officer 1994 $80,000 $48,719 -- $ 11,520(3)
Tom Anderson.................... 1996 $90,000 $67,500 -- $ 15,111(4)
Exec. Vice President and 1995 $85,000 $70,675 -- $ 14,383(4)
Chief Operating Officer 1994 $85,000 $51,760 -- $ 13,210(4)
</TABLE>
- ---------------
(1) Includes bonuses paid or to be paid during the subsequent year but
attributable to the year indicated.
(2) Perquisites and other personal benefits, if any, did not exceed the lesser
of $50,000 or 10 percent of total annual salary and bonus for the named
executive officer for any of the periods indicated.
(3) Includes life insurance premiums (1996 only) of $1,050 for $350,000 face
amount insurance above company group insurance and the Company's
contribution to match employees' salary deferral under the Company's 401(k)
Profit Sharing Plan.
(4) Includes life insurance premiums ($511 for 1996 and $711 for 1995 and 1994)
for $350,000 face amount insurance above Company group coverage and the
Company's contribution to match employees salary deferral under the
Company's 401(k) Profit Sharing Plan.
EXECUTIVE COMPENSATION PLANS
Incentive Based Bonus Plan
VRB's Incentive Based Bonus Plan for executive officers provides for
establishment of a pool of funds equal to 11.25% of net profits in excess of a
one percent return on average assets. The pool is limited to no more than
seventy-five percent of the executive officers' annual base salary. The pool is
then divided between the three highest paid executive officers according to base
salary paid during the preceding year. The executive must be employed at the
time the pool is distributed in order to participate. Distribution normally
occurs during the first quarter of each year. The Board reserves the right to
modify or terminate the plan at its discretion.
For the year ending December 31, 1996, profits generated by VRB amounted to
$3,251,000. These earnings equaled a return on average assets of 1.99% and a
return on average shareholder equity of 17.26%. Based on the performance of VRB
and the Incentive Based Bonus Plan in place for 1996, a bonus pool of $195,000
was established for payment of bonuses to executive officers. Pursuant to the
Plan, the Board awarded incentive bonus payments of $67,500 to each of Messrs.
Haden and Anderson during February 1997.
Employment and Change of Control Agreements
VRB has entered into special agreements with certain executive officers.
These agreements are intended to motivate the executives to remain in the employ
of VRB.
WILLIAM HADEN
VRB entered into an agreement with President and Chief Executive Officer,
William Haden, to provide at VRB's expense a term life insurance policy on Mr.
Haden's life in the amount of $350,000, through the year 2002 and at $150,000
thereafter. The ownership and right to name the beneficiary under the policy is
reserved to Mr. Haden. The cost of providing this policy is estimated to be less
than $1,000 during 1996. The policy was not in place during 1995.
The agreement with Mr. Haden additionally provides for a payment equal to
his base salary plus any cash bonuses or other compensation paid to or for his
benefit, during the fiscal year preceding a merger, sale of
43
<PAGE> 45
substantially all of the assets of VRB, or any other transaction that would
result in less than 50% of current VRB shareholders remaining as shareholders of
the resulting entity ("Change in Control"). Further, if Mr. Haden leaves VRB
following a Change in Control, VRB will, at its expense, provide COBRA benefits
to Mr. Haden for no longer than 18 months following a Change in Control,
provided he is eligible for such benefits.
TOM ANDERSON
VRB has an agreement with Tom Anderson, Executive Vice President, to
provide at VRB's expense a term life insurance policy on Mr. Anderson's life in
the amount of $350,000, through the year 2002, and at $150,000 thereafter. The
ownership and right to name the beneficiary under said policy is reserved to Mr.
Anderson. VRB has also provided an additional policy for $25,000 of death
benefits on Mr. Anderson's life. The premiums paid by VRB are included as
taxable compensation income to Mr. Anderson and are reported as such. The cost
of providing these additional two policies was less than $1,000 during 1996.
This benefit is in addition to group life insurance provided to all employees.
The agreement with Mr. Anderson additionally provides for a "Change in
Control" payment equal to his base salary plus any cash bonuses or other
compensation paid to or for his benefit, during the fiscal year preceding any
Change in Control. Further, if Mr. Anderson leaves VRB following a Change in
Control, VRB will, at its expense, provide COBRA benefits to Mr. Anderson for no
longer than 18 months following a Change in Control, provided he is eligible for
such benefits.
STOCK OPTION PLANS
VRB has two non-qualified stock option plans which were approved by the
shareholders during 1991, and amended in 1994. The plans reserved an aggregate
of 725,492 shares of VRB's unissued Common Stock for grants to employees and
non-employee Directors. The purchase price of the optioned shares is equal to
not less than the book value of a share of stock as of the end of the most
recently completed fiscal year. Options granted are exercisable for ten years
from the date of grant, with shares fully vested after six months for Directors
and up to a ten year period for employees.
The purpose of these plans is to advance the interests of VRB and its
shareholders by enabling VRB to attract and retain the services of people with
training, experience and ability to serve as outside Directors and employees,
and to provide additional incentive to key employees and Directors of VRB by
giving them an opportunity to participate in the ownership and growth of VRB.
During 1996, 10,500 options were contractually committed to employees for
the purchase of VRB Common Stock under the 1994 Amended Non-Qualified Stock
Option Plan for employees. No grants were awarded to any of the named executive
officers in 1996.
Option covering 21,260 shares were awarded to Directors in January, 1996
under the 1994 Amended Non-Discretionary Stock Option Plan for Non-Employee
Directors.
VRB's Board of Directors has approved grants of options to the named
executive officers effective with the Offering. Each option will have an
exercise price per share equal to the public offering price, and will first
become exercisable as to 20% of the shares each year beginning one year from the
date of grant. Mr. Haden will be granted options covering 40,000 shares, and Mr.
Anderson will be granted options covering 30,000 shares.
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<PAGE> 46
The following chart reflects options exercised in the last fiscal year and
the number and value of unexercised options at December 31, 1996.
AGGREGATED OPTION EXERCISES LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED ON OPTIONS AT FY-END (#) OPTIONS AT FY-END ($)(2)
EXERCISE VALUE ----------------------------- -----------------------------
NAME (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William A. Haden... None None None 18,720 None $ 148,800
Tom Anderson....... 12,270 $ 80,170(3) None 2,920 None $ 18,367
</TABLE>
- ---------------
(1) All share amounts have been adjusted to reflect subsequent stock dividends
and stock splits through the date of this Prospectus.
(2) On December 31, 1996 the market price of VRB's Common Stock was $5.88 per
share. For purposes of the foregoing table, all stock options have an
exercise price less than that amount and are therefore considered to be
"in-the-money" and have a value equal to the difference between $5.88 and
the exercise price of the stock option multiplied by the number of shares
covered by the stock option.
(3) On October 17, 1996, the date of exercise, the market price of VRB's Common
Stock was $6.53 per share.
45
<PAGE> 47
SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS
The following table sets forth the shares of VRB Common Stock beneficially
owned as of October 1, 1997 by each director and each named executive officer,
the directors and officers as a group, the Bank's Employee 401(k) Plan,
individual employees (through the Plan) and all employees (through the Plan),
directors and officers as a group. As of that date, VRB is not aware of anyone
who owns more than five percent of its shares either beneficially or of record.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME BENEFICIALLY OWNED(1) PERCENT OF CLASS
- ----------------------------------------------------------- --------------------- ----------------
<S> <C> <C>
James D. Coleman........................................... 108,876(2) 1.51%(2)
John Dunkin................................................ 45,248(3) *
Michael Donovan............................................ 0 --
April Sevcik............................................... 2,000 *
Gary Lundberg.............................................. 14,010(4) *
Robert DeArmond............................................ 106,660(5) 1.48%(5)
Larry Parducci............................................. 13,776(6) *
Tom Anderson............................................... 251,940(7) 3.52%(7)
William Haden.............................................. 172,550(8) 2.40%(8)
All directors and executive officers as a group............ 556,988(9) 7.65%(9)
Valley of the Rogue Bank Employee 401(k) Plan.............. 161,966 2.25%
Employees (excluding executive officers and directors)..... 53,108(10) *(10)
</TABLE>
- ---------------
* Less than 1.0%
(1) Shares held directly with sole vesting and sole investment power, unless
otherwise indicated. Also includes options exercisable within 60 days.
(2) Includes 55,106 shares held jointly with his spouse, and includes 14,278
shares covered by options exercisable within 60 days.
(3) Includes 2,208 shares held for Christopher Dunkin with John Dunkin as
custodian and 23,152 shares held in the JCLS Ltd Partnership of which Mr.
Dunkin is the general partner and includes 19,888 shares covered by options
exercisable within 60 days.
(4) Includes 6,266 shares held jointly with his spouse and includes 5,658
shares covered by options exercisable within 60 days.
(5) Includes 2,654 shares covered by options exercisable within 60 days.
(6) Includes 8,120 shares held jointly with his spouse and includes 2,654
shares covered by options exercisable within 60 days.
(7) Includes 7,162 shares held jointly with his spouse and 82,812 shares held
by VRB's Employees 401(k) Profit Sharing Plan in a segregated self-directed
account for the benefit of Tom Anderson. Also includes 161,966 shares held
by VRB's 401(k) Profit Sharing Plan in a pooled account for which Mr.
Anderson is a trustee and has or shares voting and investment power as to
those shares.
(8) Includes 10,584 shares held by VRB's Employees 401(k) Profit Sharing Plan
in a segregated self-directed account for the benefit of William Haden and
161,966 shares held in the 401(k) Plan pooled account for which Mr. Haden
is a trustee and has or shares voting and investment power as to these
shares.
(9) Includes 45,132 shares covered by options exercisable within 60 days, and
161,966 shares held by VRB's 401(k) Profit Sharing Plan in a pooled account
for which certain directors and executive officers are trustees and have or
share voting and investment power as to those shares.
(10) Includes shares held by VRB's Employee 401(k) Profit Sharing Plan in
segregated self-directed accounts.
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<PAGE> 48
RELATED TRANSACTIONS WITH DIRECTORS AND OFFICERS
Some of the directors and officers of VRB and members of their immediate
families and firms and corporations with which they are associated have been
parties to transactions with VRB, including borrowings and investments in time
deposits. All such loans and investments in time deposits have been made in the
ordinary course of business, have been made on substantially the same terms,
including interest rates paid or charged and collateral required, as those
prevailing at the time for comparable transactions with unaffiliated persons,
and did not involve more than the normal risk of collectibility or present other
unfavorable features. As of June 30, 1997, the aggregate outstanding amount of
all loans to officers and directors was approximately $1,409,000, which
represented approximately 6.5% of VRB's consolidated shareholders' equity at
that date. All such loans are currently in good standing and are being paid in
accordance with their terms.
SUPERVISION AND REGULATION
GENERAL
VRB is extensively regulated under federal and state law. These laws and
regulations are intended to protect depositors, not shareholders. To the extent
that the following information describes statutory or regulatory provisions, it
is qualified in its entirety by reference to the particular statutory or
regulatory provisions. Any change in applicable laws or regulations may have a
material effect on the business and prospects of VRB. The operations of VRB may
be affected by legislative changes and by the policies of various regulatory
authorities. VRB cannot accurately predict the nature or the extent of the
effects on its business and earnings that fiscal or monetary policies, or new
federal or state legislation may have in the future.
FEDERAL BANK HOLDING COMPANY REGULATION
VRB Bancorp is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and as such, it is subject
to regulation, supervision and examination by the Federal Reserve. VRB Bancorp
is required to file annual reports with the Federal Reserve and to provide the
Federal Reserve such additional information as the Federal Reserve may require.
The BHCA requires every bank holding company to obtain the prior approval
of the Federal Reserve before (i) acquiring, directly or indirectly, ownership
or control of any voting shares of another bank or bank holding company if,
after such acquisition, it would own or control more than 5% of such shares
(unless it already owns or controls the majority of such shares); (ii) acquiring
all or substantially all of the assets of another bank or bank holding company;
or (iii) merging or consolidating with another bank holding company. The Federal
Reserve will not approve any acquisition, merger or consolidation that would
have a substantial anti-competitive result, unless the anti-competitive effects
of the proposed transaction are clearly outweighed by a greater public interest
in meeting the convenience and needs of the community to be served. The Federal
Reserve also considers capital adequacy and other financial and managerial
factors in reviewing acquisitions or mergers.
With certain exceptions, the BHCA also prohibits a bank holding company
from acquiring or retaining direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve regulation or order,
have been identified as activities closely related to the business of banking or
of managing or controlling banks. In making this determination, the Federal
Reserve considers whether the performance of such activities by a bank holding
company can be expected to produce benefits to the public such as greater
convenience, increased competition or gains in efficiency in resources, which
can be expected to outweigh the risks of possible adverse effects such as
decreased or unfair competition, conflicts of interest or unsound banking
practices.
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<PAGE> 49
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to the
bank holding company or its subsidiaries, on investments in their securities and
on the use of their securities as collateral for loans to any borrower. These
regulations and restrictions may limit VRB Bancorp's ability to obtain funds
from Valley of the Rogue Bank for its cash needs, including funds for payment of
dividends, interest and operating expenses. Further, under the Federal Reserve
Act and certain regulations of the Federal Reserve, a bank holding company and
its subsidiaries are prohibited from engaging in certain tying arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services. For example, Valley of the Rogue Bank may not generally require a
customer to obtain other services from it or VRB Bancorp, and may not require
that the customer promise not to obtain other services from a competitor, as a
condition to an extension of credit to the customer.
FEDERAL AND STATE BANK REGULATION
Valley of the Rogue Bank, as a state chartered bank with deposits insured
by the FDIC, is subject to the supervision and regulation of the Oregon Director
and of the FDIC. These agencies may prohibit the banks from engaging in what
they believe constitute unsafe or unsound banking practices.
The Community Reinvestment Act (the "CRA") requires that, in connection
with examinations of financial institutions within their jurisdiction, the
Federal Reserve or the FDIC evaluates the record of the financial institutions
in meeting the credit needs of their local communities, including low and
moderate income neighborhoods, consistent with the safe and sound operation of
those banks. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility. Valley of the Rogue
Bank's current CRA rating is "Satisfactory."
Banks are also subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors, principal
shareholders or any related interest of such persons. Extensions of credit (i)
must be made on substantially the same terms, including interest rates and
collateral as, and follow credit underwriting procedures that are not less
stringent than, those prevailing at the time for comparable transactions with
persons not covered above and who are not employees, and (ii) must not involve
more than the normal risk of repayment or present other unfavorable features.
Banks are also subject to certain lending limits and restrictions on overdrafts
to such persons. A violation of these restrictions may result in the assessment
of substantial civil monetary penalties on the affected bank or any officer,
director, employee, agent or other person participating in the conduct of the
affairs of that bank, the imposition of a cease and desist order, and other
regulatory sanctions.
Under the Federal Deposit Insurance Corporation Improvement Act (the
"FDICIA"), each federal banking agency has prescribed, by regulation,
non-capital safety and soundness standards for institutions under its authority.
These standards cover internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, 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.
Management believes that Valley of the Rogue Bank meets all the standards, and
therefore does not believe that these regulatory standards materially affect
VRB's business operations.
DEPOSIT INSURANCE
The deposits of VRB are currently insured to a maximum of $100,000 per
depositor through the Bank Insurance Fund ("BIF") administered by the FDIC. VRB
is required to pay semiannual deposit insurance premium assessments to the FDIC.
The FDICIA included provisions to reform the Federal deposit insurance
system, including the implementation of risk-based deposit insurance premiums.
The FDICIA also permits the FDIC to make special assessments on insured
depository institutions in amounts determined by the FDIC to be necessary to
give it adequate assessment income to repay amounts borrowed from the U.S.
Treasury and other sources or
48
<PAGE> 50
for any other purpose the FDIC deems necessary. Pursuant to the FDICIA, the FDIC
implemented a risk-based insurance premium system on January 1, 1993. Generally,
under this system, banks are assessed insurance premiums according to how much
risk they are deemed to present to BIF. Banks with higher levels of capital and
a low degree of supervisory concern are assessed lower premiums than banks with
lower levels of capital or involving a higher degree of supervisory concern. The
premium range is from $.00, for the highest-rated institutions (subject to a
statutory minimum assessment of $2,000), to $.27 per $100 of domestic deposits.
The Bank has a current FDIC premium rate of $.00 per $100 of domestic deposits.
DIVIDENDS
The principal source of VRB's cash revenues is dividends received from
Valley of the Rogue Bank. Under the Oregon Bank Act, the bank is subject to
restrictions on the payment of cash dividends to its shareholders. A bank may
not pay cash dividends if that payment would reduce the amount of its capital
below that necessary to meet minimum applicable regulatory capital requirements.
In addition, the amount of the dividend may not be greater than its net
unreserved retained earnings, after first deducting (i) to the extent not
already charged against earnings or reflected in a reserve, all bad debts, which
are debts on which interest is unpaid and past due at least six months; (ii) all
other assets charged off as required by the Oregon Director or state or federal
examiner; and (iii) all accrued expenses, interest and taxes of the bank. The
Bank has been paying regular dividends to VRB, which has in turn been paying
regular dividends to its shareholders, although no assurances can be given that
dividends will continue to be paid. See "Market Price of and Dividends on Common
Stock."
In addition, the appropriate regulatory authorities are authorized to
prohibit banks and bank holding companies from paying dividends which would
constitute an unsafe or unsound banking practice. VRB and is not currently
subject to any regulatory restrictions on their dividends other than those noted
above.
CAPITAL ADEQUACY
The federal bank regulatory agencies use capital adequacy guidelines in
their examination and regulation of bank holding companies and banks. If the
capital falls below the minimum levels established by these guidelines, the bank
holding company or bank may be denied approval to acquire or establish
additional banks or non-bank businesses or to open facilities.
The FDIC and Federal Reserve have adopted risk-based capital guidelines for
banks and bank holding companies. The risk-based capital guidelines are designed
to make regulatory capital requirements more sensitive to differences in risk
profile among banks and bank holding companies, to account for off-balance sheet
exposure and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. The
guidelines are minimums, and the Federal Reserve has noted that bank holding
companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios well in
excess of the minimum. The current guidelines require all bank holding companies
and federally-regulated banks to maintain a minimum risk-based total capital
ratio equal to 8%, of which at least 4% must be Tier 1 capital.
Tier 1 capital for bank holding companies includes common shareholders'
equity, qualifying perpetual preferred stock (up to 25% of total Tier 1 capital,
if cumulative; under a Federal Reserve rule, redeemable perpetual preferred
stock may not be counted as Tier 1 capital unless the redemption is subject to
the prior approval of the Federal Reserve) and minority interests in equity
accounts of consolidated subsidiaries, less intangibles except as described
above. Tier 2 capital includes: (i) the allowance for loan losses of up to 1.25%
of risk-weighted assets; (ii) any qualifying perpetual preferred stock which
exceeds the amount which may be included in Tier 1 capital; (iii) hybrid capital
instruments (iv) perpetual debt; (v) mandatory convertible securities and (vi)
subordinated debt and intermediate term preferred stock of up to 50% of Tier 1
capital. Total capital is the sum of Tier 1 and Tier 2 capital less reciprocal
holdings of other banking organizations, capital instruments and investments in
unconsolidated subsidiaries.
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<PAGE> 51
Banks' and bank holding companies' assets are given risk-weights of 0%,
20%, 50%, and 100%. In addition, certain off-balance sheet items are given
credit conversion factors to convert them to asset equivalent amounts to which
an appropriate risk-weight will apply. These computations result in the total
risk-weighted assets.
Most loans are assigned to the 100% risk category, except for first
mortgage loans fully secured by residential property, which carry a 50% rating.
Most investment securities are assigned to the 20% category, except for
municipal or state revenue bonds, which have a 50% risk-weight, and direct
obligations of or obligations guaranteed by the United States Treasury or United
States Government agencies, which have 0% risk-weight. In converting off-balance
sheet items, direct credit substitutes, including general guarantees and standby
letters of credit backing financial obligations, are given 100% conversion
factor. The transaction-related contingencies such as bid bonds, other standby
letters of credit and undrawn commitments, including commercial credit lines
with an initial maturity of more than one year, have a 50% conversion factor.
Short-term, self-liquidating trade contingencies are converted at 20%, and
short-term commitments have a 0% factor.
The Federal Reserve also has implemented a leverage ratio, which is Tier 1
capital as a percentage of total assets less intangibles, to be used as a
supplement to risk-based guidelines. The principal objective of the leverage
ratio is to place a constraint on the maximum degree to which a bank holding
company may leverage its equity capital base. The Federal Reserve requires a
minimum leverage ratio of 3%. However, for all but the most highly rated bank
holding companies and for bank holding companies seeking to expand, the Federal
Reserve expects an additional cushion of at least 1% to 2%.
The FDICIA created a statutory framework of supervisory actions indexed to
the capital level of the individual institution. Under regulations adopted by
the FDIC, an institution is assigned to one of five capital categories depending
on its total risk-based capital ratio, Tier 1 risk-based capital ratio, and
leverage ratio, together with certain subjective factors. Institutions which are
deemed to be "undercapitalized" depending on the category to which they are
assigned are subject to certain mandatory supervisory corrective actions. VRB
does not believe that these regulations have any material effect on its
operations.
EFFECTS OF GOVERNMENT MONETARY POLICY
The earnings and growth of VRB are affected not only by general economic
conditions, but also by the fiscal and monetary policies of the federal
government, particularly the Federal Reserve. The Federal Reserve can and does
implement national monetary policy for such purposes as curbing inflation and
combating recession, but its open market operations in U.S. government
securities, control of the discount rate applicable to borrowings from the
Federal Reserve, and establishment of reserve requirements against certain
deposits, influence growth of bank loans, investments and deposits, and also
affect interest rates charged on loans or paid on deposits. The nature and
impact of future changes in monetary policies and their impact on VRB cannot be
predicted with certainty.
CHANGING REGULATORY STRUCTURE OF THE BANKING INDUSTRY
The laws and regulations affecting banks and bank holding companies are
currently undergoing significant changes. Bills are now pending or expected to
be introduced in the United States Congress that contain proposals for altering
the structure, regulation, and competitive relationships of the nation's
financial institutions. If enacted into law, these bills could have the effect
of increasing or decreasing the cost of doing business, limiting or expanding
permissible activities (including activities in the insurance and securities
fields), or affecting the competitive balance among banks, savings associations,
and other financial institutions. 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, alter the extent to which Banks would be
permitted to engage in securities 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 VRB might be affected thereby cannot be predicted with certainty.
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<PAGE> 52
Of particular note is legislation enacted by Congress in 1995, permitting
interstate banking and branching, which allows banks to expand nationwide
through acquisition, consolidation or merger. Under this law, an adequately
capitalized bank holding company may acquire banks in any state if permitted by
state law. In addition, banks may merge across state lines if permitted by state
law. Further, banks may establish and operate branches in any state subject to
the restrictions of applicable state law. Under Oregon law, an out-of-state bank
or bank holding company may merge with or acquire an Oregon state chartered bank
or bank holding company if the Oregon bank, or in the case of a bank holding
company, the subsidiary bank, has been in existence for a minimum of three
years, and the law of the state in which the acquiring bank in located permits
such merger. Branches may not be acquired or opened separately, but once an
out-of-state bank has acquired branches in Oregon, either through a merger with
or acquisition of substantially all the assets of an Oregon bank, the bank may
open additional branches.
DESCRIPTION OF CAPITAL STOCK
The Articles of Incorporation of VRB Bancorp authorize the issuance of up
to 10 million shares of Common Stock with no par value. As of June 30, 1997,
there were 7,166,130 shares of Common Stock issued and outstanding. Subject to
the rights of holders of any preferred stock which may be outstanding, the
holders of the Common Stock are entitled to receive dividends if and when
declared by the Board of Directors from any funds legally available therefor.
Each outstanding share of Common stock has the same relative rights and
preferences as each other share of Common Stock, including the rights to the net
assets of the corporation upon liquidation. Each share is entitled to one vote
on matters submitted to a vote of shareholders. Holders of Common Stock are not
entitled to preemptive rights and may not cumulate votes in the election of
directors.
The Articles of Incorporation authorize the issuance of up to 5 million
shares of voting preferred stock and up to 5 million shares of non-voting
preferred stock. As of June 30, 1997, there were no outstanding shares of either
class of preferred stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Under the Oregon Business Corporation Act, a corporation's Articles of
Incorporation may provide for limitation of liability of directors and
indemnification of directors and officers under certain circumstances. In
accordance with Oregon law, VRB's Articles of Incorporation provide that
directors are not personally liable to the corporation or its shareholders for
monetary damages for conduct as a director, except for (i) any breach of a
director's duty of loyalty to the corporation, (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of the
law, (iii) any distribution to shareholders which is unlawful, or (iv) any
transaction from which the director received an improper personal benefit.
The Articles of Incorporation also provide for indemnification of any
person who is or was a party, or is threatened to be made a party, to any civil,
administrative or criminal proceeding by reason of the fact that the person is
or was a director or officer of the corporation or any of its subsidiaries, or
is or was serving at the request of the corporation as a director, officer,
partner, agent or employee of another corporation or entity, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement,
actually and reasonably incurred by that person if (i) the person acted in good
faith and in a manner reasonably believed to not be opposed to the best
interests of the corporation, or (ii) the act or omission giving rise to such
action or proceeding is ratified, adopted or confirmed by the corporation, or
the benefit thereof was received by the corporation. Indemnification is
available under this provision of the Articles of Incorporation in the case of
derivative actions, unless the person is adjudged to be liable for gross
negligence or deliberate misconduct in the performance of the person's duty to
the corporation. To the extent a director, officer, employee or agent (including
an attorney) is successful on the merits or otherwise in defense of any action
to which this provision is applicable, the person is entitled to indemnification
for expenses actually and reasonably incurred by the person in connection with
that defense.
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ANTI-TAKEOVER PROVISIONS
VRB is subject to the Oregon Control Share Act (Oregon Revised Statutes
Sections 60.801-60.816)(the "Control Share Act"). The Control Share Act
generally provides that a person (the "Acquiring Person") who acquires voting
stock of an Oregon corporation in a transaction which results in such Acquiring
Person holding more than 20%, 33 1/3% or 50% of the total voting power of such
corporation (a "Control Share Acquisition") cannot vote the shares it acquires
in the Control Share Acquisition ("control shares") unless voting rights are
accorded to such control shares by the holders of a majority of the outstanding
voting shares, excluding the control shares held by the Acquiring Person and
shares held by VRB's officers and inside directors ("interested shares"), and by
the holders of a majority of the outstanding voting shares, including interested
shares. The foregoing vote would be required at the time an Acquiring Person's
holdings exceed 20% of the total voting power of a company, and again at the
time the Acquiring Person's holdings exceed 33 1/3% and 50%, respectively. The
term "Acquiring Person" is broadly defined to include persons acting as a group.
A transaction in which voting power is acquired solely by receipt of an
immediately revocable proxy does not constitute a Control Share Acquisition.
The Acquiring Person may, but is not required to, submit to VRB an
"Acquiring Person Statement" setting forth certain information about the
Acquiring Person and its plans with respect to VRB. The Acquiring Person
Statement may also request that VRB call a special meeting of shareholders to
determine whether the control shares will be allowed to retain voting rights. If
the Acquiring Person does not request a special meeting of shareholders, the
issue of voting rights of control shares will be considered at the next annual
meeting or special meeting of shareholders that is held more than 60 days after
the date of the Control Share Acquisition. If the Acquiring Person's control
shares are accorded voting rights and represent a majority or more of all voting
power, shareholders who do not vote in favor of the restoration of such voting
rights will have the right to receive the appraised "fair value" of their
shares, which may not be less than the highest price paid per share by the
Acquiring Person for the control shares.
VRB is also subject to the Oregon Business Combination Act (Oregon Revised
Statutes Sections 60.825-60.845)(the "Business Combination Act"). The Business
Combination Act generally provides that in the event a person or entity acquires
15% or more of the voting stock of an Oregon corporation (an "Interested
Shareholder"), the corporation and the Interested Shareholder, or any affiliated
entity, may not engage in certain business combination transactions for a period
of three years following the date the person became an Interested Shareholder.
Business combination transactions for this purpose include (a) a merger or plan
of share exchange, (b) any sale, lease, mortgage or other disposition of the
assets of the corporation where the assets have an aggregate market value equal
to 10% or more of the aggregate market value of the corporation's assets or
outstanding capital stock, and (c) certain transactions that result in the
issuance of capital stock of the corporation to the Interested Shareholder.
These restrictions do not apply if (i) the Interested Shareholder, as a result
of the transaction in which such person became an Interested Shareholder, owns
at least 85% of the outstanding voting stock of the corporation (disregarding
shares owned by directors who are also officers, and certain employee benefit
plans), (ii) the Board of Directors approves the share acquisition or business
combination before the Interested Shareholder acquired 15% or more of the
corporation's voting stock, or (iii) the Board of Directors and the holders of
at least two-thirds of the outstanding voting stock of the corporation
(disregarding shares owned by the Interested Shareholder) approve the
transaction after the Interested Shareholder acquires 15% or more of the
corporation's voting stock.
The Control Share Act and the Business Combination Act will have the effect
of encouraging any potential acquiror to negotiate with VRB's Board of Directors
and will also discourage certain potential acquirors unwilling to comply with
its provisions. A corporation may provide in its articles of incorporation or
bylaws that the laws described above do not apply to its shares. VRB has not
adopted such a provision and does not currently intend to do so. The law may
make VRB less attractive for takeover, and thus shareholders may not benefit
from a rise in the price of the Common Stock that a takeover could cause. The
limitations of the Acts are in addition to regulatory restrictions on
acquisitions of stock of banks and bank holding companies under the BHCA. See
"Supervision and Regulation -- Federal Bank Holding Company Regulation."
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<PAGE> 54
In addition to the statutory provisions discussed above, VRB's articles of
incorporation contain certain provisions that could make more difficult the
acquisition of VRB by means of a tender offer, proxy contest, merger or
otherwise. The articles of incorporation authorize the issuance of up to
5,000,000 shares of voting preferred stock, which, although intended primarily
as a financing tool and not as a defense against takeovers, could potentially be
used by Management to make more difficult uninvited attempts to acquire control
of VRB by, for example, diluting the ownership interest of a substantial
shareholder, increasing the consideration necessary to effect an acquisition, or
selling authorized but unissued shares to a friendly third party. In addition,
the articles of incorporation authorize the issuance of warrants, rights,
options or other obligations convertible into, or entitling the holder thereof,
to purchase shares of any class of stock, the issuance of which may also have
the effect of diluting the ownership interest of a shareholder or increasing the
consideration necessary to effect an acquisition of a controlling interest in
the Company.
Finally, the Company is subject to the reporting requirements of, and its
common stock is registered under, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Any person who acquires the VRB Common Stock, and
after giving effect to such acquisition, holds more than 5% of the outstanding
shares, is required to report such acquisition to the Securities and Exchange
Commission (the "Commission") under section 13 of the Securities Exchange Act.
Thus, a person contemplating acquiring control will be obligated to make public
such person's intentions, even prior to being required to report such
transactions to the Federal Reserve under the BHCA. See "Supervision and
Regulation."
TRANSFER AGENT
The transfer agent and registrar of the Common Stock is Valley of the Rogue
Bank.
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UNDERWRITING
The underwriters named below (the "Underwriters"), for which Black &
Company, Inc. is acting as representative (the "Representative"), have severally
agreed, subject to the terms and conditions set forth in the Underwriting
Agreement, to purchase from VRB the number of shares of Common Stock indicated
below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------ ---------
<S> <C>
Black & Company, Inc..............................................
---------
Total................................................... 1,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the shares of Common Stock listed above are subject to
the approval of certain legal matters by counsel and various other conditions.
The Underwriting Agreement also provides that the Underwriters are committed to
purchase all of the shares of Common Stock offered hereby, if any are purchased
(except for any shares that may be purchased through exercise of the
Underwriters' over-allotment option which may be exercised by the Underwriters
in whole or in part).
The Representative has advised VRB that the Underwriters propose to offer
the shares of Common Stock to the public at the public offering price set forth
on the cover of this Prospectus and to certain dealers at such price less a
concession not in excess of $ per share. After the Offering, the public
offering price and other selling terms may be changed by the Representatives.
The Common Stock is offered subject to receipt and acceptance by the
Underwriters, and to certain other conditions, including the right to reject
orders in whole or in part.
Prior to this Offering, there has been only a limited public market for the
Common Stock. Accordingly, the public offering price has been determined by
negotiation between VRB and the Representative. Among the factors considered in
determining the public offering price will be the recent bid prices quoted by
market makers in the Common Stock, VRB's present and historical results of
operations, VRB's current financial condition, estimates of the business
potential and prospects of VRB, economic conditions in VRB's market area, the
experience of VRB's management, the economics of the industry in general, the
general condition of the equity markets at the time of the Offering and other
relevant factors. There can be no assurance that an active trading market will
develop for the Common Stock, that purchasers in the Offering will be able to
sell their shares at or above the Offering price, or as to the price at which
the Common Stock may trade in the public market from time to time subsequent to
the Offering.
VRB has granted the Underwriters an option, exercisable during the 30-day
period after the date of this Prospectus, to purchase up to 150,000 additional
shares of Common Stock at the public offering price set forth on the cover page
of this Prospectus, less underwriting discounts and commissions. To the extent
the Underwriters exercise the option, each Underwriter will have a firm
commitment, subject to certain conditions, to purchase such number of additional
shares of Common Stock as is proportionate to such Underwriter's initial
commitment to purchase shares from VRB. The Underwriters may exercise such
option solely to cover over-allotments, if any, incurred in connection with the
sale of shares of Common Stock offered hereby.
The Underwriting Agreement provides that VRB has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"), or to contribute to
payments that the Underwriters may be required to make in respect thereof.
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<PAGE> 56
All of VRB's executive officers and directors have agreed that, for a
period of 180 days after the day on which the Registration Statement becomes
effective by order of the Commission, they will not, without the prior written
consent of Black & Company, Inc. directly or indirectly, offer for sale, sell,
contract to sell, or grant any option to sell (including, without limitation,
any short sale), pledge, establish an open "put-equivalent position" within the
meaning of Rule 16a-1(h) under the Exchange Act, transfer, assign or otherwise
dispose of any shares of VRB's Common Stock or securities exchangeable for or
convertible into shares of VRB's Common Stock, or any option, warrant or other
right to acquire such shares, or publicly announce the intention to do any of
the foregoing.
During and after the offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock; and syndicate share positions involve
the sale of the Underwriters of a greater number of shares of Common Stock than
they are required to purchase from VRB in the offering. The Underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the Common Stock sold in the
offering for their account may be reclaimed by the syndicate if such securities
are repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock which may be higher than the price that might otherwise prevail in
the open market, and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
The Representative has advised VRB that the Underwriters do not intend to
confirm sales of Common Stock offered by this Prospectus to any accounts over
which they exercise discretionary authority.
VRB has applied for inclusion of the Common Stock in the Nasdaq National
Market under the symbol "VRBA."
The foregoing is a brief summary of the provisions of the Underwriting
Agreement and does not purport to be a complete statement of its terms and
conditions. A copy of the form of Underwriting Agreement has been filed as an
exhibit to the Registration Statement.
EXPERTS
The consolidated financial statements of VRB as of December 31, 1996, 1995
and 1994, and for each of the years then ended, and the financial statements of
Colonial Banking Company as of December 31, 1996 and 1995, and for each of the
years then ended, included in this Prospectus and in the Registration Statement
have been included in reliance upon the reports of Moss Adams LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of VRB's Common Stock being offered hereby will be passed upon
for VRB by Foster Pepper & Shefelman PLLC, Portland, Oregon. Certain legal
matters will be passed upon for the Underwriters by Tonkon, Torp, Galen,
Marmaduke & Booth, Portland, Oregon.
55
<PAGE> 57
AVAILABLE INFORMATION
VRB is subject to the informational requirements of the Exchange Act, and
in accordance therewith files reports and other information with the Commission.
VRB has filed a registration statement on Form S-1 (the "Registration
Statement") with the Commission under the Securities Act with respect to the
Common Stock being offered hereby. This Prospectus is part of the Registration
Statement. As permitted by the rules and regulations of the Commission, this
Prospectus does not contain all of the information set forth in the Registration
Statement. For further information with respect to VRB and the Common Stock
offered hereby, reference is made to the Registration Statement, as well as
reports and proxy statements filed under the Exchange Act, and other information
filed by VRB with the Commission. A copy of the Registration Statement may be
examined without charge at the Commission's principal offices at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part thereof may be obtained from
the Public Reference Section of the Commission upon payment of certain fees
prescribed by the Commission. Copies of such materials may also be obtained from
the website that the Commission maintains at http://www.sec.gov. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete and, in such instance, reference is made
to the copy of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
56
<PAGE> 58
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
VRB BANCORP
Independent Auditor's Report.......................................................... F-2
Consolidated Financial Statements
Balance sheets...................................................................... F-3
Statements of income................................................................ F-4
Statements of changes in shareholders' equity....................................... F-5
Statements of cash flows............................................................ F-6
Notes to consolidated financial statements.......................................... F-7
COLONIAL BANKING COMPANY
Independent Auditor's Report.......................................................... F-23
Balance sheets...................................................................... F-24
Statements of income................................................................ F-25
Statements of changes in shareholders' equity....................................... F-26
Statements of cash flows............................................................ F-27
Notes to financial statements....................................................... F-28
</TABLE>
F-1
<PAGE> 59
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, 1995 and 1996, and the related statements of income, changes in
shareholders' equity, and cash flows for each of the years ended December 31,
1994, 1995, and 1996. 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, 1995 and 1996, and the results of its operations and cash flows for
each of the years ended December 31, 1994, 1995, and 1996, in conformity with
generally accepted accounting principles.
MOSS ADAMS LLP
Portland, Oregon
January 7, 1997, except for Note 19,
as to which the date is September 25, 1997
F-2
<PAGE> 60
VRB BANCORP
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------- -----------
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks................................. $ 13,600 $ 17,917 $ 11,527
Federal funds sold...................................... 4,500 11,300 12,400
-------- -------- --------
Total cash and cash equivalents................. 18,100 29,217 23,927
-------- -------- --------
Investment securities available-for-sale.................. 21,237 21,649 21,341
Investment securities held-to-maturity (estimated fair
value of $16,080, $18,820, and $18,668 in 1995, 1996,
and 1997, respectively)................................. 15,844 18,636 18,468
Federal Home Loan Bank stock.............................. 1,036 1,120 1,161
Loans, net of allowance for loan losses and unearned
income.................................................. 88,972 99,776 107,929
Premises and equipment, net............................... 3,882 4,093 4,511
Accrued interest and other assets......................... 2,414 2,616 2,243
-------- -------- --------
Total assets.................................... $151,485 $177,107 $ 179,580
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand deposits...................................... $ 38,098 $ 41,746 $ 46,449
Interest bearing demand deposits..................... 53,308 69,082 69,637
Savings deposits..................................... 17,508 15,448 14,354
Time deposits........................................ 23,830 29,293 26,008
-------- -------- --------
Total deposits.................................. 132,744 155,569 156,448
Accrued interest and other liabilities.................. 1,271 1,350 1,252
-------- -------- --------
Total liabilities............................... 134,015 156,919 157,700
-------- -------- --------
COMMITMENTS AND CONTINGENCIES
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 2,333,019, 3,574,682, and 7,166,130, issued and
outstanding in 1995, 1996, and 1997, respectively.... 9,085 9,480 9,516
Retained earnings....................................... 8,355 10,652 12,429
Unrealized gain (loss) on available-for-sale securities,
net of taxes......................................... 30 56 (65)
-------- -------- --------
Total shareholders' equity...................... 17,470 20,188 21,880
-------- -------- --------
Total liabilities and shareholders'............. $151,485 $177,107 $ 179,580
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 61
VRB BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, ---------------------------
------------------------------------- JUNE 30, JUNE 30,
1994 1995 1996 ----------- -----------
--------- --------- --------- 1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans............. $ 8,364 $ 9,893 $10,122 $ 4,874 $ 5,521
Interest on investment securities:
Nontaxable interest on investment
securities......................... 1,213 1,256 1,711 660 748
Taxable interest on investment
securities......................... 566 618 964 464 471
Interest on federal funds sold......... 408 206 390 299 413
------- ------- ------- ------ ------
Total interest income........... 10,551 11,973 13,187 6,297 7,153
------- ------- ------- ------ ------
INTEREST EXPENSE
Interest-bearing demand deposits....... 1,001 1,519 1,990 954 1,104
Savings deposits....................... 564 463 376 192 167
Time deposits.......................... 631 938 1,260 631 638
Federal Home Loan Bank borrowings...... -- 69 -- -- --
------- ------- ------- ------ ------
Total interest expense.......... 2,196 2,989 3,626 1,777 1,909
------- ------- ------- ------ ------
Net interest income............. 8,355 8,984 9,561 4,520 5,244
------- ------- ------- ------ ------
PROVISION FOR LOAN LOSSES................ -- -- 250 -- --
------- ------- ------- ------ ------
Net interest income after
provision for loan losses..... 8,355 8,984 9,311 4,520 5,244
------- ------- ------- ------ ------
NONINTEREST INCOME
Service charges on deposit accounts.... 1,032 1,007 979 489 522
Other service charges and fees......... 480 374 392 209 207
------- ------- ------- ------ ------
Total noninterest income........ 1,512 1,381 1,371 698 729
------- ------- ------- ------ ------
NONINTEREST EXPENSES
Salaries and employee benefits......... 3,636 3,841 3,693 1,802 2,032
Net occupancy.......................... 686 608 630 319 363
Advertising and communications......... 190 204 226 113 115
Data processing........................ 91 97 148 72 88
Deposit insurance premiums and
assessments.......................... 282 143 2 1 9
Supplies............................... 146 159 171 83 105
Professional fees...................... 153 180 144 76 77
Other real estate expense.............. 9 -- -- -- 1
Other expenses......................... 829 830 815 413 490
------- ------- ------- ------ ------
Total noninterest expenses...... 6,022 6,062 5,829 2,879 3,280
------- ------- ------- ------ ------
INCOME BEFORE INCOME TAXES............... 3,845 4,303 4,853 2,339 2,693
PROVISION FOR INCOME TAXES............... 1,335 1,395 1,602 772 916
------- ------- ------- ------ ------
NET INCOME............................... $ 2,510 $ 2,908 $ 3,251 $ 1,567 $ 1,777
======= ======= ======= ====== ======
NET INCOME PER COMMON SHARE.............. $ 0.36 $ 0.41 $ 0.46 $ 0.22 $ 0.25
======= ======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 62
VRB BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET
UNREALIZED
COMMON STOCK (LOSS) GAIN ON TOTAL
---------------- RETAINED AVAILABLE-FOR- SHAREHOLDERS'
SHARES AMOUNT EARNINGS SALE SECURITIES EQUITY
------ ------ -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993................. 1,427 $6,874 $ 6,100 $ -- $ 12,974
Stock options exercised.................... 8 56 -- -- 56
3 for 2 stock split........................ 715 -- -- -- --
Payments for fractional shares related to 3
for 2 stock split........................ -- -- (2) -- (2)
Cash dividends ($.22 per share)............ -- -- (473) -- (473)
4% stock dividend.......................... 86 986 (986) -- --
Payments for fractional shares related to
stock dividend........................... -- -- (3) -- (3)
Changes in unrealized loss on
available-for-sale securities, net of
taxes.................................... -- -- -- (62) (62)
Net income................................. -- -- 2,510 -- 2,510
------ ------ ------ ---- -------
BALANCE, December 31, 1994................. 2,236 7,916 7,146 (62) 15,000
Stock options exercised.................... 8 32 -- -- 32
Cash dividends ($.25 per share)............ -- -- (559) -- (559)
4% stock dividend.......................... 89 1,137 (1,137) -- --
Payments for fractional shares related to
stock dividend ($12.75 per share)........ -- -- (3) -- (3)
Changes in net unrealized gain on
available-for-sale securities, net of
taxes.................................... -- -- -- 92 92
Net income................................. -- -- 2,908 -- 2,908
------ ------ ------ ---- -------
BALANCE, December 31, 1995................. 2,333 9,085 8,355 30 17,470
Stock options exercised.................... 50 304 -- -- 304
Income tax benefit from exercise of stock
options.................................. -- 91 -- -- 91
Cash dividend ($.40 per share)............. -- -- (953) -- (953)
3 for 2 stock split........................ 1,192 -- -- -- --
Payments for fractional shares related to
stock split.............................. -- -- (1) -- (1)
Change in net unrealized gain on
available-for-sale securities, net of
taxes.................................... -- -- -- 26 26
Net income................................. -- -- 3,251 -- 3,251
------ ------ ------ ---- -------
BALANCE, December 31, 1996................. 3,575 9,480 10,652 56 20,188
Stock options exercised.................... 8 36 -- -- 36
2 for 1 stock split........................ 3,583 -- -- -- --
Changes in net unrealized loss on
available-for-sale securities, net of
tax...................................... -- -- -- (121) (121)
Net income................................. -- -- 1,777 -- 1,777
------ ------ ------ ---- -------
BALANCE, June 30, 1997 (Unaudited)......... 7,166 $9,516 $ 12,429 $ (65) $ 21,880
------ ------ ------ ---- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 63
VRB BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEARS ENDED DECEMBER 31, -------------------------
----------------------------- JUNE 30, JUNE 30,
1994 1995 1996 1996 1997
-------- ------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS RELATING TO OPERATING ACTIVITIES
Net income....................................... $ 2,510 $ 2,908 $ 3,251 $ 1,567 $ 1,777
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 505 430 433 227 244
Provision for loan losses...................... -- -- 250 -- --
Loss (gain) on sales of assets................. (10) -- 1 -- (7)
Write-down on other real estate owned.......... 9 -- -- -- --
FHLB stock dividend............................ (10) (55) (83) (40) (41)
Deferred taxes................................. 104 13 6 -- --
Change in cash due to changes in certain assets
and liabilities:
Increase in accrued interest and other
assets....................................... (5) (90) (227) 110 321
Decrease in accrued interest and other
liabilities.................................. 65 192 126 (324) (97)
-------- -------- ------- -------- --------
Net cash provided by operating
activities.............................. 3,168 3,398 3,757 1,540 2,197
-------- -------- ------- -------- --------
CASH FLOWS RELATING TO INVESTING ACTIVITIES
Purchases of investment securities
held-to-maturity............................... (14,356) (3,686) (8,205) (4,705) --
Proceeds from maturities and calls of investment
securities held-to-maturity.................... 16,937 7,896 5,390 395 165
Proceeds from sales and maturities of
available-for-sale securities.................. 2,000 2,000 6,118 3,060 3,190
Purchases of investment securities
available-for-sale............................. (9,035) (6,491) (4,994) (3,000)
Purchases of Federal Home Loan Bank stock........ (427) (544) -- -- --
Net loan originations............................ (9,858) (531) (11,053) (4,616) (8,153)
Purchase of premises and equipment............... (96) (250) (513) (222) (604)
Sale of premises and equipment................... 4 4 -- -- --
Proceeds from sale of other real estate owned.... 146 -- -- -- --
-------- -------- ------- -------- --------
Net cash used in investing activities..... (5,650) (4,146) (14,754) (11,082) (8,402)
-------- -------- ------- -------- --------
CASH FLOWS RELATING TO FINANCING ACTIVITIES
Net increase (decrease) in deposits.............. (2,525) 7,272 22,824 7,892 879
Cash dividends and fractional share payments..... (477) (562) (954) -- --
Net proceeds from exercise of common stock
options........................................ 56 32 244 84 36
-------- -------- ------- -------- --------
Net cash provided by (used in)
financing activities.................... (2,946) 6,742 22,114 7,976 915
-------- -------- ------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... (5,428) 5,994 11,117 (1,566) (5,290)
CASH AND CASH EQUIVALENTS, beginning of year....... 17,534 12,106 18,100 18,100 29,217
-------- -------- ------- -------- --------
CASH AND CASH EQUIVALENTS, end of year............. $ 12,106 $18,100 $ 29,217 $ 16,534 $23,927
======== ======== ======= ======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest........................... $ 2,206 $ 2,919 $ 3,635 $ 1,805 $ 1,920
======== ======== ======= ======== ========
Cash paid for taxes.............................. $ 1,442 $ 1,456 $ 1,607 $ 568 $ 571
======== ======== ======= ======== ========
SCHEDULE OF NONCASH ACTIVITIES
Stock dividends declared......................... $ 986 $ 1,137 $ -- $ -- $ --
======== ======== ======= ======== ========
Unrealized gain (loss) on available-for-sale
securities, net of tax......................... $ (62) $ 91 $ 26 $ (465) $ (121)
======== ======== ======= ======== ========
Income tax benefit of stock options exercised.... $ -- $ -- $ 91 $ -- $ --
======== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 64
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, AND 1996
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS -- The accompanying consolidated financial
statements include the accounts of VRB Bancorp (VRB), a bank holding company,
and its wholly-owned subsidiary, Valley of the Rogue Bank (the Bank).
Substantially all activity of VRB Bancorp is conducted through its subsidiary
bank and all significant intercompany accounts and transactions have been
eliminated in the preparation of the consolidated financial statements.
The Bank is a state-chartered institution authorized to provide banking
services by the State of Oregon. With its headquarters in Rogue River, Oregon,
it also has branch operations in Josephine and Jackson County, Oregon. The Bank
conducts a general banking business. Its activities include the usual deposit
functions of a commercial bank: commercial, real estate, installment and
mortgage loans; checking and savings accounts; automated teller machines
(ATM's); collection services; and safe deposit facilities. Both VRB Bancorp and
Valley of the Rogue Bank are subject to the regulations of certain Federal and
State agencies and undergo periodic examinations by those regulatory
authorities.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS -- In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of 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,
1995 and 1996, are either "available-for-sale" or "held-to-maturity" and conform
to the following accounting policies:
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.
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.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary,
result in write-downs of the individual securities to their fair value. The
related write-downs would be included in earnings as realized losses. Premiums
and discounts are recognized in interest income using the interest method over
the period to maturity.
LOANS, NET OF ALLOWANCE FOR LOAN LOSSES AND UNEARNED INCOME -- Loans are
stated at the amount of unpaid principal, reduced by an allowance for loan
losses and unearned income. Interest on loans is calculated by using the
simple-interest method on daily balances of the principal amount outstanding.
The allowance for loan losses is established through a provision for loan losses
charged to expenses. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal is unlikely.
The
F-7
<PAGE> 65
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrower's
ability to pay. Various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's reserve for loan losses.
Such agencies may require the Bank to recognize additions to the reserve based
on their judgment of information available to them at the time of their
examinations.
Impaired loans are carried at the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's market price
or the fair value of the collateral if the loan is collateral dependent. Accrual
of interest is discontinued on impaired loans when management believes, after
considering economic and business conditions, collection efforts, and collateral
position, that the borrower's financial condition is such that collection of
interest is doubtful. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment to the yield of the related loan.
PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the assets. Depreciation
is based on useful lives of 3 to 25 years for furniture and equipment; 15 to 40
years for buildings and components; and, 15 to 20 years for leasehold
improvements.
OTHER REAL ESTATE -- Other real estate, acquired through foreclosure or
deeds in lieu of foreclosure, is carried at the lower of cost or estimated net
realizable value. When property is acquired, any excess of the loan balance over
its estimated net realizable value is charged to the reserve for loan losses.
Subsequent write-downs to net realizable value, if any, or any disposition gains
or losses are included in noninterest income and expense. The Bank had no other
real estate at December 31, 1995 and 1996.
INTANGIBLE ASSETS -- Intangible assets consist of purchased goodwill of
$898,025 and $819,385 at December 31, 1995 and 1996, respectively, which are
from the previous acquisition of financial institutions. These assets are being
amortized over periods which do not exceed 15 years. Amortization expense was
$78,640 for each of the years ended December 31, 1994, 1995 and 1996.
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 (FASB) 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
F-8
<PAGE> 66
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial instruments disclose quantitative and qualitative information about
the instruments. As of December 31, 1995 and 1996, 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), 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.
ADVERTISING -- Advertising costs are charged to expense during the year in
which they are incurred.
STOCK OPTIONS -- In October 1995 the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
This new standard defines a fair-value based method of accounting for an
employee stock option or similar equity instrument.
This statement gives entities a choice of recognizing related compensation
expense by adopting the new fair value method or by continuing 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
F-9
<PAGE> 67
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
effect on the Bank's financial position or results of operations.
UNAUDITED INTERIM FINANCIAL DATA -- The interim financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management all adjustments,
including normal recurring accruals necessary for fair presentation of results
of operations for the interim periods included herein, have been made. The
results of operations for the six months ended June 30, 1997, are not
necessarily indicative of results to be anticipated for the year ending December
31, 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 1996, the FASB issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" which the Bank is required to adopt for the year
ended December 31, 1997. SFAS No. 125 requires that the Bank recognize the
financial and servicing assets it controls and the liabilities it has incurred,
derecognize financial assets when control has been surrendered, and derecognize
liabilities when extinguished. The Bank's management has determined that the
adoption of this statement will not have a material impact on its consolidated
financial statements.
In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share" which
the Bank is required to adopt for both interim and annual periods ending after
December 15, 1997. This statement specifies the computation, presentation, and
disclosure requirements of earnings per share. Management has determined that
the effect of the adoption of this statement on the consolidated earnings per
share calculation for the Bank, will not be material.
In February 1997, the FASB issued SFAS No. 129 "Disclosure of Information
about Capital Structure" which requires that the Bank describe, in the financial
statements, the pertinent rights and privileges of the various securities
outstanding. This will become effective for the year ended December 31, 1998,
and will have no significant impact on disclosures to the consolidated financial
statements.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
which the Bank is required to adopt for years beginning after December 15, 1997.
This statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general purpose financial statements. When adopted, the unrealized gain or
loss on available-for-sale securities will be recognized as a component of
comprehensive income.
Other issued but not yet required FASB statements are not currently
applicable to the Bank's operations.
RECLASSIFICATIONS -- Certain reclassifications have been made to the 1994
and 1995 consolidated financial statements to conform with current year
presentations.
F-10
<PAGE> 68
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities at
December 31, 1995 and 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Available-for-sale securities:
U.S. Treasuries and agencies................. $19,496 $ 87 $(28) $19,555
Corporate and other securities............... 1,697 -- (15) 1,682
------- ---- ---- -------
$21,193 $ 87 $(43) $21,237
======= ==== ==== =======
Held-to-maturity securities:
Obligations of state and political
subdivisions.............................. $15,844 $262 $(26) $16,080
======= ==== ==== =======
DECEMBER 31, 1996
Available-for-sale securities:
U.S. Treasuries and agencies................. $19,995 $167 $(69) $20,093
Corporate and other securities............... 1,569 -- (13) 1,556
------- ---- ---- -------
$21,564 $167 $(82) $21,649
======= ==== ==== =======
Held-to-maturity securities:
Obligations of state and political
subdivisions.............................. $18,636 $227 $(43) $18,820
======= ==== ==== =======
</TABLE>
The amortized cost and estimated fair value of investment securities at
December 31, 1996, by contractual maturity, are shown below (in thousands).
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
SECURITIES SECURITIES
--------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------- --------- -------
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
Proceeds from maturities and calls of held-to-maturity investment
securities during 1995 and 1996, were $7,896,000 and $5,390,000, respectively.
Proceeds from the sales and maturities of available-for-sale securities were
$2,000,000 and $6,118,000 in 1995 and 1996, 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 $16,238,000 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 $133,000 at
the time of transfer.
F-11
<PAGE> 69
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995 and 1996, investment securities with an amortized cost
of $4,174,000 and $5,189,000, 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 ALLOWANCE FOR LOAN LOSSES
The composition of loans at December 31, 1995 and 1996, was as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
------- --------
<S> <C> <C>
Real estate:
Construction.................................................. $ 8,225 $ 9,112
Mortgage...................................................... 59,804 66,209
Installment..................................................... 12,806 12,808
Commercial...................................................... 9,440 13,181
Other loans..................................................... 104 98
------- --------
90,379 101,408
Less allowance for loan losses.................................. (1,407) (1,632)
------- --------
$88,972 $ 99,776
======= ========
</TABLE>
The following is an analysis of the changes in the allowance for possible
loan losses (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Balance, beginning of year............................... $1,453 $1,414 $1,407
Provision for loan losses................................ -- -- 250
Loans charged-off........................................ (90) (45) (38)
Recoveries of loans previously charged-off............... 51 38 13
------ ------ ------
Balance, end of year..................................... $1,414 $1,407 $1,632
====== ====== ======
</TABLE>
Impaired loans of $52,000 and $58,000 at December 31, 1995 and 1996,
respectively, have 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, 1995 and 1996. No interest income was accrued on the
impaired loans or included in the results of operations for the years ended
December 31, 1994, 1995, and 1996. Management estimates that in 1994,
approximately $542 of interest income was not recognized on impaired loans
carried on nonaccrual status, compared with approximately $3,000 in 1995 and
$4,000 in 1996.
F-12
<PAGE> 70
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- BANK PREMISES AND EQUIPMENT
Bank premises, furniture, and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Land..................................................... $ 1,323 $ 1,323
Buildings................................................ 2,942 3,147
Furniture and equipment.................................. 2,300 2,544
------- -------
6,565 7,014
Less accumulated depreciation............................ (2,683) (2,921)
------- -------
$ 3,882 $ 4,093
======= =======
</TABLE>
NOTE 5 -- OTHER ASSETS
Other assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------ ------
<S> <C> <C>
Accrued interest receivable................................ $ 937 $1,162
Prepaid expenses........................................... 162 136
Deferred taxes............................................. 132 126
Intangible and other assets................................ 1,183 1,192
------ ------
$2,414 $2,616
====== ======
</TABLE>
NOTE 6 -- TIME DEPOSITS
Time certificates of deposit in excess of $100,000 aggregated approximately
$2,882,000 and $8,151,000 at December 31, 1995 and 1996, respectively.
At December 31, 1996, the scheduled maturities for time deposits is as
follows (in thousands):
<TABLE>
<S> <C>
1997............................................. $25,498
1998............................................. 2,135
2009............................................. 1,064
2000............................................. 469
2001 and thereafter.............................. 127
-------
$29,293
=======
</TABLE>
NOTE 7 -- INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Current.......................................... $1,231 $1,382 $1,596
Deferred......................................... 104 13 6
------ ------ ------
Provision for income taxes....................... $1,335 $1,395 $1,602
====== ====== ======
</TABLE>
F-13
<PAGE> 71
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1994 1995 1996
---- ---- -----
<S> <C> <C> <C>
Accounting loan loss provision in excess of tax
provision ..................................... $ 43 $ -- $(100)
Accounting depreciation less than (in excess of)
tax depreciation............................... (4) (6) 19
Deferred compensation............................ (16) (14) (8)
Accounting loan fees in excess of tax loan
fees........................................... 86 17 56
Federal Home Loan Bank stock dividends........... -- 19 24
Other differences................................ (5) (3) 15
---- ---- -----
$104 $ 13 $ 6
==== ==== =====
</TABLE>
The net deferred tax benefits included in other assets in the accompanying
consolidated balance sheets include the following components (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
----- -----
<S> <C> <C>
Deferred tax assets:
Loan loss reserve......................................... $ 234 $ 334
Deferred compensation..................................... 74 82
Other..................................................... 29 14
----- -----
337 430
----- -----
Deferred tax liabilities:
Accumulated depreciation.................................. (78) (97)
Deferred loan fees........................................ (103) (159)
Federal Home Loan Bank stock dividends.................... (24) (48)
----- -----
(205) (304)
----- -----
Net deferred tax asset...................................... $ 132 $ 126
===== =====
</TABLE>
The exercise of stock options which have been granted under VRB Bancorp's
stock option plans give rise to compensation which is includable in the taxable
income of the 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. The compensation deductions arising from the
exercise of stock options were not material in 1994 and 1995. In the year ended
December 31, 1996, such deductions resulted in federal and state tax deductions
increasing common stock.
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%.
F-14
<PAGE> 72
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the statutory federal income tax rate and the
effective tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Federal income taxes at statutory rate........... $1,307 $1,463 $1,650
State income tax expense, net of federal income
tax benefit.................................... 167 94 211
Effect of nontaxable interest income............. (179) (191) (298)
Other............................................ 40 29 39
------ ------ ------
$1,335 $1,395 $1,602
====== ====== ======
Effective tax rate............................... 35% 32% 33%
====== ====== ======
</TABLE>
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 commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank's experience has been that a majority of loan
commitments are drawn upon by customers. While most commercial letters of credit
are not utilized, a significant portion of such utilization is on an immediate
payment basis. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if it is deemed necessary
by the Bank upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held varies but may include cash, accounts
receivable, inventory, premises and equipment, and income-producing commercial
properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third-party. These guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank holds cash, marketable securities, or real estate as collateral
supporting those commitments for which collateral is deemed necessary.
The Bank has not been required to perform on any financial guarantees
during the past two years. The Bank did not incur any losses on its commitments
during 1994, 1995, or 1996.
F-15
<PAGE> 73
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the notional amounts of the Bank's financial instruments with
off-balance-sheet risk at December 31, 1996, follows (in thousands):
<TABLE>
<S> <C>
Commitments to extend credit....................................... $16,014
Commercial and standby letters of credit........................... 479
-------
$16,493
=======
</TABLE>
NOTE 9 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table estimates the fair values and the related carrying
values of the Bank's financial instruments (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks............... $ 13,599 $ 13,599 $ 17,917 $ 17,917
Federal funds sold.................... $ 4,500 $ 4,500 $ 11,300 $ 11,300
Investment securities
available-for-sale................. $ 21,237 $ 21,237 $ 21,649 $ 21,649
Investment securities
held-to-maturity................... $ 15,843 $ 16,080 $ 18,636 $ 18,820
Federal Home Loan Bank stock.......... $ 1,036 $ 1,036 $ 1,120 $ 1,120
Loans, net of allowance for loan
losses............................. $ 88,972 $ 87,444 $ 99,776 $ 99,544
Financial liabilities:
Demand and savings deposits........... $108,914 $108,914 $126,276 $126,276
Time deposits......................... $ 23,830 $ 23,090 $ 29,292 $ 29,373
</TABLE>
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, 1995 and 1996, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances. The estimated fair values at December
31, 1995 and 1996, should not necessarily be considered to apply at subsequent
dates.
In addition, other assets and liabilities of the Bank that are not defined
as financial instruments, such as premises and equipment, are not included in
the above disclosures. Also, nonfinancial instruments typically not recognized
in the financial statements nevertheless may have value but are not included in
the above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the earnings potential of loan servicing rights,
the trained work force, customer goodwill, and similar items.
NOTE 10 -- CONCENTRATIONS OF CREDIT RISK
All of the Bank's loans, commitments, and commercial and standby letters of
credit have been granted to customers in the Bank's market area. Investments in
state and municipal securities 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.
F-16
<PAGE> 74
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- 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 12 -- 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 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
------------------------------------------------------
<S> <C>
1997................................................ $ 90
1998................................................ 90
2009................................................ 78
2000................................................ 14
----
Total minimum payments required............. $272
====
</TABLE>
Rental expense for all operating leases was approximately $79,000, $92,000,
and $94,000 in 1994, 1995, and 1996, respectively.
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 unissued common stock to
be granted to key employees and nonemployee directors. The 1994 amendment
removed the requirement for a five-year vesting schedule for any future grants
from the Employees' Plan, thus leaving the setting of any vesting schedule to
the discretion of the Board of Directors. The Directors' Plan was amended to
extend the time in which options may be exercised following resignation or
retirement.
With the exception of certain options granted to nonemployee directors, all
options granted and outstanding under both the Directors' and Employees' Plans
are noncompensatory and exercisable at purchase prices which approximate fair
value on the date of grant. Because certain options granted to the Bank's
directors were based on purchase prices below the fair value of the stock as of
the grant date, they are considered compensatory transactions and give rise to
the recognition of compensation expense. Accordingly, the Bank has recognized
$20,000, $39,000, and $45,000 as compensation expense relating to 5,000, 7,000,
and 7,000 shares of common stock optioned to its directors during 1994, 1995,
and 1996, respectively.
F-17
<PAGE> 75
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (in thousands with the exception of the exercise
price):
<TABLE>
<CAPTION>
COMBINED
DIRECTORS' PLAN EMPLOYEES' PLAN PLANS
------------------- ------------------- --------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES
------ -------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
Options outstanding at December 31, 1993... 36 $ 1.22 174 $ 1.13 210
Options granted in 1994.................... 16 $ 1.65 52 $ 1.83 68
Options exercised in 1994.................. (18) $ 1.22 (4) $ 1.13 (22)
Options forfeited.......................... 0 $ (6) $ (6)
--- ---- --- ---- ---
Options outstanding at December 31, 1994... 34 $ 1.44 216 $ 1.48 250
=== ==== === ==== ===
Options exercisable at December 31, 1994... 34 $ 1.37 76 $ 1.13 110
=== ==== === ==== ===
Options reserved at December 31, 1994...... 202 224 426
=== === ===
Options outstanding at December 31, 1994... 34 $ 1.65 216 $ 1.83 250
Options granted in 1995.................... 22 $ 2.24 66 $ 2.97 88
Options exercised in 1995.................. 0 $ 0 (24) $ 1.30 (24)
Options forfeited.......................... 0 $ 0 (18) $ 2.60 (18)
--- ---- --- ---- ---
Options outstanding at December 31, 1995... 56 $ 1.80 240 $ 2.08 296
=== === ===
Options exercisable at December 31, 1995... 56 $ 1.80 120 $ 1.52 176
=== ==== === ==== ===
Options reserved at December 31, 1995...... 180 176 356
=== === ===
Options outstanding at December 31, 1995... 56 $ 1.80 240 $ 2.08 296
Options granted in 1996.................... 22 $ 2.50 0 $ 0 22
Options exercised in 1996.................. (42) $ 2.20 (108) $ 1.71 (150)
Options forfeited.......................... 0 $ 0 (14) $ 3.39 (14)
--- ---- --- ---- ---
Options outstanding at December 31, 1996... 36 $ 1.82 118 $ 2.90 154
=== ==== === ==== ===
Options exercisable at December 31, 1996... 36 $ 1.82 34 $ 1.69 70
=== ==== === ==== ===
Options reserved at December 31, 1996...... 158 190 348
=== === ===
</TABLE>
Had compensation cost for the Bank's 1995 and 1996 grants for stock-based
compensation plans been determined consistent with SFAS No. 123, the Bank's net
income, and net income per common share for December 31, 1995 and 1996, would
approximate the pro forma amounts below (in thousands except per share data):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net income............................................ $ 2,908 $ 2,880
Net income per common share........................... $ 0.41 $ 0.41
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net income............................................ $ 3,251 $ 3,227
Net income per common share........................... $ 0.46 $ 0.45
</TABLE>
F-18
<PAGE> 76
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option granted during 1995 and 1996, is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: (1) dividend yield of 5.72%, (2) expected volatility of
23%, (3) risk-free rate of 7.5%; and, (4) expected life of 10 years.
The effects of applying SFAS No. 123 in this proforma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
NOTE 14 -- EMPLOYEE BENEFIT PLANS
The Bank has a defined contribution profit sharing plan. All permanent
employees are eligible to participate once they meet the age and length of
employment requirements. Contributions are determined annually by the Board of
Directors and were $169,000, $172,000, and $162,000 in 1994, 1995, and 1996,
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 $154,000, $171,000, and $186,000
in 1994, 1995, and 1996, respectively.
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 nonexecutives is established and funded based on net
profits of the current and immediately proceeding year. An executives' bonus
program is similarly funded and based on current year profits with payments
measured on the basis of return on assets on after-tax income. For the years
ending December 31, 1994, 1995, and 1996, $453,000, $600,000, and $510,000,
respectively, was expensed to fund these programs with their related payroll and
benefit costs.
The Bank has also established supplemental retirement agreements with
certain of its executive officers. The agreements provide for established
post-retirement payments to covered executives for up to ten years after their
retirement. The supplemental programs are self-funded by the Bank through the
setting aside of funds into a bank-controlled deposit account. As of December
31, 1996, a liability for the supplemental retirement plans was recognized and
funded in the amount of $256,000. During 1994, 1995, and 1996, the Bank recorded
Plan expenses of $42,000, $42,000, and $28,000, 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, 1994, 1995, and 1996. 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 for primary net income per common share and the closing
market price of common stock for fully diluted net income per common share.
Weighted average common shares outstanding were 3,543,504, 3,544,982, and
3,539,422 for the years ended December 31, 1994, 1995 and 1996, respectively.
These shares do not reflect the two-for-one stock split described in Note 19.
There is no difference between primary and fully diluted net income per common
share calculations for the years ended December 31, 1994, 1995, and 1996.
NOTE 16 -- TRANSACTIONS WITH RELATED PARTIES
Certain directors, executive officers, and principal shareholders 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
F-19
<PAGE> 77
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amount of loans outstanding to directors, executive officers, principal
shareholders, and companies with which they are associated was as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------ ------
<S> <C> <C>
Beginning balance.......................................... $2,215 $1,622
Loans made................................................. 299 74
Loan repayments made....................................... (892) (249)
------ ------
Ending balance............................................. $1,622 $1,447
====== ======
</TABLE>
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 regulatory
examiners 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 below. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
following table (in thousands):
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------- ---------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1995
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%
AS OF DECEMBER 31, 1996
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%
</TABLE>
F-20
<PAGE> 78
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18 -- PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for VRB Bancorp (unconsolidated parent
company only) is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
ASSETS
Cash........................................................... $ 31 $ 123
Investment in subsidiary....................................... 17,359 19,992
Goodwill....................................................... 80 73
------- -------
$17,470 $20,188
======= =======
SHAREHOLDERS' EQUITY
Common stock................................................... $ 9,085 $ 9,480
Retained earnings.............................................. 8,355 10,652
Unrealized gain on available-for-sale securities, net of
taxes....................................................... 30 56
------- -------
$17,470 $20,188
======= =======
</TABLE>
F-21
<PAGE> 79
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
REVENUES
Equity in undistributed earnings of subsidiary
bank............................................. $ 2,092 $ 2,390 $ 2,456
Dividends received.................................. 425 525 845
EXPENSES
Goodwill and other administrative expenses.......... (7) (7) (50)
------- ------- -------
Net income....................................... $ 2,510 $ 2,908 $ 3,251
======= ======= =======
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net income.......................................... $ 2,510 $ 2,908 $ 3,251
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary
bank........................................... (2,092) (2,390) (2,456)
Amortization..................................... 7 7 7
------- ------- -------
Net cash provided by operating activities... 425 525 802
------- ------- -------
CASH FLOWS RELATED TO FINANCING ACTIVITIES
Cash dividends and fractional share payments........ (477) (562) (954)
Cash received from exercise of common stock
options.......................................... 56 32 244
------- ------- -------
Net cash used in financing activities....... (421) (530) (710)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... 4 (5) 92
CASH AND CASH EQUIVALENTS,
beginning of year................................... 32 36 31
------- ------- -------
CASH AND CASH EQUIVALENTS,
end of year......................................... $ 36 $ 31 $ 123
======= ======= =======
</TABLE>
NOTE 19 -- SUBSEQUENT EVENT (UNAUDITED)
Effective September 17, 1997, the Bank paid a 2 for 1 stock split for
shareholders on record as of September 10, 1997. Earnings per share amounts
contained herein reflect the effects of this transaction.
F-22
<PAGE> 80
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and shareholders of Colonial Banking Company
We have audited the accompanying balance sheets of Colonial Banking Company
as of December 31, 1995 and 1996, and the related statements of income, changes
in shareholders' equity, and cash flows for the years ended December 31, 1994,
1995, and 1996. These financial statements are the responsibility of Colonial
Banking Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Colonial Banking Company as
of December 31, 1995 and 1996, and the results of its operations and cash flows
for the years ended December 31, 1994, 1995, and 1996, in conformity with
generally accepted accounting principles.
As discussed in Note 2, the accompanying financial statements as of
December 31, 1995 and 1996, and for the years ended December 31, 1994, 1995, and
1996, have been restated to reflect prior period adjustments related to the
allowance for loan losses.
MOSS ADAMS LLP
Portland, Oregon
September 25, 1997
F-23
<PAGE> 81
COLONIAL BANKING COMPANY
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks.................................. $ 967 $ 1,873 $ 2,876
Federal funds sold....................................... 9,400 6,385 2,550
------- ------- --------
Total cash and cash equivalents.................. 10,367 8,258 5,426
------- ------- --------
Investment securities held-to-maturity (estimated fair
value of $15,587, $13,358, and $8,956 in 1995, 1996, and
1997, respectively)...................................... 15,685 13,348 8,909
Federal Home Loan Bank stock............................... 361 389 404
Loans, net of allowance for loan losses and unearned
income................................................... 54,608 73,207 90,176
Premises and equipment, net................................ 1,693 1,524 1,674
Accrued interest and other assets.......................... 920 1,164 1,346
------- ------- --------
73,267 89,632 102,509
------- ------- --------
Total assets..................................... $83,634 $97,890 $ 107,935
======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand deposits....................................... $ 6,862 $ 7,462 $ 9,399
Interest-bearing demand deposits...................... 18,664 22,569 24,703
Savings deposits...................................... 18,775 18,666 18,344
Time deposits......................................... 33,671 42,844 48,178
------- ------- --------
Total deposits................................... 77,972 91,541 100,624
Accrued interest and other liabilities................... 584 328 484
Long-term debt........................................... 293 271 260
------- ------- --------
Total liabilities................................ 78,849 92,140 101,368
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, nonvoting, $10.50 par value; 160,857
shares authorized, 143,008 shares issued and
outstanding........................................... 1,502 1,502 1,502
Common stock, $5.00 par value; 2,000,000 shares
authorized, 235,993 shares issued and outstanding..... 1,180 1,180 1,180
Surplus.................................................. 1,156 2,302 3,402
Undivided profits........................................ 947 766 483
------- ------- --------
Total shareholders' equity....................... 4,785 5,750 6,567
------- ------- --------
Total liabilities and shareholders' equity....... $83,634 $97,890 $ 107,935
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 82
COLONIAL BANKING COMPANY
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, ---------------------------
------------------------------------- JUNE 30, JUNE 30,
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.................. $ 3,317 $ 5,000 $ 6,061 $ 2,770 $ 4,086
Interest on investment securities:
Taxable interest on investment
securities.............................. 791 740 852 405 335
Nontaxable interest on investment
securities.............................. 36 50 43 19 16
Interest on federal funds sold.............. 95 296 680 363 192
Interest on deposits with banks............. 139 4 -- -- --
------ ------ ------ ------ ------
Total interest income................ 4,378 6,090 7,636 3,557 4,629
------ ------ ------ ------ ------
INTEREST EXPENSE
Interest-bearing demand deposits............ 446 461 516 246 313
Savings deposits............................ 513 437 333 171 150
Time deposits............................... 734 1,931 2,715 1,327 1,542
Federal Home Loan Bank borrowings........... 13 21 17 9 8
------ ------ ------ ------ ------
Total interest expense............... 1,706 2,850 3,581 1,753 2,013
------ ------ ------ ------ ------
Net interest income.................. 2,672 3,240 4,055 1,804 2,616
PROVISION FOR LOAN LOSSES..................... 505 234 428 214 268
------ ------ ------ ------ ------
Net interest income after provision
for loan losses.................... 2,167 3,006 3,627 1,590 2,348
------ ------ ------ ------ ------
NONINTEREST INCOME
Service charges on deposit accounts......... 319 374 386 190 184
Other service charges and fees.............. 212 241 286 155 155
Gains on sales of mortgage loans, net....... 156 77 100 66 37
------ ------ ------ ------ ------
Total noninterest income............. 687 692 772 411 376
------ ------ ------ ------ ------
NONINTEREST EXPENSE
Salaries and employee benefits.............. 1,181 1,202 1,443 691 796
Net occupancy............................... 433 458 509 256 254
Advertising and communications.............. 119 109 91 50 45
Deposit insurance premiums and
assessments............................... 84 78 40 11 19
Supplies.................................... 49 48 53 28 22
Professional fees........................... 15 24 35 11 17
Other expenses.............................. 479 470 486 247 254
------ ------ ------ ------ ------
Total noninterest expense............ 2,360 2,389 2,657 1,294 1,407
------ ------ ------ ------ ------
INCOME BEFORE TAXES........................... 494 1,309 1,742 707 1,317
PROVISION FOR INCOME TAXES.................... 224 449 649 295 437
------ ------ ------ ------ ------
NET INCOME.................................... $ 270 $ 860 $ 1,093 $ 412 $ 880
====== ====== ====== ====== ======
NET INCOME PER COMMON SHARE
Primary..................................... $ 0.82 $ 2.95 $ 3.87 $ 1.39 $ 3.27
====== ====== ====== ====== ======
Fully diluted............................... $ 0.82 $ 2.16 $ 2.73 $ 1.30 $ 2.20
====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 83
COLONIAL BANKING COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED COMMON
STOCK STOCK TOTAL
----------------- ----------------- UNDIVIDED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT SURPLUS PROFITS EQUITY
------ ------ ------ ------ ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993.... -- $ -- 276 $1,376 $ 725 $ 670 $2,771
Transfer to surplus........... -- -- -- -- 670 (670) --
Issuance of preferred stock,
net of issuance costs....... 143 1,500 -- -- (4) -- 1,496
Cash dividends paid on
preferred stock............. -- -- -- -- -- (55) (55)
Repurchase of common stock.... -- -- (40) (197) (236) (433)
Net income.................... -- -- -- -- -- 270 270
--- ------ --- ------ ------ ------- ------
BALANCE, December 31, 1994.... 143 1,500 236 1,179 1,155 215 4,049
Exercise of preferred stock
options..................... -- 2 -- -- -- -- 2
Exercise of common stock
options..................... -- -- -- 1 1 -- 2
Cash dividends paid on
preferred stock............. -- -- -- -- -- (128) (128)
Net income.................... -- -- -- -- -- 860 860
--- ------ --- ------ ------ ------- ------
BALANCE, December 31, 1995.... 143 1,502 236 1,180 1,156 947 4,785
Transfer to surplus........... -- -- -- -- 1,146 (1,146) --
Cash dividends paid on
preferred stock............. -- -- -- -- -- (128) (128)
Net income.................... -- -- -- -- -- 1,093 1,093
--- ------ --- ------ ------ ------- ------
BALANCE, December 31, 1996.... 143 1,502 236 1,180 2,302 766 5,750
Transfer to surplus........... -- -- -- -- 1,100 (1,100) --
Cash dividends paid on
preferred stock............. -- -- -- -- -- (63) (63)
Net income.................... -- -- -- -- -- 880 880
--- ------ --- ------ ------ ------- ------
BALANCE, June 30, 1997
(Unaudited)................. 143 $1,502 236 $1,180 $3,402 $ 483 $6,567
=== ====== === ====== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 84
COLONIAL BANKING COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- --------------------------
1994 1995 1996 1996 1997
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS RELATING TO OPERATING ACTIVITIES
Net income..................................... $ 270 $ 860 $ 1,093 $ 412 $ 880
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 164 203 213 111 96
Provision for loan losses.................... 505 234 428 214 268
Gains on sales of mortgage loans, net........ (156) (77) (100) (66) (37)
Deferred income taxes........................ (49) (117) (165) (107) (107)
Change in cash due to changes in certain
assets and liabilities:
Increase in accrued interest and other
assets.................................. (161) (97) (80) (66) (75)
Increase (decrease) in accrued interest
and
other liabilities....................... 301 180 (256) (143) 156
Originations of mortgage loans held for
sale.................................... (11,080) (5,994) (6,993) (4,704) (2,711)
Proceeds from sales of mortgage loans..... 11,568 6,110 6,993 4,770 2,748
------- ------- ------- ------- -------
Net cash provided by operating
activities............................ 1,362 1,302 1,133 421 1,218
------- ------- ------- ------- -------
CASH FLOWS RELATING TO INVESTING ACTIVITIES
Net (decrease) increase in interest-bearing
deposits with banks.......................... (494) 594 -- -- --
Purchases of investment securities
held-to-maturity............................. (9,737) (3,164) (7,674) (6,424) (2,018)
Proceeds from maturities and calls of
investment securities held-to-maturity....... 9,033 3,678 9,983 5,971 6,442
Net loan originations.......................... (13,499) (12,732) (18,925) 433 (17,238)
Purchases of premises and equipment............ (584) (452) (44) (32) (246)
------- ------- ------- ------- -------
Net cash used in investing activities... (15,281) (12,076) (16,660) (52) (13,060)
------- ------- ------- ------- -------
CASH FLOWS RELATING TO FINANCING ACTIVITIES
Net increase in deposits....................... 5,389 19,883 13,568 8,486 9,084
Net increase (decrease) in short-term
borrowings................................... 1,225 (1,225) -- -- --
Proceeds from issuance of preferred stock...... 1,496 102 -- -- --
Repayment of long-term debt.................... (15) (18) (22) (11) (11)
Repurchase of common stock..................... (433) -- -- -- --
Cash dividends paid on preferred stock......... (55) (128) (128) (64) (63)
Net proceeds from exercise of preferred
stock options................................ -- 2 -- -- --
Net proceeds from exercise of common
stock options................................ -- 2 -- -- --
------- ------- ------- ------- -------
Net cash provided by financing
activities............................ 7,607 18,618 13,418 8,411 9,010
------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... (6,310) 7,844 (2,109) 8,780 (2,832)
CASH AND CASH EQUIVALENTS, beginning of year..... 8,833 2,523 10,367 10,367 8,258
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of year........... $ 2,523 $10,367 $ 8,258 $19,147 $ 5,426
======= ======= ======= ======= =======
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest......................... $ 1,688 $ 2,690 $ 3,351 $ 1,722 $ 1,969
======= ======= ======= ======= =======
Cash paid for taxes............................ $ -- $ 534 $ 1,104 $ 498 $ 563
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 85
COLONIAL BANKING COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, AND 1996
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS -- Colonial Banking Company (the Bank) is a
majority owned subsidiary of Investors Banking Corporation (IBC). The Bank
conducts a general banking business. Its activities include the usual deposit
functions of a commercial bank: commercial, real estate, installment, credit
card and mortgage loans; checking and savings accounts; automated teller
machines (ATM's); collection services; and safe deposit facilities. The Bank
also originates and sells mortgage loans into the secondary market.
The Bank is a state-chartered institution authorized to provide banking
services by the State of Oregon. With its headquarters in Grants Pass, Oregon,
the Bank also has branch operations in Josephine and Jackson County, Oregon. The
Bank is subject to the regulations of certain Federal and State agencies and
undergoes periodic examinations by those regulatory authorities.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS -- In preparing its financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of 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,
1995 and 1996, are "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.
Declines in the fair value of individual held-to-maturity securities below
their cost that are other than temporary, result in write-downs of the
individual securities to their fair value. The related write-downs would be
included in earnings as realized losses. Premiums and discounts are recognized
in interest income using the interest method over the period to maturity.
LOANS, NET OF ALLOWANCE FOR LOAN LOSSES AND UNEARNED INCOME -- Loans are
stated at the amount of unpaid principal, reduced by an allowance for loan
losses and unearned income. Interest on loans is calculated by using the
simple-interest method on daily balances of the principal amount outstanding.
The allowance for loan losses is established through a provision for loan losses
charged to expenses. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrower's
ability to pay. Various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's reserve for loan losses.
Such agencies may require the Bank to recognize additions to the reserve based
on their judgment of information available to them at the time of their
examinations.
Impaired loans are carried at the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's market price
or the fair value of the collateral if the loan is collateral dependent. 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. When interest accrued is discontinued, all unpaid
F-28
<PAGE> 86
COLONIAL BANKING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
accrued interest is reversed. Interest income is subsequently recognized only to
the extent cash payments are received.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan.
MORTGAGE LOANS -- Mortgage loans held-for-sale are carried at the lower of
cost or estimated market value. Market value is determined on an aggregate loan
basis. At December 31, 1995 and 1996, mortgage loans held-for-sale were carried
at cost which approximated market.
PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization is
computed on straight-line and accelerated methods over the shorter of the
estimated useful lives of the assets or terms of the leases. Amortization of
leasehold improvements is included with depreciation expense in the accompanying
financial statements.
OTHER REAL ESTATE -- Other real estate, acquired through foreclosure or
deeds in lieu of foreclosure, is carried at the lower of cost or estimated net
realizable value. When the property is acquired, any excess of the loan balance
over the estimated net realizable value is charged to the reserve for loan
losses. Subsequent write-downs to net realizable value, if any, or any
disposition gains or losses are included in noninterest income and expense.
Other real estate was insignificant at December 31, 1995 and 1996.
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 (FASB) 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 financial
instruments disclose quantitative and qualitative information about the
instruments. As of December 31, 1995 and 1996, 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 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
F-29
<PAGE> 87
COLONIAL BANKING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
characteristics. Fair values for commercial real estate and commercial
loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for impaired loans are estimated using
discounted cash flow analyses or underlying collateral values, where
applicable.
Deposit liabilities -- The fair values disclosed for demand deposits
are, by definition, equal to the amount payable on demand at the reporting
date (that is, their carrying amounts). The carrying amounts of
variable-rate, fixed-term money market accounts and certificates of deposit
(CDs) approximate their fair values at the reporting date. Fair values for
fixed-rate CDs are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings -- The carrying amounts of federal funds
purchased, borrowings under repurchase agreements, and other short-term
borrowings maturing within 90 days approximate their fair values. Fair
values of other short-term borrowings are estimated using discounted cash
flow analyses based on the Bank's current incremental borrowing rates for
similar types of borrowing arrangements.
Long-term debt -- The fair values of the Bank's long-term debt are
estimated using discounted cash flow analyses based on the Bank's current
incremental borrowing rates for similar types of borrowing arrangements.
Accrued interest -- The carrying amounts of accrued interest
approximate their fair values.
Off-balance-sheet instruments -- The Bank's off-balance-sheet
instruments include unfunded commitments to extend credit and standby
letters of credit. The fair value of these instruments is not considered
practicable to estimate because of the lack of quoted market prices and the
inability to estimate fair value without incurring excessive costs.
ADVERTISING -- Advertising costs are generally charged to expense during
the year in which they are incurred.
STOCK OPTIONS -- In October 1995 the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
This new standard defines a fair-value based method of accounting for an
employee stock option or similar equity instrument.
This statement gives entities a choice of recognizing related compensation
expense by adopting the new fair value method or to continue to measure
compensation using the intrinsic value approach under Accounting Principles
Board (APB) Opinion No. 25, the former standard. If the former standard for
measurement were elected, SFAS No. 123 requires supplemental disclosure to show
the effects of using the new measurement criteria. The Bank has elected to
continue using the measurement prescribed by APB Opinion No. 25, and
accordingly, this pronouncement has had no effect on the Bank's financial
position or results of operations.
UNAUDITED INTERIM FINANCIAL DATA -- The interim financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, including normal recurring accruals necessary for fair presentation
of results of operations for the interim periods included herein, have been
made. The results of operations for the six months ended June 30, 1997, are not
necessarily indicative of results to be anticipated for the year ending December
31, 1997.
ACCOUNTING STANDARDS YET TO BE ADOPTED -- In June 1996, the FASB issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" which the Bank is required to adopt for the year
ended December 31, 1997. SFAS No. 125 requires that the Bank recognize the
financial
F-30
<PAGE> 88
COLONIAL BANKING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and servicing assets it controls and the liabilities it has incurred,
derecognize financial assets when control has been surrendered, and derecognize
liabilities when extinguished. The Bank's management has determined that the
adoption of this statement will not have a material impact on its financial
statements.
In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share" which
the Bank is required to adopt for both interim and annual periods ending after
December 15, 1997. This statement specifies the computation, presentation, and
disclosure requirements of earnings per share. Management has determined that
the effect of the adoption of this statement on the earnings per share
calculation for the Bank will not be material.
In February 1997, the FASB issued SFAS No. 129 "Disclosure of Information
about Capital Structure" which requires that the Bank describe, in the financial
statements, the pertinent rights and privileges of the various securities
outstanding. This will be effective for the year ended December 31, 1998, and
will have no significant impact on disclosures to the financial statements.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
which the Bank is required to adopt for years beginning after December 15, 1997.
This statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses). Management
expects this standard, when adopted, will have no material impact on the Bank's
financial statements.
Other issued but not yet required FASB statements are not currently
applicable to the Bank's operations.
RECLASSIFICATIONS -- Certain reclassifications have been made to the 1994
and 1995 financial statements to conform with current year presentations.
NOTE 2 -- CORRECTION OF UNDERSTATEMENT OF ALLOWANCE FOR LOAN LOSSES
During 1997, management re-evaluated the allowance for loan losses and
adopted a different methodology for determining an appropriate allowance for
loan losses. As a result, prior period adjustments related to the allowance were
made to previously issued financial statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1994 1995 1996
----- ---- ------
<S> <C> <C> <C>
Decrease to net income:
As reported...................................... $ 571 $886 $1,242
Adjustment....................................... (301) (26) (149)
----- ----- -------
As restated...................................... $ 270 $860 $1,093
===== ===== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Decrease in loans, net of allowance for loan losses and
unearned income:
As reported............................................ $55,127 $73,974
Adjustment............................................. (519) (767)
------- -------
As restated............................................ $54,608 $73,207
======= =======
Changes to deferred taxes:
As reported............................................ $ (145) $ (30)
Adjustment............................................. 241 291
------- -------
As restated............................................ $ 96 $ 261
======= =======
</TABLE>
F-31
<PAGE> 89
COLONIAL BANKING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- INVESTMENT SECURITIES HELD-TO-MATURITY
The amortized cost and estimated fair values of investment securities at
December 31, 1995 and 1996, were as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Held-to-maturity securities:
U.S. Government and agency securities.......... $ 6,320 $ -- $ 38 $ 6,282
U.S. Treasury securities....................... 5,201 -- 56 5,145
Bankers acceptances............................ 2,015 -- -- 2,015
Obligations of state and political
subdivisions................................ 1,131 5 -- 1,136
Mortgage-backed securities..................... 1,018 -- 9 1,009
------- --- ---- -------
$15,685 $ 5 $103 $15,587
======= === ==== =======
DECEMBER 31, 1996
Held-to-maturity securities:
U.S. Government and agency securities.......... $ 9,806 $ 22 $ 14 $ 9,814
U.S. Treasury securities....................... 1,988 -- 7 1,981
Obligations of state and political
subdivisions................................ 892 2 -- 894
Mortgage-backed securities..................... 662 7 -- 669
------- --- ---- -------
$13,348 $ 31 $ 21 $13,358
======= === ==== =======
</TABLE>
The amortized cost and estimated fair value of investment securities
held-to-maturity at December 31, 1996, by contractual maturity, are shown below
(in thousands). Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. Mortgage-backed securities are listed
separately as their estimated average lives vary according to changes in
interest rates:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- -------
<S> <C> <C>
Due in one year or less................................. $ 4,283 $ 4,276
Due after one year through five years................... 8,402 8,413
Mortgage-backed securities.............................. 663 669
------- -------
$13,348 $13,358
======= =======
</TABLE>
Proceeds from maturities and calls of held-to-maturity investment
securities during 1995 and 1996, were $3,678,000 and $9,983,000, respectively.
Investment securities with a carrying value of approximately $639,000 and
$505,000 were pledged at December 31, 1995 and 1996, respectively, to secure
Federal Home Loan Bank borrowings. At December 31, 1996, investment securities
with an amortized cost of $477,000 were pledged to secure public deposits and
for other purposes required or permitted by law. No investment securities were
pledged as collateral for these purposes at December 31, 1995.
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.
F-32
<PAGE> 90
COLONIAL BANKING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans at December 31, 1995 and 1996, was as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Real estate:
Commercial............................................. $ 5,257 $ 6,366
Construction........................................... 4,091 9,238
Mortgage............................................... 38,137 46,997
Mortgage loans held-for-sale........................... 80 181
Installment.............................................. 2,297 2,574
Commercial............................................... 5,901 9,527
------- -------
55,763 74,883
------- -------
Less:
Allowance for loan losses.............................. 981 1,297
Deferred loan fees..................................... 174 379
------- -------
1,155 1,676
------- -------
$54,608 $73,207
======= =======
</TABLE>
The following is an analysis of the changes in the allowance for possible
loan losses (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1995 1996
---- ---- ------
<S> <C> <C> <C>
Balance, beginning of year.......................... $294 $775 $ 981
Provision for loan losses........................... 505 234 428
Loans charged to losses............................. (32) (37) (118)
Recoveries of loans previously charged-off.......... 8 9 6
---- ---- ------
Balance, end of year................................ $775 $981 $1,297
==== ==== ======
</TABLE>
Impaired loans of $196,000 at December 31, 1995, have been recognized in
conformity with FASB Statement No. 114, as amended by FASB Statement No. 118.
There were no impaired loans at December 31, 1996. The average recorded
investment and total allowance for loan losses related to impaired loans was
equal to their recorded investment at December 31, 1995. No interest income was
accrued on impaired loans or included in the results of operations for the years
ended December 31, 1994, 1995, and 1996.
F-33
<PAGE> 91
COLONIAL BANKING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- BANK PREMISES AND EQUIPMENT
Bank premises, furniture, and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Land..................................................... $ 199 $ 199
Buildings................................................ 1,566 1,575
Furniture and equipment.................................. 846 892
Leasehold improvements................................... 387 377
------- -------
2,998 3,043
Less accumulated depreciation and amortization........... (1,305) (1,519)
------- -------
$ 1,693 $ 1,524
======= =======
</TABLE>
NOTE 6 -- OTHER ASSETS
Other assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
---- ------
<S> <C> <C>
Accrued interest receivable................................. $567 $ 713
Prepaid expenses............................................ 98 91
Deferred taxes.............................................. 96 261
Other real estate........................................... 71 3
Other assets................................................ 88 96
---- ------
$920 $1,164
==== ======
</TABLE>
NOTE 7 -- TIME DEPOSITS
Time certificates of deposit in excess of $100,000 aggregated approximately
$3,413,000 and $6,228,000 at December 31, 1995 and 1996, respectively.
At December 31, 1996, the scheduled maturities for time deposits is as
follows (in thousands):
<TABLE>
<S> <C>
1997............................................... $30,378
1998............................................... 8,185
1999............................................... 3,250
2000............................................... 413
2001............................................... 493
Thereafter......................................... 125
-------
$42,844
=======
</TABLE>
F-34
<PAGE> 92
COLONIAL BANKING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- INCOME TAXES
The income tax provision (credit) consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Current............................................ $273 $ 566 $ 814
Deferred........................................... (49) (117) (165)
----- ----- -----
Provision for income taxes......................... $224 $ 449 $ 649
===== ===== =====
</TABLE>
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):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Accounting loan loss provision in excess of tax
provision........................................ $(182) $ (78) $(120)
Accounting depreciation less than (in excess of)
tax depreciation................................. 12 (16) (27)
Cash to accrual conversion......................... 60 (40) (34)
Federal Home Loan Bank stock dividends............. 5 8 13
Other differences.................................. $ 56 9 3
----- ----- -----
$ (49) $(117) $(165)
===== ===== =====
</TABLE>
The net deferred tax benefits included in other assets in the accompanying
consolidated balance sheets include the following components (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Loan loss reserve........................................... $275 $395
Other....................................................... 3 --
---- ----
278 395
---- ----
Deferred tax liabilities:
Accumulated depreciation.................................... 27 --
Cash to accrual conversion.................................. 136 102
Federal Home Loan Bank stock dividends...................... 19 32
---- ----
182 134
---- ----
Net deferred tax asset........................................ $ 96 $261
==== ====
</TABLE>
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%.
F-35
<PAGE> 93
COLONIAL BANKING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the statutory federal income tax rate and the
effective tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax at statutory rate.................. $168 $444 $592
State income tax expense, net of federal effect....... 33 43 115
Other................................................. 23 (38) (58)
---- ---- ----
$224 $449 $649
==== ==== ====
Effective tax rate.................................... 45% 34% 37%
==== ==== ====
</TABLE>
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.
NOTE 9 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit and financial guarantees. Those instruments involve elements
of credit and interest-rate risk similar to the amounts recognized in the
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 commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank's experience has been that a majority of loan
commitments are drawn upon by customers. While most commercial letters of credit
are not utilized, a significant portion of such utilization is on an immediate
payment basis. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if it is deemed necessary
by the Bank upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held varies but may include cash, accounts
receivable, inventory, premises and equipment, and income-producing commercial
properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third-party. These guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank holds cash, marketable securities, or real estate as collateral
supporting those commitments for which collateral is deemed necessary.
The Bank has not been required to perform on any financial guarantees
during the past two years. The Bank did not incur any losses on its commitments
during 1994, 1995, or 1996.
F-36
<PAGE> 94
COLONIAL BANKING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the notional amounts of the Bank's financial instruments with
off-balance-sheet risk at December 31, 1996, follows (in thousands):
<TABLE>
<S> <C>
Commitments to extend credit....................... $10,252
Standby letters of credit.......................... 352
-------
$10,604
=======
</TABLE>
NOTE 10 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table estimates the fair values and the related carrying
values of the Bank's financial instruments (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks........................... $ 967 $ 967 $ 1,873 $ 1,873
Federal funds sold................................ 9,400 9,400 6,385 6,385
Investment securities held-to-maturity............ 15,685 15,587 13,348 13,358
Federal Home Loan Bank stock...................... 361 361 389 389
Loans, net of allowance for losses................ 54,608 52,688 73,207 74,319
Financial liabilities:
Demand and savings deposits....................... 44,301 44,301 48,697 48,697
Time deposits..................................... 33,671 33,890 42,844 42,829
Long-term debt.................................... 293 290 271 258
</TABLE>
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, 1995 and 1996, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances. The estimated fair values at December
31, 1995 and 1996, should not necessarily be considered to apply at subsequent
dates.
In addition, other assets and liabilities of the Bank that are not defined
as financial instruments are not included in the above disclosures, such as
premises and equipment. Also, nonfinancial instruments typically not recognized
in the financial statements nevertheless may have value but are not included in
the above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the earnings potential of loan servicing rights,
the trained work force, customer goodwill, and similar items.
NOTE 11 -- CONCENTRATIONS OF CREDIT RISK
The Bank's branches are located in Josephine County and Jackson County,
Oregon, and a substantial portion of the Bank's loans are collateralized by real
estate in this geographic area. In addition, the Bank's loan portfolio includes
a significant portion of real estate secured loans in the Salem, Oregon area
(approximately $18,514,000 and $21,416,000, at December 31, 1995 and 1996,
respectively) and in the Portland, Oregon area (approximately $10,425,000 at
December 31, 1996). The loans outside of the Josephine and Jackson County areas
were either purchased from another financial institution or were generated from
the Bank's loan production office in Portland which was opened in 1996. The
ultimate collectibility of the majority of the Bank's loan portfolio is
particularly susceptible to changes in conditions in these three market areas.
The concentrations of credit by type of loan are set forth in Note 4. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. Commercial and standby letters of credit were
F-37
<PAGE> 95
COLONIAL BANKING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
granted primarily to commercial borrowers as of December 31, 1996. Investments
in state and municipal securities involve government entities within the Bank's
geographical region.
NOTE 12 -- BORROWINGS FROM FEDERAL HOME LOAN BANK
At December 31, 1995 and 1996, the Bank had long-term borrowings from the
Federal Home Loan Bank of Seattle (FHLB) totaling $293,000 and $271,000,
respectively, with fixed interest rates ranging from 5.50% to 6.61%. The
borrowings require monthly principal and interest payments and mature from 2008
through 2010. All borrowings from FHLB are collateralized by a blanket pledge
agreement on FHLB stock, funds on deposit with FHLB, investments, and loans.
NOTE 13 -- 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 financial position or results of operations.
The Bank leases certain land and facilities under operating leases, some of
which include renewal options and escalation clauses. At December 31, 1996, the
aggregate minimum rental commitments under operating leases that have initial or
remaining noncancellable lease terms in excess of one year were approximately as
follows (in thousands):
<TABLE>
<S> <C>
YEARS ENDED DECEMBER 31,
1997................................................ $120
1998................................................ 78
1999................................................ 69
2000................................................ 68
2001................................................ 68
Thereafter.......................................... 509
----
Total minimum payments required............. $912
====
</TABLE>
Rental expense for all operating leases was approximately $121,000,
$132,000, and $144,000 in 1994, 1995, and 1996, respectively.
NOTE 14 -- STOCK OPTION PLANS
The Bank has established a nonqualified preferred and common stock option
plan (the Stock Plan) for key employees. The Stock Plan provides that the
exercise price of options will be the estimated fair market value at the date of
grant. Generally, options vest and become exercisable over a four-year period
commencing one year from the date of grant.
F-38
<PAGE> 96
COLONIAL BANKING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes options available and outstanding under both plans
as of December 31, 1996 (in thousands, with the exception of exercise prices):
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Options outstanding at December 31, 1993.... -- 22 $ 8.59
Options granted in 1994..................... 10 $10.50 --
Options exercised in 1994................... -- --
Options forfeited........................... -- --
-- --
Options outstanding at December 31, 1994.... 10 $10.50 22 $ 8.59
== ==
Options exercisable at December 31, 1994.... -- $10.50 5 $ 8.59
== ==
Options reserved at December 31, 1994....... 9 9
== ==
Options outstanding at December 31, 1994.... 10 $10.50 22 $ 8.59
Options granted in 1995..................... 2 $11.48 2 $11.48
Options exercised in 1995................... (1) $10.50 (1) $ 8.59
-- --
Options outstanding at December 31, 1995.... 11 $10.58 23 $ 8.78
== ==
Options exercisable at December 31, 1995.... 2 $10.50 10 $ 8.59
== ==
Options reserved at December 31, 1995....... 7 7
== ==
Options outstanding at December 31, 1995.... 11 $10.58 23 $ 8.78
Options granted in 1996..................... 7 $13.49 7 $13.49
-- --
Options outstanding at December 31, 1996.... 18 $11.76 30 $ 9.93
== ==
Options exercisable at December 31, 1996.... 5 $10.54 16 $ 8.65
== ==
Options reserved at December 31, 1996....... -- --
== ==
</TABLE>
Had compensation cost for the Bank's 1995 and 1996 grants for stock-based
compensation plans been determined consistent with SFAS No. 123, the Bank's net
income, and net income per common share for 1995 would approximate the pro forma
amounts below (in thousands except per share data):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net income............................................ $ 860 $ 859
Net income per common share:
Primary............................................. $ 2.95 $ 2.95
Fully diluted....................................... $ 2.16 $ 2.16
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net income............................................ $ 1,093 $ 1,088
Net income per common share:
Primary............................................. $ 3.87 $ 3.86
Fully diluted....................................... $ 2.73 $ 2.72
</TABLE>
F-39
<PAGE> 97
COLONIAL BANKING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option granted during 1995 and 1996, is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: (1) dividend yield of 8.5% on preferred stock; (2)
risk-free interest rate of approximately 6%; and, (3) expected life of two
years.
The effects of applying SFAS No. 123 in this proforma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
NOTE 15 -- EMPLOYEE BENEFIT PLANS
The Bank maintains a profit sharing plan (the Plan) that covers
substantially all employees of the Bank. Contributions to the Plan are made
solely at the discretion of the Board of Directors, and totaled approximately
$25,000, $26,000, and $34,000 in 1994, 1995, and 1996, respectively.
NOTE 16 -- EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES
Primary earnings per common share is computed by deducting preferred
dividends from net income in order to determine net income attributable to
common stockholders. This amount is then divided by the weighted average number
of common shares outstanding during the year, giving effect to common stock
equivalents arising from stock options (1994 -- 260,953 shares, 1995 -- 248,390
shares, and 1996 -- 249,651 shares).
Fully diluted earnings per common share is computed by dividing net income
by the weighted average number of common shares outstanding during the year,
after giving effect to common stock equivalents arising from stock options and
for preferred stock assumed to be converted into common stock (1994 -- 307,608,
1995 -- 397,431 shares, and 1996 -- 400,093 shares).
NOTE 17 -- TRANSACTIONS WITH RELATED PARTIES
Certain directors, executive officers, and principal stockholders are
customers of and have had banking transactions with the Bank in the ordinary
course of business, and the Bank expects to have such transactions in the
future. All loans and commitments to loan included in such transactions were
made in compliance with applicable laws on substantially the same terms
(including interest rates and collateral) as those prevailing at the time for
comparable transactions with other persons and, in the opinion of the management
of the Bank, do not involve more than the normal risk of collectibility or
present any other unfavorable features. The amount of loans outstanding to
directors, executive officers, principal stockholders, and companies with which
they are associated was as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1996
----- ----
<S> <C> <C>
Beginning balance............................................ $ 136 $ 69
Loans made................................................... 366 198
Loan repayments made......................................... (433) (47)
----- ----
Ending balance............................................... $ 69 $220
===== ====
</TABLE>
NOTE 18 -- 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
F-40
<PAGE> 98
COLONIAL BANKING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
following table) 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 regulatory
examiners 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.
The Bank's actual capital amounts and ratios are also presented in the
following table (in thousands):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER
PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
---------------- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1995:
Total capital to risk-weighted assets... $5,573 10.6 % $4,222 8.0% $5,278 10.0 %
Tier 1 capital to risk-weighted
assets............................... $3,610 6.8 % $2,111 4.0% $3,167 6.0 %
Tier 1 capital to average assets........ $3,610 4.3 % $3,362 4.0% $4,202 5.0 %
AS OF DECEMBER 31, 1996:
Total capital to risk-weighted assets... $6,756 9.7 % $5,573 8.0% $6,967 10.0 %
Tier 1 capital to risk-weighted
assets............................... $6,226 8.9 % $2,786 4.0% $4,180 6.0 %
Tier 1 capital to average assets........ $6,226 6.5 % $3,857 4.0% $4,821 5.0 %
</TABLE>
At December 31, 1995, the Bank's preferred stock was considered Tier 2
capital because the Bank's preferred shareholders had not voted to approve that
dividends on preferred stock were noncumulative. During 1996, the Bank held a
special shareholders meeting at which the preferred shareholders voted to
approve the noncumulative nature of the preferred stock. Accordingly, at
December 31, 1996, the Bank's preferred stock is considered Tier 1 capital.
NOTE 19 -- SUBSEQUENT EVENTS
On July 24, 1997, VRB Bancorp entered into an Option Agreement to purchase
all of the outstanding shares of Investors Banking Corporation (IBC), Colonial
Banking Company's primary shareholder, for $41 per share. Simultaneously with
the acquisition of these shares, IBC will be liquidated and Colonial Banking
Company will be merged into VRB Bancorp. The minority shareholders of Colonial
Banking Company will be paid $43.36 per share for their remaining shares of
Colonial Banking Company.
The merger of Colonial Banking Company into VRB Bancorp is subject to
certain conditions, including severance payments to certain officers of Colonial
Banking Company, buyout of certain Colonial Banking Company options, and
approval of the merger by Colonial Banking Company's shareholders, the Oregon
State Director of Finance, and the FDIC. Severance payments and option buyouts
in the amount of approximately $1,144,000 will be recorded as an expense, net of
tax benefits, of Colonial Banking Company for the year ended December 31, 1997.
F-41
<PAGE> 99
======================================================
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY VRB OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF VRB SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary..................... 3
Summary Historical and Pro Forma
Financial Data....................... 5
VRB Current Summary Financial Data..... 7
Risk Factors........................... 8
Colonial Banking Company Acquisition... 11
Use of Proceeds........................ 12
Market Price of and Dividends on the
Common Stock......................... 13
Capitalization......................... 14
VRB Bancorp Pro Forma Combined
Financial Statements................. 15
Notes to Pro Forma Combined Financial
Statements........................... 18
VRB Selected Historical Financial
Information and Other Data........... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 20
Business............................... 35
Management............................. 41
Security Ownership of Management and
Others............................... 46
Supervision and Regulation............. 47
Description of Capital Stock........... 51
Underwriting........................... 54
Experts................................ 55
Legal Matters.......................... 55
Available Information.................. 56
Index to Financial Statements.......... F-1
</TABLE>
- ------------------------------------------------------
======================================================
- ------------------------------------------------------
1,000,000 SHARES
LOGO
VRB BANCORP
COMMON STOCK
----------------------
PROSPECTUS
----------------------
BLACK & COMPANY, INC.
, 1997
- ------------------------------------------------------
======================================================
<PAGE> 100
PART II
(ITEMS NOT REQUIRED IN PROSPECTUS)
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the fees and expenses incurred by the
Company in connection with the Offering. Except for the SEC registration fees
and NASD filing fees, and Nasdaq initial listing fees, all expenses are
estimates:
<TABLE>
<S> <C>
SEC Registration Fees............................................. $ 3,136
NASD Filing Fees.................................................. 1,535
Nasdaq Initial Listing Fee........................................ 37,970
Blue Sky Fees and Expenses (including legal fees)................. 3,000
Costs of Printing................................................. 40,000
Accounting Fees and Expenses...................................... 50,000
Legal Fees........................................................ 100,000
Miscellaneous Expenses............................................ 14,359
Total Expenses.......................................... $250,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
As an Oregon corporation, the Company is subject to the Oregon Business
Corporation Act (the "Business Corporation Act"). Under the Business Corporation
Act, a corporation may provide in its Articles of Incorporation or in its Bylaws
for the indemnification of directors and officers against liability where the
director or officer has acted in good faith and with a reasonable belief that
actions taken were in the best interests of the corporation or at least not
adverse to the corporation's best interests and, if in a criminal proceeding,
the individual had no reasonable cause to believe that the conduct in question
was unlawful. Under the Business Corporation Act, a corporation may not
indemnify an officer or director against liability in connection with a claim by
or in the right of the corporation in which such officer or director was
adjudged liable to the corporation or in connection with any other proceeding in
which the officer or director was adjudged liable for receiving an improper
personal benefit; however, a corporation may indemnify against the reasonable
expenses associated with such proceeding. A corporation may not indemnify
against breaches of the duty of loyalty. The Business Corporation Act provides
for mandatory indemnification of directors against all reasonable expenses
incurred in the successful defense of any claim made or threatened whether or
not such claim was by or in the right of the corporation. A court may order
indemnification if it determines that the director or officer is fairly and
reasonably entitled to indemnification in view of all the relevant circumstances
whether or not the director or officer met the good faith and reasonable belief
standards of conduct set out in the statute. Unless otherwise stated in the
Articles of Incorporation, officers of the corporation are also entitled to the
benefit of the above statutory provisions.
The Business Corporation Act also provides that the corporation may, by so
providing in its Articles of Incorporation, eliminate or limit the personal
liability of a director to the corporation or its shareholders for monetary
damages for conduct as a director, provided that the Articles of Incorporation
may not eliminate or limit liability for any breach of the director's duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, any unlawful distribution, or any
transaction from which the director received an improper personal benefit.
In accordance with Oregon law, the Articles of Incorporation of the Company
provide that directors are not personally liable to the corporation or its
shareholders for monetary damages for conduct as a director, except for (i) any
breach of a director's duty of loyalty to the corporation, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) any distribution to shareholders which is unlawful,
or (iv) any transaction from which the director received an improper personal
benefit.
II-1
<PAGE> 101
The Articles of Incorporation also provide for indemnification of any
person who is or was a party, or is threatened to be made a party, to any civil,
administrative or criminal proceeding by reason of the fact that the person is
or was a director or officer of the corporation or any of its subsidiaries, or
is or was serving at the request of the corporation as a director, officer,
partner, agent or employee of another corporation or entity, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement,
actually and reasonably incurred by that person if (i) the person acted in good
faith and in a manner reasonably believed to not be opposed to the best
interests of the corporation, or (ii) the act or omission giving rise to such
action or proceeding is ratified, adopted or confirmed by the corporation, or
the benefit thereof was received by the corporation. Indemnification is
available under this provision of the Articles of Incorporation in the case of
derivative actions, unless the person is adjudged to be liable for gross
negligence or deliberate misconduct in the performance of the person's duty to
the corporation. To the extent a director, officer, employee or agent (including
an attorney) is successful on the merits or otherwise in defense of any action
to which this provision is applicable, the person is entitled to indemnification
for expenses actually and reasonably incurred by the person in connection with
that defense.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
The index of exhibits being filed with this Registration Statement is
attached on page Z-1.
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(A) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required
by the Underwriter to permit prompt delivery to each purchaser.
(B) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared it effective.
(C) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(D) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, (the "Act") may be permitted to
directors, officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
II-2
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Rogue
River, state of Oregon, on October 20, 1997.
VRB BANCORP
By: /s/ WILLIAM A. HADEN
------------------------------------
William A. Haden, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on October 20, 1997:
<TABLE>
<S> <C>
/s/ WILLIAM A. HADEN
- --------------------------------------------
William A. Haden, President,
Chief Executive Officer, President and
Director
(Principal Executive Officer)
/s/ FELICE BELFIORE
- --------------------------------------------
Felice Belfiore,
Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
- -------------------------------------------- --------------------------------------------
James D. Coleman, Director Gary Lundberg, Director
JOHN O. DUNKIN*
- -------------------------------------------- --------------------------------------------
John O. Dunkin, Director Robert J. DeArmond, Director
MICHAEL DONOVAN* LARRY L. PARDUCCI*
- -------------------------------------------- --------------------------------------------
Michael Donovan, Director Larry L. Parducci, Director
APRIL SEVCIK* /s/ TOM ANDERSON
- -------------------------------------------- --------------------------------------------
April Sevcik, Director Tom Anderson, Director
</TABLE>
*By: /s/ TOM ANDERSON
- -------------------------------------------------
Tom Anderson,
Attorney-in-fact
<PAGE> 103
EXHIBIT INDEX
<TABLE>
<C> <S>
1.0 Form of Underwriting Agreement (to be filed by amendment)
3.1 Articles of Incorporation of VRB Bancorp*
3.2 Bylaws of VRB Bancorp*
4.0 Specimen stock certificate*
5.0 Opinion of Foster Pepper & Shefelman PLLC re legality of shares to be issued
10.1 Stock Option Agreement, dated July 24, 1997, between Valley of the Rogue Bank and the
shareholders of Investors Banking Corporation**
10.2 Plan of Merger, dated September 30, 1997, between Valley of the Rogue Bank and
Colonial Banking Company
10.3 Ground Lease Agreement dated June 1, 1988, relating to lease of parking area of Poplar
Drive Branch Office.*
10.4 Lease Agreement and Memorandum of Agreement dated August 15, 1989 relating to lease of
Stewart Avenue Branch Office.*
10.5 Lease Agreement dated December 27, 1979, and related agreements relating to the Talent
Branch Office.*
10.6 Employment Agreement dated April 10, 1992, by and between Valley of the Rogue Bank and
Tom Anderson.*
10.7 Employment Agreement dated January 11, 1993, and Amendment to Employment Agreement,
dated September 26, 1994, by and between Valley of the Rogue Bank and William A.
Haden.*
10.8 1994 Amended Non-Discretionary Stock Option Plan for Non-Employee Directors
(incorporated by reference to Exhibit 4.3 of the Registrant's registration statement
on Form S-8 filed with the Commission on October 3, 1995)
10.9 1994 Amended Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 4.3
of the Registrant's registration statement on Form S-8 filed with the Commission on
October 3, 1995)
21.0 Subsidiaries of the Registrant**
23.1 Consent of Moss Adams, Certified Public Accountants regarding Financial Statements of
VRB Bancorp and Colonial Banking Company.
23.2 Consent of Foster Pepper & Shefelman PLLC (included in Exhibit 5.0)
</TABLE>
- ---------------
* Incorporated by reference to the Registrant's Registration Statement on Form
10 (Commission file number 0-25932) filed April 26, 1995 pursuant to Section
12(g) of the Securities Exchange Act of 1934.
** previously filed
Z-1
<PAGE> 1
EXHIBIT 5.0
October 20, 1997
Board of Directors
VRB Bancorp
110 Pine St.
Rogue River, Oregon 97537
Re: Proposed Public Offering of VRB Bancorp Common Stock
Ladies and Gentlemen:
The undersigned has acted as counsel to VRB Bancorp (the "Company") in
the preparation and filing of a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act of 1933, as amended, covering
1,150,000 shares (the "Shares") of the Company's Common Stock, including 150,000
shares that may be sold by the Company upon exercise of an option granted to the
Underwriters to cover over-allotments.
In the course of our representation we have examined the Registration
Statement, copies of the Articles of Incorporation, Bylaws, and excerpts of
minutes of meetings of the Boards of Directors of the Company. We have also
received from officers of the Company certain other documents, corporate
records, and representations concerning factual matters. We have reviewed such
documents and have made such review of laws as we consider necessary for
purposes of this opinion.
We have relied as to matters of fact upon the above documents and
investigation. We have assumed without investigation the genuineness of all
signatures and the authenticity and completeness of all documents submitted to
us as originals and the conformity to authentic and complete original documents
of all documents submitted to us as certified or photostatic copies.
Based upon the foregoing and subject to the qualifications and
exceptions heretofore and hereinafter set forth, we are of the opinion that,
when the Registration Statement has been declared effective, the applicable
provisions of state securities laws have been complied with and the Company has
issued the Shares against payment therefor in the manner described the
Registration Statement, the shares will be validly issued and fully paid, and
non-assessable.
The opinion herein expressed are specifically subject to and qualified
by the following:
This opinion is limited to the present laws of the State of Oregon and
the United States of America and to the facts bearing on this opinion as they
exist on the date of this letter.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the heading "Legal
Matters" in the prospectus.
Very truly yours,
FOSTER PEPPER & SHEFELMAN
By: /s/Kenneth E. Roberts
Kenneth E. Roberts
<PAGE> 1
EXHIBIT 10.2
PLAN OF MERGER
BY AND BETWEEN
VALLEY OF THE ROGUE BANK ("VRB")
AND
COLONIAL BANKING COMPANY ("COLONIAL BANK")
Dated as of the 30th day of September, 1997.
<PAGE> 2
PLAN OF MERGER
THIS PLAN OF MERGER is entered into as of the 30th day of September,
1997 (the "Plan" or "Plan of Merger"), by and between VALLEY OF THE ROGUE BANK
("VRB"), and COLONIAL BANKING COMPANY, ("Colonial Bank")
RECITALS:
A. VRB is an Oregon state chartered bank with its head office at 110
Pine Street, Rogue River, Oregon.
B. Colonial Bank is an Oregon state chartered bank with its head office
at 117 N.E. "F" Street, Grants Pass, Oregon.
C. The parties hereto desire to enter into a Plan of Merger under which
Colonial Bank will merge with and into VRB and Colonial Bank shareholders will
receive cash for their shares pursuant to the terms of this Plan.
D. Investors Banking Corporation ("IBC") owns 307,203 shares of capital
stock of Colonial Bank.
E. VRB and the shareholders of IBC entered into a Stock Option
Agreement that grants VRB the option to acquire all the shares of IBC capital
stock.
F. The Board of Directors of each of Colonial Bank and VRB have
approved this Plan of Merger and authorized the execution, delivery and
performance of this Plan of Merger on behalf of the respective banks.
G. At or prior to the date the Merger becomes effective, the parties
shall have taken all such actions as may be necessary or appropriate in order to
effectuate the Merger.
AGREEMENT
In consideration of the mutual covenants herein contained, the parties
hereby enter into the Plan of Merger and agree as follows:
For purposes of this Plan, the following terms shall have the
definitions given:
"Colonial Bank Stock" means shares of common and preferred stock of
Colonial Bank.
1
<PAGE> 3
"Dissenting Shares" means shares held by Colonial Bank shareholders who
have perfected their rights to have their shares purchased pursuant to ORS
711.042, 711.045 and 711.047 of the Oregon Bank Act.
"Effective Date" is the date on which the Plan of Merger is effected by
issuance of a Certificate of Merger by the Oregon Department of Consumer and
Business Services ("Oregon Director").
"Employee Benefit Plan" means an employee benefit plan as defined by
section 3 of ERISA.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHA" means the Federal Housing Administration.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FNMA" means the Federal National Mortgage Association.
"GNMA" means the Government National Mortgage Association.
"IBC" means Investors Banking Corporation.
"IRS" means the Internal Revenue Service.
"Oregon Director" means the Director of the Oregon Department of
Consumer and Business Services.
"Merger" means the merger of Colonial Bank with and into VRB on the
Effective Date in accordance with this Plan of Merger.
"Oregon Bank Act" means Chapter 706 through 716 of the Oregon Revised
Statutes.
"Plan of Merger" means this Plan of Merger by and between VRB and
Colonial Bank.
"PBGC" means the Pension Benefit Guaranty Corporation.
"SEC" means the Securities and Exchange Commission.
"SBA" means the Small Business Administration of the Department of
Commerce.
2
<PAGE> 4
"Resultant Bank" means the banking institution formed by the merger of
VRB and Colonial Bank as provided by the Plan of Merger which shall be VRB.
"VA" means the Veterans Administration.
MERGER .
1.1 The effective date of this Plan of Merger (the "Effective Date")
shall be set forth in a Certificate of Merger issued with respect to this Plan
of Merger by the Oregon Director.
1.2 At the Effective Date, the corporate existence of Colonial Bank
shall, as provided by Oregon law, be merged into and continued in Resultant
Bank, and the separate existence of Colonial Bank shall terminate. All rights,
franchises and interests of Colonial Bank in and to every type of property
(real, personal, and mixed) and choses in action shall be transferred to and
vested in Resultant Bank by virtue of such merger without any deed or other
transfer, and Resultant Bank, without any order or action on the part of any
court or otherwise, shall hold and enjoy all such rights and property,
franchises, and interests, including appointments, designations and nominations,
and in every other fiduciary capacity, in the same manner and to the same extent
as such rights, franchises, and interests were held or enjoyed by Colonial Bank
on the Effective Date.
1.3 Until altered, amended or repealed, the Articles of Incorporation
and Bylaws of VRB on the Effective Date shall be the Articles of Incorporation
and Bylaws of Resultant Bank. Until their successors are elected or appointed
and qualified, and subject to prior death, resignation or removal, the officers
and directors of VRB on the Effective Date shall be the officers and directors
of the Resultant Bank.
1.4 Until changed by the Board of Directors of Resultant Bank, the
locations and names of the existing offices of VRB shall remain the locations
and names of the offices of the Resultant Bank after the Effective Date and,
until thereafter changed, all corporate acts, plans, policies, contracts,
approvals and authorizations of VRB or Colonial Bank and their respective
shareholders, officers, agents, Boards of Directors, and committees elected or
appointed thereby, which were valid and effective immediately prior to the
Effective Date shall be taken for all purposes as the acts, plans, policies,
contracts, approvals and authorizations of Resultant Bank and shall be as
effective and binding thereon as the same were with respect to VRB prior to the
Effective Date. The following Colonial Bank branches will be given the names as
indicated:
CURRENT BRANCH NAME NAME FOLLOWING MERGER
------- ------ ---- ---- --------- ------
Head Office Downtown Grants Pass Branch
South Grants Pass Williams Highway Branch
3
<PAGE> 5
East Medford East Jackson Street
Merlin Merlin Branch
Rogue River Branch [to be consolidated into the Main Branch of VRB]
1.5 On the Effective Date, Resultant Bank shall be liable for all
liabilities of Colonial Bank; and all deposits, debts, liabilities, and
contracts of Colonial Bank matured or unmatured, whether accrued, absolute,
contingent or otherwise, and whether or not reflected or reserved against on
balance sheets, books of accounts, or records of Colonial Bank shall be those of
Resultant Bank and shall not be released or impaired by the Merger; and all
rights of creditors and other obligees and all liens on property shall be
preserved unimpaired.
1.6 Upon the Effective Date each share of Colonial Bank Stock (except
for Dissenting Shares and shares held by VRB) shall be converted into the right
to receive cash of $43.36 per share from the Resultant Bank. Colonial Bank Stock
held by VRB shall be cancelled without consideration.
1.7 At or prior to the Effective Date, VRB will deposit sufficient cash
in a designated CBC Stock Exchange Account to make the payments required
hereunder.
1.8 The shareholders of record of Colonial Bank shall, upon the
surrender by them to Resultant Bank of all certificates representing shares of
stock held by them of record, (or upon delivery of an appropriate affidavit of
loss and at the discretion of VRB either a bond or an undertaking of indemnity
in the case of any such certificates that have been lost, stolen, or destroyed),
be entitled to receive in exchange therefor cash to which they are entitled.
Until so surrendered, each outstanding certificate which, prior to the Effective
Date, represented shares of common stock of Colonial Bank shall be deemed for
all corporate purposes to be redeemed with the previous holder only entitled to
receive the cash consideration provided. Upon surrender and exchange of such
outstanding certificates which, prior to the Effective Date, represented shares
of stock of Colonial Bank, there shall be paid to the record holders of the
certificates surrendered, the amount, without interest thereon, they are
entitled to receive pursuant to Section 1.6 hereof.
1.9 Shareholders of Colonial Bank have the right to elect to dissent
from this Plan of Merger and receive the fair value for their shares (the
"Dissenting Shares") as provided by certain provisions of the Oregon Bank Act
attached hereto as Exhibit A. Notwithstanding any other provision of this Plan
of Merger, any Dissenting Shares shall, after the Effective Date, be entitled
only to such rights as are afforded in respect of Dissenting Shares pursuant to
the Oregon Bank Act.
REPRESENTATIONS AND
WARRANTIES OF COLONIAL BANK.
4
<PAGE> 6
Colonial Bank represents and warrants to VRB as follows (except as
described in a Schedule of Exceptions heretofore delivered to VRB):
Organization, Existence, and Authority of Colonial Bank.
Colonial Bank is a bank duly organized, validly existing, and in good
standing under the laws of the State of Oregon and has all requisite
corporate power and authority to own, lease, and operate its properties
and assets and carry on its business in the manner now being conducted.
Its activities do not require it to be qualified to do business in any
other state.
Authorized and Outstanding Stock, Options, and Other Rights.
The authorized capital stock of Colonial Bank consists of 2,000,000
shares of common stock ($5.00 par value) of which 235,993 shares are
outstanding and are validly issued, fully paid and nonassessable
(except as provided by the Oregon Bank Act) and 160,857 shares of
preferred stock ($10.50 par value) of which 143,008 shares are
outstanding and are validly issued, fully paid and nonassessable
(except as provided by the Oregon Bank Act). No subscriptions, options,
warrants, convertible securities or other rights or commitments which
would enable the holder to acquire any shares of capital stock or other
investment securities of Colonial Bank, or which enable or require
Colonial Bank to acquire shares of its capital stock or other
investment securities from any holder, are authorized, issued or
outstanding except for options authorizing the holders thereof to
acquire 47,599 Colonial Bank shares at a weighted average exercise
price of $10.61.
Articles of Incorporation, Bylaws, Minutes. The
copies of the Articles of Incorporation, as amended, and the
Bylaws, as amended, of Colonial Bank delivered to VRB as
Schedule 2.3, are true, correct and complete copies of
existing Articles of Incorporation and Bylaws of Colonial Bank
as amended to date. Colonial Bank is not in material violation
of any provision of its Articles of Incorporation or Bylaws.
The minute books of Colonial Bank which have been or will be
made available to VRB for its review contain accurate and
complete minutes of all meetings and all consents evidencing
actions taken without a meeting by the Board of Directors (and
any committees thereof) and by its shareholders.
No Holding Company, Joint Venture, or Other Subsidiaries. No
corporation or other entity is registered or, to the knowledge of
Colonial Bank, is required to be registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended, because of
ownership or control of Colonial Bank except for IBC. Colonial Bank
does not directly or indirectly own or control, either by power to
control the investment or power to vote, any shares of capital stock of
any other corporation or entity, other than shares held in a fiduciary
or custodial capacity in the ordinary course of business and shares
representing less than five percent of the outstanding shares of such
corporation acquired in partial or full satisfaction of debts
previously contracted. Colonial
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Bank is not a part of any joint venture, or general or limited
partnership, or a member of any unincorporated association.
Shareholder Reports. Colonial Bank has delivered to VRB as
Schedule 2.5 copies of all of Colonial Bank's reports and other
communications to stockholders since January 1, 1995, including all
proxy statements and notices of shareholder meetings. Until the
Effective Date, Colonial Bank will furnish to VRB copies of all future
shareholder communications within two days after such materials are
first sent to its shareholders.
Colonial Bank Call Reports. Colonial Bank has delivered to VRB
as Schedule 2.6 copies of Colonial Bank's "Call Reports of Conditions
and Income" filed with the FDIC for December 31, 1994, 1995 and 1996
and for the six months ended June 30, 1997 (which, together with all
future reports so filed, the "Colonial Bank Call Reports"), together
with copies of all other reports, applications, statements and other
filings required to be filed by Colonial Bank with the FDIC or Oregon
Director since December 31, 1994. Until the Effective Date, Colonial
Bank will file with the FDIC or Oregon Director (and will furnish to
VRB within two days thereafter) all additional reports and other
documents which Colonial Bank is required by law or regulation, or
otherwise files, with the FDIC or Oregon Director. The Colonial Bank
Call Reports have been and will be prepared in accordance with
regulatory accounting principles, consistently applied throughout the
periods presented and present fairly the financial conditions and
results of operation of Colonial Bank in accordance with such
regulatory principles on the dates and for the periods covered thereby.
As of the date filed, each such filing has complied or will comply with
all requirements applicable to such filing in all material respects.
Colonial Bank Financial Reports. Except as noted on Schedule
2.7, any financial statements furnished or to be furnished pursuant to
Section 2.5 for any subsequent periods have been and will be prepared
in accordance with generally accepted accounting principles,
consistently applied and present fairly the financial position and
results of operation of Colonial Bank on the dates and for the periods
covered thereby, except that interim period statements are in summary
form without required footnotes and are subject to year-end
adjustments.
Books and Records. The books and records of Colonial Bank
accurately reflect in all material respects the transactions to which
it is a party or by which it or its properties are bound or subject.
Such books and records have been and are accurate and complete and
comply in all material respects with applicable legal, regulatory and
accounting requirements.
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Legal Proceedings. Except for regulatory examinations
conducted in the normal course of regulation of Colonial Bank
and applications for regulatory approval of the Merger, and
except as disclosed in Schedule 2.9 delivered to VRB, there
are no actions, suits, proceedings, claims or governmental
investigations pending or, to the knowledge of Colonial Bank,
threatened against or affecting Colonial Bank before any
court, administrative officer or agency, other governmental
body or arbitration which might, individually or in the
aggregate, result in any material adverse change in the
business, assets, earnings, operation or condition (financial
or otherwise) of Colonial Bank or which might materially
hinder or delay the consummation of the transactions
contemplated by this Plan of Merger.
Compliance with Lending Laws and Regulations. Except as
disclosed in Schedule 2.10 delivered to VRB:
(a) The conduct by Colonial Bank of its business and the
operation by Colonial Bank of the properties or other assets owned or leased by
it does not violate or infringe any applicable domestic or foreign laws,
statutes, ordinances, rules or regulations, the enforcement of which,
individually or in the aggregate, would materially and adversely affect Colonial
Bank. Specifically, but without limitations, Colonial Bank is in compliance in
all material respects with every local, state or federal law or ordinance, and
any regulation or order issued thereunder, now in effect and applicable to
Colonial Bank governing or pertaining to fair housing, anti-redlining, equal
credit opportunity, truth-in-lending, real estate settlement procedures, fair
credit reporting and every other applicable legal prohibition against unlawful
discrimination in residential lending, or governing consumer credit, including,
but not limited to, the Community Reinvestment Act, the Consumer Credit
Protection Act, Truth-in-Lending Law, and Regulation Z promulgated by the FRB,
and the Real Estate Settlement Procedures Act of 1974. Except as would not have
a material adverse effect in relation to Colonial Bank's loan portfolio taken as
a whole (i) all loans, leases, contracts and accounts receivable (billed and
unbilled), security agreements, guarantees and recourse agreements, of Colonial
Bank, as held in its portfolios, or as sold into the secondary market represent
and are valid and binding obligations of their respective parties and debtors,
enforceable in accordance with their respective terms, (ii) each of them is
based on a valid, binding and enforceable contract or commitment, each of which
has been executed and delivered in full compliance, in form and substance, with
any and all federal, state or local laws applicable to Colonial Bank, or to the
other party or parties to the contract(s) or commitment(s), including without
limitation the Truth-in-Lending Act, Regulations Z and U of the FRB, laws and
regulations providing for nondiscriminatory practices in the granting of loans
or credit, applicable usury laws, and laws imposing lending limits, (iii) all
such contracts or commitments have been administered in full compliance with all
applicable federal, state or local laws or regulations, and (iv) all Uniform
Commercial Code filings, or filings of trust deeds, or of liens or other
security interest documentation that are required by any applicable federal,
state or local government laws and regulations to perfect the security interests
referred to in any and all of such documents or
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other security agreements have been made, and all security interests under such
deeds, documents or security agreements have been perfected, and all contracts
have been entered into or assumed in full compliance with all applicable
material legal or regulatory requirements.
(b) The loan files of Colonial Bank are complete and accurate
in all material respects and have been maintained in accordance with good
banking practice.
(c) All notices of default, foreclosure proceedings or
repossession proceedings against any real or personal property collateral have
been issued, initiated and conducted by Colonial Bank in full formal and
substantive compliance with all applicable federal, state or local laws and
regulations, and no loss or impairment of any security interest, or exposure to
meritorious lawsuits or other proceedings against Colonial Bank has been or will
be suffered or incurred by Colonial Bank.
(d) Colonial Bank is not in violation of any applicable
servicer or any other requirements of the FHA, VA, FNMA, GNMA, FHLMC, SBA or any
private mortgage insurer which insured or guaranteed any loans owned by Colonial
Bank or as to which Colonial Bank has sold to other investors, the effect of
which violation would materially and adversely affect the business, assets,
earnings, operation or condition (financial or otherwise) of Colonial Bank.
(e) Colonial Bank has not knowingly engaged principally, or as
one of its important activities, in the business of extending credit for the
purpose of purchasing or carrying any margin stock.
Commitments. Colonial Bank has delivered to VRB as
Schedule 2.11 a listing of all outstanding commitments,
including outstanding letters of credit, repurchase agreements
and unfunded agreements to lend of Colonial Bank.
Hazardous Wastes. To the knowledge of the directors
and officers of Colonial Bank, neither Colonial Bank, nor any
other person having an interest in any property which Colonial
Bank owns or leases, or has owned or leased, or in which it
holds any security interest, mortgage, or other liens or
interest including but not limited to as beneficiary of a
trust deed ("Property") has engaged in the generation, use,
manufacture, treatment, transportation, storage (in tanks or
otherwise), or disposal of Hazardous Material on or from such
Property in violation of applicable laws which would have a
material adverse effect on Colonial Bank. To the knowledge of
the directors and officers of Colonial Bank, individually or
in the aggregate, there has been no: (i) presence, use,
generation, handling, treatment, storage, release, threatened
release, migration or disposal of Hazardous Material; (ii)
condition that could result in any use, ownership or transfer
restriction; or (iii) condition of nuisance on or from such
Property, any of which individually or collectively would have
a material adverse effect on the business, assets, earnings,
operation or condition (financial or otherwise) of
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Colonial Bank. Colonial Bank has received no notice of, or has
no reason to know of, a condition that could give rise to any
private or governmental suit, claim, action, proceeding or
investigation against Colonial Bank, any such other person or
such Property as a result of any of the foregoing events.
"Hazardous Material" means any chemical, substance, material,
object, condition, or waste harmful to human health or safety
or to the environment due to its radioactivity, ignitability,
corrosivity, reactivity, explosivity, toxicity,
carcinogenicity, infectiousness or other harmful or
potentially harmful properties or effects, including, without
limitation, petroleum or petroleum products, and all of those
chemicals, substances, materials, objects, conditions, wastes
or combinations of them which are now or become listed,
defined or regulated in any manner by any federal, state or
local law based, directly or indirectly, upon such properties
or effects.
Contingent and Other Liabilities. Colonial Bank has
delivered to VRB as Schedule 2.13 a list of contingent and
other liabilities not set forth in other schedules, together
with copies of documents evidencing those liabilities. Except
as set forth in the Colonial Bank Financial Reports or in
schedules delivered by Colonial Bank to VRB, and except for
FDIC insured deposits, federal funds purchased and securities
sold under agreements to repurchase, and other obligations and
liabilities incurred in the ordinary course of business
arising out of transactions subsequent to the date of such
Financial Reports, Colonial Bank has no obligations or
liabilities of any nature (whether accrued, absolute,
contingent or otherwise) which are material or which, when
combined with all other such obligations or liabilities would
be material to the business, assets, earnings, operation or
condition (financial or otherwise) of Colonial Bank.
No Adverse Changes. Since June 30, 1997, (a) there
has been no material adverse change in the business, assets,
earnings, operation or condition (financial or otherwise) of
Colonial Bank; (b) no cash, stock or other dividends, or other
distributions with respect to capital stock, have been
declared or paid by Colonial Bank except cash dividends as
required by the terms of Colonial Bank's preferred stock
outstanding, nor has Colonial Bank purchased or redeemed any
of its shares (other than purchases of stock options as
anticipated by Section 4.11 of the Plan of Merger); and (c)
there has not been any damage, destruction or loss (whether or
not covered by insurance) materially and adversely affecting
any asset material to Colonial Bank. As of the Effective Date,
Colonial Bank will have no obligations or liabilities of any
nature, whether absolute, accrued, contingent or otherwise, in
excess of $50,000 individually, or $100,000 in the aggregate,
other than:
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Obligations and liabilities disclosed in call reports as of June 30,
1997 or otherwise disclosed to VRB pursuant to this Plan of Merger;
Obligations and liabilities incurred in, or as a result of, the normal
and ordinary course of business, consistent with past practices, which
do not, in the aggregate, have a material adverse effect on the
business, assets, earnings, operation or condition (financial or
otherwise) of Colonial Bank; and
Obligations and liabilities incurred otherwise than in or as a result
of the normal and ordinary course of business consistent with past
practices, provided VRB shall have consented thereto pursuant to
Section 4.1 hereof.
There is no basis for any claim against Colonial Bank or any other
obligation or liability of any nature, in excess of $50,000 individually or
$100,000 in the aggregate, except as set forth in clauses (a), (b), and (c)
above.
Regulatory Approvals Required. The nature of the
business and operations of Colonial Bank does not require any
approval, authorization, consent, license, clearance or order
of, any declaration or notification to, or any filing or
registration with, any governmental or regulatory authority in
order to permit Colonial Bank to perform its obligations under
this Plan, or to prevent the termination of any material
right, privilege, license or agreement of Colonial Bank, or
any material loss or disadvantage to its business, upon
consummation of the Plan of Merger, except for:
(a) Approval of the Plan of Merger by the Oregon Director;
(b) Approval of the Plan of Merger by the FDIC; and
(c) Filing of the Plan of Merger with the Oregon Director.
Corporate and Shareholder Approval of Plan, Binding
Obligations. Colonial Bank has all requisite corporate power
to execute, deliver and perform its obligations under this
Plan. The execution, delivery and performance of this Plan,
and the transactions contemplated thereby, have been duly
authorized by the Board of Directors of Colonial Bank. No
other corporate action on the part of Colonial Bank other than
shareholder approval is required to authorize the Plan of
Merger or the consummation of the transactions contemplated
thereby. This Plan has been duly executed and delivered by
Colonial Bank and constitutes the legal, valid and binding
obligation of Colonial Bank enforceable in accordance with its
terms.
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No Defaults from Transaction. Subject to compliance
with the governmental approvals described in Section 2.15,
neither the execution, delivery and performance of the Plan of
Merger by Colonial Bank, nor the consummation of the
transactions contemplated thereby will conflict with, result
in any breach or violation of, or result in any default or any
acceleration of performance under, any of the terms,
conditions or provisions of its Articles of Incorporation or
Bylaws, or of any statute, regulation or existing order, writ,
injunction or decree of any court or governmental agency, or
of any contract, agreement or instrument to which it is a
party or by which it is bound, or will result in the
declaration or imposition of any lien, charge or encumbrance
upon any of the assets of Colonial Bank which are material to
their business.
Tax Returns. Except as would not have a material
adverse effect on Colonial Bank, (i) Colonial Bank, as a
member of the IBC consolidated group, has filed all federal,
state and other income, franchise or other tax returns,
required to be filed by it, (ii) each such return is complete
and accurate in all material respects, (iii) all taxes and
related interest and liabilities to be paid in connection
therewith have been paid or adequate reserve has been
established for the timely payment thereof, and (iv) Colonial
Bank has timely and accurately filed all currency transaction
reports required by the Bank Secrecy Act, as amended, and has
timely and accurately filed all required information returns
and reports, including without limitation forms 1099, and has
exercised due diligence in obtaining certified taxpayer
identification numbers as required by the Code and Treasury
Regulations. Colonial Bank has not received notice of any
federal, state or other income, franchise or other tax
assessment or notice of a deficiency to date which has not
been paid or for which adequate reserve has not been provided,
and Colonial Bank does not know of any pending or threatened
audit or investigation of Colonial Bank with respect to any
tax liabilities. There are currently no agreements in effect
to either extend the period of limitations for assessment or
collection of any tax. Colonial Bank has delivered to VRB as
Schedule 2.18 copies of the federal and state tax returns for
years 1994 through 1996 for IBC.
Real Property, Leased Personal Property. Colonial
Bank has delivered to VRB as Schedule 2.19 a list setting
forth all real property owned by Colonial Bank as present,
former or future bank premises and all real property currently
held as other real estate owned. Except as set forth in that
schedule or except for disposition of other real estate owned
in the ordinary course of business, Colonial Bank will own all
of such real property presently owned, on the Effective Date.
Except as may be noted on that schedule, all real property
reflected in the Colonial Bank Call Report as of June 30, 1997
is included in that schedule. The leases pursuant to which
Colonial Bank leases real and personal property, copies of
which have also been delivered to VRB as part of Schedule
2.19, are valid and effective in accordance with their
respective terms and there is not under any such lease any
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default by Colonial Bank nor has there occurred any event
which, with the giving of notice, lapse of time, or otherwise,
would constitute an event of default. The real and personal
property leased by Colonial Bank is free of any adverse claims
known to Colonial Bank. Except as noted on Schedule 2.19, all
buildings and structures on the real property, the equipment
located thereon, and the real and personal property leased by
Colonial Bank, are in all material respects in good operating
condition and repair and conform in all material respects to
all applicable laws, ordinances and regulations. Colonial Bank
has good and marketable title to all of its real and personal
property, subject to no mortgages, pledges, encumbrances,
liens or charges of any kind, except liens for taxes not
delinquent and except as shown in Schedule 2.19 delivered to
VRB. Colonial Bank owns or leases all property on which its
continued business operations are materially dependent.
Insurance. Colonial Bank has provided to VRB as
Schedule 2.20 copies of all insurance policies currently in
force with respect to Colonial Bank's business and real and
personal property, and it will maintain all existing insurance
through the Effective Date. Colonial Bank is in compliance in
all material respects with all existing insurance policies and
has not failed to give timely notice or present any material
claim thereunder. Except as set forth in Schedule 2.20,
Colonial Bank has maintained such policies or comparable
coverage for each of the past six years.
Trademarks. Colonial Bank owns or licenses all
patents, trademarks, copyrights or trade names which it
considers to be material to its business taken as a whole, and
has not been charged with infringement or violation of any
patent, trademark, copyright or trade name which would be
likely to have a material adverse effect on its business.
Contracts and Agreements. Colonial Bank has delivered
to VRB as Schedule 2.22, copies of all material outstanding
contracts, agreements, leases or understandings to which
Colonial Bank is a party or to which any of its properties are
subject, except those referred to in schedules furnished
pursuant to other sections of this Plan, and except for any
contracts or agreements entered into with Colonial Bank
customers in the ordinary course of business. Such documents
include, without limitation, all agreements, contracts, leases
or understandings with officers and directors of Colonial Bank
or VRB, all of which are related to, and have been entered
into in the ordinary course of, Colonial Bank's banking
business. Colonial Bank is not in material default or breach,
nor has there occurred any event which with notice or lapse of
time would constitute a material breach or default by Colonial
Bank, under any contract, agreement, instrument, lease or
understanding, and, excluding defaults by customers of
Colonial Bank
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reflected in Colonial Bank's regular delinquent loan reports
which have been and will be made available to VRB, Colonial
Bank does not know of any default by any other party thereto
and, no contract, agreement, lease or undertaking referred to
in Schedule 2.22, will be modified or changed prior to the
Effective Date without the prior written consent of VRB which
will not be unreasonably withheld. No consent or approval by
the parties thereto is required by reason of this Plan to
maintain such contracts, agreements, leases and undertakings
in effect. No waiver or indulgence has been granted by any of
the landlords under any such leases.
Employee Benefits.
(a) Each Employee Benefit Plan sponsored or maintained by
Colonial Bank ("Benefit Plan") is set forth in Schedule 2.23. Except as set
forth in such schedule, Colonial Bank neither has nor has sponsored any other
pension, profit sharing, thrift, savings, bonus, retirement, vacation, life
insurance, health insurance, severance, sickness, disability, medical or death
benefit plans.
(b) Except as set forth on Schedule 2.23, there are no
employment contracts entered into by Colonial Bank and no other deferred
compensation contracts, agreements, arrangements or commitments maintained or
agreed to by it. There are no other compensation, employment or collective
bargaining agreements, stock options, stock purchase agreements, life, health,
accident or other insurance, bonus, deferred or incentive compensation,
change-in-control, severance or separation, profit sharing, retirement, or other
employee fringe benefit policies or arrangements of any kind, covering employees
or former employees or other persons of Colonial Bank.
(c) Colonial Bank does not maintain nor contribute to an
"employee welfare benefit plans" (as defined in section 3(1) of ERISA).
(d) Other than as set forth in Schedule 2.23, Colonial Bank
has not maintained a pension benefit plan that is subject to title 1, subtitle
B, part 3 of ERISA ("Pension Benefit Plan"). With respect to any such Pension
Benefit Plan, the amount of liability for any contribution paid or owing with
respect to such Pension Benefit Plan for the last or current plan year and the
plan year in which the Effective Date occurs are set forth on Schedule 2.23.
There are no other material liabilities of Colonial Bank that would be incurred
in connection with a termination of the Plan, and the Plan is fully funded.
(e) Colonial Bank and, to the knowledge of the executive
officers and directors of Colonial Bank, all persons having fiduciary or other
responsibilities or duties with respect to any Benefit Plan, are, and have since
inception been, in compliance in all material respects with, and each such
Benefit Plan is and has been operated in all material respects in accordance
with, its provisions and in compliance with the applicable laws, rules and
regulations governing such
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Plan, including, without limitation, the rules and regulations promulgated by
the Department of Labor, the Pension Benefit Guaranty Corporation and the IRS
under ERISA or the Code. Each Pension Benefit Plan and any related trust
agreements or annuity contracts (or any other funding instruments) comply
currently, and have complied in the past, both as to form and operation, with
the provisions of ERISA and the Code (including section 410(b) of the Code
relating to coverage), where required in order to be tax-qualified under section
401(b) or 403(a) or other applicable provisions of the Code, and all other
applicable laws, rules and regulations; all necessary governmental approvals for
the Benefit Plans have been obtained; and a favorable determination as to the
qualification under the Code of each Pension Benefit Plan set forth in Schedule
2.23 and each amendment thereto has been made by the IRS.
(f) Each Welfare Benefit Plan and each Pension Benefit Plan
has been administered to date in material compliance with the requirements of
the claims procedure of the Code and ERISA. All reports required by any
government agency and disclosures to participants with respect to each Welfare
Benefit Plan and each Pension Benefit Plan have been timely made or filed. Each
Benefit Plan has been operated since inception in material compliance with the
governing instruments and applicable federal or state law. In particular, but
without limitation, each Welfare Benefit Plan has been administered in material
compliance with federal law, including without limitation the health care
continuation requirements of federal law ("COBRA"). Other than as required by
COBRA, and amounts due Participants under each Pension Benefit Plan, Colonial
Bank has no obligation to furnish health, severance or other benefits under any
Benefit Plan after retirement or other severance of an employee.
(g) Neither Colonial Bank nor, to Colonial Bank's knowledge,
any plan fiduciary of any Welfare Benefit Plan or Pension Benefit Plan, has
engaged in any transaction in violation of section 406(a) or (b) of ERISA (for
which no exemption exists under section 408 of ERISA) or any "prohibited
transaction" (as defined in section 4975(c)(1) of the Code) for which no
exemption exists under section 4975(c)(2) or (d) of the Code or in any
prohibited transactions under predecessor provisions of the Code.
(h) Colonial Bank has had no liability to the Pension Benefit
Guaranty Corporation ("PBGC"). No material liability to the PBGC has been or
will be incurred by Colonial Bank or other trade or business under "common
control" with Colonial Bank (as determined under section 414(c) of the Code)
("Common Control Entity") on account of any termination of an employee pension
benefit plan subject to title IV of ERISA. Except as set forth in Schedule 2.23,
since September 1, 1974, no filing has been made by Colonial Bank (or any Common
Control Entity) with the PBGC (and no proceeding has been commenced by the PBGC)
to terminate any employee pension benefit plan subject to title IV of ERISA
maintained, or wholly or partially funded by Colonial Bank (or any Common
Control Entity). Neither Colonial Bank nor any Common Control Entity has (i)
ceased operations at a facility so as to become subject to the provisions of
section 4062(e) of ERISA, (ii) withdrawn as a substantial employer so as to
become subject to the provisions of section 4063 of ERISA, (iii) ceased making
contributions on or before the Effective Date to any employee pension benefit
plan subject to section 4064(a) of ERISA to which Colonial Bank (or any Common
Control Entity) made contributions during the
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<PAGE> 16
five years prior to the Effective Date, or (iv) made a complete or partial
withdrawal from a multi-employer plan (as defined in section 3(37) of ERISA) so
as to incur withdrawal liability as defined in section 4201 of ERISA (without
regard to subsequent reduction or waiver of such liability under section 4207 or
4208 or ERISA).
(i) Complete and correct copies of the following documents
have been furnished to VRB as Schedule 2.23:
(i) Each Benefit Plan and any related trust
agreements;
(ii) The most recent summary plan descriptions of each
Benefit Plan subject to ERISA;
(iii) The most recent determination letters of the IRS
with respect to the qualified status of a Pension Benefit Plan;
(iv) Annual Reports (on form 5500 series) required to
be filed with any governmental agency for the last two years;
(v) Financial information which identifies (x) all
asserted or unasserted claims arising under any Benefit Plan, (y) all claims
presently outstanding against any Benefit Plan, and (z) a description of any
future compliance action required with respect to any Benefit Plan under ERISA,
or federal or state law.
(j) Each Welfare Benefit Plan and each Pension Benefit Plan is
legally valid and binding and in full force and effect.
Employment Disputes. There is no labor strike,
dispute, slowdown or stoppage pending or, to the best
knowledge of Colonial Bank, threatened against Colonial Bank,
and Colonial Bank does not have any knowledge of any attempt
to organize any employees of Colonial Bank into a collective
bargaining unit. Consummation of the Plan of Merger will not
(either alone or in combination with any other act or event)
result in any payment of severance pay or any other payment
becoming due from Colonial Bank to any of its employees except
as set forth in Schedule 2.23. Colonial Bank is not a party to
any agreement involving payments to any person or entity based
upon the profits, revenues or other financial performance of
Colonial Bank except as set forth on Schedule 2.23.
Reserve for Loan Losses. Colonial Bank's reserve for
loan losses, as established from time to time, is adequate as
determined by the standards applied to Colonial Bank by the
applicable bank regulatory agencies and pursuant to generally
accepted accounting principles. At the time of closing, the
percentage
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of the reserve to total loans will not be less than such
percentage was at June 30, 1997.
Repurchase Agreement. Colonial Bank has valid and
perfected first position security interests in all government
securities subject to repurchase agreements and the market
value of the collateral securing each such repurchase
agreement equals or exceeds the amount of the debt secured by
such collateral under such agreements.
Shareholder List. The list of shareholders of
Colonial Bank dated June 6, 1997, provided to VRB as Schedule
2.27, is a true, correct and complete list of the names,
addresses and holdings of all record holders of Colonial Bank
Stock as of that date. Colonial Bank shall notify VRB of any
change known to Colonial Bank in such stock ownership of over
one percent (1%) through the Effective Date.
Proxy Statement. The proxy statement to be used by
Colonial Bank to solicit proxies from the holders of Colonial
Bank Stock at the meeting of shareholders held to consider and
vote upon this Plan of Merger, and the transactions
contemplated thereby (in its definitive form the "Proxy
Statement"), will fairly describe the transaction and Colonial
Bank, and will contain no untrue statement of any material
fact and will not omit to state any material fact required to
be stated therein or necessary to make the statements therein
not misleading, except those statements in or omission from
the Proxy Statement which may be made with respect to VRB.
Colonial Bank will promptly advise VRB in writing if at any
time prior to the Effective Date Colonial Bank shall obtain
knowledge of any facts that might make it necessary or
appropriate to amend or supplement the Proxy Statement in
order to make the statements therein not misleading or to
comply with applicable law.
Interests of Directors and Others. Except as shown on
Schedule 2.29, no officer or director of Colonial Bank has any
material interest in any assets or property (whether real or
personal, tangible or intangible), of or used in the business
of Colonial Bank other than as an owner of outstanding
securities or deposit accounts of Colonial Bank, or as
borrowers under loans fully performing in accordance with
their terms, which terms are no more favorable than those
available to unaffiliated parties made at or about the same
time by Colonial Bank.
Colonial Bank Schedules. Colonial Bank has delivered
to VRB the following schedules, as described in the preceding
Sections 2.1 through 2.29:
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2.3 Articles of Incorporation and Bylaws.
2.5 Reports to Shareholders since January 1, 1995.
2.6 Colonial Bank Call Reports of Condition and Income for December
31, 1994, 1995 and 1996 and June 30, 1997.
2.7 Colonial Bank Financial Reports
2.9 Schedule of Litigation.
2.10 Schedules of Law/Regulatory Violations.
2.11 Schedule of Commitments.
2.13 Schedule of Contingent and other Liabilities.
2.14 Schedule of Changes.
2.18 Federal and State Tax Returns for 1994 through 1996.
2.19 Schedule of Owned Real Property and Real and Personal Property;
Schedule of Encumbrances on Real and Personal Property.
2.20 Schedule of Insurance Policies.
2.22 Schedule of Contracts and Agreements.
2.23 Employee Benefit Plans
2.27 Shareholders List as of June 6, 1997.
2.29 Schedule of Interests of Management in Property or Business of
Colonial Bank.
The information in the schedules constitutes additional representations
and warranties made by Colonial Bank hereunder and is incorporated herein by
reference. The copies of documents furnished as part of these schedules are
true, correct and complete copies and include all amendments, supplements, and
modifications thereto and all waivers applicable thereunder.
No Misstatements or Omissions. No representation or
warranty of Colonial Bank in this Plan of Merger or in any
statement, certificate or schedule furnished or to be
furnished by Colonial Bank pursuant to this Plan of Merger or
in connection with the transaction contemplated by this Plan
of Merger, contains or will contain any untrue statements of a
material fact or omits or will omit to state any material
fact.
2.32 Brokers, Investment Bankers. Colonial Bank represents that it has
not employed any investment banker, broker, finder or other intermediaries in
connection with the transaction contemplated hereby in such manner as to give
rise to any valid claim against any party for an investment banker's fee,
broker's commission, finder's fee or any like payment.
.REPRESENTATIONS AND
WARRANTIES OF VRB
VRB represents and warrants to Colonial Bank, as of the Effective Date,
as follows:
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Organization, Existence, Authority of VRB. VRB is a
state chartered bank, duly organized, and validly existing
under the laws of the State of Oregon and has all requisite
corporate power and authority to own, lease and operate its
properties and assets and to carry on its business in the
manner then being conducted. Its activities do not require it
to be qualified to do business in any other state.
VRB Public Reports. VRB has delivered to Colonial Bank as
Schedule 3.2 copies of VRB's Form 10-K report filed with the SEC for
the years ended December 31, 1996 and the Form 10-Q for the six months
ended June 30, 1997 (which, together with such reports filed subsequent
to such date, the "VRB Public Reports"). Until the Effective Date, VRB
will file with the SEC (and will furnish to Colonial Bank within two
days thereafter) all additional reports and other documents which VRB
is required by the Securities Exchange Act of 1934 or regulations
promulgated thereunder to file or otherwise files with the SEC. The VRB
Public Reports have been and will be prepared in accordance with
generally accepted accounting principles, consistently applied, and
present fairly the financial position and results of operation of VRB
on the dates and for the periods covered thereby. As of the date filed,
each VRB Public Report has and will be accurate and complete, and
complies or will comply with all requirements applicable to such
filing.
Articles of Incorporation, Bylaws, Minutes. The
copies of the Articles of Incorporation and the Bylaws of VRB
delivered to Colonial Bank as Schedule 3.3, are true, correct
and complete copies of existing Articles of Incorporation and
Bylaws of VRB, as amended to date. VRB is not in violation of
any provision of its Articles of Incorporation or Bylaws. The
minute books of VRB contain accurate and complete minutes of
all meetings and all consents evidencing actions taken without
a meeting by the Board of Directors (and any committees
thereof) and by the shareholders of VRB.
3.4 No Adverse Changes. Since June 30, 1997, there has been no material
adverse change in the business, assets, earnings, operations, (financial or
otherwise) of VRB taken as a whole.
3.5 Regulatory Approvals Required. No approval, authorization, consent,
license, clearance or order of, any declaration or notification to, or filing or
registration with, any governmental or regulatory authority is required in order
to permit VRB to perform its obligations under this Plan of Merger except for:
(a) Approval of the Plan of Merger by the Oregon Director;
(b) Approval of the Plan of Merger by the FDIC; and
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(c) Filing of the Plan of Merger with the Oregon Director.
3.6 Corporate Approval of Plan, Binding Obligations. VRB has all
requisite corporate power to execute, deliver and perform its obligations under
this Plan of Merger. The execution, delivery and performance of this Plan of
Merger, and the transactions contemplated thereby, have been duly authorized by
the Board of Directors of VRB. No other corporate action on the part of VRB is
required to authorize this Plan of Merger or the consummation of the
transactions contemplated thereby. This Plan has been duly executed and
delivered by VRB and constitutes the legal, valid and binding obligation of VRB
enforceable against VRB in accordance with its terms.
3.7 No Violations. The execution, delivery and performance of this Plan
of Merger will not violate or conflict with the Articles of Incorporation,
Bylaws or any material contract of VRB.
3.8 Employee Benefits. Each Employee Benefit Plan sponsored or
maintained by VRB ("VRB Benefit Plan") is set forth in Schedule 3.8 and complete
copies of all VRB Benefit Plans have been delivered to Colonial Bank.
3.9 VRB Schedules. VRB has delivered to Colonial Bank the following
schedules, as described in the preceding Sections 3.1 through 3.8:
3.2 VRB Public Reports.
3.3 Articles of Incorporation and Bylaws.
3.8 Employee Benefit Plans
The information in the schedules constitutes additional representations
and warranties made by VRB hereunder and is incorporated herein by reference.
The copies of documents furnished as part of these schedules are true, correct
and complete copies and include all amendments, supplements, and modifications
thereto and all waivers applicable thereunder.
3.10 Financial Resources. VRB has adequate liquidity to provide the
funds necessary to exercise the option granted by IBC shareholders and to
consummate the transactions contemplated by this Plan of Merger without
dependence of any external sources of funds or financing except under legally
binding commitments that are not subject to satisfaction of any further
conditions.
3.11 No Misstatements or Omissions. No representation or warranty of
VRB to this Plan of Merger or in any statement, certificate or schedule
furnished or to be furnished by VRB pursuant to this Plan, contains or will
contain any untrue statement of a material fact.
3.12 Branches and Employment. VRB has no plan or intention to close any
facility of Colonial Bank other than the consolidation of the Rogue River Branch
or, except for certain senior
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officers (Vice President or above and making over $50,000), to terminate the
employment of any Colonial Bank employee.
3.13 No Brokers. VRB represents that it has not employed any investment
banker, broker, finder or other intermediaries in connection with the
transaction contemplated hereby in such manner as to give rise to any valid
claim against any party for an investment banker's fee, broker's commission,
finder's fee or any like payment.
.COVENANTS OF
COLONIAL BANK
4.1 Certain Actions. During the period between the date hereof and the
earlier of the Effective Date or the termination of this Plan, except as
otherwise contemplated by this Plan of Merger, Colonial Bank shall not, without
first obtaining the written approval of VRB, which will not be unreasonably
withheld:
(a) Amend its Articles of Incorporation or Bylaws;
(b) Declare or pay any dividend (except (i) dividends on its
preferred stock as required by the terms thereof and (ii) in the event the
closing occurs after February 28, 1998, a dividend not in excess of Colonial
Bank's adjusted net income after December 31, 1997 through the date of closing
calculated without regard to the items described in clauses (i), (ii), and (iii)
of Section 6.13); redeem, repurchase or otherwise acquire or agree to acquire
any Colonial Bank Stock or make or commit to make any other distribution to
Colonial Bank's stockholders;
(c) Issue, sell, or deliver; agree to issue, sell or deliver;
or grant or agree to grant any shares of any class of the stock of Colonial
Bank; any securities convertible into any of such shares; or any options,
warrants, or other rights to purchase;
(d) Except in the ordinary course of business, borrow or agree
to borrow any funds or voluntarily incur, assume or become subject to, whether
directly or by way of guarantee or otherwise, any commitment, obligation or
liability (absolute or contingent); or cancel or agree to cancel any debts or
claims;
(e) Except in the ordinary course of business, lease, sell or
transfer; agree to lease, sell or transfer, or grant or agree to grant any
preferential rights to lease or acquire, any of its assets, property or rights,
or make or permit any amendment or termination of any contract, agreement,
instrument or other right to which Colonial Bank is a party and which is
material to Colonial Bank's business, assets, earnings, operation or condition
(financial or otherwise); or mortgage, pledge or subject to a lien or any other
encumbrance any of its assets, tangible or intangible;
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(f) Violate, or commit a breach of or default under any
contract, agreement or instrument to which it is a party or to which any of its
assets may be subject and which is material to its business, assets, earnings,
operation or condition (financial or otherwise); or violate in any material
respect any applicable law, regulation, ordinance, order, injunction or decree
or any other requirements of any governmental body or court, relating to its
assets or business;
(g) Increase or agree to increase the compensation payable to
any officer, director, employee or agent, except for merit increases to
non-management personnel in the ordinary course of business consistent with past
practices (provided that this shall not prohibit the payment of normal year-end
bonuses which have been fully funded and do not exceed $11,000 per month in
total); enter into any contract of employment for a period greater than 30 days
or providing for payments upon termination of employment or the occurrence of
any other event including but not limited to the consummation of this Plan of
Merger; or enter into or make any change in any Employee Benefit Plan except as
required by law;
(h) Except in the ordinary course of business through
foreclosure or transfer in lieu thereof in the collection of loans to customers,
acquire control of or any other ownership interest in any other corporation,
association, joint venture, partnership, business trust or other business
entity; acquire control or ownership of all or a substantial portion of the
assets of any of the foregoing; merge, consolidate or otherwise combine with any
other corporation; or enter into any agreement providing for any of the
foregoing;
(i) Acquire an ownership or leasehold interest in any real
property whether by foreclosure, deed in lieu of foreclosure or otherwise
without making an environmental evaluation consistent with VRB's policy, a copy
of which has been provided to Colonial Bank.
(j) Make any payment in excess of $50,000 in settlement of any
pending or threatened legal proceeding involving a claim against Colonial Bank;
(k) Engage in any activity or transaction which is other than
in the ordinary course of business including the sale of any properties,
securities, servicing rights, loans or other assets except as specifically
contemplated hereby, or which would have a material adverse effect on the
business, assets, earnings, operation or condition (financial or otherwise) of
Colonial Bank provided that nothing herein shall prevent the sale of loans or
investments or the taking of other actions for the purpose of maintaining
liquidity;
(l) Acquire, open or close any office or branch;
(m) Do any act which causes Colonial Bank not to remain in
good standing with all regulatory authorities having jurisdiction over its
business operations;
(n) Make or commit to make any capital expenditures, capital
additions or capital improvements involving an amount in excess of $10,000 other
than completion of the remodel of the South Grants Pass Branch;
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(o) Make, renew, commit to make, or materially modify any loan
over $250,000 or a series of loans or commitments over $500,000 to any person or
related persons without furnishing a copy of the report provided to Colonial
Bank's loan committee to VRB at least three (3) business days prior to such
approval or when such report is first provided to the loan committee if less
than three (3) business days;
(p) Enter into or modify any agreement or arrangement (except
for renewals of previously disclosed indebtedness) which alone or together with
all similar arrangements exceeds $100,000, with any director or officer of
Colonial Bank, any person who owns more than five percent (5%) of the
outstanding capital stock of Colonial Bank, or any business or entity in which
such director, officer or beneficial owner has an ownership interest in excess
of ten percent (10%); or
(q) Sell any investment securities except as necessary to
provide liquidity in accordance with past practices, or materially restructure
the mix or maturities of its investment portfolio.
4.2 Filing Reports and Returns, Payment of Taxes. During the period
between the date hereof and the earlier of the Effective Date or the termination
of this Plan, Colonial Bank (alone or as a member of a consolidated group) shall
duly and timely (by the due date or any duly granted extension thereof) file all
reports and returns required to be filed with federal, state, local, foreign and
other regulatory authorities, including, without limitation, reports required to
be filed with the FDIC or Oregon Director and all required federal, state and
local tax returns. Unless it is contesting the same in good faith and, if
appropriate, has established reasonable reserves therefore, Colonial Bank will
promptly pay all taxes and assessments indicated by tax returns as due or
otherwise lawfully levied or assessed upon it or any of its properties and
withhold or collect and pay to the proper governmental authorities or hold in
separate bank accounts for such payment all taxes and other assessments which
are required by law to be so withheld or collected.
4.3 Preservation of Business. During the period between the date hereof
and the earlier of the Effective Date or the termination of this Plan, Colonial
Bank shall use its best efforts to preserve intact its business organization; to
preserve its relationships and goodwill with its customers, employees and other
having business dealings with it; and to keep available the services of its
present officers, agents and employees. Except as otherwise contemplated hereby
or as requested or agreed to by VRB, Colonial Bank will not institute any novel,
unusual or material change in its methods of management, lending policies,
personnel policies, accounting, marketing, investments or operations.
4.4 Best Efforts. Colonial Bank will use its best efforts to obtain and
to assist VRB in obtaining all necessary approvals, consents and orders,
including but not limited to approval of the FDIC and the Oregon Director, to
the transactions contemplated by this Plan of Merger, and to obtain the approval
of the shareholders of Colonial Bank.
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4.5 Continuing Accuracy of Representatives and Warranties. During the
period between the date hereof and the earlier of the Effective Date or the
termination of this Plan, Colonial Bank will not take any action which would
cause or constitute a breach of any of the representations or warranties of
Colonial Bank contained in this Plan or which would cause any such
representations or warranties, if made on and as the date of such event or the
Effective Date, to be untrue or inaccurate in any material respect (other than
an event so affecting a representation or warranty which is permitted hereby or
is expressly limited to a state of facts existing at a time prior to the
occurrence of such event). In the event of, and promptly upon becoming aware of
the occurrence of or the pending or threatened occurrence of any event which
would cause or constitute such a breach or inaccuracy, Colonial Bank will give
detailed written notice thereof to VRB and will use its best efforts to prevent
or promptly remedy such breach or inaccuracy.
4.6 Updating Schedules. During the period between the date hereof and
the earlier of the Effective Date or the termination of this Plan, Colonial Bank
will, from time to time and as appropriate to ensure that the schedules provided
to VRB remain at all times accurate and complete in all material respects, to
and including the Effective Date, promptly supplement the schedules.
Notwithstanding anything to the contrary contained herein, supplementation of
such schedules following the execution of this Plan shall not be deemed a
modification of Colonial Bank's representations or warranties contained herein.
4.7 Rights of Access. During the period between the date hereof and the
earlier of the Effective Date or the termination of this Plan of Merger,
Colonial Bank agrees to permit VRB, and its employees, agents and
representatives reasonable access during normal business hours to the premises
of Colonial Bank on reasonable notice and to all books, files and records of
Colonial Bank, including but not limited to loan files, litigation files and
federal and state examination reports, and to furnish to VRB such financial and
operating data and other information with respect to the business and assets of
Colonial Bank as VRB shall reasonably request.
4.8 Delivery of Reports. During the period between the date hereof and
the earlier of the Effective Date or the termination of this Plan, Colonial Bank
will deliver to VRB promptly upon preparation copies of:
(a) Minutes of meetings of Colonial Bank's shareholders, Board
of Directors, and management or director committees;
(b) Colonial Bank loan committee reports and reports of loan
delinquencies, foreclosures and other adverse developments regarding loans; and
of developments regarding other real estate owned or other assets acquired
through foreclosure or action in lieu thereof;
(c) All regularly prepared internal financial statements of
Colonial Bank, which shall be issued not less frequently than monthly; and
(d) Quarterly statements of condition and income verified by
Colonial Bank's chief financial officer and complying with either regulatory
accounting principles or generally
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accepted accounting principles consistently applied, which present fairly the
financial condition and results of operations of Colonial Bank on the dates and
for the periods covered.
4.9 Payment of Obligations. During the period between the date hereof
and the earlier of the Effective Date or the termination of this Plan, Colonial
Bank will pay promptly upon receipt of billings all accounts payable, including
professional fees for legal, financial and accounting services, and will
maintain its assets in accordance with good business practices.
4.10 Shareholder Meeting. Colonial Bank shall call a meeting of its
shareholders to consider and vote upon this Plan of Merger and the transactions
contemplated thereby. Colonial Bank shall give notice of the meeting in
accordance with Oregon law and all requirements of laws and regulations
applicable to the merger transaction. The date of the shareholders meeting shall
be set in agreement with VRB to follow receipt of regulatory approvals and to
immediately proceed the Effective Date. Colonial Bank shall deliver to its
shareholders a proxy statement complying with the representations and warranties
of Section 2.28 hereof in connection with the shareholders meeting. Provided
that the representations and warranties of VRB contained herein continue to be
accurate, the shareholders of Colonial Bank signing this Plan agree to vote all
Colonial Bank shares held or controlled by it or them for the approval of all
such matters.
4.11 Cash-Out of Options. Prior to the Effective Date, Colonial Bank
shall use its best efforts to cancel its outstanding stock options at a price
not to exceed the difference between the exercise price of each option and
$43.36 per share.
4.12 Other Actions. Colonial Bank covenants and agrees to execute, file
and record such documents and do such other acts and things as are necessary or
appropriate to obtain required government and regulatory approvals to and to
otherwise accomplish this Plan of Merger.
4.13 No Solicitation. Subject to the fiduciary duties of the directors
and officers of Colonial Bank based upon a written opinion of Miller, Nash,
Wiener, Hager & Carlsen LLP provided to VRB, between the date hereof and the
Effective Date, Colonial Bank, its Board of Directors and the shareholders of
Colonial Bank executing this Plan, shall not directly or indirectly initiate
contact with any person or entity in an effort to solicit any Alternative
Acquisition Transaction (as defined below), nor will Colonial Bank authorize or
knowingly permit any officer or any other person representing or retained by
Colonial Bank to directly furnish or cause to be furnished any non-public
information concerning its business, properties, or assets to any person or
entity in connection with any possible Alternative Acquisition Transaction.
Colonial Bank shall promptly orally notify VRB followed by written notice, of
any Alternative Acquisition Transaction, whether oral or written, by any person
or persons to Colonial Bank, or any indication from any person that it is
considering making any Alternative Acquisition Transaction. The persons
executing this plan agree to vote his or her Colonial Bank Stock and any shares
over which he or she have voting control in favor of this Plan of Merger.
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For purposes of this Plan of Merger an "Alternative Acquisition
Transaction" means any tender offer, agreement, understanding or other proposal
of any nature pursuant to which any corporation, partnership, person or other
entity, other than VRB, would directly or indirectly (i) acquire or participate
in a merger, share exchange, consolidation or any other business combination
involving Colonial Bank or IBC; (ii) acquire in excess of fifteen percent (15%)
of the outstanding Colonial Bank Stock or IBC or the right to vote fifteen
percent (15%) or more of the Colonial Bank Stock or IBC; or (iii) acquire a
significant portion of the assets or earning power of Colonial Bank or IBC.
.COVENANTS OF VRB
Best Efforts. VRB will use its best efforts to obtain
and to assist Colonial Bank in obtaining, all necessary
approvals, consents and orders, including but not limited to
approvals of the FDIC and the Oregon Director, to the
transactions contemplated by this Plan of Merger.
Continuing Accuracy of Representatives and
Warranties. During the period between the date hereof and the
earlier of the Effective Date or the termination of this Plan,
VRB will not take any action which would cause or constitute a
breach of any of the representations or warranties of VRB
contained in this Plan or which would cause any such
representations or warranties, if made on and as the date of
such event or the Effective Date, to be untrue or inaccurate
in any material respect (other than an event so affecting a
representation or warranty which is permitted hereby or is
expressly limited to a state of facts existing at a time prior
to the occurrence of such event). In the event of, and
promptly upon becoming aware of the occurrence of or the
pending or threatened occurrence of any event which would
cause or constitute such a breach or inaccuracy, VRB will give
detailed written notice thereof to Colonial Bank and will use
its best efforts to prevent or promptly remedy such breach or
inaccuracy.
Updating Schedules. During the period between the
date hereof and the earlier of the Effective Date or the
termination of this Plan, VRB will, from time to time and as
appropriate to ensure that the schedules provided to Colonial
Bank remain at all times accurate and complete, to and
including the Effective Date, promptly supplement the
schedules. Notwithstanding anything to the contrary contained
herein, supplementation of such schedules following the
execution of this Plan shall not be deemed a modification of
VRB's representations or warranties contained herein.
Other Actions. VRB covenant and agree to execute,
file and record such documents and do such other acts and
things as are necessary or appropriate to
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obtain required government and regulatory approvals to and to
otherwise accomplish this Plan of Merger.
5.5 Employee Benefit Plans. (a) Within a reasonable time after the
Effective Date, VRB shall provide to employees who formerly were employees of
Colonial Bank employee benefits, including but not limited to pension plans,
thrift plans, management incentive plans, group life plans, accidental death and
dismemberment plans, vacation benefits, travel accident plans, medical and
hospitalization plans and long-term disability plans, on the same basis as
provided to similarly situated employees of VRB and without any exclusion or
reduction by reason of any pre-existing condition. From and after the Effective
Date, and until VRB has accomplished the actions contemplated by the preceding
sentence, employees who were employees of Colonial Bank immediately prior to the
Effective Time shall be provided with employee benefits under employee benefit
plans of Colonial Bank, or a combination of benefit plans of VRB and Colonial
Bank, as may be reasonably appropriate in order to accomplish an orderly
transition of benefits. From and after the Effective Date, employees who were
employees of Colonial Bank immediately prior to the Effective Date shall receive
full credit for all purposes under such plans for their length of service prior
to the Effective Date with Colonial Bank (and any predecessors thereto) except
for vesting purposes with respect to VRB's matching contributions for such
employees under its 401(k) plan; provided, however, previous Colonial Bank
employees completing two consecutive years of full time employment with VRB will
receive credit for prior service with Colonial Bank for the purpose of vesting
under VRB's 401(k) plan.
(b) VRB agrees to honor in accordance with their terms (i) all
Colonial Bank Employee Benefit Plans and (ii) all contracts, arrangements,
commitments, or understandings described in Schedule 2.23, and (iii) all
benefits vested thereunder as of the Effective Date, including without
limitation, accrued vacation pay. The provisions of this Section 5.5 are
intended to be for the benefit for, and enforceable by, each of the
beneficiaries of or parties to such plans, contracts, arrangements, commitments,
and understandings. Nothing herein, however, shall be deemed to require VRB to
continue such benefit plans.
5.6 Indemnification; Directors' and Officers' Insurance. (a) In the
event of any threatened or actual claim, action, suit, proceeding, or
investigation, whether civil, criminal, or administrative, including without
limitation, any such claim, action, suit, proceeding, or investigation in which
any person who is now, or has been at any time prior to the date of this
Agreement, or who becomes prior to the Effective Date, a director, officer, or
employee of Colonial Bank (the "Indemnified Parties") is, or is threatened to
be, made a party based in whole or in part on, or arising in whole or in part
out of, or pertaining to (i) the fact that he is or was a director, officer, or
employee of Colonial Bank or any of its predecessors or (ii) this Agreement, the
Stock Option Agreement, or any of the transactions contemplated hereby or
thereby, whether in any case asserted or arising before or after the Effective
Date, the parties hereto agree to cooperate and use their best efforts to defend
against and respond thereto. It is understood and agreed that after the
Effective Date, VRB shall indemnify and hold harmless, as and to the fullest
extent permitted by law, each such Indemnified Party against any losses, claims,
damages,
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liabilities, costs, expenses (including reasonable attorney's fees and expenses
in advance of the final disposition of any claim, suit, proceeding, or
investigation to each Indemnified Party to the fullest extent permitted by law
upon receipt of any undertaking required by applicable law), judgments, fines,
and amounts paid in settlement in connection with any such threatened or actual
claim, action, suit, proceeding, or investigation and in the event of any such
threatened or actual claim, action, suit, proceeding, or investigation (whether
asserted or arising before or after the Effective Date), the Indemnified Parties
may retain counsel reasonably satisfactory to them after consultation with VRB;
provided, however, that (1) VRB shall have the right to assume the defense
thereof and upon such assumption VRB shall not be liable to any Indemnified
Party for any legal expenses of other counsel or other expenses subsequently
incurred by any Indemnified Party in connection with the defense thereof, except
that if VRB elects not to assume such defense or counsel for the Indemnified
Parties reasonably advises the Indemnified Parties that there are issues which
raise conflicts of interest between VRB and the Indemnified Parties, the
Indemnified Parties may retain counsel reasonably satisfactory to them after
consultation with VRB, and VRB shall pay the reasonable fees and expenses of
such counsel for the Indemnified Parties, (2) VRB shall be obligated pursuant to
this paragraph to pay for only one firm of counsel for all Indemnified Parties,
unless an Indemnified Party shall have reasonably concluded, based on the advice
of counsel, that in order to be adequately represented, separate counsel is
necessary for such Indemnified Party, in which case, VRB shall be obligated to
pay for such separate counsel, (3) VRB shall not be liable for any settlement
effected without its prior written consent (which consent shall not be
unreasonably withheld), and (4) VRB shall have no obligation hereunder to any
Indemnified Party when and if a court of competent jurisdiction shall ultimately
determine, and such determination shall have become final and nonappealable,
that indemnification for such Indemnified Party in the manner contemplated
hereby is prohibited by applicable law. Any Indemnified Party wishing to claim
Indemnification under this Section 5.6, upon learning of any such claim, action,
suit, proceeding, or investigation, shall notify VRB thereof, provided that the
failure to so notify shall not affect the obligations of VRB under this Section
5.6 except to the extent such failure to so notify materially prejudices VRB.
VRB's obligations under this Section 5.6 continue in full force and effect for a
period of six years from the Effective Time; provided, however, that all rights
to indemnification in respect of any claim (a "Claim") asserted or made within
such period shall continue until the final disposition of such Claim and
provided further that VRB shall have the right of set-off against any payments
required to be made by VRB to an Indemnified Party pursuant to this Section
5.6(a) to the extent that such Indemnified Party shall have received the
indemnification to which such Indemnified Party is entitled from an insurer
under a directors' and officers' liability insurance policy maintained by
Colonial Bank. Excluded from the above indemnification are any claims made by
VRB pursuant to this Plan of Merger, claims (i) based upon a violation of
federal banking regulations including Regulation O, (ii) not permitted by ORS
707.746, or (iii) enumerated in ORS 707.110(5)(c)(A)-(D).
(b) VRB shall purchase or cause to be purchased one year of
extended discover coverage under Colonial Bank's current directors' and
officers' liability insurance policy maintained by Colonial Bank following the
Effective Date of the Plan of Merger.
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(c) In the event VRB or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers or conveys all or substantially all of its properties and
assets to any person, then, and in each such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of VRB assume
the obligations set forth in this section.
(d) The provisions of this Section 5.6 are intended to be for
the benefit of, and shall be enforceable by, each Indemnified Party and his or
her heirs and representatives.
.CONDITIONS TO
OBLIGATIONS OF VRB
The obligation of VRB under this Plan of Merger to consummate the
Merger, shall be subject to the satisfaction, on or before the Effective Date,
of the following conditions (unless waived by VRB in writing and not required by
law):
Shareholders Approvals. Approval of this Plan of
Merger by the stockholders of Colonial Bank and holders of
fewer than five percent of Colonial Bank Stock shall have
voted against and otherwise taken steps to perfect their
dissenter appraisal rights.
No Litigation. Absence of any suit, action, or
proceeding (made or threatened) against VRB, Colonial Bank, or
any of their directors or officers, seeking to challenge,
restrain, enjoin, or otherwise affect this Plan of Merger or
the transactions contemplated thereby; seeking to restrict the
rights of the parties or the operation of the business of
Resultant Bank after consummation of the Merger; or seeking to
subject the parties to this Plan of Merger or any of their
officers or directors to any liability, fine, forfeiture or
penalty on the grounds that the parties hereto or their
directors or officers have violated or will violate their
fiduciary duties to their respective shareholders or will
violate any applicable law or regulation in connection with
the transactions contemplated by this Plan of Merger.
No Banking Moratorium. Absence of a banking
moratorium or other suspension of payment by banks in the
United States or any new limitation on extension of credit by
commercial banks in the United States.
Regulatory Approvals. Procurement of all consents,
orders and approvals required by law, and the satisfaction of
all other necessary or appropriate legal
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requirements, including but not limited to approvals by the
FDIC and the Oregon Director of the transaction contemplated
by this Plan of Merger, without the imposition of any
materially burdensome conditions other than conditions
routinely imposed in similar circumstances, and the expiration
of all regulatory waiting periods.
Other Consents. Receipt of all other consents and approvals
necessary for consummation of the transactions contemplated by this
Plan of Merger.
Opinion of Counsel. Receipt by VRB of a favorable
opinion by Miller, Nash, Wiener, Hager & Carlsen LLP, counsel
to Colonial Bank, in form and substance reasonably
satisfactory to VRB and its counsel, to the effect that,
except as disclosed pursuant to this Plan of Merger:
(a) Colonial Bank is a state chartered bank, duly organized,
validly existing and in good standing under the laws of the State of Oregon and
has all requisite corporate power and authority to own, lease and operate its
properties and assets and carry on its business in the manner being conducted on
the Effective Date;
(b) Colonial Bank has all requisite corporate power and
authority to execute, deliver and perform its obligations under the Plan of
Merger; the execution, delivery and performance of the Plan of Merger, and the
consummation of the transactions contemplated thereby, have been duly authorized
by all requisite corporate action on the part of Colonial Bank; and the Plan of
Merger has been duly executed and delivered by Colonial Bank and constitute the
legal, valid, and binding obligation of Colonial Bank, enforceable in accordance
with its terms, except as the same may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws or by equitable principles; and
(c) The authorized capital stock of Colonial Bank consists of
2,000,000 shares of common stock ($5.00 par value) and 160,857 shares of
preferred stock ($10.50 par value) of which 235,993 shares of common stock and
143,008 shares of preferred stock have been duly issued and are validly
outstanding, fully paid and nonassessable except as provided by the Oregon Bank
Act. Such shares are the only shares of capital stock of Colonial Bank
authorized, issued or outstanding; and to the best of counsel's knowledge,
Colonial Bank is not a party to, and is not obligated by, any commitment, plan
or arrangement to issue or to sell any shares of capital stock or any equity
interest in Colonial Bank. None of the shares of common stock has been issued in
violation of the preemptive rights of any stockholder.
Acquisition of IBC Shares. The acquisition by VRB of
all outstanding IBC shares (and the conversion or cancellation
of all IBC Options) pursuant to the Stock Option Agreement and
the subsequent liquidation of IBC.
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6.8 Continuing Accuracy of Representations and Warranties. Except as
expressly contemplated hereby, the representations and warranties of Colonial
Bank being true in all material respects at and as of the Effective Date as
though such representations and warranties were made at and as of the Effective
Date, except as to representations and warranties that are made as of a
particular time.
6.9 Compliance with Covenants and Conditions. Compliance by Colonial
Bank in all material respects with all agreements, covenants and conditions on
its part required by this Plan to be performed or complied with prior to or at
the Effective Date.
6.10 No Adverse Changes. Between June 30, 1997 and the Effective Date,
the absence of any material adverse change in the business, assets, liabilities,
income, or conditions, financial or otherwise, of Colonial Bank, except changes
contemplated by this Plan and such changes as may have been previously approved
in writing by VRB.
6.11 Reserve for Loan Losses. Prior to the Effective Date, and if
requested as of December 31, 1997 if all regulatory approvals have been received
and closing is anticipated early January 1998, Colonial Bank shall make a
provision sufficient to increase its loan loss reserves to 1.75% of its
outstanding loans. Any such provision shall not, however, be deemed a material
adverse change to Colonial Bank's income or financial condition for purposes of
Section 6.10, or otherwise form a basis for any breach or failure of condition
and shall not serve as a basis for any assertion that the current reserve is
inadequate.
6.12 Certificate. Receipt by VRB of a Certificate of the President and
the Chief Financial Officer of Colonial Bank, dated as of the Effective Date,
certifying to the best of their knowledge the fulfillment of the conditions
specified in Sections 6.1, 6.2, 6.4, 6.5, 6.8. 6.9, 6.10 and 6.11 hereof, and
such other matters with respect to the fulfillment by Colonial Bank of any of
the conditions of this Plan as VRB may reasonably request.
6.13 Minimum Net Worth. The total adjusted stockholders equity of
Colonial Bank as of the Effective Date will not be less than $7,480,700. The
adjusted stockholders equity of Colonial Bank for purposes of this condition
will be the book value of Colonial Bank (consisting of preferred stock, common
stock, surplus, and accumulated undivided profits including any current period
profit loss) as shown on its accounting records at the Effective Date after
adjustments necessary to reflect the application of generally accepted
accounting principles applied on a basis consistent with their application in
prior periods, but not reflecting (i) any loan loss provision that may be
requested by VRB under Section 6.11 to increase Colonial Bank's loan loss
reserve from the level required by Section 2.25, (ii) the amount and effect of
any cash payments to cancel outstanding stock options pursuant to Section 4.11,
or (iv) other payments or accruals contemplated by or in connection with this
Plan of Merger.
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6.14 Severance Agreements. The Severance Agreements between VRB and
each of Rollie Hutton and John Linton shall be executed and delivered with no
material default existing thereunder.
. CONDITIONS TO OBLIGATIONS OF COLONIAL BANK
The obligations of Colonial Bank under this Plan of Merger to
consummate the merger, shall be subject to the satisfaction, on or before the
Effective Date, of the following conditions (unless waived by Colonial Bank in
writing and not required by law):
Shareholder Approval. Approval of this Plan of Merger
by the stockholders of Colonial Bank.
No Litigation. Absence of any suit, action, or
proceeding (made or threatened) against Colonial Bank or its
directors or officers, seeking to challenge, restrain, enjoin,
or otherwise affect this Plan of Merger or the transactions
contemplated thereby; or seeking to subject any of them or
their officers or directors to any liability, fine, forfeiture
or penalty on the grounds that such parties have violated or
will violate their fiduciary duties to their shareholders or
will violate any applicable law or regulation in connection
with the transactions contemplated by this Plan of Merger.
No Banking Moratorium. Absence of a banking
moratorium or other suspension of payment by banks in the
United States or any new limitation on extension of credit by
commercial banks in the United States.
Regulatory Approvals. Procurement of all consents,
orders and approvals required by law, and the satisfaction of
all other necessary or appropriate legal requirements,
including but not limited to approvals by the FDIC and the
Oregon Director of the transaction contemplated by this Plan
of Merger and the expiration of all regulatory waiting
periods.
Other Consents. Receipt of all other consents and
approvals necessary for consummation of the transactions
contemplated by this Plan of Merger.
Opinions of Counsel. Receipt by Colonial Bank of a
favorable opinion of Foster Pepper & Shefelman PLLC, counsel
to VRB, dated as of the Effective Date, in form and substance
satisfactory to Colonial Bank and its counsel to the effect
that:
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(a) VRB is a state chartered bank, duly organized and validly
existing under the laws of the state of Oregon, and has all requisite corporate
power and authority to own, lease, and operate its properties and assets and
carry on its business in the manner being conducted on the Effective Date;
(b) VRB has all requisite corporate power and authority to
execute, deliver and perform its obligations under the Plan of Merger; the
execution, delivery and performance of the Plan of Merger and the consummation
of the transactions contemplated thereby, has been duly authorized by all
requisite corporate action; and the Plan of Merger has been duly executed and
delivered by VRB and constitute the legal, valid and binding obligation,
enforceable in accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws or by
equitable principles; and
(c) All required notifications and filings with and consents
and approvals of governmental authorities have been given or obtained and all
required waiting periods have expired.
Corporate Documents. Receipt by Colonial Bank of:
(a) Copy certified by the appropriate governmental officer of
the Articles of Incorporation of VRB;
(b) A current good standing certificate for VRB issued by the
appropriate governmental officer as of a date immediately prior to the Effective
Date; and
(c) Copy certified by the Secretary of the Bylaws of VRB as
amended to date and of the resolutions adopted by the Board of Directors
approving this Plan of Merger.
Continuing Accuracy with Representations and
Warranties. Except as contemplated hereby, the representations
and warranties of VRB being true at and as of the Effective
Date as though such representations and warranties were made
at and as of the Effective Date.
Compliance with Covenants and Conditions. VRB having
complied with all agreements, covenants and conditions on its
part required by this Plan to be performed or complied with
prior to or at the Effective Date.
Certificates. Receipt by Colonial Bank of a
Certificate of the President and Chief Financial Officer of
VRB dated as of the Effective Date, certifying to the best of
their knowledge the fulfillment of the conditions specified in
Sections 7.4,
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<PAGE> 34
7.5, 7.8 and 7.9 hereof and such other matters with respect to
the fulfillment by VRB of any of the conditions of this Plan
as Colonial Bank may reasonably request.
7.11 Deposit of Funds. Cash in the amount necessary to fund the
payments to be made to Colonial Bank shareholders shall have been placed in a
designated deposit account within VRB for the benefit of the shareholders of
Colonial Bank.
.CLOSING
The transactions contemplated by this Plan of Merger will close in the
office of Foster Pepper & Shefelman PLLC at such time and on such date (but not
prior to January 1, 1998) within seven (7) days following the satisfaction of
all conditions prior to closing set forth in Sections 6 and 7 (not waived or to
be satisfied by delivery of documents or opinions or a state of facts to exist
at closing), as set by notice from VRB to Colonial Bank or such other time and
place as the parties may agree.
.TERMINATION
Procedure for Termination. This Plan may be
terminated before the Effective Date:
(a) By the mutual consent of the Boards of Directors of VRB
and Colonial Bank acknowledged in writing;
(b) By VRB or Colonial Bank acting through their Boards of
Directors upon written notice to the other parties, if (i) at the time of such
notice the party giving the notice is not in default under this Plan and the
Merger shall not have become effective by March 31, 1998 (or such later date as
shall have been agreed to in writing by VRB and Colonial Bank acting through
their respective Boards of Directors) or (ii) shareholders of Colonial Bank
holding at least two-thirds of the Colonial Bank Shares shall have failed to
approve this Plan of Merger at a meeting held for such purpose; or
(c) By VRB, acting through its Board of Directors upon written
notice to Colonial Bank, if there has been a material misrepresentation or
material breach on the part of Colonial Bank in its representations and
warranties set forth herein or if there has been any material failure on the
part of Colonial Bank to comply with its obligations and covenants hereunder
which misrepresentation, breach or failure is not cured within thirty (30) days
after notice to Colonial Bank of such misrepresentation, breach or failure; or
by Colonial Bank, acting through its Board of Directors upon written notice to
VRB, if there has been a material misrepresentation or material breach by VRB in
its representations and warranties set forth herein
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<PAGE> 35
or if there has been a material failure on the part of VRB to comply with its
obligations and covenants hereunder which misrepresentation, breach or failure
is not cured within thirty (30) days after notice to VRB of such
misrepresentation, breach or failure.
Effect of Termination. In the event this Plan is
terminated pursuant to Section 9.1(a) or 9.1(b), it shall
become wholly void and of no further force and effect and
there shall be no liability on the part of any party as a
result of such termination or abandonment, except in the event
prior notice of misrepresentation, breach, or failure has been
given under Section 9.1(c).
If the Plan is terminated by Colonial Bank pursuant to Section 9.1(c),
VRB shall pay to Colonial Bank its reasonable out-of-pocket costs plus the sum
of $250,000 to compensate it for the expenses and effort taken to enter into and
attempt to consummate the transactions.
If the Plan is terminated by VRB pursuant to Section 9.1(c), Colonial
Bank agrees to pay to VRB its reasonable out-of-pocket costs plus the sum of
$250,000 to compensate it for the expenses and effort taken to enter into and
attempt to consummate the transactions.
Documents from Colonial Bank. In the event of
termination of this Plan, VRB will promptly deliver to
Colonial Bank all originals and copies of documents and work
papers obtained by VRB from Colonial Bank, whether so obtained
before or after the execution hereof, and will not use any
information so obtained, and will not disclose or divulge such
information so obtained; provided, however, that any
disclosure of such information may be made to the extent
required by applicable law or regulation or judicial or
regulatory process; and provided further that VRB shall not be
obligated to treat as confidential any such information which
is publicly available or readily ascertainable from public
sources, or which was known to VRB at the time that such
information was disclosed to it by Colonial Bank or which is
rightfully received by VRB from a third party. The obligations
arising under this Section 9.3 shall survive any termination
or abandonment of this Plan.
Documents from VRB. In the event of termination of
this Plan, Colonial Bank will promptly deliver to VRB all
originals and copies of documents and work papers obtained by
Colonial Bank from VRB, whether so obtained before or after
the execution hereof, and will not use, disclose or divulge
any information so obtained; provided, however, that any
disclosure of such information may be made to the extent
required by applicable law, regulation or judicial or
regulatory process; and provided further, Colonial Bank shall
not be obligated to treat as confidential any information
which is publicly available or readily ascertainable from
public sources, or which was known to Colonial Bank at the
time that such information was disclosed to it by VRB or which
is rightfully received by Colonial
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Bank from a third party. The obligations arising under this
Section 9.4 shall survive any termination or abandonment of
this Plan.
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<PAGE> 37
.MISCELLANEOUS
PROVISIONS
Amendment or Modification. Prior to the Effective
Date, this Plan of Merger may be amended or modified, either
before or after approval by the shareholders of Colonial Bank,
only by an agreement in writing executed by the parties hereto
upon approval of their respective boards of directors;
provided, however, that no such amendment or modification
shall decrease the amount or modify the form of consideration
to be received by the Colonial Bank shareholders pursuant to
this Plan of Merger without the approval of the Colonial Bank
shareholders.
Public Statements. No party to this Plan shall issue
any press release or other public statement concerning the
transactions contemplated by this Plan without first providing
the other party hereto with a written copy of the text of such
release or statement and obtaining the consent of the other
parties to such release or statement, which consent will not
be unreasonably withheld. The consent provided for in this
Section shall not be required if the delay would preclude the
timely issuance of a press release or public statement
required by law or any applicable regulations. The provisions
of this section shall not be construed as limiting the parties
from communications consistent with the purposes of this Plan,
including but not limited to seeking regulatory and
shareholder approvals necessary to complete the transactions
contemplated by this Plan of Merger.
Confidentiality. Each party shall use the non-public
information that it obtains from the other parties to this
Plan solely for the effectuation of the transactions
contemplated by this Plan of Merger or for other purposes
consistent with the intent of the Plan of Merger and shall not
use any such information for other purposes, including but not
limited to the competitive detriment of the other parties.
Each party shall maintain strictly confidential all non-public
information it receives from the other party and shall, upon
termination of this Plan prior to the Effective Date, return
such information in accordance with Sections 9.3 and 9.4
hereof. The provisions of this section shall not prohibit the
use of information consistent with the provisions of those
sections or to prohibit disclosure of information to the
party's respective counsel, accountants, tax advisors, and
consultants, provided that those parties also agree to
maintain such information confidential in accordance with this
section and Sections 9.3 and 9.4 hereof, or to banking
regulators from whom consent is required.
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Waivers and Extensions. Each of the parties hereto
may, by an instrument in writing, extend the time for or waive
the performance of any of the obligations of the other parties
hereto or waive compliance by the other parties hereto of any
of the covenants or conditions contained herein other than
those required by law. No such waiver or extension of time
shall constitute a waiver of any subsequent or other
performance or compliance. No such waiver shall require the
approval of the shareholders of any party.
Expenses. Each of the parties hereto shall pay their
respective expenses in connection with this Plan of Merger and
the transactions contemplated thereby, except as otherwise may
be specifically provided.
Binding Effect, No Assignment. This Plan and all the
provisions hereof shall be binding upon and inure to the
benefit of the parties hereto and their respective successors
and permitted assigns, but neither this Plan nor any of the
rights, interests or obligations hereunder, shall be assigned
by any of the parties hereto without the prior written consent
of the other parties.
Representations and Warranties. The respective
representations and warranties of each party hereto contained
herein shall not be deemed to be waived or otherwise affected
by any investigation made by the other parties, and except for
claims based upon fraud of the parties or their
representatives, shall not survive the closing hereof.
Remedies. Except for claims based upon fraud of the
parties or their representatives, or as provided in Section
9.2, the only remedy available to any party hereunder is for
specific performance.
No Benefit to Third Parties. Nothing herein expressed
or implied is intended or shall be construed to confer upon or
give any person or entity, other than the parties hereto, any
right or remedy under or by reason hereof, except the
provisions of Article I for the benefit of the shareholders of
Colonial Bank and the provisions of Sections 5.5 and 5.6..
Notices. Any notice, demand or other communication
permitted or desired to be given hereunder shall be in writing
and shall be deemed to have been sufficiently given or served
for all purposes if personally delivered or mailed by
registered or certified mail, return receipt requested, or
sent via confirmed
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<PAGE> 39
facsimile to the respective parties at their addresses or
telephone numbers set forth below:
If to VRB:
Valley of the Rogue Bank
P.O. Box 1046
Rogue River, Oregon 97537
Attn: Tom Anderson, Executive Vice President
Fax: 541-582-6950
Copies of Notices to VRB to:
Kenneth E. Roberts, Esq.
Foster Pepper & Shefelman PLLC
One Main Place, 15th Floor
101 S.W. Main Street
Portland, OR 97204-3223
Fax: 1-800-601-9234
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If to Colonial Bank:
Colonial Bank
117 N.E. "F" Street
P.O. Box 971
Grants Pass, Oregon 97526
Attn: Rollie Hutton, President/CEO
Fax: 541-474-4529
Copies of Notices to Colonial Bank to:
Miller, Nash, Wiener, Hager & Carlsen LLP
3500 U.S. Bancorp Tower
111 S.W. Fifth Avenue
Portland, Oregon 97204-3699
Attn: John J. DeMott
Fax: (503) 224-0155
Any party from time to time may change such address or facsimile
telephone number by so notifying the other parties hereto of such change, which
address or number shall thereupon become effective for purposes of this section.
Governing Law. This Plan shall be governed by and
construed in accordance with the laws of the State of Oregon.
Entire Agreement. This Plan, including all of the
schedules and other documents or agreements referred to
herein, constitutes the entire agreement between the parties
with respect to the merger and other transactions contemplated
hereby and supersedes all prior agreements and understandings
between the parties with respect to such matters.
Headings. The article and section headings in this
Plan are for the convenience of the parties and shall not
affect the interpretation of this Plan.
Counterparts. At the convenience of the parties, this
Plan may be executed in counterparts, and each such executed
counterpart shall be deemed to be an original instrument, but
all such executed counterparts together shall constitute but
one Plan of Merger.
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<PAGE> 41
Non-Competition Agreement. Each member of the Board
of Directors of Colonial Bank signing at the end of this Plan
(except Messrs. Hutton and Linton who have separate Severance
Agreements) severally agrees that such member will not, for a
period of one year following the Effective Date, engage in the
business of banking in Jackson or Josephine County, Oregon, in
any manner associated with any financial institution other
than the Resultant Bank with offices or branches in Jackson or
Josephine Counties, Oregon, whether directly or indirectly,
alone or as a member of a partnership, or as an officer,
director, stockholder or employee. Ownership of less than
three percent of the stock of a publicly traded corporation
shall not be deemed to be prohibited by this provision.
10.16 Arbitration. Any claim or controversy arising out of this Plan or
the breach thereof shall be settled by arbitration pursuant to the commercial
arbitration rules of the American Arbitration Association. The Arbitration shall
be held in Multnomah County, Oregon. The arbitration award may be entered as a
judgment in any court or courts with proper jurisdiction. The prevailing party
in such arbitration proceedings shall be entitled to attorney's fees, or as
determined by the arbitrator.
IN WITNESS WHEREOF, the parties hereto, pursuant to the approval and
authority duly given by resolutions adopted by a majority of their respective
Boards of Directors, have each caused this Plan of Merger to be executed by its
duly authorized officers.
<TABLE>
<S> <C>
VALLEY OF THE ROGUE BANK COLONIAL BANKING COMPANY
By: /s/ William Haden By: /s/ Rollie Hutton
William Haden, President Rollie Hutton, President
By: /s/ Tom Anderson By: /s/ John Linton
Tom Anderson, Exec. Vice President John Linton, Exec. Vice President
</TABLE>
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<PAGE> 42
The undersigned, Members of the Board of Directors and Shareholders of Colonial
Bank Company execute this Plan of Merger for the limited purpose of Sections
2.32, 4.10, and 10.15 hereof.
/s/ Morry Burford /s/ Georgette Brown
Morry Burford Georgette Brown
/s/ Rollie Hutton /s/ William Fisher
Rollie Hutton William Fisher
/s/ Rex Titus /s/ Jerry Lausmann
Rex Titus Jerry Lausmann
/s/ Howard Wagner
Howard Wagner
INVESTORS BANKING CORPORATION
By: /s/ Morry Burford
Morry Burford, President
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<PAGE> 43
EXHIBIT A
DISSENTERS RIGHTS
ORS 711.045
(1) Any stockholder of an Oregon stock bank who dissented to a
transaction listed under section 280(1) of this 1997 Act and who desires to
receive the value in cash of those shares, shall make written demand upon the
Oregon stock bank or its successor and accompany the demand with the surrender
of the share certificates, properly indorsed within 30 days after the
stockholders' meeting at which a vote to approve such transaction involving an
Oregon stock bank was taken. Any stockholder failing to make written demand
within the 30-day period shall be bound by the terms of the proposed plan of
merger, plan of share exchange or acquisition transaction agreement.
(2) Within 30 days after a transaction listed under section 280(1) of
this 1997 Act is effected, the Oregon stock bank or its successor shall give
written notice thereof to each dissenting stockholder who has made demand under
this section at the address of the stockholder on the stock record books of the
Oregon stock bank, and shall make a written offer to each such stockholder to
pay for the shares at a specified price in cash determined by the Oregon stock
bank or its successor to be the fair value of the shares as of the effective
date of the transaction. The notice and offer shall be accompanied by a
statement of condition of the Oregon stock bank, the shares of which the
dissenting stockholder held, as of the latest available date and not more than
four months prior to the consummation of the transaction, and a statement of
income of the Oregon stock bank for the period ending on the date of the
statement of condition.
(3) Any stockholder who accepts the offer of the Oregon stock bank or
its successor within 30 days following the date on which notice of the offer was
mailed or delivered to dissenting stockholders shall be paid the price per share
offered, in cash, within 30 days following the date on which the stockholder
communicates acceptance in writing to the Oregon stock bank or its successor.
Upon payment, the dissenting stockholder shall cease to have any interest in the
shares previously held by the stockholder.
(4) If, within 30 days after notice of the offer, one or more
dissenting stockholders do not accept the offer of the Oregon stock bank or its
successor or if no offer is made, then the value of the shares of the dissenting
stockholders who have not accepted the offer shall be ascertained, as of the
effective date of the transaction, by an independent, qualified appraiser chosen
by the Director of the Department of Consumer and Business Services. The
valuation determined by the appraiser shall govern and the appraiser's valuation
of such shares shall not be appealable except for one or more of the reasons set
forth in ORS 36.355(1). Any such appeal must be made within 30 days after the
date of the appraiser's valuation and is subject to ORS 183.415 to 183.500. The
Oregon stock bank or its successor shall pay the dissenting shareholders the
appraised value of the shares within 30 days after the date the appraiser sends
the Oregon stock bank or its successor written notice of the appraiser's
valuation.
(5) The director shall assess the reasonable costs and expenses of the
appraisal proceeding equally to the Oregon stock bank or its successor and to
the dissenting shareholders, as a group, if the amount offered by the Oregon
stock bank or its successor is between 85 percent and 115 percent of the
appraised value of the shares. The director shall assess the reasonable costs
and expenses of the appraisal proceeding and the reasonable costs and expenses,
including attorney fees and costs, of the Oregon stock bank or its successor to
the dissenting stockholders, as a group, if the amount offered by the Oregon
stock bank or its successor is 115 percent or more of the appraised value of the
shares. The director shall assess the reasonable costs and expenses of the
appraisal proceeding and the reasonable costs and expenses, including
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<PAGE> 44
attorney fees and costs, of the dissenting shareholders, as a group, to the
Oregon stock bank or its successor if the amount offered by the Oregon stock
bank or its successor is 85 percent or less of the appraised value of the
shares. The director's decision regarding assessment of fees and costs may be
appealed as provided in ORS 183.415 to 183.500.
(6) Amounts required to be paid by the Oregon stock bank or its
successors, or the dissenting shareholders under this section shall be paid
within 30 days after the director's assessment of any fees or costs becomes
final or, if the director's decision is appealed, within 30 days after a final
determination of such fees and costs is made.
(7) The director may require, as a condition of approving a transaction
listed in section 280(1) of this 1997 Act, the replacement of all or a portion
of the stockholders' equity of an Oregon stock bank expended in payment to
dissenting stockholders under this section.
(8) A stockholder may not receive the fair value of the stockholder's
shares under this section:
(a) If the plan of merger provides that all stockholders of
the resulting insured stock institution receive common stock of a holding
company pursuant to a merger with an interim Oregon stock bank chartered under
ORS 707.025, and the stockholder's Oregon stock bank and the interim Oregon
stock bank are the only parties to the merger; or
(b) If the shares held by the dissenting stockholder
immediately before the effective date of a transaction listed in section 280(1)
of this 1997 Act are listed on any national securities exchange or are included
on the list of over-the-counter margin stocks issued by the Board of Governors
of the Federal Reserve System.
1997 Or. Laws Ch. ; Sections 280 - 282.
Section 280
(1) A stockholder of an Oregon stock bank may dissent from the
following:
(a) A plan of merger pursuant to which the Oregon stock bank
is not the resulting insured institution;
(b) A plan of merger pursuant to which the Oregon stock bank
is the resulting insured stock institution and the number of its voting shares
outstanding immediately after the merger, plus the number of shares issuable as
a result of the merger, either by the conversion of securities issued pursuant
to the merger or the exercise of rights and warrants issued pursuant to the
merger, will exceed by more than 20 percent the total number of voting shares of
the resulting insured stock institution outstanding immediately before the
merger;
(c) A plan of share exchange pursuant to which the Oregon
stock bank in which the stockholder owns shares is acquired; and
(d) An acquisition transaction requiring such stockholder's
approval pursuant to section 297(5) of this 1997 Act.
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<PAGE> 45
(2) To perfect a stockholder's right to dissent to a transaction
described in subsection (1) of this section, the stockholder must send or
deliver a notice of dissent to the Oregon stock bank prior to or at the meeting
of the stockholders at which the transaction is submitted to a vote, or the
stockholder must vote against such transaction.
(3) A stockholder shall not dissent as to less than all the shares
registered in the name of the stockholder, except a stockholder holding, as a
fiduciary or nominee, shares registered in the stockholder's name for the
benefit of more than one beneficiary, may dissent as to less than all of the
shares registered in the fiduciary or nominee's name if any dissent as to the
shares held for a beneficiary is made as to all the shares held by the fiduciary
for that beneficiary or nominee. The fiduciary's rights shall be determined as
if the shares to which the fiduciary has dissented and the other shares are
registered in the names of different stockholders.
Section 281.
(1) A dissenting stockholder making a demand under ORS 711.045 may
withdraw the demand if:
(a) The Oregon stock bank or its successor consents to the
withdrawal; or
(b) The dissenting stockholder pays such stockholder's pro
rata share of the appraisal costs and the Oregon stock bank's reasonable costs
and expenses, including attorney fees and costs.
(2) When a dissenting stockholder withdraws the demand under subsection
(1) of this section, the stockholder's status as a stockholder shall be
restored, without prejudice to any corporate proceedings taking place in the
interim.
Section 282.
If a merger, conversion or acquisition of an Oregon bank involves a
trust company, the Director of the Department of Consumer and Business Services
shall not approve the merger, conversion, or acquisition until satisfied that
adequate provision has been made for successor fiduciaries.
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<PAGE> 1
EXHIBIT 23.1
[MOSS ADAMS LETTERHEAD]
CONSENT AND REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANT
We hereby consent to the use in amendment number one to this Registration
Statement of our report dated January 7, except for Note 19, as to which the
date is September 25, 1997, relating to the consolidated financial statements
of VRB Bancorp and subsidiary, and our report dated September 25, 1997,
relating to the financial statements of Colonial Banking Company and to the
reference to our Firm under the caption "Experts" in the Prospectus.
/s/ Moss Adams LLP
Portland, Oregon
October 21, 1997
