UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number: 0-25932
VRB Bancorp
(Exact name of Registrant as specified in its charter)
Oregon 93-0892559
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
110 Pine St., P.O. Box 1046, Rogue River, Oregon 97537
(Address of principal executive offices) (Zip Code)
(541) 582-3216
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act
None
Name of exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filing pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $48,308,049 at March 8, 1997.
As of March 8, 1997, there were 3,578,374 shares of the Registrant's Common
Stock outstanding.
Documents Incorporated by Reference:
Portions of the Registrant's proxy statement dated March 8, 1997, for the 1997
annual meeting of shareholders ("Proxy Statement"), and the 1996 Annual Report
to Shareholders are incorporated by reference in Part III hereof.
<PAGE>
Part I
Item 1. Business
General
VRB Bancorp (the "Company"), was organized in 1983 under Oregon law for
the purpose of becoming a holding company of Valley of the Rogue Bank (the
"Bank"), an Oregon state-chartered bank organized in 1967. The Company
conducts its business through the Bank, and has no material operations outside
of those of the Bank. The Bank has nine offices, all of which are located in
southern Oregon, including its main office in Rogue River and branch offices in
Ashland, Medford, Talent, Phoenix and Grants Pass, Oregon.
The Bank offers a broad variety of commercial banking services, primarily
to small and medium-sized businesses, professionals, farmers and retail
customers, including commercial and agricultural loans, accounts receivable and
inventory financing, consumer installment loans, acceptance of deposits, and
personal savings and checking accounts. The Bank's accounts are insured by the
Federal Deposit Insurance Corporation. As of December 31, 1996, the Bank had
assets of approximately $177.1 million and deposits of approximately $155.6
million.
The Company's trade area has become increasingly popular as a retirement
area, and has seen an increase in the population of approximately 12% during
the period from 1983 to 1993. Over the past 10 years, the economic base of
southern Oregon has undergone significant change. While agriculture and timber
remain the area's largest economic sector, income and employment has become
less dependent on logging and wood products manufacturing, a generally
declining industry, with the growth of retirement services, tourism, retail
trade and technology-related manufacturing.
Competition
Competition for deposits and loans has intensified with the consolidation
of larger banks in the Bank's market area. Furthermore, competition from
outside the traditional banking system from investment banking firms, insurance
companies and related industries offering bank-like products has widened the
competition for deposits and loans.
The banking industry in the Bank's primary market area is characterized
by well-established branches of large banks with headquarters located out of
the trade area and, in many cases, outside the state. Although these branch
networks are controlled from outside the area, and many lending and other
decisions are not made locally, these institutions have competitive advantages
over the Bank in that they have high public visibility and are able to maintain
advertising and marketing activity on a much larger scale than the Bank can
economically maintain. Because single borrower lending limits imposed by law
are dependent on the capital of the institution, the branches of larger insti-
tutions with substantial capital bases have some degree of competitive
advantage with respect to loan applications which are in excess of the Bank's
legal lending limits.
Supervision and Regulation
The Company
General Regulatory and Supervisory Program For Bank Holding Companies.
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended, and is registered as such with the Federal
Reserve Board. Under the terms of that Act, the activities of a bank holding
company, and those of companies which it controls or in which it holds more
than 5% of the voting stock, are limited to banking or managing or controlling
banks or furnishing services to or performing services for its subsidiaries, or
any other activity which the Federal Reserve Board determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. The Federal Reserve Board has adopted regulations (Regulation Y, as
amended) that specify various permitted activities, including the ownership of
shares of companies engaged in such permitted activities. Bank holding
companies are required to obtain prior approval of the Federal Reserve Board to
engage in any new activity or to acquire more than 5% of any class of voting
stock of any company.
<PAGE>
As a bank holding company, the Company is subject to supervisory
authority of the Federal Reserve. A bank holding company must file periodic
reports of its financial condition, and must seek approval prior to acquiring
control of any bank, bank holding company or other permissible non-banking
business. Under Federal Reserve policy, bank holding companies are expected to
act as a source of financial strength to, and commit resources to support,
their subsidiary banks.
In addition, a bank holding company and any subsidiaries it may control
are deemed to be affiliates of the Bank, and transactions between a subsidiary
bank and its affiliates are subject to restrictions. Such transactions include
loans to the affiliates, investment by the bank in securities of affiliates, or
taking such securities as collateral. A bank holding company and its
subsidiary banks are subject to restrictions on engaging in the underwriting,
public sale and distribution of securities, and is prohibited from engaging in
certain tying arrangements in connection with the extension of credit, sale or
lease of property or provision of services.
The Federal Reserve Board is authorized to adopt regulations affecting
various aspects of bank holding companies. Pursuant to the general supervisory
authority of the Bank Holding Company Act and directives set forth in the
International Lending Supervision Act of 1983, the Federal Reserve Board has
adopted capital adequacy guidelines prescribing both risk-based capital and
leverage ratios.
Regulatory Capital Requirements
Risk-Based Capital Guidelines. The Federal Reserve Board established
risk-based capital guidelines for bank holding companies effective March 15,
1989. The guidelines define Tier 1 Capital and Total capital. Tier 1 Capital
consists of common and qualifying preferred shareholders, equity and minority
interests in equity accounts of consolidated subsidiaries, less goodwill and
50% (and in some cases up to 100%) of investment in unconsolidated
subsidiaries. Total Capital consists of Tier I Capital plus qualifying
mandatory convertible debt, perpetual debt, certain hybrid capital instruments,
certain preferred stock not qualifying as Tier 1 Capital, subordinated and
other qualifying term debt up to specified limits, and a portion of the
allowance for credit losses, less investments in unconsolidated subsidiaries
and in other designated subsidiaries or other associated companies at the
discretion of the Federal Reserve Board, certain intangible assets, a portion
of limited-life capital instruments approaching maturity and reciprocal
holdings of banking organizations' capital instruments. The Tier 1 component
must constitute at least 50% of qualifying Total Capital. Risk-based capital
ratios are calculated with reference to risk weighted assets, which include
both on-balance sheet and off balance sheet exposures. As of year-end 1992,
the minimum required ratio for qualifying Total Capital became 8%, of which at
least 4% must consist of Tier 1 Capital. At December 31, 1996, the Company's
Tier 1 and Total Capital ratios were 16.1% and 17.3%, respectively.
The current risk-based capital ratio analysis establishes minimum
supervisory guidelines and standards. It does not evaluate all factors
affecting an organization's financial condition. Factors which are not
evaluated include (i) overall interest rate exposure; (ii) liquidity, funding
and market risks; (iii) quality and level of earnings; (iv) investment or loan
portfolio concentrations; (v) quality of loans and investments; (vi) the
effectiveness of loan and investment policies; and (vii) management's overall
ability to monitor and control other financial and operating risks. The
capital adequacy assessment of federal bank regulators will, however, continue
to include analyses of the foregoing considerations and in particular, the
level and severity of problem and classified assets.
Minimum Leverage Ratio. The Federal Reserve Board has adopted capital
standards and leverage capital guidelines that include a minimum leverage ratio
of 3% Tier I Capital to total assets (the "leverage ratio"). The leverage
ratio is used in tandem with the final risk-based ratio of 8% that took effect
at the end of 1992.
The Federal Reserve Board has emphasized that the leverage ratio
constitutes a minimum requirement for well-run banking organizations having
well diversified risk, including no undue interest rate exposure, excellent
asset quality, high liquidity, good earnings, and a composite rating of 1 under
the Interagency Bank Rating System. Banking organizations experiencing or
anticipating significant growth, as well as those organizations which do not
exhibit the characteristics of a strong, well-run banking organization
described above, will be required to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. The Company's leverage ratio at December 31, 1996, was
10.8%.
<PAGE>
The Bank
The Bank is an Oregon state-chartered bank, the deposits of which are
insured by the Federal Deposit Insurance Corporation ("FDIC"). Accordingly,
the Bank files financial and other reports with, and is regularly examined by,
the Director ("Director") of the Oregon Department of Consumer and Business
Services and the FDIC.
Under federal law, banks are subject to regulatory capital requirements
as are bank holding companies. Pursuant to such authority and directives set
forth in the International Lending Supervision Act of 1983, the FDIC and the
Federal Reserve Board have issued regulations establishing the capital
requirements for banks under federal law. The regulations, which apply to the
Bank, establish minimum risk-based and leverage ratios which are substantially
similar to those applicable to the Company. As of December 31, 1996, the risk-
based and leverage ratios of the Bank exceeded the minimum requirements.
Under the Federal Deposit Insurance Corporation Improvement Act
("FDICIA"), each Federal banking agency is required to prescribe, by
regulation, non-capital safety and soundness standards for institutions under
its authority. These standards are to cover internal controls, information
systems and internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, compensation, fees and benefits, such
other operational and managerial standards as the agency determines to be
appropriate, and standards for asset quality, earnings and stock valuation. An
institution which fails to meet these standards must develop a plan acceptable
to the agency, specifying the steps that the institution will take to meet the
standards. Failure to submit or implement such a plan may subject the
institution to regulatory sanctions. The Company believes that the Bank
already meets substantially all the standards which are likely to be adopted,
and therefore does not believe that the implementation of these regulatory
standards will materially affect the Company's business operations.
FDICIA also contains provisions which, among other things, restrict
investments and activities as principal by state nonmember banks to those
eligible for national banks, impose limitations on deposit account balance
determinations for the purpose of the calculation of interest, and require the
federal banking regulators to prescribe, implement or modify standards,
respectively, for extensions of credit secured by liens on interests in real
estate or made for the purpose of financing construction of a building or other
improvements to real estate, loans to bank insiders, regulatory accounting and
reports, internal control reports, independent audits, exposure on interbank
liabilities, contractual arrangements under which institutions receive goods,
products or services, deposit-account-related disclosures and advertising as
well as to impose restrictions on federal reserve discount window advances for
certain institutions and to require that insured depository institutions
generally be examined on-site by federal or state personnel at least once every
twelve months.
Bills are now pending or expected to be introduced in the United States
Congress that contain proposals for altering the structure, regulation, and
competitive relationships of the nation's financial institutions. If enacted
into law, these pending bills could have the effect of increasing or decreasing
the cost of doing business, limiting or expanding permissible activities
(including activities in the insurance and securities fields), or affecting the
competitive balance among banks, savings associations, and other financial
institutions. Some of these bills would reduce the extent of federal deposit
insurance, broaden the powers or the geographical range of operations of bank
holding companies, modify interstate branching restrictions applicable to
national banks, regulate bank involvement in derivative activities, and realign
the structure and jurisdiction of various financial institution regulatory
agencies. Whether or in what form any such legislation may be adopted or the
extent to which the business of the Company might be affected thereby cannot be
accurately predicted.
The Bank is subject to state and federal laws and regulations governing
most aspects of the banking business, including reserves against deposits,
loans, investments, mergers, acquisitions, borrowings, dividends and
establishment of branch offices. Among the most significant restrictions are
lending limits. The amount of funds which any bank may lend to a single
borrower is limited to a percentage of capital and surplus, as defined by
applicable statues and regulations. In addition to the size of any loan, state
law gives the Director authority to limit loan interest rates and to effect
various other activities and powers.
<PAGE>
Federal banking law provides that in certain circumstances, officers or
directors of a bank may be removed by the institution's federal supervisory
agency, imposes restraints on lending by a bank to its executive officers,
directors, or principal shareholders, and prohibits management personnel of a
bank from serving as a director or in other management positions of another
financial institution the assets of which exceed a specified amount or that has
an office within a specified geographic area.
Deposit Insurance Assessments
As an FDIC member institution, the deposits of the Bank are currently
insured to a maximum of $100,000 per depositor through the Bank Insurance Fund
("BIF"), administered by the FDIC. The Bank is required to pay semiannual
deposit insurance premium assessments to the FDIC.
The FDICIA includes provisions to reform the Federal deposit insurance
system, including the implementation of risk-based deposit insurance premiums.
The FDICIA also permits the FDIC to make special assessments on insured
depository institutions in amounts determined by the FDIC to be necessary to
give it adequate assessment income to repay amounts borrowed from the U.S.
Treasury and other sources or for any other purpose the FDIC deems necessary.
Pursuant to the FDICIA, the FDIC implemented a transitional risk based
insurance premium system on January 1, 1993. Generally, under this system,
banks are assessed insurance premiums according to how much risk they are
deemed to present to BIF. Banks with higher levels of capital and a low degree
of supervisory concern are assessed lower premiums than banks with lower levels
of capital or involving a higher degree of supervisory concern. The Bank's
current FDIC premium rate during 1996 was $.00 per $100 of domestic deposits.
The premium range is from $.00, for the highest-rated institutions (subject to
a statutory minimum assessment of $2,000) to $.27 per $100 of domestic
deposits.
Monetary Policy
The earnings of the Company and the Bank are directly affected by the
monetary and fiscal policies of the federal government and governmental
agencies. The Federal Reserve Board has broad powers to expand and constrict
the supply of money and credit and to regulate the reserves which its member
banks must maintain based on deposits. These broad powers are used to
influence the growth of bank loans, investments and deposits, and may affect
the interest rates which will prevail in the market for loans investments and
deposits. Governmental and Federal Reserve Board monetary policies have had a
significant effect on the operating results of commercial banks in the past and
are expected to do so in the future. The future impact of such policies and
practices on the growth or profitability of the Company and the Bank cannot be
accurately predicted.
<PAGE>
Item 2. Properties
The Company maintains its principal offices at the main office of its
subsidiary bank, Valley of the Rogue Bank, at 110 Pine St., Rogue River,
Oregon, and conducts its business through the branch offices of the Bank, all
of which are in good repair and are adequate for carrying on the business of
the Bank and the Company. All of the branches have drive-up facilities. The
Bank also maintains automated teller machines located at the main office in
Rogue River, the Fruitdale and 7th and Midland office in Grants Pass, and an
off-site machine at 2230 Biddle Road, Medford, Oregon. The following sets
forth all branch offices of the Bank. Except as otherwise indicated, all of
the branch premises are owned by the Company or the Bank.
Main Office Ashland Branch
110 Pine St. 250 Pioneer St.
Rogue River, Oregon Ashland, Oregon
Fruitdale Branch Medford Branch
1040 Rogue River Highway 220 E. 10th St.
Grants Pass, Oregon Medford, Oregon
Poplar Drive Branch (1) Stewart Avenue Branch (2)
2400 Poplar Drive 809 Stewart Ave.
Medford, Oregon Medford, Oregon
Phoenix Branch Talent Branch (3)
4000 S. Pacific Highway 201 N. Pacific Highway
Phoenix, Oregon Talent, Oregon
Seventh & Midland Branch
100 N.E. Midland
Grants Pass, Oregon
(1) A portion of the parking lot is leased for approximately $366.00
per month under a ground lease with the option to renew every
five years, and final expiration in the year 2063.
(2) Premises leased under a lease agreement dated August 15, 1989,
renewable every five years until August 31, 2004.
(3) Premises leased under a 15-year lease agreement dated
December 27, 1979, renewable for three 5-year terms.
The lease was renewed for the first time in 1994.
Item 3. Legal Proceedings
No material legal proceedings, to which the Company is a party or which
involve any of its properties, was pending as of the date of this report on
Form 10-K.
Item 4. Submissions of Matters to a Vote of Securities Holders
No matters were submitted to a vote of securities holders of the
Registrant during the quarter ended December 31, 1996.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of December 31, 1996, there were 3,574,682 shares of common
stock outstanding, held by approximately 700 shareholders. As of that date,
there were 34,679 shares of common stock subject to issuance upon the exercise
of outstanding options pursuant to the Company's stock option plans for
directors and key employees. VRB Bancorp stock is not currently quoted on
NASDAQ and its trading activity is limited. The Company paid annual cash
dividends of $0.27, after giving effect to stock dividends and splits, and
$0.16 per share in 1995 and 1996, respectively.
Item 6. Selected Financial Data
The response to this item is incorporated by reference to page 3 of the
company's 1996 Annual Report to Shareholders.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The response to this item is incorporated by reference to the section
entitled " Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 5-18 of the company's 1996 Annual Report to
Shareholders.
Item 8. Financial Statements and Supplementary Data
The financial statements called for by this item and filed herewith are
listed in the Index to Consolidated Financial Statements on page 11, and are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The response to this item is incorporated by reference to the sections
entitled "ELECTION OF DIRECTORS" and "EXECUTIVE OFFICERS" on pages 1-3 and
page 7, respectively, of the Company's Proxy Statement for the 1997 annual
meeting of shareholders.
Item 11. Executive Compensation
The response to this item is incorporated by reference to the section
entitled "EXECUTIVE COMPENSATION" on pages 8-14 and the section entitled "STOCK
PERFORMANCE GRAPH" on pages 4 and 5 of the Company's Proxy Statement for the
1997 annual meeting of shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The response to this item is incorporated by reference to the section
<PAGE>
entitled "SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS" on page 6-7 of the
Company's Proxy Statement for the 1997 annual meeting of shareholders.
Item 13. Certain Relationships and Related Transactions
The response to this item is incorporated by reference to the section
entitled "TRANSACTIONS WITH OF MANAGEMENT" on page 14 of the Company's Proxy
Statement for the 1997 annual meeting of shareholders.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements:
The consolidated financial statements are listed in the Index
to Financial Statements and Schedules on page 11 herein.
(2) Financial Statement Schedules:
See the Index to Financial Statements and Schedules on page 11.
(3) The exhibits filed herewith are listed in the Exhibit Index on page
11 herein.
(b) There were no current reports on Form 8-K filed by the Registrant
during the last quarter of the year ended December 31, 1996.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
VRB BANCORP
(Registrant)
By: /s/ Tom Anderson Date: March 24, 1997
--------------------------------------
Tom Anderson, Executive Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ R. Gene Morris Date: March 24, 1997
-----------------------------------------
R. Gene Morris, Chairman, Director
By: /s/ John O. Dunkin Date: March 24, 1997
-----------------------------------------
John O. Dunkin, Director
By: /s/ James D. Coleman Date: March 24, 1997
-----------------------------------------
James D. Coleman, Vice Chairman, Director
By: /s/ Lawrence S. Horton Date: March 24, 1997
------------------------------------------
Lawrence S. Horton, Director
By: /s/ Gary Lundberg Date: March 24, 1997
------------------------------------------
Gary Lundberg, Director
By: /s/ Rober J. DeArmond Date: March 24, 1997
------------------------------------------
Robert J. DeArmond, Director
By: /s/ Larry L. Parducci Date: March 24, 1997
------------------------------------------
Larry L. Parducci, Director
By: /s/ William A. Haden Date: March 24, 1997
------------------------------------------
William A. Haden, President, Director
(Principal Executive Officer)
By: /s/ Tom Anderson Date: March 24, 1997
------------------------------------------
Tom Anderson, Executive Vice President, Director
(Principal Accounting Officer)
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements
The following consolidated financial statements and Report of Independent
Public Accountants, included in the 1996 Annual Report to Shareholders at the
pages indicated, are incorporated herein by reference:
Page of 1996 Annual
Report to Shareholders
VRB Bancorp and subsidiaries
Consolidated Balance Sheets at
December 31, 1996 and 1995 20
Consolidated Statements of Income
for the years ended December 31, 1996, 1995 and 1994 21
Consolidated Statements of Changes in Shareholders Equity
for the years ended December 31, 1996, 1995 and 1994 22-23
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 24-25
Notes to Consolidated Financial Statements 26-42
Report of Independent Public Accountants 43
Financial Statement Schedules
All schedules have been omitted because the information is either not
required, not applicable, not present in amounts sufficient to require
submission of the schedule, or is included in the financial statements or notes
thereto.
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
YEARS ENDED DECEMBER 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Interest income $ 13,188 $ 11,973 $ 10,551 $ 8,768 $ 7,808
Interest expense 3,627 2,989 2,196 2,264 2,490
Net interest income 9,561 8,984 8,355 6,504 5,318
Provision for loan losses 250 - - - 165
Net interest income after
provision for loan losses 9,311 8,984 8,355 6,504 5,153
Other income 1,370 1,380 1,512 1,632 1,292
Other expenses 5,828 6,061 6,022 4,978 4,003
Income before income taxes 4,853 4,303 3,845 3,158 2,442
Provision for income taxes 1,602 1,395 1,335 1,104 777
Net income $ 3,251 $ 2,908 $ 2,510 $ 2,054 $ 1,665
Per share:*
Net income $ .92 $ .82 $ .71 $ .58 $ .50
Cash dividends $ .27 $ .16 $ .14 $ .12 $ .11
Year-end book value $ 5.75 $ 5.03 $ 4.32 $ 3.88 $ 3.40
Total assets $ 177,107 $ 151,485 $ 141,537 $ 141,970 $ 110,065
Total deposits $ 155,568 $ 132,745 $ 124,472 $ 127,998 $ 98,459
Net loans $ 99,776 $ 88,972 $ 88,441 $ 78,583 $ 57,376
Shareholders' equity $ 20,188 $ 17,470 $ 15,000 $ 12,973 $ 11,312
Performance ratios:
Return on average assets 1.97% 2.02% 1.74% 1.62% 1.61%
Return on average equity 17.26% 17.75% 17.69% 16.97% 16.44%
Equity to total assets 11.40% 11.53% 10.60% 9.14% 10.28%
Net loans to deposits 64.14% 67.02% 70.49% 61.39% 58.27%
(*All per share data has been retroactively restated to reflect stock
dividends and stock splits during 1991 through 1995.
</TABLE>
<PAGE>
The following discussion is intended to be read in conjunction with and is
qualified in its entirety by reference to the consolidated financial
statements and accompanying notes presented in Item 8 of this report.
Years Ended December 31, 1996, 1995 and 1994
Financial Highlights
Net income for 1996 of $3,251,270 was 11.80% higher than the $2,908,091
reported in 1995, which was 15.87% greater than the $2,509,782 reported in
1994. Return on average assets (ROA) declined slightly to 1.99% in 1996
compared to 2.02% and 1.74% in 1995 and 1994, respectively. Return on
average shareholders' equity (ROE) was 17.26% in 1996, compared to 17.75% and
17.69% in 1995 and 1994, respectively. The average equity to asset ratio was
10.63% at December 31, 1996, compared to 11.37% and 9.83% at year-end 1995 and
1994, respectively.
Earnings Performance
For financial institutions, the primary component of earnings is net
interest income. Net interest income is the difference between interest income,
principally from loans and investment securities portfolios, and interest
expense, principally on customer deposits. Changes in net interest income
result from changes in "volume", "spread" and "margin." Volume refers to the
dollar level of interest-earning assets and interest-bearing liabilities.
Spread refers to the difference between the yield on interest-earning assets
and the cost of interest-bearing liabilities. Margin refers to net interest
income divided by interest-earning assets and is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities.
Net Interest Income. Net interest margin, which is tax-equivalent net
interest income divided by average earning assets, decreased to 6.02% during
1996. This compares to 6.37% in 1995 and 6.02% in 1994. This statistical
measurement of the primary earnings source is an important indicator of VRB
Bancorp's ability to effectively manage earning assets and interest bearing
liabilities.
The overall tax-equivalent earning asset yield was 9.52% in 1996 compared to
9.68% and 8.37% for the same periods in 1995 and 1994, respectively, due to
flat market interest rates and growth in the proportion of relatively lower-
yielding investments to earning assets. Loans, which generally carry a
higher yield than investment securities and other earning assets, comprised
66.0% of average earning assets during 1996, versus 72.7% in 1995 and 64.5%
in 1994. During these same periods, average yields on loans also increased
from 10.00% in 1994 to 10.72% in 1995, but declined to 10.67% in 1996.
Investment securities comprised 28.8% of average earning assets in 1996 which
was up from 24.5% in 1995 and 28.0% in 1994. The reduced portfolio of
investment securities reflects the relatively stable yields realized from
these investments during 1994 to 1996 and the greater yield opportunity
recognized in growing the Bank's loan portfolio. Tax-equivalent interest
yields on investment securities have ranged from 7.67% in 1996 to 7.05% in
1995 and 5.71% in 1994.
Interest cost as a percentage of earning assets increased to 2.52% in 1996
compared to 2.35% in 1995, and 1.69% in 1994. Local competitive pricing
conditions and funding needs for the Bank's investments in loans was the
primary cause for increases in rates paid for deposits during 1995 and 1996.
As a result, tax-equivalent net interest income for the year ended December
31, 1996, of $10,057,265 was $755,297 or 8.12% higher than the $9,301,968 in
1995, which was $655,209 or 7.58% greater than the $8,646,759 reported in
1994.
<PAGE>
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID
The following table shows average balances and interest income or interest
expense, with the resulting average yield or rates by category of average
earning asset or interest-bearing liability (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME OR YIELDS OR AVERAGE INCOME OR YIELDS OR AVERAGE INCOME OR YIELDS OR
BALANCE EXPENSE RATES BALANCE EXPENSE RATES BALANCE EXPENSE RATES
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1) $ 94,907 $ 10,122 10.67% $ 92,268 $ 9,893 10.72% $ 83,633 $ 8,364 10.00%
Investment securities:
Taxable securities 22,328 1,711 7.66 18,275 1,256 6.87 24,372 1,213 4.98
Nontaxable securities(2) 19,080 1,461 7.66 12,818 936 7.30 11,903 858 7.20
Federal funds sold 7,419 390 5.26 3,614 206 5.71 9,636 408 4.24
Total interest-earning
assets 143,734 13,684 9.52 126,975 12,291 9.68% 129,544 10,843 8.37%
Cash and due from banks 14,788 12,213 9,333
Fixed assets 3,957 3,900 4,064
Loan loss allowance (1,396) (1,423) (1,435)
Other assets 2,444 2,425 2,873
Total assets $ 163,527 $ 144,090 $ 144,379
Interest-bearing liabilities:
Interest-bearing checking
and savings accounts $ 79,256 $ 2,367 2.99 $ 70,167 $ 1,983 2.83 $ 75,841 $ 1,565 2.06
Time deposits 24,436 1,261 5.16 19,043 938 4.93 17,447 631 3.60
Borrowed funds - - - 1,091 69 6.29 - - -
Total interest-bearing
liabilities 103,692 3,628 3.50% 90,301 2,990 3.31% 93,288 2,196 2.35%
Noninterest bearing
deposits 39,836 36,310 35,968
Other liabilities 1,166 1,092 933
Total liabilities 144,694 127,703 130,189
Shareholders' equity 18,833 16,387 14,190
Total liabilities and
shareholders' equity $ 163,527 $ 144,090 $ 144,379
Net interest income $ 10,056 $ 9,301 $ 8,647
Net interest margin 6.02% 6.37% 6.02%
Average yield on earning
assets (1) (2) 9.52% 9.68% 8.37%
Interest expense to earning
assets (1) (2) 2.52% 2.35% 1.69%
Net interest income to
earning assets (1) (2) 7.00% 7.33% 6.67%
(1) Nonaccrual loans are included in the average balance.
(2) Tax-exempt income has been adjusted to a tax-equivalent basis at a 34 percent rate.
</TABLE>
<PAGE>
Analysis of Changes in Interest Differential. The following table shows the
dollar amount of the increase (decrease) in Bancorp's net interest income
and expense and attributes such dollar amounts to changes in volume as well as
changes in rates. Rate/volume variances have been allocated proportionally
between rate and volume changes (in thousands):
<TABLE>
<CAPTION>
1996 OVER 1995 1995 OVER 1994
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 283 $ (53) $ 230 $ 863 $ 669 $ 1,529
Investment securities
Taxable securities 279 153 432 (303) 347 44
Nontaxable securities 457 45 502 66 13 79
Federal funds sold 217 (16) 201 (255) 53 (202)
Total* 1,236 129 1,365 371 1,082 1,453
Interest-bearing liabilities:
Interest-bearing checking
and savings accounts (257) (112) (369) 117 (535) (418)
Time deposits (266) (44) (310) (58) (249) (307)
Borrowed funds 69 - 69 (68) (6) (74)
Total* (454) (156) (610) (9) (790) (799)
Net increase (decrease)
in net interest $ 782 $ (27) $ 755 $ 362 $ 292 $ 654
* Tax-exempt income has been adjusted to a tax-equivalent basis at a 34 percent rate.
</TABLE>
Provision for Possible Loan Losses. Recoveries have been nearly equivalent
to or have exceeded charge-offs over the past three year periods. Net charge-
offs for 1996 were approximately $25,000 which compares to net charge-offs of
approximately $7,000 in 1995 and $39,000 in 1994. Loans on nonaccrual status
have been insignificant. At December 31, 1996, nonaccrual loans totaled
$58,166 compared to only $52,499 at December 31, 1995 and $7,475 at the end
of 1994. These factors point out the strong underwriting and collection
practices employed by the Bank. As a result over the past three years, only in
1996, when an expense of $250,000 was recognized, did the Bank record a
provision for loan losses. When a charge to the loan loss provision is recorded,
the amount is based on past charge-off experience, a careful analysis of our
current portfolio, and evaluation of future economic trends in our market
area. Management continues to closely monitor the loan quality of new and
existing relationships. Net loan losses or recoveries in 1997 are expected
to approximate the Bank's recent historical experience.
Noninterest Income and Noninterest Expense. Total noninterest income has
declined from 1994 through year-end 1996. Over the three year period
noninterest income has ranged from $1,511,706 in 1994 and $1,380,487 in 1995
to $1,370,635 in 1996. While service charges on deposit accounts have
remained stable from 1994 through 1996, other operating income, which includes
earnings from the Bank's real estate mortgage processing activities, declined
after 1994. Closure of the Bank's manufactured housing lending division early
in 1995 significantly impacted other operating income levels such that revenues
of approximately $480,000 in 1994 declined to nearly $370,000 in 1995 and
approximately $390,000 in 1996. The Bank does not actively trade or sell
investment securities and, consequently, has received no material income
from such transactions during the period from 1994 to 1996.
<PAGE>
Other operating expenses are comprised principally of employees' salaries
and benefits but also include occupancy costs, data processing and
communication expenses, FDIC insurance premiums, professional fees, and other
noninterest expenses. A measure of the Bank's ability to contain noninterest
expenses is the efficiency ratio. This statistic is derived by dividing total
noninterest expenses by total interest and noninterest income. As of December
31, 1996, the ratio had improved to 40.03% compared to 45.38% and 49.92% at
the end of 1995 and 1994, respectively. This decrease reflects management's
emphasis and success in closely monitoring and controlling noninterest
expenses.
Salary and benefit expense of $3,692,594 in 1996 was 3.86% or $148,461 less
than the $3,841,055 reported in 1995 which was $204,721 or 5.62% higher than
the $3,636,334 reported in 1994. As of December 31, 1996, the Bank had 116
full-time equivalent employees which compares to 107 and 111 as of December
31, 1995 and 1994, respectively.
Net occupancy expenses consist of depreciation on premises and equipment,
maintenance and repair expenses, utilities and related expenses. The Bank's
net occupancy expense in 1996 of $629,642 was $21,903 or 3.60% higher than
the $607,739 reported in 1995, which was $78,508 or 11.44% less than the
$686,247 reported in 1994. At the close of 1995, the Bank embarked upon
upgrading its data processing systems. The result will increase operating
efficiencies, but may also cause increases to net occupancy expenses during
future years.
Communications expenses have increased consistently from 1994 through 1996
as the Bank continues to promote and advertise its products and services to the
communities it serves. In 1996, communication expenses of $226,390 were 10.80%
higher than 1995 which were 7.30% greater than 1994. Expenditures relating
to communications are important for the Bank to realize its market share and
growth goals for the future.
FDIC insurance premiums are a function of outstanding deposit liabilities
and through 1994 increased consistent with the Bank's growth in depository
relationships. However, insurance expense decreased nearly $140,000 in 1995
when the Bank received a premium refund after the Bank Insurance Fund was
recapitalized. Because the Bank Insurance Fund is adequately capitalized,
the Bank was required to make only nominal premium payments in 1996. For the
three years ended December 31, 1996, the Bank has been rated to pay the lowest
premiums available for its deposit insurance coverage.
All other noninterest expenses, as a percentage of total revenues, declined
in 1996 compared to both 1995 and 1994. In 1996, all other noninterest expenses
were 8.8% of total revenues while in 1995 and 1994 these items were 9.5% and
10.2%, respectively, of total revenues. Cost controls and careful management
of expenses have contributed to reduction in other noninterest expenses.
Income Taxes. The provision for income taxes amounted to $1,602,000,
$1,395,000, and $1,335,000 for 1996, 1995, and 1994, respectively. The
provision resulted in effective combined federal and state tax rates of 33%
in 1996 and 32% and 35% in 1995 and 1994, respectively. Effective tax rates
differ from combined estimated statutory rates of 38% principally due to the
effects of nontaxable interest income which is recognized for book but not
for tax purposes. In addition, during 1995, Bancorp's state income tax rate was
reduced 50% from 6.6% to 3.3% as a result of surplus revenues that had been
received by the State of Oregon.
Balance Sheet Analysis
Total assets of VRB Bancorp and its wholly-owned subsidiary, Valley of the
Rogue Bank, increased 16.91% when comparing balances at December 31, 1996 to
1995. At year-end 1996, total assets of $177,106,667 were $25,621,216 more
than total assets of $151,485,451 reported for December 31, 1995. Similarly,
the Bank's daily average outstanding total assets of $163,526,452 grew over
the 1995 daily average of $144,090,446. Growth in the level of daily average
outstanding assets in 1996 over 1995 illustrates the competitiveness for
strong customer loan and deposit relationships. It is management's opinion
that the Bank's growth in assets during 1996 illustrates its strategy to
aggressively pursue opportunities and grow within existing markets.
<PAGE>
Investment Securities and other investments. Investment securities held at
December 31, 1996, totaled $40,284,694, representing a $3,203,895 or 8.64%
increase when compared to December 31, 1995 investment security totals of
$37,080,799. Total investment securities at December 31, 1994 were 8.57%
higher than those reported in 1995. Increases or decreases in our investment
portfolio are primarily a function of loan demand and changes in the Bank's
deposit structure.
The Bank follows a financial accounting principle which requires the
identification of investment securities as held-to-maturity or available-
for-sale. Securities designated as held-to-maturity are those that the Bank
has the intent and ability to hold until they mature or are called rather than
those that management may sell if liquidity requirements dictate or
alternative investment opportunities arise. The mix of available-for-sale
and held-to-maturity investment securities is considered in context with the
Bank's overall asset-liability policy and illustrates management's assessment
of the relative liquidity of the Bank. At December 31, 1996, the investment
portfolio was 53.74% comprised of available-for-sale securities and 46.26%
comprised of held-to-maturity investments, compared to 57.27% comprised of
available-for-sale securities and 42.73% comprised of held-to-maturity
investments in 1995. This mix provides the Bank greater investment
flexibility than the mix which was 15.81% comprised of available-for-sale
securities and 84.19% in held-to-maturity securities at December 31, 1994.
At December 31, 1996, the Bank's investment portfolio had total net
unrealized gains of approximately $85,000. This compares to net unrealized
gains of approximately $44,000 at the end of 1995 and unrealized losses of
$1,201,000 at December 31, 1994. Unrealized gains and losses reflect changes
in market conditions and do not represent the amount of actual profits or
losses the Bank may ultimately realize. Actual realized gains and losses
occur at the time investment securities are sold or redeemed.
Federal funds sold are short term investments which often mature on a daily
basis. The Bank invests in these instruments to provide for additional
earnings on excess available cash balances. Because of their short
maturities, the balance of federal funds sold fluctuates dramatically on a
day-to-day basis. The balance on any one day is influenced by cash demands,
customer deposit levels, loan activity and other investment transactions.
Investments in federal funds sold totaled $11,300,000 at December 31, 1996
compared to $4,500,000 and $6,800,000 at December 31, 1995 and 1994,
respectively.
In 1994, the Bank became a member and stockholder in the Federal Home Loan
Bank. At December 31, 1996, the Bank held $1,119,500 in Federal Home Loan
Bank stock. Our relationship and stock investment with the Federal Home Loan
Bank has and will afford us, in addition to dividend earnings, a borrowing
source for meeting liquidity requirements.
<PAGE>
Investment securities at December 31 consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31,1995 December 31, 1994
APPROXI- APPROXI- APPROXI-
MATE MATE MATE
AMORTIZED MARKET % AMORTIZED MARKET % AMORTIZED MARKET %
COST VALUE YIELD COST VALUE YIELD COST VALUE YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasuries and agencies:
One year or less $ 10,002 $ 9,942 6.16% $ 7,847 $ 7,749 5.70% $ 9,354 $ 9,297 5.87%
One to five years 9,993 10,150 7.12 12,008 12,075 6.14 10,397 10,078 5.86
Five to ten years - - - - - - - - -
Obligations of states
and political subdivisions:
One year or less 215 216 7.05 1,906 1,916 6.03 373 375 7.30
One to five years 6,106 6,169 7.33 3,036 3,050 6.12 4,586 4,468 6.10
Five to ten years 11,749 11,848 8.08 4,351 4,402 7.13 4,594 4,235 7.17
Over ten years 566 589 8.41 6,551 6,712 8.09 3,010 2,793 8.49
Corporate and other:
One year or less 1,569 1,555 6.04 128 126 5.35 224 213 5.77
One to five years - - - 1,570 1,557 6.04 1,705 1,582 6.00
Five to ten years - - - - - - - - -
Over ten years - - - - - - - - -
$ 40,200 $ 40,469 7.17% $ 37,037 $ 37,317 6.50% $ 34,243 $ 33,041 6.32%
* Weighted average yields are stated on a federal tax equivalent basis at a 34% rate.
</TABLE>
Loans. Outstanding loans totaled $99,775,802 at December 31, 1996,
representing a $10,803,321, or 12.14% increase when compared to December 31,
1995, loan totals of $88,972,481. Loan totals grew 0.6% in 1995 over 1994.
Due to the closure of the Bank's manufactured housing department in 1995 and
strong competitive pressure for loan relationships, loan portfolio growth in
1995 was below management's expectations. However, the introduction of
aggressive marketing and additional incentive programs resulted in
significant loan growth for 1996.
The Bank's loan portfolio mix as of December 31, 1996 remained consistent
with the mix reported at the end of 1995. Approximately 75% of the loan
portfolio continues to involve real estate secured transactions. At
December 31, 1996, real estate mortgage loans totaled $66,209,000 and
construction or residential real estate loans totaled $9,112,000, or 65.28%
and 8.98%, respectively, of gross outstanding loans. At the same time, other
commercial loans were $13,181,000 (12.99%) and consumer loans were $12,808,000
(12.63%) of gross outstanding loans.
Although real estate loans constitute a significant portion of the total
loan portfolio, this portfolio has performed well and, management believes,
represents low risk of loss. The Bank's normal lending criteria requires a
loan-to-value ratio on commercial real estate not to exceed 75%, and a loan-
to-value ratio on residential real estate not to exceed 80%. Consequently,
the Bank's loans secured by real estate have a lower delinquency rate than the
balance of its loan portfolio. As of December 31, 1996 and 1995, the Bank
had no investment in other real estate owned.
<PAGE>
The composition of the consolidated loan portfolio as of the end of the
preceding five fiscal years, was as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Commercial $ 13,181 $ 9,440 $ 10,619 $ 10,719 $ 9,632
Real estate - construction 9,112 8,225 16,930 11,659 8,153
Real estate - mortgage 66,209 59,804 49,882 46,511 30,019
Installment 12,808 12,806 12,274 10,933 10,373
Other 98 104 150 214 140
Total loans 101,408 90,379 89,855 80,036 58,317
Allowance for loan losses 1,632 1,407 1,414 1,453 941
Net loans $ 99,776 $ 88,972 $ 88,441 $ 78,583 $ 57,376
</TABLE>
As of December 31, 1995 and 1994, there was no concentration of loans
exceeding 10% of the total loans to a multiple number of borrowers engaged
in similar activities.
The maturity distribution of selected categories of VRB Bancorp's
consolidated loan portfolio at December 31, 1996, and the interest sensitivity
are estimated in the following table (in thousands):
<TABLE>
<CAPTION>
COMMERCIAL LOANS SECURED
LOANS BY REAL ESTATE TOTAL
<S> <S> <S> <S>
Due within one year $ 8,465 $ 47,674 $ 56,139
Due after one through five
years 4,488 19,469 23,957
Due after five years 228 8,178 8,406
Total $ 13,181 $ 75,321 $ 88,502
Fixed-rate loans $ 5,483 $ 25,955 $ 31,438
Variable-rate loans 7,698 49,366 57,064
Total $ 13,181 $ 75,321 $ 88,502
</TABLE>
Summary of Loan Loss Experience. Although management recorded a $250,000
provision for loan losses in 1996 to support loan portfolio growth, the
quality of the Bank's loan portfolio remains strong. At December 31, 1996,
the allowance for loan losses of $1,632,000 was considered sufficient to absorb
possible losses on loans which may become uncollectible based on evaluations
by management.
The amount of the allowance for loan losses is assessed by management on a
regular basis to ensure that it is sufficient to cover potential future loan
losses. Management does not specifically allocate the reserve for loan
losses by loan category. The reserve balance and amount of provision charged to
operations is based primarily on management's evaluation of the entire
portfolio. This analysis includes review of the following factors: (a) the
<PAGE>
volume and mix of the existing loan portfolio, including the volume and
severity of nonperforming loans and adversely classified credits, as well as
analysis of net charge-offs experienced on previously classified loans; (b)
the extent to which loan renewals and extensions are used to maintain loans
on a current basis and the degree of risk associated with such loans; (c) the
trend in loan growth, including any rapid increase in loan volume within a
relatively short period of time; (d) general and local economic conditions
affecting the collectibility of the Bank's loans; (e) the relationship and
trend over the past several years of recoveries as a percentage of previous
years' charge-offs; and, (g) available outside information of a comparable
nature regarding the loan portfolios of other banks, including peer group
banks.
The following table shows VRB Bancorp's loan loss performance for the years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Loans outstanding at end of year,
net of unearned interest income $ 101,408 $ 90,379 $ 89,855 $ 80,036 $ 58,317
Average loans outstanding,
net of unearned interest income 94,907 92,268 83,633 68,739 55,529
Reserve balance, beginning of year 1,407 1,414 1,453 941 754
Loans charged-off:
Commercial 29 31 24 35 13
Real estate - - - - -
Consumer 9 14 66 23 151
Total loans charged-off 38 45 90 58 164
Recoveries:
Commercial 10 20 31 156 162
Real estate - - - - -
Consumer 3 18 20 53 24
Total recoveries 13 38 51 209 186
Provision charged to operations 250 - - - 165
Changes incidental to merger - - - 361 -
Reserve balance, end of year $ 1,632 $ 1,407 $ 1,414 $ 1,453 941
Ratio of net loans charged-off to
average loans outstanding 0.03% 0.01% 0.05% (0.22)% (0.04)%
Ratio of reserve for loan losses to
loans at year-end 1.61% 1.56% 1.57% 1.82% 1.61%
</TABLE>
As the table illustrates, during both 1996 and 1995, the Bank charged
nominal amounts to losses and recovered on loans previously charged-off of
nearly the same amounts. At December 31, 1996, the Bank classified $96,655
in loans as either doubtful of collection or loss. The majority of these
classified loans are comprised of commercial loans with the balance
consisting of consumer transactions. Management believes it is reasonable
to expect a significant portion of this amount may be charged to losses in
the future.
<PAGE>
Nonperforming loans. The table below shows information regarding
consolidated loans as of December 31 of each year (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more
and still accruing:
Commercial $ - $ 30 $ 23 $ 76 $ -
Real estate - - - - -
Consumer 12 18 85 41 53
Subtotal 12 48 108 117 53
Nonaccrual loans:
Commercial - 1 7 111 30
Real estate - - - - -
Consumer 58 52 - 60 44
Subtotal 58 53 7 171 74
Restructured loans - - - - -
Total nonperforming loans 70 101 115 288 127
Other nonperforming assets
Other real estate - - - 146 120
Total nonperforming assets $ 70 $ 101 $ 115 $ 434 $ 247
Nonperforming loans as % of
total loans 0.06% 0.11% 0.13% 0.36% 0.22%
Nonperforming assets as % of
total assets 0.04% 0.07% 0.08% 0.31% 0.22%
Reserve coverage - Allowance for
loan losses as a % of non-
performing loans 2331.43% 1393.07% 1229.57% 504.51% 740.94%
</TABLE>
No interest income was accrued on the nonaccrual loans or included in the
results of operations for the years ended December 31, 1996, 1995 and 1994.
The Bank's policy is to place a loan on nonaccrual status when there is
significant question as to the collectibility of the interest. Normally if
the loan is past due 90 days or more, it is placed in nonaccrual status unless
well secured and in the process of collection.
Deposits. From December 31, 1995 to 1996, total deposits increased by
$22,823,910, or 17.19% from $132,744,547 to $155,568,457. This represents an
increase from 1995, when total deposits increased by 5.80% over 1994.
Nonvolatile, noninterest bearing demand deposits, also referred to as core
deposits, continued to represent a significant percentage of the Bank's
deposit base. To the extent that the Bank funds operations with noninterest
bearing core deposits, net interest margin, the difference between interest
income and interest expense, will improve. At December 31, 1996, these
demand deposits accounted for 26.83% of total deposits which was down slightly
from 28.70% as of December 31, 1995. Nevertheless, average outstanding core
deposit balances improved in 1996 over 1995 by approximately $3,500,000 to
$39,836,439.
<PAGE>
Interest bearing deposits consist of NOW, money market, savings and time
certificate accounts. By their nature, interest bearing account balances
will tend to grow or decline as the Bank reacts to changes in competitor
pricing and interest paying strategies. In 1996, total interest bearing
deposit accounts of $113,822,282 increased $19,176,002 or 20.26% from 1995.
Significant growth in interest-bearing demand deposits ($15,774,164 or
29.59%) and time deposits ($5,462,095 or 22.92%) was more than sufficient
to offset a decline in savings deposits ($2,060,257 or 11.77%). Management's
analysis of the shifts in interest bearing deposit mix indicates that a
significant number of the Bank's savings account customers shifted into
higher earning time deposit accounts during the year.
In 1994 and early 1995, management of the Bank purposely held down interest
paid on time deposits as it was unwilling to aggressively compete for such
deposits when no need for additional liquidity existed. This allowed the
Bank to improve its net interest margin by keeping down the interest paid on
deposit accounts. As a result, however, increased competition from local
financial institutions and other investment sources attracted depositors
away from the Bank. As competition eased for time deposit accounts and interest
rates paid for such accounts became more favorable in 1995 and 1996, the
Bank became more aggressive in pricing its time deposit products. This resulted
in the deposit growth in 1995 and 1996, and will help support management's
growth expectations for the future.
The Bank, by policy, does not depend on brokered deposits nor high priced
time deposits. At December 31, 1996, time certificates of deposits in excess of
$100,000 totaled $7,051,302 or 24.07% of total outstanding time deposits.
This compares to 12.09% and 13.06% as of December 31, 1995 and 1994,
respectively.
The following table sets forth by time remaining to maturity, time
certificates of deposit accounts in amounts of $100,000 or more at December
31, 1996 (in thousands):
Less than three months $ 4,397
Three to twelve months 3,234
Over one year through five years 520
More than five years -
$ 8,151
<PAGE>
Return on Equity and Assets. Return on daily average assets and equity and
certain other ratios for the years ended December 31 are presented below (in
thousands except per share data):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net income $ 3,251 $ 2,908 $ 2,510 $ 2,053 $ 1,665
Average assets 163,526 144,090 144,379 126,750 103,393
RETURN ON AVERAGE ASSETS 1.99% 2.02% 1.74% 1.62% 1.61%
Net income 3,251 2,908 2,509 2,053 1,665
Average equity 18,833 16,382 14,190 12,095 10,129
RETURN ON AVERAGE EQUITY 17.26% 17.75% 17.69% 16.97% 16.44%
Cash dividends paid per share $ .27 $ .16 $ .14 $ .12 $ .11
Net income per share $ .92 $ .82 $ .71 $ .58 $ .50
DIVIDEND PAYOUT RATIO 29.35% 19.51% 19.72% 20.68% 22.00%
Average equity 18,833 16,382 14,190 12,095 10,129
Average assets 163,526 144,090 144,379 126,750 103,393
AVERAGE EQUITY TO ASSET 11.52% 11.37% 9.83% 9.54% 9.80%
RATIO
</TABLE>
Capital Adequacy. The primary capital-to-asset leverage ratio was 11.40% at
December 31, 1996, versus 11.53% at year-end 1995. The 1996 ratio was a
direct result of the continuing strong profitability of the Bank and an
increased cash dividend payout to existing shareholders. With a strong
equity to asset ratio, the Bank enjoys greater financial flexibility and
less dependence upon its deposit base to support loan and investment
activities.
In 1989, banking regulators adopted risk-based capital guidelines under
which one of four risk weights is applied to balance sheet assets, each with
different capital requirements based on the credit risk of the asset. At
December 31, 1996, the Bank was required to have minimum Tier 1 and total
capital ratios of 4.00% and 8.00%, respectively. The Bank's actual ratios on
that date substantially exceeded regulatory guidelines at 16.08% and 17.34%,
respectively.
Management seeks to attain a level of capital consistent with appropriate
business risk and an ongoing need for financial flexibility. Adequacy of
capital depends on the assessment of a number of factors such as stability
of earnings, asset quality, liquidity, and economic conditions. Nevertheless,
management and the Board of Directors are cognizant of the need to provide
shareholders with a fair return on their investment in the Bank. With these
factors in mind, the Bank's total cash dividend payout ratio to shareholders
has been 29.35% and 19.51% in 1996 and 1995, respectively.
Liquidity Management. Liquidity represents the ability to meet cash flow
requirements and financial commitments at a reasonable cost, while retaining
the flexibility to take advantage of business opportunities. Management has
always placed a high priority on maintaining a high liquidity through a
moderate loan-to-deposit ratio and a conservative investment portfolio. Our
loan-to-deposit ratio was 65.19% at December 31, 1996, versus 68.08% at
year-end 1995. Approximately $3,311,000 or 8.22% of our securities portfolio
matures within one year. In addition, the Bank participates in the Cash
Management Advance Program with the Federal Home Loan Bank of Seattle and
other borrowing arrangements with Bank of America and Wells Fargo Bank.
<PAGE>
Under these programs, the Bank may borrow to a maximum of $11,900,000 although
no borrowings were outstanding at December 31, 1996. Management believes these
factors are indicative of the emphasis placed upon maintaining sufficient
liquidity for the Bank.
Asset-Liability Management. The principal purpose of asset-liability
management is to manage the Bank's sources and uses of funds to maximize net
interest income under different interest rate conditions with minimal risk.
The Bank employs a financial model to project earnings performance under
various rate scenarios and growth assumptions.
A part of this financial model calculates the "GAP," the difference between
repricing assets and repricing liabilities in a specific time period. This
analysis provides an indication of the Bank's earnings risk due to future
interest rate changes. At December 31, 1996, the analysis indicated that
the earnings risk was within the Bank's policy guidelines.
Interest Rate Sensitivity. A key component of the asset-liability management
is the measurement of interest-rate sensitivity. Interest-rate sensitivity
refers to the volatility in earnings resulting from fluctuations in interest
rates, variability in spread relationships, and the mismatch of repricing
intervals between assets and liabilities. Interest-rate sensitivity
management attempts to maximize earnings growth by minimizing the effects of
changing market rates, asset and liability mix, and prepayment trends.
Management reviews the Bank's interest-rate sensitivity position on an
ongoing basis, and prepares strategies to adjust that sensitivity, as
appropriate. Consideration is given and strategies are developed to minimize
the effect of any compression on net interest income which may arise from
earlier repricing of loans at lower rates or earlier repricing of deposits at
higher rates. As of December 31, 1996, management believes its strategies are
sufficient to offset any compression on net interest income that may arise from
asset and liability repricing in the near term.
The table below presents interest-rate sensitivity data as of December 31,
1996. The interest rate gaps reported in the table arise when assets are
funded with liabilities having different repricing intervals. Since these
gaps are actively managed and change daily as adjustments are made in interest
rate views and market outlook, positions at the end of any period may not be
reflective of the Bank's interest rate view in subsequent periods. Active
management dictates that longer-term economic views are balanced against the
prospects of short-term interest rate changes in all repricing intervals.
<PAGE>
<TABLE>
<CAPTION>
BY REPRICING INTERVAL
NON
INTEREST-
December 31, 1996 0 - 3 3 - 6 6 - 12 1 - 5 OVER 5 BEARING
(in thousands) MONTHS MONTHS MONTHS YEARS YEARS FUNDS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold $ 11,300 $ - $ - $ - $ - $ - $ 11,300
Securities available-
for-sale - 3,012 - 15,597 3,040 - 21,649
Securities held-to-
maturity 150 15 50 2,809 15,612 - 18,636
Loans 50,196 2,431 4,485 30,759 11,904 - 99,775
Noninterest earning
assets and allowance
for credit losses - - - - - 25,747 25,747
Total $ 61,646 $ 5,458 $ 4,535 $ 49,165 $ 30,556 $ 25,747 $ 177,107
Liabilities and stock-
holders' equity
Interest-bearing
demand deposits $ 69,082 $ - $ - $ - $ - $ - $ 69,082
Savings deposits 15,448 - - - - - 15,448
Time deposits
Over $100,000 4,397 1,496 1,738 520 - - 8,151
Under $100,000 7,439 6,204 3,486 3,997 15 - 21,141
Noninterest bearing
liabilities and
common stock - - - - - 63,285 63,285
Total 96,366 7,700 5,224 4,517 15 63,285 177,107
Interest rate
sensitivity gap - - - - - - -
Cumulative interest
rate sensitivity gap $ 96,366 $ 7,700 $ 5,224 $ 4,517 $ 15 $ 63,285 $ 177,107
</TABLE>
VRB Bancorp Consolidated Balance Sheet
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
ASSETS
<S> <C> <C>
Cash and due from banks $ 17,916,909 $ 13,599,620
Federal funds sold 11,300,000 4,500,000
Total cash and cash equivalents 29,216,909 18,099,620
Held-to-maturity securities:
State and municipal subdivisions 18,635,932 15,843,744
18,635,932 15,843,744
Available-for-sale securities:
U.S. Treasuries and agencies 20,092,813 19,554,343
Corporate and other 1,555,949 1,682,712
21,648,762 21,237,055
Federal Home Loan Bank stock 1,119,500 1,036,200
Loans, net of allowance for loan losses
and unearned income 99,775,802 88,972,481
Premises and equipment, net 4,093,669 3,881,683
Accrued interest and other assets 2,616,093 2,414,668
Total assets $ 177,106,667 $ 151,485,451
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS
Demand deposits $ 41,746,175 $ 38,098,267
Interest bearing demand deposits 69,082,274 53,308,110
Savings deposits 15,447,644 17,507,901
Time deposits 29,292,364 23,830,269
Total deposits 155,568,457 132,744,547
Accrued interest and other liabilities 1,350,076 1,271,159
Total liabilities 156,918,533 134,015,706
SHAREHOLDERS' EQUITY
Preferred stock, voting, $5 par value; 5,000,000 shares
authorized and unissued
Preferred stock, nonvoting, $5 par value; 5,000,000 shares
authorized and unissued
Common stock, no par value, 10,000,000 shares authorized
with 3,574,682 and 2,333,019, issued and outstanding
at December 31, 1996 and 1995, respectively 9,480,330 9,085,013
Retained earnings 10,652,015 8,355,113
Unrealized gain on available-for-sale securities,
net of taxes 55,789 29,619
Total shareholders' equity 20,188,134 17,469,745
Total liabilities and shareholders' equity $ 177,106,667 $ 151,485,451
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
VRB Bancorp Consolidated Statements of Income
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 10,122,237 $ 9,892,695 $ 8,363,776
Interest on investment securities held-to-maturity:
State and municipal subdivisions 964,043 617,886 565,982
U.S. Treasuries and agencies 1,229,046 891,985 1,152,820
Interest on investment securities available-for-sale:
Corporate and other investments 482,256 364,428 60,038
Federal funds sold 390,450 206,215 408,219
Total interest income 13,188,032 11,973,209 10,550,835
INTEREST EXPENSE
Interest-bearing demand deposits 1,990,377 1,519,257 1,000,647
Savings deposits 376,290 463,435 563,994
Time deposits 1,260,728 938,197 631,001
Other borrowings - 68,658 -
Total interest expense 3,627,395 2,989,547 2,195,642
Net interest income 9,560,637 8,983,662 8,355,193
Provision for loan losses 250,000 - -
Net interest income after provision
for loan losses 9,310,637 8,983,662 8,355,193
NONINTEREST INCOME
Service charges on deposit accounts 978,739 1,006,765 1,031,819
Other operating income 391,896 373,722 479,887
Total noninterest income 1,370,635 1,380,487 1,511,706
NONINTEREST EXPENSES
Salaries and benefits 3,692,594 3,841,055 3,636,634
Net occupancy 629,642 607,739 686,247
Communications 226,390 204,323 190,419
Data processing 147,844 97,339 91,192
FDIC insurance premium 2,000 142,633 281,720
Supplies 170,948 158,648 145,534
Professional fees 143,817 179,686 152,844
Other real estate expense - - 8,858
Other expenses 814,767 829,635 828,969
Total noninterest expenses 5,828,002 6,061,058 6,022,117
INCOME BEFORE INCOME TAXES 4,853,270 4,303,091 3,844,782
PROVISION FOR INCOME TAXES 1,602,000 1,395,000 1,335,000
NET INCOME $ 3,251,270 $ 2,908,091 $ 2,509,782
NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE $ 0.92 $ 0.82 $ 0.71
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
VRB Bancorp Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
(LOSS) GAIN ON TOTAL
COMMON STOCK RETAINED AVAILABLE-FOR- SHAREHOLDERS'
SHARES AMOUNT EARNINGS SALE SECURITIES EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1993 1,426,482 $ 6,873,549 $ 6,099,821 $ - $12,973,370
Stock option exercised
(April to September 1994) 3,825 30,380 - - 30,380
3 for 2 Stock split
(September 15, 1994) 715,217 - - - -
Payments for fractional shares
related to 3 for 2 stock
split ($12 per share) - - (1,398) - (1,398)
Stock option exercised
(September 30, 1994) 4,047 25,947 - - 25,947
Cash dividend ($ .22 per share
paid December 1, 1994) - - (472,985) - (472,985)
4% stock dividend (85,755
shares issued, dated
December 1, 1994) 85,755 986,183 (986,183) - -
Payments for fractional shares
related to stock dividend
($11.50 per share) - - (2,785) - (2,785)
Changes in unrealized loss
on available-for-sale
securities, net of taxes - - - (61,706) (61,706)
Net income - - 2,509,782 - 2,509,782
BALANCE,
December 31, 1994 2,235,686 7,916,059 7,146,252 (61,706) 15,000,605
Stock options exercised
(August 11, 1995) 143 581 - - 581
Cash dividend ($ .25 per
share, paid November
10, 1995) - - (558,957) - (558,957)
4% stock dividend (89,190
shares issued, dated
November 10, 1995) 89,190 1,137,173 (1,137,173) - -
The accompanying notes are an integral part of these consolicated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK RETAINED AVAILABLE-FOR- SHAREHOLDERS'
SHARES AMOUNT EARNINGS SALE SECURITIES EQUITY
<S> <C> <C> <C> <C> <C>
Payments for fractional
shares related to stock
dividend ($12.75 per
share) - $ - $ (3,100) $ - $ (3,100)
Stock options exercised
(December 28, 1995) 8,000 31,200 - - 31,200
Net income - - 2,908,091 - 2,908,091
Changes in net unrealized
gain on available-for-sale
securities, net of taxes - - - 91,325 91,325
BALANCE, December 31,
1995 2,333,019 9,085,013 8,355,113 29,619 17,469,745
Stock options exercised
(January to October 1995) 50,180 304,054 - - 304,054
Income tax benefit from exercised
of stock option - 91,263 - - 91,263
Cash dividend ($ .40 per share,
paid November 20, 1996) - - (953,280) - (953,280)
2 for 1 stock split
(November 20, 1996) 1,191,483 - - - -
Payments for fractional shares
related to stock split
($9.33 per share) - - (1,088) - (1,088)
Net income - - 3,251,270 - 3,251,270
Changes in net unrealized gain
on available-for-sale
securities, net of taxes - - - 26,170 26,170
BALANCE,
December 31, 1996 3,574,682 $ 9,480,330 $10,652,015 $ 55,789 $20,188,134
</TABLE>
<PAGE>
VRB Bancorp Consolidated Statements of Cash Flows
<TABLE>
YEARS ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS RELATING TO OPERATING ACTIVITIES
Net income $ 3,251,270 $ 2,908,091 $ 2,509,782
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 432,815 430,123 505,259
Loss (gain) on sales of assets 1,493 - (9,998)
Provision for loan losses 250,000 - -
Write-down on other real estate owned - - (8,858)
FHLB dividend (83,800) (55,128) (9,900)
Deferred taxes 6,451 13,118 104,120
Change in cash due to changes in certain assets
and liabilities:
Increase in accrued interest and other assets (226,911) (90,327) (5,290)
Decrease in accrued interest and other liabilities 125,871 192,234 64,689
Net cash provided by operating activities 3,757,689 3,398,111 3,167,520
CASH FLOWS RELATING TO INVESTING ACTIVITIES
Proceeds from the maturity of held-to-maturity securities 5,390,000 7,895,537 16,937,000
Purchases of held-to-maturity securities (8,204,586) (3,686,000) (14,355,971)
Proceeds from maturity of available-for-sale securities 6,118,455 2,000,000 2,000,000
Purchases of available-for-sale securities (6,490,627) (9,034,989) -
Purchases of Federal Home Loan Bank stock - (544,472) (426,700)
Net increase in loans (11,053,321) (530,996) (9,858,207)
Purchase of premises and equipment (513,479) (249,433) (96,401)
Sale of premises and equipment - 4,010 4,405
Proceeds from sale of other real estate owned - - 146,833
Net cash used in investing activities (14,753,558) (4,146,343) (5,649,041)
CASH FLOWS RELATING TO FINANCING ACTIVITIES
Net increase (decrease) in deposits 22,823,910 7,272,231 (2,525,281)
Cash dividends and fractional share payments (954,368) (562,057) (477,168)
Cash received from exercise of common stock options 243,616 31,781 56,327
Net cash provided by (used in) financing activities 22,113,158 6,741,955 (2,946,122)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 11,117,289 5,993,723 (5,427,643)
CASH AND CASH EQUIVALENTS, beginning of year 18,099,620 12,105,897 17,533,540
CASH AND CASH EQUIVALENTS, end of year $ 29,216,909 $ 18,099,620 $ 12,105,897
The accompanying notes are an integral part of these consolidated financial statements.
<PAGE>
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest $ 3,363,185 $ 2,919,329 $ 2,205,676
Cash paid for taxes $ 1,607,300 $ 1,456,256 $ 1,441,586
SCHEDULE OF NONCASH ACTIVITIES
Stock dividends declared $ - $ 1,137,173 $ 986,183
Unrealized loss (gain) on available-for-sale
securities, net of tax $ 26,170 $ 91,325 $ 61,706
Income tax benefit of stock options exercised $ 91,263 $ - $ -
</TABLE>
<PAGE>
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization - VRB Bancorp is the parent holding company for Valley of the
Rogue Bank. Substantially all activity of VRB Bancorp is conducted through its
subsidiary bank and all significant intercompany accounts and transactions have
been eliminated in the preparation of the consolidated financial statements.
Nature of operations - The Bank is a state-chartered institution authorized
to provide banking services by the State of Oregon. With its headquarters in
Rogue River, Oregon, the Bank also has branch operations in Josephine and
Jackson County, Oregon. Both VRB Bancorp and Valley of the Rogue Bank are
subject to the regulations of certain Federal and State agencies and undergo
periodic examinations by those regulatory authorities.
Management's estimates and assumptions - In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the balance sheet and revenues and expenses for the period. Actual results
could differ significantly from those estimates.
Investment securities - The Bank is required to specifically identify under
generally accepted accounting principles its investment securities as
"held-to-maturity," "available-for-sale," or "trading accounts." Accordingly,
management has determined that all investment securities held at December 31,
1996 and 1995, are either "available-for-sale" or "held-to-maturity" and
conform to the following accounting policies:
Securities held-to-maturity - Bonds, notes, and debentures for which the Bank
has the intent and ability to hold to maturity are reported at cost, adjusted
for premiums and discounts that are recognized in interest income using the
interest method over the period to maturity.
Securities available-for-sale - Available-for-sale securities
consist of bonds, notes, debentures, and certain equity securities not
classified as held-to-maturity securities. Securities are generally classified
as available-for-sale if the instrument may be sold in response to such
factors as: (1) changes in market interest rates and related changes in the
security's prepayment risk, (2) needs for liquidity, (3) changes in the
availability of and the yield on alternative instruments, and (4) changes in
funding sources and terms. Unrealized holding gains and losses, net of tax, on
available-for-sale securities are reported as a net amount in a separate
component of equity until realized. Fair values for investment securities are
based on quoted market prices. Gains and losses on the sale of available-for-
sale securities are determined using the specific-identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary,
result in write-downs of the individual securities to their fair value. The
related write-downs would be included in earnings as realized losses. Premiums
and discounts are recognized in interest income using the interest method over
the period to maturity.
<PAGE>
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (Continued)
Loans, net of allowance for loan losses and unearned income -
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan losses and unearned income. Interest on loans is calculated by using
the simple-interest method on daily balances of the principal amount
outstanding. The allowance for loan losses is established through a provision
for loan losses charged to expenses. Loans are charged against the allowance
for loan losses when management believes that the collectibility of the
principal is unlikely. The allowance is an amount that management believes
will be adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions
that may affect the borrower's ability to pay. Accrual of interest is
discontinued on a loan when management believes, after considering economic
and business conditions, collection efforts, and collateral position, that the
borrower's financial condition is such that collection of interest is
doubtful. Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related loan.
The Bank adopted the Financial Accounting Standards Board's
Statements No. 114 "Accounting by Creditors for Impairment of a Loan" and No.
118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" as of January 1, 1995. These pronouncements require that the Bank
assess loans that are considered impaired and measure this impairment based on
the present value of expected future cash flows discounted at the loan's
effective interest rate. There were no loans of material value considered
impaired for the years ended December 31, 1996 and 1995.
Premises and equipment - Premises and equipment are stated at
cost, less accumulated depreciation. Depreciation is computed principally by
the straight-line method over the estimated useful lives of the assets.
Depreciation is based on useful lives of 3 to 25 years on furniture and
equipment; 15 to 40 years for buildings and components; and, 15 to 20 years on
leasehold improvements.
Intangible assets - Intangible assets consist of purchased
goodwill arising from the previous acquisition of financial institutions.
These assets are being amortized over periods which do not exceed 15 years.
Income taxes - Deferred tax assets and liabilities are reflected
at currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
Statement of cash flows - Cash equivalents are generally all
short-term investments with a maturity of three months or less. Cash and cash
equivalents normally include cash on hand, amounts due from banks, and federal
funds sold.
Off-balance-sheet financial instruments - In the ordinary course
of business, the Bank has entered into off-balance-sheet financial instruments
consisting of commitments to extend credit as well as commercial letters of
credit and standby letters of credit. Such financial instruments are recorded
in the financial statements when they are funded or related fees are incurred
or received.
The Financial Accounting Standards Board issued Statement No. 119,
"Disclosures about Derivative Financial Instruments and Fair Value of
Financial Instruments" which became effective for the Bank for the year ending
December 31, 1995. This pronouncement requires that banks holding derivative
<PAGE>
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (Continued)
financial instruments, disclose quantitative and qualitative information about
the instruments. As of December 31, 1996 and 1995, and for the years then
ended, the Bank held no derivative financial instruments.
Fair value of financial instruments - The following methods and
assumptions were used by the Bank in estimating fair values of financial
instruments as disclosed herein:
Cash and cash equivalents - The carrying amounts of cash and
short-term instruments approximate their fair value.
Held-to-maturity and available-for-sale securities - Fair values
for investment securities, excluding restricted equity securities, are based
on quoted market prices. The carrying values of restricted equity securities
approximate fair values.
Loans receivable - For variable-rate loans that reprice frequently
and have no significant change in credit risk, fair values are based on
carrying values. Fair values for certain mortgage loans (for example, one-to-
four family residential), credit card loans, and other consumer loans are
based on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan characteristics.
Fair values for commercial real estate and commercial loans are estimated
using discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
Fair values for impaired loans are estimated using discounted cash flow
analyses or underlying collateral values, where applicable.
Deposit liabilities - The fair values disclosed for demand
deposits are, by definition, equal to the amount payable on demand at the
reporting date (that is, their carrying amounts). The carrying amounts of
variable-rate, fixed-term money market accounts and certificates of deposit
(CDs) approximate their fair values at the reporting date. Fair values for
fixed-rate CDs are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a schedule
of aggregated expected monthly maturities on time deposits.
Short-term borrowings - The carrying amounts of federal funds
purchased, borrowings under repurchase agreements, and other short-term
borrowings maturing within 90 days approximate their fair values. Fair values
of other short-term borrowings are estimated using discounted cash flow
analyses based on the Bank's current incremental borrowing rates for similar
types of borrowing arrangements.
Long-term debt - The fair values of the Bank's long-term debt are
estimated using discounted cash flow analyses based on the Bank's current
incremental borrowing rates for similar types of borrowing arrangements.
Accrued interest - The carrying amounts of accrued interest
approximate their fair values.
Off-balance-sheet instruments - The Bank's off-balance-sheet
instruments include unfunded commitments to extend credit and standby letters
of credit. The fair value of these instruments is not considered practicable
to estimate because of the lack of quoted market prices and the inability to
estimate fair value without incurring excessive costs.
Reclassifications - Certain reclassifications have been made to
the 1995 and 1994 consolidated financial statements to conform with current
year presentations.
<PAGE>
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (Continued)
Stock options - In October 1995 the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." This new standard defines a fair
value based method of accounting for an employee stock option or similar
equity instrument. This statement gives entities a choice of recognizing
related compensation expense by adopting the new fair value method or to
continue to measure compensation using the intrinsic value approach under
Accounting Principles Board (APB) Opinion No. 25, the former standard. If
the former standard for measurement were elected, SFAS No. 123 requires
supplemental disclosure to show the effects of using the new measurement
criteria. The Bank has elected to continue using the measurement prescribed
by APB Opinion No. 25, and accordingly, this pronouncement has had no affect
on the Bank's financial position or results of operations.
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated market values of investment
securities at December 31, 1996 and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
December 31, 1996
Held-to-maturity securities:
State and political subdivisions $ 18,636 $ 227 $ (43) $ 18,820
Available-for-sale securities:
U.S. Treasuries and agencies $ 19,995 $ 167 $ (69) $ 20,093
Corporate and other 1,569 - (13) 1,556
$ 21,564 $ 167 $ (82) $ 21,649
December 31, 1995
Held-to-maturity securities:
State and municipal subdivision $ 15,844 $ 262 $ (26) $ 16,080
Available-for-sale securities:
U.S. Treasuries and agencies $ 19,496 $ 87 $ (28) $ 19,555
Corporate and other 1,697 - (15) 1,682
$ 21,193 $ 87 $ (43) $ 21,237
</TABLE>
<PAGE>
NOTE 2 - INVESTMENT SECURITIES - (Continued)
The amortized cost and estimated market value of investment
securities at December 31, 1996, by contractual maturity, are shown below (in
thousands). Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
SECURITIES SECURIITES
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
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 of held-to-maturity investment securities
during 1996 and 1995, were $5,390,000 and $7,895,537, respectively. Proceeds
from the maturity of available-for-sale securities was $6,118,455 and
$2,000,000 in 1996 and 1995, respectively.
During 1995, pursuant to implementation guidance on accounting for
certain investments in debt and equity securities issued in a Special Report
by the Financial Accounting Standards Board, the Bank reassessed the
appropriateness of its classifications for investment securities. Accordingly,
securities with an amortized cost of $16,237,960 were transferred from the
held-to-maturity category to the available-for-sale category. This resulted in
the recognition of an unrealized loss on available-for-sale securities, net of
tax, of $132,610 at the time of transfer.
At December 31, 1996 and 1995, investment securities with an
amortized cost of $5,188,961 and $4,174,355, respectively, were pledged to
secure public deposits and for other purposes required or permitted by law.
The Bank, as a member of the Federal Home Loan Bank (FHLB) system,
is required to maintain an investment in capital stock of the FHLB. The FHLB
stock is not actively traded but is redeemable by FHLB at its current book
value.
<PAGE>
NOTE 3 - LOANS AND RESERVE FOR LOAN LOSSES
The loan portfolio consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
Real estate - construction $ 9,112 $ 8,225
Real estate - mortgage 66,209 59,804
Commercial 13,181 9,440
Installment 12,808 12,806
Other loans 98 104
101,408 90,379
(1,632) (1,407)
$ 99,776 $ 88,972
</TABLE>
The following is an analysis of the changes in the reserve for
possible loan losses (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Beginning balance $ 1,470 $ 1,414 $ 1,453
Provision for possible loan losses 250 - -
Losses (38) (45) (90)
Recoveries 13 38 51
Ending balance $ 1,632 $ 1,407 $ 1,414
</TABLE>
Impairment of loans having recorded investments of $58,166 and
$52,499 at December 31, 1996 and 1995, respectively, has been recognized in
conformity with FASB Statement No. 114, as amended by FASB Statement No. 118.
The average recorded investment and total allowance for loan losses related to
impaired loans was equal to their recorded investment at December 31, 1996 and
1995. No interest income was accrued on the impaired loans or included in the
results of operations for the years ended December 31, 1996, 1995, and 1994.
Management estimates that in 1996, approximately $3,788 of interest income was
not recognized on impaired loans on nonaccrual status, compared with
approximately $2,868 in 1995 and $543 in 1994.
<PAGE>
NOTE 4 - BANK PREMISES AND EQUIPMENT
Bank premises, furniture, and equipment consisted of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
Land $ 1,323 $ 1,323
Buildings 3,147 2,942
Furniture and equipment 2,545 2,300
7,015 6,565
Less: accumulated depreciation (2,921) (2,683)
$ 4,094 $ 3,882
</TABLE>
NOTE 5 - OTHER ASSETS
Other assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
Accrued interest receivable $ 1,162 $ 937
Prepaid expenses 136 162
Deferred taxes 126 132
Intangible and other assets 1,192 1,184
$ 2,616 $ 2,415
</TABLE>
NOTE 6 - TIME DEPOSITS
Time certificates of deposit of $100,000 and over, aggregated
$8,151,302 and $2,881,559 at December 31, 1996 and 1995, respectively.
At December 31, 1996, the scheduled maturities for time deposits
is as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $ 25,498
1998 2,135
1999 1,064
2000 469
2001 and thereafter 126
$ 29,292
</TABLE>
<PAGE>
NOTE 7 - INCOME TAXES
The income tax provision consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Currently payable $ 1,596 $ 1,382 $ 1,231
Deferred 6 13 104
Provision for income taxes $ 1,602 $ 1,395 $ 1,335
</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,
1996 1995 1994
<S> <C> <C> <C>
Accounting loan loss provision
in excess of tax provision $ (100) $ - $ 43
Accounting depreciation less than
(in excess of) tax depreciation 19 (6) (4)
Deferred compensation (8) (14) (16)
Accounting loan fees in excess
of tax loan fees 56 17 86
Federal Home Loan Bank stock dividends 24 19 -
Other differences 15 (3) (5)
$ 6 $ 13 $ 104
</TABLE>
<PAGE>
NOTE 7 - INCOME TAXES - (Continued)
The net deferred tax benefits included in other assets in the
accompanying consolidated balance sheets include the following components (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
Deferred tax assets:
Loan loss reserve $ 334 $ 234
Deferred compensation 82 74
Other 14 29
430 337
Deferred tax liabilities:
Accumulated depreciation (97) (78)
Deferred loan fees (159) (103)
Other (48) (24)
(304) (205)
Net deferred tax asset $ 126 $ 132
</TABLE>
The exercise of stock options which have been granted under VRB
Bancorp's stock option plan for directors give rise to compensation which is
includable in the taxable income of the applicable employees and deductible by
the Bank for federal and state income tax purposes. Such compensation results
from increases in the fair market value of VRB Bancorp's common stock
subsequent to the date of grant of the applicable exercised stock options and,
accordingly, in accordance with Accounting Principles Board Opinion No. 25,
such compensation is not recognized as an expense for financial accounting
purposes and the related tax benefits are taken directly to common stock. In
the year ended December 31, 1996, such deductions resulted in federal and
state tax deductions increasing common stock. The compensation deductions
arising from the exercise of stock options were not material in 1995 and 1994.
Management believes, based upon the Bank's historical performance,
net deferred tax assets will be realized in the normal course of operations
and, accordingly, management has not reduced net deferred tax assets by a
valuation allowance.
The tax provision differs from the federal statutory rate of 34%
due principally to the effect of tax exemptions for interest received on
municipal investments. The 1995 provision for income taxes reflects a
reduction in the state income tax rate from 6.6% to 3.3%.
<PAGE>
NOTE 7 - INCOME TAXES - (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,
1996 1995 1994
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 1,650 $ 1,463 $ 1,307
State income tax expense, net of
federal income tax benefit 211 94 167
Effect of nontaxable interest income (298) (191) (179)
Other 39 29 40
$ 1,602 1,395 1,335
Effect tax rate 33% 32% 35%
</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 many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank's experience has been
that nearly all loan commitments are drawn upon by customers. While most
commercial letters of credit are not utilized, a significant portion of such
utilization is on an immediate payment basis. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if it is deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include cash, accounts receivable, inventory, premises and
equipment, and income-producing commercial properties.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the Bank to guarantee the performance of a
customer to a third-party. These guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Bank holds cash, marketable securities, or real
estate as collateral supporting those commitments for which collateral is
deemed necessary.
<PAGE>
NOTE 8 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK -
(Continued)
The Bank has not been required to perform on any financial
guarantees during the past two years. The Bank has not incurred any losses on
its commitments in either 1996, 1995, or 1994.
A summary of the notional amounts of the Bank's financial
instruments with off-balance-sheet risk at December 31, 1996, follows:
Commitments to extend credit $ 16,013,904
Commercial and standby letters of credit $ 479,328
NOTE 9 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table estimates fair value and the related carrying
values of the Bank's financial instruments (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <S> <S> <S> <S>
Financial assets:
Cash and due from bank $ 17,917 $ 17,917 $ 13,599 $ 13,559
Federal funds sold $ 11,300 $ 11,300 $ 4,500 $ 4,500
Securities available-for-sale $ 21,649 $ 21,649 $ 21,237 $ 21,237
Securities held-to-maturity $ 18,636 $ 18,820 $ 15,843 $ 16,080
Federal Home Loan Bank stock $ 1,120 $ 1,120 $ 1,036 $ 1,036
Loans, net of allowance for
loan losses $ 99,776 $ 99,544 $ 88,972 $ 87,444
Financial liabilities:
Demand and savings deposits $ 126,276 $ 126,276 $ 108,914 $ 108,914
Time deposits $ 29,292 $ 29,373 $ 23,830 $ 23,090
</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, 1996 and 1995, the estimated fair
values would necessarily have been achieved at that date, since market values
may differ depending on various circumstances. The estimated fair values at
December 31, 1996 and 1995, should not necessarily be considered to apply at
subsequent dates.
In addition, other assets and liabilities of the Bank that are not
defined as financial instruments are not included in the above disclosures,
such as premises and equipment. Also, nonfinancial instruments typically not
recognized in the financial statements nevertheless may have value but are not
included in the above disclosures. These include, among other items, the
estimated earnings power of core deposit accounts, the earnings potential of
loan servicing rights, the trained work force, customer goodwill, and similar
items.
<PAGE>
NOTE 10 - CONCENTRATIONS OF CREDIT
All of the Bank's loans, commitments, and commercial and standby
letters of credit have been granted to customers in the Bank's market area.
Investments in state and municipal securities involve government entities also
within the Bank's geographical region. The concentrations of credit by type of
loan are set forth in Note 3. The distribution of commitments to extend credit
approximates the distribution of loans outstanding. Commercial and standby
letters of credit were granted primarily to commercial borrowers as of
December 31, 1996. The Bank's loan policy does not allow the extension of
credit to any single borrower or group of related borrowers in excess of a
total of $200,000 without approval from the Board of Directors.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Bank becomes involved in
various litigation arising from normal banking activities. In the opinion of
management, the ultimate disposition of these actions will not have a material
adverse effect on the consolidated financial position or results of
operations.
The Bank leases certain branch premises and equipment. The
following is a schedule of future minimum lease payments under operating
leases in effect as of December 31, 1996:
YEARS ENDING DECEMBER 31,
1997 $ 90,260
1998 90,260
1999 78,260
2000 13,940
Total minimum payments required $ 272,720
Total rental expense was $94,413, $92,059, and $79,308 in
1996, 1995, and 1994, respectively.
NOTE 12 - BORROWING AGREEMENTS
The Bank has borrowing agreements with the Bank of America and
Wells Fargo Bank for $2,000,000 and $3,000,000, respectively. There is no
stated rate of interest on these borrowings. As of December 31, 1996, there
were no borrowings outstanding under these agreements.
The Bank also participates in the Cash Management Advance Program
with the Federal Home Loan Bank of Seattle (FHLB). Under the program, the Bank
may borrow to a maximum of $6,900,000 with interest at the FHLB's cash
management rate. There were no borrowings outstanding at December 31, 1996.
NOTE 13 - STOCK OPTION PLANS
The Bank has two stock option plans which were approved by the
shareholders during 1991 and amended in 1994. The Plans provide for an
aggregate of 362,746 shares of the Bank's unissued common stock to be granted
to key employees and nonemployee directors. The 1994 amendment removed the
requirement for a five-year vesting schedule for any future grants from the
<PAGE>
NOTE 13 - STOCK OPTION PLANS - (Continued)
Employees' Plan, thus leaving the setting of any vesting schedule to the
discretion of the Board of Directors. The Directors' Plan was amended to
extend the time in which options may be exercised following resignation or
retirement.
With the exception of certain options granted to nonemployee
directors, all options granted and outstanding under both the Directors' and
Employees' Plans are noncompensatory and exercisable at purchase prices which
approximate fair value on the date of grant. Because certain options granted
to the Bank's directors were based on purchase prices below the fair value of
the stock as of the grant date, they are considered compensatory transactions
and give rise to the recognition of compensation expense. Accordingly, the
Bank has recognized $44,564, $39,151, and $20,368 as compensation expense
relating to 7,087, 6,702, and 5,382 shares of common stock optioned to its
directors during 1996, 1995, and 1994 respectively.
The following summarizes options available and outstanding under
both the Directors' and Employees' Plans as of December 31, 1996, after the
effect of the current year's stock split:
<TABLE>
<CAPTION>
COMBINED
DIRECTOR'S PLAN EMPLOYEE'S PLAN PLANS
AVERAGE AVERAGE
OPTION OPTION
SHARES PRICE SHARES PRICE SHARES
<S> <C> <C> <C> <C> <C>
Options reserved,
December 31, 1995 90,233 94,765 184,998
Options granted in 1996 (10,631) - (10,631)
Options reserved,
December 31, 1996 79,602 94,765 174,367
Options under grant,
December 31, 1995 27,963 $ 3.59 119,099 $ 4.15 147,062
Options granted in 1996 10,631 $ 4.99 - $ - 10,631
Options exercised in 1996 (20,920) $ (4.39) (54,347) $ (3.41) (75,267)
Options forfeited - $ - (5,648) $ 6.77 5,648
Options under grant,
December 31, 1996 17,674 $ 3.64 59,104 $ 5.79 76,778
Options vested at
December 31, 1996 17,674 $ 3.64 17,005 $ 3.37 34,679
</TABLE>
NOTE 14 - EMPLOYEE BENEFIT PLANS
The Bank has a defined contribution profit sharing plan. All
permanent employees are eligible to participate once they meet the age and
length of employment requirements. Contributions are determined annually by
the Board of Directors and were $162,210, $172,401, and $168,635 in 1996,
1995, and 1994, respectively, excluding additional amounts set aside for
funding through the Bank's bonus program. Voluntary employee contributions are
required to share in Bank contributions. Employee contributions were $185,861,
$170,582, and $153,673 in 1996, 1995, and 1994, respectively.
<PAGE>
NOTE 14 - EMPLOYEE BENEFIT PLANS - (Continued)
The Bank has established a bonus program as part of the
compensation package it provides to employees. At December 31, 1996, the Bank
employed approximately 120 individuals eligible to participate in this
program. Under the program, a bonus pool for non-executives is established and
funded based on net profits of the current and immediately proceeding year. An
executives bonus program is similarly funded and based on current year profits
with payments measured on the basis of return on assets on after-tax income.
For the years ending December 31, 1996, 1995, and 1994, $510,000, $600,000,
and $452,500, respectively, was expensed to fund these programs with their
related payroll and benefit costs.
The Bank has also established supplemental retirement agreements
with certain of its executive officers. The agreements provide for established
post-retirement payments to covered executives for up to ten years after their
retirement. The supplemental programs are self-funded by the Bank through the
setting aside of funds into a bank-controlled deposit account. As of December
31, 1996, a liability for the supplemental retirement plans was recognized and
funded in the amount of $255,943. During 1996, 1995, and 1994, the Bank
recorded Plan expenses of $28,000, $42,000, and $42,000, respectively.
NOTE 15 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES
Earnings per share were computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding for the years ending December 31, 1996, 1995, and 1994. Common
stock equivalents include the number of shares issuable on exercise of the
outstanding options less the numbers of shares that would have been purchased
with the proceeds from the exercise of the options based on the average price
of common stock during the year.
NOTE 16 - TRANSACTIONS WITH RELATED PARTIES
Certain directors, executive officers, and principal stockholders
are customers of and have had banking transactions with the Bank in the
ordinary course of business, and the Bank expects to have such transactions in
the future. All loans and commitments to loan included in such transactions
were made in compliance with applicable laws on substantially the same terms
(including interest rates and collateral) as those prevailing at the time for
comparable transactions with other persons and, in the opinion of the
management of the Bank, do not involve more than the normal risk of
collectibility or present any other unfavorable features. The amount of loans
outstanding to directors, executive officers, principal stockholders, and
companies with which they are associated was as follows:
DECEMBER 31,
1996 1995
Beginning balance $ 1,621,867 $ 2,214,833
Loans made 74,000 299,164
Loans paid (248,658) (892,130)
Ending balance $ 1,447,209 $ 1,621,867
<PAGE>
NOTE 17 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of
the Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital to average assets
(as defined). Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the
Office of the Comptroller of the Currency categorized the Bank as adequately
capitalized under the regulatory framework for prompt corrective action. To be
categorized as adequately capitalized the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that notification that
management believes have changed the institution's category.
<TABLE>
<CAPTION>
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
As of December 31, 1996
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk-weighted
assets $ 20,628 17.3% $ 9,539 >8.0% $ 11,924 >10.0%
- -
Tier I capital to risk-weighted
assets $ 19,139 16.1% $ 4,755 >4.0% $ 7,133 > 6.0%
- _
Tier I capital to average
assets $ 19,139 11.1% $ 6,897 >4.0% $ 8,622 >5.0%
- -
As of December 31, 1995
(in thousands)
Total capital to risk-weighted
assets $ 17,680 17.6% $ 8,036 >8.0% $ 10,045 >10.0%
- -
Tier I capital to risk-weighted
assets $ 16,420 16.3% $ 4,029 >4.0% $ 6,043 >6.0%
-
Tier I capital to average
assets $ 16,420 10.8% $ 6,081 >4.0% $ 7,601 >5.0%
- -
</TABLE>
<PAGE>
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for VRB Bancorp (unconsolidated
parent company only) is as follows:
DECEMBER 31,
1996 1995
ASSETS
Cash $ 122,128 $ 30,912
Investment in subsidiary 19,993,191 17,358,972
Goodwill 72,815 79,861
$ 20,188,134 $ 17,469,745
SHAREHOLDERS' EQUITY
Common stock $ 9,480,330 $ 9,085,013
Retained earnings 10,652,015 8,355,113
Market value adjustment, available-
for-sale securities, net of taxes 55,789 29,619
$ 20,188,134 $ 17,469,745
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
REVENUES
Equity in undistributed
earnings of subsidiary bank $ 2,456,348 $ 2,390,137 $ 2,091,828
Dividends 845,000 525,000 425,000
EXPENSES
Goodwill and other administrative expenses (50,078) (7,046) (7,046)
Net income $ 3,251,270 $ 2,908,091 $ 2,509,782
</TABLE>
<PAGE>
NOTE 19 - PARENT COMPANY FINANCIAL INFORMATION - (Continued)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS RELATED TO OPERATING
ACTIVITIES
Net income $ 3,251,270 $ 2,908,091 $ 2,509,782
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings
of subsidiary bank (2,456,348) (2,390,137) (2,091,828)
Amortization 7,046 7,046 7,046
Net cash provided by operating
activities 801,968 525,000 425,000
CASH FLOWS RELATED TO FINANCING
ACTIVITIES
Cash dividends and fractional share payments (954,368) (562,057) (477,168)
Cash received from exercise of
common stock options 243,616 31,781 56,327
Net cash used in
financing activities (710,752) (530,276) (420,842)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 91,216 (5,276) 4,159
CASH AND CASH EQUIVALENTS,
beginning of year 30,912 36,188 32,029
CASH AND CASH EQUIVALENTS,
end of year $ 122,128 $ 30,912 $ 36,188
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and Shareholders of VRB Bancorp
We have audited the accompanying consolidated balance sheets of VRB Bancorp as
of December 31, 1996 and 1995, and the related statements of income, changes
in shareholders' equity, and cash flows for the years ended December 31, 1996,
1995, and 1994. These financial statements are the responsibility of VRB
Bancorp's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of VRB
Bancorp as of December 31, 1996 and 1995, and the results of its operations
and cash flows for the years ended December 31, 1996, 1995, and 1994, in
conformity with generally accepted accounting principles.
Moss Adams LLP
Portland, Oregon
January 7, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 17,917
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,649
<INVESTMENTS-CARRYING> 18,636
<INVESTMENTS-MARKET> 18,820
<LOANS> 101,408
<ALLOWANCE> 1,632
<TOTAL-ASSETS> 177,107
<DEPOSITS> 155,568
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,350
<LONG-TERM> 0
0
0
<COMMON> 9,480
<OTHER-SE> 10,652
<TOTAL-LIABILITIES-AND-EQUITY> 177,107
<INTEREST-LOAN> 10,122
<INTEREST-INVEST> 2,675
<INTEREST-OTHER> 390
<INTEREST-TOTAL> 13,188
<INTEREST-DEPOSIT> 3,627
<INTEREST-EXPENSE> 3,627
<INTEREST-INCOME-NET> 9,561
<LOAN-LOSSES> 250
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,828
<INCOME-PRETAX> 4,853
<INCOME-PRE-EXTRAORDINARY> 3,251
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,251
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.92
<YIELD-ACTUAL> 9.52
<LOANS-NON> 58
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1407
<CHARGE-OFFS> 38
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 1632
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
