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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Commission file number: 0-25932
VRB Bancorp
(Exact name of Registrant as specified in its charter)
Oregon 93-0892559
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
110 Pine St., P.O. Box 1046, Rogue River, Oregon 97537
(Address of principal executive offices) (Zip Code)
(541) 582-4554
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
None
Name of exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filing pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $90,082,000 at March 1, 1998.
As of March 1, 1998, there were 8,340,744 shares of the Registrant's Common
Stock outstanding.
Documents Incorporated by Reference:
Portions of the Registrant's 1997 Annual Report to Shareholders is incorporated
by reference in Part II hereof. Portions of the Registrant's proxy statement
dated March 8, 1998, for the 1998 annual meeting of shareholders in incorporated
by reference in Part III hereof.
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Disclosure Regarding Forward-Looking Statements
The following discussion includes forward-looking statements within the
meaning of the "safe-harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based on the beliefs of
the Company's management and on assumptions made by and information currently
available to management. All statements other than statements of historical
fact, regarding the Company's financial position, business strategy and plans
and objectives of management for future operations of the Company are
forward-looking statements. When used herein, the words "anticipate," "believe,"
"estimate," "expect," and "intend" and words or phrases of similar meaning, as
they relate to the Company or management, are intended to identify
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct.
Forward-looking statements are subject to certain risks and uncertainties, which
could cause actual results to differ materially from those indicated by the
forward-looking statements. These risks and uncertainties include the Company's
ability to maintain or expand its market share or net interest margins, or to
implement its marketing and growth strategies. Further, actual results may be
affected by the Company's ability to compete on price and other factors with
other financial institutions; customer acceptance of new products and services;
and, general trends in the banking industry and the regulatory environment, as
they relate to the Company's cost of funds and returns on assets. In addition,
there are risks inherent in the banking industry relating to collectibility of
loans and changes in interest rates. The reader is advised that this list of
risks is not exhaustive and should not be construed as any prediction by the
Company as to which risks would cause actual results to differ materially from
those indicated by the forward-looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
VRB Bancorp was organized in 1983 under Oregon law for the purpose of
becoming a holding company of Valley of the Rogue Bank, an Oregon
state-chartered bank organized in 1967. The Company conducts its business
through, and has no material operations outside of, Valley of the Rogue Bank.
Accordingly, reference to "VRB", "the Company", and "the Bank" are intended to
denote VRB Bancorp and Valley of the Rogue Bank as a consolidated entity, except
as the context may otherwise indicate.
BUSINESS
VRB is the largest community bank in Southern Oregon, currently
operating nine full service branches in the Rogue Valley, and seeks significant
growth in its earning assets while maintaining a high return on shareholders'
equity. The Company believes that this objective can be achieved by continuing
to provide personalized, quality banking products and services to its customers.
The Company operates under the conviction that services that are specifically
designed to satisfy the needs of individual customers will enable the Bank to
retain and expand existing market share. The Company complements this strategy
by distinguishing its interactive services from those of the larger regional and
national banks, all of which are headquartered in other states and have
transferred lending decisions away from local branches.
VRB is principally a commercial lender with loan products tailored to
meet the banking requirements of targeted customers in its market area. Products
available to business and commercial customers include equipment and inventory
financing, operating lines of credit, SBA loans for qualified businesses, and
accounts receivable financing. The Company is also an active construction lender
and frequently underwrites the purchase and refinance of commercial, residential
owner-occupied, and rental properties. VRB also provides consumer loans for a
variety of purposes, including secured and unsecured personal loans, home equity
and personal lines of credit, vehicle loans and student loans. VRB attempts to
maintain sound loan underwriting standards with written loan policies,
conservative individual and branch lending limits and oversight by Board
designated loan committees.
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The Company offers a broad array of traditional deposit products and
services, including non-interest bearing and interest bearing checking accounts,
savings accounts, money market accounts and certificates of deposit. These
products generally earn interest at rates established by management based upon
competitive market factors and management's desire to increase certain types or
maturities of deposit liabilities. VRB strives to develop customer relations to
attract core deposits in non-interest bearing transactional accounts and thus
maintain a low cost of funds.
While the Company recognizes that the majority of its customers have
come to expect traditional personal banking products and services, VRB has also
made the commitment to provide new technology-based products, including a
24-hour telephone account access system, a debit card program and an expanded
ATM network.
MARKET AREA AND COMPETITION
The Company primarily accepts deposits and makes loans in Jackson and
Josephine Counties (the Rogue Valley) in southern Oregon. VRB's geographic
market area has undergone significant change in the last several years. Southern
Oregon has become increasingly popular as a family community and retirement
area, and has seen an increase in population of approximately 14.5% from 1990 to
1996. The region's employment base has diversified away from timber related
manufacturing to encompass growing industry sectors in non-timber manufacturing,
municipality, higher education and medical services.
Within the Company's geographic market, VRB's primary competition for
deposits comes from commercial banks, savings and loan associations, and credit
unions, some of which may offer higher interest rates than VRB can or is willing
to offer. Major commercial bank competitors, or super-regional institutions
headquartered outside of the state of Oregon command approximately 75% of the
traditional deposits in the Rogue Valley. These institutions have the advantage
of offering their customers services and statewide banking facilities that VRB
does not offer. In addition, such institutions have high public visibility and
are able to maintain advertising and marketing activity on a much larger scale
than the Company can economically maintain. Secondary competition for funds
comes from issuers of corporate and government securities, insurance companies,
mutual funds and other financial intermediaries. See "Risk Factors"
VRB's competition for loans comes from commercial banks, savings and
loan associations, mortgage companies, finance companies, and other
institutional lenders. Many of its competitors have substantially higher single
borrower lending limits than those of VRB. The Company competes for loan
originations through the level of interest rates and loan fees, the variety of
commercial and mortgage loan products, and the efficiency and quality of
services provided to borrowers. Lending activity can also be affected by the
availability of lendable funds, local and national economic conditions, current
interest rates, and loan demand. See "Risk Factors".
COLONIAL BANKING COMPANY ACQUISITION
On July 24, 1997, the Bank entered into a Stock Option Agreement with
the shareholders of Investor Banking Corporation ("IBC") which owned
approximately 81% of the outstanding stock of Colonial Banking Company ("CBC").
Pursuant to the Stock Option Agreement, the Bank was given the right to acquire
all of the outstanding shares of IBC for an aggregate purchase price equal to
the number of Colonial shares held by IBC at a price of $41 per share. In
addition, as of September 30, 1997, the Bank entered into a Plan of Merger with
CBC. Effective January 5, 1998, VRB executed the Stock Option Agreement and Plan
of Merger which resulted in the acquisition of CBC (referred to herein as the
"Acquisition). The aggregate purchase price paid to the shareholders of IBC and
CBC was $15.7 million.
CBC, previously headquartered in Grants Pass, Oregon, had $113.1 million
in total assets as of December 31, 1997 and operated five banking offices
throughout the Rogue Valley. In addition to these banking offices, Colonial had
a loan production office located in Portland, Oregon. The loans generated by
this office were geographically dispersed throughout the Portland metropolitan
area and the state of Oregon.
Upon closing, CBC began operating under the name Valley of the Rogue
Bank. With the exception of the Rogue River Branch of CBC, which was
consolidated with the head office of the Bank, the Bank retained all of the
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branches of CBC. CBC's loan production office in Portland, Oregon, was closed,
and loans originated in that market are now serviced by existing Bank credit
administrators. Following the merger, the Bank instituted its pricing policies
for deposits and loans and introduced the Bank's products to all CBC customers
while endeavoring to provide the same services throughout its entire branch
network. By mid January 1998, CBC's data processing system had been discontinued
and converted into a data format compatible with VRB's data processing system,
allowing the two systems to merge.
EMPLOYEES
As of December 31, 1997, the Bank employed a total of 124 full time
equivalent employees. Upon the Acquisition, the Bank increased its staffing to
170 full time equivalent employees. None of the employees are subject to a
collective bargaining agreement and the Bank considers its relationships with
its employees to be favorable.
RISK FACTORS
Ownership of VRB Bancorp stock involves certain risks. Current and
prospective investors should carefully consider and evaluate all of the Risk
Factors as set forth below. The Company cautions the reader that this list of
risk factors may not be exhaustive.
EXPOSURE TO LOCAL ECONOMY
The Company's performance is materially dependent upon and sensitive to
the economy of its market area in Southern Oregon consisting of the Rogue Valley
in Jackson and Josephine Counties. Adverse economic developments can affect loan
demand and the collectibility of existing loans and have a negative effect on
the Company's earnings and financial condition. The economy of the Rogue Valley
depends primarily on retail trade, tourism, government, services, agriculture,
forest products and other manufacturing industries. Particularly in the 1980's,
the Company's market area experienced high unemployment as a result of the
reduction in forest products manufacturing jobs. Subsequent developments have
reduced the dependence of the local economy on forest products manufacturing and
have increased the number of non-manufacturing jobs. Nonetheless, the loss of
forest industry jobs is projected to continue (but at a lower rate) and there
can be no assurance that new jobs will replace those lost, or that future
economic changes will not have a significant adverse effect on the Company.
Further, a decline in economic activity in the Company's market area could
adversely affect its borrowers' ability to repay loans, and the value of
collateral securing such loans.
COMPETITION
In recent years, competition for deposits and loans has intensified. New
community banks have opened in Grants Pass and in Medford. In addition, two
super-regional banks in the Company's market area have been acquired by even
larger banks. Furthermore, pressure from outside the traditional banking system,
from credit unions, investment banking firms, insurance companies and related
industries offering bank-like products, has increased the competition for
deposits and loans. The banking industry in the Company's primary market area is
characterized by well-established branches of large banks which hold
approximately 75% of local deposits. These institutions have competitive
advantages over the Company in that they have higher public visibility and are
able to maintain advertising and marketing activity on a much larger scale than
the Company can economically sustain. Because single-borrower lending limits
imposed by law are dependent on the capital of the institution, the branches of
larger financial institutions also have a competitive advantage with respect to
loan applications which are in excess of the Company's legal lending limits.
See "Business - Competition."
CREDIT RISK
The Company, like other lenders, is subject to credit risk, which is the
risk of losing principal and interest due to a customer's failure to repay loans
in accordance with their terms. Although the Company has an established lending
criteria and most loans are secured with collateral, a downturn in the economy
or the real estate market in the Rogue Valley or a rapid increase in interest
rates could have a negative effect on collateral values and borrowers' ability
to
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repay.
INTEREST RATE RISK
VRB's earnings are largely derived from net interest income, which is
interest income and fees earned on loans and investment income, less interest
expense paid on deposits and other borrowings. Interest rates are highly
sensitive to many factors which are beyond the control of the Company's
management, including general economic conditions and the policies of various
governmental and regulatory authorities. As interest rates change, net interest
income is affected. With fixed rate assets (such as fixed rate loans) and
liabilities (such as certificates of deposit), the effect on net interest income
depends on the maturity of the asset or liability. Although the Company strives
to minimize interest rate risk through asset/liability management policies, from
time to time maturities are not balanced. Although rates have remained stable in
recent periods, an unanticipated decrease or increase in interest rates could
have an adverse effect on the spreads between the interest rates earned on
assets and the rates of interest paid on liabilities, and therefore on the level
of net interest income.
DEPENDENCE ON KEY PERSONNEL
VRB's success is dependent on the services of William A. Haden,
President and Chief Executive Officer, and Tom Anderson, Executive Vice
President and Chief Operating Officer. The loss of services of either of these
executives, or of certain other key officers, could adversely affect the
Company. No assurance can be given that replacement officers of comparable
abilities could be found. The Company does not maintain key person life
insurance on these individuals.
REGULATION
VRB and the Bank are subject to extensive regulations under federal and
state laws. These laws and regulations are intended to protect depositors, not
shareholders. As a state chartered bank, the Bank is subject to regulation and
supervision by the FDIC which insures the deposits of the Bank, and the Director
of the Oregon Department of Consumer and Business Services ("Oregon Director").
As a bank holding company, VRB is subject to regulation and supervision by the
Board of Governors of the Federal Reserve and the Oregon Director. Federal and
state regulation puts banks at a competitive disadvantage compared to less
regulated competitors such as finance companies, credit unions, mortgage banking
companies, and leasing companies. Although the Company has been able to compete
effectively in its market area in the past, there can be no assurance that it
will be able to continue to do so. Further, future changes in federal and state
banking regulations could adversely affect VRB's and the Bank's operating
results and ability to continue to effectively compete. See "Supervision and
Regulation."
ANTI-TAKEOVER PROVISIONS
As a bank holding company, the acquisition of the Company or the Bank
would be subject to approval of banking regulators. These limitations and
requirements may serve to delay or prevent an acquisition of VRB by another
financial institution without the consent and cooperation of the Board of
Directors. Moreover, certain provisions of Oregon law limit the ability of
persons or entities to acquire control of VRB or to effect certain corporate
transactions without the consent of the Board of Directors or the shareholders.
These provisions are intended to discourage hostile corporate acquisitions. In
addition, VRB's articles of incorporation authorize the Board of Directors to
issue additional shares of authorized but unissued shares of VRB's stock,
including the Common Stock, voting preferred stock, and warrants, options or
other rights to acquire shares of stock. While this authority is intended to
give the Board of Directors the ability to raise capital and to provide
flexibility in financing corporate transactions, the issuance of additional
securities of VRB could have the effect of diluting the ownership interest of a
substantial shareholder or increasing the consideration necessary to acquire
control of VRB. The shareholders, therefore, may not benefit from a rise in the
price of the Common Stock that a takeover could cause.
SUPERVISION AND REGULATION
GENERAL
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VRB and the Bank are extensively regulated under federal and state law.
These laws and regulations are intended to protect depositors, not shareholders.
To the extent that the following information describes statutory or regulatory
provisions, it is qualified in its entirety by reference to the particular
statutory or regulatory provisions. Any change in applicable laws or regulations
may have a material effect on the business and prospects of VRB and the Bank.
The operations of VRB may be affected by legislative changes and by the policies
of various regulatory authorities. The Company cannot accurately predict the
nature or the extent of the effects on its business and earnings that fiscal or
monetary policies, or new federal or state legislation may have in the future.
FEDERAL BANK HOLDING COMPANY REGULATION
VRB is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended ("BHCA"), and as such, it is subject to
regulation, supervision and examination by the Board of Governors of the Federal
Reserve System (the "Federal Reserve"). VRB is required to file annual reports
with the Federal Reserve and to provide the Federal Reserve such additional
information as the Federal Reserve may require.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to the
bank holding company or its subsidiaries, on investments in their securities and
on the use of their securities as collateral for loans to any borrower. These
regulations and restrictions may limit VRB's ability to obtain funds from its
subsidiary banks for its cash needs, including funds for payment of dividends,
interest and operating expenses. Further, under the Federal Reserve Act and
certain regulations of the Federal Reserve, a bank holding company and its
subsidiaries are prohibited from engaging in certain tying arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services. For example, the Bank may not generally require a customer to
obtain other services from it or VRB, and may not require that the customer
promise not to obtain other services from a competitor, as a condition to an
extension of credit to the customer.
FEDERAL AND STATE BANK REGULATION
The Bank, as a state chartered bank with deposits insured by the FDIC,
is subject to the supervision and regulation of the Oregon Director and of the
FDIC. These agencies may prohibit the bank from engaging in what they believe
constitute unsafe or unsound banking practices.
The Community Reinvestment Act ("CRA") requires that, in connection with
examinations of financial institutions within their jurisdiction, the Federal
Reserve or the FDIC evaluates the record of the financial institutions in
meeting the credit needs of their local communities, including low and moderate
income neighborhoods, consistent with the safe and sound operation of those
banks. These factors are also considered in evaluating mergers, acquisitions and
applications to open a branch or facility. The Bank's current CRA rating is
"Satisfactory".
Banks are also subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors, principal
shareholders or any related interest of such persons. Extensions of credit (i)
must be made on substantially the same terms, including interest rates and
collateral, and follow credit underwriting procedures that are not less
stringent than those prevailing at the time for comparable transactions with
persons not covered above and who are not employees, and (ii) must not involve
more than the normal risk of repayment or present other unfavorable features.
Banks are also subject to certain lending limits and restrictions on overdrafts
to such persons. A violation of these restrictions may result in the assessment
of substantial civil monetary penalties on the affected bank or any officer,
director, employee, agent or other person participating in the conduct of the
affairs of that bank, the imposition of a cease and desist order, and other
regulatory sanctions.
Under the Federal Deposit Insurance Corporation Improvement Act
("FDICIA"), each federal banking agency has prescribed, by regulation,
non-capital safety and soundness standards for institutions under its authority.
These standards cover internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, other operational and managerial
standards as the agency determines to be appropriate, and standards for asset
quality, earnings and stock valuation. An institution which fails to meet these
standards must develop a plan acceptable to the agency, specifying the steps
that
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the institution will take to meet the standards. Failure to submit or implement
such a plan may subject the institution to regulatory sanctions. VRB believes
that the Bank meets all the standards, and therefore does not believe that these
regulatory standards materially affect VRB's business operations.
DEPOSIT INSURANCE
As a FDIC member institution, deposits of the Bank are currently insured
to a maximum of $100,000 per depositor through the Bank Insurance Fund ("BIF"),
administered by the FDIC. The Bank is required to pay semiannual deposit
insurance premium assessments to the FDIC.
The FDICIA included provisions to reform the Federal deposit insurance
system, including the implementation of risk-based deposit insurance premiums.
The FDICIA also permits the FDIC to make special assessments on insured
depository institutions in amounts determined by the FDIC to be necessary to
give it adequate assessment income to repay amounts borrowed from the U.S.
Treasury and other sources or for any other purpose the FDIC deems necessary.
Pursuant to the FDICIA, the FDIC implemented a transitional risk-based insurance
premium system on January 1, 1993. Generally, under this system, banks are
assessed insurance premiums according to how much risk they are deemed to
present to BIF. Banks with higher levels of capital and a low degree of
supervisory concern are assessed lower premiums than banks with lower levels of
capital or involving a higher degree of supervisory concern. The premium range
is from $.00, for the highest-rated institutions (subject to a statutory minimum
assessment of $2,000) to $.27 per $100 of domestic deposits. The Bank has a
current FDIC premium rate of $.00 per $100 of domestic deposits.
DIVIDENDS
The principal source of VRB's cash revenues is dividends received from
the Bank. Under the Oregon Bank Act, the Bank is subject to restrictions on the
payment of cash dividends to its shareholders. A bank may not pay cash dividends
if that payment would reduce the amount of its capital below that necessary to
meet minimum applicable regulatory capital requirements. In addition, the amount
of the dividend may not be greater than its net unreserved retained earnings,
after first deducting (i) to the extent not already charged against earnings or
reflected in a reserve, all bad debts, which are debts on which interest is
unpaid and past due at least six months; (ii) all other assets charged off as
required by the Oregon Director or state or federal examiner; and, (iii) all
accrued expenses, interest and taxes of the bank. The Bank has been paying
regular dividends to shareholders, although no assurances can be given that
dividends will continue to be paid. See "Market Price of and Dividends on
Registrant's Common Equity and Related Stockholder Matters."
In addition, the appropriate regulatory authorities are authorized to
prohibit banks and bank holding companies from paying dividends which would
constitute an unsafe or unsound banking practice. VRB is not currently subject
to any regulatory restrictions on their dividends other than those noted above.
CAPITAL ADEQUACY
The federal bank regulatory agencies use capital adequacy guidelines in
their examination and regulation of bank holding companies and banks. If the
capital falls below the minimum levels established by these guidelines, the bank
holding company or bank may be denied approval to acquire or establish
additional banks or non-bank businesses or to open facilities.
The FDIC and Federal Reserve have adopted risk-based capital guidelines
for banks and bank holding companies. The risk-based capital guidelines are
designed to make regulatory capital requirements more sensitive to differences
in risk profile among banks and bank holding companies, to account for
off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance
sheet items. The guidelines are minimums, and the Federal Reserve has noted that
bank holding companies contemplating significant expansion programs should not
allow expansion to diminish their
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capital ratios and should maintain ratios well in excess of the minimum. The
current guidelines require all bank holding companies and federally-regulated
banks to maintain a minimum risk-based total capital ratio equal to 8%, of which
at least 4% must be Tier 1 capital.
The Federal Reserve also has implemented a leverage ratio, which is Tier
1 capital as a percentage of total assets less intangibles, to be used as a
supplement to risk-based guidelines. The principal objective of the leverage
ratio is to place a constraint on the maximum degree to which a bank holding
company may leverage its equity capital base. The Federal Reserve requires a
minimum leverage ratio of 3%. However, for all but the most highly rated bank
holding companies and for bank holding companies seeking to expand, the Federal
Reserve expects an additional cushion of at least 1% to 2%.
The FDICIA created a statutory framework of supervisory actions indexed
to the capital level of the individual institution. Under regulations adopted by
the FDIC, an institution is assigned to one of five capital categories depending
on its total risk-based capital ratio, Tier 1 risk-based capital ratio, and
leverage ratio, together with certain subjective factors. Institutions which are
deemed to be "undercapitalized" depending on the category to which they are
assigned are subject to certain mandatory supervisory corrective actions. VRB
does not believe that these regulations have any material effect on its
operations.
EFFECTS OF GOVERNMENT MONETARY POLICY
The earnings and growth of VRB are affected not only by general economic
conditions, but also by the fiscal and monetary policies of the federal
government, particularly the Federal Reserve. The Federal Reserve can and does
implement national monetary policy for such purposes as curbing inflation and
combating recession, but its open market operations in U.S. government
securities, control of the discount rate applicable to borrowings from the
Federal Reserve, and establishment of reserve requirements against certain
deposits, influence growth of bank loans, investments and deposits, and also
affect interest rates charged on loans or paid on deposits. The nature and
impact of future changes in monetary policies and their impact on VRB or the
Bank cannot be predicted with certainty.
CHANGING REGULATORY STRUCTURE OF THE BANKING INDUSTRY
The laws and regulations affecting banks and bank holding companies are
currently undergoing significant changes. Bills are now pending or expected to
be introduced in the United States Congress that contain proposals for altering
the structure, regulation, and competitive relationships of the nation's
financial institutions. If enacted into law, these bills could have the effect
of increasing or decreasing the cost of doing business, limiting or expanding
permissible activities (including activities in the insurance and securities
fields), or affecting the competitive balance among banks, savings associations,
and other financial institutions. Whether or in what form any such legislation
may be adopted or the extent to which the business of VRB might be affected
thereby cannot be predicted with certainty.
Of particular note is legislation enacted by Congress in 1995,
permitting interstate banking and branching, which allows banks to expand
nationwide through acquisition, consolidation or merger. Under this law, an
adequately capitalized bank holding company may acquire banks in any state if
permitted by state law. In addition, banks may merge across state lines if
permitted by state law. Further, banks may establish and operate branches in any
state subject to the restrictions of applicable state law. Under Oregon law, an
out-of-state bank or bank holding company may merge with or acquire an Oregon
state chartered bank or bank holding company if the Oregon bank, or in the case
of a bank holding company, the subsidiary bank, has been in existence for a
minimum of three years, and the law of the state in which the acquiring bank is
located permits such merger. Branches may not be acquired or opened separately,
but once an out-of-state bank has acquired branches in Oregon, either through a
merger with or acquisition of substantially all the assets of an Oregon bank,
the bank may open additional branches.
ITEM 2. PROPERTIES
The Company maintains its principal offices at the main office of its
subsidiary bank, Valley of the Rogue Bank, in Rogue River, Oregon, and conducts
its business through thirteen branch offices of the Bank throughout the Rogue
Valley, all of which are in good repair and are adequate for carrying on the
business of the Bank and the
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Company. All of the branches have drive-up facilities and automated teller
machines. In addition, the Bank maintains a satellite ATM in Medford, Oregon.
The Bank leases bank premises for the Talent, Stewart, and East Medford
branches. In addition, the Bank leases land for the Merlin, North Operations
Center, Downtown Grants Pass and Poplar branches. The following sets forth all
branch offices of the Bank.
Main Office Ashland Branch
110 Pine St. 250 Pioneer St.
Rogue River, Oregon Ashland, Oregon
Fruitdale Branch Medford Branch
1040 Rogue River Highway 220 E. 10th St.
Grants Pass, Oregon Medford, Oregon
Poplar Drive Branch Stewart Avenue Branch
2400 Poplar Drive 809 Stewart Ave.
Medford, Oregon Medford, Oregon
Phoenix Branch Talent Branch
4000 S. Pacific Highway 201 N. Pacific Highway
Phoenix, Oregon Talent, Oregon
Seventh & Midland Branch Merlin Branch
100 N.E. Midland 3600 Merlin Rd.
Grants Pass, Oregon Merlin, Oregon
Downtown GP Branch Williams Hwy. Branch
117 N.E. "F" St. 1670 Williams Hwy.
Grants Pass, Oregon Grants Pass, Oregon
East Medford Branch North Operations Center
701 East Jackson 8991 Rogue River Hwy
Medford, Oregon Rogue River, Oregon
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings, to which the Company is a party or which
involve any of its properties, was pending as of the date of this report on Form
10-K.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of securities holders of the
Registrant during the quarter ended December 31, 1997.
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PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Effective November 5, 1997, VRB Bancorp stock began trading on the
Nasdaq National Market under the symbol "VRBA". Prior to that date, the stock
was traded over-the-counter through the Bulletin Board Service of the Nasdaq
Stock Market. The following table lists the high and low bid quotations obtained
from the Nasdaq Stock Market, and more recently, the Nasdaq National Market, as
adjusted for subsequent stock dividends and stock splits. Prices do not include
retail mark-ups, mark-downs or commissions and may not represent actual
transactions.
<TABLE>
<CAPTION>
High Bid Low Bid Cash Stock
Price Price Dividends Splits
for Period for Period Declared Declared
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
1996
First Quarter $ 4.33 $ 4.33
Second Quarter 4.67 4.33
Third Quarter 5.00 4.33
Fourth Quarter 5.50 5.50 $ 0.13 50%
1997
First Quarter $ 7.50 $ 5.50
Second Quarter 8.00 7.50
Third Quarter 10.00 8.25 $ 0.14 100%
Fourth Quarter 10.00 7.50
</TABLE>
As of December 31, 1997, there were 8,340,744 shares of common stock
outstanding, held by approximately 2,400 shareholders. VRB Bancorp's ability to
pay expenses and make cash dividend payments to shareholders is dependent on
earnings generated by its subsidiary, Valley of the Rogue Bank. Oregon and
federal banking laws and regulations place restrictions on the payment of
dividends by a bank to its shareholders. See "Supervision and Regulations -
Dividends". The Board of Directors' dividend policy is to review VRB's financial
performance, capital adequacy, regulatory compliance and cash resources and, if
such review is favorable, to declare and pay a cash dividend to shareholders
annually. Although VRB expects to continue to pay cash dividends, future
dividends are subject to these limitations and to the discretion of the Board of
Directors, and could be reduced or eliminated.
ITEM 6. SELECTED FINANCIAL DATA
The response to this item is incorporated by reference to the
information under the caption "Selected Financial Data" set forth on page 3 of
the Company's 1997 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The response to this item is incorporated by reference to the section
entitled " Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 6-14 of the Company's 1997 Annual Report to
Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements called for by this item are incorporated by
reference to the Company's 1997 Annual Report to Shareholders. Such statements
are listed in the Index to Consolidated Financial Statements set forth on page
13 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
10
<PAGE> 11
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is incorporated by reference to the sections
entitled "Election of Directors" and "Executive Officers" on pages 3-5 and page
7, respectively, of the Company's Proxy Statement for the 1998 annual meeting of
shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated by reference to the section
entitled "Executive Compensation" on pages 7-9 of the Company's Proxy Statement
for the 1998 annual meeting of shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated by reference to the section
entitled "Security Ownership of Management and Others" on pages 11-12 of the
Company's Proxy Statement for the 1998 annual meeting of shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference to the section
entitled "Transactions with Management" on page 12 of the Company's Proxy
Statement for the 1998 annual meeting of shareholders.
11
<PAGE> 12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
None
(2) Financial Statement Schedules:
See the Index to Financial Statements and Schedules on
page 13.
(3) The exhibits filed herewith are listed in the Index to Exhibits
on page 14 herein.
(b) There were no current reports on Form 8-K filed by the Registrant
during the last quarter of the year ended December 31, 1997.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
VRB BANCORP
(Registrant)
By: /s/ Tom Anderson Date: 03/26/98
Tom Anderson, Executive Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ James D. Coleman Date: 03/26/98
James D. Coleman, Chairman, Director
By: /s/ John O. Dunkin Date: 03/26/98
John O. Dunkin, Vice Chairman, Director
By: /s/ Gary Lundberg Date: 03/26/98
Gary Lundberg, Director
By: /s/ Robert J. DeArmond Date: 03/26/98
Robert J. DeArmond, Director
By: /s/ Larry L. Parducci Date: 03/26/98
Larry L. Parducci, Director
By: /s/ William A. Haden Date: 03/26/98
William A. Haden, President, Director
(Principal Executive Officer)
By: /s/ Tom Anderson Date: 03/26/98
Tom Anderson, Executive Vice President, Director
By: /s/ Felice Belfiore Date: 03/26/98
Felice Belfiore, Senior Vice President
(Principal Accounting Officer)
By: /s/ April Sevcik Date: 03/26/98
April Sevcik, Director
By: /s/ Michael Donovan Date: 03/26/98
Michael Donovan, Director
13
<PAGE> 14
INDEX TO FINANCIAL CONSOLIDATED STATEMENTS AND SCHEDULES
Financial Statements
The following consolidated financial statements and Report of
Independent Public Accountants, included in the 1997 Annual Report to
Shareholders at the pages indicated, are incorporated herein by reference:
<TABLE>
<CAPTION>
Page of 1997 Annual
Report to Shareholders
----------------------
<S> <C>
VRB Bancorp and subsidiaries
Consolidated Balance Sheets at
December 31, 1997 and 1996 20
Consolidated Statements of Income
for the years ended December 31, 1997, 1996 and 1995 21
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995 22-23
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995 24-25
Notes to Consolidated Financial Statements 42
Report of Independent Public Accountants 43
</TABLE>
Financial Statement Schedules
None
14
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<S> <C>
3.1 Articles of Incorporation of VRB Bancorp*
3.2 Bylaws of VRB Bancorp*
4.0 Specimen stock certificate*
10.1 Stock Option Agreement, dated July 24, 1997, between Valley of the Rogue
Bank and the shareholders of Investors Banking Corporation**
10.2 Plan of Merger, dated September 30, 1997, between Valley of the Rogue
Bank and Colonial Banking Company**
10.3 Ground Lease Agreement dated June 1, 1988, relating to lease of parking
area of Poplar Drive Branch Office*
10.4 Lease Agreement and Memorandum of Agreement dated August 15, 1989
relating to lease of Stewart Avenue Branch Office*
10.5 Lease Agreement dated December 27, 1979, and related agreements for the
Talent Branch Office*
10.6 Employment Agreement dated April 10, 1992, by and between Valley of the
Rogue Bank and Tom Anderson*
10.7 Employment Agreement dated January 11, 1993, and Amendment to Employment
Agreement, dated September 26, 1994, by and between Valley of the Rogue
Bank and William A. Haden*
10.8 1994 Amended Non-Discretionary Stock Option Plan for Non-Employee
Directors (incorporated by reference to Exhibit 4.3 of the Registrant's
registration statement on Form S-8 filed with the Commission on October
3, 1995)
10.9 1994 Amended Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 4.3 of the Registrant's registration statement on Form S-8
filed with the Commission on October 3, 1995)
10.10 Employment Agreement dated February 27, 1997 by and among Valley of the
Rogue Bank, VRB Bancorp and Felice Belfiore**
10.11 Employment Agreement dated May 1, 1996 by and between Valley of the
Rogue Bank and Brad Copeland**
13.0 1997 Annual Report to Shareholders
23.0 Consent of Moss Adams, LLP
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule, December 31, 1996.
27.3 Restated Financial Data Schedule, June 30, 1997.
27.4 Restated Financial Data Schedule, September 30, 1996.
</TABLE>
- ----------
* Incorporated by reference to the Company's registration statement on
Form 10 (Commission file number 0-25932) filed April 26, 1995 pursuant
to Section 12(g) of the Securities Exchange Act of 1934.
** Incorporated by reference to the Company's registration statement on
Form S-1 (Commission File number 333-37167) declared effective November
5, 1997.
15
<PAGE> 1
Exhibit 13.0
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 2
Financial Highlights............................. 3
Management's Discussion and
Analysis of Financial Condition and Results
of Operations............................... 5
Consolidated Balance Sheets...................... 16
Consolidated Statements of Income................ 17
Consolidated Statements of Shareholders'
Equity......................................... 18
Consolidated Statements of Cash Flows............ 19
Notes to Consolidated Financial Statements....... 20
Report of Independent Public Accountants......... 35
Directors and Executive Officers................. 37
Staff and Branch Locations....................... 39
</TABLE>
These statement have not been reviewed, or confirmed
for accuracy or relevance, by the Federal Deposit
Insurance Corporation.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
<PAGE> 2
A Letter to VRB Shareholders, Customers, and Friends,
It is our pleasure to report that 1997 was another record year in the
successful history of VRB Bancorp. We are very proud of the fact that our
Bank has celebrated 29 consecutive years of profitability. An important
part of our tradition is meeting the financial needs of the communities we
serve while providing our shareholders with outstanding operating results.
This past year was consistent with that proud tradition.
1997 was filled with a number of significant historic events for our
company. In November, we successfully subscribed over one million new
shares of stock and joined the NASDAQ National Market System. In addition,
the Bank negotiated and signed a merger agreement to acquire Colonial
Banking Company in 1998. We anticipate that both of these projects should
have a very favorable impact on the future success of our Bank and will
enhance shareholder value.
Earnings for 1997 exceeded $3.7 million, providing a return on
average equity of 15.7% and a return on average assets of 2.0%. Our
results improved by 13.9% over the previous year. Earnings are both strong
and consistent when compared with the last several years of our operating
results.
While our earnings improved, we were also able to increase total
loans from $99.8 million in 1996 to $115.4 million in 1997, representing
growth of $15.6 million or 15.6%. The Bank captured a larger share of the
Rogue Valley market as total deposits grew from $155.6 million in 1996 to
$173.2 million in 1997, a 11.3% increase.
The past year was also marked by the retirement of our Credit
Administrator, Virgil Syverson, and two of our most senior board members,
Gene Morris and Larry Horton. These three individuals have made
significant contributions to the past success of our company. While their
insight and experience will be missed, we are pleased to welcome Brad
Copeland as our new Credit Administrator along with April Sevcik and
Michael Donovan, our two newest board members. We look forward to serving
with these three new and key members of our team. It is also our pleasure
to welcome Felice Belfiore, Chief Financial Officer, Owen Atkinson,
Director of Information Services, and Carrie Brownell, Human Resources
Director. These three individuals filled needed positions created in 1997
and have already helped to strengthen our company. Thanks Virgil, Gene,
and Larry for your past service. Welcome Brad, April, Michael, Felice,
Owen, and Carrie for the knowledge and strength you bring to our financial
institution.
We know that the long-term success of any company is driven by the
quality and dedication of its people. VRB Bancorp is no exception to that
rule. We are very fortunate to have an outstanding professional team of
men and women guiding the success of our Bank. It is through their hard
work and knowledge that we grow deposits, loans, and corporate profits. We
commend them for their outstanding effort and thank them for their
significant contribution for yet another record year.
We are very pleased to announce the completion of our merger with
Colonial Banking Company which was effective January 5, 1998. The
acquisition of over $100 million in assets and addition of four new
offices makes us the largest community bank in the Rogue Valley, the third
largest community bank in Oregon, and the seventh largest bank in the
state. The staff at Colonial has proven to be well trained as well as
dedicated to providing outstanding customer service. Their addition to the
VRB team strengthens our company and positions us for future growth and
success. With combined assets over $300 million, we are large enough to
provide our customers with convenient access at over thirteen traditional
banking locations, yet small enough to provide the personalized responsive
service our customers deserve.
We have great expectations in the coming year. It is our plan to
continue the profitable growth and improvement of VRB Bancorp. Our goal to
reach $500 million in assets by the year 2001 is within our grasp. Thank
you for your continued support as shareholders, customers, and friends.
Best wishes to each of you in 1998. We look forward to serving your
financial needs and making you proud of VRB Bancorp.
<TABLE>
<S> <C>
/s/ WILLIAM A. HADEN /s/ JAMES D. COLEMAN
William A. Haden James D. Coleman
President/C.E.O. Chairman
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
<PAGE> 3
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
(in thousands except per share data) -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income Statement Data
Interest Income.............................. $ 14,955 $ 13,188 $ 11,973 $ 10,551 $ 8,768
Interest Expense............................. 4,062 3,627 2,989 2,196 2,264
-------- -------- -------- -------- --------
Net interest income.......................... 10,893 9,561 8,984 8,355 6,504
Provision for loan losses.................... 250 250 - - -
-------- -------- -------- -------- --------
Net interest income after provision for loan
losses..................................... 10,643 9,311 8,984 8,355 6,504
Non-interest income.......................... 1,671 1,370 1,380 1,512 1,632
Non-interest expense......................... 6,873 5,828 6,061 6,022 4,978
-------- -------- -------- -------- --------
Income before provision for income taxes..... 5,441 4,853 4,303 3,845 3,158
Provision for income taxes................... 1,737 1,602 1,395 1,335 1,104
-------- -------- -------- -------- --------
Net income................................... $ 3,704 $ 3,251 $ 2,908 $ 2,510 $ 2,054
======== ======== ======== ======== ========
Dividends
Cash......................................... $ 1,006 $ 953 $ 559 $ 473 $ 412
Ratio of dividends declared to net income.... 27.16% 29.31% 19.22% 18.84% 20.06%
Per Share Data(1)
Basic earnings per share..................... $ 0.50 $ 0.46 $ 0.42 $ 0.36 $ 0.29
Cash dividends per common share.............. $ 0.14 $ 0.13 $ 0.08 $ 0.07 $ 0.06
Weighted average shares outstanding.......... 7,345 7,072 6,976 6,953 6,933
Balance Sheet Data (at period end)
Investment securities........................ $ 40,806 $ 41,404 $ 38,117 $ 34,589 $ 38,824
Loans, net................................... 115,414 99,776 88,972 88,441 78,583
Total assets................................. 206,654 177,107 151,485 141,537 141,970
Total deposits............................... 173,176 155,568 132,744 125,472 127,998
Total shareholders' equity................... $ 31,861 $ 20,188 $ 17,470 $ 15,000 $ 12,973
Selected Ratios
Return on average total assets............... 2.00% 1.99% 2.02% 1.74% 1.62%
Return on average total shareholders'
equity..................................... 15.65 17.26 17.75 17.69 16.97
Average equity to assets..................... 12.75 11.52 11.37 9.83 9.54
Net interest margin.......................... 6.69 6.73 7.13 6.67 5.99
Efficiency ratio (2)......................... 56.18% 53.32% 58.49% 61.03% 61.18%
</TABLE>
- ---------------
(1) Per share data has been adjusted to reflect all stock dividends and stock
splits through December 31, 1997.
(2) Efficiency ratio is noninterest expense divided by the sum of net interest
income plus noninterest income.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
3
<PAGE> 4
This page intentionally left blank
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
4
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
5
<PAGE> 6
MANAGEMENT'S DISCUSSION
- --------------------------------------------------------------------------------
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations includes a discussion of certain significant business
trends and uncertainties, and is intended to be read in conjunction with and is
qualified in its entirety by reference to the consolidated financial statements
of VRB Bancorp ("VRB") and accompanying notes beginning on page 16 of this
report.
FINANCIAL HIGHLIGHTS
VRB is the largest community bank in southern Oregon, currently operating
nine full service branches. VRB has had 29 consecutive years of profitability.
During the most recent five years, it has increased earnings by an average of
17% per year and increased its return on average assets from 1.62% in 1993 to
2.00% in 1997. During the same period, VRB has achieved a return on average
equity greater than 15% while sustaining high asset quality. VRB has
consistently performed in the top quartile when comparing its return on average
equity to its bank peers.
[VRB BANCORP NET INCOME]
[GRAPH]
Net income for 1997 was $3.7 million, an increase of 13.9% over net income
of $3.3 million reported in 1996. The return on total average assets was 2.00%
and net interest margin was 6.69%, continuing VRB's history of strong financial
results.
Effective September 30, 1997, VRB's wholly-owned subsidiary, Valley of the
Rogue Bank ("the Bank"), signed a definitive merger agreement with Colonial
Banking Company ("CBC") pursuant to which CBC will be merged with and into the
Bank, with the resulting bank continuing under the name and charter of Valley of
the Rogue Bank.
The Bank agreed to purchase all of the outstanding shares of CBC stock for
a cash price of approximately $17.3 million. The Bank anticipates the merger to
take place effective on January 5, 1998. As of December 31, 1997, CBC has $116.4
million in total assets, of which $92.8 million represent outstanding loans. CBC
has five full service branches in Southern Oregon, as well as a loan production
office in Portland, Oregon. Following the merger, four of CBC's branches will
become branch offices of the Bank, and a fifth branch will be consolidated into
the Bank's main office in Rogue River, Oregon. The Portland loan production
office will be closed, and existing loans based out of that market will be
serviced by local VRB management.
On November 6, 1997, VRB commenced an offering of 1,150,000 shares of its
common stock pursuant to a registration statement on Form S-1 that was declared
effective by the Securities and Exchange Commission ("SEC") on November 5, 1997.
The shares were sold by VRB at a price to the public of $8.50 per share, for an
aggregate offering price of $9,775,000. Fees and expenses payable by VRB in
connection with the offering totaled $991,000, including $684,000 in
underwriting discounts and commissions, $45,000 for SEC and NASDAQ Stock Market
filing fees, $250,000 for legal, accounting and printing fees, and $12,000 for
other expenses. The offering resulted in net proceeds of $8,784,000, which will
be used in connection with the acquisition of CBC.
RESULTS OF OPERATIONS
Net Interest Income. For financial institutions, the primary component of
earnings is net interest income. Net interest income is the difference between
interest income, principally from loans and investment securities portfolios,
and interest expense, principally on customer deposits.
Changes in net interest income result from changes in "volume", "spread"
and "margin." Volume refers to the dollar level of interest-earning assets and
interest-bearing liabilities. Spread refers to the difference between the yield
on interest-earning assets and the cost of interest-bearing liabilities. Margin
refers to net interest income divided by interest-earning assets and is
influenced by the level and relative mix of interest-earning assets and
interest-bearing liabilities.
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
6
<PAGE> 7
MANAGEMENT'S DISCUSSION
- --------------------------------------------------------------------------------
Average Balances and Average Rates Earned and Paid. The following table
shows average balances and interest income or interest expense, with the
resulting average yield or rates by category of earning assets or interest-
bearing liabilities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
------------------------------- ------------------------------- -------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME OR YIELDS AVERAGE INCOME OR YIELDS AVERAGE INCOME OR YIELDS
BALANCE EXPENSE OR RATES BALANCE EXPENSE OR RATES BALANCE EXPENSE OR RATES
-------- --------- -------- -------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Interest-earning assets:
Loans*................... $109,581 $11,444 10.44% $94,907 $10,122 10.67% $92,268 $9,893 10.72%
Investment securities....
Taxable securities...... 22,486 1,504 6.69 22,328 1,411 6.32 18,275 1,055 5.77
Nontaxable
securities**.......... 18,480 1,431 7.74 19,080 1,461 7.66 12,818 936 7.30
Federal funds sold....... 19,556 1,063 5.44 13,102 691 5.27 7,142 409 5.73
-------- ------- ----- -------- ------- ----- -------- ------ -----
Total interest earning
assets.............. 170,103 15,442 9.08 149,417 13,685 9.16 130,503 12,293 9.42
Cash and due from
banks.................. 10,222 9,105 8,685
Fixed assets............. 4,403 3,957 3,900
Loan loss allowance...... (1,597) (1,397) (1,423)
Other assets............. 2,431 2,444 2,425
-------- -------- --------
Total assets.......... $185,562 $163,526 $144,090
======== ======== ========
Interest-bearing
liabilities:
Interest-bearing checking
accounts............... $73,292 2,415 3.30 $62,238 2,005 3.22 $48,997 1,520 3.10
Savings accounts......... 15,358 337 2.19 17,017 376 2.21 21,170 463 2.19
Time deposits............ 26,285 1,310 4.98 24,435 1,246 5.10 19,043 938 4.93
Borrowed funds........... - - - - - - 1,091 69 6.32
-------- ------- ----- -------- ------- ----- -------- ------ -----
Total interest-bearing
liabilities......... 114,935 4,062 3.53 103,690 3,627 3.50 90,301 2,990 3.31
Noninterest bearing
deposits............... 45,552 39,836 36,310
-------- -------- --------
Total deposits and
borrowed funds...... 160,487 143,526 126,611
Other liabilities........ 1,415 1,168 1,092
-------- -------- --------
Total Liabilities..... 161,902 144,694 127,703
Shareholders' equity..... 23,660 18,832 16,387
-------- -------- --------
Total liabilities and
shareholders'
equity.............. $185,562 $163,526 $144,090
======== ======== ========
Net interest income...... $11,380 $10,058 $9,303
======= ======= ======
Net interest spread...... 5.55% 5.66% 6.11%
===== ===== =====
Average yield on earning
assets................. 9.08% 9.16% 9.42%
===== ===== =====
Interest expense to
earning assets......... 2.39% 2.43% 2.29%
===== ===== =====
Net interest margin...... 6.69% 6.73% 7.13%
===== ===== =====
</TABLE>
- ---------------
* Nonaccrual loans are included in the average balance.
** Tax-exempt income has been adjusted to a tax equivalent basis at 34%.
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
7
<PAGE> 8
MANAGEMENT'S DISCUSSION
- --------------------------------------------------------------------------------
Analysis of Changes in Interest Differential. The following table shows
the dollar amount of the increase (decrease) in VRB's net interest income and
expense and attributes such dollar amounts to changes in volume as well as
changes in rates. Rate/volume variances have been allocated proportionally
between rate and volume changes:
<TABLE>
<CAPTION>
1997 OVER 1996 1996 OVER 1995
---------------------- ----------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
------------- NET ------------- NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
------ ---- ------ ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Interest-earning assets:
Loans............................ $1,532 $(210) $1,322 $283 $(53) $230
Investment securities
Taxable securities.............. 11 83 94 279 153 432
Nontaxable securities* ......... (46) 16 (30) 457 45 502
Federal funds sold............... 351 21 372 217 (16) 201
------ ----- ------- ----- ---- -----
Total...................... 1,848 (90) 1,758 1,236 129 1,365
------ ----- ------- ----- ---- -----
Interest-bearing liabilities:
Interest bearing checking and
savings accounts................ 328 45 373 257 112 369
Time deposits.................... 92 (29) 63 266 44 310
Borrowed funds................... - - - (69) - (69)
------ ----- ------- ----- ---- -----
Total...................... 420 16 436 454 156 610
------ ----- ------- ----- ---- -----
Net increase (decrease) in net
interest income................ $1,428 $(106) $ 1,322 $ 782 $(27) $755
====== ===== ======= ===== ==== =====
</TABLE>
------------------
* Tax-exempt income has been adjusted to a tax equivalent basis at 34%.
Net interest income for the year ended December 31, 1997, was $10,893,000
an increase of $1,332,000 or 13.9% compared to net interest income of $9,561,000
in 1996, which was $577,000, or 6.4% higher than the $8,984,000 reported in
1995. The overall tax equivalent earning asset yield declined slightly to 9.08%
in 1997 compared to 9.16% in 1996, and 9.42% in 1995. In recent years, interest
rates have declined and the lending market in the Rogue Valley has tightened in
response to competitive pressures. As a result, low yielding assets such as
federal funds sold grew at a faster pace than assets with typically higher
yields such as loans. These factors contributed to a decline in average asset
yield over the last three years.
Loans, which generally carry a higher yield than investment securities and
other earning assets, comprised 64.4% of average earning assets in 1997,
compared with 63.5% in 1996 and 70.7% in 1995. For the same periods, average
yields on loans were 10.44% in 1997, 10.67% in 1996, and 10.72% in 1995.
Investment securities comprised 24.1% of average interest-earning assets in
1997, which was down from 27.7% in 1996 after an increase from 23.8% in 1995.
Reflecting VRB's investment in high grade nontaxable securities, the tax
equivalent yield of the investment portfolio increased to 7.16%, an improvement
of 22 basis points when compared to 6.94% in 1996 which was a 54 basis point
improvement over VRB's investment yield of 6.40% in 1995. VRB's investment in
federal funds sold increased to 11.5% of average interest-earning assets in
1997, up from 8.7% and 5.5% in 1996 and 1995, respectively. Particularly in the
third and fourth quarter of 1997, management deliberately began accumulating
federal funds sold in preparation for the cash acquisition of CBC sched-
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
8
<PAGE> 9
MANAGEMENT'S DISCUSSION
- --------------------------------------------------------------------------------
uled in January 1998. Interest cost as a percentage of earning assets decreased
to 2.39% in 1997 compared to 2.43% in 1996 after an increase from 2.29% in 1995.
VRB's deposit mix shifted in 1997, as VRB continued to expand non-interest and
interest-bearing checking balances, in response to a stabilizing demand for
savings and time certificates of deposits.
Provision for Loan Losses. In 1997, VRB recorded a $250,000 loan loss
provision which was based upon past charge-off experience, a careful analysis of
the current portfolio, and an evaluation of the loan portfolio over the last
year. The increase is in line with the 15.7% growth in VRB's loans. Net loan
charge-offs for 1997 were approximately $102,000 which compares to net
charge-offs of approximately $25,000 and $7,000 in 1996 and 1995, respectively.
Loans on non-accrual have grown to $372,000, up from $58,000 and $53,000 as of
December 31, 1996 and 1995, respectively. Management believes this modest loan
loss experience is a result of the stringent underwriting and collection
practices employed by VRB, the strength of the local economy, and the underlying
quality of the loan portfolio.
Non-Interest Income. Non-interest income increased approximately $301,000,
or 21.9% in 1997, the balance of which increased from $1,370,000 in 1996 to
$1,671,000 in 1997. Non-interest income in 1995 totaled $1,380,000. Customer
deposits, which grew 11.3% in 1997, generated additional service revenue when
compared to the previous year. In addition, the growth in VRB's real estate
mortgage processing department generated additional fee income over the last 12
months. With the entrance of Wells Fargo into the Rogue Valley market, VRB
redesigned its logo as both banks used a similar stagecoach logo. In 1996, VRB
received a one time benefit of $225,000 from Wells Fargo, to assist in the
purchase of new signs, stationery, and other supplies resulting from the logo
change. Non-interest income has been recognized as the funds were applied.
Non-Interest Expense. Non-interest expense totaled $6,873,000 in 1997, a
17.9% or $1,045,000 increase over total non-interest expense of $5,828,000
recognized in 1996. During 1997, VRB experienced a period of deposit growth and
increased market share within the Rogue Valley. VRB's infrastructure was
expanded and the costs of supporting VRB's growth can be seen in the following
categories.
Salaries and benefits: Salaries and benefits increased by $428,000, or
11.6% in 1997. With the addition of several administrative and managerial
positions, and increasing wages due to the State of Oregon's rising minimum
wage, as well as normal salary adjustments, salaries and benefits increased to
$4,120,000 in 1997 compared to $3,693,000 in 1996 and $3,841,000 in 1995. As of
December 31, 1997, VRB had 126 full time equivalent employees which compares to
116 and 107 as of December 31, 1996 and 1995, respectively.
Occupancy: Net occupancy expenses include depreciation, repairs and
maintenance, utilities, and other related costs. In 1997, VRB invested
significant funds for the improvement of several branches in connection with the
Bank's logo change, driving net occupancy to $814,000 in 1997, up $184,000, or
29.2% when compared to total net occupancy costs of $630,000 and $608,000
recognized in 1996 and 1995.
Data processing: 1997 marked the third year of VRB's three year technology
plan. The bank's data processing system was upgraded in anticipation of future
growth. Maintenance and support for the new system saw data processing expense
increase to $181,000 in 1997 up from $148,000 and $97,000 in 1996 and 1995,
respectively.
FDIC premiums: FDIC premiums are a function of outstanding deposit
liabilities. Premiums have ranged from $143,000 in 1995, to $2,000 in 1996 and
$18,000 in 1997. In 1996, VRB received a premium refund from the FDIC after the
Bank Insurance Fund was recapitalized. This also allowed VRB to pay a nominal
insurance premium in 1997.
Other non-interest expenses: Principal components of other non-interest
expenses include advertising, business development, dues and publications, and
amortization of goodwill. VRB embarked on a new advertising campaign in late
1997, the results of which will be seen in upcoming years. Overall, other
non-interest expenses represented 8.7%, 7.5%, and 8.0% of total net revenues for
the years ended December 31, 1997, 1996 and 1995. Careful management of expenses
have contributed to controlled growth in this category.
Income Taxes. The provision for federal and state income taxes in 1997
totaled $1,737,000, which approximates an effective tax rate of 32%. The in-
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
9
<PAGE> 10
MANAGEMENT'S DISCUSSION
- --------------------------------------------------------------------------------
come tax provision for 1996 and 1995 totaled $1,602,000 and $1,395,000 for
effective rates of 33% and 32%, respectively. Effective tax rates differ from
combined estimated statutory rates due to the effects of nontaxable interest
income which is recognized for book purposes but not tax purposes. In addition,
in compliance with State tax law, VRB's state income tax rate was reduced in
1997 and 1995 from 6.6%, to 3.8% and 3.3%, respectively.
FINANCIAL CONDITION
Asset -- Liability Management/Interest Rate Sensitivity. The principal
purpose of asset-liability management is to manage VRB's resources and uses of
funds while maximizing net interest income under different interest rate
conditions with minimal risk.
A key component of asset-liability management is the measurement of
interest-rate sensitivity. Interest-rate sensitivity refers to the volatility in
earnings resulting from fluctuations in interest rates, variability in spread
relationships, and the mismatch of repricing intervals between assets and
liabilities. Interest-rate sensitivity management attempts to maximize earnings
growth by minimizing the effects of changing market rates, asset and liability
mix, and prepayment trends, as well as estimate VRB's earnings risk when
assuming future interest rate changes.
Management reviews VRB's interest-rate sensitivity position, or market
risk, on an ongoing basis, and prepares strategies to adjust that sensitivity,
as appropriate. Financial instruments whose earnings may be affected by a change
in interest rates include variable and fixed rate loans, investment securities,
federal funds sold, and interest-bearing deposits. Other types of market risk,
including foreign exchange risk and commodities price risk, do not materially
impact VRB financial instruments.
VRB's sensitivity to the potential loss of future earnings due to a
hypothetical drop in interest rates is as follows:
<TABLE>
<CAPTION>
FINANCIAL
DECLINE IMPACT ON
IN INTEREST NET INTEREST
RATES MARGIN
- ----------- ------------
<S> <C>
1% $(313,000)
2% $(626,000)
</TABLE>
The analysis presents the impact of a reasonably possible near-term decline
in interest rates. Near-term means a period going forward through one year. As
with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented. For example, although certain
assets and liabilities may have similar maturities, or periods of repricing,
they may react in different degrees to changes in market interest rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis. Further, in the event of a
change in interest rates, expected rates of prepayments on loans and early
withdrawals from time certificates could likely deviate significantly from those
assumed in the table's calculations.
Liquidity. Liquidity represents the ability to meet cash flow requirements
and financial commitments at a reasonable cost, while retaining the flexibility
to take advantage of business opportunities. Management has always placed a high
priority on maintaining a high liquidity through a moderate loan-to-deposit
ratio and a conservative investment portfolio. As of December 31, 1997, VRB's
loan to deposit ratio was 66%.
Approximately $2.8 million or 7% of VRB's securities portfolio matures
within one year. This excludes approximately $10 million in agency securities
that will most likely be called within 1998 assuming a stable interest rate
environment over the next 12 months. Additionally, although no balances were
outstanding at December 31, 1997, VRB has borrowing arrangements with the
Federal Home Loan Bank of Seattle for cash advances of $8.9 million as well as
approximately $8 million in credit agreements with various correspondent banks.
The acquisition of CBC is expected to have a modest impact on VRB's
liquidity. As of December 31, 1997, VRB has $22.5 million in federal funds sold.
Approximately $17.3 million will be used to fund the acquisition.
In addition, CBC has historically had a higher cost of funds than VRB,
resulting from a higher proportion of deposits held in interest-bearing accounts
with higher rates. VRB's management anticipates that as the interest rates paid
on CBC deposits are reduced to mirror VRB's pricing strategy, some depositors
will likely withdraw their funds, decreasing
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
10
<PAGE> 11
MANAGEMENT'S DISCUSSION
- --------------------------------------------------------------------------------
VRB's liquidity. This is especially relevant for the $35.6 million in CBC time
certificates of deposit that mature in 1998. Despite this, VRB management
believes that VRB has ample cash and cash equivalent resources to fund the CBC
acquisition and anticipated deposit run-off without restricting VRB's growth or
materially compromising its liquidity.
Capital Adequacy. The primary source of VRB's capital has historically
been from the retention of net profits. VRB's profitability has allowed it to
enjoy a strong capital position and to consistently pay dividends to its
shareholders, as evidenced by the cash dividend payout ratio of 27.2%, 29.3%,
and 19.2% for the years ended December 31, 1997, 1996 and 1995.
In 1989, banking regulators adopted risk-based capital guidelines under
which one of four risk weights is applied to balance sheet assets, each with
different capital requirements based on the credit risk of the asset. VRB is
required to maintain minimum amounts of capital to "risk weighted" assets, as
defined by banking regulators. As of December 31, 1997, VRB was required to have
Tier 1 and Total Capital Ratio's of 4.0% and 8.0%, respectively. VRB's actual
ratio's at that date were 21.3% and 22.5%.
The acquisition of CBC will significantly reduce VRB's capital ratios,
particularly its Tier 1 capital ratio, as goodwill incurred as a result of the
acquisition is deducted from VRB's capital for purposes of this calculation.
However, in November of 1997, VRB raised an additional $8,784,000 in capital
which will serve to mitigate the risk that VRB would not qualify as
"well-capitalized" under applicable regulatory guidelines in the future.
Impact of Year 2000 Issue. Based upon recent assessment, VRB has
significant portions of its data processing software that are date sensitive and
may be adversely effected by the software's inability to recognize the Year
2000. VRB presently believes that with modifications to existing software, the
Year 2000 issue can be mitigated using existing internal and external resources.
At this time, VRB estimates that the total cost of the Year 2000 issue will be
less than $25,000. VRB plans to complete the Year 2000 reprogramming, and
testing by the first quarter of 1999. In addition, VRB has initiated
communications with the Bank's principal borrowers to determine the extent that
VRB is vulnerable to those parties' failure to remediate their own Year 2000
issue.
Investment Securities and Other Investments. VRB's principal investment
objectives are to manage liquidity and generate after tax profits consistent
with the risk guidelines established by the Board of Directors. Changes in VRB's
investment portfolio are primarily a function of loan demand and adjustments
within the Bank's deposit structure.
As of December 31, 1997, VRB's investment portfolio of $39,598,000 is
relatively consistent when compared to 1996's investment portfolio which totaled
$40,285,000. VRB follows financial accounting principles which require the
identification of investment securities as held-to-maturity or available-for-
sale. Securities designated as held-to-maturity are those that VRB has the
intent and ability to hold until they mature or are called rather than those
that management may sell if liquidity requirements dictate. The mix of
available-for-sale and held-to-maturity investment securities is considered in
context with VRB's overall asset-liability policy and illustrates management's
assessment of the relative liquidity of the Bank. At December 31, 1997, 53.5% of
VRB's investment portfolio was comprised of available-for-sale securities and
46.5% was comprised of held-to-maturity securities, virtually unchanged when
compared to 1996.
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
11
<PAGE> 12
MANAGEMENT'S DISCUSSION
- --------------------------------------------------------------------------------
The following table sets forth the composition and relative maturities
within VRB's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------- ---------------------------- ----------------------------
AMORTIZED MARKET % AMORTIZED MARKET % AMORTIZED MARKET %
COST VALUE YIELD* COST VALUE YIELD* COST VALUE YIELD*
(in thousands) --------- ------- ------ --------- ------- ------ --------- ------- ------
<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%
One to five years... 17,998 18,062 6.59 9,993 10,150 7.12 12,008 12,075 6.14
Five to ten years... 2,000 2,013 7.50 - - - - - -
Over ten years...... - - - - - - - - -
Obligations of states
and political
subdivisions:
One year or less.... 2,337 2,344 5.86 215 216 7.05 1,906 1,916 6.03
One to five years... 550 565 7.29 6,106 6,169 7.33 3,036 3,050 6.12
Five to ten years... 5,364 5,521 7.40 11,749 11,848 8.08 4,351 4,402 7.13
Over ten years...... 10,163 10,593 7.93 566 589 8.41 6,551 6,712 8.09
Corporate and other:
One year or less.... 430 428 5.35 1,569 1,555 6.04 128 126 5.35
One to five years... 682 681 6.49 - - - 1,570 1,557 6.04
Five to ten years... - - - - - - - - -
Over ten years...... - - - - - - - - -
------- ------- ----- ------- ------- ----- ------- ------- -----
$39,524 $40,207 7.04% $40,200 $40,469 7.17% $37,397 $37,587 6.50%
======= ======= ===== ======= ======= ===== ======= ======= =====
</TABLE>
- ---------------
* Weighted average yields are stated on a federal tax equivalent basis at a 34%.
Loans: Outstanding loans totaled $115,414,000 at December 31, 1997,
representing a $15,638,000, or 15.7% growth rate over outstanding loans as of
December 31, 1996. The growth, which is in part the result of VRB's focus on
construction lending and home equity credit loans, exceeds growth rates of prior
years. Loan growth totaled 12.1% and .6% in 1996 and 1995, respectively.
VRB's loan portfolio continues to primarily involve real estate secured
transactions, with 80% and 76% of VRB's portfolio within this category as of
December 31, 1997 and 1996, respectively. Loans secured by real estate includes
loans made for purposes other than financing the purchase of real property, such
as commercial and home equity lines of credit. However, real estate is
invariably the collateral securing these loans.
Although real estate loans constitute a significant portion of the total
loan portfolio, this portfolio has performed well and, management believes,
represents low risk of loss. VRB's normal lending criteria requires a
loan-to-value ratio on commercial real estate not to exceed 75%, and a
loan-to-value ratio on residential real estate not to exceed 80%. Consequently,
the Bank's loans secured by real estate have a lower delinquency rate than the
balance of its loan portfolio. As of December 31, 1997 and 1996, the
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
12
<PAGE> 13
MANAGEMENT'S DISCUSSION
- --------------------------------------------------------------------------------
Bank had no material investment in other real estate owned.
The composition, interest sensitivity, and maturity distribution of the
loan portfolio as of the noted dates, is illustrated as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Commercial........... $ 12,720 $ 13,181 $ 9,440 $10,619 $10,719
Real estate
construction........ 15,476 9,112 8,225 16,930 11,659
Real estate
mortgage............ 77,049 66,209 59,804 49,882 46,511
Consumer and other... 11,949 12,906 12,910 12,424 11,147
-------- -------- ------- ------- -------
117,194 101,408 90,379 89,855 80,036
Allowance for loan
losses.............. (1,780) (1,632) (1,407) (1,414) (1,453)
-------- -------- ------- ------- -------
Net loans............ $115,414 $ 99,776 $88,972 $88,441 $78,583
======== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------
DUE AFTER DUE
DUE IN ONE YEAR AFTER
ONE YEAR THROUGH FIVE TOTAL
OR LESS FIVE YEARS YEARS LOANS
-------- ---------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C>
Commercial........... $ 4,123 $ 6,348 $ 2,248 $ 12,719
Real estate
construction........ 7,740 2,297 5,439 15,476
Real estate
mortgage............ 4,893 14,536 57,620 77,049
Consumer and other... 1,508 6,761 3,681 11,950
------- ------- ------- --------
$18,264 $29,942 $68,988 $117,194
======= ======= ======= ========
Loans with fixed
interest rates...... $ 40,824
Loans with floating
interest rates...... 76,370
--------
$117,194
========
</TABLE>
Reserve for Loan Losses and Nonperforming Loans. The allowance for loan
losses is evaluated by management on a monthly basis to ensure that it is
sufficient to cover potential future loan losses. The reserve balance and amount
of provision charged to operations is based primarily on management's evaluation
of the entire portfolio.
This analysis includes review of the following factors: (a) the volume and
mix of the existing loan portfolio, including the volume and severity of
nonperforming loans and adversely classified credits, as well as analysis of net
charge-offs experienced on previously classified loans; (b) the extent to which
loan renewals and extensions are used to maintain loans on a current basis and
the degree of risk associated with such loans; (c) the trend in loan growth,
including any rapid increase in loan volume within a relatively short period of
time; (d) general and local economic conditions; (e) the relationship and trend
over the past several years of recoveries as a
percentage of previous years' charge-offs; and, (f) available outside
information of a comparable nature regarding the loan portfolios of other banks,
including peer group banks. The reserve for loan losses was $1,780,000 as of
December 31, 1997, as compared to $1,632,000 at December 31, 1996 and $1,407,000
at December 31, 1995. VRB's loan loss reserve as a percentage of total loans was
1.52% at December 31, 1997, compared to 1.61% in 1996 and 1.56% in 1995.
<TABLE>
<CAPTION>
LOAN LOSS EXPERIENCE
--------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Reserve balance,
beginning of
year............... $1,632 $1,407 $1,414 $1,453 $ 941
Loans charged-off:
Commercial.......... 48 29 31 24 35
Real Estate......... - - - - -
Consumer............ 87 9 14 66 23
------ ------ ------ ------ ------
Total loans
charged-off...... 135 38 45 90 58
Recoveries:
Commercial.......... 22 10 20 31 156
Real Estate......... - - - - -
Consumer............ 11 3 18 20 53
------ ------ ------ ------ ------
Total recoveries... 33 13 38 51 209
Net Charge-offs...... 102 25 7 39 (151)
------ ------ ------ ------ ------
Provision charged to
operations......... 250 250 - - -
------ ------ ------ ------ ------
Changes incidental to
merger............. - - - - 361
------ ------ ------ ------ ------
Reserve balance, end
of year............ $1,780 $1,632 $1,407 $1,414 $1,453
====== ====== ====== ====== ======
Ratio of net
charge-offs during
the period to
average loans
outstanding during
the period......... 0.09% 0.03% 0.01% 0.05% (0.22%)
====== ====== ====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
13
<PAGE> 14
MANAGEMENT'S DISCUSSION
- --------------------------------------------------------------------------------
The following table presents information with respect to VRB's allowance
for loan losses and nonperforming assets for the dates specified:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
(in thousands) -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual status.................................. $ 372 $ 58 $ 53 $ 7 $ 171
Loans past due greater than 90 days but not on nonaccrual
status.................................................... - 12 48 108 117
------- ------ ------ ------ ------
Total nonperforming loans............................... 372 70 101 115 288
Other nonperforming assets.................................. - - - - 146
------- ------ ------ ------ ------
Total nonperforming assets.............................. $ 372 $ 70 $ 101 $ 115 $ 434
======= ====== ====== ====== ======
Percentage of nonperforming loans to total loans............ 0.32% 0.06% 0.11% 0.13% 0.36
Percentage of nonperforming assets to total assets.......... 0.18% 0.04% 0.07% 0.08% 0.31
Allowance for loan losses as a percentage of non performing
loans..................................................... 477% 2331% 1393% 1230% 505
</TABLE>
No interest income was accrued on nonaccrual loans or included in the
results of operations for the years ended December 31, 1997, 1996 and 1995. The
Bank's policy is to place a loan on nonaccrual status when there is significant
question as to the collectibility of the interest. Normally if the loan is past
due 90 days or more, it is placed in nonaccrual status unless well secured and
in the process of collection.
Deposits. Deposit growth in 1997 was $17,608,000 or 11.3%, and can be
attributed to management's decision to promote an attractive pricing strategy,
increased marketing, and an increased emphasis on implementing a sales culture
within the branches. By their nature, interest-bearing account balances will
tend to grow or decline as the Bank reacts to changes in competitor pricing and
interest paying strategies.
In 1997, VRB realized substantial growth in its money market accounts.
Money market deposits increased by $13.8 million in 1997, from $47.2 million as
of December 31, 1996 to $61.0 million as of December 31, 1997. In addition,
non-interest bearing demand deposits continue to represent a significant
percentage of VRB's deposit base. To the extent that VRB can continue to funds
operations with non-interest-bearing deposits, the Bank's net interest margin
will improve. At December 31, 1997, demand deposits accounted for 28.9% of total
deposits which is up from 26.8 % as of December 31, 1996. This is further
illustrated at right:
[DEPOSIT MIX CHART]
The Bank, by policy, does not depend on brokered deposits nor high priced
time deposits. At December 31, 1997, time certificates of deposits in excess of
$100,000 totaled $5,259,000 or 18.6% of total outstanding time deposits. This
compares to 24.1% as of December 31, 1996.
The following table sets forth by time remaining to maturity, all time
certificate of deposit accounts outstanding at December 31, 1997.
<TABLE>
<CAPTION>
IN
EXCESS
OF $100,000 ALL OTHER TOTAL
(in thousands) ----------- --------- -------
<S> <C> <C> <C>
Three months or
less............... $2,608 $ 7,684 $10,292
Three through twelve
months............. 2,233 13,219 15,452
One year through five
years.............. 418 1,821 2,239
Over five years...... - 234 234
------ ------- -------
$5,259 $22,958 $28,217
====== ======= =======
</TABLE>
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
14
<PAGE> 15
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
15
<PAGE> 16
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
VRB BANCORP CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 21,144,289 $ 17,916,909
Federal funds sold.......................................... 22,500,000 11,300,000
------------ ------------
Total cash and cash equivalents......................... 43,644,289 29,216,909
------------ ------------
Held-to-maturity securities:
State and municipal subdivisions........................... 18,415,049 18,635,932
------------ ------------
Available-for-sale securities:
U.S. Treasuries and agencies............................... 20,074,686 20,092,813
Collateralized mortgage obligations and other
investments.............................................. 1,108,163 1,555,949
------------ ------------
21,182,849 21,648,762
------------ ------------
Federal Home Loan Bank stock................................ 1,208,000 1,119,500
------------ ------------
Loans, net of allowance for loan losses and unearned
income.................................................... 115,413,898 99,775,802
Premises and equipment, net................................. 4,411,372 4,093,669
Accrued interest and other assets........................... 2,378,189 2,616,093
------------ ------------
Total assets............................................ $206,653,646 $177,106,667
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand deposits............................................ $ 49,998,132 $ 41,746,175
Interest bearing demand deposits........................... 80,334,130 69,082,274
Savings deposits........................................... 14,626,880 15,447,644
Time deposits.............................................. 28,217,204 29,292,364
------------ ------------
Total deposits.......................................... 173,176,346 155,568,457
Accrued interest and other liabilities...................... 1,616,745 1,350,076
------------ ------------
Total liabilities....................................... 174,793,091 156,918,533
------------ ------------
Shareholders' equity
Preferred stock, voting, $5 par value; 5,000,000 shares
authorized and unissued.................................. - -
Preferred stock, nonvoting, $5 par value; 5,000,000 shares
authorized and unissued.................................. - -
Common stock, no par value, 10,000,000 shares authorized
with 8,340,744 and 3,574,682, issued and outstanding at
December 31, 1997 and 1996, respectively................. 18,462,712 9,480,330
Retained earnings........................................... 13,349,301 10,652,015
Unrealized gain on available-for-sale securities, net of
taxes..................................................... 48,542 55,789
------------ ------------
Total shareholders' equity.............................. 31,860,555 20,188,134
------------ ------------
Total liabilities and shareholders' equity.............. $206,653,646 $177,106,667
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
16
<PAGE> 17
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
VRB BANCORP CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans................................. $11,443,683 $10,122,237 $ 9,892,695
Interest on investment securities held-to-maturity:
State and municipal subdivisions.......................... 944,226 964,043 617,886
Interest on investment securities available-for-sale:
U.S. Treasuries and agencies.............................. 1,336,882 1,229,046 891,985
Collateralized mortgage obligations and other
investments............................................. 78,310 98,314 106,291
Federal Home Loan Bank stock dividends..................... 88,500 83,300 55,128
Federal funds sold......................................... 1,063,088 691,092 429,224
----------- ----------- -----------
Total interest income................................... 14,954,684 13,188,032 11,973,209
----------- ----------- -----------
INTEREST EXPENSE
Interest-bearing demand deposits........................... 2,414,951 1,990,377 1,519,257
Savings deposits........................................... 336,830 376,290 463,435
Time deposits.............................................. 1,309,999 1,260,728 938,197
Other borrowings........................................... - - 68,658
----------- ----------- -----------
Total interest expense.................................. 4,061,780 3,627,395 2,989,547
----------- ----------- -----------
NET INTEREST INCOME......................................... 10,892,904 9,560,637 8,983,662
PROVISION FOR LOAN LOSSES................................... 250,000 250,000 -
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 10,642,904 9,310,637 8,983,662
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts........................ 1,019,786 978,739 1,006,765
Other operating income..................................... 650,853 391,896 373,722
----------- ----------- -----------
Total noninterest income................................ 1,670,639 1,370,635 1,380,487
----------- ----------- -----------
NONINTEREST EXPENSES
Salaries and benefits...................................... 4,120,469 3,692,594 3,841,055
Net occupancy.............................................. 813,915 629,642 607,739
Communications............................................. 239,721 226,390 204,323
Data processing............................................ 181,460 147,844 97,339
FDIC insurance premium..................................... 18,201 2,000 142,633
Supplies................................................... 230,255 170,948 158,648
Professional fees.......................................... 180,658 143,817 179,686
Other expenses............................................. 1,088,245 814,767 829,635
----------- ----------- -----------
Total noninterest expenses.............................. 6,872,924 5,828,002 6,061,058
----------- ----------- -----------
INCOME BEFORE INCOME TAXES.................................. 5,440,619 4,853,270 4,303,091
PROVISION FOR INCOME TAXES.................................. 1,737,000 1,602,000 1,395,000
----------- ----------- -----------
NET INCOME.................................................. $ 3,703,619 $ 3,251,270 $ 2,908,091
=========== =========== ===========
BASIC EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE....... $ 0.50 $ 0.46 $ 0.42
=========== =========== ===========
DILUTED EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE..... $ 0.50 $ 0.45 $ 0.41
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
17
<PAGE> 18
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
VRB BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSS)
ON
COMMON STOCK AVAILABLE- TOTAL
----------------------- RETAINED FOR-SALE SHAREHOLDERS'
SHARES AMOUNT EARNINGS SECURITIES EQUITY
--------- ----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994................... 2,235,686 $ 7,916,059 $ 7,146,252 $ (61,706) $ 15,000,605
Stock options exercised (August 11, 1995).... 143 581 - - 581
Cash dividend ($.25 per share, paid November
10, 1995).................................. - - (558,957) - (558,957)
4% stock dividend (November 10, 1995)........ 89,190 1,137,173 (1,137,173) - -
Payments for fractional shares related to
stock dividend ($12.75 per share).......... - - (3,100) - (3,100)
Stock options exercised (December 28,
1995)...................................... 8,000 31,200 - - 31,200
Net income................................... - - 2,908,091 - 2,908,091
Changes in net unrealized gain on
available-for-sale securities, net of
taxes...................................... - - - 91,325 91,325
--------- ----------- ----------- ----------- ----------------
BALANCE, December 31, 1995................... 2,333,019 9,085,013 8,355,113 29,619 17,469,745
Stock options exercised (January to October
1996)...................................... 50,180 304,054 - - 304,054
Income tax benefit from exercise of stock
options.................................... - 91,263 - - 91,263
Cash dividend ($.40 per share, paid November
20, 1996).................................. - - (953,280) - (953,280)
3 for 2 stock split
(November 20, 1996)......................... 1,191,483 - - - -
Payments for fractional shares related
to stock split ($9.33 per share)............ - - (1,088) - (1,088)
Net income................................... - - 3,251,270 - 3,251,270
Change in net unrealized gain on
available-for-sale securities, net of
taxes....................................... - - - 26,170 26,170
--------- ----------- ----------- ----------- ----------------
BALANCE, December 31, 1996................... 3,574,682 9,480,330 10,652,015 55,789 20,188,134
Stock options exercised
(February to August 1997)................... 17,475 85,230 - - 85,230
2 for 1 stock split
(September 10, 1997)........................ 3,592,157 - - - -
Stock options exercised
(September to October 1997)................. 6,430 26,152 - - 26,152
Income tax benefit from stock options
exercised................................... - 86,896 - - 86,896
Cash dividend ($.14 per share, paid October
31, 1997)................................... - - (1,006,333) - (1,006,333)
Stock offering (November 1997)............... 1,150,000 8,784,104 - - 8,784,104
Net income................................... - - 3,703,619 - 3,703,619
Change in net unrealized gain on
available-for-sale securities, net of
taxes....................................... - - - (7,247) (7,247)
--------- ----------- ----------- ----------- ----------------
BALANCE, December 31, 1997................... 8,340,744 $18,462,712 $13,349,301 $ 48,542 $ 31,860,555
========= =========== =========== =========== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
18
<PAGE> 19
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
VRB BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 3,703,619 $ 3,251,270 $ 2,908,091
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization............................. 392,547 432,815 430,123
Loss (gain) on sales of assets............................ (8,429) 1,493 -
Provision for loan losses................................. 250,000 250,000 -
FHLB stock dividend....................................... (88,500) (83,300) (55,128)
Deferred taxes............................................ 22,684 6,451 13,118
Change in cash due to changes in certain assets and
liabilities:
(Increase) decrease in accrued interest and other
assets.................................................. 215,220 (226,911) (90,327)
Increase in accrued interest and other liabilities........ 357,298 125,871 192,234
------------ ------------ -----------
Net cash from operating activities...................... 4,844,439 3,757,689 3,398,111
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the maturity of held-to-maturity
securities............................................... 215,000 5,390,000 7,895,537
Purchases of held-to-maturity securities................... - (8,204,586) (3,686,000)
Proceeds from maturity of available-for-sale securities.... 446,971 6,118,455 2,000,000
Proceeds from sales of available-for-sale securities....... 3,008,437 - -
Purchases of available-for-sale securities................. (3,000,000) (6,490,627) (9,034,989)
Purchases of Federal Home Loan Bank stock.................. - - (544,472)
Net increase in loans...................................... (15,888,096) (11,053,321) (530,996)
Purchase of premises and equipment......................... (699,013) (513,479) (249,433)
Sale of premises and equipment............................. 2,600 - 4,010
------------ ------------ -----------
Net cash from investing activities...................... (15,914,101) (14,753,558) (4,146,343)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits................................... 17,607,889 22,823,910 7,272,231
Proceeds from public stock offering, net of expenses....... 8,784,104 - -
Cash dividends and fractional share payments............... (1,006,333) (954,368) (562,057)
Cash received from exercise of common stock options........ 111,382 243,616 31,781
------------ ------------ -----------
Net cash from financing activities...................... 25,497,042 22,113,158 6,741,955
------------ ------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 14,427,380 11,117,289 5,993,723
CASH AND CASH EQUIVALENTS, beginning of year................ 29,216,909 18,099,620 12,105,897
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 43,644,289 $ 29,216,909 $18,099,620
============ ============ ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest..................................... $ 4,048,741 $ 3,635,185 $ 2,919,329
============ ============ ===========
Cash paid for taxes........................................ $ 1,320,994 $ 1,607,300 $ 1,456,256
============ ============ ===========
SCHEDULE OF NONCASH ACTIVITIES
Stock dividends declared................................... $ - $ - $ 1,137,173
============ ============ ===========
Unrealized gain (loss) on available-for-sale securities,
net of tax............................................... $ (7,247) $ 26,170 $ 91,325
============ ============ ===========
Income tax benefit of stock options exercised.............. $ 86,896 $ 91,263 $ -
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
19
<PAGE> 20
FINANCIAL NOTES
- --------------------------------------------------------------------------------
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - The accompanying consolidated financial
statements include the accounts of VRB Bancorp (VRB), a bank holding company,
and its wholly-owned subsidiary, Valley of the Rogue Bank (the Bank).
Substantially all activity of VRB Bancorp is conducted through its subsidiary
bank and all significant intercompany accounts and transactions have been
eliminated in the preparation of the consolidated financial statements.
The Bank is a state-chartered institution authorized to provide banking
services by the State of Oregon. With its headquarters in Rogue River, Oregon,
it also has branch operations in Josephine and Jackson County, Oregon. The Bank
conducts a general banking business. Its activities include the usual deposit
functions of a commercial bank: commercial, real estate, installment and
mortgage loans; checking and savings accounts; automated teller machines
(ATM's); collection services; and safe deposit facilities. Both VRB Bancorp and
Valley of the Rogue Bank are subject to the regulations of certain Federal and
State agencies and undergo periodic examinations by those regulatory
authorities.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS - In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates.
INVESTMENT SECURITIES - The Bank is required to specifically identify under
generally accepted accounting principles its investment securities as
"held-to-maturity," "available-for-sale," or "trading accounts." Accordingly,
management has determined that all investment securities held at December 31,
1997 and 1996, are either "available-for-sale" or "held-to-maturity" and conform
to the following accounting policies:
Securities held-to-maturity - Bonds, notes, and debentures for which
the Bank has the intent and ability to hold to maturity are reported at
cost, adjusted for premiums and discounts that are recognized in interest
income using the interest method over the period to maturity.
Securities available-for-sale - Available-for-sale securities consist
of bonds, notes, debentures, and certain equity securities not classified
as held-to-maturity securities. Securities are generally classified as
available-for-sale if the instrument may be sold in response to such
factors as: (1) changes in market interest rates and related changes in the
security's prepayment risk, (2) needs for liquidity, (3) changes in the
availability of and the yield on alternative instruments, and (4) changes
in funding sources and terms. Unrealized holding gains and losses, net of
tax, on available-for-sale securities are reported as a net amount in a
separate component of equity until realized. Fair values for investment
securities are based on quoted market prices. Gains and losses on the sale
of available-for-sale securities are determined using the
specific-identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary,
result in write-downs of the individual securities to their fair value. The
related write-downs would be included in earnings as realized losses. Premiums
and discounts are recognized in interest income using the interest method over
the period to maturity.
LOANS, NET OF ALLOWANCE FOR LOAN LOSSES AND UNEARNED INCOME - Loans are
stated at the amount of unpaid principal, reduced by an allowance for loan
losses and unearned income. Interest on loans is calculated by using the
simple-interest method on daily balances of the principal amount outstanding.
The allowance for loan losses is established through a provision for loan losses
charged to expenses. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
20
<PAGE> 21
FINANCIAL NOTES
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
(continued)
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower's ability to pay.
Various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's reserve for loan losses. Such agencies may
require the Bank to recognize additions to the reserve based on their judgment
of information available to them at the time of their examinations.
Impaired loans are carried at the present value of expected future cash
flows discounted at the loan's effective interest rate, the loans market price
or the fair value of the collateral if the loan is collateral dependent. Accrual
of interest is discontinued on impaired loans when management believes, after
considering economic and business conditions, collection efforts, and collateral
position, that the borrower's financial condition is such that collection of
interest is doubtful. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment to the yield of the related loan.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the assets. Depreciation
is based on useful lives of 3 to 25 years on furniture and equipment; 15 to 40
years for buildings and components; and, 15 to 20 years on leasehold
improvements.
OTHER REAL ESTATE - Other real estate, acquired through foreclosure or
deeds in lieu of foreclosure, is carried at the lower of cost or estimated net
realizable value. When property is acquired, any excess of the loan balance over
its estimated net realizable value is charged to the reserve for loan losses.
Subsequent write-downs to net realizable value, if any, or any disposition gains
or losses are included in noninterest income and expense. The Bank had no other
real estate at December 31, 1997 and 1996.
INTANGIBLE ASSETS - Intangible assets consist of purchased goodwill arising
from the previous acquisition of financial institutions. These assets are being
amortized over periods which do not exceed 15 years.
INCOME TAXES - Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
STATEMENT OF CASH FLOWS - Cash equivalents are generally all short-term
investments with a maturity of three months or less. Cash and cash equivalents
normally include cash on hand, amounts due from banks, and federal funds sold.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS - The Bank holds no derivative
financial instruments. However, in the ordinary course of business, the Bank
enters into off-balance-sheet financial instruments consisting of commitments to
extend credit as well as commercial letters of credit and standby letters of
credit. Such financial instruments are recorded in the financial statements when
they are funded or related fees are incurred or received.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The following methods and assumptions
were used by the Bank in estimating fair values of financial instruments as
disclosed herein:
Cash and cash equivalents - The carrying amounts of cash and
short-term instruments approximate their fair value.
Held-to-maturity and available-for-sale securities - Fair values for
investment securities, excluding restricted equity securities, are based on
quoted market prices. The carrying values of restricted equity securities
approximate fair values.
Loans receivable - For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying values. Fair values for certain mortgage loans (for example, one-
to four-family residential), credit card loans, and other consumer loans
are based on quoted market prices of similar
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
21
<PAGE> 22
FINANCIAL NOTES
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
(continued)
loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. Fair values for commercial real estate
and commercial loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms
to borrowers of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral
values, where applicable.
Deposit liabilities - The fair values disclosed for demand deposits
are, by definition, equal to the amount payable on demand at the reporting
date (that is, their carrying amounts). The carrying amounts of variable-
rate, fixed-term money market accounts and certificates of deposit (CDs)
approximate their fair values at the reporting date. Fair values for
fixed-rate CDs are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings - The carrying amounts of federal funds
purchased, borrowings under repurchase agreements, and other short-term
borrowings maturing within 90 days approximate their fair values. Fair
values of other short-term borrowings are estimated using discounted cash
flow analyses based on the Bank's current incremental borrowing rates for
similar types of borrowing arrangements.
Long-term debt - The fair values of the Bank's long-term debt are
estimated using discounted cash flow analyses based on the Bank's current
incremental borrowing rates for similar types of borrowing arrangements.
Accrued interest - The carrying amounts of accrued interest
approximate their fair values.
Off-balance-sheet instruments - The Bank's off-balance-sheet
instruments include unfunded commitments to extend credit and standby
letters of credit. The fair value of these instruments is not considered
practicable to estimate because of the lack of quoted market prices and the
inability to estimate fair value without incurring excessive costs.
ADVERTISING - Advertising costs are charged to expense during the year in
which they are incurred.
STOCK OPTIONS - In October 1995 the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." This new standard defines a fair
value based method of accounting for an employee stock option or similar equity
instrument.
This statement gives entities a choice of recognizing related compensation
expense by adopting the new fair value method or to continue to measure
compensation using the intrinsic value approach under Accounting Principles
Board (APB) Opinion No. 25, the former standard. If the former standard for
measurement were elected, SFAS No. 123 requires supplemental disclosure to show
the effects of using the new measurement criteria. The Bank has elected to
continue using the measurement prescribed by APB Opinion No. 25, and
accordingly, this pronouncement has had no affect on the Bank's financial
position or results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1997, the FASB issued SFAS
No. 130 "Reporting Comprehensive Income" which the Bank is required to adopt for
years beginning after December 15, 1997, This statement establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. When adopted, the unrealized gain or loss on available-for-sale
securities will be recognized as a component of comprehensive income.
Other issued but not yet required FASB statements are not currently
applicable to the Bank's operations.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1996
and 1995 consolidated financial statements to conform with current year
presentations.
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
22
<PAGE> 23
FINANCIAL NOTES
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities at
December 31, 1997 and 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Held-to-maturity securities:
State and municipal subdivisions....... $18,415 $ 609 $ - $19,024
======= ======= ======= =======
Available-for-sale securities:
U.S. Treasuries and agencies........... $19,998 $ 77 $ - $20,075
Collateralized mortgage obligations.... 1,111 - (3) 1,108
------- ------- ------- -------
$21,109 $ 77 $ (3) $21,183
======= ======= ======= =======
DECEMBER 31, 1996
Held-to-maturity securities:
State and municipal subdivisions....... $18,636 $ 227 $ (43) $18,820
======= ======= ======= =======
Available-for-sale securities:
U.S. Treasuries and agencies........... $19,995 $ 167 $ (69) $20,093
Collateralized mortgage obligations.... 1,569 - (13) 1,556
------- ------- ------- -------
$21,564 $ 167 $ (82) $21,649
======= ======= ======= =======
</TABLE>
The amortized cost and estimated market value of investment securities at
December 31, 1997, by contractual maturity, are shown below (in thousands).
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
SECURITIES SECURITIES
----------------------- -----------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Due in one year or less................. $ 2,338 $ 2,344 $ 429 $ 427
Due after one year through five years... 550 565 18,680 18,743
Due after five years through ten
years................................. 5,364 5,521 2,000 2,013
Due after ten years..................... 10,163 10,594 - -
------- ------- ------- -------
$18,415 $19,024 $21,109 $21,183
======= ======= ======= =======
</TABLE>
For purposes of the maturity table, collateralized mortgage obligations,
which are not due at a single maturity date, have been allocated over maturity
groupings based on the weighted-average contractual maturities of underlying
collateral. Collateralized mortgage obligations may mature earlier than their
weighted-average contractual maturities because of principal payments.
At December 31, 1997 and 1996, investment securities with an amortized cost
of $5,186,574 and $5,188,961, respectively, were pledged to secure public
deposits and for other purposes required or permitted by law.
The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is
required to maintain an investment in capital stock of the FHLB. The FHLB stock
is not actively traded but is redeemable by FHLB at its current book value.
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
23
<PAGE> 24
FINANCIAL NOTES
- --------------------------------------------------------------------------------
NOTE 3 - LOANS AND RESERVE FOR LOAN LOSSES
The loan portfolio consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Real estate -- construction................................ $ 15,476 $ 9,112
Real estate -- mortgage.................................... 77,049 66,209
Commercial................................................. 12,720 13,181
Installment................................................ 11,850 12,808
Other loans................................................ 99 98
-------- --------
117,194 101,408
(1,780) (1,632)
-------- --------
$115,414 $ 99,776
======== ========
</TABLE>
The following is an analysis of the changes in the reserve for possible
loan losses (in thousands);
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Beginning balance..................................... $1,632 $1,407 $1,414
Provision for possible loan losses.................... 250 250 -
Losses................................................ (141) (38) (45)
Recoveries............................................ 39 13 38
------ ------ ------
Ending balance........................................ $1,780 $1,632 $1,407
====== ====== ======
</TABLE>
Impairment of loans having recorded investments of $371,820 and $58,166 at
December 31, 1997 and 1996, respectively, has been recognized in conformity with
SFAS Statement No. 114, as amended by SFAS Statement No. 118. The average
recorded investment and total allowance for loan losses related to impaired
loans was equal to their recorded investment at December 31, 1997 and 1996.
Interest income recognized on impaired loans during the years ended December 31,
1997, 1996, and 1995, was not significant. Management estimates that in 1997,
approximately $29,590 of interest income was not recognized on impaired loans on
nonaccrual status, compared with approximately $3,788 in 1996 and $2,868 in
1995.
NOTE 4 - BANK PREMISES AND EQUIPMENT
Bank premises, furniture, and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Land........................................................ $ 1,323 $ 1,323
Buildings................................................... 3,248 3,147
Furniture and equipment..................................... 3,035 2,545
------- -------
7,606 7,015
Less: accumulated depreciation.............................. (3,195) (2,921)
------- -------
$ 4,411 $ 4,094
======= =======
</TABLE>
NOTE 5 - ACCRUED INTEREST AND OTHER ASSETS
Accrued interest and other assets consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accrued interest receivable................................. $ 1,240 $ 1,162
Prepaid expenses............................................ 137 136
Deferred taxes.............................................. 104 126
Intangible and other assets................................. 897 1,192
------- -------
$ 2,378 $ 2,616
======= =======
</TABLE>
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
24
<PAGE> 25
FINANCIAL NOTES
- --------------------------------------------------------------------------------
NOTE 6 - TIME DEPOSITS
Time certificates of deposit of $100,000 and over, aggregated $5,258,874
and $8,151,302 at December 31, 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities for time deposits is as
follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $25,744
1999........................................................ 1,234
2000........................................................ 890
2001........................................................ 115
2002 and thereafter......................................... 234
-------
$28,217
=======
</TABLE>
NOTE 7 - INCOME TAXES
The income tax provision consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Currently payable..................................... $1,715 $1,596 $1,382
Deferred.............................................. 22 6 13
------ ------ ------
Provision for income taxes............................ $1,737 $1,602 $1,395
====== ====== ======
</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>
1997 1996 1995
---- ----- ----
<S> <C> <C> <C>
Accounting loan loss provision in excess of tax provision... $(58) $(100) $ -
Accounting depreciation less than (in excess of) tax
depreciation.............................................. 3 19 (6)
Deferred compensation....................................... (6) (8) (14)
Accounting loan fees in excess of tax loan fees............. 66 56 17
Federal Home Loan Bank stock dividends...................... 28 24 19
Other differences........................................... (11) 15 (3)
---- ----- ----
$ 22 $ 6 $ 13
==== ===== ====
</TABLE>
The net deferred tax benefits included in other assets in the accompanying
consolidated balance sheets include the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Deferred tax assets:
Loan loss reserve.......................................... $ 392 $ 334
Deferred compensation...................................... 88 82
Other...................................................... 25 14
----- -----
505 430
----- -----
Deferred tax liabilities:
Accumulated depreciation................................... (100) (97)
Deferred loan fees......................................... (225) (159)
Federal Home Loan Bank stock dividends..................... (76) (48)
----- -----
(401) (304)
----- -----
Net deferred tax asset...................................... $ 104 $ 126
===== =====
</TABLE>
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
25
<PAGE> 26
FINANCIAL NOTES
- --------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES - (continued)
The exercise of stock options which have been granted under VRB Bancorp's
stock option plan for directors give rise to compensation which is includable in
the taxable income of the applicable employees and deductible by the Bank for
federal and state income tax purposes. Such compensation results from increases
in the fair market value of VRB Bancorp's common stock subsequent to the date of
grant of the applicable exercised stock options and, accordingly, in accordance
with Accounting Principles Board Opinion No. 25, such compensation is not
recognized as an expense for financial accounting purposes and the related tax
benefits are taken directly to common stock. For the years ended December 31,
1997 and 1996, such deductions resulted in federal and state tax deductions
increasing common stock. The compensation deductions arising from the exercise
of stock options were not material in 1995.
Management believes, based upon the Bank's historical performance, net
deferred tax assets will be realized in the normal course of operations and,
accordingly, management has not reduced net deferred tax assets by a valuation
allowance.
The tax provision differs from the federal statutory rate of 34% due
principally to the effect of tax exemptions for interest received on municipal
investments. The 1997 and 1995 provision for income taxes reflects a reduction
in the state income tax rate from 6.6% to 3.8%, and 3.3%, respectively.
A reconciliation between the statutory federal income tax rate and the
effective tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Federal income taxes at statutory rate...................... $1,850 $1,650 $1,463
State income tax expense, net of federal income tax
benefit................................................... 237 211 94
Effect of nontaxable interest income........................ (294) (298) (191)
Other....................................................... (56) 39 29
------ ------ ------
$1,737 $1,602 $1,395
====== ====== ======
</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 a
majority of loan commitments are drawn upon by customers. While most commercial
letters of credit are not utilized, a significant portion of such utilization is
on an immediate payment basis. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
it is deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include cash, accounts receivable, inventory, premises and equipment, and
income-producing commercial properties.
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
26
<PAGE> 27
FINANCIAL NOTES
- --------------------------------------------------------------------------------
NOTE 8 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - (continued)
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third-party. These guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank holds cash, marketable securities, or real estate as collateral
supporting those commitments for which collateral is deemed necessary.
The Bank has not been required to perform on any financial guarantees
during the past two years. The Bank has not incurred any losses on its
commitments in either 1997, 1996, or 1995.
A summary of the notional amounts of the Bank's financial instruments with
off-balance-sheet risk at December 31, 1997 and 1996, follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Commitments to extend credit.......................... $22,106,031 $16,013,904
Commercial and standby letters of credit.............. $ 630,611 $ 479,328
</TABLE>
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>
1997 1996
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks.......................... $21,144 $ 21,144 $17,917 $ 17,917
Federal funds sold............................... $22,500 $ 22,500 $11,300 $ 11,300
Securities available-for-sale.................... $21,183 $ 21,183 $21,649 $ 21,649
Securities held-to-maturity...................... $18,415 $ 19,024 $18,636 $ 18,820
Federal Home Loan Bank stock..................... $ 1,208 $ 1,208 $ 1,120 $ 1,120
Loans, net of allowance for loan losses.......... $115,414 $112,722 $99,776 $ 99,544
Financial liabilities:
Demand and savings deposits...................... $144,959 $144,959 $126,276 $126,276
Time deposits.................................... $28,217 $ 27,604 $29,292 $ 29,373
</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, 1997 and 1996, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances. The estimated fair values at December
31, 1997 and 1996, should not necessarily be considered to apply at subsequent
dates.
In addition, other assets and liabilities of the Bank that are not defined
as financial instruments are not included in the above disclosures, such as
premises and equipment. Also, nonfinancial instruments typically not recognized
in the financial statements nevertheless may have value but are not included in
the above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the earnings potential of loan servicing rights,
the trained work force, customer goodwill, and similar items.
NOTE 10 - CONCENTRATIONS OF CREDIT RISK
All of the Bank's loans, commitments, and commercial and standby letters of
credit have been granted to customers in the Bank's market area. Investments in
state and municipal securities are not significantly concentrated within any one
region of the United States. The concentrations of credit by type of loan are
set forth in Note 3. The distribution of commitments to extend credit
approximates the distribution of loans outstanding.
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
27
<PAGE> 28
FINANCIAL NOTES
- --------------------------------------------------------------------------------
NOTE 10 - CONCENTRATIONS OF CREDIT RISK - (continued)
Commercial and standby letters of credit were granted primarily to commercial
borrowers as of December 31, 1997. The Bank's loan policy does not allow the
extension of credit to any single borrower or group of related borrowers in
excess of a total of $200,000 without approval from the Board of Directors.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Bank becomes involved in various
litigation arising from normal banking activities. In the opinion of management,
the ultimate disposition of these actions will not have a material adverse
effect on the consolidated financial position or results of operations.
The Bank leases certain branch premises and equipment. The following is a
schedule of future minimum lease payments under operating leases in effect as of
December 31, 1997:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1998....................................................... $ 92,272
1999....................................................... 78,255
2000....................................................... 8,959
--------
Total minimum payments required............................. $179,486
========
</TABLE>
Total rental expense was $94,350, $94,413, and $92,059 in 1997, 1996, and
1995, respectively.
NOTE 12 - BORROWING AGREEMENTS
The Bank has borrowing agreements with Bank of America and Wells Fargo Bank
for $5,000,000 and $3,000,000, respectively. There is no stated rate of interest
on these borrowings. As of December 31, 1997, there were no borrowings
outstanding under these agreements.
The Bank also participates in the Cash Management Advance Program with the
Federal Home Loan Bank of Seattle (FHLB). Under the program, the Bank may borrow
to a maximum of $8,850,000 with interest at the FHLB's cash management rate.
There were no borrowings outstanding at December 31, 1997.
NOTE 13 - STOCK OPTION PLANS
The Bank has two stock option plans which were approved by the shareholders
during 1991 and amended in 1994. The Plans provide for an aggregate of 725,492
shares of the Bank's unissued common stock to be granted to key employees and
nonemployee directors. The 1994 amendment removed the requirement for a
five-year vesting schedule for any future grants from the Employees' Plan, thus
leaving the setting of any vesting schedule to the discretion of the Board of
Directors. The Directors' Plan was amended to extend the time in which options
may be exercised following resignation or retirement.
With the exception of certain options granted to nonemployee directors, all
options granted and outstanding under both the Directors' and Employees' Plans
are noncompensatory and exercisable at purchase prices which approximate fair
value on the date of grant. Because certain options granted to the Bank's
directors were based on purchase prices below the fair value of the stock as of
the grant date, they are considered compensatory transactions and give rise to
the recognition of compensation expense. Accordingly, the Bank has recognized
$57,312, $44,564, and $39,151 as compensation expense relating to 18,790,
21,262, and 20,910 shares of common stock optioned to its directors during 1997,
1996, and 1995, respectively.
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
28
<PAGE> 29
FINANCIAL NOTES
- --------------------------------------------------------------------------------
NOTE 13 - STOCK OPTION PLANS - (continued)
The following summarizes options available and outstanding under both the
Directors' and Employees' Plans as of December 31, 1997, after the effect of the
current year's stock split (in thousands with the exception of the exercise
price):
<TABLE>
<CAPTION>
COMBINED
DIRECTOR'S PLAN EMPLOYEE'S PLAN PLANS
----------------- ----------------- --------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTION OPTION
SHARES PRICE SHARES PRICE SHARES
------ -------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
Options outstanding at December 31, 1994........ 34 $1.65 216 $1.83 250
Options granted in 1995......................... 22 $2.24 66 $2.97 88
Options exercised in 1995....................... - $- (24) $ 1.3 (24)
Options forfeited............................... - $- (18) $ 2.6 (18)
--- ---- ----
Options outstanding at December 31, 1995........ 56 $1.80 240 $2.08 296
=== ===== ==== ===== ====
Options exercisable at December 31, 1995........ 56 $1.80 120 $1.52 176
=== ===== ==== ===== ====
Options reserved at December 31, 1995........... 180 176 356
=== ==== ====
Options outstanding at December 31, 1995........ 56 $1.80 240 $2.08 296
Options granted in 1996......................... 22 $2.50 - $- 22
Options exercised in 1996....................... (42) $2.20 (108) $1.71 (150)
Options forfeited............................... - $- (14) $3.39 (14)
--- ---- ----
Options outstanding at December 31, 1996........ 36 $1.82 118 $2.90 154
=== ===== ==== ===== ====
Options exercisable at December 31, 1996........ 36 $1.82 34 $1.69 70
=== ===== ==== ===== ====
Options reserved at December 31, 1996........... 158 190 348
=== ==== ====
Options outstanding at December 31, 1996........ 36 $1.82 118 $2.90 154
Options granted in 1997......................... 18 $2.83 142 $8.95 160
Options exercised in 1997....................... (9) $2.56 (32) $2.01 (41)
Options forfeited............................... - $- (5) $3.61 (5)
--- ---- ----
Options outstanding at December 31, 1997........ 45 $2.09 223 $6.05 268
=== ===== ==== ===== ====
Options exercisable at December 31, 1997........ 45 $2.09 13 $2.04 58
=== ===== ==== ===== ====
Options reserved at December 31, 1997........... 140 53 193
=== ==== ====
</TABLE>
Had compensation cost for the Bank's 1997 and 1996 grants for stock-based
compensation plans been determined consistent with SFAS No. 123, the Bank's net
income, and net income per common share for December 31, 1997 and 1996, would
approximate the pro forma amounts below (in thousands except per share data):
<TABLE>
<CAPTION>
1997
------------------
AS PRO
REPORTED FORMA
-------- ------
<S> <C> <C>
Net income................................................. $3,704 $3,504
Basic earnings per common and common equivalent share...... $ 0.50 $ 0.48
Diluted earnings per common and common equivalent share.... $ 0.50 $ 0.48
</TABLE>
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
29
<PAGE> 30
FINANCIAL NOTES
- --------------------------------------------------------------------------------
NOTE 13 - STOCK OPTION PLANS - (continued)
<TABLE>
<CAPTION>
1996
------------------
AS PRO
REPORTED FORMA
-------- ------
<S> <C> <C>
Net income................................................. $3,251 $3,227
Basic earnings per common and common equivalent share...... $ 0.46 $ 0.45
Diluted earnings per common and common equivalent share.... $ 0.45 $ 0.44
</TABLE>
The fair value of each option granted during 1997 and 1996, is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: (1) dividend yields of 1.52% in 1997 and 4.25% in 1996,
(2) expected volatility of 28% in 1997 and 23% in 1996, (3) risk-free rates of
6.5% in 1997 and 7.5% in 1996; and, (4) expected life of five to ten in both
years.
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
NOTE 14 - EMPLOYEE BENEFIT PLANS
The Bank has a defined contribution profit sharing plan. All permanent
employees are eligible to participate once they meet the age and length of
employment requirements. Contributions are determined annually by the Board of
Directors and were $168,557, $162,210, and $172,401 in 1997, 1996, and 1995,
respectively, excluding additional amounts set aside for funding through the
Bank's bonus program. Voluntary employee contributions are required to share in
Bank contributions. Employee contributions were $189,640, $185,861, and $170,582
in 1997, 1996, and 1995, respectively.
The Bank has established a bonus program as part of the compensation
package it provides to employees. At December 31, 1997, the Bank employed
approximately 120 individuals eligible to participate in this program. Under the
program, a bonus pool for nonexecutives is established and funded based on net
profits of the current and immediately proceeding year. An executives bonus
program is similarly funded and based on current year profits with payments
measured on the basis of return on assets on after-tax income. For the years
ending December 31, 1997, 1996, and 1995, $542,400, $510,000, and $600,000,
respectively, was expensed to fund these programs with their related payroll and
benefit costs.
The Bank has also established supplemental retirement agreements with
certain of its executive officers. The agreements provide for established
post-retirement payments to covered executives for up to ten years after their
retirement. The supplemental programs are self-funded by the Bank through the
setting aside of funds into a bank-controlled deposit account. As of December
31, 1997, a liability for the supplemental retirement plans was recognized and
funded in the amount of $274,635. During 1997, 1996, and 1995, the Bank recorded
Plan expenses of $21,000, $28,000, and $42,000, respectively.
NOTE 15 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES
In 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which is
effective for financial statements issued for periods ending after December 15,
1997. SFAS No. 128 replaced standards for computing and presenting earnings per
share and requires a dual presentation of basic and diluted earnings per share.
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the year. Diluted earnings per share reflect the potential
dilution that could occur if common shares were issued pursuant to the exercise
of options under the Company's stock option plans. Comparative earnings per
share data for the years ended December 31, 1997, 1996, and 1995, have been
restated to conform with the current year presentation. The following table
illustrates the computations of basic and
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
30
<PAGE> 31
FINANCIAL NOTES
- --------------------------------------------------------------------------------
NOTE 15 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES - (continued)
diluted earnings per share for the years ended December 31, 1997, 1996, and 1995
(dollars in thousands except per share amounts):
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
1997 (NUMERATOR) (DENOMINATOR) AMOUNT
---- ------------ ------------- ---------
<S> <C> <C> <C>
Basic earnings per share
Income available to common shareholders......... $3,704 $7,345 $0.50
=====
Effect of dilutive securities
Outstanding common stock options................ - 28
------ ------
Income available to common shareholders plus
assumed conversions........................... $3,704 $7,373 $0.50
====== ====== =====
1996
- ----
Basic earnings per share
Income available to common shareholders......... $3,251 $7,072 $0.46
=====
Effect of dilutive securities
Outstanding common stock options................ - 74
------ ------
Income available to common shareholders plus
assumed conversions........................... $3,251 $7,146 $0.45
====== ====== =====
1995
- ----
Basic earnings per share
Income available to common shareholders......... $2,908 $6,976 $0.42
=====
Effect of dilutive securities
Outstanding common stock options................ - 114
------ ------
Income available to common shareholders plus
assumed conversions........................... $2,908 $7,090 $0.41
====== ====== =====
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Beginning balance....................................... $1,447,209 $1,621,867
Loans made.............................................. - 74,000
Loans paid.............................................. (92,406) (248,658)
---------- ----------
Ending balance.......................................... $1,354,803 $1,447,209
========== ==========
</TABLE>
NOTE 17 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
31
<PAGE> 32
FINANCIAL NOTES
- --------------------------------------------------------------------------------
NOTE 17 - REGULATORY MATTERS - (continued)
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital to average assets (as
defined). Management believes, as of December 31, 1997, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as adequately capitalized
under the regulatory framework for prompt corrective action. To be categorized
as adequately capitalized the Bank must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios in the table below. There are no
conditions or events since that notification that management believes have
changed the institution's category.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
--------------- --------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
(in thousands)
Total capital to risk weighted
assets......................... $31,815 22.5% $11,312 (M)8.0% $14,140 (M)10.0%
Tier I capital to risk weighted
assets......................... $30,051 21.3% $5,643 (M)4.0% $ 8,465 (M) 6.0%
Tier I capital to average
assets......................... $30,051 14.9% $8,067 (M)4.0% $10,084 (M) 5.0%
AS OF DECEMBER 31, 1996
(in thousands)
Total capital to risk weighted
assets......................... $20,628 17.3% $9,539 (M)8.0% $11,924 (M)10.0%
Tier I capital to risk weighted
assets......................... $19,139 16.1% $4,755 (M)4.0% $ 7,133 (M) 6.0%
Tier I capital to average
assets......................... $19,139 11.1% $6,897 (M)4.0% $ 8,622 (M) 5.0%
</TABLE>
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for VRB Bancorp (unconsolidated parent
company only) is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash....................................................... $ 887,967 $ 122,128
Investment in subsidiary................................... 30,906,820 19,993,191
Goodwill................................................... 65,768 72,815
----------- -----------
$31,860,555 $20,188,134
=========== ===========
SHAREHOLDERS' EQUITY
Common stock............................................... $18,462,712 $ 9,480,330
Retained earnings.......................................... 13,349,301 10,652,015
Market value adjustment, available-for-sale securities, net
of taxes................................................. 48,542 55,789
----------- -----------
$31,860,555 $20,188,134
=========== ===========
</TABLE>
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VRB BANCORP 1997 ANNUAL REPORT
32
<PAGE> 33
FINANCIAL NOTES
- --------------------------------------------------------------------------------
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION - (continued)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Equity in undistributed earnings of subsidiary bank........ $2,810,666 $2,456,348 $2,390,137
Dividends.................................................. 900,000 845,000 525,000
EXPENSES
Goodwill and other administrative expenses................. (7,047) (50,078) (7,046)
---------- ---------- ----------
Net income.................................................. $3,703,619 $3,251,270 $2,908,091
========== ========== ==========
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $3,703,619 $3,251,270 $2,908,091
Adjustments to reconcile net income to net cash from
operating activities:
Equity in undistributed earnings of subsidiary bank....... (2,810,666) (2,456,348) (2,390,137)
Amortization.............................................. 7,047 7,046 7,046
---------- ---------- ----------
Net cash from operating activities...................... 900,000 801,968 525,000
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash investment in subsidiary.............................. (8,000,000) - -
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from public stock offering, net of costs.......... 8,784,104 - -
Cash dividends and fractional share payments............... (1,006,333) (954,368) (562,057)
Cash received from exercise of common stock options........ 88,068 243,616 31,781
---------- ---------- ----------
Net cash from financing activities...................... 7,865,839 (710,752) (530,276)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 765,839 91,216 (5,276)
CASH AND CASH EQUIVALENTS, beginning of year................ 122,128 30,912 36,188
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 887,967 $ 122,128 $ 30,912
========== ========== ==========
</TABLE>
NOTE 19 - STOCK OFFERING
During November 1997, the Bank registered 1,150,000 shares of common stock
for sale to the public at a price of $8.50 per share, for an aggregate offering
price of $9,775,000. All shares were sold, resulting in net proceeds of
$8,784,104, after deducting $990,896 for underwriting discounts and commissions,
legal, accounting and printing fees, and other offering expenses. Net proceeds
to the Bank were used in connection with the acquisition of Colonial Banking
Company in early January 1998. Pending such use, the net proceeds were invested
in short-term, investment-grade securities.
NOTE 20 - SUBSEQUENT EVENT
Effective September 1997, the Company's wholly-owned subsidiary, Valley of
the Rogue Bank ("the Bank"), signed a definitive merger agreement with Colonial
Banking Company ("CBC") pursuant to which CBC would be merged with and into the
Bank, with the resulting bank continuing under the name and charter of Valley of
the Rogue Bank. The merger was subject to satisfaction of certain conditions of
closing, including regulatory and shareholder approval. The Bank agreed to
purchase all of the outstanding shares of CBC stock for a cash price of
approximately $17.3 million. This merger took place effective early in January
1998. CBC had five full service branches in southern Oregon, as well as a loan
production office in Portland, Oregon. Following the merger, four of CBC's
branches became branch offices of the Bank, and the fifth branch was
consolidated into the Bank's main office in Rogue River, Oregon.
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
33
<PAGE> 34
FINANCIAL NOTES
- --------------------------------------------------------------------------------
NOTE 20 - SUBSEQUENT EVENT - (continued)
Following is a summary of assets acquired and liabilities assumed in the
Bank's acquisition of Colonial Banking Company (dollars in thousands):
<TABLE>
<S> <C>
Cash and due from banks..................................... $ 5,934
Investment securities....................................... 13,319
Loans, net.................................................. 92,774
Goodwill.................................................... 10,198
Other assets................................................ 4,330
Deposit liabilities......................................... (107,876)
Other liabilities........................................... (1,412)
---------
Purchase price paid......................................... $ 17,267
=========
</TABLE>
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
34
<PAGE> 35
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and Shareholders of VRB Bancorp
We have audited the accompanying consolidated balance sheets of VRB Bancorp
as of December 31, 1997 and 1996, and the related statements of income, changes
in shareholders' equity, and cash flows for the years ended December 31, 1997,
1996, and 1995. These financial statements are the responsibility of VRB
Bancorp's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of VRB Bancorp
as of December 31, 1997 and 1996, and the results of its operations and cash
flows for the years ended December 31, 1997, 1996, and 1995, in conformity with
generally accepted accounting principles.
[Moss Adams Signature]
Portland, Oregon
January 9, 1998
35
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VRB BANCORP 1997 ANNUAL REPORT
<PAGE> 36
This page intentionally left blank
36
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VRB BANCORP 1997 ANNUAL REPORT
<PAGE> 37
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<S> <C> <C>
James D. Coleman photo John O. Dunkin photo Robert J. DeArmond photo
JAMES D. COLEMAN JOHN O. DUNKIN ROBERT J. DEARMOND
Board of Directors Board of Directors Board of Directors
Chairman Vice Chairman
Member since 1987 Member since 1986 Member since 1990
Gary Lundberg photo Larry Parducci photo April Sevcik photo Michael Donovan photo
GARY LUNDBERG LARRY PARDUCCI APRIL SEVCIK MICHAEL DONOVAN
Board of Directors Board of Directors Board of Directors Board of Directors
Member since 1993 Member since 1994 Member since 1997 Member since 1997
William A. Haden photo Tom Anderson photo Brad Copeland photo Felice Belfiore photo
WILLIAM A. HADEN TOM ANDERSON BRAD COPELAND FELICE BELFIORE
President Executive Vice President Executive Vice President Senior Vice President
Chief Executive Officer Chief Operating Officer Credit Administer Chief Financial Officer
Board of Directors Board of Directors
Joined Bank in 1993 Joined Bank in 1977 Joined Bank in 1996 Joined Bank in 1997
</TABLE>
37
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VRB BANCORP 1997 ANNUAL REPORT
<PAGE> 38
[INSERT VRB MAP]
38
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VRB BANCORP 1997 ANNUAL REPORT
<PAGE> 39
STAFF AND LOCATIONS
VRB BANCORP AND
VALLEY OF THE
ROGUE BANK
ADMINISTRATIVE OFFICES
110 Pine Street
P. O. Box 1046
Rogue River, Oregon 97537
(541) 582-4561
William A. Haden
President
Chief Executive Officer
Tom Anderson
Executive Vice President
Chief Operating Officer
Brad Copeland
Executive Vice President
Credit Administrator
Felice Belfiore
Senior Vice President
Chief Financial Officer
Sharon Warburton
Vice President
Operations
Helen Smith
Vice President
Operations
Scott Hall
Vice President
Credit Administration
Kathy Peckham
Vice President
Corporate Sales Manager
Carrie Brownell
Vice President
Human Resources
Jean J. Mickson
Compliance Officer
Owen Atkinson
Vice President
Information Technology
Sharon Duff
Vice President
Manager, EDP Services
Johnna Sharpe
Assistant Manager
EDP Services
FRUITDALE OFFICE
Larry G. Stewart
Vice President
Manager
Jodi MacDonald
Assistant Vice President
Loan Officer
Shirley Murschall
Assistant Vice President
Operations
7TH & MIDLAND OFFICE
Don Myrick, Jr.
Vice President
Manager
Terrell A. Bergmann
Assistant Vice President
Operations
James Hamilton
Assistant Vice President
Loan Officer
Linda Deba
Loan Officer
ROGUE RIVER OFFICE
Jerry L. Cole
Vice President
Manager
Ruth M. Bailey
Assistant Vice President
Operations
Bob Murphy
Vice President
Loan Officer
TALENT OFFICE
Ellen Ashbaugh
Assistant Vice President
Manager
Deanna Grimes
Operations Officer
MEDFORD OFFICE
Fred Moran
Vice President
Manager
Sandy Antich
Operations Officer
Wayne Thompson
Assistant Vice President
Loan Officer
STEWART AVENUE OFFICE
Peggy Bennett
Manager
POPLAR DRIVE OFFICE
Janice Brigham
Vice President
Manager
Carla Cartwright
Operations Officer
Trish Andrews
Assistant Vice President
Loan Officer
PHOENIX OFFICE
Mike Bingaman
Vice President
Manager
Alice Orcutt
Operations Officer
ASHLAND OFFICE
Frank Billovits
Vice President
Manager
Susan Eichler
Assistant Vice President
Loan Officer
Heidi Carson
Operations Officer
MERLIN OFFICE*
Jerry Herbold
Vice President
Manager
Ellen Cobb-deGraaf
Operations Officer
DOWNTOWN GRANTS PASS OFFICE*
Harold "Bud"
Bebeau
Vice President
Manager
Karen Collins
Operations Officer
Sue Ann King
Loan Officer
WILLIAMS HIGHWAY OFFICE*
Sharon Johnson
Operations Officer
E. JACKSON STREET OFFICE*
Noland Alston
Assistant Vice President
Manager
Cathy Fuller
Operations Officer
*Former branch of Colonial Banking Company acquired 1/5/98
39
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VRB BANCORP 1997 ANNUAL REPORT
<PAGE> 1
EXHIBIT 23.0
CONSENT AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use on Form 10-K dated March 1, 1998, of our report
dated January 9, 1998, relating to the financial statements of VRB Bancorp.
/s/ Moss Adams LLP
Portland, Oregon
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements for VRB Bancorp and subsidiary, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 21,144
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 22,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,183
<INVESTMENTS-CARRYING> 18,415
<INVESTMENTS-MARKET> 19,024
<LOANS> 117,194
<ALLOWANCE> 1,780
<TOTAL-ASSETS> 206,654
<DEPOSITS> 173,176
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,617
<LONG-TERM> 0
0
0
<COMMON> 18,463
<OTHER-SE> 13,349
<TOTAL-LIABILITIES-AND-EQUITY> 206,654
<INTEREST-LOAN> 11,444
<INTEREST-INVEST> 2,448
<INTEREST-OTHER> 1,063
<INTEREST-TOTAL> 14,955
<INTEREST-DEPOSIT> 4,062
<INTEREST-EXPENSE> 4,062
<INTEREST-INCOME-NET> 10,893
<LOAN-LOSSES> 250
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 1,088
<INCOME-PRETAX> 5,441
<INCOME-PRE-EXTRAORDINARY> 3,710
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,710
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.50
<YIELD-ACTUAL> 6.69
<LOANS-NON> 373
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,633
<CHARGE-OFFS> 135
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 1,780
<ALLOWANCE-DOMESTIC> 1,780
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR VRB BANCORP AND SUBSIDIARY, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<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> 0.46
<EPS-DILUTED> 0.45
<YIELD-ACTUAL> 6.73
<LOANS-NON> 58
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,407
<CHARGE-OFFS> 38
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 1,632
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 11,527,435
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,400,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,340,861
<INVESTMENTS-CARRYING> 18,468,014
<INVESTMENTS-MARKET> 18,668,660
<LOANS> 109,530,749
<ALLOWANCE> 1,601,858
<TOTAL-ASSETS> 179,580,349
<DEPOSITS> 156,447,756
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,252,685
<LONG-TERM> 0
0
0
<COMMON> 9,516,396
<OTHER-SE> 12,428,714
<TOTAL-LIABILITIES-AND-EQUITY> 179,580,349
<INTEREST-LOAN> 5,520,607
<INTEREST-INVEST> 1,218,237
<INTEREST-OTHER> 412,994
<INTEREST-TOTAL> 7,151,838
<INTEREST-DEPOSIT> 1,908,422
<INTEREST-EXPENSE> 1,908,422
<INTEREST-INCOME-NET> 5,243,416
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 7,139
<EXPENSE-OTHER> 3,279,995
<INCOME-PRETAX> 2,692,699
<INCOME-PRE-EXTRAORDINARY> 1,776,699
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,776,669
<EPS-PRIMARY> .25
<EPS-DILUTED> .24
<YIELD-ACTUAL> 6.68
<LOANS-NON> 46,280
<LOANS-PAST> 2,549
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,632,531
<CHARGE-OFFS> 49,464
<RECOVERIES> 18,791
<ALLOWANCE-CLOSE> 1,601,858
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 9,853,620
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25,287,610
<INVESTMENTS-CARRYING> 19,590,196
<INVESTMENTS-MARKET> 19,444,066
<LOANS> 97,918,270
<ALLOWANCE> 1,392,808
<TOTAL-ASSETS> 166,949,161
<DEPOSITS> 146,156,437
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,068,971
<LONG-TERM> 0
0
0
<COMMON> 9,238,479
<OTHER-SE> 10,800,860
<TOTAL-LIABILITIES-AND-EQUITY> 166,949,161
<INTEREST-LOAN> 7,481,408
<INTEREST-INVEST> 1,738,225
<INTEREST-OTHER> 464,259
<INTEREST-TOTAL> 9,683,892
<INTEREST-DEPOSIT> 2,682,687
<INTEREST-EXPENSE> 2,682,687
<INTEREST-INCOME-NET> 7,001,205
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,375,760
<INCOME-PRETAX> 3,665,750
<INCOME-PRE-EXTRAORDINARY> 2,445,750
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,445,750
<EPS-PRIMARY> .35
<EPS-DILUTED> .34
<YIELD-ACTUAL> 6.76
<LOANS-NON> 14,218
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,407,084
<CHARGE-OFFS> 25,543
<RECOVERIES> 11,267
<ALLOWANCE-CLOSE> 1,392,808
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
