<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, as par value
(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 $ 72,337,531 at March 5, 1999.
As of March 5, 1999, there were 8,701,736 shares of the Registrant's Common
Stock outstanding.
Documents Incorporated by Reference:
Portions of the Registrant's 1998 Annual Report to Shareholders is incorporated
by reference in Part II hereof. Portions of the Registrant's proxy statement
dated March 12, 1999, for the 1999 annual meeting of shareholders is
incorporated by reference in Part III hereof.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I PAGE
----
<S> <C>
Item 1. Description of business
Introduction 3
Business 3
Acquisition 4
Market area 4
Competition 4
Employees 5
Risk Factors 5
Supervision and regulation 6
Item 2. Properties 9
Item 3. Legal proceedings 10
Item 4. Submission of matters to vote on security issues 10
PART II
Item 5. Market for registrant's common equity and
related shareholder matters 11
Item 6. Selected financial data 11
Item 7. Management's discussion and analysis of
financial condition and results of operation 11
Item 8. Financial statements and supplementary data 11
Item 9. Changes in and disagreements with accountants on accounting
and financial disclosure 11
PART III
Item 10. Directors and executive officers of the registrant 12
Item 11. Executive compensation 12
Item 12. Security ownership of certain beneficial owners and management 12
Item 13. Certain relationships and related transactions 12
PART IV
Item 14. Exhibits, financial statement schedules and reports on
Form 8-K 13
SIGNATURES 14
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES 15
EXHIBIT INDEX 16
</TABLE>
<PAGE> 3
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
thirteen full service branches in the Rogue Valley, and seeks significant growth
in its earning assets while maintaining a high return on shareholders' equity.
VRB believes that this objective can be achieved by continuing to provide
personalized, quality banking services to its customers. VRB 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. VRB complements this strategy by distinguishing its 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's strategy is to make available community banking services to individuals,
professionals, and small to medium size businesses. The Bank is most active in
commercial and construction lending. Such loans are typically characterized by
innovative or flexible terms, and collateralized by commercial, residential
owner-occupied or rental properties. Other lending products available to local
business and commercial customers include equipment and inventory financing,
revolving lines of credit, and other small business loans. 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 maintains sound loan underwriting standards with written loan
policies, conservative individual and branch lending limits, and supervisory
oversight by Board designated loan committees.
VRB offers a broad array of traditional deposit products and services, including
non-interest bearing and interest
3
<PAGE> 4
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 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. As of June 30,
1998, VRB held approximately 15% of the total market, measured as a percentage
of total deposits then held by financial institutions operating in Jackson and
Josephine county.
While VRB 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.
ACQUISITION
Effective January 5, 1998, Valley of the Rogue Bank executed a plan of merger
with Colonial Banking Company ("CBC") under the purchase method of accounting.
CBC, previously headquartered in Grants Pass, Oregon, had $116 million in total
assets as of December 31, 1997. The merger added four branches, operating under
the name of Valley of the Rogue Bank.
VRB faced certain challenges with the acquisition of CBC, including credit
quality and deposit pricing. CBC's loan portfolio, which exceeded $92 million at
the time of the merger, was geographically dispersed through out the Rogue
Valley and the Portland metropolitan area. The portfolio was almost entirely
collateralized by real property, and contained concentrations in short-term
construction financing and commercial properties. Over the past several months,
under-collateralized loans have been shored up with additional security and non
performing credits have been brought current or paid off. By year-end, the
overall credit quality of the portfolio was very strong, with total non-
performing loans less than a quarter of one percent of total loans.
Following the merger, the Bank applied existing pricing policies to CBC
accounts, which served to reengineer the Bank's mix of deposits and loans. In
particular, renewal rates on time certificates of deposit were significantly
beneath those rates previously offered by CBC and as a result, concentrations in
time certificates of deposit declined. As the year progressed, declining time
accounts were replaced by inflows of non interest bearing deposits and money
market accounts, and the Bank's overall cost of funds dipped beneath 3%.
MARKET AREA
The Company primarily conducts its business in Jackson and Josephine Counties
(the Rogue Valley) in southern Oregon. The two counties have experienced an
estimated 17% increase in population from 1990 to 1998. The fastest growing age
groups were those in the middle working years (20-54), reflecting the areas'
reputation as a family orientated community. The Rogue Valley continues to
become increasingly urbanized and infrastructure growth has been robust,
including both residential and commercial development.
The region's employment base has diversified in the last decade. The region's
dependence on wood products declined by 30%, with timber manufacturing jobs
accounting for less than half of all manufacturing jobs in the Rogue Valley by
1997. Southern Oregon has a good track record of attracting smaller sized firms
to the area, and industry sectors such as wholesale and retail trade, higher
education and medical services have experienced strong growth. Non-farm payroll
jobs are predicted to grow 23% from 1996 through 2006, outpacing the 21%
expected average for the state of Oregon.
COMPETITION
Within the Company's geographic market, VRB's competes with commercial banks,
savings and loan associations, and credit unions, some of which may offer
lending and/or deposit products with rates that VRB cannot or is not 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
4
<PAGE> 5
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.
In recent years, competition for deposits and loans has intensified. New
community banks have opened in Grants Pass and in Medford. Super-regional banks
continue to consolidate into larger, more influential financial institutions.
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.
VRB distinguishes itself from the competition by promoting local, personalized
service and community involvement. VRB's lending strategies target particular
industry niches or clientele, providing financial services tailored to meet the
customers' individual needs. VRB believes these strategies to be successful.
EMPLOYEES
As of December 31, 1998, the Bank employed a total of 165 full time equivalent
employees. A number of benefit plans are available to eligible employees,
including paid sick leave and vacation, group medical plans, a 401(k) plan, and
a discretionary stock option plan. 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 dependent upon and sensitive to the economy of its
market area. An economic downturn could affect overall loan demand. Such a
downturn could also affect borrowers' ability to repay loans, or reduce the
value of collateral securing such loans. 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. Nor are there any guarantees
that future economic changes will not have a significant adverse effect on the
Company.
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 repay.
5
<PAGE> 6
INTEREST RATE RISK
VRB's earnings are largely derived from net interest income, which is interest
income and fees earned on loans and investments, less interest expense paid on
deposits and other borrowings. Interest rates are highly sensitive to many
factors typically beyond the control of the Company's management. These factors
include general economic conditions and the policies of various governmental and
regulatory authorities. As interest rates change, net interest income is
affected. Although interest rates have remained relatively stable in recent
periods, an unanticipated decrease or increase in interest rates could have an
adverse effect on the Bank's financial performance.
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 is 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. Future changes in federal and state
banking regulations could adversely affect the Bank's operating results and
ability to continue to effectively compete. See "Supervision and Regulation."
SUPERVISION AND REGULATION
GENERAL
VRB Bancorp and Valley of the Rogue Bank are extensively regulated under federal
and state law. 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.
FEDERAL BANK HOLDING COMPANY REGULATION
VRB Bancorp is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended ("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 Bancorp is required to file
financial reports with the Federal Reserve, as well as respond to any other
inquiries made by the Federal Reserve.
Valley of the Rogue Bank is subject to certain restrictions imposed by the
Federal Reserve Act on (1) extensions of credit to VRB Bancorp, (2) investments
in VRB Bancorp stock and (3) the use VRB Bancorp stock as collateral for loans
to any borrower. These regulations and restrictions may limit VRB Bancorp's
ability to obtain funds from Valley of the Rogue Bank for its cash needs,
including funds for payment of dividends, interest and operating expenses.
Further, under the Federal Reserve Act and certain regulations of the Federal
Reserve, VRB Bancorp and its subsidiary is prohibited from engaging in certain
tying arrangements which involve any extension of credit, lease or sale of
property or furnishing of services. For example, Valley of the Rogue Bank may
not generally require a customer to
6
<PAGE> 7
obtain other services from it or VRB Bancorp as a condition to an extension of
credit to the customer.
FEDERAL AND STATE BANK REGULATION
Valley of the Rogue Bank, as a state chartered bank with deposits insured by the
FDIC, is subject to the supervision and regulation of the Oregon Director and of
the FDIC. These agencies may prohibit the bank from engaging in what they
believe constitute unsafe or unsound banking practices.
The Community Reinvestment Act ("CRA") requires that Valley of the Rogue Bank is
evaluated based upon its ability to meet the credit needs of its local
community. This includes providing service to low and moderate income
neighborhoods, consistent 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".
Valley of the Rogue Bank is also subject to certain restrictions imposed by the
Federal Reserve Act on loans to executive officers, directors, principal
shareholders or any related interest of such persons. Extensions of credit must
meet the following criteria:
(i) must be made on substantially the same terms, including interest rates
and collateral, roughly equivalent to those offered in the marketplace
(ii) follow credit underwriting procedures that are not less stringent than
those existing bank customers
(iii) must not involve more than the normal risk of repayment or present other
unfavorable features.
Valley of the Rogue Bank is also subject to certain lending limits and
restrictions on overdrafts to such individuals. A violation of these
restrictions may result in severe financial consequences for the Bank or any
officer, director, employee, agent or other person participating in the conduct
of the affairs of the Bank
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. If Valley of the Rogue Bank fails to meet these
standards, it must develop a plan acceptable to the agency, specifying the steps
that the institution will take to meet the standards. Failure to submit or
implement such a plan may subject the institution to regulatory sanctions.
Valley of the Rogue Bank believes that it meets all these standards as outlined
above.
DEPOSIT INSURANCE
As a FDIC member institution, deposits of Valley of the Rogue 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. 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. Valley of the Rogue Bank qualifies for
the highest rating and therefore, has a current FDIC premium rate of $.00 per
$100 of domestic deposits.
7
<PAGE> 8
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act") was
enacted. The Funds Act, for a three year period beginning in 1997, subjects BIF
insured deposits to a Financing Corporation ("FICO") premium assessment. The
FICO assessment is not tied to the FDIC risk classification and is re-determined
quarterly. VRB's most recent premium assessment was $.0122 per $100 of domestic
deposits.
DIVIDENDS
Under the Oregon Bank Act, Valley of the Rogue Bank is subject to restrictions
covering the payment of cash dividends to its shareholder, VRB Bancorp. The 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, less (i) certain bad debts (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.
Valley of the Rogue Bank has been paying regular dividends to VRB Bancorp,
although no assurances can be given that dividends will continue to be paid.
In addition, the appropriate regulatory authorities are authorized to prohibit
VRB Bancorp from paying dividends that would be considered unsafe or unsound
banking practice. VRB Bancorp 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 the
risk profiles among banks and bank holding companies, to account for off-balance
sheet exposure and to minimize disincentives for holding liquid assets. Assets
and off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. The
guidelines are minimums, and the Federal Reserve has noted that bank holding
companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios well in
excess of the minimum. The current guidelines require all bank holding companies
and federally-regulated banks to maintain a minimum risk-based total capital
ratio equal to 8%, of which at least 4% must be Tier 1 capital.
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 believes that it meets all capital adequacy requirements to which it is
subject.
8
<PAGE> 9
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. However, more importantly, the Federal Reserve's 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, can influence growth of bank loans,
investments and deposits, and can 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. 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 locations. The following sets forth all
properties 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
9
<PAGE> 10
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
10
<PAGE> 11
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, 1998.
11
<PAGE> 12
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
VRB Bancorp common stock trades on The Nasdaq Stock Market(R) under the symbol
VRBA. Prior to November 5, 1997, VRB Bancorp's common stock was traded
over-the-counter through the Bulletin Board Service of the Nasdaq Stock
Market(R). The following table lists the high and low bid quotations obtained
from the Nasdaq Stock Market(R), 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>
1998 1997
---------------------------------------- ----------------------------------------
Cash Stock Cash Stock
High Low Dividend Dividend High Low Dividend Dividend
------- ------ -------- -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $ 11.78 $ 9.62 - - $ 7.21 $ 5.29 - -
2nd Quarter 11.54 9.38 - - 7.69 7.21 - -
3rd Quarter 10.00 7.33 $ 0.19 - 9.62 7.93 $ 0.13 100%
4th Quarter 10.13 7.00 - - 9.62 7.21 - -
</TABLE>
As of December 31, 1998, there were 8,694,286 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 1998
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
"Selected Financial Data and Results of Operation" on pages 3-11 of the
Company's 1998 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 1998 Annual Report to Shareholders. Such statements are listed
in the Index to Consolidated Financial Statements set forth on page 15 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
12
<PAGE> 13
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 1999 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
1999 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 1999 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 1999 annual meeting of shareholders.
13
<PAGE> 14
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 15.
(3) The exhibits filed herewith are listed in the Index to
Exhibits on page 16 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, 1998.
14
<PAGE> 15
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/ Felice Belfiore Date: March 29, 1999
------------------------------------------------
Felice Belfiore, Senior Vice President &
Chief Financial Officer
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.
<TABLE>
<S> <C>
By: /S/ James D. Coleman Date: March 29, 1999
------------------------------------------------
James D. Coleman, Chairman, Director
By: /S/ John O. Dunkin Date: March 29, 1999
------------------------------------------------
John O. Dunkin, Vice Chairman, Director
By: /S/ Gary Lundberg Date: March 29, 1999
------------------------------------------------
Gary Lundberg, Director
By: /S/ Robert J. DeArmond Date: March 29, 1999
------------------------------------------------
Robert J. DeArmond, Director
By: /S/ Larry L Parducci Date: March 29, 1999
------------------------------------------------
Larry L. Parducci, Director
By: /S/ William A. Haden Date: March 29, 1999
------------------------------------------------
William A. Haden, President, Director
(Principal Executive Officer)
By: /S/ Tom Anderson Date: March 29, 1999
------------------------------------------------
Tom Anderson, Executive Vice President, Director
By: /S/ April Sevcik Date: March 29, 1999
------------------------------------------------
April Sevcik, Director
By: /S/ Michael Donovan Date: March 29, 1999
------------------------------------------------
Michael Donovan, Director
By: /S/ Felice Belfiore Date: March 29, 1999
------------------------------------------------
Felice Belfiore, Senior Vice President
(Principal Accounting Officer)
</TABLE>
15
<PAGE> 16
INDEX TO FINANCIAL CONSOLIDATED STATEMENTS AND SCHEDULES
Financial Statements
The following consolidated financial statements and Report of
Independent Public Accountants, included in the 1998 Annual Report to
Shareholders at the pages indicated, are incorporated herein by reference:
<TABLE>
<CAPTION>
Page of 1998 Annual
Report to Shareholders
----------------------
<S> <C>
VRB Bancorp and subsidiaries
Consolidated Balance Sheets at
December 31, 1998 and 1997 12
Consolidated Statements of Income
for the years ended December 31, 1998, 1997 and 1996 13
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998, 1997 and 1996 14
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996 15
Notes to Consolidated Financial Statements 16
Report of Independent Public Accountants 33
Financial Statement Schedules
None
</TABLE>
16
<PAGE> 17
INDEX TO EXHIBITS
3.1 Articles of Incorporation of VRB Bancorp*
3.2 Bylaws of VRB Bancorp*
4.0 Specimen stock certificate*
10.1 Stock Option Agreement, dated July 24, 1997, between Valley of the Rogue
Bank and the shareholders of Investors Banking Corporation**
10.2 Plan of Merger, dated September 30, 1997, between Valley of the Rogue
Bank and Colonial Banking Company**
10.3 Ground Lease Agreement dated June 1, 1988, relating to lease of parking
area of Poplar Drive Branch Office*
10.4 Lease Agreement and Memorandum of Agreement dated August 15, 1989
relating to lease of Stewart Avenue Branch Office*
10.5 Lease Agreement dated December 27, 1979, and related agreements for the
Talent Branch Office*
10.6 Employment Agreement dated April 10, 1992, by and between Valley of the
Rogue Bank and Tom Anderson*
10.7 Employment Agreement dated January 11, 1993, and Amendment to Employment
Agreement, dated September 26, 1994, by and between Valley of the Rogue
Bank and William A. Haden*
10.8 1994 Amended Non-Discretionary Stock Option Plan for Non-Employee
Directors (incorporated by reference to Exhibit 4.3 of the Registrant's
registration statement on Form S-8 filed with the Commission on October
3, 1995)
10.9 1994 Amended Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 4.3 of the Registrant's registration statement on Form S-8
filed with the Commission on October 3, 1995)
10.10 Employment Agreement dated February 27, 1997 by and among Valley of the
Rogue Bank, VRB Bancorp and Felice Belfiore**
10.11 Employment Agreement dated May 1, 1996 by and between Valley of the
Rogue Bank and Brad Copeland**
13.0 1998 Annual Report to Shareholders
23.0 Consent of Moss Adams, LLP
27.0 Financial Data Schedule
- ---------------------------
* 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.
17
<PAGE> 1
VRB
BANCORP
1998
ANNUAL
REPORT
TABLE OF CONTENTS
LETTER TO SHAREHOLDERS ........................................ 2
SELECTED FINANCIAL DATA ....................................... 3
RESULTS OF OPERATIONS ......................................... 5
CONSOLIDATED BALANCE SHEETS ................................... 12
CONSOLIDATED STATEMENTS OF INCOME & COMPREHENSIVE
INCOME ..................................................... 13
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY ..................................................... 14
CONSOLIDATED STATEMENTS OF CASH FLOWS ......................... 15
NOTES TO CONSOLIDATED STATEMENTS .............................. 16
INDEPENDENT AUDITOR'S REPORT .................................. 33
DIRECTORS & EXECUTIVE OFFICERS ................................ 34
STAFF & BRANCH LOCATIONS ...................................... 35
<PAGE> 2
LETTER TO SHAREHOLDERS
A LETTER TO VRB SHAREHOLDERS, CUSTOMERS & FRIENDS:
1998 was another banner year for VRB, filled with a number of unusual challenges
and contrasts. It is again my pleasure to report the attainment of record growth
and earnings for our company. This was also our 30th consecutive year of
profitability and our 30th year as a community bank in Southern Oregon.
The most significant event during the past twelve months was the assimilation of
Colonial Banking Company ("CBC") by VRB. This was by no means a small task; two
successful cultures have now been blended into one new and stronger company. CBC
came to VRB with $116 million in assets, four traditional banking offices and
its own unique credit culture. It took hard work and dedication by our employees
to put the two banks together. The outcome has been very satisfying and
beneficial, both to the customers we serve, and our loyal shareholders.
Our earnings for 1998 reached $4.9 million, providing a return on equity of
14.58% and a return on average assets of 1.60%. Our earnings increased by 33%
over the previous year. This is a substantial improvement over 1997 and supports
the accretive outcome of the CBC acquisition.
It is important to note that VRB Bancorp has experienced substantial growth over
the past three years. On December 31, 1995, our company had achieved $151.5
million in total assets and approximately $17.5 million in shareholders' equity.
As this report indicates, as of December 31, 1998, VRB had grown to $311.2
million in assets with over $35.2 million in shareholders' equity. While
increasing our market share in the Rogue Valley, we continue to provide our
shareholders with consistent earnings growth over time.
This was also a year where the banking industry was influenced by significant
events abroad. While the economy in the United States seemed strong and
impervious to decline, we saw firsthand how closely tied we all are to global
markets. As countries abroad found themselves unable to meet their international
debt obligations, monetary policy by the Federal Reserve changed and short term
interest rates declined. As a result, interest margins were squeezed and despite
the strong earnings reported by most financial institutions, stock prices fell.
VRB Bancorp was no exception to this event. While reporting our most profitable
year, combined with substantial asset growth and record dividends, our stock
price experienced unusual volatility and declined to lows that contradicted our
current successes. It would appear that even VRB Bancorp's stock price
contracted the Asian flu.
We continue to set very high standards for our company. Through our strategic
planning and goal setting processes, we empower our employees and strive to
improve VRB. We know that the strength of our company depends on the quality of
our people. It is through their continued hard work and commitment that we have
become the largest community bank in Southern Oregon. With 13 traditional
banking offices in Jackson and Josephine counties, we have, in fact, become the
premier community bank in our market. We will strive in 1999 to further improve
our market share and will always look for sensible opportunities to expand.
Watch us grow again in 1999.
Best wishes to all of you in the coming year.
/s/ WILLIAM A. HADEN
William A. Haden
President/CEO
/s/ JAMES D. COLEMAN
James D. Coleman
Chairman
2 VRB BANCORP 1998 ANNUAL REPORT
<PAGE> 3
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share data
Operating results
- ----------------------------------------------------------------------------------------------------------------
Interest income $ 23,912 $ 14,955 $ 13,188 $ 11,973 $ 10,551
Interest expense 7,671 4,062 3,627 2,989 2,196
- ----------------------------------------------------------------------------------------------------------------
Net interest income 16,241 10,893 9,561 8,984 8,355
- ----------------------------------------------------------------------------------------------------------------
Provision for credit losses -- 250 250 -- --
Noninterest income 2,141 1,671 1,370 1,380 1,512
Noninterest expense 10,489 6,873 5,828 6,061 6,022
Income before income taxes 7,893 5,441 4,853 4,303 3,845
Provision for income taxes 2,966 1,737 1,602 1,395 1,335
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $ 4,927 $ 3,704 $ 3,251 $ 2,908 $ 2,510
RETURN ON AVERAGE EQUITY 14.6% 15.6% 17.3% 17.8% 17.7%
- ----------------------------------------------------------------------------------------------------------------
Per share data(1)
- ----------------------------------------------------------------------------------------------------------------
Earnings per common share $ 0.58 $ 0.48 $ 0.44 $ 0.40 $ 0.35
- ----------------------------------------------------------------------------------------------------------------
Diluted earnings per share 0.58 0.48 0.44 0.39 0.35
Dividends declared per common share 0.19 0.13 0.13 0.08 0.07
Ratio of dividends declared to net income 32.8% 27.1% 29.5% 20.0% 20.0%
Balance sheet data at year end
- ----------------------------------------------------------------------------------------------------------------
LOANS $175,188 $115,414 $ 99,776 $ 88,972 $ 88,441
TOTAL ASSETS 311,217 206,654 177,107 151,485 141,537
TOTAL DEPOSITS 274,122 173,176 155,568 132,744 125,472
TOTAL EQUITY 35,235 31,861 20,188 17,470 15,000
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share data has been adjusted to reflect all stock dividends and
stock splits through December 31, 1998.
FORWARD LOOKING STATEMENTS
This report contains certain "forward-looking statements" usually containing the
words "estimate," "project," "goal," "objective," or similar expressions. We
have used forward looking statements to describe future plans and strategies,
including our expectations of VRB's future financial results. Those statements
are subject to uncertainty, in particular in the Letter to Shareholders,
Interest Rate Risk Management and Capital Management on pages 8-10, and Year
2000 on pages 10-11. These uncertainties could cause actual results to differ
materially. Readers are cautioned not to place undue reliance on these forward
looking statements, which speak only as of the date hereof. Readers should also
consider information on risks and uncertainties contained in the discussions of
competition, supervision and regulation, and forward-looking statements in VRB's
most recent report on Form 10-K.
FINANCIAL REVIEW
VRB Bancorp and its subsidiary, Valley of the Rogue Bank (collectively VRB),
operates 13 full service banking offices throughout Southern Oregon's Rogue
Valley. VRB was founded in 1968, and has recognized 30 consecutive years of
profitability. The consolidation of the banking industry in Oregon has had a
positive impact on VRB. While larger regional banks have chosen to de-per-
sonalize their service to customers, VRB continues to maintain personal service
and local decision making believed to be important to future growth.
Effective January 5, 1998, VRB acquired Colonial Banking Company ("CBC"). CBC
was purchased for $15.7 million in cash for all of the outstanding stock of CBC
and its holding company, Investors Banking Corporation. Organized in 1978, CBC
was a state chartered community bank with approximately $116.4 million in total
assets, $107.9 in total deposits, $92.8 million in total loans and $7.1 million
in total equity at the time of acquisition. CBC, now operating under the name
VRB, added four branches to VRB's existing branch structure in the Rogue Valley.
VRB BANCORP 1998 ANNUAL REPORT 3
<PAGE> 4
- --------------------------------------------------------------------------------
PRICE RANGE OF COMMON STOCK
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
High $4.01 $4.24 $5.29 $9.62 $11.78
Low $2.98 $3.93 $4.17 $5.29 $ 7.00
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
STOCK DATA
- ---------------------------------------------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Book value per common share at year end $ 4.05 $ 3.67 $ 2.72
Closing common stock price $ 7.75 $ 9.25 $ 5.29
Number of common shares outstanding (2) 8,694,286 8,674,374 7,435,339
Price to Earnings Ratio 13.4 19.3 12.0
- ---------------------------------------------------------------------------------------------
</TABLE>
(2) Shares outstanding have been adjusted to reflect all stock dividends and
stock splits through December 31, 1998.
In November 1997, VRB completed a common stock offering of 1,150,000 shares of
VRB common stock, raising additional capital of close to $9 million.
Simultaneous to this offering, VRB stock was listed on the Nasdaq Stock
Market(TM), tickler symbol VRBA. Proceeds from the offering were used in
conjunction with the CBC acquisition.
In 1998, VRB Bancorp grew to be the fourth largest community bank in the State
of Oregon(3) and, as of December 31, 1998, had a total market capitalization of
$67 million. At year end 1998, VRB's closing stock price was $7.75.
VRB reported record earnings of $4.9 million for 1998. VRB's earnings increased
$1.2 million, or 33% when compared to $3.7 million in 1997. Diluted earnings per
share was $.58, an increase of 21% from $.48 in 1997.
The increased earnings are the result of strong asset growth in 1998,
principally from the CBC acquisition. Total assets grew 51.2% over the 1997
year, from $206.6 to $311.2 at 1998 year end. Net interest income was $16.2
million in 1998, up $5.3 million from 1997. VRB's net interest margin on a tax
equivalent basis was 6.01% in 1998, a 68 basis point drop from 1997. The decline
in the margin follows the recent declines in the interest rate environment and
the stated rates on loans and deposits acquired from CBC. Noninterest income
increased by $470,000, or 28% over 1997. Fees from VRB's mortgage loan
department increased on attractive mortgage rates and a strong residential
housing market in the Rogue Valley. Noninterest expense increased $3.6 million
with the addition of 39 full time equivalent employees and routine overhead
expenses related to bank expansion.
(3) Based upon total assets reported by the Oregon Department of Consumer
and Business Services, Division of Finance and Corporate Securities, as
of September 30, 1998.
- --------------------------------------------------------------------------------
FULLY DILUTED EARNINGS PER COMMON SHARE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$0.35 $0.40 $0.44 $0.48 $0.58
</TABLE>
4 VRB BANCORP 1998 ANNUAL REPORT
<PAGE> 5
RESULTS OF OPERATIONS
NET INTEREST INCOME
For financial institutions, the primary component of earnings is net interest
income which is the difference between interest income, and interest expense. In
1998, VRB's net interest income grew on a tax equivalent basis to $16.7 million,
a 47% increase from 1997. The increase in net interest income comes primarily
from asset growth, from which VRB recognized additional net interest income of
$5.9 million in 1998, partially offset by the impact of lower interest rates.
In 1998, VRB's net interest margin, which is net interest income divided by
interest earning assets, declined 68 basis points to 6.01%, down from 6.69% in
1997. Although VRB saw interest earning assets grow to $279 million, up 64% from
$170 million in 1997, the interest rate charac-
- --------------------------------------------------------------------------------
NET INTEREST INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dollars in thousands and on a tax equivalent basis
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
$8,647 $9,303 $10,058 $11,380 $16,734
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
CHANGE IN INTEREST INCOME: RATE/VOLUME ANALYSIS
- ----------------------------------------------------------------------------------------------------------
Dollars in thousands 1998 over 1997 1997 over 1996
--------------------------------- ---------------------------------
Increase (decrease) due to Increase (decrease) due to
--------------------------------- ---------------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
- ----------------------------------------------------------------------------------------------------------
Federal funds $ 1,002 $ (12) $ 990 $ 351 $ 21 $ 372
Held to maturity securities (4) 5 1 (46) 16 (30)
Available for sale securities 386 (76) 310 11 82 93
Commercial loans 8,316 (586) 7,730 1,397 (96) 1,301
Consumer loans (120) 46 (74) 152 (131) 21
- ----------------------------------------------------------------------------------------------------------
TOTAL 9,580 (623) 8,957 1,865 (108) 1,757
- ----------------------------------------------------------------------------------------------------------
INTEREST BEARING DEPOSITS
- ----------------------------------------------------------------------------------------------------------
Interest bearing checking 174 (27) 147 6 (11) (5)
Money market 823 (175) 648 426 (11) 415
Savings 193 (7) 186 (36) (3) (39)
Time 2,528 94 2,622 92 (28) 64
- ----------------------------------------------------------------------------------------------------------
TOTAL 3,718 (115) 3,603 488 (53) 435
- ----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
- ----------------------------------------------------------------------------------------------------------
IN NET INTEREST INCOME $ 5,862 $ (508) $ 5,354 $ 1,377 $ (55) $ 1,322
- ----------------------------------------------------------------------------------------------------------
</TABLE>
VRB BANCORP 1998 ANNUAL REPORT 5
<PAGE> 6
teristics of newly acquired assets were heavily influenced by competitive
pricing and declining interest rates. The net portfolio return on loans acquired
from CBC was approximately 70 basis points lower than VRB's then present
average. As such, the total yield on earning assets declined to 8.76%, a 32
basis point change over 1997.
Average deposits grew 69% in 1998, skewed by a large segment of time deposits
acquired from CBC. Time deposits, which previously represented 16% of total
deposits, represented 27% of the total deposit mix at year end. As a result, the
average cost of interest bearing deposits moved from 3.53% to 3.71%.
NONINTEREST INCOME
Noninterest income increased by $470,000 in 1998, a 28% change when compared to
1997. The increase reflects the growth in VRB's retail deposit base, increased
fee generating activities, and other commissions.
Deposit fees, the largest component in noninterest income, increased $275,000 in
1998, reaching $1,295,000 by year end. Noninterest income was further enhanced
by VRB's mortgage processing department. Fees reached $330,000 in 1998, an
increase of 150%, on increased efforts within the local housing market and a
favorable rate environment.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES & AVERAGE RATES EARNED & PAID
- -----------------------------------------------------------------------------------------------------------------
Years ended December 31 1998 1997
--------------------------- -------------------------------
Dollars in thousands Balance Interest Rate Balance Interest Rate
--------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
- -----------------------------------------------------------------------------------------------------------------
Federal funds sold and interest
bearing deposits with other banks $ 38,206 2,053 5.37% $ 19,556 1,063 5.44%
Held to maturity securities 18,432 1,432 7.77 18,480 1,431 7.74
Available for sale securities 28,573 1,814 6.35 22,486 1,504 6.69
Commercial loans 156,049 15,261 9.78 71,016 7,531 10.60
Consumer loans 37,397 3,839 10.27 38,565 3,913 10.15
Total earning assets 278,657 24,399 8.76 170,103 15,442 9.08
- -----------------------------------------------------------------------------------------------------------------
Nonearning assets 33,161 17,056
Less: loan loss reserve & deferred loan fees (4,062) (1,597)
--------- ---------
Total assets $ 307,756 $ 185,562
========= =========
INTEREST BEARING LIABILITIES
- -----------------------------------------------------------------------------------------------------------------
Interest bearing checking 33,188 446 1.34 20,256 299 1.48
Money market 75,519 2,764 3.66 53,036 2,116 3.99
Savings 24,336 523 2.15 15,358 337 2.19
Time 73,627 3,932 5.34 26,285 1,310 4.98
- -----------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 206,670 7,665 3.71 114,935 4,062 3.53
- -----------------------------------------------------------------------------------------------------------------
Noninterest bearing deposits 64,733 45,552
Total deposits 271,403 160,487
Other liabilities 2,571 1,415
Total liabilities 273,974 161,902
Shareholders' equity 33,782 23,660
--------- ---------
Total liabilities and shareholders' equity $ 307,756 $ 185,562
========= =========
Net interest income 16,734 11,380
Interest income as a percentage
of average earning assets 8.76% 9.08%
Interest expense as a percentage
of average earning assets 2.75 2.39
Net interest margin 6.01% 6.69%
---- ----
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AVERAGE BALANCES & AVERAGE RATES EARNED & PAID
- -------------------------------------------------------------------------------
Years ended December 31 1996
-----------------------------
Dollars in thousands Balance Interest Rate
-----------------------------
<S> <C> <C> <C>
INTEREST EARNING ASSETS
- -------------------------------------------------------------------------------
Federal funds sold and interest
bearing deposits with other banks $ 13,102 691 5.27%
Held to maturity securities 19,080 1,461 7.66
Available for sale securities 22,328 1,411 6.32
Commercial loans 57,838 6,230 10.77
Consumer loans 37,069 3,892 10.50
Total earning assets 149,417 13,685 9.16
- -------------------------------------------------------------------------------
Nonearning assets 15,506
Less: loan loss reserve & deferred loan fees (1,397)
---------
Total assets $ 163,526
=========
INTEREST BEARING LIABILITIES
- -------------------------------------------------------------------------------
Interest bearing checking 19,868 304 1.53
Money market 42,370 1,701 4.01
Savings 17,017 376 2.21
Time 24,435 1,246 5.10
- -------------------------------------------------------------------------------
Total interest bearing deposits 103,690 3,627 3.50
- -------------------------------------------------------------------------------
Noninterest bearing deposits 39,836
Total deposits 143,526
Other liabilities 1,168
Total liabilities 144,694
Shareholders' equity 18,832
--------
Total liabilities and shareholders' equity $163,526
========
Net interest income 10,058
Interest income as a percentage
of average earning assets 9.16%
Interest expense as a percentage
of average earning assets 2.43
Net interest margin 6.73%
----
- -------------------------------------------------------------------------------
</TABLE>
6 VRB BANCORP 1998 ANNUAL REPORT
<PAGE> 7
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------
Dollars in thousands
<TABLE>
<CAPTION>
Goodwill Occupancy Other Salaries & Benefits Total
-------- --------- ----- ------------------- -----
<S> <C> <C> <C> <C> <C>
1997 $110 $ 814 $ 1,829 $ 4,120 $ 6,873
1998 $739 $ 1,025 $ 2,740 $ 5,985 $ 10,489
</TABLE>
NONINTEREST EXPENSE
Noninterest expense grew to $10.5 million, a $3.6 million or 52% increase over
1997 when noninterest expense totaled $6.9 million. The increase reflects the
acquisition of CBC, adding four full service branches and one administrative
operating center. This is most evident in salaries and benefits which grew $1.9
million, or 45% in 1998. At the end of 1998, VRB employed 165 full time
equivalent employees, compared to 126 in 1997. Increases in other noninterest
expense were caused by higher operating activity levels associated with growth.
Included within this category are costs associated with VRB's advertising
promotions, which intensified in 1998 in response to overall competitive
pressures.
In 1998, VRB maintained an efficiency margin (noninterest expense divided by net
interest income plus noninterest income) of 57%, up slightly from 56% in 1997.
Excluding goodwill from the measurement, the efficiency margin drops to 53% and
55% for 1998 and 1997, indicating improved efficiencies when comparing the two
periods.
INCOME TAXES
The income tax provision was $3.0 million in 1998, compared to $1.7 in 1997. The
$1.3 million increase reflects VRB's rising profit levels taxed at an effective
tax rate of 38%. The tax provision differs from statutory rates principally due
to nontaxable interest income and nondeductible goodwill amortization acquired
in the purchase of CBC.
For further information concerning the provisions for federal and state income
taxes, refer to Note 8 of the Notes to Consolidated Financial Statements on
pages 22-23.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996.
Net interest income for 1997 was $10.9 million, a 13.9% increase over 1996.
VRB's interest margin remained relatively consistent when comparing the two
periods, with stable interest rates and a slightly different asset mix. VRB
increased the loan loss reserve by $250,000 in 1997 to accommodate a 15%
increase in loans. The provision was similar to past action by management in
1996 when the reserve was increased by an equal amount. Noninterest income
increased in 1997 over 1996 by $300,000, or 21.9%. The increase paralleled the
growth in retail deposit accounts, with noninterest and interest bearing DDA up
17% over 1996. Noninterest expense was $6.9 million in 1997, a 17.9% increase
over 1996. Certain management positions were added in 1997 in preparation of
future growth, shifting full time equivalent employees from 116 employees in
1996, to 126 employees in 1997.
BALANCE SHEET REVIEW
With the acquisition of CBC, total assets grew to $311.2 million, a 51% increase
over 1997. Immediately post acquisition, the combined institution saw increased
balance sheet concentrations in commercial loans and good-
VRB BANCORP 1998 ANNUAL REPORT 7
<PAGE> 8
will. Deposits levels moved initially to reflect CBC's deposit mix which focused
heavily in time certificates of deposit, and other interest bearing accounts.
In the months following, declining interest rates, competitive pressures, and
strict lending renewal strategies reshuffled the balance sheet. In particular,
VRB saw declines in CBC loans that had originated out of VRB's local market. VRB
also received a high volume of early payoffs from new and existing competitors
in the marketplace. Further contributing to changing loan volumes, VRB choose
not to renew certain underperforming credits. In response to changing loan
levels, VRB's investment portfolio grew by $35.1 million, much of which
represented short duration securities.
Pricing strategies on deposits were designed to change VRB's overall deposit
mix. Outflows in certificates of deposit were replaced by inflows of noninterest
and interest bearing demand deposits. Combined, deposit levels remained stable
and VRB's cost of funds improved significantly as the year progressed.
Cash flow requirements arising from shifts in balance sheet categories and other
off-balance-sheet commitments were addressed in 1998 without incurring
additional or unwarranted cost. Available to VRB are several lines of credit
with correspondent financial institutions, as well as short and long-term credit
agreements with the Federal Home Loan Bank of Seattle.
CREDIT MANAGEMENT
Risk of nonpayment exists for all types of loans, with certain types of risk
associated with different loans. VRB's loan portfolio is focused on real estate
related and commercial credits, with 84% of the portfolio collateralized by real
estate. The expected source of repayment on these loans is generally the
operations of the borrowers' business
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
LOAN LOSS EXPERIENCE
- -------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $1,780 $1,632 $1,407 $1,414 $1,453
LOAN LOSSES
- -------------------------------------------------------------------------------------------------------------------------------
Commercial 21 48 29 31 24
Real Estate 95 -- -- -- --
Consumer 73 93 9 14 66
Total 189 141 38 45 90
------ ------ ------ ------ ------
RECOVERIES
- -------------------------------------------------------------------------------------------------------------------------------
Commercial 36 22 10 20 31
Real Estate -- -- -- -- --
Consumer 14 17 3 18 20
Total 50 39 13 38 51
------ ------ ------ ------ ------
Net loan losses 139 102 25 7 39
Provision of loan losses -- 250 250 -- --
Changes incidental to merger 1,898 -- -- -- --
Balance, end of year $3,539 $1,780 $1,632 $1,407 $1,414
------ ------ ------ ------ ------
Loan loss reserve / total loans 1.98% 1.52% 1.61% 1.56% 1.57%
------ ------ ------ ------ ------
Net loan losses / average loans outstanding 0.07% 0.09% 0.03% 0.01% 0.05%
------ ------ ------ ------ ------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8 VRB BANCORP 1998 ANNUAL REPORT
<PAGE> 9
or personal income, with real estate providing additional security. Risks
associated with real estate loans include the current economic climate,
fluctuating real property values, and geographic and industry concentrations.
VRB has established credit policies and guidelines that control and monitor
credit risk on an ongoing basis. Managing credit risk is the responsibility of
all loan officers. Each credit is evaluated as to the likelihood that a borrower
will repay a loan from expected sources. When collateral is involved, this
includes ensuring that sufficient collateral is obtained at the outset, and that
the value of the collateral remains sufficient to support the credit.
At year end, VRB's loan loss reserve was 1.98% of total loans, up 30% over the
prior year. The increase reflects the loan loss reserve balance affixed to those
loans acquired from CBC.
Nonperforming assets include assets that are on nonaccrual status, loans past
due greater than 90 days but not on nonaccrual status, and other real estate
owned (OREO). Nonperforming assets dropped by $55,000 over the prior year, and
have consistently averaged less than a quarter of one percentage point when
compared to total assets over the last five years.
INTEREST RATE RISK MANAGEMENT
Interest rate risk is the risk that changes in market interest rates will have
an adverse impact on VRB's earnings. The greatest source of interest rate risk
results from the mismatch of maturities and repricing intervals for rate
sensitive assets, liabilities and off balance sheet commitments. To further
illustrate, if VRB makes long term fixed rate loans and finances them with
floating-rate deposits, a gap mismatch is created because the repricing period
for loans and deposits are different. If interest rates were to rise in this
scenario, VRB may be obligated to pay more interest on deposits while receiving
the same amount of interest on loans.
VRB measures its interest rate risk using asset/liability simulation modeling
which quantifies variations in net interest income due to gap mismatches and
changes in the rate environment. The analysis incorporates maturity and
repricing characteristics of VRB's current configuration of interest bearing
assets and liabilities. By adjusting interest rates up or down in even
increments of 100 and 200 basis points in a series of "rate shocks," VRB can
develop a range of possible outcomes.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual status $ 262 $ 372 $ 58 $ 53 $ 7
Loans past due greater than 90 days 4 -- 12 48 108
Total nonperforming loans 266 372 70 101 115
------- ------- ------- ------- -------
Other real estate owned 51 -- -- -- --
Total nonperforming assets $ 317 $ 372 $ 70 $ 101 $ 115
------- ------- ------- ------- -------
Allowance for loan losses / nonperforming loans 1330% 477% 2331% 1393% 1230%
------- ------- ------- ------- -------
Nonperforming loans / total loans 0.15% 0.32% 0.06% 0.11% 0.13%
------- ------- ------- ------- -------
Nonperforming assets / total assets 0.10% 0.18% 0.04% 0.07% 0.08%
------- ------- ------- ------- -------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
VRB BANCORP 1998 ANNUAL REPORT 9
<PAGE> 10
The table below sets forth the estimated changes in VRB's net interest income
over a 12 month period under the scenarios set forth.
<TABLE>
<CAPTION>
- -------------------------------------------------------
Rate Shock Scenario Estimated pre tax change
(Basis points) in net interest income
Dollars in thousands
- -------------------------------------------------------
<S> <C> <C>
+200 $ 269 1.65%
+100 135 0.83
0 -- --
- -100 (659) 4.05
- -200 (1,319) 8.12
- -------------------------------------------------------
</TABLE>
Certain shortcomings are inherent in the above analysis. Broad assumptions have
been made regarding customer behavior in periods of changing interest rates,
including the prepayment characteristics of loans and the repricing and
withdrawal of deposits. Additionally, certain assets, such as adjustable rate
loans have features which restrict changes in interest rates. The interest rate
sensitivity of VRB's net interest income could vary significantly if different
assumptions were used, or if actual experience differs from the assumptions
used.
CAPITAL MANAGEMENT
At December 31, 1998, shareholders' equity was $35.2 million, a $3.4 million
increase over the prior year. The Board of Directors approved a $.19 (4) per
share cash dividend for shareholders of record on September 10, 1998. Also in
1998, VRB announced a 4% stock dividend issued October 1, 1998. As a result of
the dividend, $3.0 million was reclassified from retained earnings to common
stock and 334,132 additional shares were issued. All references within this
report to the number of common shares and common share amounts have been
restated to reflect the stock dividend.
VRB and its wholly owned subsidiary, Valley of the Rogue Bank, are subject to
risk-based capital guidelines. Bank regulatory authorities use these guidelines
to evaluate capital adequacy based upon an institution's asset risk profile and
off balance sheet exposures, such as unused loan commitments, and standby
letters of credit. Institutions are required to maintain a minimum 8 percent
total risk-based capital ratio (the ratio of total capital divided by
risk-weighted assets), and a Tier 1 capital ratio of at least 4 percent. In
addition, institutions are also required to exceed a minimum 4% leverage ratio,
which is Tier 1 capital divided by total average assets. At December 31, 1998,
VRB maintained capital ratios well above regulatory levels. See Note 18 of the
Notes to Consolidated Statements on page 18 for further discussion.
YEAR 2000
The year 2000 issue results from computer programs being written using two
digits rather than four to define the applicable year. Computer programs, at VRB
and elsewhere, with time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalcula-
- --------------------------------------------------------------------------------
DIVIDENDS DECLARED PER COMMON SHARE*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$0.07 $0.08 $0.13 $0.13 $0.19
</TABLE>
10 VRB BANCORP 1998 ANNUAL REPORT
<PAGE> 11
tion causing disruptions of operations, including, among other things, a
temporary inability to process transactions or engage in other normal business
activities.
To address the Year 2000, VRB has developed an action plan to evaluate the risks
and implement appropriate remediation and contingency plans. The action plan
meets established timelines and key milestones outlined in interagency
statements and workprograms issued by the Federal Financial Institutions
Examination Council.
All information technology supported systems and products have been identified
and evaluated. Integrated testing and validation of VRB's critical data
processing systems was completed in December 1998 using a certified test model.
Testing of various other stand alone systems is presently ongoing. Previously
scheduled replacement and improvement of VRB's existing data processing and
communication systems are not expected to be affected by the Year 2000 problem.
To address issues arising from noninformation technology supported systems or
embedded chips, VRB has sought confirmation from critical outside vendors of
their present or intended Year 2000 compliance. There can be no guarantee,
however, that such vendors will be prepared for Year 2000, and that their Year
2000 problems will not have an adverse effect on VRB's business operations.
VRB is currently drafting a contingency plan, in the event that its business
operations are materially impacted by Year 2000. The contingency plan includes
sections on liquidity, back up power capacity, and system failure due to factors
beyond our control.
VRB's credit risk associated with its borrowers may increase as a result of
their individual Year 2000 issues. Current underwriting procedures have been
modified to include Year 2000 inquiries. In addition, large credit customers
have been contacted to build Year 2000 awareness and encourage early solutions
regarding potential business disruption due to system failures. Regardless, VRB
recognizes that there may be an increase in problem loans and credit losses in
future years. However, it is not possible to quantify the potential impact of
such situations at this time.
In 1998, VRB spent approximately $18,650 in direct costs for Year 2000
compliance. VRB expects to spend an additional $92,000 to complete its
remediation efforts which includes the early upgrade of VRB's customer telephone
account access system and the purchase of a propane powered generator. These
costs and the dates on which VRB plans to complete their Year 2000 modification
and testing processes are management's best estimates. Actual events are
dependent on the continued availability of certain resources, third party
modification plans and other factors.
- --------------------------------------------------------------------------------
YEAR 2000 WORKPROGRAM
- --------------------------------------------------------------------------------
[GRAPH]
VRB BANCORP 1998 ANNUAL REPORT 11
<PAGE> 12
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------------
Years ended December 31 1998 1997
------------ ------------
<S> <C> <C>
Cash and due from banks $ 14,513,570 $ 11,144,289
Interest-bearing deposits with other banks 3,100,000 10,000,000
Federal funds sold 23,000,000 22,500,000
------------ ------------
Total cash and cash equivalents 40,613,570 43,644,289
------------ ------------
Held-to-maturity securities
State and municipal subdivisions 17,454,188 18,415,049
Available-for-sale securities
U.S. Treasuries and agencies 57,070,000 20,074,686
Collateralized mortgage obligations and other investments 193,631 1,108,163
------------ ------------
Total available-for-sale securities 57,263,631 21,182,849
------------ ------------
Federal Home Loan Bank stock 1,765,220 1,208,000
Loans, net of allowance for loan losses and unearned income 175,188,200 115,413,898
Premises and equipment, net 6,499,131 4,411,372
Goodwill 9,511,831 740,745
Other real estate owned 51,161 --
Accrued interest and other assets 2,870,121 1,637,444
------------ ------------
Total assets $311,217,053 $206,653,646
------------ ------------
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------
Years ended December 31 1998 1997
------------ ------------
Deposits
Demand deposits $ 72,134,186 $ 49,998,132
Interest-bearing demand deposits 110,900,199 80,334,130
Savings deposits 24,269,197 15,308,820
Time deposits 66,818,719 27,535,264
------------ ------------
Total deposits 274,122,301 173,176,346
------------ ------------
Accrued interest and other liabilities 1,859,297 1,616,745
------------ ------------
Total liabilities 275,981,598 174,793,091
------------ ------------
Commitments and contingencies (Note 12)
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, 30,000,000 shares authorized
(20,000,000 in 1997) with 8,694,286 and 8,340,744 issued
and outstanding at December 31, 1998 and 1997, respectively 21,583,869 18,462,712
Retained earnings 13,590,957 13,349,301
Accumulated other comprehensive income, net of taxes 60,629 48,542
------------ ------------
Total shareholders' equity 35,235,455 31,860,555
------------ ------------
Total liabilities and shareholders' equity $311,217,053 $206,653,646
------------ ------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
12 VRB BANCORP 1998 ANNUAL REPORT
<PAGE> 13
CONSOLIDATED STATEMENTS OF
INCOME & COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Years ended December 31 1998 1997 1996
------------ ----------- -----------
INTEREST INCOME
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and fees on loans $19,099,960 $11,443,683 $10,122,237
Interest on investment securities held-to-maturity:
State and municipal subdivisions 945,018 944,226 964,043
Interest on investment securities available-for-sale:
U.S. Treasuries and agencies 1,648,543 1,336,882 1,229,046
Collateralized mortgage obligations and other investments 27,624 78,310 98,314
Federal Home Loan Bank stock dividends 137,720 88,500 83,300
Federal funds sold 1,537,913 655,746 691,092
Interest on deposits in banks 514,895 407,337 --
----------- ----------- -----------
Total interest income 23,911,673 14,954,684 13,188,032
----------- ----------- -----------
INTEREST EXPENSE
- -----------------------------------------------------------------------------------------------------------------------
Interest-bearing demand deposits 3,210,401 2,414,951 1,990,377
Savings deposits 523,341 336,830 376,290
Time deposits 3,932,290 1,309,999 1,260,728
Other borrowings 4,490 -- --
----------- ----------- -----------
Total interest expense 7,670,522 4,061,780 3,627,395
----------- ----------- -----------
Net interest income 16,241,151 10,892,904 9,560,637
----------- ----------- -----------
Provision for loan losses -- 250,000 250,000
Net interest income after provision for loan losses 16,241,151 10,642,904 9,310,637
NONINTEREST INCOME
- -----------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts 1,294,878 1,019,786 978,739
Other operating income 846,102 650,853 391,896
----------- ----------- -----------
Total noninterest income 2,140,980 1,670,639 1,370,635
----------- ----------- -----------
NONINTEREST EXPENSES
- -----------------------------------------------------------------------------------------------------------------------
Salaries and benefits 5,984,912 4,120,469 3,692,594
Net occupancy 1,024,860 813,915 629,642
Amortization of goodwill 739,616 110,297 110,299
Communications 386,461 239,721 226,390
Data processing 306,499 181,460 147,844
FDIC insurance premium 47,270 18,201 2,000
Supplies 289,675 230,255 170,948
Professional fees 266,446 180,658 143,817
Other real estate expense 25,486 -- --
Other expenses 1,418,223 977,946 704,468
----------- ----------- -----------
Total noninterest expenses 10,489,448 6,872,924 5,828,002
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 7,892,683 5,440,619 4,853,270
----------- ----------- -----------
PROVISION FOR INCOME TAXES 2,966,000 1,737,000 1,602,000
----------- ----------- -----------
NET INCOME 4,926,683 3,703,619 3,251,270
----------- ----------- -----------
OTHER COMPREHENSIVE INCOME
Unrealized gain (loss) on securities, net of taxes
Unrealized holding gain (loss) arising during period 12,087 (2,964) 26,170
Reclassification adjustment for (gain) loss included in net income -- (4,283) --
Other comprehensive income 12,087 (7,247) 26,170
----------- ----------- -----------
COMPREHENSIVE INCOME $ 4,938,770 $ 3,696,372 $ 3,277,440
----------- ----------- -----------
BASIC EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $ 0.58 $ 0.48 $ 0.44
DILUTED EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $ 0.58 $ 0.48 $ 0.44
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
VRB BANCORP 1998 ANNUAL REPORT 13
<PAGE> 14
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER TOTAL
COMMON STOCK RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT EARNINGS INCOME EQUITY
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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 ($.40 per share,
paid November 20, 1996) -- -- (953,280) -- (953,280)
3 for 2 stock split (November 20, 1996) 1,191,483 -- -- -- --
Payments for fractional shares related
to stock split -- -- (1,088) -- (1,088)
--------- ------------ ------------ ------------ ------------
Net income and comprehensive income -- -- 3,251,270 26,170 3,277,440
--------- ------------ ------------ ------------ ------------
BALANCE, December 31, 1996 3,574,682 9,480,330 10,652,015 55,789 20,188,134
--------- ------------ ------------ ------------ ------------
Stock options exercised
(February to August 1997) 17,475 85,230 -- -- 85,230
2 for 1 stock split (September 10, 1997) 3,592,157 -- -- -- --
Stock options exercised
(September to October 1997) 6,430 26,152 -- -- 26,152
Income tax benefit from stock
options exercised -- 86,896 -- -- 86,896
Cash dividend ($.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 and comprehensive income -- -- 3,703,619 (7,247) 3,696,372
--------- ------------ ------------ ------------ ------------
BALANCE, December 31, 1997 8,340,744 18,462,712 13,349,301 48,542 31,860,555
--------- ------------ ------------ ------------ ------------
Stock options exercised
(March to September 1998) 19,410 50,128 -- -- 50,128
Income tax benefit from stock
options exercised -- 60,500 -- -- 60,500
Cash dividend ($.20 per share,
paid October 1, 1998) -- -- (1,672,031) -- (1,672,031)
4% stock dividend (October 1, 1998) 334,132 3,010,529 (3,010,529) -- --
Payments for fractional shares
related to stock dividend -- -- (2,467) -- (2,467)
--------- ------------ ------------ ------------ ------------
Net income and comprehensive income -- -- 4,926,683 12,087 4,938,770
--------- ------------ ------------ ------------ ------------
BALANCE, December 31, 1998 8,694,286 $ 21,583,869 $ 13,590,957 $ 60,629 $ 35,235,455
--------- ------------ ------------ ------------ ------------
See accompanying notes.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14 VRB BANCORP 1998 ANNUAL REPORT
<PAGE> 15
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Years ended December 31 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,926,683 $ 3,703,619 $ 3,251,270
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 1,134,242 392,547 432,815
Loss (gain) on sales of assets (18,931) (8,429) 1,493
Provision for loan losses -- 250,000 250,000
FHLB stock dividend (137,720) (88,500) (83,300)
Deferred taxes 89,269 22,684 6,451
Compensation expense - stock options 13,611 23,314 --
Change in cash due to changes in certain assets and liabilities
Net change in accrued interest and other assets 410,555 215,220 (226,911)
Net change in accrued interest and other liabilities (1,212,884) 357,298 125,871
------------ ------------ ------------
Net cash from operating activities 5,204,825 4,867,753 3,757,689
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------
Proceeds from the maturity of held-to-maturity securities 3,425,000 215,000 5,390,000
Purchases of held-to-maturity securities (2,371,411) -- (8,204,586)
Proceeds from maturity of available-for-sale securities -- 446,971 6,118,455
Proceeds from sales of available-for-sale securities 33,611,023 3,008,437 --
Purchases of available-for-sale securities (64,980,969) (3,000,000) (6,490,627)
Net (increase) decrease in loans 31,608,420 (15,888,096) (11,053,321)
Cash paid, net of cash acquired from acquisition (1,644,499) -- --
Sale of credit card portfolio obtained in acquisition 939,583 -- --
Purchase of premises and equipment (675,541) (699,013) (513,479)
Proceeds from the sale of other real estate 420,850 -- --
Sale of premises and equipment -- 2,600 --
------------ ------------ ------------
Net cash from investing activities 332,456 (15,914,101) (14,753,558)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in deposits (6,930,019) 17,607,889 22,823,910
Proceeds from public stock offering, net of expenses -- 8,784,104 --
Cash dividends and fractional share payments (1,674,498) (1,006,333) (954,368)
Cash received from exercise of common stock options 36,517 88,068 243,616
------------ ------------ ------------
Net cash from financing activities (8,568,000) 25,473,728 22,113,158
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,030,719) 14,427,380 11,117,289
CASH AND CASH EQUIVALENTS, beginning of year 43,644,289 29,216,909 18,099,620
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 40,613,570 $ 43,644,289 $ 29,216,909
------------ ------------ ------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------
Cash paid for interest $ 7,464,255 $ 4,048,741 $ 3,635,185
Cash paid for taxes 2,805,000 1,320,994 1,607,300
SCHEDULE OF NONCASH ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------
Stock dividends declared $ 3,010,529 $ -- $ --
Transfer of loan balances to other real estate 453,079 -- --
Unrealized gain (loss) on available-for-sale securities, net of tax 12,087 (7,247) 26,170
Income tax benefit of stock options exercised 60,500 86,896 91,263
See accompanying notes
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
VRB BANCORP 1998 ANNUAL REPORT 15
<PAGE> 16
NOTES TO CONSOLIDATED STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation - 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 is conducted through its subsidiary bank and all significant
intercompany accounts and transactions have been eliminated in the preparation
of the consolidated financial statements.
Description of business - 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,
1998 and 1997, 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
16 VRB BANCORP 1998 ANNUAL REPORT
<PAGE> 17
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay. Various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
reserve for loan losses. Such agencies may require the Bank to recognize
additions to the reserve based on their judgment of information available to
them at the time of their examinations.
Loans receivable that will not be repaid in accordance with their contractual
and terms are measured using a discounted cash flow methodology or the fair
value of the collateral for certain loans. 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 - Real estate acquired by the Bank in satisfaction of debt 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 allowance 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.
Goodwill - Goodwill represents the costs in excess of net assets acquired
arising from the purchase of Colonial Banking Company (see Note 2), and is being
amortized over 15 years.
Income taxes - Deferred income tax assets and liabilities are determined based
on the tax effects of the differences between the book and tax bases of the
various balance sheet assets and liabilities. 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.
VRB BANCORP 1998 ANNUAL REPORT 17
<PAGE> 18
Fair value of financial instruments - The following methods and assumptions were
used by the Bank in estimating fair values of financial instruments as disclosed
herein:
Cash and cash equivalents - The carrying amounts of cash and short-term
instruments approximate their fair value.
Held-to-maturity and available-for-sale securities - Fair values for investment
securities, excluding restricted equity securities, are based on quoted market
prices. The carrying values of restricted equity securities approximate fair
values.
Loans receivable - For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying values.
Fair values for certain mortgage loans (for example, one-to-four family
residential), credit card loans, and other consumer loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. Fair values for
commercial real estate and commercial loans are estimated using discounted cash
flow analysis, 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 - Effective December 31, 1995, VRB adopted the disclosure
requirements of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," but has determined that it will
continue to measure its director and employee stock-based compensation
arrangements under the provisions of Accounting Principles Board (APB) Opinion
No. 25.
VRB BANCORP 1998 ANNUAL REPORT 18
<PAGE> 19
Recently issued accounting standards - In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130 "Reporting Comprehensive Income."
This statement establishes standards for reporting comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of financial
statements. This Statement requires that VRB recognize the unrealized gain or
loss on available-for-sale securities as a component of comprehensive income.
This Statement is effective for the year ended December 31, 1998.
Other issued but not yet required FASB statements are not currently applicable
to the Bank's operations. Management believes these pronouncements will have no
material effect upon VRB's financial position or results of operation.
Reclassifications - Certain reclassifications have been made to the 1997 and
1996 consolidated financial statements to conform with current year
presentations.
NOTE 2: ACQUISITION OF COLONIAL BANKING COMPANY
VRB Bancorp completed its acquisition of Colonial Banking Company (CBC)
effective January 5, 1998. VRB paid former stockholders of CBC $15.7 million in
cash for the common and preferred stock of CBC. This acquisition was treated as
a purchase for accounting purposes. Accordingly, under generally accepted
accounting principles, the assets and liabilities of CBC have been recorded on
the books of the Bank at their respective fair market values at the effective
date the acquisition was consummated. Goodwill, the excess of the purchase price
(cost) over the net fair value of the assets and liabilities acquired, was
recorded at $9.5 million. Amortization of goodwill over a 15-year period will
result in a charge to earnings of approximately $635,000 per year. The following
are the fair values of assets acquired and liabilities assumed as of the January
5, 1998, acquisition date (in thousands).
<TABLE>
<S> <C>
- --------------------------------------------------------------
Investment securities $ 4,797
Federal Home Loan Bank stock 420
Loans, net 92,775
Premises and equipment, net 1,802
Goodwill 9,526
Accrued interest and other assets 1,710
Total assets $111,030
--------
Deposits $107,876
Accrued interest and other liabilities 1,510
Cash paid for acquisition, net of cash acquired 1,644
Total liabilities $111,030
--------
- --------------------------------------------------------------
</TABLE>
The financial statements for the year ended December 31, 1998, include the
operations of CBC from January 6, 1998 to December 31, 1998. Actual results of
operations for the year ended December 31, 1998, would not have been materially
different had the acquisition occurred on January 1, 1998. The following
information presents the pro forma results of operations for the years ended
December 31, 1997 and 1996, as though the acquisition had occurred on January 1,
1996. The pro forma results do not necessarily indicate the actual result that
would have been obtained nor are they necessarily indicative of the future
operations of the combined companies.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
PRO FORMA RESULTS OF OPERATION
- -----------------------------------------------------------------------------------------------------
ACTUAL UNAUDITED PRO FORMA
---------- ---------------------------
Years ended December 31 1998 1997 1996
<S> <C> <C> <C>
Dollars in thousands, except per share amounts
Net interest income before provision for loan loss $ 16,241 $ 16,404 $ 12,752
Net income 4,927 3,713 3,094
Earnings per common share:
Basic 0.58 0.51 0.44
Diluted 0.58 0.50 0.43
</TABLE>
VRB BANCORP 1998 ANNUAL REPORT 19
<PAGE> 20
NOTE 3: INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities at
December 31, 1998 and 1997, are as follows (in thousands).
The amortized cost and estimated market value of investment securities at
December 31, 1998, 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 prepayment
penalties.
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 prepayments.
At December 31, 1998 and 1997, investment securities with an amortized cost of
$8,168,284 and $5,186,574, 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
December 31, 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity securities:
State and municipal subdivisions $ 17,454 $ 793 $ -- $ 18,247
-------- -------- -------- --------
Available-for-sale securities:
U.S. Treasuries and agencies $ 56,977 $ 177 $ (84) $ 57,070
Collateralized mortgage obligations 195 -- (1) 194
$ 57,172 $ 177 $ (85) $ 57,264
-------- -------- -------- --------
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
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
MATURITY TABLE
- ------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES AVAILABLE-FOR-SALE SECURITIES
--------------------------- -----------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $ 75 $ 76 $ 133 $ 132
Due after one year through five years 3,999 4,132 27,039 27,101
Due after five years through ten years 2,350 2,480 30,000 30,031
Due after ten years 11,030 11,559 -- --
$ 17,454 $ 18,247 $ 57,172 $ 57,264
-------- -------- -------- --------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
20 VRB BANCORP 1998 ANNUAL REPORT
<PAGE> 21
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES
Impairment of loans having recorded investments of $262,456 and $371,820 at
December 31, 1998 and 1997, respectively, has been recognized in conformity with
SFAS No. 114, as amended by SFAS No. 118. The average recorded investment in
impaired loans approximates their recorded investment at December 31, 1998 and
1997. The total allowance for loan losses related to these loans at December 31,
1998 and 1997 was approximately $42,000 and $65,000, respectively. Interest
income recognized on impaired loans during the years ended December 31, 1998,
1997, and 1996, was not significant. Management estimates that in 1998,
approximately $35,300 of interest income was not recognized on impaired loans on
nonaccrual status, compared with approximately $29,600 in 1997 and $3,800 in
1996.
The loan portfolio consisted of the following (in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Real estate - construction $ 23,552 $ 15,476
Real estate - residential and commercial 126,332 77,049
Commercial 16,418 12,720
Installment 12,327 11,850
Other loans 98 99
178,727 117,194
Allowance for loan losses (3,539) (1,780)
$ 175,188 $ 115,414
----------- -----------
- ---------------------------------------------------------------------------
</TABLE>
The following is an analysis of the changes in the allowance for loan losses (in
thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Beginning balance $ 1,780 $ 1,632 $ 1,407
Acquired with CBC 1,898 -- --
Provision for possible loan losses -- 250 250
Loans changed off (189) (141) (38)
Recoveries 50 39 13
Ending balance $ 3,539 $ 1,780 $ 1,632
---------- ---------- ----------
- ---------------------------------------------------------------------------------
</TABLE>
NOTE 5: BANK PREMISES AND EQUIPMENT
Bank premises, furniture, and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Land $ 1,613 $ 1,323
---------- ----------
Buildings 5,375 3,248
Furniture and equipment 4,136 3,035
11,124 7,606
Less: accumulated depreciation (4,625) (3,195)
$ 6,499 $ 4,411
---------- ----------
- ---------------------------------------------------------------
</TABLE>
NOTE 6: ACCRUED INTEREST AND OTHER ASSETS
Accrued interest and other assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------
1998 1997
-------- --------
<S> <C> <C>
Accrued interest receivable $ 1,931 $ 1,240
Prepaid expenses 234 137
Deferred taxes 553 104
Intangible and other assets 152 156
$ 2,870 $ 1,637
-------- --------
- -------------------------------------------------------
</TABLE>
NOTE 7: TIME DEPOSITS
Time certificates of deposit of $100,000 and over aggregated $8,089,537 and
$5,258,874 at December 31, 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities for time deposits is as follows
(in thousands):
<TABLE>
- ------------------------------------------------
<S> <C> <C>
Year 1999 $ 55,766
2000 8,018
2001 1,751
2002 1,022
2003 and thereafter 262
$ 66,819
--------
- ------------------------------------------------
</TABLE>
VRB BANCORP 1998 ANNUAL REPORT 21
<PAGE> 22
NOTE 8: INCOME TAXES
The income tax provision consisted of the following (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Currently payable $ 2,877 $ 1,715 $ 1,596
Deferred 89 22 6
Provision for income taxes $ 2,966 $ 1,737 $ 1,602
-------- -------- --------
- -------------------------------------------------------------------
</TABLE>
The net deferred tax benefits included in other assets in the accompanying
consolidated balance sheets include the following components (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1998 1997
DEFERRED TAX ASSETS:
- --------------------------------------------------------------------
<S> <C> <C>
Loan loss reserve $ 1,076 $ 392
Deferred compensation 100 88
Other 86 25
1,262 505
-------- --------
DEFERRED TAX LIABILITIES
- --------------------------------------------------------------------
Accumulated depreciation (151) (100)
Deferred loan fees (365) (225)
Federal home loan bank stock dividends (193) (76)
(709) (401)
Net deferred tax asset $ 553 $ 104
-------- --------
- --------------------------------------------------------------------
</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 shown at bottom (in thousands):
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 APB 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, 1998 and 1997, these transactions
resulted in federal and state tax deductions and benefits which have increased
common stock.
Management believes, based upon the Bank's historical performance, that 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 tax exemptions for interest received on municipal investments and
nondeductible goodwill expense amortization. The 1997 provision for income taxes
reflects a reduction in the state income tax rate from 6.6% to 3.8%.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Accounting loan loss provision less than (in excess of) tax provision $ 69 $ (58) $ (100)
Accounting depreciation less than tax depreciation 46 3 19
Deferred compensation 9 (6) (8)
Accounting loan fees in excess of tax loan fees 67 66 56
Federal Home Loan Bank stock dividends 52 28 24
Cash to accrual adjustment (72) -- --
Option compensation expense (72) -- --
Other differences (10) (11) 15
$ 89 $ 22 $ 6
------- ------- -------
</TABLE>
22 VRB BANCORP 1998 ANNUAL REPORT
<PAGE> 23
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TAX RATE
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 2,684 $ 1,850 $ 1,650
State income tax expense, net of federal income tax benefit 344 237 211
Effect of nontaxable interest income (321) (294) (298)
Non-deductible goodwill 219 -- --
Other 40 (56) 39
$ 2,966 $ 1,737 $ 1,602
------- ------- -------
Effective tax rate 38% 32% 33%
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation between the statutory federal income tax rate and the effective
tax rate is as shown above (in thousands).
NOTE 9: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit and financial guarantees. Those instruments involve elements
of credit and interest-rate risk similar to the amounts recognized in the
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 non-performance 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 varies but may
include cash, accounts receivable, inventory, premises and equipment, and
income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third-party. These guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank holds cash, marketable securities, or real estate as collateral
supporting those commitments for which collateral is deemed necessary.
VRB BANCORP 1998 ANNUAL REPORT 23
<PAGE> 24
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 1998, 1997, or 1996.
A summary of the notional amounts of the Bank's financial instruments with
off-balance-sheet risk at December 31, 1998 and 1997, follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Commitments to extend credit $21,165,221 $22,106,031
Commercial and standby letters of credit $ 1,090,009 $ 630,611
- ----------------------------------------------------------------------------
</TABLE>
NOTE 10: 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>
- ------------------------------------------------------------------------------------------------------------------------
FAIR VALUES
- ------------------------------------------------------------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
- ------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 17,614 $ 17,614 $ 21,144 $ 21,144
Federal funds sold 23,000 23,000 22,500 22,500
Securities held-to-maturity 17,454 18,247 18,415 19,024
Securities available-for-sale 57,264 57,264 21,183 21,183
Federal Home Loan Bank stock 1,765 1,765 1,208 1,208
Loans, net of allowance for loan losses 175,188 175,233 115,414 112,722
Accrued interest 1,931 1,931 1,240 1,240
FINANCIAL LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------
Demand and savings deposits $ 207,304 $ 207,304 $ 145,641 $ 145,641
Time deposits 66,819 67,196 27,535 26,937
Accrued interest 348 348 142 142
- ------------------------------------------------------------------------------------------------------------------------
</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, 1998 and 1997, 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,
1998 and 1997, 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.
24 VRB BANCORP 1998 ANNUAL REPORT
<PAGE> 25
NOTE 11: 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 4. The distribution of commitments to extend credit
approximates the distribution of loans outstanding. Commercial and standby
letters of credit were granted primarily to commercial borrowers as of December
31, 1998. 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 $1,250,000
without approval from the Board of Directors.
NOTE 12: COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Bank becomes involved in various
litigation arising from normal banking activities. In the opinion of management,
the ultimate disposition of these actions will not have a material adverse
effect on the consolidated financial position or results of operations.
Operating leases - 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, 1998:
<TABLE>
<CAPTION>
- -------------------------------------------------
Years ending December 31
<S> <C>
1999 $ 216,759
2000 187,754
2001 167,792
2002 164,826
2003 104,348
Thereafter 373,018
Total minimum payments required $1,214,497
----------
- -------------------------------------------------
</TABLE>
Total rental expense was $226,920, $94,350, and $94,413 in 1998, 1997, and 1996,
respectively.
Year 2000 compliance - The "Year 2000" (Y2K) issue is the result of older
computer programs being written using two digits rather than four to define the
applicable year. A computer program that has date-sensitive software may
recognize a date using "00" as the year 1900 rather than the Year 2000. This
could result in a system failure or miscalculations causing disruption of
operations including, among other things, a temporary inability to process
transactions, send statements, or engage in similar normal business activities.
Based on an assessment of computer hardware, software, and other equipment, the
Bank presently believes that all equipment and programs should be Y2K compliant
by December 31, 1999. A program for addressing the Y2K issue through awareness,
assessment, renovation and testing has been developed and implemented. The costs
of implementing and completing the program's phases have not been of a material
nature and should continue to be minimal through program completion.
The Bank has initiated formal communications with all significant suppliers to
determine the extent to which they are vulnerable to those third parties'
failures to remedy their own Y2K impact issues. Third-party responses have
indicated satisfactory progress in addressing any needs for equipment or
software renovation. The Bank's large customers are also being contacted to
build Y2K awareness and encourage early solutions regarding potential business
disruption due to processing failures. There can be no guarantee that the
systems of other companies on which the Bank's systems rely will be timely
converted, or that a failure to convert by another company, or a conversion that
is incompatible with the Bank's systems, would not have a material adverse
effect on the Bank. However, the Bank will test for the Y2K preparedness of all
internal functions and external functions provided by third parties whenever
possible.
VRB BANCORP 1998 ANNUAL REPORT 25
<PAGE> 26
NOTE 13: BORROWING AGREEMENTS
The Bank has federal fund 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, 1998, 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 5% of total assets (approximately $15 million at December 31,
1998) with interest at the FHLB's cash management rate. There were no borrowings
outstanding at December 31, 1998.
NOTE 14: 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 754,514
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
$93,340, $57,312, and $44,564 as compensation expense relating to 16,851,
18,790, and 21,262 shares of common stock optioned to its directors during 1998,
1997, and 1996, respectively.
The chart, on the next page, summarizes options available and outstanding under
both the Directors' and Employees' Plans as of December 31, 1998, after the
effect of the current year's stock dividend (in thousands with the exception of
the exercise price).
Had compensation cost for the Bank's 1998 and 1997 grants for stock-based
compensation plans been determined consistent with the fair value provisions of
SFAS No. 123, the Bank's net income, and net income per common share for
December 31, 1998 and 1997, would approximate the pro forma amounts below (in
thousands except per share data):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1998
-------------------------------
AS REPORTED PRO FORMA
<S> <C> <C>
Net income $ 4,927 $ 4,735
Basic earnings per common and
common equivalent share $ 0.58 $ 0.56
Diluted earnings per common and
common equivalent share $ 0.58 $ 0.56
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------
AS REPORTED PRO FORMA
<S> <C> <C>
Net income $ 3,704 $ 3,497
Basic earnings per common and
common equivalent share $ 0.48 $ 0.46
Diluted earnings per common and
common equivalent share $ 0.48 $ 0.46
- -------------------------------------------------------------------------
</TABLE>
The fair value of options granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: (1) dividend
yields of 5.75% in 1998 and 1.52% in 1997, (2) expected volatility of 18.35% in
1998 and 28% in 1997, (3) risk-free rates of 4.75% in 1998 and 6.5% in 1997;
and, (4) expected life of one 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.
26 VRB BANCORP 1998 ANNUAL REPORT
<PAGE> 27
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
OPTIONS
- --------------------------------------------------------------------------------------------------------------------------
DIRECTORS' PLAN EMPLOYEES' PLAN COMBINED PLANS
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES OPTION PRICE SHARES OPTION PRICE SHARES
------ --------------- ------ --------------- --------------
<S> <C> <C> <C> <C> <C>
Options outstanding at December 31, 1995 58 $ 1.73 250 $ 2.00 308
Options granted in 1996 23 2.40 -- -- 23
Options exercised in 1996 (44) 2.11 (112) 1.64 (156)
Options forfeited -- -- (15) 3.25 (15)
Options outstanding at December 31, 1996 37 $ 1.75 123 $ 2.78 160
------ ---------- ------ ---------- ------
Options exercisable at December 31, 1996 37 1.75 35 1.62 72
Options reserved at December 31, 1996 165 197 362
Options outstanding at December 31, 1996 37 1.75 123 2.78 160
Options granted in 1997 19 2.72 147 8.59 166
Options exercised in 1997 (9) 2.46 (33) 1.93 (42)
Options forfeited -- -- (5) 3.47 (5)
Options outstanding at December 31, 1997 47 $ 2.01 232 $ 5.81 279
------ ---------- ------ ---------- ------
Options exercisable at December 31, 1997 47 2.01 14 1.96 61
Options reserved at December 31, 1997 145 56 201
Options outstanding at December 31, 1997 47 2.01 232 5.81 279
Options granted in 1998 17 3.67 18 10.62 35
Options exercised in 1998 (13) 1.89 (8) 1.67 (21)
Options forfeited -- -- (5) 8.14 (5)
Options outstanding at December 31, 1998 51 $ 2.58 237 $ 6.28 288
------ ---------- ------ ---------- ------
Options exercisable at December 31, 1998 51 2.58 40 5.40 91
Options reserved at December 31, 1998 128 43 171
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 15: 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 $313,562, $168,557, and $162,210 in 1998, 1997, and 1996, respectively,
excluding additional amounts set aside for funding through the Bank's bonus
program. Voluntary employee contributions are required to share in Bank
contributions. Employee contributions were $226,381, $189,640, and $185,861 in
1998, 1997, and 1996, respectively.
The Bank has established a bonus program as part of the compensation package it
provides to employees. At December 31, 1998, the Bank employed approximately 190
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 preceeding year. An executive bonus program is similarly
funded and based on current year profits with payments measured on the basis of
return on assets. For the years ending December 31, 1998, 1997, and 1996,
$620,000, $542,400, and $510,000, respectively, was expensed to fund these
programs with their related payroll and benefit costs.
The Bank has also established supplemental retirement agreements with certain
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, 1998, a
liability for the supplemental retirement plans was recognized and funded in the
amount of $250,932. During 1998, 1997, and 1996, the Bank recorded Plan expenses
of $38,600, $21,000, and $28,000, respectively.
VRB BANCORP 1998 ANNUAL REPORT 27
<PAGE> 28
NOTE 16: 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 Bank's stock option plans. Comparative earnings per share
data for the years ended December 31, 1997 and 1996, have been restated to
conform with the current year presentation. The following table illustrates the
computations of basic and diluted earnings per share for the years ended
December 31, 1998, 1997, and 1996 (dollars in thousands except per share
amounts):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
- ---------------------------------------------------------------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
1998
- ---------------------------------------------------------------------------------------------------------------------
Basic earnings per share
Income available to common shareholders $ 4,927 8,454 $ 0.58
Effect of dilutive securities
Outstanding common stock options -- 71
Income available to common shareholders plus assumed conversions $ 4,927 8,525 $ 0.58
----------- ----- -----------
1997
- ---------------------------------------------------------------------------------------------------------------------
Basic earnings per share
Income available to common shareholders $ 3,704 7,639 $ 0.48
Effect of dilutive securities
Outstanding common stock options -- 21
Income available to common shareholders plus assumed conversions $ 3,704 7,660 $ 0.48
----------- ----- -----------
1996
- ---------------------------------------------------------------------------------------------------------------------
Basic earnings per share
Income available to common shareholders $ 3,251 7,355 $ 0.44
Effect of dilutive securities
Outstanding common stock options -- 77
Income available to common shareholders plus assumed conversions $ 3,251 7,432 $ 0.44
----------- ----- -----------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
28 VRB BANCORP 1998 ANNUAL REPORT
<PAGE> 29
NOTE 17: TRANSACTIONS WITH RELATED PARTIES
Certain directors, executive officers, and principal stockholders are customers
of and have had banking transactions with the Bank in the ordinary course of
business, and the Bank expects to have such transactions in the future. All
loans and commitments to loan included in such transactions were made in
compliance with applicable laws on substantially the same terms (including
interest rates and collateral) as those prevailing at the time for comparable
transactions with other persons and, in the opinion of the management of the
Bank, do not involve more than the normal risk of collectibility or present any
other unfavorable features. The amount of loans outstanding to directors,
executive officers, principal stockholders, and companies with which they are
associated was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Beginning balance $ 1,354,803 $ 1,447,209
Loans made 891,665 --
Loans paid (299,920) (92,406)
Ending balance $ 1,946,548 $ 1,354,803
----------- -----------
- ------------------------------------------------------------
</TABLE>
NOTE 18: REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital to average assets (as
defined). Management believes, as of December 31, 1998, that the Bank meets all
capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
TIER 1 CAPITAL
- -------------------------------------------------------------------------------------------------------------------------
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998 (in thousands)
- -------------------------------------------------------------------------------------------------------------------------
Total capital to risk weighted assets $ 28,019 14.0% $ 16,011 >8.0% $ 20,013 >10.0%
Tier 1 capital to risk weighted assets 25,509 12.7% 8,034 >4.0% 12,051 > 6.0%
Tier 1 capital to average assets 25,509 8.5% 12,004 >4.0% 15,005 > 5.0%
As of December 31, 1997 (in thousands)
- -------------------------------------------------------------------------------------------------------------------------
Total capital to risk weighted assets 31,815 22.5% 11,312 >8.0% 14,140 >10.0%
Tier 1 capital to risk weighted assets 30,051 21.3% 5,643 >4.0% 8,465 > 6.0%
Tier 1 capital to average assets $ 30,051 14.9% $ 8,067 >4.0% $ 10,084 > 5.0%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
VRB BANCORP 1998 ANNUAL REPORT 29
<PAGE> 30
As of December 31, 1998, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
NOTE 19: PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for VRB Bancorp (unconsolidated parent company
only) is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PARENT COMPANY
- -------------------------------------------------------------------------------------------
Years ended December 31 1998 1997
----------- -----------
<S> <C> <C>
ASSETS
- -------------------------------------------------------------------------------------------
Cash $ 49,986 $ 887,967
Investment in subsidiary 35,126,747 30,906,820
Goodwill 58,722 65,768
$35,235,455 $31,860,555
----------- -----------
SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------
Common stock $21,583,869 $18,462,712
Retained earnings 13,590,957 13,349,301
Accumulated other comprehensive income, net of taxes 60,629 48,542
$35,235,455 $31,860,555
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
INCOME
- --------------------------------------------------------------------------------------------------------------
Equity in undistributed earnings of subsidiary bank $ 4,133,730 $ 2,810,666 $ 2,456,348
Dividends 800,000 900,000 845,000
EXPENSES
- --------------------------------------------------------------------------------------------------------------
Goodwill and other administrative expenses (7,047) (7,047) (50,078)
Net income $ 4,926,683 $ 3,703,619 $ 3,251,270
----------- ----------- -----------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
30 VRB BANCORP 1998 ANNUAL REPORT
<PAGE> 31
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOW
- ---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31 1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,926,683 $ 3,703,619 $ 3,251,270
Adjustments to reconcile net income to net cash from operating activities:
Equity in undistributed earnings of subsidiary bank (4,133,730) (2,810,666) (2,456,348)
Amortization 7,047 7,047 7,046
Net cash from operating activities 800,000 900,000 801,968
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 (1,674,498) (1,006,333) (954,368)
Cash received from exercise of common stock options 36,517 88,068 243,616
Net cash from financing activities (1,637,981) 7,865,839 (710,752)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (837,981) 765,839 91,216
CASH AND CASH EQUIVALENTS, beginning of year 887,967 122,128 30,912
CASH AND CASH EQUIVALENTS, end of year $ 49,986 $ 887,967 $ 122,128
----------- ----------- -----------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 20: 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 (see Note 2). Pending such use, the net proceeds
were invested in short-term, investment-grade securities.
VRB BANCORP 1998 ANNUAL REPORT 31
<PAGE> 32
NOTE 21: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1998 QUARTER ENDED DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(in thousands)
RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------
Interest income $ 5,914 $ 5,886 $ 6,009 $ 6,103
Interest expense 1,733 1,941 1,953 2,043
Net interest income 4,181 3,945 4,056 4,060
Provision for credit losses -- -- -- --
Noninterest income 573 535 522 510
Noninterest expense 2,717 2,599 2,565 2,608
Income before income taxes 2,037 1,881 2,013 1,962
Provision for income taxes 780 701 765 720
Net income $ 1,257 $ 1,180 $ 1,248 $ 1,242
------------ ------------ ------------ ------------
Earnings per common share $ 0.14 $ 0.14 $ 0.15 $ 0.15
------------ ------------ ------------ ------------
Diluted earnings per common share $ 0.14 $ 0.14 $ 0.15 $ 0.15
------------ ------------ ------------ ------------
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1997 QUARTER ENDED DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(in thousands)
RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------
Interest income $ 4,031 $ 3,772 $ 3,681 $ 3,471
Interest expense 1,121 1,033 942 966
Net interest income 2,910 2,739 2,739 2,505
Provision for credit losses 250 -- -- --
Noninterest income 561 381 381 348
Noninterest expense 1,883 1,710 1,686 1,594
Income before income taxes 1,338 1,410 1,434 1,259
Provision for income taxes 425 396 491 425
Net income $ 913 $ 1,014 $ 943 $ 834
------------ ------------ ------------ ------------
Earnings per common share $ 0.11 $ 0.14 $ 0.13 $ 0.12
------------ ------------ ------------ ------------
Diluted earnings per common share $ 0.11 $ 0.13 $ 0.13 $ 0.12
------------ ------------ ------------ ------------
- -----------------------------------------------------------------------------------------------
</TABLE>
32 VRB BANCORP 1998 ANNUAL REPORT
<PAGE> 33
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, 1998 and 1997, and the related statements of income and
comprehensive income, changes in shareholders' equity, and cash flows for the
years ended December 31, 1998, 1997, and 1996. These financial statements are
the responsibility of VRB Bancorp's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of VRB Bancorp as of
December 31, 1998 and 1997, and the results of its operations and cash flows for
each of the years in the three year period ended December 31, 1998, 1997, and
1996, in conformity with generally accepted accounting principles.
/s/ MOSS ADAMS LLP
Portland, Oregon
January 9, 1999
VRB BANCORP 1998 ANNUAL REPORT 33
<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 29, 1999, of our report
dated January 9, 1999, relating to the financial statements of VRB Bancorp.
/S/ Moss Adams, LLP
Portland, Oregon
March 23, 1999
18
<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> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,513
<INT-BEARING-DEPOSITS> 3,100
<FED-FUNDS-SOLD> 23,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 57,264
<INVESTMENTS-CARRYING> 17,454
<INVESTMENTS-MARKET> 18,247
<LOANS> 178,727
<ALLOWANCE> 3,539
<TOTAL-ASSETS> 311,217
<DEPOSITS> 274,122
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,859
<LONG-TERM> 0
<COMMON> 21,584
0
0
<OTHER-SE> 13,652
<TOTAL-LIABILITIES-AND-EQUITY> 311,217
<INTEREST-LOAN> 19,100
<INTEREST-INVEST> 4,812
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 23,912
<INTEREST-DEPOSIT> 7,666
<INTEREST-EXPENSE> 5
<INTEREST-INCOME-NET> 16,241
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,489
<INCOME-PRETAX> 7,893
<INCOME-PRE-EXTRAORDINARY> 7,893
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,927
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
<YIELD-ACTUAL> .086
<LOANS-NON> 266
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,780
<CHARGE-OFFS> 189
<RECOVERIES> 50
<ALLOWANCE-CLOSE> 3,539
<ALLOWANCE-DOMESTIC> 3,539
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
