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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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
(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 $42,527,000 at March 16, 2000.
As of March 16, 2000, there were 8,297,979 shares of the Registrant's Common
Stock outstanding.
Documents Incorporated by Reference:
Portions of the Registrant's 1999 Annual Report to Shareholders is incorporated
by reference in Part II hereof. Portions of the Registrant's proxy statement
dated March 27, 2000 for the 2000 annual meeting of shareholders is incorporated
by reference in Part III hereof.
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INDEX
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PART I
Item 1. Description of business
Introduction 3
Business 3
Market area 4
Competition 4
Employees 5
Risk Factors 5
Supervision and regulation 6
Item 2. Properties 9
Item 3. Legal proceedings 11
Item 4. Submission of matters to vote on security issues 11
PART II
Item 5. Market for registrant's common equity and related shareholder matters 12
Item 6. Selected financial data 12
Item 7. Management's discussion and analysis of financial condition and results
of operation 12
Item 8. Financial statements and supplementary data 12
Item 9. Changes in and disagreements with accountants on accounting
and financial disclosure 12
PART III
Item 10. Directors and executive officers of the registrant 13
Item 11. Executive compensation 13
Item 12. Security ownership of certain beneficial owners and management 13
Item 13. Certain relationships and related transactions 13
PART IV
Item 14. Exhibits, financial statement schedules and reports on Form 8-K 14
SIGNATURES 15
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES 16
EXHIBIT INDEX 17
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Disclosure Regarding Forward-Looking Statements
The following discussion includes forward-looking statements within the
meaning of the "safe-harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based on the beliefs of
the Company's management and on assumptions made by and information currently
available to management. All statements other than statements of historical
fact, regarding the Company's financial position, business strategy and plans
and objectives of management for future operations of the Company are
forward-looking statements. When used herein, the words "anticipate," "believe,"
"estimate," "expect," and "intend" and words or phrases of similar meaning, as
they relate to the Company or management, are intended to identify
forward-looking statements. The Company can give no assurance that such
expectations will prove to be 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. These and other risk factors may be discussed more
fully in the Company's annual and quarterly reports filed with the Securities
and Exchange Commission.
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
fourteen full service branches. The Bank has prospered by emphasizing
relationship banking and excellent customer service to consumers and small to
medium sized businesses across southern Oregon.
Earnings growth and consistent returns on shareholders' equity are fundamental
to the bank's business strategies. Over the last five years, earnings have grown
by 68% and the return to shareholders has consistently exceeded 14%. Other
traditional indicators of financial strength such as the underlying quality of
the loan portfolio and the Bank's capital position remain very strong, and are
core to the bank's increasing prosperity.
VRB's business strategy is to appropriately blend customer relationship
management with the benefits of technology. VRB emphasizes a personalized
approach to banking, and targets those customers that utilize traditional
products and services as an essential part of their day to day activities. VRB
operates in an area that has a strong sense of community, and is a vested
participant in improving the economic strength of the area it serves. The
technological sophistication of the region is growing, and use of VRB's atm
network, debit cards and 24 hour telephone banking is now routine for most
customers. VRB has renewed its commitment to technology as expectations for PC
banking and other technological conveniences are now visible. VRB believes
future investment in technology is vital and intends to move VRB to an
increasingly paperless system which has shown to be less costly to the
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bank than traditional banking practices.
VRB continues to seek branch expansion where financially beneficial, and its
branch network remains the primary place of business, as well as a portal to
other community activities. For those areas that geographic dominance becomes
less of a competitive advantage, the bank will consider closure of those
branches that are in close proximity to each other.
VRB is evolving into a small business bank, and is therefore very visible in
commercial and construction lending circles. 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's business strategies have also targeted the professional services market,
providing easy access to credit with products such as revolving executive lines
of credit. In 1999, commercial, commercial real estate and construction lending
increased by $27 million, an increase of 25% over prior year balances.
Because a significant portion of the bank's business lending activity is
supported by consumer deposits, 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.
For all 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 core deposit products and services, including
non-interest bearing and interest bearing checking accounts, savings accounts,
money market accounts and certificates of deposit. The Bank promotes deposit
growth by emphasizing relationship banking, and deposit products are often
packaged with commercial lending activities. This strategy was reasonably
successful in 1999. Average non-interest dda and money market accounts, staple
deposit products for small and medium commercial business, grew 13.7% and 12.0%,
respectively.
Similar to many banks, loan demand has outpaced deposit growth, and future
deposit growth on the part of VRB may require more aggressive pricing
strategies. In addition, the bank will most likely utilize alternative funding
sources, such as Federal Home Loan Bank advances, to supplement deposit growth
(if needed).
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 17.5% increase in population from 1990 to 1998. The area continues to
experience an influx of out of state retirees who are attracted to the beauty of
the area, and more importantly, the low cost of living relative to neighboring
states. This is reflective in the area's demographics, for which an estimated
22% of the population base is 60 years or older.
The Rogue Valley continues to become increasingly urbanized and infrastructure
growth has been robust, including both residential and commercial development.
The region's dependence on wood products has declined significantly, with timber
manufacturing jobs now accounting for less than half of all manufacturing jobs
in the Rogue Valley. Despite historical job losses in wood products, the region
has seen relatively steady job growth over the last decade. Since 1990, the
region has added almost 19,000 jobs, and service industry sectors such as 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 institutions have high public visibility and
are able to maintain advertising and marketing activity on a much larger scale
than the Company can economically
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maintain.
In 1999, competition for deposits intensified. Despite aggressive pricing
strategies, heady stock market returns, and strong consumer spending are
influencing deposit levels on an industry wide basis. Investment brokerage
accounts are increasingly popular and offer an array of investment products as
well as flexible cash management services. For example, mutual funds now make up
22% of the average household's liquid assets, verses just 6% in the early 90's.
VRB currently holds approximately 15% of the total market measured as a
percentage of total deposits then held by financial institutions operating in
Jackson and Josephine County. Management believes that its emphasis in customer
relationship management and local decision-making will continue to provide VRB
with a hometown advantage. However, management expects competition to continue,
and that future pricing strategies will most likely be more aggressive than seen
in the past.
EMPLOYEES
As of December 31, 1999, the Bank employed a total of 177 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.
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
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VRB's success is dependent on the services of William A. Haden, President and
Chief Executive Officer, and Brad Copeland, Executive Vice President and Credit
Administration. 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 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
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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.
Generally, 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.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act") was
enacted. The Funds Act, 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 $.0053 per $100 of domestic deposits.
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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, and maybe subject to certain
mandatory supervisory corrective actions.
VRB believes that it meets all capital adequacy requirements to which it is
subject.
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
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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 have
undergone significant changes.
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.
Early 2000 marked the effective date of the Gramm-Leach-Bliley Financial
Services Modernization Act, which repeals provisions of prior legislation that
have historically separated banking, insurance, and securities activities. The
law creates a new financial services structure, the financial holding company,
under the Bank Holding Company Act. Banks are now able to engage in any activity
that is deemed "financial in nature" and affiliate with securities firms and
insurance companies all within, and through, a single financial holding company.
The legislation will most likely impact the competitive balance among banks and
other financial services providers, and encourage mergers between banks,
insurance companies and brokerage firms. However, whether and in what form the
legislation may effect the business of VRB cannot be predicted with certainty.
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.
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Main Office Ashland Branch
110 Pine St. 250 Pioneer St.
Rogue River, Oregon Ashland, Oregon
Fruitdale Branch Medford Branch
1040 Rogue River Highway 220 E. 10th St.
Grants Pass, Oregon Medford, Oregon
Poplar Drive Branch Stewart Avenue Branch
2400 Poplar Drive 809 Stewart Ave.
Medford, Oregon Medford, Oregon
Phoenix Branch Talent Branch
4000 S. Pacific Highway 201 N. Pacific Highway
Phoenix, Oregon Talent, Oregon
Seventh & Midland Branch Merlin Branch
100 N.E. Midland 3600 Merlin Rd.
Grants Pass, Oregon Merlin, Oregon
Downtown GP Branch Williams Hwy. Branch
117 N.E. "F" St. 1670 Williams Hwy.
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Grants Pass, Oregon Grants Pass, Oregon
East Medford Branch North Operations Center
701 East Jackson 8991 Rogue River Hwy
Medford, Oregon Rogue River, Oregon
Central Point Branch
1800 E. Pine St.
Central Point, Oregon
</TABLE>
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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, 1999.
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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.
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1999 1998
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Cash Cash
High Low Dividend High Low Dividend
----- ------ -------- ------ ------ --------
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1st Quarter $ 9.50 $ 7.00 $ - $11.78 $ 9.62 $ -
2nd Quarter 8.63 7.03 0.12 11.54 9.38 -
3rd Quarter 8.44 6.50 - 10.00 7.33 0.19
4th Quarter 7.38 5.75 0.12 10.13 7.00 -
</TABLE>
As of December 31, 1999, there were 8,303,596 shares of common stock
outstanding, held by approximately 2,100 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 6 of the Company's 1999
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 6-12 of the
Company's 1999 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 1999 Annual Report to Shareholders. Such statements are listed
in the Index to Consolidated Financial Statements set forth on page 16 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
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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 3-4 and page 7,
respectively, of the Company's Proxy Statement for the 2000 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 7-8 of the Company's Proxy Statement for the
2000 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 10-11 of the Company's
Proxy Statement for the 2000 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 11 of the Company's Proxy
Statement for the 2000 annual meeting of shareholders.
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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, 1999.
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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 27, 2000
-------------------------------------------
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 27, 2000
-------------------------------------------
James D. Coleman, Chairman, Director
By: /S/ John O. Dunkin Date: March 27, 2000
-------------------------------------------
John O. Dunkin, Vice Chairman, Director
By: /S/ Gary Lundberg Date: March 27, 2000
-------------------------------------------
Gary Lundberg, Director
By: /S/ Robert J. DeArmond Date: March 27, 2000
-------------------------------------------
Robert J. DeArmond, Director
By: /S/ Larry L Parducci Date: March 27, 2000
-------------------------------------------
Larry L. Parducci, Director
By: /S/ Tom Anderson Date: March 27, 2000
-------------------------------------------
Tom Anderson, Director
By: /S/ William A. Haden Date: March 27, 2000
-------------------------------------------
William A. Haden, President, Director
(Principal Executive Officer)
By: /S/ April Sevcik Date: March 27, 2000
-------------------------------------------
April Sevcik, Director
By: /S/ Michael Donovan Date: March 27, 2000
-------------------------------------------
Michael Donovan, Director
By: /S/ Felice Belfiore Date: March 27, 2000
-------------------------------------------
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 1999 Annual Report to
Shareholders at the pages indicated, are incorporated herein by reference:
<TABLE>
<CAPTION>
Page of 1999 Annual
Report to Shareholders
----------------------
<S> <C>
VRB Bancorp and subsidiaries
Consolidated Balance Sheets at
December 31, 1999 and 1998 13
Consolidated Statements of Income
for the years ended December 31, 1999, 1998 and 1997 14
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1999, 1998 and 1997 15
Consolidated Statements of Cash Flows
for the years ended December 31, 1999, 1998 and 1997 16
Notes to Consolidated Financial Statements 17
Report of Independent Public Accountants 32
Financial Statement Schedules
None
</TABLE>
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<S> <C>
3.1 Articles of Incorporation of VRB Bancorp*
3.2 Bylaws of VRB Bancorp*
4.0 Specimen stock certificate*
10.1 Stock Option Agreement, dated July 24, 1997, between Valley of the Rogue
Bank and the shareholders of Investors Banking Corporation**
10.2 Plan of Merger, dated September 30, 1997, between Valley of the Rogue
Bank and Colonial Banking Company**
10.3 Ground Lease Agreement dated June 1, 1988, relating to lease of parking
area of Poplar Drive Branch Office*
10.4 Lease Agreement and Memorandum of Agreement dated August 15, 1989
relating to lease of Stewart Avenue Branch Office*
10.5 Lease Agreement dated December 27, 1979, and related agreements for the
Talent Branch Office*
10.6 Employment Agreement dated April 10, 1992, by and between Valley of the
Rogue Bank and Tom Anderson*
10.7 Employment Agreement dated January 11, 1993, and Amendment to Employment
Agreement, dated September 26, 1994, by and between Valley of the Rogue
Bank and William A. Haden*
10.8 1994 Amended Non-Discretionary Stock Option Plan for Non-Employee
Directors (incorporated by reference to Exhibit 4.3 of the Registrant's
registration statement on Form S-8 filed with the Commission on October
3, 1995)
10.9 1994 Amended Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 4.3 of the Registrant's registration statement on Form S-8
filed with the Commission on October 3, 1995)
10.10 Employment Agreement dated February 27, 1997 by and among Valley of the
Rogue Bank, VRB Bancorp and Felice Belfiore**
10.11 Employment Agreement dated May 1, 1996 by and between Valley of the
Rogue Bank and Brad Copeland**
13.0 1999 Annual Report to Shareholders
23.0 Consent of Moss Adams, LLP
27.0 Financial Data Schedule
</TABLE>
- ---------------------------
* Incorporated by reference to the Company's registration statement on
Form 10 (Commission file number 0-25932) filed April 26, 1995 pursuant
to Section 12(g) of the Securities Exchange Act of 1934.
** Incorporated by reference to the Company's registration statement on
Form S-1 (Commission File number 333-37167) declared effective November
5, 1997.
17
<PAGE> 1
EXHIBIT 13
Forward Looking Statements: The following narrative includes a
discussion of certain significant business trends and uncertainties as well as
other forward looking statements and is intended to be read in conjunction with
and is qualified in its entirety by reference to the consolidated financial
statements and accompanying notes included elsewhere in the annual report. This
report contains certain "forward-looking statements" that are based on the
current beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. All statements
other than statements of historical facts regarding the Company's financial
position, business strategy and plans and objectives of future operations, are
forward looking statements. When used in this report, the words "estimate",
"believes", "project", "goal", "objective", or similar expressions 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. Based
upon changing conditions, the occurrence of certain risks or uncertainties, or
if any of the underlying assumptions prove incorrect, actual results may vary
materially from those described herein.
MANAGEMENTS DISCUSSION AND ANALYSIS
Financial Overview
VRB Bancorp and its subsidiary, Valley of the Rogue Bank (collectively
VRB or the Bank), operates 14 banking offices along the I-5 corridor in southern
Oregon. The Bank has prospered by emphasizing relationship banking and excellent
customer service to small and medium size businesses in specific commercial
niches. VRB will continue to emphasize personal service balanced with a more
recent commitment toward providing new means of product delivery, and electronic
banking services.
In 1999, net income totaled $4.9 million, virtually unchanged from that
in 1998. Earnings per share for each period was also consistent at $.57 per
average share outstanding. Internal departmental restructuring, and pressure on
interest margins influenced earnings growth. Costs to establish a brand image,
and strengthen the lending and technological capabilities of the Bank also lead
to higher costs. It is management's belief that these costs will be recovered in
the form of future efficiencies and profitability.
VRB operated under a relatively low interest rate environment until
after the third quarter of 1999 when interest rates increased by .75%, in three
successive increases of .25% each. The effect of rising rates had a minor impact
on VRB in 1999. Gains as a result of variable loans re-pricing at higher rates
were offset by strong competition that served to limit rate increases on new and
renewed loans. Future growth in both loans and deposits may require more
aggressive pricing strategies and management expects pressure on interest
margins to continue unabated.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Years ended December 31
(in thousands, except per share data) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Interest income $ 22,693 $ 23,912 $ 14,955 $ 13,188 $ 11,973
Interest expense 6,413 7,671 4,062 3,627 2,989
- -------------------------------------------------------------------------------------------------------------------
Net interest income 16,280 16,241 10,893 9,561 8,984
- -------------------------------------------------------------------------------------------------------------------
Provision for credit losses -- -- 250 250 --
Noninterest income 2,055 2,141 1,671 1,370 1,380
Noninterest expense 10,564 10,489 6,873 5,828 6,061
Income before income taxes 7,771 7,893 5,441 4,853 4,303
Provision for income taxes 2,883 2,966 1,737 1,602 1,395
- -------------------------------------------------------------------------------------------------------------------
Net income $ 4,888 $ 4,927 $ 3,704 $ 3,251 $ 2,908
- -------------------------------------------------------------------------------------------------------------------
Return on average equity 14.17% 14.60% 15.60% 17.30% 17.80%
Return on average assets 1.57% 1.60% 2.00% 1.99% 2.02%
PER SHARE DATA(1)
- -------------------------------------------------------------------------------------------------------------------
Earnings per common share $ 0.57 $ 0.57 $ 0.48 $ 0.44 $ 0.40
- -------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 0.57 0.56 0.48 0.43 0.39
Dividends declared per common share 0.24 0.19 0.13 0.13 0.08
Ratio of dividends declared to net income 42.1% 33.7% 28.0% 28.3% 19.0%
BALANCE SHEET DATA AT YEAR END
Loans $198,001 $175,188 $115,414 $ 99,776 $ 88,972
- -------------------------------------------------------------------------------------------------------------------
Total assets 311,504 311,217 177,107 151,485 141,537
- -------------------------------------------------------------------------------------------------------------------
Total deposits 276,366 274,122 173,176 155,568 132,744
- -------------------------------------------------------------------------------------------------------------------
Total equity 33,609 35,235 31,861 20,188 17,470
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Adjusted to reflect all stock dividends and stock splits through
December 31, 1999.
1
<PAGE> 2
AVERAGE BALANCES & AVERAGE RATES EARNED & PAID
<TABLE>
<CAPTION>
Years Ended December 31 (in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Federal funds sold $ 18,792 $ 936 4.98% $ 38,206 $ 2,053 5.37%
Held to maturity securities(1) 18,004 1,382 7.68 18,432 1,410 7.65
Available for sale securities 57,340 3,483 6.07 28,573 1,814 6.35
Commercial Loans(2) 149,589 13,845 9.26 156,049 15,261 9.78
Consumer Loans(2) 36,226 3,501 9.66 37,397 3,852 10.27
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets 279,951 23,147 8.27 278,657 24,390 8.75
- ---------------------------------------------------------------------------------------------------------------------------------
Nonearning assets 35,947 33,161
Less: Loan loss reserve (3,835) (4,062)
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 312,063 $ 307,756
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest-bearing checking $ 32,813 $ 321 0.98% $ 33,188 $ 446 1.34%
Money market 84,549 2,774 3.28 75,519 2,764 3.66
Savings 24,764 486 1.96 24,336 523 2.15
Time 59,252 2,832 4.78 73,627 3,932 5.34
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 201,378 6,413 3.18 206,670 7,665 3.71
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 73,610 64,733
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 274,988 271,403
- ---------------------------------------------------------------------------------------------------------------------------------
Other liabilities 2,588 2,571
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 277,576 273,974
- ---------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 34,487 33,782
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 312,063 $ 307,756
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income(1) $ 16,734 $ 16,725
Interest Income as a percentage
of average earning assets 8.27% 8.75%
Interest expense as a percentage
of average earning assets 2.29 2.75
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest margin 5.98% 6.00%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31 (in thousands) 1997
- --------------------------------------------------------------------------------------
Balance Interest Rate
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Federal funds sold $ 19,556 $ 1,063 5.44%
Held to maturity securities(1) 18,480 1,431 7.74
Available for sale securities 22,486 1,504 6.69
Commercial Loans(2) 71,016 7,531 10.60
Consumer Loans(2) 38,565 3,913 10.15
- --------------------------------------------------------------------------------------
Total earning assets 170,103 15,442 9.08
- --------------------------------------------------------------------------------------
Nonearning assets 17,056
Less: Loan loss reserve (1,597)
- --------------------------------------------------------------------------------------
Total assets $ 185,562
- --------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest-bearing checking $ 20,256 $ 299 1.48%
Money market 53,036 2,116 3.99
Savings 15,358 337 2.19
Time 26,285 1,310 4.98
- --------------------------------------------------------------------------------------
Total interest-bearing deposits 114,935 4,062 3.53
- --------------------------------------------------------------------------------------
Noninterest-bearing deposits 45,552
- --------------------------------------------------------------------------------------
Total deposits 160,487
- --------------------------------------------------------------------------------------
Other liabilities 1,415
- --------------------------------------------------------------------------------------
Total liabilities 161,902
- --------------------------------------------------------------------------------------
Shareholders' equity 23,660
- --------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 185,562
- --------------------------------------------------------------------------------------
Net interest income(1) $ 11,380
Interest Income as a percentage
of average earning assets 9.08%
Interest expense as a percentage
of average earning assets 2.39
- --------------------------------------------------------------------------------------
Net interest margin 6.69%
- --------------------------------------------------------------------------------------
</TABLE>
(1) Tax exempt income has been adjusted to a tax equivalent basis at a 37%
effective rate.
(2) Nonaccrual loans are included in average balances.
Net Interest Income
For financial institutions, the primary component of earnings is net
interest income, which is the difference between interest income, from loans and
investment securities, and interest expense on deposits. In 1999, VRB sustained
net interest income levels while experiencing changing interest rates and
increased competitive pressures by investing excess liquidity in securities,
expanding the loan portfolio, and reducing the rates paid on deposits.
A key financial benchmark for all financial institutions is the interest
margin, which is net interest income divided by average interest earning assets.
In 1999, VRB's interest margin of 5.98% declined by .02%, virtually unchanged
from the prior year.
During 1999, the average yield on interest earning assets declined by
.48%, reflecting the low interest rate environment in effect for most of the
year. To offset the decline in asset yields, select deposit rates were reduced.
These pricing decisions influenced the bank's deposit mix, and $14.3 million in
certificates of deposit were replaced by less expensive funding such as
interest-bearing demand deposits. Overall, VRB's average cost of funds declined
from 3.71% to 3.18%.
2
<PAGE> 3
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 99 compared to December 98 December 99 compared to December 97
Increase (decrease) in Increase (decrease) in
interest due to changes in interest due to changes in
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) Average Volume Average Rate Net Effect Average Volume Average Rate Net Effect
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Federal funds sold $ (967) $ (150) $(1,117) $ 1,002 $ (12) $ 990
Held-to-maturity securities (33) 5 (28) (4) (17) (21)
Available-for-sale securities 1,747 (78) 1,669 386 (76) 310
Commercial loans (598) (818) (1,416) 8,316 (586) 7,730
Consumer loans (113) (238) (351) (107) 46 (61)
- ------------------------------------------------------------------------------------------------------------------------------------
Total 36 (1,279) (1,243) 9,593 (645) 8,948
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest-bearing checking (4) (121) (125) 174 (27) 147
Money market 296 (286) 10 823 (175) 648
Savings 8 (45) (37) 193 (7) 186
Time deposits (687) (413) (1,100) 2,528 94 2,622
- ------------------------------------------------------------------------------------------------------------------------------------
Total (387) (865) (1,252) 3,718 (115) 3,603
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net interest income $ 423 $ (414) $ 9 $ 5,875 $ (530) $ 5,345
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fee Income
Fee income, or noninterest income, totaled $2.1 million, a 4% decline
when compared to the prior year. As a percent of total revenues, fee income
equaled 8.3% in 1999, virtually unchanged from 1998. The decline in
noninterest income is due to the decrease in residential mortgage loans
originated through the Bank's mortgage lending department.
In the third quarter, the mortgage lending department was restructured
and moved in-house to include local processing, underwriting and closing of
residential real estate loans. In connection with the restructure, the
department introduced new products and expanded its mortgage services.
Management believes the department is now positioned to capture a much larger
share of the market; however, the origination and refinance of mortgage loans
and related fees are dependent on the general level and direction of interest
rates. Accordingly, there can be no assurance that such income will improve in
the future.
Cost of Operations
Cost of operations, or noninterest expense, grew to $10.6 million, a
small increase of less than one percent. VRB hired a number of senior lending
and calling officers in 1999 to generate loan growth. As a result, salaries and
benefits rose from $6.0 million to $6.3 million, a 5.6% increase. VRB had 177
full time equivalent employees at December 31, 1999 compared to 167 full time
equivalent employees at December 31, 1998.
Occupancy costs, including depreciation, rent and small equipment,
increased by 12.9% to $1.2 million. In 1999, VRB embarked on a campaign to
upgrade operating equipment and streamline data and voice communications,
investing $1.1 million into capital projects and company infrastructure. With
the exception of communication expense (primarily postage and phone service),
other administrative expenses declined slightly, centered around reductions in
professional fees and other one-time expenses related to the acquisition of
Colonial Banking Company in 1998 (see Note 2 in Notes to Consolidated Financial
Statements).
One measure of VRB's ability to contain noninterest expenses is the
efficiency ratio. It is calculated by dividing total noninterest expense by the
sum of net interest income and noninterest income. In 1999, VRB maintained an
efficiency margin of 57.6%, slightly higher than 1998's efficiency margin of
57.1%. Excluding the amortization of goodwill from the measurement, the
efficiency margin drops to 53.5% and 52.8% for 1999 and 1998, respectively.
3
<PAGE> 4
Income Taxes
The income tax provision was $2.9 million in 1999, compared to $3.0 in
1998. VRB's effective tax rate declined slightly to 37% in 1999, and differs
from federal and state statutory rates due to nondeductible goodwill (see Note 8
in Notes to Consolidated Financial Statements).
Comparison of Results of Operations for the Years Ended December 31,
1998 and December 31, 1997
In the first quarter of 1998, VRB acquired Colonial Banking Company
("CBC"). CBC was a state charted bank owned by Investors Banking Corporation,
with approximately $116 million in total assets. CBC added four branches to
VRB's existing branch network in Southern Oregon. VRB paid $15.7 million in
cash, which was approximately 2.5 times book value. The acquisition of CBC
brought increased market share to the Bank and preempted the acquisition of CBC
by potential competitors looking to enter the Rogue Valley market.
Earnings grew to $4.9 million in 1998, up $1.2 million or 33% when
compared to 1997. Diluted earnings per share grew to $.57, an increase of 19%
from $.48 in 1997. Earnings accretion from the CBC acquisition was partially
diluted by the sale of 1.2 million shares of VRB common stock, the proceeds of
which were used to finance the CBC acquisition.
The acquisition of CBC altered VRB's deposit structure with a new
emphasis in certificates of deposit (27% of total deposits vs. 16%
pre-acquisition). CBC also brought an unusually large concentration of out-of-
area commercial loans with very low interest rates. The net portfolio return on
CBC loans was approximately 70 basis points lower than VRB's then present
average. While net interest income grew by $1.3 million, VRB's interest margin
declined from 6.69% to 6.01%. Noninterest income and expenses also reflected the
acquisition, growing 28% and 53%, respectively.
Lending and Credit Management
Loans: As of December 31, 1999, loans outstanding totaled $201.7 (not
including mortgage loans held for sale). This is a 13% increase over 1998, when
loans totaled $179.1. Loan growth was diversified across all categories, with
the biggest gains in commercial real estate, term debt and lines of credit. Loan
growth is the result of aggressive calling strategies, innovative terms and
favorable economic conditions.
LOAN PORTFOLIO MIX
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------------------
(in thousands) Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate mortgage - commercial and residential $134,765 67% $126,675 71%
Real estate - construction 29,034 14% 23,552 13%
Commercial 23,940 12% 16,418 9%
Installment 13,997 7% 12,425 7%
- ---------------------------------------------------------------------------------------------------------------
$201,736 100% $179,070 100%
- ---------------------------------------------------------------------------------------------------------------
Loans at fixed rates $ 53,440 26% $ 56,775 32%
Loans at variable rates 148,296 74% 122,295 68%
- ---------------------------------------------------------------------------------------------------------------
$201,736 100% $179,070 100%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 5
LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $3,539 $1,780 $1,632 $1,407 $1,414
LOAN LOSSES
Commercial -- 21 48 29 31
Real Estate 28 95 -- -- --
Consumer 58 73 93 9 14
- -----------------------------------------------------------------------------------------------------------------
Total 86 189 141 38 45
- -----------------------------------------------------------------------------------------------------------------
RECOVERIES
Commercial 38 36 22 10 20
Real Estate -- -- -- -- --
Consumer 12 14 17 3 18
- -----------------------------------------------------------------------------------------------------------------
Total 50 50 39 13 38
- -----------------------------------------------------------------------------------------------------------------
Net loan losses 36 139 102 25 7
Provision of loan losses -- -- 250 250 --
Changes incidental to merger -- 1,898 -- -- --
- -----------------------------------------------------------------------------------------------------------------
Balance, end of year $3,503 $3,539 $1,780 $1,632 $1,407
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Loan loss reserve / total loans 1.74% 1.98% 1.52% 1.61% 1.56%
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Net loan losses / average loans outstanding 0.02% 0.07% 0.09% 0.03% 0.01%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Loan loss reserve: 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 mortgage and construction loans, with 81% of the
portfolio collateralized by some sort of real estate. The expected source of
repayment on these loans is generally the operations of the borrowers' business
or personal income, with real estate providing additional security. Risks
associated with real estate loans include the current economic climate,
fluctuating land values, and geographic and industry concentrations.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Nonperforming assets (in thousands) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual status $551 $262 $372 $ 58 $ 53
Loans past due greater than 90 days -- 4 -- 12 48
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 551 266 372 70 101
- ------------------------------------------------------------------------------------------------------------------
Other real estate owned -- 51 -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $551 $317 $372 $ 70 $101
- ------------------------------------------------------------------------------------------------------------------
Allowance for loan losses / nonperforming loans 636% 1330% 477% 2331% 1393%
Nonperforming loans / total loans 0.27% 0.15% 0.32% 0.06% 0.11%
Nonperforming assets / total assets 0.18% 0.10% 0.18% 0.04% 0.07%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
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 have consistently averaged less than a
quarter of one percentage point of total assets over the last 5 years.
5
<PAGE> 6
Liquidity
Liquidity enables VRB to meet the borrowing needs of its customers and
deposit withdrawals of its depositors. VRB manages its liquidity through a
mature and stable base of customer deposits, various lines of credit with other
financial institutions and cash flows from continuing operations. VRB's
investment portfolio remains a potential source of liquidity, however, in 1999,
the portfolio remained unchanged, due to the overall interest rate conditions
and the depreciated value of securities available-for-sale.
In 1999, liquidity was influenced by the following events:
o Lending efforts gained momentum and VRB funded net loan growth of $23
million.
o Capital expenditures grew in 1999, with cash outlays of $1.8 million
for the new Central Point site ($500,000), building remodel ($300,000), and
communication and data equipment upgrades ($1,000,000).
o Deposit growth remained low, growing to $276.4 million as of December
31, 1999, an increase of $2.2 million over the prior year. Ongoing business
development strategies fostered higher growth in non interest and interest
bearing demand for total growth of $11.3 million. This growth was offset by a
decline in time certificates of deposit.
o Cash outlays increased to accommodate record dividend payments ($2.1
million) and the repurchase of common stock ($3.1 million).
Management anticipates that the bank will continue to rely upon customer
deposits, maturities of investments, loan repayments, income from continuing
operations and short-term borrowings to provide liquidity. Deposit strategies
have been designed to promote growth. However, such strategies may be influenced
by changes in general economic conditions, the banking industry, and competition
from banks and non-bank financial corporations. Short-term borrowings may be
used to compensate for reductions in other sources of funds.
VRB maintains a cash management credit facility with the Federal Home
Loan Bank. The credit facility is limited to 10% of total assets, (approximately
$30 million at December 31, 1999) measured on a quarterly basis. The credit
facility is collateralized by FHLB stock owned by VRB and by all its other
assets. In addition, VRB maintains federal funds lines with correspondent banks
as an alternative source of temporary liquidity. At December 31, 1999, VRB had
federal funds lines totaling $8 million. No advances were outstanding at
year-end.
Interest Rate Risk
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 changes in
the interest rate environment. The analysis incorporates the 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. The following table sets forth the
estimated changes in VRB's net interest income over a period of one year under
the scenarios set forth.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Rate Shock Analysis
- --------------------------------------------------------------------------------------------------------------------------------
Change in the prime rate Increase (decrease) Adjusted net interest margin Adjusted return on equity
CURRENT: 8.50% in net interest income 5.98% 14.17%
<S> <C> <C> <C>
2.00% $ (66) 5.95% 14.05%
1.00% $ (33) 5.97% 14.11%
-- -- -- --
-1.00% $ 81 6.01% 14.32%
-2.00% $(827) 5.68% 12.66%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 7
Certain shortcomings are inherent in this 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
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 institutions 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 required to exceed a minimum 4% leverage ratio, which
is Tier 1 capital divided by total average assets. At December 31, 1999, VRB
maintained capital well above required regulatory levels. (See Note 18 of Notes
to Consolidated Statements)
Management strives to sustain capital levels that assure financial
soundness while at the same time employs leverage to achieve increasing
profitability.
Market for Common Stock
VRB's common stock is listed on the Nasdaq Stock Market()and trades
under the symbol VRBA. As of February 15, 2000, VRB had approximately 2,100
shareholders of record.
Dividends
VRB paid a cash dividend of $.12 per share for shareholders of record on
March 31, 1999 and paid a second cash dividend of equal amount to shareholders
of record on September 15, 1999. Combined, the two dividends represented 42% of
the bank's net income. VRB anticipates that cash dividends will continue to be
paid on a regular basis. However, the amount paid will depend on the bank's
overall financial condition and liquidity.
MARKET FOR COMMON STOCK
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
The reported high and low closing stock prices were as follows: 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
High Low High Low
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1st quarter 9.50 7.00 11.78 9.62
2nd quarter 8.63 7.03 11.54 9.38
3rd quarter 8.44 6.50 10.00 7.33
4th quarter 7.38 5.75 10.23 7.00
- ----------------------------------------------------------------------------------------------------------------------------
Stock Data 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Book value per common share at year-end 4.05 4.05 3.66
Closing common stock price 6.06 7.75 9.25
Number of common shares outstanding 8,303,596 8,694,286 8,674,374
P/E Ratio 10.6 13.6 19.3
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 1999 1998
<S> <C> <C>
Cash and due from banks $ 17,086,676 $ 14,513,570
Interest-bearing deposits with other banks 1,600,000 3,100,000
Federal funds sold -- 23,000,000
- -----------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 18,686,676 40,613,570
- -----------------------------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
State and municipal subdivisions 18,010,109 17,454,188
Available-for-sale securities:
U.S. Treasuries and agencies 54,755,835 57,070,000
Collateralized mortgage obligations and other investments 134,146 193,631
Federal Home Loan Bank stock 1,898,800 1,765,220
Loans held-for-sale 1,182,951 --
Loans, net of allowance for loan losses and unearned income 196,818,024 175,188,200
Premises and equipment, net of accumulated depreciation and amortization 7,797,420 6,499,131
Goodwill, net of amortization 8,798,661 9,511,831
Other real estate owned -- 51,161
Accrued interest and other assets 3,421,075 2,870,121
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $ 311,503,697 $ 311,217,053
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 1999 1998
DEPOSITS
Demand deposits $ 74,804,533 $ 72,134,186
Interest-bearing demand deposits 119,569,318 110,900,199
Savings deposits 23,512,119 24,269,197
Time deposits 58,479,936 66,818,719
- -----------------------------------------------------------------------------------------------------------------------------
Total deposits 276,365,906 274,122,301
- -----------------------------------------------------------------------------------------------------------------------------
Accrued interest and other liabilities 1,528,447 1,859,297
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 277,894,353 275,981,598
- -----------------------------------------------------------------------------------------------------------------------------
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 with 8,303,596 and
8,694,286 issued and outstanding at December 31, 1999 and 1998, respectively 18,699,060 21,583,869
Retained earnings 16,428,287 13,590,957
Accumulated other comprehensive (loss) income, net of taxes (1,518,003) 60,629
- -----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 33,609,344 35,235,455
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 311,503,697 $ 311,217,053
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
See accompanying notes. The Financial Statements on Pages 13-32 have not been
reviewed, or confirmed for accuracy or relevance by the Federal Deposit
Insurance Corporation.
8
<PAGE> 9
CONSOLIDATED STATEMENTS OF INCOME & COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 17,345,427 $ 19,099,960 $ 11,443,683
Interest on investment securities held-to-maturity:
State and municipal subdivisions 929,551 945,018 944,226
Interest on investment securities available-for-sale:
U.S. Treasuries and agencies 3,340,584 1,648,543 1,336,882
Collateralized mortgage obligations and other investments 8,721 27,624 78,310
Federal Home Loan Bank stock dividends 133,792 137,720 88,500
Federal funds sold 683,822 1,537,913 655,746
Interest on deposits in banks 251,678 514,895 407,337
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income 22,693,575 23,911,673 14,954,684
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest-bearing demand deposits 3,095,169 3,210,401 2,414,951
Savings deposits 486,210 523,341 336,830
Time deposits 2,831,771 3,932,290 1,309,999
Other borrowings -- 4,490 --
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 6,413,150 7,670,522 4,061,780
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 16,280,425 16,241,151 10,892,904
- -------------------------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES -- -- 250,000
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 16,280,425 16,241,151 10,642,904
- -------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 1,300,921 1,294,878 1,019,786
Other operating income 754,731 846,102 650,853
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,055,652 2,140,980 1,670,639
- -------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries and benefits 6,317,618 5,984,912 4,120,469
Net occupancy 1,157,013 1,024,860 813,915
Amortization of goodwill 713,170 739,616 110,299
Communications 452,014 386,461 239,721
Data processing 325,376 306,499 181,460
Supplies 267,454 289,675 230,255
Professional fees 192,401 266,446 180,658
FDIC insurance premium 30,603 47,270 18,201
Other real estate expense 14,970 25,486 --
Other expenses 1,093,825 1,418,223 977,946
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 10,564,444 10,489,448 6,872,924
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 7,771,633 7,892,683 5,440,619
- -------------------------------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES 2,883,250 2,966,000 1,737,000
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 4,888,383 $ 4,926,683 $ 3,703,619
- -------------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
Unrealized gain (loss) on securities, net of tax:
Unrealized holding gain (loss) arising during period (1,578,632) 12,087 (2,964)
Reclassification adjustment for gain included in net income -- -- (4,283)
- -------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (1,578,632) 12,087 (7,247)
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 3,309,751 $ 4,938,770 $ 3,696,372
- -------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $ 0.57 $ 0.57 $ 0.48
DILUTED EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $ 0.57 $ 0.56 $ 0.48
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
9
<PAGE> 10
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON STOCK RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 ($.14 per share, paid October 31, 1997) -- -- (1,006,333) -- (1,006,333)
Stock offering (November 1997) 1,150,000 8,784,104 -- -- 8,784,104
- ----------------------------------------------------------------------------------------------------------------------------------
Net income and comprehensive loss -- -- 3,703,619 (7,247) 3,696,372
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 8,340,744 18,462,712 13,349,301 48,542 31,860,555
- ----------------------------------------------------------------------------------------------------------------------------------
Stock options exercised (March to September 1998) 19,410 50,128 -- -- 50,128
Income tax benefit from stock options exercised -- 60,500 -- -- 60,500
Cash dividend ($.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
- ----------------------------------------------------------------------------------------------------------------------------------
Stock options exercised March to December 1999 36,179 219,126 -- -- 219,126
Cash dividend ($0.12 per share, paid May 21
and October 15, 1999) -- -- (2,051,053) -- (2,051,053)
Stock repurchased (April to December 1999) (426,869) (3,103,935) -- -- (3,103,935)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income and comprehensive loss -- -- 4,888,383 (1,578,632) 3,309,751
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1999 8,303,596 $ 18,699,060 $ 16,428,287 $ (1,518,003) $ 33,609,344
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
10
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,888,383 $ 4,926,683 $ 3,703,619
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES:
Depreciation and amortization 1,220,546 1,134,242 392,547
Loss (gain) on sales of assets 18,423 (18,931) (8,429)
Provision for loan losses -- -- 250,000
FHLB stock dividend (133,580) (137,720) (88,500)
Deferred taxes (167,988) 89,269 22,684
Compensation expense - stock options 89,763 93,340 57,312
CHANGE IN CASH DUE TO CHANGES IN CERTAIN ASSETS AND LIABILITIES:
Net change in accrued interest and other assets 324,277 410,555 215,220
Net change in accrued interest and other liabilities (313,041) (1,292,613) 323,300
- -----------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 5,926,783 5,204,825 4,867,753
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the maturity of held-to-maturity securities 575,000 3,425,000 215,000
Purchases of held-to-maturity securities (1,125,587) (2,371,411) --
Proceeds from maturity of available-for-sale securities -- -- 446,971
Proceeds from sales of available-for-sale securities 10,559,844 33,611,023 3,008,437
Purchases of available-for-sale securities (10,500,000) (64,980,969) (3,000,000)
Net (increase) decrease in loans (22,963,084) 31,608,420 (15,888,096)
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 (1,795,106) (675,541) (699,013)
Proceeds from the sale of other real estate 186,500 420,850 --
Proceeds from the sale of premises and equipment 8,585 -- 2,600
- -----------------------------------------------------------------------------------------------------------------------------
Net cash from investing activities (25,053,848) 332,456 (15,914,101)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 2,243,605 (6,930,019) 17,607,889
Proceeds from public stock offering, net of expenses -- -- 8,784,104
Cash dividends and fractional share payments (2,051,053) (1,674,498) (1,006,333)
Cash received from exercise of common stock options 111,554 36,517 88,068
Repurchase of common stock (3,103,935) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities (2,799,829) (8,568,000) 25,473,728
- -----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (21,926,894) (3,030,719) 14,427,380
CASH AND CASH EQUIVALENTS, beginning of year 40,613,570 43,644,289 29,216,909
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 18,686,676 $ 40,613,570 $ 43,644,289
- -----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest $ 6,486,065 $ 7,464,255 $ 4,048,741
Cash paid for taxes 2,944,100 2,805,000 1,320,994
SCHEDULE OF NONCASH ACTIVITIES
Stock dividends declared $- $ 3,010,529 $-
Transfer of loan balances to other real estate 150,309 453,079 --
Unrealized gain (loss) on available-for-sale securities, net of tax (1,578,632) 12,087 (7,247)
Income tax benefit of stock options exercised -- 60,500 86,896
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
11
<PAGE> 12
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.
Notes to Consolidated 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,
1999 and 1998, are either "available-for-sale" or "held-to-maturity" and conform
to the following accounting policies:
Securities held-to-maturity - Bonds, notes, and debentures for which the
Bank has the intent and ability to hold to maturity are reported at cost,
adjusted for premiums and discounts that are recognized in interest income using
the interest method over the period to maturity.
Securities available-for-sale - Available-for-sale securities consist of
bonds, notes, debentures, and certain equity securities not classified as
held-to-maturity securities. Securities are generally classified as
available-for-sale if the instrument may be sold in response to such factors as:
(1) changes in market interest rates and related changes in the security's
prepayment risk, (2) needs for liquidity, (3) changes in the availability of and
the yield on alternative instruments, and (4) changes in funding sources and
terms. Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of equity until
realized. Fair values for investment securities are based on quoted market
prices. Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary,
result in write-downs of the individual securities to their fair value. The
related write-downs would be included in earnings as realized losses. Premiums
and discounts are recognized in interest income using the interest method over
the period to maturity.
Loans, net of allowance for loan losses and unearned income - Loans are
stated at the amount of unpaid principal, reduced by an allowance for loan
losses and unearned income. Interest on loans is calculated by using the
simple-interest method on daily balances of the principal amount outstanding.
The allowance for loan losses is established through a provision for loan losses
charged to expenses. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into 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
12
<PAGE> 13
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 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 principally 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 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.
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 characteris-
13
<PAGE> 14
tics. Fair values for commercial real estate and commercial loans are estimated
using discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
Fair values for impaired loans are estimated using discounted cash flow analyses
or underlying collateral values, where applicable.
Deposit liabilities - The fair values disclosed for demand deposits are,
by definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money market accounts and certificates of deposit (CDs) approximate their fair
values at the reporting date. Fair values for fixed-rate CDs are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.
Short-term borrowings - The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings maturing
within 90 days approximate their fair values. Fair values of other short-term
borrowings are estimated using discounted cash flow analyses based on the Bank's
current incremental borrowing rates for similar types of borrowing arrangements.
Long-term debt - The fair values of the Bank's long-term debt are
estimated using discounted cash flow analyses based on the Bank's current
incremental borrowing rates for similar types of borrowing arrangements.
Accrued interest - The carrying amounts of accrued interest approximate
their fair values.
Off-balance-sheet instruments - The Bank's off-balance-sheet instruments
include unfunded commitments to extend credit and standby letters of credit. The
fair value of these instruments is not considered practicable to estimate
because of the lack of quoted market prices and the inability to estimate fair
value without incurring excessive costs.
Advertising - Advertising costs are charged to expense during the year
in which they are incurred. Advertising expenses were $137,276, $169,524, and
$114,670 for the years ended December 31, 1999, 1998, and 1997, respectively.
Stock options - VRB applies Accounting Principles Board Opinion 25 and
related interpretations in accounting for its stock option plans. Accordingly,
compensation costs are recognized as the difference between the exercise price
of each option and the market price of VRB's stock at the date each grant
becomes further vested. Accordingly, compensation costs charged to income were
$89,673, $93,340, and $57,312 in 1999, 1998, and 1997, respectively. Had
compensation for VRB's stock option plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the method
of Statement of Financial Accounting Standards No. 123, the Bank's net income
would have been affected as described in Note 14.
Recently issued accounting standards - In June 1999, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standard (SFAS) No. 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that VRB recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. SFAS No. 133, as amended by
SFAS No. 137, shall be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. However, management of VRB believes this
accounting standard will have no material effect on the financial condition and
results of operation of the Bank.
14
<PAGE> 15
Other issued but not yet required FASB statements are not currently
applicable to the Bank's operations. Management believes these pronouncements
will also have no material effect upon VRB's financial position or results of
operation.
Reclassifications - Certain reclassifications have been made to the 1998
and 1997 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
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 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 unaudited pro forma results of operations for the
year ended December 31, 1997, as though the acquisition had occurred on January
1, 1997. The pro forma results do not necessarily indicate the actual result
that would have been obtained had the acquisition of CBC actually occurred on
January 1, 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
NOTE 2: The following are the fair values of assets acquired and liabilities
assumed as of the January 5, 1998, acquisition date (in thousands):
- -----------------------------------------------------------------------------------------
<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
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Pro forma results of operation for the year ended December 31, 1997
- -----------------------------------------------------------------------------------------
Net interest income before provision for loan loss $ 16,404
Net income 3,713
Earnings per common share:
Basic 0.51
Diluted 0.50
- -----------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NOTE 3: Investment Securities. The amortized cost and estimated market values of
investment securities at December 31, 1999 and 1998, are as follows (in
thousands):
- ---------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
HELD-TO-MATURITY SECURITIES:
- ---------------------------------------------------------------------------------------------------------
State and municipal subdivisions $ 18,010 $ 137 $ (249) $ 17,898
- ---------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasuries and agencies $ 56,990 $- $ (2,234) $ 54,756
Collateralized mortgage obligations 132 2 -- 134
- ---------------------------------------------------------------------------------------------------------
$ 57,122 $ 2 $ (2,234) $ 54,890
- ---------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Note 3: Investment Securities
The amortized cost and estimated market value of investment securities
at December 31, 1999, 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, 1999 and 1998, investment securities with an amortized
cost of $6,185,993 and $8,168,284, 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>
- ----------------------------------------------------------------------------------------------------------------------------
NOTE 3: Maturity Table
- ----------------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY AVAILABLE-FOR-SALE
SECURITIES SECURITIES
- ----------------------------------------------------------------------------------------------------------------------------
ESTIMATED ESTIMATED
AMORTIZED COST MARKET VALUE AMORTIZED COST MARKET VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 205 $ 206 $ 2,572 $ 2,549
Due after one year through five years 3,394 3,418 38,050 36,672
Due after five years through ten years 3,089 3,108 15,500 14,756
Due after ten years 11,322 11,166 1,000 913
- ----------------------------------------------------------------------------------------------------------------------------
$18,010 $17,898 $57,122 $54,890
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
Note 4: Loans and Allowance for Loan Losses
The Bank's recorded investment in impaired loans was $523,857 and
$262,456 at December 31, 1999 and 1998, respectively. The average recorded
investment in impaired loans approximates their recorded investment at December
31, 1999 and 1998. The total allowance for loan losses related to these loans at
December 31, 1999 and 1998, was approximately $70,000 and $42,000, respectively.
Interest income recognized on impaired loans during the years ended December 31,
1999, 1998, and 1997, was not significant. Management estimates that in 1999,
approximately $42,600 of interest income was not recognized on impaired loans on
nonaccrual status, compared with approximately $35,300 in 1998 and $29,600 in
1997.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
NOTE 4: The loan portfolio, including loans held-for-sale,
consisted of the following (in thousands):
- ----------------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate - construction $ 29,034 $ 23,552
Real estate - residential and commercial 134,765 126,675
Commercial 23,940 16,418
Installment 13,946 12,327
Other loans 51 98
- ----------------------------------------------------------------------------------------------------------
201,736 179,070
- ----------------------------------------------------------------------------------------------------------
Allowance for loan losses (3,503) (3,539)
Unearned loan fee income (232) (343)
- ----------------------------------------------------------------------------------------------------------
$ 198,001 $ 175,188
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
The following is an analysis of the changes in the allowance for loan losses (in
thousands):
- --------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 3,539 $ 1,780 $ 1,632
Acquired upon CBC acquisition (Note 2) -- 1,898 --
Provision for possible loan losses -- -- 250
Loans charged-off (86) (189) (141)
Recoveries 50 50 39
- --------------------------------------------------------------------------------------------------------------------
Ending balance $ 3,503 $ 3,539 $ 1,780
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 5: Bank Premises and Equipment
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
NOTE 5: Bank premises, furniture, and equipment consisted of the following
(in thousands):
- ---------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 2,069 $ 1,613
Buildings 6,001 5,375
Furniture and equipment 4,268 4,136
- ---------------------------------------------------------------------------------------------------
12,338 11,124
- ---------------------------------------------------------------------------------------------------
Less: accumulated depreciation (4,541) (4,625)
- ---------------------------------------------------------------------------------------------------
$ 7,797 $ 6,499
- ---------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
Note 6: Accrued Interest and Other Assets
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NOTE 6: Accrued interest and other assets consisted of the following (in thousands):
- ---------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued interest receivable $1,925 $1,931
Prepaid expenses 272 234
Deferred taxes 1,099 553
Other assets 125 152
- ---------------------------------------------------------------------------------------------------------
$3,421 $2,870
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Note 7: Time Deposits
Time certificates of deposit of $100,000 and over aggregated $8,574,472
and $8,089,537 at December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
NOTE 7: At December 31, 1999, the scheduled maturities for time deposits is as
follows (in thousands):
- ----------------------------------------------------------------------------------------------
<S> <C>
2000 $52,802
2001 2,459
2002 2,774
2003 222
2004 and thereafter 223
- ----------------------------------------------------------------------------------------------
$58,480
- ----------------------------------------------------------------------------------------------
</TABLE>
Note 8: Income Taxes
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
NOTE 8: The income tax provision consisted of the following (in thousands):
- -----------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable $2,665 $2,877 $1,715
Deferred 168 89 22
- -----------------------------------------------------------------------------------------------------------------
Provision for income taxes $2,833 $2,966 $1,737
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Deferred income taxes represent the tax effect of differences in timing between
financial income and taxable income. Deferred income taxes, according to the
timing differences, which caused them, were as follows (in thousands):
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accounting loan loss provision less than (in excess of) tax provision $ 14 $ 69 $ (58)
Accounting depreciation less than tax depreciation 42 46 3
Deferred compensation 15 9 (6)
Accounting loan fees in excess of tax loan fees 178 67 66
Federal Home Loan Bank stock dividends 54 52 28
Cash to accrual adjustment -- (72) --
Option compensation expense (36) (72) --
Other differences (99) (10) (11)
- ----------------------------------------------------------------------------------------------------------------------------
$ 168 $ 89 $ 22
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
The net deferred tax benefits included in other assets in the accompanying
consolidated balance sheets include the following components (in thousands):
- --------------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Loan loss reserve $ 1,062 $ 1,076
Deferred compensation 64 100
Other 242 86
- --------------------------------------------------------------------------------------------------------
1,368 1,262
- --------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Accumulated depreciation (193) (151)
Deferred loan fees (543) (365)
Federal Home Loan Bank stock dividends (247) (193)
(983) (709)
- --------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 385 $ 553
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
A reconciliation between the statutory federal income tax rate and the
effective tax rate is as follows (in thousands):
- -------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 2,647 $ 2,684 $ 1,850
State income tax expense, net of federal income tax benefit 370 344 237
Effect of nontaxable interest income (389) (321) (294)
Non-deductible goodwill 275 219 --
Other (70) 40 (56)
- -------------------------------------------------------------------------------------------------------------------------
$ 2,833 $ 2,966 $ 1,737
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Effective tax rate 37% 38% 32%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The exercise of stock options which have been granted under VRB
Bancorp's stock option plans give rise to compensation which is includable in
the taxable income of the participant 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%.
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 nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, and financial guarantees written, is represented by
the contractual notional amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
19
<PAGE> 20
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.
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 1999, 1998, or 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
NOTE 9: A summary of the notional amounts of the Bank's financial instruments
with off-balance-sheet risk at December 31, 1999 and 1998, follows:
- -------------------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
Commitments to extend credit $32,106,632 $21,165,221
Commercial and standby letters of credit $ 1,113,024 $ 1,090,009
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Note 10: Fair Values of Financial Instruments
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 assets or liabilities at December 31, 1999 and 1998, the
estimated fair values would necessarily have been realized at that date, since
market values may differ depending on various circumstances. The estimated fair
values at December 31, 1999 and 1998, should not necessarily be considered to
apply at subsequent dates. 25
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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
NOTE 10: The following table estimates fair value and the related carrying
values of the Bank's financial instruments (in thousands):
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 17,087 $ 17,087 $ 14,514 $ 14,514
Interest-bearing deposits with other banks 1,600 1,600 3,100 3,100
Federal funds sold -- -- 23,000 23,000
Securities held-to-maturity 18,010 17,898 17,454 18,247
Securities available-for-sale 54,890 54,890 57,264 57,264
Federal Home Loan Bank stock 1,899 1,899 1,765 1,765
Loans held-for-sale 1,183 1,183 -- --
Loans, net of allowance for loan losses and unearned income 196,818 196,208 175,188 175,233
Accrued interest 1,925 1,925 1,931 1,931
FINANCIAL LIABILITIES:
Demand and savings deposits 217,886 217,886 207,304 207,304
Time deposits 58,480 58,355 66,819 67,196
Accrued interest $ 275 $ 275 $ 348 $ 348
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
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, 1999. 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
Litigation - 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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
NOTE 12: The following is a schedule of future minimum lease payments under
operating leases in effect as of December 31, 1999:
- ---------------------------------------------------------------------------------------------
<S> <C>
YEARS ENDING DECEMBER 31
2000 $ 249,453
2001 244,031
2002 241,065
2003 177,844
2004 161,646
Thereafter 361,598
- ---------------------------------------------------------------------------------------------
Total minimum payments required $1,435,637
- ---------------------------------------------------------------------------------------------
</TABLE>
Total rental expense was $239,785, $226,920, and $94,350 in 1999, 1998,
and 1997, respectively.
Year 2000 - Because of the unprecedented nature of the Year 2000 issue,
its effects, if any, may not be identified until a future date. Management
cannot assure that VRB or the Bank have has identified all Year 2000 issues,
that VRB's or the Bank's remediation efforts has been successful in whole or in
part, or that parties with whom VRB or the Bank does business will not be
significantly impacted by Year 2000 issues.
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, 1999, 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 10% of total assets (approximately $30 million at
December 31, 1999 and 1998) with interest at the FHLB's cash management rate.
There were no borrowings outstanding at December 31, 1999 and 1998.
21
<PAGE> 22
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
$89,763, $93,340, and $57,312 as compensation expense relating to 15,695,
16,851, and 18,790 shares of common stock optioned to its directors during 1999,
1998, and 1997, respectively.
Had compensation cost for the Bank's 1999, 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, 1999, 1998, and 1997, would approximate the pro forma
amounts below (in thousands except per share data):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
NOTE 14: Stock Option Plans
- -------------------------------------------------------------------------------------------------
1999 AS REPORTED PRO FORMA
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 4,888 $ 4,788
Basic earnings per common and common equivalent share 0.57 0.56
Diluted earnings per common and common equivalent share 0.57 0.56
1998 AS REPORTED PRO FORMA
- -------------------------------------------------------------------------------------------------
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
1997 AS REPORTED PRO FORMA
- -------------------------------------------------------------------------------------------------
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>
22
<PAGE> 23
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
NOTE 14: The following summarizes options available and outstanding under both
the Directors' and Employees' Plans as of December 31, 1999, after the effect of
the current year's stock dividend (in thousands with the exception of the
exercise price):
- -----------------------------------------------------------------------------------------------------------------------------------
DIRECTORS' PLAN EMPLOYEES' PLAN
WEIGHTED AVERAGE WEIGHTED AVERAGE COMBINED PLANS
SHARES OPTION PRICE SHARES OPTION PRICE SHARES
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 146 55 201
- -----------------------------------------------------------------------------------------------------------------------------------
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 129 42 171
- -----------------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1998 51 $ 2.58 237 $ 6.28 288
- -----------------------------------------------------------------------------------------------------------------------------------
Options granted in 1999 16 4.05 5 7.17 21
Options exercised in 1999 (25) 3.09 (11) 3.06 (36)
Options forfeited -- -- (32) 8.12 (32)
- -----------------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1999 42 $ 2.82 199 $ 6.18 241
- -----------------------------------------------------------------------------------------------------------------------------------
Options exercisable at December 31, 1999 42 2.82 52 5.54 94
Options reserved at December 31, 1999 113 69 182
- -----------------------------------------------------------------------------------------------------------------------------------
</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 3.24% in 1999, 5.75% in 1998, and 1.52% in 1997; (2) expected
volatility of 28.57% in 1999, 18.35% in 1998, and 28.00% in 1997; (3) risk-free
rates of 6.50% in 1999, 4.75% in 1998; and 6.50% in 1997; and, (4) expected life
of one to ten years for all three years.
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
Note 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 $337,418, $313,562, and $168,557 in 1999, 1998, and 1997,
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 $222,313, $226,381, and $189,640
in 1999, 1998, and 1997, respectively.
23
<PAGE> 24
The Bank has established a bonus program as part of the compensation
package it provides to employees. At December 31, 1999, 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 preceding year. An executive bonus
program is similarly funded and is based on current year profits with payments
measured on the basis of return on assets. For the years ending December 31,
1999, 1998, and 1997, $660,000, $620,000, and $542,400, 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, 1999, a liability for the supplemental retirement plans was recognized and
funded in the amount of $225,736. During 1999, 1998, and 1997, the Bank recorded
Plan expenses of $38,600, $38,600, and $21,000, respectively.
Note 16: Earnings Per Common and Common Equivalent Shares
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, 1998 and 1997, have been
restated to conform with the current year presentation.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
NOTE 16: The following table illustrates the computations of basic and diluted
earnings per share for the years ended December 31, 1999, 1998, and 1997
(dollars in thousands except per share amounts):
- -------------------------------------------------------------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
- -------------------------------------------------------------------------------------------------------------------
1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share
Income available to common shareholders $4,888 8,579 $ 0.57
Effect of dilutive securities
Outstanding common stock options -- 43
Income available to common shareholders plus assumed conversions $4,888 8,622 $ 0.57
- -------------------------------------------------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per share
Income available to common shareholders $4,927 8,685 $ 0.57
Effect of dilutive securities
Outstanding common stock options -- 77
Income available to common shareholders plus assumed conversions $4,927 8,762 $ 0.56
- -------------------------------------------------------------------------------------------------------------------
1997
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per share
Income available to common shareholders $3,704 7,639 $ 0.48
Effect of dilutive securities -- 21
Income available to common share-
holders plus assumed conversions $3,704 7,660 $ 0.48
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
NOTE 17: The amount of loans outstanding to directors, executive officers,
principal stockholders, and companies with which they are associated was as
follows:
- ---------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
Beginning balance $ 1,946,548 $ 1,354,803
Loans made 4,194,000 891,665
Loans paid (584,600) (299,920)
- ---------------------------------------------------------------------------------------
Ending balance $ 5,555,948 $ 1,946,548
- ---------------------------------------------------------------------------------------
</TABLE>
Note 18: Regulatory Matters
VRB Bancorp and the Bank are 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 VRB Bancorp and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, VRB Bancorp and the Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
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 VRB Bancorp and the Bank to maintain minimum amounts and ratios
(set forth in the table below) 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, 1999, that
VRB Bancorp and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 1999, 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. VRB Bancorp's capital ratios are not significantly
different from those of the Bank.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
NOTE 18: Regulatory capital (in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
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, 1999
Total capital to risk weighted assets $28,728 12.7% $18,080 >=8.0% $22,601 >=10.0%
Tier 1 capital to risk weighted assets 25,895 11.5% 9,040 >=4.0% 13,560 >=6.0%
Tier 1 capital to average assets 25,895 8.3% 12,442 >=4.0% 15,553 >=5.0%
As of December 31, 1998
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%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
PARENT COMPANY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
NOTE 19: Condensed financial information for VRB Bancorp (unconsolidated parent
company only) is as follows:
- -------------------------------------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 387,667 $ 49,986
Investment in subsidiary 33,239,060 35,126,747
Goodwill 51,675 58,722
- -------------------------------------------------------------------------------------------------------------
Total assets 33,678,402 35,235,455
- -------------------------------------------------------------------------------------------------------------
LIABILITIES 69,058 --
SHAREHOLDERS' EQUITY
Common stock 8,699,060 21,583,869
Retained earnings 16,428,287 13,590,957
Accumulated other comprehensive income (loss), net of taxes (1,518,003) 60,629
- -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 33,678,402 $ 35,235,455
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Equity in undistributed (excess distribution of) earnings of subsidiary bank $ (416,627) $ 4,133,730 $ 2,810,666
Dividends 5,320,000 800,000 900,000
Other income 57 -- --
EXPENSES
Goodwill and other administrative expenses (7,047) (7,047) (7,047)
Professional fees (8,000) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,888,383 $ 4,926,683 $ 3,703,619
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash from operating activities:
Net income $ 4,888,383 $ 4,926,683 $ 3,703,619
Equity in undistributed (excess distribution of) earnings of subsidiary bank 416,627 (4,133,730) (2,810,666)
Amortization 7,047 7,047 7,047
Increase in liabilities 69,058 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 5,381,115 800,000 900,000
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash investment in subsidiary -- -- (8,000,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from public stock offering, net of costs -- -- 8,784,104
Cash dividends and fractional share payments (2,051,053) (1,674,498) (1,006,333)
Repurchase of common stock (3,103,935) -- --
Cash received from exercise of common stock options 111,554 36,517 88,068
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities (5,043,434) (1,637,981) 7,865,839
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 337,681 (837,981) 765,839
CASH AND CASH EQUIVALENTS, beginning of year 49,986 887,967 122,128
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 387,667 $ 49,986 $ 887,967
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 27
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.
Note 21: Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NOTE 21: Quarterly financial information (in thousands):
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 QUARTER ENDED DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
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
- ---------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 0.14 $ 0.14 $ 0.14 $ 0.15
Diluted earnings per common share $ 0.14 $ 0.13 $ 0.14 $ 0.15
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1999 and 1998, and the related consolidated
statements of income and comprehensive income, changes in shareholders'
equity, and cash flows for the years ended December 31, 1999, 1998, and 1997.
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, 1999 and 1998, and the results of its operations and cash
flows for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ [SIGNATURE ELIGIBLE]
Portland, Oregon
January 14, 2000
27
<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 27, 2000, of our report
dated January 14, 2000, relating to the financial statements of VRB Bancorp.
/s/ Moss Adams, LLP
- ------------------------------
Portland, Oregon
March 23, 2000
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 17,087
<INT-BEARING-DEPOSITS> 1,600
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 54,890
<INVESTMENTS-CARRYING> 18,010
<INVESTMENTS-MARKET> 17,898
<LOANS> 201,504
<ALLOWANCE> 3,503
<TOTAL-ASSETS> 311,504
<DEPOSITS> 276,366
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,528
<LONG-TERM> 0
0
0
<COMMON> 18,699
<OTHER-SE> 14,910
<TOTAL-LIABILITIES-AND-EQUITY> 311,504
<INTEREST-LOAN> 17,345
<INTEREST-INVEST> 5,348
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 22,694
<INTEREST-DEPOSIT> 6,413
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 16,280
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,564
<INCOME-PRETAX> 7,772
<INCOME-PRE-EXTRAORDINARY> 7,772
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,888
<EPS-BASIC> .57
<EPS-DILUTED> .57
<YIELD-ACTUAL> .083
<LOANS-NON> 551
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,539
<CHARGE-OFFS> 86
<RECOVERIES> 50
<ALLOWANCE-CLOSE> 3,503
<ALLOWANCE-DOMESTIC> 3,503
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
