10-Q 1 e10-q.txt FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE THREE MONTHS ENDED JUNE 30, 2000 ---------------------------------------- 0-25932 ------------------------ (Commission File Number) VRB BANCORP ----------- (Exact name of registrant as specified in its charter) OREGON 93-0892559 ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 110 Pine Street, Rogue River, Oregon 97537 --------------------------------------- -------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (541) 582-4554 --------------

Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) to 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. ~~Class Outstanding at July 15, 2000 ----- ---------------------------- Common stock, no par value 8,301,361~~

2 VRB BANCORP Form 10-Q June 30, 2000 Table of contents

3 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS VRB BANCORP CONSOLIDATED BALANCE SHEETS

1 4 VRB BANCORP CONSOLIDATED STATEMENTS OF INCOME

2 5 VRB BANCORP CONSOLIDATED STATEMENTS OF INCOME

3 6 VRB BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME

4 7 VRB BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS

5 8 VRB BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Organization The accompanying financial statements reflect the operations of VRB Bancorp and its wholly owned subsidiary, Valley of the Rogue Bank. NOTE 2 - Basis of presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, and in compliance with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Adjustments to the interim financial statements are of a normal recurring nature and include all adjustments that, in the opinion of management, are necessary to the fair presentation of the financial position and operating results for the interim periods. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Bank's 1999 Annual Report to Shareholders. The operating results for the six months ended June 30, 2000, are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2000, or any other future interim period. NOTE 3 - 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 period. Diluted earnings per share reflect the potential dilution that could occur if common shares were issued pursuant to the exercise of options under the Company's stock option plans. 6 9 The following table illustrates the computations of basic and diluted earnings per share for the three-month and six-month periods ended June 30, 2000 and 1999 (in thousands except per share amounts):

7 10 Disclosure Regarding Forward-Looking Statements The following discussion includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the current beliefs of the Company's management and on assumptions made by management based on currently available information. All statements other than statements of historical fact, regarding the Company's financial position, business strategy and plans and objectives for future operations 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 in part to help identify forward-looking statements. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that such expectations will prove correct. Forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially and adversely. These risks and uncertainties include the Company's ability to maintain or expand its market share or net interest margins and to implement its marketing and growth strategies. Further, actual results may be affected by the Company's ability to compete on price and other factors with other financial institutions; customer acceptance of new products and services; and, general trends in the banking industry and the regulatory environment, as they relate to the Company's cost of funds and returns on assets. In addition, there are risks inherent in the banking industry relating to collectibility of loans and changes in interest rates. The reader is advised that this list of risks is not exhaustive and should not be construed as any prediction by the Company as to which risks would cause actual results to differ materially from those indicated by the forward-looking statements. PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION INTRODUCTION VRB Bancorp was organized in 1983 under Oregon law as the 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. INDUSTRY TRENDS AND COMPANY ANNOUNCEMENTS Interest Rate environment: By the end of the second quarter, the Bank's prime lending rate had risen to 9.25%, 1.50% higher than prime one year ago. However, the rise in interest rates has had a relatively minor impact on the Bank's interest margin, which remained close to the 6% mark for the year. In addition, loan demand remained steady for the period, with the Bank's loan portfolio growing by 9% over the first six months of 2000. Branch openings and closures: On January 31, 2000, the Bank opened a temporary branch in Central Point, Oregon. Construction on the permanent facility has commenced and the new facility is expected to open for business in the fourth quarter. Central Point continues to be one of the fastest growing communities in southern Oregon and initial acceptance of the branch has been very positive with branch assets and deposits growing to $9 million and $1.5 million, respectively. On May 15, 2000, the Bank announced the impending closure of one of its four branches located in Medford, Oregon. The branch closure, scheduled for August 15, 2000, comes as a result the Company's plan to streamline its branch network and reduce operating overhead. 8 11 MATERIAL CHANGES IN THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999 Earnings: Second quarter earnings grew by 5% to $1,241,000 when compared 1999 earnings of $1,178,000. On a per share basis, earnings increased by 7%, totaling $.15 for the quarter ended June 30, 2000 compared with $.14 for the same period in 1999. Net interest income: Net interest income (interest income less interest expense) increased from $4,058,000 to $4,109,000 when comparing the three months ended June 30, 2000 and 1999. The increase reflected the net effect of the following: - Interest earned on loans grew by 10% in part as a result of loan growth of 36% over the same quarter last year. - Unusually strong loan growth caused the Bank to utilize its line of credit with the Federal Home Loan of Seattle, and 84% of second quarter loan growth was funded with debt. For the period, the Bank averaged $4.6 million in overnight borrowings, resulting in interest expense of approximately $79,000. (See liquidity review on page 11) - Interest expense grew as the Bank paid a higher average rate on interest bearing deposits (primarily time certificates of deposit). Overall, the Bank's cost of funds grew from 2.27% to 2.41%. MATERIAL CHANGES IN THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 Earnings: Earnings reached $2,458,000 for the year. The results were a slight increase over last year's earnings of $2,429,000 during the same period. On a per share basis, earnings increased from $.28 in 1999, to $.30 in 2000, an increase of 7%. A decrease in the number of shares outstanding, as a result of the Company's 1999 share buyback program, further enhanced the Company's earnings on a per share basis. Net interest income: Interest income on loans and investments increased on a tax equivalent basis by $467,000 when comparing the six months ended June 30, 2000 to the same period in the prior year. Average loans outstanding grew by $24.8 million, or 14%, and contributed substantially to the higher income levels. Gains in interest income were partially offset by increases in the Bank's interest expense. Deposit rates increased throughout the first six months of 2000, reflecting recent monetary policy and competitive pressures. As a result, the Bank paid an additional $348,000 on interest bearing deposit accounts and overnight funds. We expect this trend to continue if the Federal Reserve Board further tightens its monetary policy in attempt to control inflation. 9 12 The above discussion is supported in the following analysis of the Bank's interest margin (on a tax equivalent basis) for the six months ended June 30, 2000 and 1999:

(1) Tax exempt income has been adjusted to a tax equivalent basis at the Bancorp's effective tax rate of 37% (2) Non accrual loans are included in the average balance 10 13 The following table further analyzes the Bank's interest margin, and attributes increases in interest income and interest expense to changes in "volume" or changes in interest "rate".

Fee income: Fee income, or non-interest income, increased by $228,000, or 23% when comparing the first six months of 1999 and 2000. In May, the Bank updated its fee structure, which resulted in the more frequent assessment of account charges for certain products and services. Also contributing to the increase in fee income were ATM surcharge fees (beginning February 2000) and fees from the origination and sale of mortgage loans. Cost of operations: Cost of operations, or non-interest expense, grew to $5.4 million year-to-date. Salaries and depreciation expense prompted the 7% increase, reflecting this year's investment in both people and technology. The Bank's efficiency ratio, or non-interest expense as a percentage of total net interest income plus non-interest income, was 58.2% for the six months ended June 30, 2000 compared to 56.7% for the same period in 1999. Excluding the amortization of intangibles, such as goodwill (an approximate charge of $640,000 per year), the efficiency ratio improves to 54.1% and 52.3% for the periods ended June 30, 2000 and 1999, respectively. CHANGES IN FINANCIAL CONDITION AS OF JUNE 30, 2000 Liquidity review: The Bank must maintain cash flows adequate to fund operations and meet commitments on a timely and cost effective basis. Overall liquidity declined throughout the quarter as loan balances grew while deposits remained relatively unchanged. As a result, the Bank drew from its line of credit with the Federal Home Loan Bank ("FHLB") intermittently during the period. At the end of the second quarter, the Bank had $11 million in overnight borrowings. Management expects that the Bank will continue to borrower from the FHLB. However, the volume of such borrowings is dependent on deposit growth and on the Bank's ability to continue to grow its loan portfolio. Currently, the Bank has a $30 million line of credit with the FHLB of Seattle to be utilized as needed. 11 14 For the first six months of 2000, the Bank experienced net cash outflows (cash and federal funds) of nearly $1,000,000. The net impact of cash inflows and outflows included net loan growth of $17.5 million, funded by a combination of $11.0 million in debt (reflected in an increase in the FHLB line of credit), new deposits of $2.7 million and $2.9 million in cash from ongoing operations. Capital management: As of June 30, 2000, shareholders' equity totaled $34.9 million, an increase of $1.3 million when compared to total shareholders' equity as of the end of the last fiscal year. The increase in shareholders' equity reflects earnings of $2.5 million offset by dividends of one million ($.12 per share), paid May 1, 2000. The Bank is required to maintain minimum amounts of capital to "risk-weighted" assets, as defined by banking regulators. At June 30, 2000, the Bank was required to have Tier 1 and Total Capital ratios of 4.0% and 8.0%, respectively. The Bank's actual ratios at that date were 10.9% and 12.1%, respectively. Balance Sheet Analysis: The table below provides abbreviated balance sheets, which illustrate the material changes in financial condition between December 31, 1999 and June 30, 2000:

Loans: The Bank offers a broad range of commercial and consumer lending products. Credit is extended principally to small and medium sized businesses, and local residents. Outstanding loans totaled $219.4 million at June 30, 2000, representing a $17.6 million increase when compared to loans of $201.7 million as of December 31, 1999. Commitments, principally real estate construction notes and commercial lines of credit, totaled $34.3 million at June 30, 2000, relatively unchanged when compared to commitments outstanding as of the end of the previous year. 12 15 Reflective of the Bank's underwriting standards, as well as local economic trends, 78% of the Bank's loan portfolio is secured by real estate. Of the $148 million in real estate mortgage loans outstanding as of June 30, 2000, approximately $104 million were made to commercial customers and were secured by the real estate occupied by the customers' businesses. An additional $20 million represented loans secured by multi-family (5 or more) residential property and the remaining $24 million was secured by single-family residential property. This is relatively unchanged from previous reporting periods. The following table presents the composition of the Bank's loan portfolio at the date indicated:

Loan Loss Reserve: The reserve for loan losses represents management's estimate of the Bank's exposure to credit loss when evaluating the asset quality of the loan portfolio. The reserve is based primarily on management's evaluation of the overall risk characteristics of the Bank's loan portfolio, which is influenced by non-performing loans, value of collateral, general and local economic conditions and historical loan loss experience. Management seeks to control credit losses by maintaining strong underwriting standards and by closely monitoring the borrower's financial condition. As of June 30, 2000, the Bank's allowance for loan losses was $3,494,000 or 1.62% of net loans, and is believed to be adequate to absorb potential credit losses that may arise in the normal course of business. As such, the Bank did not record a loan loss provision in the first or second quarter of 2000. As of June 30, 2000, total non-performing assets as a percentage of total assets declined .09%, or $202,000. Loan charge-offs were minimal in the first and second quarter of the year. After netting recoveries against charge-offs, net charge-offs were just over $9,000. 13 16 The following table presents information with respect to non-performing assets:

Investments: Investment securities are purchased to help manage liquidity and generate after tax profits consistent with the risk guidelines established by management and the Board of Directors. As of June 30, 2000, the Bank's portfolio of investment securities totaled $73.2 million, virtually unchanged when compared to the December 31, 1999 balance of $74.8 million. VRB follows financial accounting principles that require the identification of investment securities as held-to-maturity ("HTM") or available-for-sale ("AFS"). Securities designated as HTM are those that VRB has the intent and ability to hold until they mature or are called, rather than those that management may sell if liquidity requirements dictate. As of June 30, 2000, the Bank's investment portfolio that is currently AFS totaled $54.0 million, or approximately 74% of the total portfolio. Due to rising interest rates, the market value the Bank's AFS portfolio has dropped by approximately $2.6 million, before accruing for tax benefits. This represents an 4.5% percent decline in the aggregate market value of the Bank's available for sale investments. If long-term interest rates continue to rise, the value of the Bank's investment holdings will most likely continue to decline. This could hinder the Bank's ability to liquidate securities quickly without incurring a loss on the sale. Because future rate fluctuations are subject to great uncertainty, management continues to monitor the market value of the portfolio in relation to current liquidity needs on a regular basis. 14 17 The following table provides the book value of the Bank's investment portfolio as divided between HTM and AFS as of June 30, 2000 and December 31, 1999:

Deposits: Deposits are the Bank's principal source of funds available for lending and other investment opportunities. Deposit inflows and outflows are influenced by general interest rate changes, competition and local, regional and national economic conditions. Substantially all of the Bank's depositors are individuals or businesses located in southern Oregon. Total deposits increased $2.7 million, or 1%, when comparing June 30, 2000 to the end of the prior fiscal year. Non-interest bearing deposits have increased to 29.3% of total deposits, up from 27.1% at year-end. High concentrations in non-interest bearing accounts provide inexpensive funding evidenced by the fact that the Bank's cost of funds has averaged 2.50% for the year, to date. However, non-interest bearing account balances are also prone to volatility and can fluctuate from day to day depending on the time of month and external events like tax deadlines. The Bank's current deposit mix is further illustrated below:

15 18 PART I - FINANCIAL INFORMATION ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, interest rate and credit risks are the most significant market risks that could have an adverse impact on the Bank's financial condition and results of operation. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk do not have a material effect on Bank operations at this time. Interest rate risk: Interest rate risk is managed by monitoring the Bank's "gap" position, and the sensitivity of the Bank's net interest margins and capital position to changing interest rate environments. The Bank's gap is the difference between re-pricing assets and re-pricing liabilities over specific time periods. By matching the re-pricing characteristics of the Bank's assets and liabilities, the Bank can minimize the potential adverse impact of changing interest rates. Periodically, the Bank will "rate shock" the balance sheet by simulating a 100 and 200 basis point change in interest rates. Rate shock simulates an instantaneous adjustment in market rates on a balance sheet level to determine the effect such changes would have on the Bank's income levels and capital position for the succeeding twelve months. As of June 30, 2000, management's analysis indicated that the Bank's overall interest rate risk was within acceptable guidelines and that there are no material changes in the Bank's exposure to mismatched re-pricing positions from that reported as of December 31, 1999. Credit risk: Credit risk is principally controlled by prudent loan underwriting standards and adequate allowances for potential loan loss (See discussion under Item 2 - Management's discussion and analysis, Loans and Loan Loss Reserve). 16 19 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings: The registrant is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the registrant. ITEM 2. Changes in Securities: None ITEM 3. Defaults Upon Senior Securities: None ITEM 4. Submission of Matters to a Vote of Security Holders: None ITEM 5. Other Information: None ITEM 6a. Exhibits The following exhibits are being filed with or incorporated by reference into this report in Form 10-Q and this list shall constitute the exhibit index: 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 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* 10.4 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) --------------------------- * 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 20 10.5 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) 10.6 Employment Agreement dated February 27, 1997 by and among Valley of the Rogue Bank, VRB Bancorp and Felice Belfiore** 10.7 Employment Agreement dated May 1, 1996 by and between Valley of the Rogue Bank and Brad Copeland** 15.0 Independent Accountant's Review Report 27.0 Financial Data Schedule ITEM 6b. REPORTS ON FORM 8-K: NONE 18 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 3, 2000 /S/ William A. Haden ---------------------------------------- William A. Haden President Chief Executive Officer Date: August 3, 2000 /S/ Felice Belfiore ---------------------------------------- Felice Belfiore Senior Vice President Chief Financial Officer 19

VRB BANCORP 10-Q