<PAGE> 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 MARCH 31, 1998
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.
<TABLE>
<CAPTION>
Class Outstanding at March 31, 1998
----- -----------------------------
<S> <C>
Common Stock, No par value 8,345,208
</TABLE>
<PAGE> 2
VRB BANCORP
Form 10-Q
March 31, 1998
Table of Contents
------------------------
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION Number
------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 ..................... 1
Consolidated Statements of Income
For the Three Months Ended March 31, 1998 and 1997 ....... 2
Consolidated Statements of Changes in Shareholders' Equity
For the Period December 31, 1996 through March 31, 1998 .. 3
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1998 and 1997 ....... 4
Notes to Consolidated Financial Statements ............... 5-7
Item 2. Management's discussion and analysis of financial
condition and results of operations ...................... 8-15
PART II OTHER INFORMATION
Item 1. Legal proceedings ........................................ 16
Changes in securities .................................... 16
Defaults upon senior securities .......................... 16
Submission of matters to a vote of security holders ...... 16
Other information ........................................ 16
Exhibits and reports on Form 8-K ......................... 16-17
SIGNATURES .................................................................. 18
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VRB BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
------------ ------------
1998 1997
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,259,131 $ 11,144,289
Federal funds sold 41,200,000 32,500,000
------------ ------------
Total cash and cash equivalents 52,459,131 43,644,289
------------ ------------
Investments
U.S. Treasury and agencies 18,346,132 20,074,686
States and political subdivisions 17,658,946 18,415,049
Corporate and other investments 1,234,311 1,108,163
Federal Home Loan Bank stock 1,667,100 1,208,000
Loans, net of allowance for loan losses and unearned income 199,199,619 115,413,898
Premises and equipment, net 6,317,947 4,411,372
Other real estate owned -- --
Accrued interest and other assets 13,678,892 2,378,189
------------ ------------
TOTAL ASSETS $310,562,078 $206,653,646
============ ============
LIABILITIES
Deposits
Demand deposits $ 62,033,730 $ 49,998,132
Interest bearing demand deposits 110,368,949 80,334,130
Savings deposits 24,817,527 15,308,820
Time deposits 78,075,233 27,535,264
------------ ------------
Total deposits 275,295,439 173,176,346
Accrued interest and other liabilities 2,203,805 1,616,745
------------ ------------
Total liabilities 277,499,244 174,793,091
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, voting, $5 par value; 5,000,000 shares
authorized and unissued
Preferred stock, nonvoting, $5 par value; 5,000,000 shares
authorized and unissued
Common stock, no par value, 10,000,000 shares authorized
at March 31, 1998 and December 31, 1997, respectively 18,468,516 18,462,712
Unrealized gain on available for sale securities 2,655 48,542
Retained earnings 14,591,663 13,349,301
------------ ------------
Total shareholders' equity 33,062,834 31,860,555
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $310,562,078 $206,653,646
============ ============
</TABLE>
1
<PAGE> 4
VRB BANCORP
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------
1998 1997
---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $5,113,455 $2,643,614
Interest on investment securities:
U.S. Treasury and agencies 338,893 330,064
States and political subdivisions 231,520 234,790
Corporate and other investments 48,346 42,261
Federal funds sold 411,931 220,176
---------- ----------
Total interest income 6,144,145 3,470,905
---------- ----------
INTEREST EXPENSE
Interest bearing demand deposits 831,300 561,150
Savings deposits 133,551 85,096
Time deposits 1,073,799 319,879
Borrowed funds 4,490 --
---------- ----------
Total interest expense 2,043,140 966,125
---------- ----------
Net interest income 4,101,005 2,504,780
PROVISION FOR LOAN LOSSES -- --
---------- ----------
Net interest income after provision for loan losses 4,101,005 2,504,780
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 310,298 255,225
Other operating income 158,762 85,990
Securities transactions -- 7,139
---------- ----------
Total noninterest income 469,060 348,354
---------- ----------
NONINTEREST EXPENSES
Salaries and benefits 1,468,072 1,021,390
Net occupancy 307,913 180,225
Communications 87,882 56,512
Data processing 53,281 47,184
FDIC insurance premium 15,801 1,998
Supplies 84,897 46,736
Professional fees 60,332 33,997
Other expenses 529,525 205,780
---------- ----------
Total noninterest expenses 2,607,703 1,593,822
---------- ----------
INCOME BEFORE INCOME TAXES 1,962,362 1,259,312
PROVISION FOR INCOME TAXES 720,000 425,000
---------- ----------
NET INCOME $1,242,362 $ 834,312
========== ==========
BASIC AND FULLY DILUTED EARNINGS PER SHARE $ 0.15 $ 0.12
========== ==========
</TABLE>
2
<PAGE> 5
VRB BANCORP
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSS) ON
COMMON STOCK AVAILABLE- TOTAL
------------------------- RETAINED FOR-SALE SHAREHOLDERS'
SHARES AMOUNT EARNINGS SECURITIES EQUITY
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996 (Audited) 3,574,682 9,480,330 10,652,015 55,789 20,188,134
Stock options exercised 17,475 85,230 -- -- 85,230
(Febuary to August 1997)
2 for 1 stock split 3,592,157 -- -- -- --
(September 10, 1997)
Stock options exercised 6,430 26,152 -- -- 26,152
(September to October 1997)
Income tax benefit from stock
options exercised -- 86,896 -- -- 86,896
Cash dividend ($.14 per share, -- -- (1,006,333) -- (1,006,333)
paid October 31, 1997)
Stock Offering (November 1997) 1,150,000 8,784,104 -- -- 8,784,104
Net income -- -- 3,703,619 -- 3,703,619
Change in net unrealized gain on
available-for-sale securities,
net of taxes -- -- -- (7,247) (7,247)
--------- ------------ ------------ ------------ ------------
BALANCE, December 31, 1997
(audited) 8,340,744 $ 18,462,712 $ 13,349,301 $ 48,542 $ 31,860,555
========= ============ ============ ============ ============
Stock options exercised 4,464 5,804 -- -- 5,804
(March 1998)
Net income -- -- 1,242,362 -- 1,242,362
Change in net unrealized gain on
available-for-sale securities,
net of taxes -- -- -- (45,887) (45,887)
--------- ------------ ------------ ------------ ------------
BALANCE, March 31, 1998
(unaudited) 8,345,208 $ 18,468,516 $ 14,591,663 $ 2,655 $ 33,062,834
========= ============ ============ ============ ============
</TABLE>
3
<PAGE> 6
VRB BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------
1998 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS RELATING TO OPERATING ACTIVITIES
Net Income $ 1,242,362 $ 834,283
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 296,707 111,753
FHLB of Seattle stock dividend (39,600) (20,000)
Changes in cash due to changes in certain assets and liabilities
Accrued interest receivable and other assets (328,940) 148,193
Accrued interest payable and other liabilities (602,623) (216,476)
------------ ------------
Net cash provided by operating activities 567,906 857,753
------------ ------------
CASH FLOWS RELATING TO INVESTING ACTIVITIES
Proceeds from the sale of available-for-sale securities -- 3,158,438
Proceeds from the maturity of available-for-sale securities 6,216,506 76,935
Proceeds from the maturity of held-to-maturity securities 850,000
Purchases of available-for-sale securities -- (3,000,000)
Loan originations, net of principal repayments 9,053,026 (2,043,565)
Purchases of premises and equipment (227,979) (380,449)
Net cash used to purchase Colonial Banking Company (1,644,499) --
------------ ------------
Net cash provided by / (used in) investing activities 14,247,054 (2,188,641)
------------ ------------
CASH FLOWS RELATING TO FINANCING ACTIVITIES
Net increase/(decrease) in deposit liabilities (5,756,881) 1,863,227
Proceeds from the exercise of common stock options 5,804 20,304
Repayments of FHLB of Seattle advances (249,041) --
------------ ------------
Net cash provided by / (used in) financing activities (6,000,118) 1,883,531
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,814,842 552,643
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 43,644,289 29,216,909
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 52,459,131 $ 29,769,552
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest $ 1,745,463 $ 973,064
Cash paid for taxes $ -- $ --
SCHEDULE OF NONCASH ACTIVITIES
Changes in unrealized gain on available-for-sale
securities, net of tax $ (45,887) $ (253,600)
SUPPLEMENTAL SCHEDULE OF CASH USED TO PURCHASE
COLONIAL BANKING COMPANY
NET ASSETS ACQUIRED
Cash, cash equivilents and investment securities $ 19,280,208
Loans, net of allowance for loan
losses and unearned income 92,775,384
Premises and equipment 1,816,296
Accrued interest receivable and other assets 1,732,388
Deposits (107,875,973)
Accrued interest payable and other liabilities (1,462,104)
Goodwill 9,442,285
------------
Total proceeds payable to shareholders
of Colonial Banking Company 15,708,484
------------
Less: cash and cash equivilents
acquired as a result of the acquisition (14,063,985)
------------
NET CASH USED TO PURCHASE COLONIAL BANKING COMPANY $ 1,644,499
============
</TABLE>
4
<PAGE> 7
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 accompanying 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 Company's 1997 Annual
Report to Shareholders. The operating results for the three months ended March
31, 1998, are not necessarily indicative of the results that may be expected for
the entire fiscal year ending December 31, 1998, or any other future interim
period.
NOTE 3 - SFAS No. 128, "Earnings per share"
In 1997, the FASB issued SFAS No. 128, "Earnings per share" which is effective
for financial statements issued for periods ending after December 15, 1997. SFAS
No. 128 replaced standards for computing and presenting earnings per share and
requires a dual presentation of basic and diluted earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if common shares were issued pursuant to the exercise
of options under the Company's stock option plans.
5
<PAGE> 8
The following table illustrates the computations of basic and diluted earnings
per share for the three month periods ended March 31, 1998 and 1997 (dollars in
thousands except per share amounts)
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
------ ------- -----
<S> <C> <C> <C>
For the three months ended March 31, 1998
Basic earnings per share -
Income available to common shareholders $1,242 8,341 $0.15
Effect of dilutive securities
Outstanding common stock options -- 123
------ -------
Income available to common shareholders
plus assumed conversions $1,242 8,464 $0.15
====== ======= =====
For the three months ended March 31, 1997
Basic earnings per share -
Income available to common shareholders $ 834 7,153 $0.12
Effect of dilutive securities
Outstanding common stock options -- 97
------ -------
Income available to common shareholders
plus assumed conversions $ 834 7,250 $0.12
====== ======= =====
</TABLE>
NOTE 4 - SFAS No. 130, "Reporting Comprehensive Income"
SFAS No. 130 requires that all enterprises report a financial measure of the
changes in equity that result from recognized transactions and other economic
events of the period. Such changes in equity shall be reported in the financial
statements as components of comprehensive income. SFAS No. 130 is effective for
all enterprises for years beginning after December 15, 1997.
Changes in the unrealized gain or loss on securities classified as available for
sale qualify as elements of comprehensive income in the period the changes are
recognized. For the quarter ended March 31, 1998, the unrealized gain on the
Company's available for sale investment portfolio decreased by $45,887, net of
tax. This decline is not considered material, and until such changes are
material, the provisions of this statement need not be applied.
NOTE 5 - Acquisition of Colonial Banking Company
Effective January 5, 1998, the Company acquired Colonial Banking Company
("CBC"), a community bank with five full service branches located in the Rogue
Valley, the Company's principal region of business (herein referred to as "the
acquisition", or "the merger"). CBC also operated a loan production office out
of Portland, Oregon, which was closed immediately after the acquisition. The
acquisition, reported under the
6
<PAGE> 9
purchase method of accounting, resulted in the addition of approximately $100
million in assets with an aggregate purchase price of $15.7 million, and created
$9.4 million in purchased goodwill with an realizable recovery period of 15
years. With the exception of one branch which was consolidated into the head
office of the Company, the Company retained all of the branches of CBC.
Following the acquisition, the Company instituted its pricing policies for
deposits and loans, and introduced the Company's products to all CBC customers
while endeavoring to provide the same services throughout its entire branch
network. By mid January, 1998, CBC's data processing system had been
discontinued, and the data converted and merged with the Company's existing in
house data processing system.
Below is condensed pro forma information for the results of operations as if the
Company and CBC had combined at the beginning of each of the respective periods
presented:
<TABLE>
<CAPTION>
For the three months
ended March 31,
-------------------------
PRO FORMA INFORMATION 1998 1997
--------- ---------
<S> <C> <C>
in thousands, except EPS
Net Interest Margin $ 4,148 $ 3,712
Net Income $ 1,261 $ 969
Basic earnings per share $ 0.15 $ 0.14
Fully diluted earnings per share $ 0.15 $ 0.13
</TABLE>
Further discussion of the acquisition is noted throughout this document under
Part 1, Financial Information, Item 2, Management's discussion and analysis of
financial condition and results of operations.
7
<PAGE> 10
Disclosure Regarding Forward-Looking Statements
The following discussion includes forward-looking statements within the meaning
of the "safe-harbor" provisions of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are based on the beliefs of the
Company's management and on assumptions made by and information currently
available to management. All statements other than statements of historical
fact, regarding the Company's financial position, business strategy and plans
and objectives of management for future operations of the Company are
forward-looking statements. When used herein, the words "anticipate," "believe,"
"estimate," "expect," and "intend" and words or phrases of similar meaning, as
they relate to the Company or management, are intended to identify
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct.
Forward-looking statements are subject to certain risks and uncertainties, which
could cause actual results to differ materially from those indicated by the
forward-looking statements. These risks and uncertainties include the Company's
ability to maintain or expand its market share or net interest margins, or to
implement its marketing and growth strategies. Further, actual results may be
affected by the Company's ability to compete on price and other factors with
other financial institutions; customer acceptance of new products and services;
and, general trends in the banking industry and the regulatory environment, as
they relate to the Company's cost of funds and returns on assets. In addition,
there are risks inherent in the banking industry relating to collectibility of
loans and changes in interest rates. The reader is advised that this list of
risks is not exhaustive and should not be construed as any prediction by the
Company as to which risks would cause actual results to differ materially from
those indicated by the forward-looking statements.
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Net income totaled $1,242,000 or 15 cents per share for the three months ended
March 31, 1998. This is a 49% increase when compared to the same period last
year, when earnings totaled $834,000 or 12 cents per share. The improved results
reflect the acquisition of CBC and the effective application of the assets
acquired.
8
<PAGE> 11
INTEREST MARGIN:
Below is an analysis of the various financial components that make up the Bank's
interest margin for the periods ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
For the three months ended For the three months ended
March 31, 1998 March 31, 1997
---------------------------- -------------------------------
Average Inc/Exp Rate Average Inc/Exp Rate
--------- --------- ---- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Interest-earning assets:
Loans (*) $ 206,073 $ 5,113 9.92% $ 103,415 $ 2,644 10.23%
Investment securities
Taxable securities 23,881 387 6.48% 22,674 372 6.56%
Nontaxable securities (**) 18,186 351 7.72% 18,589 356 7.66%
Federal funds sold 30,372 412 5.43% 16,982 220 5.18%
--------- --------- ---- --------- --------- -----
Total interest earning assets 278,512 6,263 8.99% 161,660 3,592 8.89%
--------- --------- ---- --------- --------- -----
Cash and due from banks 13,513 9,645
Fixed assets 6,157 4,211
Loan loss allowance (3,591) (1,630)
Other assets 12,005 2,369
--------- ---------
Total Assets $ 306,596 $ 176,255
========= =========
Interest-bearing liabilities:
Interest-bearing checking accounts $ 107,293 $ 831 3.10% $ 70,362 $ 561 3.19%
Savings accounts 24,463 134 2.19% 15,864 85 2.14%
Time deposits 79,604 1,074 5.40% 26,362 320 4.86%
Borrowed funds 213 4 7.51% -- -- 0.00%
--------- --------- ---- --------- --------- -----
Total interest-bearing liabilities 211,573 2,043 3.86% 112,588 966 3.43%
Noninterest bearing deposits 60,390 -- 0.00% 41,805 -- 0.00%
--------- --------- ---- --------- --------- -----
Total deposits and borrowed funds 271,963 2,043 3.00% 154,393 966 2.50%
--------- --------- ---- --------- --------- -----
Other liabilities 2,159 1,164
--------- ---------
Total Liabilities 274,122 155,557
Shareholders' equity 32,474 20,698
--------- ---------
Total liabilities and shareholders' equity $ 306,596 $ 176,255
========= =========
Net interest income $ 4,220 $ 2,626
========= =========
Net interest spread 5.13% 5.46%
---- -----
Average yield on earning assets (**) 8.99% 8.89%
---- -----
Interest expense to earning assets(*) 2.93% 2.39%
---- -----
Net interest margin 6.06% 6.50%
==== =====
</TABLE>
(*) Nonaccrual loans are included in the average balance.
(**) Tax-exempt income has been adjusted to a tax equivalent basis at 34%.
The Bank's net interest margin after adjusting tax exempt income to reflect a
tax equivalent basis, increased $1,594,000, or 60.7%, when comparing the first
quarter of 1998 and that reported in 1997. The Bank's margin was $4,220,000 for
the quarter compared to $2,626,000 for the same quarter in 1997. As noted in the
following rate/volume analysis, the increase in the Bank's interest margin was
the result of increased volume (principally the CBC acquisition), tapered, in
part, by declining rates.
9
<PAGE> 12
In total, the margin expressed as a percentage of net average earning assets was
6.06% and 6.50% for the periods ending March 31, 1998, and 1997, respectively, a
decline of 44 basis points. With the acquisition of CBC, the Bank's yield on net
interest bearing assets shifted to include the interest rate characteristics of
the assets acquired. More specifically, the Bank's average loan yield dropped
from 10.23% to 9.92% when comparing the two respective periods and the average
cost of funds (interest paid as a percent of total average deposits) increased
from 2.50% in the first quarter of 1997 to 3.00% for the same period in 1998.
Both these factors had the effect of compressing the Bank's total interest
margin as a percentage of net average earning assets.
The Bank's strategic pricing has been modified to better accommodate the CBC
acquisition. New and renewed loans will be funded at rates that are favorable to
the Bank's overall pricing policies, yet with terms that maintain the Bank's
competitive presence in the local market. The Bank's deposit pricing strategies
have been designed to place downward pressure on the Bank's average cost of
funds, without adversely impacting the bank's liquidity or financial
performance(1).
The following table shows the increase (decrease) in VRB Bancorp's consolidated
interest income and expense for the three months ended March 31, 1998, when
compared to the same period for the previous year. The table attributes such
amounts to changes in volume as well as changes in rates:
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1998
-----------------------------------------
Increase (Decrease) Due To
--------------------------
Volume Rate Net Change
------- ------- -------
<S> <C> <C> <C>
(in thousands)
Interest-earning assets:
Loans $ 2,547 $ (77) $ 2,470
Investment securities
Taxable securities 20 (4) 16
Nontaxable securities (**) (8) 3 (5)
Federal funds sold 182 10 192
------- ------- -------
Total 2,741 (68) 2,673
------- ------- -------
Interest-bearing liabilities:
Interest bearing checking 286 (15) 271
Savings accounts 47 3 50
Time deposits 718 36 754
Borrowed funds 4 -- 4
------- ------- -------
Total 1,055 24 1,079
------- ------- -------
Net increase (decrease) in net interest income $ 1,686 $ (92) $ 1,594
======= ======= =======
</TABLE>
- ----------
(1) This paragraph contains foward looking statements.
10
<PAGE> 13
MATERIAL CHANGES IN FINANCIAL CONDITION:
LIQUIDITY AND CAPITAL RESOURCES
The Bank must maintain an adequate level of liquidity to ensure the availability
of sufficient funds to support loan growth and deposit withdrawals, to satisfy
financial commitments and to take advantage of investment opportunities. With
the acquisition of CBC, and the potential reaction of their customer base to
VRB's pricing policies and banking philosophy, management has become
increasingly conscious of the importance of maintaining a position of adequate
liquidity.
Throughout the first quarter, the Company has experienced strong competition for
both deposits and loans. In particular, larger super-regional banks have
aggressively marketed loan programs with low interest rates and no fee options.
Over the last three months, principal loan repayments have exceeded loan
originations as commercial entities have taken advantage of refinancing
opportunities available in the marketplace. Fueled by flat loan growth and the
maturity or call of over $7 million in investment securities, the Bank's
investment in federal funds sold grew to $41.2 million as of March 31, 1998 or
13.3% of total assets. Currently, interest rates on long term bonds do not
compensate the holder for the risk that interest rates will rise, and the Bank
will most likely reinvest these funds in highly liquid investments until current
lending and deposit trends within the Bank are further clarified(2).
ASSET-LIABILITY MANAGEMENT AND INTEREST RATE RISK
The principal purpose of asset-liability management is to manage the Bank's
sources and uses of funds to maximize net interest income under changing
interest rate conditions. On a monthly basis, the Bank evaluates the stability
of the bank's net interest margins and capital position under meaningful rate
changes. This includes the calculation of the bank's "GAP", the difference
between repricing assets and repricing liabilities over specific time periods.
As of March 31, 1998, management's analysis indicated that the Bank's interest
rate risk was within acceptable guidelines and that there are no material
changes in the Bank's exposure to mismatched repricing positions from that
reported as of December 31, 1997.
CONTINGENCIES
Year 2000 - Management continues to monitor the impact of Year 2000 on the
Bank's data processing and proprietary systems, as well as the Bank's
vulnerability to the principal borrowers of the Bank and their potential failure
to address their own Year 2000 issues. The Bank has an established action
plan which establishes a timeline for the testing of all systems impacted by the
Year 2000, using internal and external resources at relatively minimal cost(3).
- --------
(2) This sentence is a foward looking statement.
(3) This paragraph contains foward looking statements.
11
<PAGE> 14
BALANCE SHEET ANALYSIS
The table below provides abbreviated balance sheets which illustrate the
material changes in financial condition when comparing the end of the proceeding
fiscal year to March 31, 1998:
<TABLE>
<CAPTION>
March 31 December 31,
1998 1997 $ Change % Change
--------- --------- --------- -----
<S> <C> <C> <C> <C>
(in thousands)
ASSETS
Loans $ 199,200 $ 115,414 $ 83,786 72.60%
Investments 38,906 40,806 (1,900) (4.66%)
Federal funds sold 41,200 32,500 8,700 26.77%
Other Assets 31,256 17,934 13,322 74.28%
--------- --------- --------- -----
Total assets $ 310,562 $ 206,654 $ 103,908 50.28%
========= ========= ========= =====
LIABILITIES AND EQUITY
Noninterest bearing deposits $ 62,034 $ 49,998 $ 12,036 24.07%
Interest bearing deposits 213,262 123,178 90,084 73.13%
--------- --------- --------- -----
Total Deposits 275,295 173,176 102,119 58.97%
Other Liabilites 2,204 1,617 587 36.30%
--------- --------- --------- -----
Total Liabilities 277,499 174,793 102,706 58.76%
Total Capital 33,063 31,861 1,202 3.77%
--------- --------- --------- -----
Total Liabilites and Capital $ 310,562 $ 206,654 $ 103,908 50.28%
========= ========= ========= =====
</TABLE>
LOANS:
The Bank provides a broad range of commercial and consumer lending products.
Credit is extended principally to small and medium sized businesses, and
residents in the local area. Outstanding loans totaled $199.2 million at March
31, 1998, representing a $83.8 million or 72.6% increase when compared to loans
of $115.4 million as of December 31, 1997. However, when excluding the loans
acquired as a result of the CBC merger, principal repayments have exceeded new
loans by over nine million for the first quarter of 1998. Loan commitments,
principally real estate construction notes and commercial lines of credit, have
grown to $24.8 million at March 31, 1998.
Reflective of the Bank's customer base, as well as trends within the local
economy, 74% of the Bank's loan portfolio resides in real estate mortgage loans.
Of the $148 million in real estate mortgage loans outstanding as of March 31,
1998, approximately $90 million were made to commercial customers where the
collateral for the loans includes the real estate occupied by the customers'
businesses. An additional $36 million represented loans secured by multi family
(5 or more) residential property and the remaining $22 million was secured by
family residential property.
12
<PAGE> 15
Of the loans acquired as a result of the merger with CBC, 97% are collateralized
with real estate. Approximately 80% of such loans are categorized as loans
secured by nonresidential and multi-family residential properties located
throughout the state, including loans based out of Portland/Salem metropolitan
area.
The following table presents the composition of the Bank's loan portfolio at the
date indicated:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------------------- --------------------------
Amount Percentage Amount Percentage
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
(in thousands)
Commercial $ 15,971 8.02% $ 12,720 11.02%
Real estate construction 26,730 13.42% 15,476 13.41%
Real estate mortgage 147,980 74.29% 77,049 66.76%
Consumer and other 12,690 6.37% 11,949 10.35%
-------- ------- -------- ------
203,371 102.09% 117,194 101.54%
Allowance for loan losses and
unearned fees (4,171) (2.09%) (1,780) (1.54%)
-------- ------- -------- ------
Net loans $ 199,200 100.00% $ 115,414 100.00%
======== ======= ======== ======
</TABLE>
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 mitigate credit losses by
maintaining strong underwriting standards and closely monitoring the financial
condition of the borrower. As of March 31, 1998, the Bank's allowance for loan
losses was $3,673,000, or 1.8% of total loans, and is believed to be adequate to
absorb potential credit losses in the near term(4).
With the acquisition of CBC, loans account for 64% of total assets, compared to
56% as of December 31, 1997. Despite the increase in the Bank's loan portfolio,
as of March 31, 1998, total non performing assets as a percentage of total
assets actually declined from .18% to .16%. Due to a low number of charge off's,
(charge off's totaled $19,000 and $14,000 and recoveries were $14,000 and
$12,000 for the three months ended March 31, 1998 and 1997, respectively), and
the relative strength of the Bank's total loan portfolio, the Bank did not
record a provision for loan losses in the first quarter.
- --------
(4) This statement is a foward looking statement.
13
<PAGE> 16
The following table presents information with respect to nonperforming assets:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
(in thousands)
Loans on nonaccrual status $490 $372
Loans past due greater than 90 days but not on nonaccrual status 18
Other real estate owned -- --
---- ----
Total nonperforming assets $508 $372
==== ====
Percentage of nonperforming assets to total assets 0.16% 0.18%
==== ====
</TABLE>
INVESTMENT PORTFOLIO:
Investment securities are purchased for managing liquidity and generating after
tax profits consistent with the risk guidelines established by management and
the Board of Directors. As of March 31, 1998 the Bank's portfolio of investment
securities (including FHLB stock) totaled $38,906,000, a decrease of $1,900,000,
or 4.7% when compared to the balance of the portfolio at December 31, 1997 of
$40,806,000. The decline reflects the call or maturity of over $7 million in
securities, offset by the acquisition of approximately $5 million in securities
from the CBC merger.
VRB follows financial accounting principles which require the identification of
investment securities as held-to-maturity or available-for-sale. Securities
designated as held-to-maturity are those that VRB has the intent and ability to
hold until they mature or are called, rather than those that management may sell
if liquidity requirements dictate. The following table provides the book value
of the Bank's investment portfolio (excluding FHLB stock) as divided between
held-to maturity and available-for-sale as of March 31, 1998 and December 31,
1997:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
(in thousands)
Investments available-for-sale
U.S. Treasury and agencies $18,346 $20,075
States and political subdivisions -- --
Corporate and other investments 1,234 1,108
------- -------
$19,580 $21,183
======= =======
Investments held-to-maturity
U.S. Treasury and agencies $ -- $ --
States and political subdivisions 17,658 18,415
Corporate and other investments -- --
------- -------
$17,658 $18,415
======= =======
</TABLE>
DEPOSITS:
Deposits are the Bank's major source of funds available for lending and other
investment opportunities. Deposit inflows and outflows are influenced
significantly by general interest rates and market conditions. Substantially all
of the Bank's depositors are residents of the Southern Oregon. With the
acquisition of CBC, deposits have increased by $102.1 million, growing from
$173.1 million to $275.3 million over the last three months. Because the
composition of CBC's deposit portfolio was heavily skewed toward time
14
<PAGE> 17
certificates of deposit, the Bank's deposit mix has shifted significantly, with
180% increase in fixed maturity accounts. Despite this shift, non-interest
bearing deposits remain a reliable and substantial portion of our deposit base
accounting for 22.5% of total deposits at March 31, 1998 and, when excluding the
impact of the CBC acquisition, growth in interest bearing demand deposits such
as tiered money market accounts, continues to outpace other deposit categories.
The changes evident in the Bank's deposit mix is further illustrated below:
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
MARCH 31, TOTAL DECEMBER 31, TOTAL
1998 DEPOSITS 1997 DEPOSITS
-------- ---------- ----------- --------
<S> <C> <C> <C> <C>
(in thousands)
Demand $ 62,034 22.5% $ 49,998 28.9%
Interest bearing demand 110,369 40.1 80,334 46.4
Savings 24,817 9.0 15,309 8.8
Time deposits 78,075 28.4 27,535 15.9
-------- ----- -------- -----
$275,295 100.0% $173,176 100.0%
======== ===== ======== =====
</TABLE>
SHAREHOLDERS' EQUITY:
Shareholder equity at March 31, 1998 amounted to $33,063,000 compared to
$31,861,000 at December 31, 1997. The increase in equity reflects consolidated
earnings of $1,242,000 and the proceeds from the exercise of stock options
(4,464 shares for a total increase of $5,804). These additions to equity were
partially offset by a change in the value of the "available for sale" portion of
our investment portfolio. The "unrealized gain/loss" on this portion of the
portfolio is reflected in shareholder equity. The current value of this segment
of the bank's investment portfolio declined $45,887, net of tax, when comparing
December 31, 1997 to March 31, 1998.
The Bank is required to maintain minimum amounts of capital to "risk weighted"
assets, as defined by banking regulators. At March 31, 1998, 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 10.6% and 11.9%, respectively. While
the Bank is considered well capitalized, these ratios are materially different
when compared to ratios of 16.4% and 17.6% for the same period in 1997. The
decline in the Bank's relative capital position is principally due to the
exclusion of all purchased goodwill created as a result of the CBC acquisition
when computing the Bank's tier 1 capital.
15
<PAGE> 18
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 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)
16
<PAGE> 19
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**
27.0 Financial Data Schedule
- ------------------
* Incorporated by reference to the Company's registration statement on
Form 10 (Commission file number 0-25932) filed April 26, 1995 pursuant
to Section 12(g) of the Securities Exchange Act of 1934.
** Incorporated by reference to the Company's registration statement on
Form S-1 (Commission File number 333-37167) declared effective November
5, 1997.
ITEM 6b. Reports on Form 8-K: The registrant filed a Form 8-K on January 5, 1998
reporting the acquisition of Colonial Banking Company ("Colonial Bank)", an
Oregon bank with five branch offices in southern Oregon. The terms and
conditions of the acquisition were previously reported in a registrations
statement Form S-1 relating to a public offering of 1,150,000 shares of the
registrant's common stock. Consideration for the acquisition was paid in cash
and totaled approximately $17.3 million. $1.6 million of this was paid prior to
the acquisition by Colonial Bank to cancel outstanding options to acquire
Colonial Bank stock.
In an amendment to that filing, the audited financial statements of Colonial
Banking Company as of December 31, 1997 and 1996 were filed on March 23, 1998.
Within that same amendment, pro forma financial statements of the registrant
reflecting the acquisition of Colonial Bank were filed as of, and for the year
ended December 31, 1997.
17
<PAGE> 20
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: May 13, 1998 /s/ Tom Anderson
________________________________________
Tom Anderson
Executive Vice President
Chief Operating Officer and Secretary
Date: May 13, 1998 /s/ Felice Belfiore
________________________________________
Felice Belfiore
Vice President
Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,259
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 41,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,580
<INVESTMENTS-CARRYING> 18,346
<INVESTMENTS-MARKET> 18,212
<LOANS> 202,873
<ALLOWANCE> 3,673
<TOTAL-ASSETS> 310,562
<DEPOSITS> 275,295
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,204
<LONG-TERM> 0
0
0
<COMMON> 18,469
<OTHER-SE> 14,594
<TOTAL-LIABILITIES-AND-EQUITY> 310,562
<INTEREST-LOAN> 5,113
<INTEREST-INVEST> 1,030
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,144
<INTEREST-DEPOSIT> 2,039
<INTEREST-EXPENSE> 5
<INTEREST-INCOME-NET> 4,101
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,608
<INCOME-PRETAX> 1,962
<INCOME-PRE-EXTRAORDINARY> 1,962
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,242
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
<YIELD-ACTUAL> 0.09
<LOANS-NON> 490
<LOANS-PAST> 18
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,780
<CHARGE-OFFS> 19
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 3,673
<ALLOWANCE-DOMESTIC> 3,673
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
