<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, 1999
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 March 31, 1999
----- -----------------------------
Common stock, no par value 8,713,244
<PAGE> 2
VRB BANCORP
Form 10-Q
March 31, 1999
Table of Contents
------------------------
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION Number
------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998.................................. 1
Consolidated Statements of Income and Comprehensive Income
For the three months ended March 31, 1999 and 1998.................... 2-3
Consolidated Statements of Changes in Shareholders' Equity
For the period December 31, 1997 through March 31, 1999............... 4
Consolidated Statements of Cash Flows
For the three months ended March 31, 1999 and 1998.................... 5
Notes to Consolidated Financial Statements............................ 6-8
Item 2. Management's discussion and analysis of financial
condition and results of operations................................... 9-17
Item 3. Quantitative and qualitative disclosures about market risk............ 18
PART II OTHER INFORMATION
Item 1. Legal proceedings..................................................... 19
Item 2. Changes in securities................................................. 19
Item 3. Defaults upon senior securities....................................... 19
Item 4. Submission of matters to a vote of security holders................... 19
Item 5. Other information..................................................... 19
Item 6. Exhibits and reports on Form 8-K...................................... 19-20
SIGNATURES............................................................................... 21
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VRB BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
For the period ended March 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 14,382,930 $ 14,513,570
Federal funds sold 16,300,000 26,100,000
- --------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 30,682,930 40,613,570
Investments
U.S. Treasury and agencies 56,521,740 57,070,000
States and political subdivisions 18,081,068 17,454,188
Corporate and other investments 174,900 193,631
Federal Home Loan Bank stock 1,798,932 1,765,220
Loans, net of allowance for loan losses and unearned income 178,141,593 175,188,200
Premises and equipment, net 6,731,312 6,499,131
Other real estate owned 51,161 51,161
Accrued interest and other assets 12,676,118 12,381,952
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 304,859,754 $ 311,217,053
====================================================================================================================
LIABILITIES
Deposits
Demand deposits $ 68,306,717 $ 72,134,186
Interest bearing demand deposits 113,403,180 110,900,199
Savings deposits 25,038,788 24,269,197
Time deposits 60,151,186 66,818,719
- --------------------------------------------------------------------------------------------------------------------
Total deposits 266,899,871 274,122,301
Accrued interest and other liabilities 2,784,241 1,859,297
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 269,684,112 275,981,598
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 8,713,244 and 8,694,286, issued and outstanding
at March 31, 1999 and December 31, 1998, respectively 21,682,596 21,583,869
Accumulated other comprehensive income, net of taxes (302,201) 60,629
Retained earnings 13,795,247 13,590,957
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 35,175,642 35,235,455
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 304,859,754 $ 311,217,053
====================================================================================================================
</TABLE>
1
<PAGE> 4
VRB BANCORP
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the three months ended March 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 4,198,597 $ 5,113,455
Interest on investment securities:
U.S. Treasury and agencies 804,064 338,893
States and political subdivisions 228,641 231,520
Corporate and other investments 33,732 48,346
Federal funds sold 266,405 411,931
- --------------------------------------------------------------------------------------------------------------------
Total interest income 5,531,439 6,144,145
INTEREST EXPENSE
Interest bearing demand deposits 711,489 831,300
Savings deposits 119,767 133,551
Time deposits 771,654 1,073,799
Borrowed funds -- 4,490
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 1,602,910 2,043,140
- --------------------------------------------------------------------------------------------------------------------
Net interest income 3,928,529 4,101,005
- --------------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES -- --
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,928,529 4,101,005
NONINTEREST INCOME
Service charges on deposit accounts 307,812 310,298
Other operating income 203,272 158,762
- --------------------------------------------------------------------------------------------------------------------
Total noninterest income 511,084 469,060
NONINTEREST EXPENSES
Salaries and benefits 1,540,705 1,468,072
Net occupancy 244,610 307,913
Communications 104,747 87,882
Data processing 92,680 53,281
FDIC insurance premium 7,913 15,801
Supplies 60,247 84,897
Professional fees 45,897 60,332
Other real estate expense -- --
Other expenses 342,398 529,525
- --------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 2,439,197 2,607,703
</TABLE>
2
<PAGE> 5
VRB BANCORP
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (cont.)
<TABLE>
<S> <C> <C>
INCOME BEFORE INCOME TAXES 2,000,416 1,962,362
PROVISION FOR INCOME TAXES 750,000 720,000
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,250,416 $ 1,242,362
====================================================================================================================
OTHER COMPREHENSIVE INCOME
UNREALIZED GAIN (LOSS) ON SECURITIES, NET OF TAXES
Unrealized holding gain (loss) arising during period (362,830) (45,887)
Reclassification adjustment for (gain) loss included
in net income -- --
- --------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 887,586 $ 1,196,475
====================================================================================================================
BASIC EARNINGS PER SHARE $ 0.14 $ 0.14
====================================================================================================================
FULLY DILUTED EARNINGS PER SHARE $ 0.14 $ 0.14
====================================================================================================================
</TABLE>
3
<PAGE> 6
VRB BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON STOCK RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT EARNINGS INCOME EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997
(audited) 8,340,744 $ 18,462,712 $ 13,349,301 $ 48,542 $ 31,860,555
Stock options exercised
(March - Sept 1998) 19,410 50,128 - - 50,128
Income tax benefit from stock
options exercised - 60,500 - - 60,500
Cash dividend ($.20 per share,
October 1, 1998) - - (1,672,031) - (1,672,031)
4% stock dividend (October 1,
1998) 334,132 3,010,529 (3,010,529) - -
Payment for fractional shares
related to stock dividend
($9.00 per share) - - (2,467) - (2,467)
Net income and comprehensive income - - 4,926,683 12,087 4,938,770
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998
(audited) 8,694,286 21,583,869 13,590,957 60,629 35,235,455
==================================================================================================================================
Stock options exercised
(January to March 1999) 18,958 98,727 - - 98,727
Cash dividend declared ($.12 per share,
March 29, 1999) - - (1,046,126) - (1,046,126)
Net income and comprehensive income - - 1,250,416 (362,830) 887,586
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, March 31, 1999
(unaudited) 8,713,244 $ 21,682,596 $ 13,795,247 $ (302,201) $ 35,175,642
==================================================================================================================================
</TABLE>
4
<PAGE> 7
VRB BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the three months ended March 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,250,416 $ 1,242,362
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 233,023 296,707
FHLB of Seattle stock dividend (33,680) (39,600)
Changes in cash due to changes in assets and liabilities
Accrued interest receivable and other assets (473,552) (328,940)
Accrued interest payable and other liabilities 65,730 (602,623)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,041,937 567,906
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the maturity of available-for-sale securities 10,519,853 6,216,506
Proceeds from the maturity of held-to-maturity securities 500,000 850,000
Purchases of available-for-sale securities (10,500,000) --
Purchases of held-to-maturity securities (1,125,587) --
Net (increase) decrease in loans (2,928,460) 8,113,443
Purchases of premises and equipment (314,681) (227,979)
Proceeds from the sale of credit card portfolio obtained through acquisition -- 939,583
Net cash used to purchase Colonial Banking Company -- (1,644,499)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) investing activities (3,848,875) 14,247,054
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in deposits (7,222,430) (5,756,881)
Proceeds from the exercise of common stock options 98,728 5,804
Repayments of FHLB of Seattle advances -- (249,041)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (7,123,702) (6,000,118)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,930,640) 8,814,842
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 40,613,570 43,644,289
- -------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30,682,930 $ 52,459,131
===============================================================================================================================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest $ 1,570,921 $ 1,745,463
Cash paid for taxes $ 43,755 $ --
SCHEDULE OF NONCASH ACTIVITIES
Changes in unrealized loss on available-for-sale
securities, net of tax $ (362,830) $ (45,887)
</TABLE>
5
<PAGE> 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 1998 Annual Report
to Shareholders. The operating results for the three months ended March 31,
1999, are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 31, 1999, or any other future interim period.
NOTE 3 - Earnings per common and common equivalent shares
In 1997, the FASB issued SFAS No. 128, "Earnings per share" which is effective
for financial statements issued for periods ending after December 15, 1997. SFAS
No. 128 replaced standards for computing and presenting earnings per share and
requires a dual presentation of basic and diluted earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the 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
<PAGE> 9
The following table illustrates the computations of basic and diluted earnings
per share for the three month periods ended March 31, 1999 and 1998 (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, 1999
Basic earnings per share -
Income available to common shareholders $1,250 8,700 $ 0.14
Effect of dilutive securities
Outstanding common stock options -- 39
------ ------
Income available to common shareholders
plus assumed conversions $1,250 8,739 $ 0.14
====== ====== ========
For the three months ended March 31, 1998
Basic earnings per share -
Income available to common shareholders $1,242 8,675 $ 0.14
Effect of dilutive securities
Outstanding common stock options -- 76
------ ------
Income available to common shareholders
plus assumed conversions $1,242 8,751 $ 0.14
====== ====== ========
</TABLE>
NOTE 4 - Recently issued accounting standards
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130 "Reporting Comprehensive Income." This Statement establishes standards for
reporting comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of financial statements. This Statement requires that
VRB recognize the unrealized gain or loss on available-for-sale securities as a
component of comprehensive income. This Statement is effective for the year
ended December 31, 1998.
7
<PAGE> 10
NOTE 5 - Acquisition of Colonial Banking Company
VRB Bancorp completed its acquisition of Colonial Banking Company (herein
referred to as "CBC") effective January 5, 1998. VRB paid former shareholders 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 at their respective fair market values at the time of
acquisition. 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 following are the fair values of assets acquired and liabilities assumed (in
thousands):
<TABLE>
<S> <C>
Investment securities $ 4,797
Federal Home Loan Bank stock 420
Loans, net 92,775
Premises and equipment 1,802
Goodwill 9,526
Accrued interest and other assets 1,710
- ---------------------------------------------------------
Total assets $ 111,030
Deposits $ 107,876
Accrued interest and other liabilities 1,510
Cash paid for acquisition, net of cash
acquired 1,644
- ---------------------------------------------------------
Total liabilities $ 111,030
</TABLE>
8
<PAGE> 11
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 THE RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Earnings per share
Earnings for the three months ended March 31, 1999 increased slightly over the
same period in 1998, from $1, 242,000 in 1998 to $1,250,000 in 1999. On a per
share basis, earnings remained consistent at $.14 per share.
Interest margin
1. Interest rate environment: monetary policy and changing interest rates
over the last 12 months have placed increasing pressure on the rates
that the Bank can competitively offer on loan and deposit products.
Local competitive forces, including new entrants to the market, and
competition from non traditional banks have further compounded tight
margins. As a result, maturing loans and investments have typically
re-priced at lower rates and the Bank's overall yield on interest
earning assets has declined from 8.99% to 8.18% (on a tax equivalent
basis) when comparing the 1st quarter of 1999 to the same quarter in
1998.
9
<PAGE> 12
2. Changing loan balances: loan balances averaged 74% of interest earning
assets in the first quarter of 1998, compared to 65% for the same period
in 1999, an approximate difference of $28 million in loans. Much of the
loan run off relates to loans acquired from CBC. At the time of
acquisition, at least one quarter of its loan portfolio originated from
the Portland metropolitan area, in short-term construction and
commercial loans. Segments of this portfolio had scheduled maturity
dates in 1998. In addition, high competition and low interest rates
available in that market encouraged several borrowers to refinance their
credit obligations under terms that the Bank was unwilling to match.
3. Changing deposit mix: when comparing the two quarters, the Bank's
deposit mix changed significantly. The Bank experienced declining
concentrations in time certificates of deposits, in part replaced by
growth in non interest demand deposits and money market accounts. For
example, time certificates of deposit declined by $16 million over the
last twelve months, representing maturing accounts originating from the
CBC deposit base. The shift in the Bank's deposit mix contributed to a
favorable declining cost of funds, which moved from 3.01% to 2.40% when
comparing the two periods.
The above discussion is supported in the following analysis of the Bank's
interest margin (on a tax equivalent basis) for the period ended March 31, 1999
and 1998:
<TABLE>
<CAPTION>
Three months ended March 31, 1999 1998
(in thousands) Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------
Interest-earning assets
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 22,703 266 4.69% $ 30,372 412 5.43%
Held to maturity securities 17,922 345 7.70 18,186 351 7.72
Available for sale securities 57,004 839 5.89 23,881 387 6.48
Commercial loans 143,059 3,348 9.36 165,137 4,021 9.74
Consumer loans 35,469 850 9.59 40,936 1,092 10.67
- --------------------------------------------------------------------------------------------------------------------------
Total earning assets 276,157 5,648 8.18 278,512 6,263 8.99
Non earning assets 33,545 31,675
Less: Loan loss reserve (3,880) (3,591)
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 305,822 $ 306,596
==========================================================================================================================
Interest bearing liabilities
- --------------------------------------------------------------------------------------------------------------------------
Interest bearing checking 32,663 79 0.97 34,151 122 1.43
Money market 79,141 632 3.19 73,142 709 3.88
Savings 24,681 120 1.94 24,463 134 2.19
Time 63,271 772 4.88 79,817 1,078 5.40
- --------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 199,756 1,603 3.21 211,573 2,043 3.86
Noninterest bearing deposits 68,014 60,390
- --------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 267,770 271,963
Other liabilities 2,185 2,159
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 269,955 274,122
Shareholders' equity 35,867 32,474
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 305,822 $ 306,596
==========================================================================================================================
Net interest income 4,045 4,220
Interest income as a percentage
of average earning assets 8.18% 8.99%
Interest expense as a percentage
of average earning assets 2.32 2.93
- --------------------------------------------------------------------------------------------------------------------------
Net interest margin 5.86% 6.06%
==========================================================================================================================
</TABLE>
10
<PAGE> 13
In total, net interest income declined slightly, from $4.2 million for the three
months ended March 31, 1998 to $4.0 million for the same period in 1999. By
effectively managing the cost of its funding sources (deposits), the Bank has
been able to significantly offset unfavorable changes in both asset yields and
loan volumes, as further illustrated in the following table:
<TABLE>
<CAPTION>
March 99 over March 98
(dollars in thousands) Increase (decrease) due to
Interest earning assets Volume Rate Net
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds sold $ (89,854) $ (56,146) $(146,000)
Held to maturity securities (5,082) (918) (6,000)
Available for sale securities 487,513 (35,513) 452,000
Commercial loans (516,690) (156,310) (673,000)
Consumer loans (131,014) (110,986) (242,000)
- -----------------------------------------------------------------------------------------------------
Total (255,127) (359,873) (615,000)
- -----------------------------------------------------------------------------------------------------
Interest bearing liabilities
- -----------------------------------------------------------------------------------------------------
Interest bearing checking (3,599) (39,401) (43,000)
Money market 47,906 (124,906) (77,000)
Savings 1,060 (15,060) (14,000)
Time deposits (201,886) (104,114) (306,000)
- -----------------------------------------------------------------------------------------------------
Total (156,518) (283,482) (440,000)
- -----------------------------------------------------------------------------------------------------
Net decrease in net interest income $ (98,609) $ (76,391) $(175,000)
- -----------------------------------------------------------------------------------------------------
</TABLE>
Management expects price competition to continue or increase, and rates on new
and refinanced loans will most likely reflect this environment. Loan demand has
improved, and remains the focus of the Bank's outside calling efforts and
advertising programs. Deposit strategies, designed to place downward pressure on
the Bank's average cost of funds, will be adjusted as needed to accommodate loan
demand and bank liquidity.(1)
Noninterest income and expense
Noninterest income year to date was $511,000, an increase of $42,000 or 9%, from
the same period in 1998. In particular, processing fees for mortgage
applications grew by approximately $38,000, when comparing the two periods. The
housing market has continued to expand at a robust rate in southern Oregon,
supported by low interest rates and expanding populations seeking
family-orientated communities. The Bank will continues to seek opportunities to
expand noninterest sources of revenue, which are generally less sensitive to
changing interest rates.(1)
Noninterest expense declined by $168,000, or 6%, down to $2,439,000 from
$2,608,000 for the three months ended March 31, 1999 and 1998, respectively. 60%
of the decline represents the recovery of an operational loss originally
recognized by the Bank in the 4th quarter of 1998. Administrative expenses also
- ----------
(1) These paragraphs contains forward looking statements.
11
<PAGE> 14
declined slightly, centered around reductions in professional fees and other
one-time costs related to the acquisition and integration of CBC.
The Bank's efficiency ratio, or noninterest expense as a percentage of total net
interest income plus noninterest income, was 55% for the three months ended
March 31, 1999 verses 57% for the same period in 1998. While this comparison is
slightly skewed by the Bank's one time operational recovery described
previously, certain operating economies have been realized as a result of the
CBC acquisition. To illustrate further, after eliminating the amortization of
intangible assets directly related to the CBC merger and the one time recovery,
the Bank's current efficiency margin is reduced to approximately 53%. This is a
favorable comparison when compared to the Bank's historical averages of 56%
experienced prior to the acquisition of CBC.
MATERIAL CHANGES IN FINANCIAL CONDITION
LIQUIDITY REVIEW
The Bank must maintain cashflows adequate to fund operations and meet
commitments on a timely and cost effective basis. Fundamental to the management
of liquidity is the coordination of the different maturities of the Bank's
assets and liabilities, while maintaining enough liquidity at all times to fund
sudden loan growth and deposit withdrawals.
The liquid assets of the Bank include cash and due from banks, interest bearing
deposits in other banks, and federal funds sold. As of March 31, 1999, liquid
assets made up 10% of total bank assets. In addition, the Bank has approximately
$56 million in available-for-sale securities that can be sold to accommodate
changing liquidity needs as well as multiple funding sources with the FHLB of
Seattle and other large banks.
For the first three months of 1999, the ongoing operations of the Bank resulted
in cash outflows (cash and federal funds) of close to $10 million. The change in
the Bank's liquidity represents net loan growth of $3 million, and deposit run
off of $7 million.
CAPITAL MANAGEMENT
As of March 31, 1999, shareholders' equity totaled $35,176,000, a decrease of
$60,000 when compared to total shareholders' equity as of the end of the
previous fiscal year. The decline in shareholders' equity reflects the Board of
Directors recent decision to declare a $.12 per share cash dividend, payable May
21, 1999. The dividend, when paid, will total approximately $1.0 million.
The Bank is required to maintain minimum amounts of capital to "risk weighted"
assets, as defined by banking regulators. At March 31, 1999, 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 12.8% and 14.1%, respectively.
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
12
<PAGE> 15
potential failure to address their own Year 2000 issues. As described in the
Company's most recent 10-K regulatory filing, VRB remains on schedule in
relation to its action plan which was designed to meet established timelines and
key milestones outlined in interagency statements issued by the Federal
Financial Institutions Examination Council. Below is a brief analysis of the
various phases of the Bank's Year 2000 action plan, and the progress made to
date:
Assessment: All information technology supported systems and products have
been identified and evaluated. Significant borrowers of the Bank have been
contacted to build year 2000 awareness and encourage early solutions
regarding potential business interruption due to system failures.
Third party evaluation and remediation: Third party confirmation of Year
2000 compliance has been received by critical outside vendors that support
non-information technology systems such as embedded chips.
Integrated testing: Integrated testing and validation of the Bank's critical
data processing systems was completed in December of 1998. Testing of other
various stand alone systems is presently ongoing.
Contingency planning: VRB is currently drafting a contingency plan in the
event that its business operations are materially impacted by the turn of
the century. Sections of the plan include the Bank's preparation for
unprecedented customer withdrawals leading up the Year 2000, security of the
Bank's employees, customers and funds, strategies to accommodate extended
power loss, and failure of our data processing system due to circumstances
beyond our control.
As of March 31, 1999, neither the Company's integrated testing of critical
systems, nor the Bank's ongoing contingency planning, has revealed any
circumstances that would cause management to believe that Year 2000 will have a
material financial impact on the performance of the Bank. To date, the Bank has
spent approximately $85,000 in direct and indirect costs on Year 2000 compliance
issues. Management expects to spend an additional $30,000 in 1999 to complete
its remediation efforts. The costs to complete the Bank's Year 2000 modification
and testing processes are management's best estimates. Actual events are
dependent on the continued availability of certain resources, third party
modification plans and other factors.(1)
- ----------
(1) This paragraph contains forward looking statements.
13
<PAGE> 16
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, 1999:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 $ Change % Change
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Loans $ 178,142 $ 175,188 $ 2,954 1.69%
Investments 76,577 76,483 94 0.12%
Federal funds sold 16,300 26,100 (9,800) (37.55)%
Other assets 33,841 33,446 395 1.18%
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 304,860 $ 311,217 $ (6,357) (2.04)%
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY
Noninterest bearing deposits $ 68,307 $ 72,135 $ (3,828) (5.31)%
Interest bearing deposits 198,593 201,988 (3,395) (1.68)%
- -------------------------------------------------------------------------------------------------------------------
Total deposits 266,900 274,123 (7,223) (2.63)%
- -------------------------------------------------------------------------------------------------------------------
Other liabilities 2,784 1,859 925 49.76%
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 269,684 275,982 (6,298) (2.28)%
Total shareholders' equity 35,176 35,235 (59) (0.17)%
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 304,860 $ 311,217 $ (6,357) (2.04)%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
LOANS:
The Bank offers 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 $182.0 million at March
31, 1999, representing a $3.3 million increase when compared to loans of $178.7
million as of December 31, 1998.
Commitments, principally real estate construction notes and commercial lines of
credit, have grown to $29.0 million at March 31, 1999, a 33% increase when
compared to commitments outstanding as of the end of the previous year.
Reflective of the Bank's lending criteria, as well as trends within the local
economy, 71% of the Bank's loan portfolio is classified as real estate mortgage
loans. Of the $127 million in real estate mortgage loans outstanding as of March
31, 1999, approximately $83 million were made to commercial customers where the
collateral for the loans includes the real estate occupied by the customers'
businesses. An additional $27 million represented loans secured by multi family
(5 or more) residential property and the remaining $17
14
<PAGE> 17
million was secured by 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:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
Amount Percentage Amount Percentage
- -------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Commercial $ 20,385 11.44% $ 16,418 9.37%
Real estate construction 22,165 12.44% 23,552 13.44%
Real estate mortgage 126,658 71.10% 126,332 72.11%
Consumer and other 12,798 7.18% 12,425 7.09%
- -------------------------------------------------------------------------------------------------
182,006 102.17% 178,727 102.02%
Allowance for loan losses
and unearned fees (3,864) (2.17)% (3,539) (2.02)%
- -------------------------------------------------------------------------------------------------
Net loans $ 178,142 100.00% $ 175,188 100.00%
- -------------------------------------------------------------------------------------------------
</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, 1999, the Bank's allowance for loan
losses was $3,546,000 or 1.95% of total loans, and is believed to be adequate to
absorb potential credit losses that may arise in the normal course of
business(1).
As of March 31, 1999, total non performing assets as a percentage of total
assets increased slightly to .28%, to total $840,000. The increase is
attributable to the credit issues of one borrower. The note is well
collateralized, and management expects to resolve the delinquency without moving
into foreclosure(1).
Recoveries exceeded charge offs in the 1st quarter of 1999, for net recoveries
of $7,000. Due to the Bank's substantial loan loss reserve and the strength of
the Bank's loan portfolio, the Bank has not recorded a loan loss provision in
1999.
- ----------
(1) These paragraphs contain forward looking statements.
15
<PAGE> 18
The following table presents information with respect to non-performing
assets:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Loans on nonaccrual status $ 789 $ 262
Loans past due greater than 90 days but not on nonaccrual status -- 4
Other real estate owned 51 51
- ----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 840 $ 317
- ----------------------------------------------------------------------------------------------------------------------
Percentage of nonperforming assets to total assets 0.28% 0.10%
- ----------------------------------------------------------------------------------------------------------------------
</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, 1999, the Bank's portfolio of investment
securities totaled $76.6 million, virtually unchanged when compared to the
balance of the portfolio at December 31, 1998 of $76.5 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 March 31, 1999, the Bank's investment portfolio that is currently AFS
totaled $56.7 million, or approximately 74% of the total portfolio. Due to
recent improvements in average yields for similar securities now available in
the bond market, the market value the AFS portfolio has dropped by approximately
$363,000, net of tax. This represents a one percent decline in the aggregate
market value of the Bank's available for sale investments. If long term rates
continue to increase, the value of the Bank's investment holdings will most
likely decline. This could hinder the Bank's ability to quickly liquidate
securities 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.(1)
- ----------
(1) The paragraph contains forward looking statements.
16
<PAGE> 19
The following table provides the book value of the Bank's investment portfolio
as divided between HTM and AFS as of March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
- ------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Investments available-for-sale
U.S. Treasury and agencies $56,522 $57,070
States and political subdivisions -- --
Corporate and other investments 175 194
- ------------------------------------------------------------------------------
$56,697 $57,264
- ------------------------------------------------------------------------------
Investments held-to-maturity
U.S. Treasury and agencies $ -- $ --
States and political subdivisions 18,081 17,454
Corporate and other investments -- --
- ------------------------------------------------------------------------------
$18,081 $17,454
==============================================================================
FHLB stock $ 1,799 $ 1,765
==============================================================================
</TABLE>
DEPOSITS:
Deposits are the Bank's major source of funds available for lending and other
investment opportunities. Deposit inflows and outflows, are influenced by
general interest rates and economic conditions. Substantially all of the Bank's
depositors are residents of southern Oregon.
Total deposits declined $7.2 million, or 3% when comparing March 31, 1999 to the
end of 1998. Fluctuations in noninterest bearing deposits are common and despite
the decline in balances outstanding on March 31, 1999, the Bank continues to
experience conservative account growth. Time certificates of deposit continue
their decline as seen in 1998. The decline is linked to those accounts acquired
from CBC, as funds mature and leave seeking higher returns. This trend will most
likely continue until management determines that growth in time certificates of
deposit is financially beneficial, and alters its pricing strategy
accordingly.(1) The decline in time certificates of deposits has resulted in a
lower average cost of funds. For example, when comparing the 4th quarter of 1998
to the 1st quarter of 1999, the Bank's average cost of funds declined from 2.51%
to 2.40%
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
1999 DEPOSITS 1998 DEPOSITS
(in thousands)
<S> <C> <C> <C> <C>
Demand $ 68,307 25.6% $ 72,134 26.3%
Interest bearing demand 113,403 42.5 110,900 40.5
Savings 25,039 9.4 24,269 8.9
Time deposits 60,151 22.5 66,819 24.4
-------- -------- -------- --------
$266,900 100.0% $274,122 100.0%
======== ======== ======== ========
</TABLE>
- ----------
(1) This statement is a forward looking statement.
17
<PAGE> 20
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 are not
applicable to Bank operations at this time.
INTEREST RATE RISK
Interest rate risk is managed through the monitoring of 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 managing the re-pricing characteristics of the Bank's assets
and liabilities, the Bank can minimize the potential adverse impact from
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 is an instantaneous
adjustment in market rates on a balance sheet level to determine the effect such
changes would have on the Company's income levels and capital position for the
succeeding twelve months.
As of March 31, 1999, 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, 1998.
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 discussion and analysis, Loans and Loan Loss Reserve).
18
<PAGE> 21
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 April 10, 1992, by and between Valley of the
Rogue Bank and Tom Anderson*
10.4 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*
10.5 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)
10.6 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)
10.7 Employment Agreement dated February 27, 1997 by and among Valley of the
Rogue Bank, VRB Bancorp and Felice Belfiore**
10.8 Employment Agreement dated May 1, 1996 by and between Valley of the
Rogue Bank and Brad Copeland**
19
<PAGE> 22
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: None
20
<PAGE> 23
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 12, 1999 /s/ Tom Anderson
----------------------------------------
Tom Anderson
Executive Vice President
Chief Operating Officer and Secretary
Date: May 12, 1999 /s/ Felice Belfiore
-----------------------------------------
Felice Belfiore
Senior Vice President
Chief Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 14,383
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 16,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,495
<INVESTMENTS-CARRYING> 18,081
<INVESTMENTS-MARKET> 18,812
<LOANS> 182,005
<ALLOWANCE> 3,864
<TOTAL-ASSETS> 304,860
<DEPOSITS> 266,900
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,784
<LONG-TERM> 0
0
0
<COMMON> 21,683
<OTHER-SE> 13,493
<TOTAL-LIABILITIES-AND-EQUITY> 204,860
<INTEREST-LOAN> 4,199
<INTEREST-INVEST> 1,333
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,531
<INTEREST-DEPOSIT> 1,603
<INTEREST-EXPENSE> 5
<INTEREST-INCOME-NET> 3,928
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,439
<INCOME-PRETAX> 2,000
<INCOME-PRE-EXTRAORDINARY> 2,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,250
<EPS-PRIMARY> .14<F1>
<EPS-DILUTED> .14
<YIELD-ACTUAL> .08
<LOANS-NON> 789
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,539
<CHARGE-OFFS> 13
<RECOVERIES> 20
<ALLOWANCE-CLOSE> 3,546
<ALLOWANCE-DOMESTIC> 3,546
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>For Purposes of This Exhibit, Primary means Basic.
</FN>
</TABLE>
