<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 JUNE 30, 2000
----------------------------------------
0-25932
------------------------
(Commission File Number)
VRB BANCORP
-----------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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
--------------
</TABLE>
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>
<S> <C>
Class Outstanding at July 15, 2000
----- ----------------------------
Common stock, no par value 8,301,361
</TABLE>
<PAGE> 2
VRB BANCORP
Form 10-Q
June 30, 2000
Table of contents
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION Number
------
<S> <C> <C> <C>
Item 1. Financial statements
Consolidated balance sheets
June 30, 2000 and December 31, 1999 1
Consolidated statements of income
For the three months ended June 30, 2000 and 1999 2
Consolidated statements of income
For the six months ended June 30, 2000 and 1999 3
Consolidated statements of changes in shareholders' equity
and comprehensive income
For the period December 31, 1998 through June 30, 2000 4
Consolidated statements of cash flows
For the six months ended June 30, 2000 and 1999 5
Notes to consolidated financial statements 6-7
Item 2. Management's discussion and analysis of results of operations
and financial condition 8-15
Item 3. Quantitative and qualitative disclosures about market risk 16
PART II OTHER INFORMATION
Item 1. Legal proceedings 17
Item 2. Changes in securities 17
Item 3. Defaults upon senior securities 17
Item 4. Submission of matters to a vote of security holders 17
Item 5. Other information 17
Item 6. Exhibits, independent accountant's review report, and reports on Form 8-K 17-18
SIGNATURES 19
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VRB BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
---------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 17,722,662 $ 17,086,676
Federal funds sold -- 1,600,000
---------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 17,722,662 18,686,676
Investments
U.S. Treasury and agencies 53,872,905 54,755,835
States and political subdivisions 17,242,784 18,010,109
Corporate and other investments 114,872 134,146
Federal Home Loan Bank stock 1,960,500 1,898,800
Loans, net of allowance for loan losses and unearned income 215,524,873 198,000,975
Premises and equipment, net 7,853,675 7,797,420
Goodwill 8,442,076 8,798,661
Accrued interest and other assets 3,860,929 3,421,075
---------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 326,595,276 $ 311,503,697
=========================================================================================================
LIABILITIES
Deposits
Demand deposits $ 81,631,576 $ 74,804,533
Interest bearing demand deposits 110,651,167 119,569,318
Savings deposits 23,097,697 23,512,119
Time deposits 63,696,219 58,479,936
---------------------------------------------------------------------------------------------------------
Total deposits 279,076,659 276,365,906
Borrowed funds 11,000,000 --
Accrued interest and other liabilities 1,592,145 1,528,447
---------------------------------------------------------------------------------------------------------
Total liabilities 291,668,804 277,894,353
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 8,301,361 and 8,303,596, issued and outstanding
at June 30, 2000 and December 31, 1999, respectively 18,686,305 18,699,060
Retained earnings 17,890,734 16,428,287
Accumulated other comprehensive income, net of taxes (1,650,567) (1,518,003)
---------------------------------------------------------------------------------------------------------
Total shareholders' equity 34,926,472 33,609,344
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 326,595,276 $ 311,503,697
=========================================================================================================
</TABLE>
1
<PAGE> 4
VRB BANCORP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the three months ended June 30, 2000 1999
----------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $4,778,120 $4,327,308
Interest on investment securities:
U.S. Treasury and agencies 834,156 844,463
States and political subdivisions 228,540 233,155
Corporate and other investments 33,196 35,087
Federal funds sold 12,870 157,921
----------------------------------------------------------------------------------------------------------
Total interest income 5,886,882 5,597,934
INTEREST EXPENSE
Interest bearing demand deposits 802,474 731,687
Savings deposits 118,681 122,476
Time deposits 778,102 685,434
Borrowed Funds 78,861 --
----------------------------------------------------------------------------------------------------------
Total interest expense 1,778,118 1,539,597
----------------------------------------------------------------------------------------------------------
Net interest income 4,108,764 4,058,337
----------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES -- --
----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,108,764 4,058,337
NON-INTEREST INCOME
Service charges on deposit accounts 379,209 322,744
Other operating income 272,771 154,436
----------------------------------------------------------------------------------------------------------
Total non-interest income 651,980 477,180
NON-INTEREST EXPENSES
Salaries and benefits 1,634,793 1,536,491
Net occupancy 342,460 304,946
Communications 112,153 119,655
Data processing 50,712 79,107
FDIC insurance premium 13,659 7,670
Supplies 58,447 64,784
Professional fees 51,283 42,564
Advertising 103,319 127,375
Other expenses 389,863 364,496
----------------------------------------------------------------------------------------------------------
Total non-interest expenses 2,756,689 2,647,088
INCOME BEFORE INCOME TAXES 2,004,055 1,888,429
PROVISION FOR INCOME TAXES 763,000 710,250
----------------------------------------------------------------------------------------------------------
NET INCOME $1,241,055 $1,178,179
==========================================================================================================
BASIC EARNINGS PER SHARE $ 0.15 $ 0.14
==========================================================================================================
DILUTED EARNINGS PER SHARE $ 0.15 $ 0.14
==========================================================================================================
</TABLE>
2
<PAGE> 5
VRB BANCORP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the six months ended June 30, 2000 1999
----------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 9,386,688 $ 8,525,906
Interest on investment securities:
U.S. Treasury and agencies 1,674,884 1,646,167
States and political subdivisions 460,047 461,796
Corporate and other investments 65,785 71,180
Federal funds sold 25,416 424,326
----------------------------------------------------------------------------------------------------------
Total interest income 11,612,820 11,129,375
INTEREST EXPENSE
Interest bearing demand deposits 1,656,588 1,443,176
Savings deposits 233,946 242,244
Time deposits 1,489,205 1,457,088
Borrowed funds 111,050 --
----------------------------------------------------------------------------------------------------------
Total interest expense 3,490,789 3,142,508
----------------------------------------------------------------------------------------------------------
Net interest income 8,122,031 7,986,867
----------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES -- --
----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 8,122,031 7,986,867
NON-INTEREST INCOME
Service charges on deposit accounts 706,979 630,556
Other operating income 509,088 357,708
----------------------------------------------------------------------------------------------------------
Total non-interest income 1,216,067 988,264
NON-INTEREST EXPENSES
Salaries and benefits 3,193,020 3,077,196
Net occupancy 734,432 581,620
Communications 234,223 224,402
Data processing 130,537 171,214
FDIC insurance premium 27,817 15,583
Supplies 119,957 125,031
Professional fees 87,279 88,461
Advertising 161,700 186,725
Other expenses 747,928 616,053
----------------------------------------------------------------------------------------------------------
Total non-interest expenses 5,436,893 5,086,285
INCOME BEFORE INCOME TAXES 3,901,205 3,888,846
PROVISION FOR INCOME TAXES 1,443,000 1,460,250
----------------------------------------------------------------------------------------------------------
NET INCOME $ 2,458,205 $ 2,428,596
==========================================================================================================
BASIC EARNINGS PER SHARE $ 0.30 $ 0.28
==========================================================================================================
DILUTED EARNINGS PER SHARE $ 0.30 $ 0.28
==========================================================================================================
</TABLE>
3
<PAGE> 6
VRB BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
SHARES AMOUNT EARNINGS
----------------------------------------------
<S> <C> <C> <C>
BALANCE, December 31, 1998
(audited) 8,694,286 $ 21,583,869 $ 13,590,957
Net income 4,888,383
Other comprehensive income, net of tax
Unrealized losses on
securities arising during
the period
Comprehensive income
Stock options exercised 36,179 219,126 --
Cash dividend ($.12 per
share, paid May 21 and
October 15, 1999) -- -- (2,051,053)
Stock repurchased (426,869) (3,103,935) --
---------------------------------------------
BALANCE, December 31, 1999
(audited) 8,303,596 $ 18,699,060 $ 16,428,287
=============================================
Net income 2,458,205
Other comprehensive income, net of tax
Unrealized losses on
securities arising during the
period
Comprehensive income
Stock repurchased (8,000) (49,257) --
Stock options exercised 5,765 36,502 --
Cash dividend ($.12 per share,
paid May 1) (995,758)
---------------------------------------------
BALANCE, June 30, 2000
(unaudited) 8,301,361 $ 18,686,305 $ 17,890,734
=============================================
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE COMPREHENSIVE SHAREHOLDERS'
INCOME INCOME EQUITY
--------------------------------------------------
<S> <C> <C> <C>
BALANCE, December 31, 1998
(audited) $ 60,629 $ 35,235,455
Net income $ 4,888,383 4,888,383
Other comprehensive income, net of tax
Unrealized losses on
securities arising during
the period (1,578,632) (1,578,632) (1,578,632)
------------
Comprehensive income $ 3,309,751
============
Stock options exercised -- 219,126
Cash dividend ($.12 per
share, paid May 21 and
October 15, 1999) -- (2,051,053)
Stock repurchased -- (3,103,935)
------------------------------
BALANCE, December 31, 1999
(audited) $ (1,518,003) $ 33,609,344
==============================
Net income 2,458,205 2,458,205
Other comprehensive income, net of tax
Unrealized losses on
securities arising during the
period (132,564) (132,564) (132,564)
------------
Comprehensive income $ 2,325,641
============
Stock repurchased -- (49,257)
Stock options exercised -- 36,502
Cash dividend ($.12 per share,
paid May 1) (995,758)
------------------------------
BALANCE, June 30, 2000
(unaudited) $ (1,650,567) $ 34,926,472
==============================
</TABLE>
4
<PAGE> 7
VRB BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the six months ended June 30 2000 1999
----------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,458,205 $ 2,428,596
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 681,634 516,045
FHLB of Seattle stock dividend (61,700) (66,180)
Changes in cash due to changes in assets and liabilities
Accrued interest receivable and other assets (203,951) (660,119)
Accrued interest payable and other liabilities 63,698 (573,490)
----------------------------------------------------------------------------------------------------
Net cash from operating activities 2,937,886 1,644,852
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the maturity of available-for-sale securities 518,281 10,526,996
Proceeds from the maturity of held-to-maturity securities 770,000 520,000
Purchases of available-for-sale securities -- (10,500,000)
Purchases of held-to-maturity securities -- (1,125,587)
Net increase in loans (17,523,898) (9,304,673)
Purchases of premises and equipment (368,524) (605,458)
----------------------------------------------------------------------------------------------------
Net cash from investing activities (16,604,141) (10,488,722)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits 2,710,754 (2,683,121)
Proceeds from the exercise of common stock options 36,502 131,620
Net cash used to repurchase common stock (49,257) (508,365)
Net borrowings 11,000,000 --
Cash dividend (995,758) (1,046,126)
----------------------------------------------------------------------------------------------------
Net cash from financing activities 12,702,241 (4,105,992)
NET DECREASE IN CASH AND CASH EQUIVALENTS (964,014) (12,949,862)
CASH AND CASH EQUIVALENTS, beginning of period 18,686,676 40,613,570
----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 17,722,662 $ 27,663,708
====================================================================================================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest $ 3,514,421 $ 3,214,684
Cash paid for taxes $ 1,206,000 $ 1,572,288
SCHEDULE OF INVESTING AND FINANCING ACTIVITIES
Changes in unrealized loss on available-for-sale
securities, net of tax $ (132,564) $ (1,052,330)
</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 1999 Annual Report
to Shareholders. The operating results for the six months ended June 30, 2000,
are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 31, 2000, or any other future interim period.
NOTE 3 - Earnings per common and common equivalent shares
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution that could occur if common shares were issued pursuant to the exercise
of options under the Company's stock option plans.
6
<PAGE> 9
The following table illustrates the computations of basic and diluted earnings
per share for the three-month and six-month periods ended June 30, 2000 and 1999
(in thousands except per share amounts):
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
For the three months ended June 30, 1999
Basic earnings per share -
Income available to common shareholders $1,178 8,676 $0.14
Effect of dilutive securities
Outstanding common stock options -- 39
------ -----
Income available to common shareholders
plus assumed conversions $1,178 8,715 $0.14
====== ====== =====
For the three months ended June 30, 2000
Basic earnings per share -
Income available to common shareholders $1,241 8,300 $0.15
Effect of dilutive securities
Outstanding common stock options -- --
------ -----
Income available to common shareholders
plus assumed conversions $1,241 8,300 $0.15
====== ====== =====
For the six months ended June 30, 1999
Basic earnings per share -
Income available to common shareholders $2,429 8,688 $0.28
Effect of dilutive securities
Outstanding common stock options -- 36
------ -----
Income available to common shareholders
plus assumed conversions $2,429 8,724 $0.28
====== ====== =====
For the six months ended June 30, 2000
Basic earnings per share -
Income available to common shareholders $2,458 8,299 $0.30
Effect of dilutive securities
Outstanding common stock options -- --
------ -----
Income available to common shareholders
plus assumed conversions $2,458 8,299 $0.30
====== ====== =====
</TABLE>
7
<PAGE> 10
Disclosure Regarding Forward-Looking Statements
The following discussion includes forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are based on the current beliefs of the Company's management and on
assumptions made by management based on currently available information. All
statements other than statements of historical fact, regarding the Company's
financial position, business strategy and plans and objectives for future
operations are forward-looking statements. When used herein, the words
"anticipate," "believe," "estimate," "expect," and "intend" and words or phrases
of similar meaning, as they relate to the Company or management, are intended in
part to help identify forward-looking statements. Although the Company believes
that the expectations reflected in these forward-looking statements are
reasonable, it can give no assurance that such expectations will prove correct.
Forward-looking statements are subject to various risks and uncertainties that
could cause actual results to differ materially and adversely. These risks and
uncertainties include the Company's ability to maintain or expand its market
share or net interest margins and to implement its marketing and growth
strategies. Further, actual results may be affected by the Company's ability to
compete on price and other factors with other financial institutions; customer
acceptance of new products and services; and, general trends in the banking
industry and the regulatory environment, as they relate to the Company's cost of
funds and returns on assets. In addition, there are risks inherent in the
banking industry relating to collectibility of loans and changes in interest
rates. The reader is advised that this list of risks is not exhaustive and
should not be construed as any prediction by the Company as to which risks would
cause actual results to differ materially from those indicated by the
forward-looking statements.
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INTRODUCTION
VRB Bancorp was organized in 1983 under Oregon law as the holding company of
Valley of the Rogue Bank, an Oregon state chartered bank organized in 1967. The
Company conducts its business through, and has no material operations outside
of, Valley of the Rogue Bank. Accordingly, reference to "VRB", "the Company",
and "the Bank", are intended to denote VRB Bancorp and Valley of the Rogue Bank
as a consolidated entity.
INDUSTRY TRENDS AND COMPANY ANNOUNCEMENTS
Interest Rate environment: By the end of the second quarter, the Bank's prime
lending rate had risen to 9.25%, 1.50% higher than prime one year ago. However,
the rise in interest rates has had a relatively minor impact on the Bank's
interest margin, which remained close to the 6% mark for the year. In addition,
loan demand remained steady for the period, with the Bank's loan portfolio
growing by 9% over the first six months of 2000.
Branch openings and closures: On January 31, 2000, the Bank opened a temporary
branch in Central Point, Oregon. Construction on the permanent facility has
commenced and the new facility is expected to open for business in the fourth
quarter. Central Point continues to be one of the fastest growing communities in
southern Oregon and initial acceptance of the branch has been very positive with
branch assets and deposits growing to $9 million and $1.5 million, respectively.
On May 15, 2000, the Bank announced the impending closure of one of its four
branches located in Medford, Oregon. The branch closure, scheduled for August
15, 2000, comes as a result the Company's plan to streamline its branch network
and reduce operating overhead.
8
<PAGE> 11
MATERIAL CHANGES IN THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE
30, 2000 AND 1999
Earnings: Second quarter earnings grew by 5% to $1,241,000 when compared 1999
earnings of $1,178,000. On a per share basis, earnings increased by 7%, totaling
$.15 for the quarter ended June 30, 2000 compared with $.14 for the same period
in 1999.
Net interest income: Net interest income (interest income less interest expense)
increased from $4,058,000 to $4,109,000 when comparing the three months ended
June 30, 2000 and 1999. The increase reflected the net effect of the following:
- Interest earned on loans grew by 10% in part as a result of
loan growth of 36% over the same quarter last year.
- Unusually strong loan growth caused the Bank to utilize its
line of credit with the Federal Home Loan of Seattle, and 84%
of second quarter loan growth was funded with debt. For the
period, the Bank averaged $4.6 million in overnight
borrowings, resulting in interest expense of approximately
$79,000. (See liquidity review on page 11)
- Interest expense grew as the Bank paid a higher average rate
on interest bearing deposits (primarily time certificates of
deposit). Overall, the Bank's cost of funds grew from 2.27% to
2.41%.
MATERIAL CHANGES IN THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE
30, 2000 AND 1999
Earnings: Earnings reached $2,458,000 for the year. The results were a slight
increase over last year's earnings of $2,429,000 during the same period. On a
per share basis, earnings increased from $.28 in 1999, to $.30 in 2000, an
increase of 7%. A decrease in the number of shares outstanding, as a result of
the Company's 1999 share buyback program, further enhanced the Company's
earnings on a per share basis.
Net interest income: Interest income on loans and investments increased on a tax
equivalent basis by $467,000 when comparing the six months ended June 30, 2000
to the same period in the prior year. Average loans outstanding grew by $24.8
million, or 14%, and contributed substantially to the higher income levels.
Gains in interest income were partially offset by increases in the Bank's
interest expense. Deposit rates increased throughout the first six months of
2000, reflecting recent monetary policy and competitive pressures. As a result,
the Bank paid an additional $348,000 on interest bearing deposit accounts and
overnight funds. We expect this trend to continue if the Federal Reserve Board
further tightens its monetary policy in attempt to control inflation.
9
<PAGE> 12
The above discussion is supported in the following analysis of the Bank's
interest margin (on a tax equivalent basis) for the six months ended June 30,
2000 and 1999:
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000 1999
(in thousands) Avg Balance Interest Rate Avg Balance Interest Rate
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
-------------------------------------------------------------------------------------------------------------------------
Federal funds sold $ 808 $ 26 6.44% $ 17,972 $ 424 4.72%
Held to maturity securities(1) 17,886 725 8.11 18,002 745 8.28
Available for sale securities 56,496 1,741 6.16 57,746 1,717 5.95
Commercial loans(2) 167,105 7,477 8.95 146,560 6,807 9.29
Consumer loans(2) 40,216 1,910 9.50 35,900 1,719 9.58
-------------------------------------------------------------------------------------------------------------------------
Total earning assets 282,511 11,879 8.41 276,180 11,412 8.26
Non-earning assets 35,355 34,041
Less: loan loss reserve (3,762) (3,544)
-------------------------------------------------------------------------------------------------------------------------
Total average assets $ 314,104 $ 306,677
=========================================================================================================================
Interest bearing liabilities
-------------------------------------------------------------------------------------------------------------------------
Interest bearing checking $ 30,331 $ 154 1.02% $ 32,779 $ 160 0.98%
Money market 83,785 1,503 3.59 79,805 1,283 3.22
Savings 23,908 233 1.95 24,959 242 1.94
Time 59,635 1,489 4.99 60,812 1,457 4.79
Borrowed funds 3,363 111 6.60 -- --
-------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits and
borrowed funds 201,022 3,490 3.47 198,355 3,142 3.17
Non-interest bearing deposits 77,577 70,487
-------------------------------------------------------------------------------------------------------------------------
Total deposits and borrowed funds 278,599 268,842
Other liabilities 901 1,571
-------------------------------------------------------------------------------------------------------------------------
Total liabilities 279,500 270,413
Shareholders' equity 34,604 36,264
-------------------------------------------------------------------------------------------------------------------------
Total average liabilities and
shareholders' equity $ 314,104 $ 306,677
=========================================================================================================================
Net interest income $ 8,389 $ 8,270
Interest income as a percentage
of average earning assets 8.41% 8.26%
Interest expense as a percentage
of average earning assets 2.47 2.28
-------------------------------------------------------------------------------------------------------------------------
Net interest margin 5.94% 5.98%
=========================================================================================================================
</TABLE>
(1) Tax exempt income has been adjusted to a tax equivalent basis at the
Bancorp's effective tax rate of 37%
(2) Non accrual loans are included in the average balance
10
<PAGE> 13
The following table further analyzes the Bank's interest margin, and attributes
increases in interest income and interest expense to changes in "volume" or
changes in interest "rate".
<TABLE>
<CAPTION>
June 30, 2000 over June 30, 1999
(in thousands) Increase (decrease) in interest due to changes in
Interest earning assets Volume Rate Net
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds sold $(552) $ 154 $(398)
Held to maturity securities (5) (15) (20)
Available for sale securities (39) 63 24
Commercial loans 919 (249) 670
Consumer loans 205 (14) 191
------------------------------------------------------------------------------------
Total 528 (61) 467
------------------------------------------------------------------------------------
Interest bearing liabilities
------------------------------------------------------------------------------------
Interest bearing checking (12) 6 (6)
Money market 71 149 220
Savings (10) 1 (9)
Time deposits (29) 61 32
Borrowed funds 111 -- 111
------------------------------------------------------------------------------------
Total 131 217 348
------------------------------------------------------------------------------------
Net increase in net interest income 397 (278) 119
====================================================================================
</TABLE>
Fee income: Fee income, or non-interest income, increased by $228,000, or 23%
when comparing the first six months of 1999 and 2000. In May, the Bank updated
its fee structure, which resulted in the more frequent assessment of account
charges for certain products and services. Also contributing to the increase in
fee income were ATM surcharge fees (beginning February 2000) and fees from the
origination and sale of mortgage loans.
Cost of operations: Cost of operations, or non-interest expense, grew to $5.4
million year-to-date. Salaries and depreciation expense prompted the 7%
increase, reflecting this year's investment in both people and technology.
The Bank's efficiency ratio, or non-interest expense as a percentage of total
net interest income plus non-interest income, was 58.2% for the six months ended
June 30, 2000 compared to 56.7% for the same period in 1999. Excluding the
amortization of intangibles, such as goodwill (an approximate charge of $640,000
per year), the efficiency ratio improves to 54.1% and 52.3% for the periods
ended June 30, 2000 and 1999, respectively.
CHANGES IN FINANCIAL CONDITION AS OF JUNE 30, 2000
Liquidity review: The Bank must maintain cash flows adequate to fund operations
and meet commitments on a timely and cost effective basis.
Overall liquidity declined throughout the quarter as loan balances grew while
deposits remained relatively unchanged. As a result, the Bank drew from its line
of credit with the Federal Home Loan Bank ("FHLB") intermittently during the
period. At the end of the second quarter, the Bank had $11 million in overnight
borrowings. Management expects that the Bank will continue to borrower from the
FHLB. However, the volume of such borrowings is dependent on deposit growth and
on the Bank's ability to continue to grow its loan portfolio. Currently, the
Bank has a $30 million line of credit with the FHLB of Seattle to be utilized as
needed.
11
<PAGE> 14
For the first six months of 2000, the Bank experienced net cash outflows (cash
and federal funds) of nearly $1,000,000. The net impact of cash inflows and
outflows included net loan growth of $17.5 million, funded by a combination of
$11.0 million in debt (reflected in an increase in the FHLB line of credit), new
deposits of $2.7 million and $2.9 million in cash from ongoing operations.
Capital management: As of June 30, 2000, shareholders' equity totaled $34.9
million, an increase of $1.3 million when compared to total shareholders' equity
as of the end of the last fiscal year. The increase in shareholders' equity
reflects earnings of $2.5 million offset by dividends of one million ($.12 per
share), paid May 1, 2000.
The Bank is required to maintain minimum amounts of capital to "risk-weighted"
assets, as defined by banking regulators. At June 30, 2000, the Bank was
required to have Tier 1 and Total Capital ratios of 4.0% and 8.0%, respectively.
The Bank's actual ratios at that date were 10.9% and 12.1%, respectively.
Balance Sheet Analysis: The table below provides abbreviated balance sheets,
which illustrate the material changes in financial condition between December
31, 1999 and June 30, 2000:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999 $ Change % Change
------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Loans $ 219,363 $ 201,736 $ 17,627 8.74%
Allowance for loan losses and deferred fees (3,838) (3,735) (103) 2.76%
Investments 73,192 74,799 (1,607) (2.15%)
Federal funds sold -- 1,600 (1,600) (100.00%)
Other assets 37,878 37,104 774 2.09%
Total assets $ 326,595 $ 311,504 $ 15,091 4.84%
============================================================================================================
LIABILITIES AND EQUITY
Non interest bearing deposits $ 81,632 $ 74,804 $ 6,828 9.13%
Interest bearing deposits 197,445 201,562 (4,117) (2.04%)
------------------------------------------------------------------------------------------------------------
Total deposits 279,077 276,366 2,711 0.98%
------------------------------------------------------------------------------------------------------------
Other liabilities 12,592 1,529 11,063 723.54%
------------------------------------------------------------------------------------------------------------
Total liabilities 291,669 277,895 13,774 4.96%
Total shareholders' equity 34,926 33,609 1,317 3.92%
------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 326,595 $ 311,504 $ 15,091 4.84%
------------------------------------------------------------------------------------------------------------
</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 local residents. Outstanding loans totaled $219.4 million at June 30, 2000,
representing a $17.6 million increase when compared to loans of $201.7 million
as of December 31, 1999.
Commitments, principally real estate construction notes and commercial lines of
credit, totaled $34.3 million at June 30, 2000, relatively unchanged when
compared to commitments outstanding as of the end of the previous year.
12
<PAGE> 15
Reflective of the Bank's underwriting standards, as well as local economic
trends, 78% of the Bank's loan portfolio is secured by real estate. Of the $148
million in real estate mortgage loans outstanding as of June 30, 2000,
approximately $104 million were made to commercial customers and were secured by
the real estate occupied by the customers' businesses. An additional $20 million
represented loans secured by multi-family (5 or more) residential property and
the remaining $24 million was secured by single-family residential property.
This is relatively unchanged from previous reporting periods.
The following table presents the composition of the Bank's loan portfolio at the
date indicated:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------------- ------------------------
Amount Percentage Amount Percentage
-----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Commercial $ 36,793 17.07% $ 23,940 12.09%
Real estate construction 19,714 9.15% 29,034 14.66%
Real estate residential mortgage 44,267 20.54% 41,225 20.82%
Real estate commercial mortgage 103,688 48.11% 93,540 47.24%
Consumer and other 14,901 6.91% 13,997 7.07%
-----------------------------------------------------------------------------------------------
219,363 101.78% 201,736 101.89%
Allowance for loan losses (3,494) (1.62%) (3,503) (1.77%)
Deferred loan fees (344) (0.16%) (232) (0.12%)
-----------------------------------------------------------------------------------------------
Net loans $ 215,525 100.00% $ 198,001 100.00%
-----------------------------------------------------------------------------------------------
</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 control
credit losses by maintaining strong underwriting standards and by closely
monitoring the borrower's financial condition. As of June 30, 2000, the Bank's
allowance for loan losses was $3,494,000 or 1.62% of net loans, and is believed
to be adequate to absorb potential credit losses that may arise in the normal
course of business. As such, the Bank did not record a loan loss provision in
the first or second quarter of 2000.
As of June 30, 2000, total non-performing assets as a percentage of total assets
declined .09%, or $202,000.
Loan charge-offs were minimal in the first and second quarter of the year. After
netting recoveries against charge-offs, net charge-offs were just over $9,000.
13
<PAGE> 16
The following table presents information with respect to non-performing assets:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
----------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Loans on nonaccrual status $ 202 $ 551
Loans past due greater than 90 days but not on nonaccrual status -- --
Other real estate owned -- --
----------------------------------------------------------------------------------------------------------
Total non-performing assets $ 202 $ 551
----------------------------------------------------------------------------------------------------------
Percentage of non-performing loans to total loans 0.09% 0.27%
Percentage of non-performing assets to total assets 0.06% 0.18%
----------------------------------------------------------------------------------------------------------
</TABLE>
Investments: Investment securities are purchased to help manage liquidity and
generate after tax profits consistent with the risk guidelines established by
management and the Board of Directors. As of June 30, 2000, the Bank's portfolio
of investment securities totaled $73.2 million, virtually unchanged when
compared to the December 31, 1999 balance of $74.8 million.
VRB follows financial accounting principles that require the identification of
investment securities as held-to-maturity ("HTM") or available-for-sale ("AFS").
Securities designated as HTM are those that VRB has the intent and ability to
hold until they mature or are called, rather than those that management may sell
if liquidity requirements dictate.
As of June 30, 2000, the Bank's investment portfolio that is currently AFS
totaled $54.0 million, or approximately 74% of the total portfolio. Due to
rising interest rates, the market value the Bank's AFS portfolio has dropped by
approximately $2.6 million, before accruing for tax benefits. This represents an
4.5% percent decline in the aggregate market value of the Bank's available for
sale investments. If long-term interest rates continue to rise, the value of the
Bank's investment holdings will most likely continue to decline. This could
hinder the Bank's ability to liquidate securities quickly without incurring a
loss on the sale. Because future rate fluctuations are subject to great
uncertainty, management continues to monitor the market value of the portfolio
in relation to current liquidity needs on a regular basis.
14
<PAGE> 17
The following table provides the book value of the Bank's investment portfolio
as divided between HTM and AFS as of June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
--------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Investments available-for-sale
U.S. Treasury and agencies $53,873 $54,756
Corporate and other investments 115 134
--------------------------------------------------------------------------------
$53,988 $54,890
================================================================================
Investments held-to-maturity
States and political subdivisions $17,243 $18,010
================================================================================
FHLB stock $ 1,961 $ 1,899
================================================================================
</TABLE>
Deposits: Deposits are the Bank's principal source of funds available for
lending and other investment opportunities. Deposit inflows and outflows are
influenced by general interest rate changes, competition and local, regional and
national economic conditions. Substantially all of the Bank's depositors are
individuals or businesses located in southern Oregon.
Total deposits increased $2.7 million, or 1%, when comparing June 30, 2000 to
the end of the prior fiscal year. Non-interest bearing deposits have increased
to 29.3% of total deposits, up from 27.1% at year-end. High concentrations in
non-interest bearing accounts provide inexpensive funding evidenced by the fact
that the Bank's cost of funds has averaged 2.50% for the year, to date. However,
non-interest bearing account balances are also prone to volatility and can
fluctuate from day to day depending on the time of month and external events
like tax deadlines.
The Bank's current deposit mix is further illustrated below:
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
JUNE 30 TOTAL DECEMBER 31 TOTAL
2000 DEPOSITS 1999 DEPOSITS
------- ---------- ----------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Demand $ 81,632 29.3 % $ 74,805 27.1 %
Interest bearing demand 110,651 39.6 119,569 43.3
Savings 23,098 8.3 23,512 8.5
Time deposits 63,696 22.8 58,480 21.1
---------- ----- ---------- -----
$ 279,077 100.0 % $ 276,366 100.0 %
========== ===== ========== =====
</TABLE>
15
<PAGE> 18
PART I - FINANCIAL INFORMATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, interest rate and credit risks are the most
significant market risks that could have an adverse impact on the Bank's
financial condition and results of operation. Other types of market risk, such
as foreign currency exchange rate risk and commodity price risk do not have a
material effect on Bank operations at this time.
Interest rate risk: Interest rate risk is managed by monitoring the Bank's "gap"
position, and the sensitivity of the Bank's net interest margins and capital
position to changing interest rate environments. The Bank's gap is the
difference between re-pricing assets and re-pricing liabilities over specific
time periods. By matching the re-pricing characteristics of the Bank's assets
and liabilities, the Bank can minimize the potential adverse impact of changing
interest rates.
Periodically, the Bank will "rate shock" the balance sheet by simulating a 100
and 200 basis point change in interest rates. Rate shock simulates an
instantaneous adjustment in market rates on a balance sheet level to determine
the effect such changes would have on the Bank's income levels and capital
position for the succeeding twelve months.
As of June 30, 2000, management's analysis indicated that the Bank's overall
interest rate risk was within acceptable guidelines and that there are no
material changes in the Bank's exposure to mismatched re-pricing positions from
that reported as of December 31, 1999.
Credit risk: Credit risk is principally controlled by prudent loan underwriting
standards and adequate allowances for potential loan loss (See discussion under
Item 2 - Management's discussion and analysis, Loans and Loan Loss Reserve).
16
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings:
The registrant is not a party to any pending legal proceedings that it believes
would have a material adverse effect on the financial condition or operations of
the registrant.
ITEM 2. Changes in Securities: None
ITEM 3. Defaults Upon Senior Securities: None
ITEM 4. Submission of Matters to a Vote of Security Holders: None
ITEM 5. Other Information: None
ITEM 6a. Exhibits
The following exhibits are being filed with or incorporated by reference into
this report in Form 10-Q and this list shall constitute the exhibit index:
3.1 Articles of Incorporation of VRB Bancorp*
3.2 Bylaws of VRB Bancorp*
4.0 Specimen stock certificate*
10.1 Stock Option Agreement, dated July 24, 1997, between Valley of the
Rogue Bank and the shareholders of Investors Banking Corporation**
10.2 Plan of Merger, dated September 30, 1997, between Valley of the Rogue
Bank and Colonial Banking Company**
10.3 Employment Agreement dated January 11, 1993, and Amendment to
Employment Agreement, dated September 26, 1994, by and between Valley
of the Rogue Bank and William A. Haden*
10.4 1994 Amended Non-Discretionary Stock Option Plan for Non-Employee
Directors (incorporated by reference to Exhibit 4.3 of the Registrant's
registration statement on Form S-8 filed with the Commission on October
3, 1995)
---------------------------
* Incorporated by reference to the Company's registration statement on
Form 10 (Commission file number 0-25932) filed April 26, 1995 pursuant
to Section 12(g) of the Securities Exchange Act of 1934.
** Incorporated by reference to the Company's registration statement on
Form S-1 (Commission File number 333-37167) declared effective November
5, 1997.
17
<PAGE> 20
10.5 1994 Amended Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 4.3 of the Registrant's registration statement on Form S-8
filed with the Commission on October 3, 1995)
10.6 Employment Agreement dated February 27, 1997 by and among Valley of the
Rogue Bank, VRB Bancorp and Felice Belfiore**
10.7 Employment Agreement dated May 1, 1996 by and between Valley of the
Rogue Bank and Brad Copeland**
15.0 Independent Accountant's Review Report
27.0 Financial Data Schedule
ITEM 6b. REPORTS ON FORM 8-K: NONE
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 3, 2000 /S/ William A. Haden
----------------------------------------
William A. Haden
President
Chief Executive Officer
Date: August 3, 2000 /S/ Felice Belfiore
----------------------------------------
Felice Belfiore
Senior Vice President
Chief Financial Officer
19
