<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 SEPTEMBER 30, 2000
---------------------------------------------
0-25932
------------------------
(Commission File Number)
VRB BANCORP
-----------
(Exact name of registrant as specified in its charter)
OREGON 93-0892559
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
110 Pine Street, Rogue River, Oregon 97537
---------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (541) 582-4554
----------------
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) to the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 6, 2000
----- -------------------------------
Common stock, no par value 8,319,580
<PAGE> 2
VRB BANCORP
Form 10-Q
September 30, 2000
Table of contents
------------------------
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION Number
----------
<S> <C> <C>
Item 1. Financial statements
Consolidated balance sheets
September 30, 2000 and December 31, 1999 3
Consolidated statements of income
For the three months ended September 30, 2000 and 1999 4
Consolidated statements of income
For the nine months ended September 30, 2000 and 1999 5
Consolidated statement of changes in shareholders' equity and
comprehensive income
For the period December 31, 1998 through September 30, 2000 6
Consolidated statements of cash flows
For the nine months ended September 30, 2000 and 1999 7
Notes to consolidated financial statements 8-9
Item 2. Management's discussion and analysis of financial
condition and results of operations 10-17
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, independent accountant's review report, and reports on Form 8-K 19-20
SIGNATURES 21
</TABLE>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VRB BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 17,772,137 $ 17,086,676
Interest bearing deposits with other banks 9,900,000 1,600,000
Federal funds sold 2,500,000 --
---------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 30,172,137 18,686,676
Investments
U.S. Treasury and agencies 54,662,559 54,755,835
States and political subdivisions 17,059,136 18,010,109
Corporate and other investments 106,161 134,146
Federal Home Loan Bank stock 1,992,500 1,898,800
Loans held for sale 794,188 1,182,951
Loans, net of allowance for loan losses and unearned income 222,904,374 196,818,024
Premises and equipment, net 8,097,217 7,797,420
Goodwill 8,263,783 8,798,661
Accrued interest and other assets 3,726,295 3,421,075
---------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 347,778,350 $ 311,503,697
=========================================================================================================
LIABILITIES
Deposits
Demand deposits $ 84,760,500 $ 74,804,533
Interest bearing demand deposits 121,567,225 119,569,318
Savings deposits 22,909,317 23,512,119
Time deposits 80,500,571 58,479,936
---------------------------------------------------------------------------------------------------------
Total deposits 309,737,613 276,365,906
Accrued interest and other liabilities 2,455,578 1,528,447
---------------------------------------------------------------------------------------------------------
Total liabilities 312,193,191 277,894,353
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 8,309,433 and 8,303,596, issued and outstanding
at September 30, 2000 and December 31, 1999, respectively 18,747,003 18,699,060
Retained earnings 17,991,587 16,428,287
Accumulated other comprehensive income, net of taxes (1,153,431) (1,518,003)
---------------------------------------------------------------------------------------------------------
Total shareholders' equity 35,585,159 33,609,344
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 347,778,350 $ 311,503,697
=========================================================================================================
</TABLE>
<PAGE> 4
VRB BANCORP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the three months ended September 30, 2000 1999
-----------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $5,073,303 $4,342,326
Interest on investment securities:
U.S. Treasury and agencies 838,809 848,251
States and political subdivisions 222,782 234,343
Corporate and other investments 33,925 35,448
Interest on deposits with other banks 72,891 89,219
Federal funds sold 13,574 201,918
-----------------------------------------------------------------------------------------------------
Total interest income 6,255,284 5,751,505
INTEREST EXPENSE
Interest bearing demand deposits 909,279 817,437
Savings deposits 116,819 123,696
Time deposits 986,427 678,677
Borrowed Funds 42,202 --
-----------------------------------------------------------------------------------------------------
Total interest expense 2,054,727 1,619,810
-----------------------------------------------------------------------------------------------------
Net interest income 4,200,557 4,131,695
-----------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES -- --
-----------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,200,557 4,131,695
NONINTEREST INCOME
Service charges on deposit accounts 390,251 327,892
Other operating income 251,703 183,681
-----------------------------------------------------------------------------------------------------
Total noninterest income 641,954 511,573
NONINTEREST EXPENSES
Salaries and benefits 1,582,748 1,605,512
Net occupancy 380,212 343,323
Communications 107,165 109,130
Data processing 56,778 83,131
FDIC insurance premium 13,728 7,373
Supplies 67,287 66,645
Professional fees 31,580 63,903
Advertising 88,986 95,631
Merger related expenses 217,786 --
Amortization of goodwill 187,878 188,002
Other expenses 185,852 135,045
-----------------------------------------------------------------------------------------------------
Total noninterest expenses 2,920,000 2,697,695
INCOME BEFORE INCOME TAXES 1,922,511 1,945,573
PROVISION FOR INCOME TAXES 824,525 738,000
-----------------------------------------------------------------------------------------------------
NET INCOME $1,097,986 $1,207,573
=====================================================================================================
BASIC EARNINGS PER SHARE $ 0.13 $ 0.14
=====================================================================================================
FULLY DILUTED EARNINGS PER SHARE $ 0.13 $ 0.14
=====================================================================================================
</TABLE>
<PAGE> 5
VRB BANCORP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the nine months ended September 30, 2000 1999
-------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $14,459,991 $12,868,231
Interest on investment securities:
U.S. Treasury and agencies 2,513,693 2,494,418
States and political subdivisions 682,828 696,139
Corporate and other investments 99,710 106,628
Interest on deposits with other banks 96,411 190,087
Federal funds sold 15,470 525,376
-------------------------------------------------------------------------------------------------------
Total interest income 17,868,103 16,880,879
INTEREST EXPENSE
Interest bearing demand deposits 2,565,866 2,260,614
Savings deposits 350,765 365,940
Time deposits 2,475,632 2,135,765
Borrowed funds 153,253 --
-------------------------------------------------------------------------------------------------------
Total interest expense 5,545,516 4,762,319
-------------------------------------------------------------------------------------------------------
Net interest income 12,322,587 12,118,560
-------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES -- --
-------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 12,322,587 12,118,560
NON INTEREST INCOME
Service charges on deposit accounts 1,097,230 958,448
Other operating income 760,791 541,389
-------------------------------------------------------------------------------------------------------
Total non interest income 1,858,021 1,499,837
NON INTEREST EXPENSES
Salaries and benefits 4,775,768 4,682,709
Net occupancy 1,114,644 924,943
Communications 341,388 333,533
Data processing 187,315 254,345
FDIC insurance premium 41,545 22,956
Supplies 187,244 191,676
Professional fees 118,859 152,364
Advertising 250,686 282,356
Merger related expenses 217,786 --
Amortization of goodwill 563,634 565,038
Other expenses 558,024 374,061
-------------------------------------------------------------------------------------------------------
Total non interest expenses 8,356,893 7,783,981
INCOME BEFORE INCOME TAXES 5,823,715 5,834,416
PROVISION FOR INCOME TAXES 2,267,525 2,198,250
-------------------------------------------------------------------------------------------------------
NET INCOME $ 3,556,190 $ 3,636,166
=======================================================================================================
BASIC EARNINGS PER SHARE $ 0.43 $ 0.42
=======================================================================================================
FULLY DILUTED EARNINGS PER SHARE $ 0.43 $ 0.42
=======================================================================================================
</TABLE>
<PAGE> 6
VRB BANCORP
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
ACCUMULATED
COMPREHENSIVE OTHER TOTAL
COMMON STOCK RETAINED INCOME, NET COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT EARNINGS OF TAX INCOME EQUITY
------------ ------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998
(audited) 8,694,286 $ 21,583,869 $ 13,590,957 $ 60,629 $ 35,235,455
Net income -- -- 4,888,383 $ 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
============
Common stock options exercised 36,179 219,126 -- -- 219,126
Cash dividend ($.12 per share,
paid May 21 and October 15, 1999) -- -- (2,051,053) -- (2,051,053)
Common stock repurchased (426,869) (3,103,935) -- -- (3,103,935)
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1999
(audited) 8,303,596 18,699,060 16,428,287 (1,518,003) 33,609,344
Net income -- -- 3,556,190 3,556,190 -- 3,556,190
Other comprehensive income, net of tax
Unrealized gains on securities arising
during the period -- -- -- 364,572 364,572 364,572
------------
Comprehensive income $ 3,920,762
============
Common stock options exercised 13,837 97,197 -- -- 97,197
Cash dividend ($.12 per share, declared
March 30, and September 25, 2000) -- -- (1,992,890) -- (1,992,890)
Common stock repurchased (8,000) (49,254) -- -- (49,254)
------------ ------------ ------------ ------------ ------------
BALANCE, September 30, 2000
(unaudited) 8,309,433 $ 18,747,003 $ 17,991,587 $ (1,153,431) $ 35,585,159
============ ============ ============ ============ ============
</TABLE>
<PAGE> 7
VRB BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the nine months ended September 30 2000 1999
------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 3,556,190 $ 3,636,166
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,160,665 802,639
FHLB of Seattle stock dividend (93,700) (99,580)
Changes in cash due to changes in assets and liabilities
Accrued interest receivable and other assets (370,917) (93,398)
Accrued interest payable and other liabilities (70,001) (400,481)
------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,182,237 3,845,346
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the maturity of available-for-sale securities 527,043 10,541,579
Proceeds from the maturity of held-to-maturity securities 955,000 575,000
Purchases of available-for-sale securities -- (10,500,000)
Purchases of held-to-maturity securities -- (1,125,587)
Net increase in loans (25,913,881) (9,423,417)
Purchases of premises and equipment (688,830) (1,467,319)
------------------------------------------------------------------------------------------------------
Net cash used in investing activities (25,120,668) (11,399,744)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits 33,371,707 6,293,905
Proceeds from the exercise of common stock options 97,197 131,619
Net cash used to repurchase common stock (49,254) (2,413,716)
Cash dividend (995,758) (1,046,126)
------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 32,423,892 2,965,682
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,485,461 (4,588,716)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,686,676 40,613,570
------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30,172,137 $ 36,024,854
======================================================================================================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest $ 5,462,509 $ 4,843,138
Cash paid for taxes $ 2,005,000 $ 2,206,100
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Changes in unrealized gain (loss) on available-for-sale
securities, net of tax $ 364,572 $ (1,106,087)
</TABLE>
<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 nine months ended September 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.
<PAGE> 9
The following table illustrates the computations of basic and diluted earnings
per share for the three-month and nine-month periods ended September 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 September 30, 1999
Basic earnings per share -
Income available to common shareholders $1,208 8,581 $ 0.14
Effect of dilutive securities
Outstanding common stock options -- 47
------ ------
Income available to common shareholders
plus assumed conversions $1,208 8,628 $ 0.14
====== ====== ======
For the three months ended September 30, 2000
Basic earnings per share -
Income available to common shareholders $1,098 8,306 $ 0.13
Effect of dilutive securities
Outstanding common stock options -- 13
------ ------
Income available to common shareholders
plus assumed conversions $1,098 8,319 $ 0.13
====== ====== ======
For the nine months ended September 30, 1999
Basic earnings per share -
Income available to common shareholders $3,636 8,652 $ 0.42
Effect of dilutive securities
Outstanding common stock options -- 45
------ ------
Income available to common shareholders
plus assumed conversions $3,636 8,697 $ 0.42
====== ====== ======
For the nine months ended September 30, 2000
Basic earnings per share -
Income available to common shareholders 3,556 8,301 $ 0.43
Effect of dilutive securities
Outstanding common stock options -- 13
------ ------
Income available to common shareholders
plus assumed conversions $3,556 8,314 $ 0.43
====== ====== ======
</TABLE>
<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
Merger of Equals with Umpqua Holdings Corporation: On August 14, 2000, VRB
announced its plans to merge with Umpqua Holdings Corporation and to merge its
subsidiary, Valley of the Rogue Bank, with Umpqua's subsidiary, South Umpqua
Bank. The terms of the merger are fully described in the Joint Proxy Statement
mailed to shareholders on Friday, October 27, 2000 and concurrently filed with
the SEC under form 14A. The merger remains subject to final regulatory and
shareholder approval.
If approved, the merger will be accounted for under a "pooling of interest", in
which VRB common stock is exchanged for Umpqua stock and the balance sheets of
the two companies are combined. Total assets of the combined company will
approximate $740 million, with branches in 27 locations, all along the I-5
corridor in Oregon.
In conjunction with the merger negotiations, the Company has recognized legal
and professional fees totaling $218,000, or $.03 per share. Financial analysis
discussed in Management Discussion and Analysis, below, will exclude these costs
when noted.
Branch closures:
Effective August 15, 2000, the Bank closed one of its four branches in Medford,
Oregon. The closure comes as a result of the Company's plan to streamline its
branch network and reduce operating overhead. Due in part to the number of VRB
branch locations in the Medford area, the Bank has not experienced any negative
ramifications from
<PAGE> 11
the closure.
MATERIAL CHANGES IN THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999
Earnings: Prior to one-time merger-related expenses, the Company earned
$1,316,000 in the third quarter, up $108,000, or 9% when compared to 1999's
third quarter earnings of $1,208,000. On a per share basis, earnings before
merger-related expenses increased by 14%, totaling $0.16 for the quarter ended
September 30, 2000 compared with $0.14 for the same period in 1999. Including
merger-related expenses, the Company earned $1,098,000, or $.13 per share.
Net interest income: Net interest income (interest income less interest expense)
increased from $4,131,000 to $4,201,000 when comparing the three months ended
September 30, 2000 and 1999. The increase was the result of the following:
- Quarter over quarter, average earning assets grew by $16 million, fueled
by strong loan growth. As a result, interest income grew by 8%.
- Total deposits grew by $29 million, or 10% when comparing the two
quarters. The growth comes as a result of the Bank's aggressive time
certificates of deposit (CD's) promotions, targeting customers with
existing checking accounts with VRB. The CD growth improved the Bank's
liquidity and provided some additional stability to the Bank's deposit
base.
MATERIAL CHANGES IN THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999
Earnings: Earnings reached $3,774,000 prior to merger related expenses, up 9% on
per share earnings of $0.46 per share. These results compare favorably to
earnings of $3,636,000, or $0.42 per share in 1999. Including merger costs,
earnings in 2000 totaled $3,556,000.
Net interest income: Interest income on loans and investments increased on a tax
equivalent basis by $979,000 when comparing the nine months ended September 30,
2000 to the same period in the prior year. Average outstanding loans grew by
$28.4 million, or 15%, and contributed substantially to the higher income
levels.
Gains in interest income were partially offset by increases in the Bank's
interest expense, in part due to growth in interest bearing deposit balances. In
addition, deposit rates increased throughout the first nine months of 2000,
reflecting local competitive pressures. As a result, the Bank paid an additional
$783,000 on interest bearing deposit accounts and overnight funds.
<PAGE> 12
The above discussion is supported in the following analysis of the Bank's
interest margin (on a tax equivalent basis) for the nine months ended September
30, 2000 and 1999:
<TABLE>
<CAPTION>
Nine Months Ended September 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 $ 2,316 $ 111 6.39% $ 19,544 $ 715 4.88%
Held-to-maturity securities (1) 17,630 1,012 7.65 18,002 1,035 7.67
Available-for-sale securities 56,352 2,614 6.18 57,661 2,601 6.01
Commercial loans (2) 170,829 11,515 8.99 147,811 10,271 9.26
Consumer loans (2) 41,407 2,945 9.48 36,068 2,597 9.60
-----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 288,534 18,197 8.41 279,086 17,219 8.23
Non-earning assets 36,163 35,279
Less: loan loss reserve (3,801) (3,850)
-----------------------------------------------------------------------------------------------------------------------------------
Total average assets $ 320,896 $ 310,515
===================================================================================================================================
Interest bearing liabilities
-----------------------------------------------------------------------------------------------------------------------------------
Interest bearing checking $ 30,259 $ 229 1.01% $ 32,830 $ 240 0.97%
Money market 84,934 2,337 3.67 82,769 2,021 3.26
Savings 23,810 351 1.97 24,945 366 1.96
Time 63,099 2,475 5.23 59,638 2,135 4.77
Borrowed funds 3,091 153 6.60 -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits and borrowed funds 205,193 5,545 3.60 200,182 4,762 3.17
Non-interest bearing deposits 79,501 72,658
-----------------------------------------------------------------------------------------------------------------------------------
Total deposits and borrowed funds 284,694 272,840
Other liabilities 1,584 2,510
-----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 286,278 275,350
Shareholders' equity 34,618 35,165
-----------------------------------------------------------------------------------------------------------------------------------
Total average liabilities and shareholders' equity $ 320,896 $ 310,515
===================================================================================================================================
Net interest income $ 12,652 $ 12,457
Interest income as a percentage
of average earning assets 8.41% 8.23%
Interest expense as a percentage
of average earning assets 2.56 2.28
-----------------------------------------------------------------------------------------------------------------------------------
Net interest margin 5.85% 5.95%
===================================================================================================================================
</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
<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>
September 30, 2000 over
September 30, 1999
Increase (decrease) in
(in thousands) interest due to changes in
Interest earning assets Volume Rate Net
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds sold $ (826) $ 222 $ (604)
Held to maturity securities (21) (2) (23)
Available for sale securities (61) 74 13
Commercial loans 1,552 (308) 1,244
Consumer loans 380 (32) 348
------------------------------------------------------------------------------------------
Total $ 1,024 $ (46) $ 978
------------------------------------------------------------------------------------------
Interest bearing liabilities
------------------------------------------------------------------------------------------
Interest bearing checking $ (19) $ 8 $ (11)
Money market 60 256 316
Savings (17) 2 (15)
Time deposits 136 204 340
Borrowed funds 153 -- 153
------------------------------------------------------------------------------------------
Total $ 312 $ 471 $ 783
------------------------------------------------------------------------------------------
Net increase (decrease) in net interest income $ 711 $ (516) $ 195
==========================================================================================
</TABLE>
Fee income: Fee income, or non-interest income, increased by $358,000, or 24%
when comparing the first nine 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 (prior to merger related expenses) grew
to $8.1 million year-to-date. Salaries and depreciation expense prompted the
4.5% 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 58.9% for the nine months
ended September 30, 2000 compared to 57.2% for the same period in 1999.
Excluding the amortization of intangibles, such as goodwill (an approximate
charge of $640,000 per year), and merger related expenses, the efficiency ratio
improves to 53.4% and 53.0% for the periods ended September 30, 2000 and 1999,
respectively.
CHANGES IN FINANCIAL CONDITION AS OF SEPTEMBER 30, 2000
Liquidity review: The Bank must maintain cash flows adequate to fund operations
and meet commitments on a timely and cost effective basis.
By the end of the quarter, overall had liquidity had improved as a result of
stronger than expected deposit growth. Although the Bank did borrow
intermittently from its line of credit with the Federal Home Loan Bank ("FHLB")
early in the quarter, all debt had been repaid by September 30, 2000. Management
expects that the Bank will continue to
<PAGE> 14
borrower from the FHLB on an occasional basis. 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.
For the first nine months of 2000, the Bank experienced net cash inflows (cash
and federal funds) of just over $11 million. Cash outflows included loan growth
of $25.9 million, funded by cash inflows that included a combination of new
deposit growth of $33.4 million and $4.2 million in cash from ongoing
operations.
Capital management: As of September 30, 2000, shareholders' equity totaled $35.6
million, an increase of $2.0 million when compared to total shareholders' equity
as of the end of the last fiscal year. The increase in shareholders' equity
reflects earnings of $3.6 million offset by dividends of $2.0 million, or $.12
per share, declared March 30, 2000 and September 25, 2000.
The Bank is required to maintain minimum amounts of capital to "risk-weighted"
assets, as defined by banking regulators. At September 30, 2000, the Bank was
required to have Tier 1 and Total Capital ratios of at least 4.0% and 8.0%,
respectively. The Bank's actual ratios at that date were 10.86% and 12.11%,
respectively.
Balance Sheet Analysis: The table below provides abbreviated balance sheets,
which illustrate the material changes in financial condition between September
30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999 $ Change % Change
--------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Loans $ 227,643 $ 201,736 $ 25,907 12.84%
Allowance for loan losses and deferred fees (3,945) (3,735) (210) 5.62%
Investments 73,821 74,799 (978) (1.31%)
Federal funds sold 12,400 1,600 10,800 675.00%
Other assets 37,859 37,104 755 2.03%
--------------------------------------------------------------------------------------------------------------
Total assets $ 347,778 $ 311,504 $ 36,274 11.64%
--------------------------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY
Non-interest bearing deposits $ 84,761 $ 74,804 $ 9,957 13.31%
Interest bearing deposits 224,977 201,562 23,415 11.62%
--------------------------------------------------------------------------------------------------------------
Total deposits 309,738 276,366 33,372 12.08%
--------------------------------------------------------------------------------------------------------------
Other liabilities 2,455 1,529 926 60.56%
--------------------------------------------------------------------------------------------------------------
Total liabilities 312,193 277,895 34,298 12.34%
Total shareholders' equity 35,585 33,609 1,976 5.88%
--------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 347,778 $ 311,504 $ 36,274 11.64%
--------------------------------------------------------------------------------------------------------------
</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 $227.6 million at September 30,
2000, representing a $25.9 million increase when compared to loans of $201.7
million as of December 31, 1999.
<PAGE> 15
Commitments, principally real estate construction notes and commercial lines of
credit, totaled $45.3 million at September 30, 2000, approximately $12 million
higher when compared to commitments outstanding as of the end of the previous
year. The growth reflects available credit under approved commercial
construction loans, primarily in participation with other financial
institutions.
Reflective of the Bank's underwriting standards, as well as local economic
trends, 77% of the Bank's loan portfolio is secured by real estate. Of the
$152.5 million in real estate mortgage loans outstanding as of September 30,
2000, approximately $108.9 million were made to commercial customers, secured by
commercial real estate. An additional $19.6 million represented loans secured by
multi-family (5 or more) residential property and the remaining $24.0 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,
including loans held for sale, at the date indicated:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
Amount Percentage Amount Percentage
-----------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Commercial $ 38,418 17.17% $ 23,940 12.09%
Real estate construction 22,028 9.85% 29,034 14.66%
Real estate residential mortgage 23,936 10.70% 41,225 20.82%
Real estate commercial mortgage 128,533 57.46% 93,540 47.24%
Consumer and other 14,728 6.58% 13,997 7.07%
----------------------------------------------------------------------------------------------------------
227,643 101.76% 201,736 101.89%
Allowance for loan losses (3,498) (1.56%) (3,504) (1.77%)
Deferred loan fees (447) (0.20%) (232) (0.12%)
----------------------------------------------------------------------------------------------------------
Net loans $ 223,698 100.00% $ 198,000 100.00%
----------------------------------------------------------------------------------------------------------
</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 September 30, 2000, the
Bank's allowance for loan losses was $3,498,000 or 1.56% 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, second or third quarter of 2000.
Loan charge-offs were minimal in the first three quarters of the year. After
netting recoveries against charge-offs, net charge-offs were just over $6,000.
<PAGE> 16
The following table presents information with respect to non-performing assets:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Loans on non-accrual status $ 157 $ 551
Loans past due greater than 90 days but not on non-accrual status -- --
Other real estate owned -- --
--------------------------------------------------------------------------------------------------
Total non-performing assets $ 157 $ 551
--------------------------------------------------------------------------------------------------
Percentage of non-performing loans to total loans 0.07% 0.27%
Percentage of non-performing assets to total assets 0.05% 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 September 30, 2000, the Bank's
portfolio of investment securities totaled $71.8 million, virtually unchanged
when compared to the December 31, 1999 balance of $72.9 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 September 30, 2000, $54.8 million of the Bank's investment portfolio was
classified as AFS, representing approximately 76% of the total portfolio. Due to
rising interest rates, the market value the Bank's AFS portfolio has dropped by
approximately $1.8 million, before accruing for tax benefits. This represents a
3.2% 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.
<PAGE> 17
The following table provides the book value of the Bank's investment portfolio
as divided between HTM and AFS as of September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Investments available-for-sale
U.S. Treasury and agencies $ 54,662 $ 54,756
Corporate and other investments 106 134
-----------------------------------------------------------------------
$ 54,768 $ 54,890
=======================================================================
Investments held-to-maturity
States and political subdivisions $ 17,059 $ 18,010
=======================================================================
FHLB stock $ 1,993 $ 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 $33.3 million, or 12%, when comparing September 30,
2000 to the end of the prior fiscal year. Non-interest bearing deposits remained
at approximately 27% of total deposits, on growth of $10 million. The Company's
high concentrations in non-interest bearing accounts provide inexpensive funding
evidenced by the fact that the Bank's cost of deposits has averaged 2.55% 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
September 30 TOTAL December 31 TOTAL
2000 DEPOSITS 1999 DEPOSITS
------------ ---------- ----------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Demand $ 84,761 27.4% $ 74,805 27.1%
Interest bearing demand 121,567 39.2 119,569 43.3
Savings 22,909 7.4 23,512 8.5
Time deposits 80,501 26.0 58,480 21.2
-------- -------- -------- --------
$309,738 100.0% $276,366 100.0%
======== ======== ======== ========
</TABLE>
<PAGE> 18
PART I - FINANCIAL INFORMATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, interest rate risk and credit risk 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 September 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 in the Joint Proxy Statement dated October 17, 2000 for the
period ended June 30, 2000.
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).
<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: On October 27,
2000, the registrant gave notice that a special meeting of shareholders will be
held on November 29, 2000 for purposes of voting on a proposed merger with
Umpqua Holding Corp, further discussed under Item 6b.
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:
<TABLE>
<S> <C>
3.1 Articles of Incorporation of VRB Bancorp*
3.2 Bylaws of VRB Bancorp*
4.0 Specimen stock certificate*
10.1 Stock Option Agreement, dated July 24, 1997, between Valley of the Rogue
Bank and the shareholders of Investors Banking Corporation**
10.2 Plan of Merger, dated September 30, 1997, between Valley of the Rogue
Bank and Colonial Banking Company**
10.3 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)
</TABLE>
----------
* Incorporated by reference to the Company's registration statement on
Form 10 (Commission file number 0-25932) filed April 26, 1995 pursuant
to Section 12(g) of the Securities Exchange Act of 1934.
** Incorporated by reference to the Company's registration statement on
Form S-1 (Commission File number 333-37167) declared effective November
5, 1997.
<PAGE> 20
<TABLE>
<S> <C>
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
</TABLE>
ITEM 6b. Reports on form 8-K: On August 14, 2000 the registrant and its wholly
owned subsidiary, Valley of the Rogue Bank, an Oregon chartered bank, entered
into an Agreement and Plan of Reorganization with Umpqua Holdings Corporation,
an Oregon financial holding company, and its wholly owned subsidiary, South
Umpqua Bank, an Oregon chartered bank, pursuant to which the registrant will,
contingent upon certain conditions, merge with and into Umpqua Holdings
Corporation, with Umpqua Holdings Corporation to be the surviving entity. The
merger is further described in VRB's Proxy Statement on Schedule 14A, which was
filed with the Securities and Exchange Commission on October 27, 2000 and mailed
to shareholders on that date. The merger is subject to final regulatory and
shareholder approval.
<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: November 13, 2000 /S/ WILLIAM A. HADEN
-----------------------------------
William A. Haden
President
Chief Executive Officer
Date: November 13, 2000 /S/ FELICE BELFIORE
-----------------------------------
Felice Belfiore
Senior Vice President
Chief Financial Officer
