10-Q 1 v67326e10-q.txt FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE THREE MONTHS ENDED 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 2 VRB BANCORP Form 10-Q September 30, 2000 Table of contents ------------------------

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

4 VRB BANCORP CONSOLIDATED STATEMENTS OF INCOME

5 VRB BANCORP CONSOLIDATED STATEMENTS OF INCOME

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

7 VRB BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS

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. 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):

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 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. 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:

(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 13 The following table further analyzes the Bank's interest margin, and attributes increases in interest income and interest expense to changes in "volume" or changes in interest "rate".

Fee income: Fee income, or non-interest income, increased by $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 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:

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. 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:

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. 16 The following table presents information with respect to non-performing assets:

Investments: Investment securities are purchased to help manage liquidity and generate after tax profits consistent with the risk guidelines established by management and the Board of Directors. As of 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. 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:

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:

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). 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: 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. 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: 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. 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

VRB BANCORP 10-Q